UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
--------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------- -------------------
Commission file number 1-8483
UNOCAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-3825062
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2141 ROSECRANS AVENUE, SUITE 4000, EL SEGUNDO, CALIFORNIA 90245
(Address of principal executive offices)
(Zip Code)
(310) 726-7600
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Number of shares of Common Stock, $1 par value, outstanding as of
April 30, 2002: 244,609,488
TABLE OF CONTENTS
PART I PAGE
Item 1. Financial Statements
Consolidated Earnings............................................. 1
Consolidated Balance Sheet........................................ 2
Consolidated Cash Flows........................................... 3
Notes to Financial Statements..................................... 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................... 17
Operating Highlights ............................................... 20
Item 3 Quantative and Qualitative Disclosures About Market Risk............ 27
PART II
Item 1 Legal Proceedings................................................... 31
Item 6 Exhibits and Reports on Form 8-K.................................... 31
SIGNATURES.................................................................. 32
EXHIBIT INDEX............................................................... 33
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED EARNINGS (UNAUDITED) UNOCAL CORPORATION
For the Three Months
Ended March 31,
----------------------------
Millions of dollars except per share amounts 2002 2001
--------------------------------------------------------------------------------
Revenues
Sales and operating revenues $ 1,024 $ 2,206
Interest, dividends and miscellaneous income 12 8
Gain on sales of assets 2 -
--------------------------------------------------------------------------------
Total revenues 1,038 2,214
Costs and other deductions
Crude oil, natural gas and product purchases 295 987
Operating expense 288 330
Administrative and general expense 43 44
Depreciation, depletion and amortization 224 223
Dry hole costs 28 40
Exploration expense 59 56
Interest expense 51 49
Property and other operating taxes 16 21
Distributions on convertible preferred
securities of subsidiary trust 8 8
--------------------------------------------------------------------------------
Total costs and other deductions 1,012 1,758
Earnings from equity investments 37 42
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Earnings from continuing operations before
income taxes and minority interests 63 498
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Income taxes 40 190
Minority interests 1 16
--------------------------------------------------------------------------------
Earnings from continuing operations 22 292
Discontinued operations
Refining, marketing and transportation
Gain on disposal (net of tax) - 4
--------------------------------------------------------------------------------
Earnings from discontinued operations - 4
Cumulative effect of accounting change - (1)
--------------------------------------------------------------------------------
Net earnings $ 22 $ 295
================================================================================
Basic earnings per share of common stock (a)
Continuing operations $ 0.09 $ 1.19
Net earnings $ 0.09 $ 1.21
Diluted earnings per share of common stock (b)
Continuing operations $ 0.09 $ 1.16
Net earnings $ 0.09 $ 1.18
Cash dividends declared per share of common stock $ 0.20 $ 0.20
--------------------------------------------------------------------------------
(a) Basic weighted average shares
outstanding (in thousands) 244,207 243,169
(b) Diluted weighted average shares
outstanding (in thousands) 245,247 256,399
See Notes to Consolidated Financial Statements.
-1-
CONSOLIDATED BALANCE SHEET UNOCAL CORPORATION
At March 31, At December 31,
--------------------------------------
Millions of dollars 2002 (a) 2001
--------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 338 $ 190
Accounts and notes receivable - net 869 847
Inventories 96 102
Deferred income taxes 126 123
Other current assets 31 33
--------------------------------------------------------------------------------
Total current assets 1,460 1,295
Investments and long-term receivables - net 1,459 1,405
Properties - net (b) 7,543 7,514
Deferred income taxes 174 128
Other assets 122 83
--------------------------------------------------------------------------------
Total assets $ 10,758 $ 10,425
================================================================================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 772 $ 823
Taxes payable 331 249
Dividends payable 49 49
Interest payable 48 49
Current portion of environmental liabilities 110 124
Current portion of long-term debt
and capital leases 9 9
Other current liabilities 148 119
--------------------------------------------------------------------------------
Total current liabilities 1,467 1,422
Long-term debt and capital leases 3,174 2,897
Deferred income taxes 639 627
Accrued abandonment, restoration
and environmental liabilities 605 590
Other deferred credits and liabilities 729 724
Subsidiary stock subject to repurchase 69 70
Minority interests 456 449
Company-obligated mandatorily redeemable
convertible preferred securities of a subsidiary
trust holding solely parent debentures 522 522
Common stock ($1 par value,
shares authorized: 750,000,000 (c)) 255 255
Capital in excess of par value 568 551
Unearned portion of restricted stock issued (29) (29)
Retained earnings 2,861 2,888
Accumulated other comprehensive income (105) (88)
Notes receivable - key employees (42) (42)
Treasury stock - at cost (d) (411) (411)
--------------------------------------------------------------------------------
Total stockholders' equity 3,097 3,124
--------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 10,758 $ 10,425
================================================================================
(a) Unaudited
(b) Net of accumulated depreciation,
depletion and amortization of: $ 11,768 $ 11,648
(c) Number of shares outstanding
(in thousands) 244,501 243,998
(d) Number of shares (in thousands) 10,623 10,623
See Notes to the Consolidated Financial Statements.
-2-
CONSOLIDATED CASH FLOWS (UNAUDITED UNOCAL CORPORATION
For the Three Months
Ended March 31,
---------------------
Millions of dollars 2002 2001
-------------------------------------------------------------------------
Cash Flows from Operating Activities
Net earnings $ 22 $ 295
Adjustments to reconcile net earnings to
net cash provided by operating activities
Depreciation, depletion and amortization 224 223
Dry hole costs 28 40
Amortization of exploratory leasehold costs 22 22
Deferred income taxes (23) 32
Gain on sales of assets (pre-tax) (2) -
Gain on disposal of discontinued operations(pretax) - (7)
Earnings applicable to minority interests 1 16
Other (12) 54
Working capital and other changes
related to operations
Accounts and notes receivable (14) 169
Inventories 6 27
Accounts payable (51) (166)
Taxes payable 82 69
Other (12) (1)
-------------------------------------------------------------------------
Net cash provided by operating activities 271 773
-------------------------------------------------------------------------
Cash Flows from Investing Activities
Capital expenditures (includes dry hole costs) (390) (360)
Major acquisitions - (261)
Proceeds from sales of assets 28 8
Proceeds from sale of discontinued operations 2 7
-------------------------------------------------------------------------
Net cash used in investing activities (360) (606)
-------------------------------------------------------------------------
Cash Flows from Financing Activities
Long-term borrowings 399 240
Reduction of long-term debt
and capital lease obligations (123) (6)
Minority interests (2) (5)
Proceeds from issuance of common stock 14 5
Dividends paid on common stock (49) (49)
Other (2) -
-------------------------------------------------------------------------
Net cash provided by financing activities 237 185
-------------------------------------------------------------------------
Increase in cash and cash equivalents 148 352
-------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 190 235
-------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 338 $ 587
=========================================================================
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Interest (net of amount capitalized) $ 53 $ 61
Income taxes (net of refunds) $ (8) $ 85
See Notes to the Consolidated Financial Statements.
-3-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) General
The consolidated financial statements included in this report are unaudited and,
in the opinion of management, include all adjustments necessary for a fair
presentation of financial position and results of operations. All adjustments
are of a normal recurring nature. Such financial statements are presented in
accordance with the Securities and Exchange Commission's disclosure requirements
for Form 10-Q.
These interim consolidated financial statements should be read in conjunction
with the consolidated financial statements and the related notes filed with the
Commission in Unocal Corporation's 2001 Annual Report on Form 10-K.
For the purpose of this report, Unocal Corporation ("Unocal") and its
consolidated subsidiaries, including Union Oil Company of California ("Union
Oil"), are referred to as the "Company".
The consolidated financial statements of the Company include the accounts of
subsidiaries in which a controlling interest is held. Investments in entities
without a controlling interest are accounted for by the equity method or cost
basis. Under the equity method, the investments are stated at cost plus the
Company's equity in undistributed earnings and losses after acquisition. Income
taxes estimated to be payable when earnings are distributed are included in
deferred income taxes.
Results for the three months ended March 31, 2002, are not necessarily
indicative of future financial results.
Certain items in the prior year financial statements have been reclassified to
conform to the 2002 presentation.
(2) Accounting Changes
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142
addresses accounting for goodwill and identifiable intangible assets subsequent
to their initial recognition, eliminates the amortization of goodwill and
provides specific steps for testing the impairment of goodwill. Separable
intangible assets that are not deemed to have an indefinite life will continue
to be amortized over their useful lives. SFAS No. 142 also eliminates
amortization of the excess of cost over the underlying equity in the net assets
of an equity method investee that is recognized as goodwill. The adoption of the
statement did not have a material effect on the Company's financial position and
results of operations.
Effective January 1, 2002, the Company also adopted SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and the
accounting and reporting provisions of Accounting Principles Board Opinion No.
30, "Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". The adoption of SFAS No. 144 did not have a material
effect on the Company's financial position and results of operations.
(3) Other Financial Information
During the first quarters of 2002 and 2001, approximately 20 percent and 37
percent, respectively, of total sales and operating revenues were attributable
to the resale of crude oil, natural gas and natural gas liquids purchased from
others in connection with the Company's marketing activities.
Capitalized interest totaled $9 million and $5 million for the first quarters of
2002 and 2001, respectively. The increase was primarily due to the capitalized
interest related to the West Seno oil and gas development project in the
deepwater Kutei Basin, offshore East Kalimantan, Indonesia.
-4-
Exploration expense on the consolidated earnings statement consisted of the
following:
For the Three Months
Ended March 31,
---------------------------
Millions of dollars 2002 2001
--------------------------------------------------------------------------------
Exploration operations $ 23 $ 18
Geological and geophysical 11 13
Amortization of exploratory leases 22 22
Leasehold rentals 3 3
--------------------------------------------------------------------------------
Exploration expense $ 59 $ 56
================================================================================
(4) Income Taxes
Income taxes on earnings from continuing operations for the first quarter of
2002 were $40 million compared with $190 million for the first quarter of 2001.
The effective income tax rate for the first quarter of 2002 was 65 percent
compared with 39 percent for the first quarter of 2001. In 2002, the mix effect
of domestic losses coupled with foreign earnings, which are generally taxed at a
higher rate, resulted in the higher effective tax rate when compared to 2001.
(5) Earnings Per Share
The following are reconciliations of the numerators and denominators of the
basic and diluted earnings per share (EPS) computations for earnings from
continuing operations for the first quarters ended March 31, 2002 and 2001:
Earnings Shares Per Share
Millions except per share amounts (Numerator) (Denominator) Amount
--------------------------------------------------------------------------------
Three months ended March 31, 2002
Earnings from continuing operations $ 22 244.2
Basic EPS $0.09
======
Effect of dilutive securities
Options and common stock equivalents 1.0
----------------------------
Diluted EPS 22 245.2 $0.09
======
Distributions on subsidiary trust
preferred securities (after-tax) 7 12.3
----------------------------
Antidilutive $ 29 257.5 $0.11
======
Three months ended March 31, 2001
Earnings from continuing operations $ 292 243.2
Basic EPS $1.19
======
Effect of dilutive securities
Options and common stock equivalents 0.9
----------------------------
292 244.1 $1.19
Distributions on subsidiary trust
preferred securities (after-tax) 7 12.3
----------------------------
Diluted EPS $ 299 256.4 $1.16
======
Not included in the computation of diluted EPS for the three months ended March
31, 2002 and 2001, were options outstanding to purchase approximately 5.1
million and 5.0 million shares, respectively, of common stock. These options
were not included in the computation as the exercise prices were greater than
the year-to-date average market price of the common shares.
-5-
(6) Comprehensive Income
The Company's comprehensive income was:
For the Three Months
Ended March 31,
------------------------
Millions of dollars 2002 2001
--------------------------------------------------------------------------------
Net earnings $ 22 $ 295
Cumulative effect of change in accounting principle
SFAS No. 133 adoption (a) - (59)
Change in unrealized loss on hedging instruments (b) (20) (5)
Reclassification adjustment for settled hedging contracts (c) 6 12
Unrealized foreign currency translation adjustments (3) (31)
--------------------------------------------------------------------------------
Total comprehensive income $ 5 $ 212
================================================================================
(a) Net of tax expense (benefit) of: - (36)
(b) Net of tax expense (benefit) of: (12) (3)
(c) Net of tax expense (benefit) of: 3 7
(7) Cash and Cash Equivalents
At March 31, At December 31,
------------------------------------
Millions of dollars 2002 2001
----------------------------------------------------------------------------
Cash $ 55 $ 12
Time deposits 178 123
Restricted cash 5 5
Marketable securities 100 50
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Cash and cash equivalents $ 338 $ 190
============================================================================
(8) Long Term Debt and Credit Agreements
During the first three months of 2002, the Company's consolidated debt,
including the current portion, increased by $277 million. This net increase
included $399 million in new commercial paper borrowings, the proceeds of which
were used to refinance maturing debt and for general corporate purposes. The
Company retired $23 million of maturing medium-term notes during the quarter. In
February 2002, the Company's Northrock Resourses, Ltd. subsidiary redeemed its
$35 million "Series A" and $40 million "Series B" senior U.S. dollar-denominated
notes, which bore interest of 6.54 percent and 6.74 percent, respectively.
The Company's Pure Resources, Inc. ("Pure") subsidiary reduced its long-term
debt, included in the Company's consolidated debt, by $25 million principally
due to a decrease in borrowing under its revolving credit facilities.
Pure's debt was $562 million at March 31, 2002. Neither Unocal nor Union Oil
guarantees any of Pure's debt.
(9) Accrued Abandonment, Restoration and Environmental Liabilities
At March 31, 2002, the Company had accrued $482 million for the estimated future
costs to abandon and remove wells and production facilities. The total costs for
these abandonments are predominantly accrued on a unit-of-production basis and
are estimated to be approximately $670 million. This estimate was derived in
large part from abandonment cost studies performed by independent third party
firms and is used to calculate the amount to be amortized. The Company's reserve
for environmental remediation obligations at March 31, 2002 totaled $233
million, of which $110 million was included in current liabilities.
-6-
(10) Commitments and Contingencies
The Company has contingent liabilities with respect to material existing or
potential claims, lawsuits and other proceedings, including those involving
environmental, tax and other matters, certain of which are discussed more
specifically below. The Company accrues liabilities when it is probable that
future costs will be incurred and such costs can be reasonably estimated. Such
accruals are based on developments to date, the Company's estimates of the
outcomes of these matters and its experience in contesting, litigating and
settling other matters. As the scope of the liabilities becomes better defined,
there will be changes in the estimates of future costs, which could have a
material effect on the Company's future results of operations and financial
condition or liquidity.
Environmental matters
The Company is subject to loss contingencies pursuant to federal, state, local
and foreign environmental laws and regulations. These include existing and
possible future obligations to investigate the effects of the release or
disposal of certain petroleum, chemical and mineral substances at various sites;
to remediate or restore these sites; to compensate others for damage to property
and natural resources, for remediation and restoration costs and for personal
injuries; and to pay civil penalties and, in some cases, criminal penalties and
punitive damages. These obligations relate to sites owned by the Company or
others and are associated with past and present operations, including sites at
which the Company has been identified as a potentially responsible party (PRP)
under the federal Superfund laws and comparable state laws. Liabilities are
accrued when it is probable that future costs will be incurred and such costs
can be reasonably estimated.
However, in many cases, investigations are not yet at a stage where the Company
is able to determine whether it is liable or, even if liability is determined to
be probable, to quantify the liability or estimate a range of possible exposure.
In such cases, the amounts of the Company's liabilities are indeterminate due to
the potentially large number of claimants for any given site or exposure, the
unknown magnitude of possible contamination, the imprecise and conflicting
engineering evaluations and estimates of proper clean-up methods and costs, the
unknown timing and extent of the corrective actions that may be required, the
uncertainty attendant to the possible award of punitive damages, the recent
judicial recognition of new causes of action, the present state of the law,
which often imposes joint and several and retroactive liabilities on PRPs, the
fact that the Company is usually just one of a number of companies identified as
a PRP, or other reasons.
As disclosed in note 9, at March 31, 2002, the Company had accrued $233 million
for estimated future environmental assessment and remediation costs at various
sites where liabilities for such costs are probable. At those sites where
investigations or feasibility studies have advanced to the stage of analyzing
feasible alternative remedies and/or ranges of costs, the Company estimates that
it could incur possible additional remediation costs aggregating approximately
$240 million.
The Company maintains insurance coverage intended to reimburse the cost of
damages and remediation related to environmental contamination resulting from
sudden and accidental incidents under current operations. The purchased
coverages contain specified and varying levels of deductibles and payment
limits. Although certain of the Company's contingent legal exposures enumerated
above are uninsurable either due to public policy or market conditions,
management believes that its current insurance program significantly reduces the
possibility of an incident causing a material adverse financial impact to the
Company.
-7-
Tax matters
The company believes it has adequately provided in its accounts for tax items
and issues not yet resolved. Several prior material tax issues are unresolved.
Resolution of these tax issues impact not only the year in which the items
arose, but also the company's tax situation in other tax years. With respect to
1979-1984 taxable years, all issues raised for these years have now been
settled, with the exception of the effect of the carryback of a 1993 net
operating loss (NOL) to tax year 1984 and resultant credit adjustments. The
1985-1990 taxable years are before the Appeals division of the Internal Revenue
Service. All issues raised with respect to those years have now been settled,
with the exception of the effect of the 1993 NOL carryback and resultant
adjustments. The Joint Committee on Taxation of the U.S. Congress has reviewed
the settled issues with respect to 1979-1990 taxable years and no additional
issues have been raised. While all tax issues for the 1979-1990 taxable years
have been agreed and reviewed by the Joint Committee, these taxable years will
remain open due to the 1993 NOL carryback. The 1993 NOL results from certain
specified liability losses, which occurred during 1993, and which resulted in a
tax refund of $73 million. Consequently, these tax years will remain open until
the specified liability loss, which gave rise to the 1993 NOL, is finally
determined by the Internal Revenue Service and is either agreed to with the IRS
or otherwise concluded in the Tax Court proceeding. In 1999, the United States
Tax Court granted Unocal's motion to amend the pleadings in its Tax Court cases
to place the 1993 NOL carryback in issue. The 1991-1994 taxable years are now
before the Appeals division of the Internal Revenue Service. The 1995-1997
taxable years are under examination by the Internal Revenue Service.
Pure Resources, Inc. Employment and Severance Agreements
Under circumstances specified in the employment and/or severance agreements
entered into between the Company's Pure subsidiary and its officers, each
covered officer will have the right to require Pure to purchase its common
shares currently held or subsequently obtained by the exercise of any option
held by the officer at a calculated "net asset value" per share. The
circumstances under which certain officers may exercise this right include the
termination of the officer without cause prior to May 25, 2003, termination for
any reason after May 24, 2003, a change in control of either Pure or Unocal and
other events specified in the agreements. The net asset value per share is
calculated by reference to each common share's pro rata amount of the present
value of Pure's proved reserves discounted at 10 percent, as defined, times 110
percent, less funded debt, as defined. At March 31, 2002, Pure estimated that
the amount it may have to repurchase under these agreements was approximately
$69 million, which is reflected as subsidiary stock subject to repurchase on the
consolidated balance sheet. The repurchase amount will fluctuate with changes in
the net asset value per share. At December 31, 2001, the repurchase amount under
these agreements was approximately $70 million.
Other matters
The Company has a lease agreement relating to its Discoverer Spirit deepwater
drillship, with a remaining term of approximately three years and six months at
March 31, 2002. In 2001, the Company signed a sublease agreement with a third
party for a minimum period of 200 days. Under the provisions of the agreement,
the third party assumed all of the lease payments to the lessor during the
sublease period, which began in December 2001. The drillship has a minimum
daily rate of approximately $219,000. The future remaining minimum lease
payment obligation, excluding the 200-day sublease period, was approximately
$255 million at March 31, 2002. If the sublease period runs longer than the
minimum period of 200 days, the amount of the future remaining lease rental
payment obligation would decrease by the minimum daily rate amount times the
number of days over the minimum sublease period.
In the normal course of business, the Company has performance obligations which
are secured by surety bonds or letters of credit. These obligations primarily
cover self-insurance, site restoration, dismantlement and other programs where
governmental organizations require such support. These surety bonds and letters
of credit are issued by financial institutions but are funded by the Company if
exercised. At March 31, 2002, the Company, including its Pure subsidiary, had
obtained various surety bonds for approximately $360 million. These surety bonds
primarily consisted of bonds for the Company's mining operation discussed in the
following paragraph and a bond for $102 million securing the Company's
performance under a fixed price natural gas sales contract for the delivery of
72 billion cubic feet of gas over a ten year period that began in
-8-
January of 1999 and will end in December of 2008. The Company also had obtained
approximately $52 million in standby letters of credit at March 31, 2002.
In addition, the Company has various other guarantees for approximately
$410 million. The Company has entered into indemnification obligations in favor
of the providers of these surety bonds and letters of credit. Approximately
$190 million of the $410 million in guarantees would require the Company to
obtain a bond or a letter of credit, or establish a trust fund if its credit
rating drops below BBB- or Baa3 from Standard & Poor's Ratings Services and
Moody's Investors Service, Inc., respectively. Approximately $150 million of
the surety bonds, letters of credit and other guarantees that the Company is
required to obtain or issue reflect obligations that are already included on the
consolidated balance sheet in other current liabilities and other deferred
credits. The surety bonds, letters of credit and other guarantees may also
reflect some of the possible additional remediation liabilities discussed
earlier in this note.
As mentioned in the previous paragraph, the Company's Molycorp subsidiary has
permits covering discharges from its Questa, New Mexico, molybdenum mine.
Obtaining these permits involved the posting by Molycorp of two bonds totaling
$152 million that provide financial assurance of completion of temporary closure
plans (required only upon cessation of operations) and other obligations
required under the terms of the permits. These costs are based on estimations
provided by agencies of the state of New Mexico. Unocal has indemnified the
insurance company that issued the bonds with respect to all amounts that may be
drawn against them.
The Company has certain investments in entities that it accounts for under the
equity method, such as Colonial Pipeline Company. These entities have
approximately $1.8 billion of their own debt obligations that are either fully
non-recourse or of limited recourse to the Company. Of the total $1.8 billion in
equity investee debt, $1.1 billion belongs to the Colonial Pipeline Company, in
which the Company holds a 23.44 percent equity interest. The Company guarantees
only $72 million of the total $1.8 billion debt obligations. Approximately $46
million of the $72 million in debt guarantees will expire in June 2002.
The Company also has other contingent liabilities with respect to litigation,
claims, and contractual agreements arising in the ordinary course of business.
Although these contingencies could result in expenses or judgments that could be
material to the Company's results of operations for a given reporting period, on
the basis of management's best assessment of the ultimate amount and timing of
these events, such expenses or judgments are not expected to have a material
adverse effect on the Company's consolidated financial condition or liquidity.
(11) Financial Instruments and Commodity Hedging
Fair values of debt and other long-term instruments - The estimated fair value
of the Company's long-term debt at March 31, 2002, including the current
portion, was approximately $3.29 billion. The fair value was based on the
discounted amounts of future cash outflows using the rates offered to the
Company for debt with similar remaining maturities.
The estimated fair value of the mandatorily redeemable convertible preferred
securities of the Company's subsidiary trust was approximately $540 million at
March 31, 2002. The fair value was based on the trading prices of the preferred
securities on March 29, 2002, as reported to the Company.
Commodity hedging activities - During the first quarter of 2002, the Company
recognized $1 million in after-tax gains for the ineffectiveness of both cash
flow and fair value hedges. At March 31, 2002, the Company had approximately $12
million of after-tax deferred losses in accumulated other comprehensive income
on the consolidated balance sheet related to cash flow hedges for future
commodity sales for the period beginning April 2002 through October 2004. Of
this amount, approximately $3 million in after-tax losses are expected to be
reclassified to the consolidated earnings statement during the next twelve
months.
-9-
Foreign currency contracts - At March 31, 2002, the Company had approximately $1
million of after-tax deferred losses in accumulated other comprehensive income
on the consolidated balance sheet related to cash flow hedges for future foreign
currency denominated payment obligations through December 2003. Of this amount,
the losses expected to be reclassified to the consolidated earnings statement
during the next twelve months are immaterial.
(12) Supplemental Condensed Consolidating Financial Information
Unocal guarantees all the publicly held securities issued by its 100
percent-owned subsidiaries Unocal Capital Trust and Union Oil. Such guarantees
are full and unconditional and no subsidiaries of Unocal or Union Oil guarantee
these securities.
The following tables present condensed consolidating financial information for
the first quarters of 2002 and 2001 for (a) Unocal (Parent), (b) the Trust, (c)
Union Oil (Parent) and (d) on a combined basis, the subsidiaries of Union Oil
(non-guarantor subsidiaries). Virtually all of the Company's operations are
conducted by Union Oil and its subsidiaries.
CONDENSED CONSOLIDATED EARNINGS STATEMENT
Period ended March 31, 2002
Non-
Unocal Union Guarantor
Unocal Capital Oil Subsi- Elim- Conso-
Millions of dollars (Parent) Trust (Parent) diaries nations lidated
--------------------------------------------------------------------------------
Revenues
Sales and operating revenues $ - $ - $ 209 $ 981 $ (166)$ 1,024
Interest, dividends and
miscellaneous income - 8 7 5 (8) 12
Gain (loss) on sales of assets - - 13 (11) - 2
--------------------------------------------------------------------------------
Total revenues - 8 229 975 (174) 1,038
Costs and other deductions
Purchases, operating and
other expenses 2 - 227 634 (162) 701
Depreciation, depletion,
and amortization - - 87 137 - 224
Dry hole costs - - 15 13 - 28
Interest expense 8 - 43 9 (9) 51
Distributions on convertible
preferred securties - 8 - - - 8
--------------------------------------------------------------------------------
Total costs and
other deductions 10 8 372 793 (171) 1,012
Equity in earnings of
subsidiaries 30 - 128 - (158) -
Earnings from
equity investments - - - 37 - 37
--------------------------------------------------------------------------------
Earnings from continuing
operations before income taxes
and minority interests 20 - (15) 219 (161) 63
--------------------------------------------------------------------------------
Income taxes (4) - (45) 89 - 40
Minority interests - - - 2 (1) 1
--------------------------------------------------------------------------------
Net earnings $ 24 $ - $ 30 $ 128 $ (160) $ 22
================================================================================
-10-
CONDENSED CONSOLIDATED EARNINGS STATEMENT
Period ended March 31, 2001
Non-
Unocal Union Guarantor
Unocal Capital Oil Subsi- Elim- Conso-
Millions of dollars (Parent) Trust (Parent) diaries nations lidated
--------------------------------------------------------------------------------
Revenues
Sales and operating revenues $ - $ - $ 693 $ 2,082 $ ( 569)$ 2,206
Interest, dividends and
miscellaneous income 5 8 (1) 5 ( 9) 8
Gain (loss) on sales of assets - - - - - -
--------------------------------------------------------------------------------
Total revenues 5 8 692 2,087 (578) 2,214
Costs and other deductions
Purchases, operating and
other expenses 1 - 395 1,622 (580) 1,438
Depreciation, depletion,
and amortization - - 86 137 - 223
Dry hole costs - - 10 30 - 40
Interest expense 8 - 45 5 (9) 49
Distributions on convertible
preferred securties - 8 - - - 8
--------------------------------------------------------------------------------
Total costs and
other deductions 9 - 536 1,794 (589) 1,758
Equity in earnings of
subsidiaries 299 - 211 - (510) -
Earnings from
equity investments - - (2) 44 - 42
--------------------------------------------------------------------------------
Earnings from continuing
operations before income taxes
and minority interests 295 - 365 327 (498) 498
--------------------------------------------------------------------------------
Income taxes (1) - 69 122 - 190
Minority interests - - - 4 12 16
--------------------------------------------------------------------------------
Earnings from continuing
operations 296 - 296 211 (511) 292
Earnings from discontinued
operations - - 4 - - 4
Cumulative effect of
accounting change - - (1) - - (1)
--------------------------------------------------------------------------------
Net earnings $ 296 $ - $ 299 $ 211 $ (511) $ 295
================================================================================
-11-
CONDENSED CONSOLIDATED BALANCE SHEET
At March 31, 2002
Non-
Unocal Union Guarantor
Unocal Capital Oil Subsi- Elim- Conso-
Millions of dollars (Parent) Trust (Parent) diaries nations lidated
--------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 1 $ - $ 149 $ 188 $ - $ 338
Accounts and notes
receivable - net 62 - 83 796 (72) 869
Inventories - - 12 84 - 96
Other current assets - - 114 43 - 157
--------------------------------------------------------------------------------
Total current assets 63 - 358 1,111 (72) 1,460
Investments and long-term
receivables - net 4,006 - 4,274 1,033 (7,854) 1,459
Properties - net - - 2,142 5,401 - 7,543
Other assets 3 541 432 2,176 (2,856) 296
--------------------------------------------------------------------------------
Total assets $4,072 $541 $ 7,206 $ 9,721 $(10,782) $10,758
================================================================================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ - $ - $ 216 $ 618 $ (62) $ 772
Current portion of long-term
debt and capital leases - - - 9 - 9
Other current liabilities 47 3 192 455 (11) 686
--------------------------------------------------------------------------------
Total current liabilities 47 3 408 1,082 (73) 1,467
Long-term debt and
capital leases - - 2,558 616 - 3,174
Deferred income taxes - - (78) 717 - 639
Accrued abandonment, restoration
and environmental liabilities - - 325 280 - 605
Other deferred credits
and liabilities 541 - 314 2,695 (2,821) 729
Subsidiary stock subject
to repurchase - - - 69 - 69
Minority interests - - - 311 145 456
Company-obligated mandatorily
redeemable convertible
preferred securities of a
subsidiary trust holding
solely parent debentures - 522 - - - 522
Stockholders' equity 3,484 16 3,679 3,951 (8,033) 3,097
--------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $4,072 $541 $7,206 $ 9,721 $(10,782) $10,758
================================================================================
-12-
CONDENSED CONSOLIDATED BALANCE SHEET
At December 31, 2001
Non-
Unocal Union Guarantor
Unocal Capital Oil Subsi- Elim- Conso-
Millions of dollars (Parent) Trust (Parent) diaries nations lidated
--------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ - $ - $ 62 $ 128 $ - $ 190
Accounts and notes
receivable - net 51 - 154 693 (51) 847
Inventories - - 3 99 - 102
Other current assets - - 122 34 - 156
--------------------------------------------------------------------------------
Total current assets 51 - 341 954 (51) 1,295
Investments and long-term
receivables - net 4,032 - 4,143 968 (7,738) 1,405
Properties - net - - 2,149 5,365 - 7,514
Other assets 3 541 214 2,403 (2,950) 211
--------------------------------------------------------------------------------
Total assets $4,086 $ 541 $ 6,847 $ 9,690 $(10,739) $10,425
================================================================================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ - $ - $ 278 $ 596 $ (51) $ 823
Current portion of long-term
debt and capital leases - - - 9 - 9
Other current liabilities 42 3 145 400 - 590
--------------------------------------------------------------------------------
Total current liabilities 42 3 423 1,005 (51) 1,422
Long-term debt and
capital leases - - 2,181 716 - 2,897
Deferred income taxes - - (71) 698 - 627
Accrued abandonment, restoration
and environmental liabilities - - 293 297 - 590
Other deferred credits
and liabilities 541 - 312 2,821 (2,950) 724
Subsidiary stock subject
to repurchase - - - 70 - 70
Minority interests - - - 309 140 449
Company-obligated mandatorily
redeemable convertible
preferred securities of a
subsidiary trust holding
solely parent debentures - 522 - - - 522
Stockholders' equity 3,503 16 3,709 3,774 (7,878) 3,124
--------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $4,086 $541 $6,847 $ 9,690 $(10,739) $10,425
================================================================================
-13-
CONDENSED CONSOLIDATED CASH FLOWS
For the Three Months Ended March 31, 2002
Non-
Unocal Union Guarantor
Unocal Capital Oil Subsi- Elim- Conso-
Millions of dollars (Parent) Trust (Parent) diaries nations lidated
--------------------------------------------------------------------------------
Cash Flows from
Operating Activities $ 36 $ - $(192) $ 427 $ - $ 271
Cash Flows from Investing Activities
Capital expenditures
and acquisitions
(includes dry hole costs) - - ( 98) ( 292) - ( 390)
Proceeds from sales of assets
and discontinued operations - - 3 27 - 30
--------------------------------------------------------------------------------
Net cash used in
investing activities - - ( 95) ( 265) - ( 360)
--------------------------------------------------------------------------------
Cash Flows from Financing Activities
Change in long-term debt
and capital leases - - 376 ( 100) - 276
Dividends paid on common stock ( 49) - - - - ( 49)
Minority interests - - - (2) - ( 2)
Other 14 - (2) - - 12
--------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities ( 35) - 374 (102) - 237
--------------------------------------------------------------------------------
Increase in cash
and cash equivalents 1 - 87 60 - 148
--------------------------------------------------------------------------------
Cash and cash equivalents
at beginning of period - - 62 128 - 190
--------------------------------------------------------------------------------
Cash and cash equivalents
at end of period $ 1 $ - $149 $ 188 $ - $ 338
================================================================================
CONDENSED CONSOLIDATED CASH FLOWS
For the Three Months Ended March 31, 2001
Non-
Unocal Union Guarantor
Unocal Capital Oil Subsi- Elim- Conso-
Millions of dollars (Parent) Trust (Parent) diaries nations lidated
--------------------------------------------------------------------------------
Cash Flows from
Operating Activities $ 44 $ - $ 420 $ 309 $ - $ 773
Cash Flows from Investing Activities
Capital expenditures
and acquisitions
(includes dry hole costs) - - (195) ( 426) - ( 621)
Proceeds from sales of assets
and discontinued operations - - 15 - - 15
--------------------------------------------------------------------------------
Net cash used in
investing activities - - (180) ( 426) - ( 606)
--------------------------------------------------------------------------------
Cash Flows from Financing Activities
Change in long-term debt
and capital leases - - ( 5) 239 - 234
Dividends paid on common stock ( 49) - - - - ( 49)
Minority interests - - - (5) - ( 5)
Other 5 - - - - 5
--------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities ( 44) - ( 5) 234 - 185
--------------------------------------------------------------------------------
Increase in cash
and cash equivalents - - 235 117 - 352
--------------------------------------------------------------------------------
Cash and cash equivalents
at beginning of period 1 - 84 150 - 235
--------------------------------------------------------------------------------
Cash and cash equivalents
at end of period $ 1 $ - $319 $ 267 $ - $ 587
================================================================================
-14-
(13) Segment Data
The Company's reportable segments are: Exploration and Production, Trade,
Midstream, and Geothermal and Power Operations. General corporate overhead,
unallocated costs and other miscellaneous operations, including real estate,
carbon, minerals and those businesses that were sold, are included under the
Corporate and Other heading.
-----------------------------------------------------------------------
Segment Information Exploration & Production Trade
For the Three Months North America International
ended March 31, 2002 Lower 48 Alaska Canada Far East Other
Millions of dollars -----------------------------------------------------------------------
Sales & operating revenues $ 113 $ 51 $ 39 $ 219 $ 23 $ 456
Other income (loss) (a) 3 - - - - -
Inter-segment revenues 166 - - 52 20 -
-----------------------------------------------------------------------
Total 282 51 39 271 43 456
Earnings (loss) from equity investments ( 1) - - 8 2 (1)
Net earnings (loss) 4 (6) (9) 90 12 1
Assets (at March 31, 2002) 3,254 341 1,034 2,596 787 223
-----------------------------------------------------------------------
-----------------------------------------------------------------------------------
Midstream Geothermal Corporate & Other Total
& Power Admin Net Environmental
Operations & Interest &
General Expense Litigation Other (b)
-----------------------------------------------------------------------------------
Sales & operating revenues $ 63 $ 28 $ - $ - $ - $ 32 $ 1,024
Other income (loss) (a) 1 2 - 3 - 5 14
Inter-segment revenues 2 - - - - ( 240) -
-----------------------------------------------------------------------------------
Total 66 30 - 3 - ( 203) 1,038
Earnings (loss) from equity investments 19 (3) - - - 13 37
Net earnings (loss) 19 6 (24) ( 37) ( 23) (11) 22
Assets (at March 31, 2002) 472 591 - - - 1,460 10,758
-----------------------------------------------------------------------------------
(a) Includes interest, dividends and miscellaneous income, and gain (loss) on
sales of assets.
(b) Includes eliminations and consolidation adjustments.
-15-
-----------------------------------------------------------------------
Segment Information Exploration & Production Trade
For the Three Months North America International
ended March 31, 2001 Lower 48 Alaska Canada Far East Other
Millions of dollars -----------------------------------------------------------------------
Sales & operating revenues $ 161 $ 72 $ 32 $ 232 $ 35 $ 1,503
Other income (loss) (a) 1 - (1) (3) ( 1) (7)
Inter-segment revenues 566 - - 55 35 -
-----------------------------------------------------------------------
Total 728 72 31 284 69 1,496
Earnings (loss) from equity investments 6 - - 11 - -
Earnings (loss) from continuing operations 241 19 (3) 106 22 3
Earnings from discontinued operations (net) - - - - - -
Cumulative effect of accounting changes - - - - - -
-----------------------------------------------------------------------
Net earnings (loss) 241 19 (3) 106 22 3
Assets (at December 31, 2001) 3,345 344 1,015 2,463 741 156
-----------------------------------------------------------------------
-----------------------------------------------------------------------------------
Midstream Geothermal Corporate & Other Total
& Power Admin Net Environmental
Operations & Interest &
General Expense Litigation Other (b)
-----------------------------------------------------------------------------------
Sales & operating revenues $ 100 $ 44 $ - $ - $ - $ 27 $ 2,206
Other income (loss) (a) 1 3 - 6 - 9 8
Inter-segment revenues 2 - - - - ( 658) -
-----------------------------------------------------------------------------------
Total 103 47 - 6 - ( 622) 2,214
Earnings (loss) from equity investments 9 - - - - 16 42
Earnings (loss) from continuing operations 9 1 (23) ( 33) ( 34) (16) 292
Earnings from discontinued operations (net) - - - - - 4 4
Cumulative effect of accounting changes - - - - - (1) (1)
-----------------------------------------------------------------------------------
Net earnings (loss) 9 1 (23) ( 33) ( 34) (13) 295
Assets (at December 31, 2001) 479 594 - - - 1,288 10,425
-----------------------------------------------------------------------------------
(a) Includes interest, dividends and miscellaneous income, and gain (loss) on
sales of assets.
(b) Includes eliminations and consolidation adjustments.
-16-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis of the consolidated financial condition
and results of operations of Unocal should be read in conjunction with
Management's Discussion and Analysis in Item 7 of the Company's 2001 Annual
Report on Form 10-K.
CONSOLIDATED RESULTS
For the Three Months
Ended March 31,
-----------------------
Millions of dollars 2002 2001
--------------------------------------------------------------------------------
Earnings from continuing operations $ 22 $ 292
Earnings from discontinued operations - 4
Cumulative effect of accounting change - (1)
--------------------------------------------------------------------------------
Net earnings $ 22 $ 295
================================================================================
Earnings from continuing operations were $22 million in the first quarter of
2002 compared to $292 million for the first quarter of 2001, which was a
decrease of $270 million. The decrease was primarily due to lower prices for
natural gas and liquids (crude oil, condensate and natural gas liquids). The
Company's worldwide average natural gas price, including a benefit of 9 cents
per thousand cubic feet (Mcf) from hedging activities, was $2.39 per Mcf in the
first quarter of 2002 compared to $4.41 per Mcf in the same period a year ago,
which included a loss of 20 cents per Mcf from hedging activities. In the first
quarter of 2002, the Company's worldwide average liquids price, including a
benefit of 6 cents per barrel from hedging activities, was $18.28 per barrel
compared to $24.63 per barrel in the same period a year ago, which included a
loss of 6 cents per barrel from hedging activities. The lower natural gas prices
reduced net earnings by approximately $160 million, while the lower liquids
prices reduced net earnings by approximately $50 million. The first quarter of
2002 was also impacted by lower production compared to the same period a year
ago, principally in the Lower 48 operations. The lower worldwide production
reduced net earnings by approximately $85 million. In the first quarter of 2002,
$3 million in higher pension expense compared to the same period a year ago also
impacted net earnings. These negative factors were partially offset by $13
million in lower after-tax losses related to non-hedging commodity derivative
positions, $10 million in lower after-tax provisions for environmental and
litigation matters (the first quarter of 2002 included $21 million while the
first quarter of 2001 included $31 million) and $8 million in lower after-tax
dry hole costs. The first quarter of 2002 also included $2 million after-tax
gain from an insurance settlement related to a prior year environmental issue
and $2 million after-tax gain adjustment related to a Lower 48 prior year asset
sale.
Total revenues from continuing operations for the first quarter of 2002 were
$1.04 billion, compared with $2.21 billion for the first quarter of 2001. The
lower 2002 revenues primarily reflected lower commodity prices and lower third
party crude oil purchase and resale activity by the Company's Trade segment.
The first quarter of 2001 included a $4 million gain from discontinued
operations, related to the Company's 1997 sale of its former West Coast
refining, marketing and transportation assets.
In the first quarter of 2001, the Company recorded a non-cash $1 million
after-tax charge consisting of the cumulative effect of a change in accounting
principle related to the initial adoption of Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities".
-17-
Net Earnings Reconciliation to Adjusted Earnings
The purpose of the table below is to provide the investment community
supplemental financial data in addition to the data prepared in accordance with
generally accepted accounting principles in the U.S.
The table provides a reconciliation of consolidated net earnings to adjusted
after-tax earnings. Special items represent certain significant transactions,
the results of which are included in net earnings, that management determines to
be unrelated to or not representative of the Company's ongoing operations.
For the Three Months
Ended March 31,
-----------------------
Millions of dollars 2002 2001
--------------------------------------------------------------------------------
Net earnings (a) $ 22 $ 295
Less: Earnings from discontinued operations - 4
Less: Cumulative effect of accounting change - (1)
--------------------------------------------------------------------------------
Earnings from continuing operations 22 292
Special items:
Continuing operations
Environmental and litigation provisions (21) (31)
Trading derivatives -- non-hedging (4) (17)
Insurance settlement related to an environmental issue 2 -
Asset sales 2 -
--------------------------------------------------------------------------------
Total special items from continuing operations (21) (48)
--------------------------------------------------------------------------------
Adjusted after-tax earnings (before special items) (a) $ 43 $ 340
================================================================================
(a) Includes amounts attributable to minority interests of: $ (1) $ (16)
-18-
Exploration and Production
The Company engages in oil and gas exploration, development and production
worldwide. The results of this segment are discussed under the following two
geographical breakdowns:
North America - Included in this category are the U.S. Lower 48, Alaska and
Canada oil and gas operations. The emphasis of the U.S. Lower 48 operations is
on the onshore, the shelf and deepwater areas of the Gulf of Mexico region. The
U.S. Lower 48 also includes the consolidated results of Pure Resources, Inc.
("Pure"), which operates primarily in the Permian and San Juan Basins in west
Texas and New Mexico, the Gulf of Mexico region and offshore in the Gulf of
Mexico. A substantial portion of the crude oil and natural gas produced in the
U.S. Lower 48 operations, excluding that of Pure, is sold to the Company's Trade
business segment. The remainder of North America production, including the
production of Pure and Northrock Resources Ltd. ("Northrock") in Canada, is sold
to third parties. In Alaska, natural gas production, pursuant to agreements with
the purchaser of the Company's former agricultural products business, is sold to
a fertilizer plant in Nikiski, Alaska. In addition, the Company including Pure
takes pricing positions in hydrocarbon derivative instruments in support of its
oil and gas operations.
Operations resulted in an after-tax loss of $11 million in the first quarter of
2002 compared to after-tax earnings of $257 million in the same period a year
ago, which was a decrease of $268 million. The decrease was primarily due to
lower prices for natural gas and liquids. The average natural gas price for
North America, including a benefit of 19 cents per Mcf from hedging activities,
was $2.35 per Mcf in the first quarter of 2002 compared to $5.87 per Mcf in the
same period a year ago, which included a loss of 36 cents per Mcf from hedging
activities. In the first quarter of 2002, the Company's North America average
liquids price, including a benefit of 11 cents per barrel from hedging
activities, was $17.19 per barrel compared to $24.60 per barrel in the same
period a year ago, which included a loss of 9 cents per barrel from hedging
activities. The lower natural gas prices reduced net earnings by $155 million,
while the lower liquids prices reduced net earnings by approximately $40
million. The first quarter of 2002 was also impacted by lower natural gas
production compared to the same period a year ago, which reduced net earnings by
approximately $80 million. North America average net daily natural gas
production was 937 million cubic feet per day (MMcf/d) in the first quarter of
2002 compared to 1,152 MMcf/d in the same period a year ago, which was a
decrease of 19 percent, primarily due to Lower 48 production of 746 MMcf/d
compared to 874 MMcf/d in the same period a year ago. The Lower 48 decline
reflected lower natural gas production from the Gulf of Mexico shelf area
including production from Ship Shoal Block 295 (Muni field), which averaged
slightly over 16 MMcf/d in the first quarter of 2002 compared to 55 MMcf/d
during the first quarter of 2001. These negative factors were partially offset
by $13 million in lower after-tax losses related to non-hedging commodity
derivative positions held by Northrock and $ 6 million in lower after-tax dry
hole costs in North America. Lower 48 dry hole costs in the first quarter of
2002 were lower by $15 million after-tax than the same period a year ago,
primarily due to lower drilling activity in the deepwater Gulf of Mexico. This
decrease was partially offset by $8 million after-tax in higher dry hole costs
in Alaska.
International - Unocal's International operations include oil and gas
exploration and production activities outside of North America. The Company
operates or participates in production operations in Thailand, Indonesia,
Myanmar, Bangladesh, the Netherlands, Azerbaijan, the Democratic Republic of
Congo and Brazil. International operations also include the Company's
exploration and development activities primarily in Asia, Latin America and West
Africa.
After-tax earnings totaled $102 million in the first quarter of 2002 compared to
$128 million in the same period a year ago, which was a decrease of $26 million.
The decrease was primarily due to lower sales volumes, lower liquids prices and
higher effective tax rates, primarily due to changes in the Thai baht/U.S.
dollar exchange rate. Liquids sales volumes decreased due to the timing of
liftings in Azerbaijan and the Democratic Republic of Congo. The average liquids
price for International operations was $19.86 per barrel in the first quarter of
2002, which was a decrease of $4.81 per barrel, or 19 percent, from the same
period a year ago. These negative factors were partially offset by higher
natural gas production in the Far East, as the result of higher natural gas
sales in Thailand. The average net daily natural gas production was 897 MMcf/d
in the first quarter of 2002 compared to 850 MMcf/d in the same period a year
ago, which was an increase of 6 percent.
-19-
For the Three Months
Ended March 31,
-----------------------
Operating Highlights 2002 2001
--------------------------------------------------------------------------------
North America Net Daily Production
Liquids (thousand barrels)
Lower 48 (a) (b) 56 53
Alaska 25 24
Canada 18 15
--------------------------------------------------------------------------------
Total liquids 99 92
Natural gas - dry basis (million cubic feet)
Lower 48 (a) (b) 746 874
Alaska 101 138
Canada 90 140
--------------------------------------------------------------------------------
Total natural gas 937 1,152
North America Average Prices (c)
Liquids (per barrel)
Lower 48 $ 18.48 $ 26.75
Alaska $ 14.54 $ 22.76
Canada $ 16.52 $ 20.46
Average $ 17.19 $ 24.60
Natural gas (per Mcf)
Lower 48 $ 2.47 $ 6.93
Alaska $ 1.57 $ 1.20
Canada $ 2.25 $ 4.22
Average $ 2.35 $ 5.87
--------------------------------------------------------------------------------
International Net Daily Production (d)
Liquids (thousand barrels)
Far East 53 50
Other (a) 20 19
--------------------------------------------------------------------------------
Total liquids 73 69
Natural gas - dry basis (million cubic feet)
Far East 822 793
Other (a) 75 57
--------------------------------------------------------------------------------
Total natural gas 897 850
International Average Prices (c)
Liquids (per barrel)
Far East $ 19.28 $ 24.25
Other $ 21.96 $ 25.55
Average $ 19.86 $ 24.67
Natural gas (per Mcf)
Far East $ 2.44 $ 2.48
Other $ 2.48 $ 2.89
Average $ 2.44 $ 2.50
--------------------------------------------------------------------------------
Worldwide Net Daily Production (a) (b) (d)
Liquids (thousand barrels) 172 161
Natural gas - dry basis (million cubic feet) 1,834 2,002
Barrels oil equivalent (thousands) 477 495
Worldwide Average Prices (c)
Liquids (per barrel) $ 18.28 $ 24.63
Natural gas (per Mcf) $ 2.39 $ 4.41
--------------------------------------------------------------------------------
(a) Production includes proportional shares of production of equity investees.
(b) Includes minority interest shares of :
Liquids 9 8
Natural gas 98 89
Barrels oil equivalent 25 23
(c) Average prices include hedging gains and losses but exclude gains or losses
on derivative positions not accounted for as hedges, the ineffective
portion of hedges and other Trade margins.
(d) International production is presented utilizing the economic interest
method.
-20-
TRADE
The Trade segment conducts the majority of the Company's worldwide crude oil,
condensate and natural gas marketing activities, excluding those of Pure and
Northrock. It is also responsible for commodity-specific risk management
activities on behalf of most of the Company's Exploration and Production
segment, excluding Pure. The Trade segment also purchases crude oil, condensate
and natural gas from certain of the Company's royalty owners, joint venture
partners and other unaffiliated oil and gas producing and trading companies for
resale. In addition, the segment takes pricing positions in hydrocarbon
derivative instruments.
After-tax earnings totaled $1 million in the first quarter of 2002 compared to
$3 million in the same period a year ago. The decrease was primarily due to
lower results related to domestic natural gas marketing activities.
Sales and operating revenues from the Trade business segment were $456 million
in the first quarter of 2002 compared to $1,503 million in the same period a
year ago, which was a decrease of $ 1,047 million. These revenues represented
approximately 45 percent and 68 percent of the Company's total sales and
operating revenues for the first quarters of 2002 and 2001, respectively.
For the period, natural gas revenues declined by $465 million primarily due
to lower commodity prices and lower domestic production volumes. Crude oil
revenues declined by $485 million, primarily due to significantly reduced
activity in the purchase and resale of third party barrels intended
to take advantage of market price differentials.
MIDSTREAM
The Midstream segment is comprised of the Company's equity interests in
affiliated petroleum pipeline companies, wholly-owned pipeline systems
throughout the U.S., and the Company's North America gas storage business.
After-tax earnings totaled $19 million in the first quarter of 2002 compared to
$9 million in the same period a year ago. The increase was due primarily to
improved throughput volumes from the pipeline business and a $6 million asset
write-down related to a Colonial Pipeline Company investment that was recorded
in the first quarter of 2001.
GEOTHERMAL AND POWER OPERATIONS
The Geothermal and Power Operations business segment produces geothermal steam
for power generation, with operations in the Philippines and Indonesia. The
segment's activities also include the operation of power plants in Indonesia and
equity interests in gas-fired power plants in Thailand. The Company's
non-exploration and production business development activities, primarily
power-related, are also included in this segment.
After-tax earnings totaled $6 million in the first quarter of 2002 compared to
$1 million in the same period a year ago. This increase was primarily due to
lower receivable provisions related to geothermal operations in Indonesia.
-21-
CORPORATE AND OTHER
Corporate and Other includes general corporate overhead, miscellaneous
operations (including real estate activities, carbon and minerals) and other
corporate unallocated costs. Net interest expense represents interest expense,
net of interest income and capitalized interest.
The after-tax earnings effect for the first quarter of 2002 was a loss of $95
million compared to a loss of $106 million in the same period a year ago. Lower
after-tax provisions for environmental and litigation matters benefited the
first quarter of 2002, which included provisions of $22 million after-tax while
the first quarter of 2001 included provisions of $31 million after-tax. The
current period results also benefited from a $2 million after-tax gain from an
insurance settlement related to a prior year environmental issue. The results in
the Other category included a $10 million pre-tax ($7 million after-tax)
contribution to a charitable foundation in the first quarter of 2001. The 2002
earnings benefit from the lower contribution was partially offset by $3 million
after-tax in higher pension related expenses. For the full-year 2002, pension
costs related to the Company's U.S. based employees are expected to increase by
approximately $25 million after-tax compared to the full-year 2001. Lower
returns on plan assets and the use of a lower discount rate to measure
benefit-related liabilities are the principal factors behind the increase. Net
interest expense was $4 million higher primarily due to a premium on an early
repayment of long-term debt and higher overall long-term debt levels, partially
offset by higher capitalized interest on development projects.
FINANCIAL CONDITION
At At At
March 31, December 31, March 31,
-------------------------------------------
Millions of dollars 2002 2001 2001
--------------------------------------------------------------------------------
Current ratio 1.0:1 0.9:1 1.1:1
Total debt and capital leases $ 3,183 $ 2,906 $ 2,740
Trust convertible preferred securities 522 522 522
Stockholders' equity 3,097 3,124 2,888
-----------------------------------------
Total capitalization $ 6,802 $ 6,552 $ 6,150
=========================================
Total debt/total capitalization 47% 44% 45%
Floating-rate debt/total debt 19% 8% 11%
--------------------------------------------------------------------------------
Cash flows from operating activities, including discontinued operations and
working capital and other changes, were $271 million in the first quarter of
2002 compared to $773 million in the same period a year ago. This decrease
principally reflected the effects of lower worldwide average natural gas and
liquids prices.
Pre-tax proceeds from asset sales, including those classified as discontinued
operations, were $30 million for the first quarter of 2002. The proceeds were
primarily from an asset sale by the Company's Pure subsidiary of oil and gas
producing properties in the U.S.
Capital expenditures in the first three months of 2002 were $390 million,
compared with $360 million in the same period a year ago. The higher capital
expenditures in 2002 were primarily due to higher development expenditures in
Indonesia partially offset by lower Gulf of Mexico exploratory expenditures. The
capital expenditures amount for the first quarter of 2001 excluded Pure's
acquisition of properties from International Paper Company for $261 million.
The Company's long-term debt, including the current portion, was $3.18 billion
at March 31, 2002, compared with $2.91 billion at year-end 2001. This increase
primarily reflected the commercial paper borrowings made by the Company to fund
scheduled maturing fixed-rate debt and for other general corporate purposes (see
note 8 for further detail on the Company's long-term debt).
-22-
In 2001, the Company replaced its $1 billion bank credit agreement with two new
revolving credit facilities totaling $1 billion. One of these credit facilities
is a $400 million 364-day credit agreement and the other credit facility is a
$600 million 5-year credit agreement. The credit facilities provide for the
termination of their loan commitments and require the prepayment of all
outstanding borrowings in the event that (1) any person or group becomes the
beneficial owner of more than 30 percent of the then outstanding voting stock of
Unocal other than in a transaction having the approval of the Company's board of
directors, at least a majority of which are continuing directors, or (2) if
continuing directors shall cease to constitute at least a majority of the board.
The bank credit agreements do not have a drawdown restriction nor a prepayment
obligation in the event of a credit rating downgrade.
Based on current commodity prices and current development projects, the Company
does not expect cash generated from operating activities, asset sales and cash
on hand in 2002 to be sufficient to cover its operating and capital spending
requirements and to meet dividend payments. The Company has substantial
borrowing capacity to enable it to meet anticipated and unanticipated cash
requirements. The Company relies on the commercial paper market on an interim
basis, its accounts receivable securitization program and its revolving credit
facility to cover short-term borrowing requirements. The Company also has in
place a universal shelf registration statement with an unutilized balance of
approximately $739 million, which can be issued as debt and/or equity
securities, depending on the Company's needs and market conditions. From time to
time, the Company may also look to fund some of its long-term projects using
other financing sources, including multilateral and bilateral agencies.
Maintaining investment-grade credit ratings is a significant factor in the
Company's ability to raise short-term and long-term financing. The Company
currently has a BBB+ / Baa1 credit rating by Standard & Poor's Ratings Services
and Moody's Investors Service, Inc. Moody's recently changed its rating outlook
for the Company's long-term debt to negative from stable and retained an outlook
of stable for the Company's Prime-2 commercial paper rating. As outlined in the
tables on pages 40 and 41 of Management's Discussion and Analysis in Item 7 of
the Company's 2001 Annual Report on Form 10-K, the Company continues to believe
that it does not have a significant liquidity exposure in the event of a credit
rating downgrade.
ENVIRONMENTAL MATTERS
At March 31, 2002, the Company's reserves for environmental remediation
obligations totaled $233 million, of which $110 million was included in current
liabilities. During the first quarter of 2002, cash payments of $35 million were
applied against the reserve and $31 million in provisions were added to the
reserve balance. The provision included revised cost estimates related to the
anticipated cleanup of former service stations and distribution facilities
throughout the United States. The provision for these sites is included in
the former company-operated sites environmental reserve category shown in
the table below. A provision was also recorded for revised estimates for
various remediation projects at the former Guadalupe oil field on the
central California coast. The provision for Guadalupe is included in the
inactive or closed company facilities reserve category. A provision was
recorded for the company's estimated remaining share of oversight and
monitoring costs for the McColl Superfund site in Fullerton, California.
The provision was recorded as the result of a federal appeals court
overturning a 1998 court decision that held the federal government responsible
for cleanup of the site because of its role in encouraging oil companies to
produce gasoline during World War II. The Company also estimated as of
March 31, 2002, that it possibly could incur additional remediation
costs aggregating approximately $240 million. The Company's total
environmental reserve and possible additional liability amounts are grouped
into the following four categories.
At March 31, 2002
----------------------------
Possible
Millions of dollars Reserve Additional
--------------------------------------------------------------------------------
Superfund and similar sites $ 17 $ 10
Active company facilities 38 90
Company facilities sold with retained liabilities
and former company-operated sites 95 60
Inactive or closed company facilities 83 80
--------------------------------------------------------------------------------
Totals $ 233 $ 240
================================================================================
-23-
OUTLOOK
Certain of the statements in this discussion, as well as other forward-looking
statements within this document, contain estimates and projections of amounts of
or increases / decreases in future revenues, earnings, cash flows, capital
expenditures, assets, liabilities and other financial items and of future levels
of or increases / decreases in reserves, production, sales including related
costs and prices, drilling activities and other statistical items; plans and
objectives of management regarding the Company's future operations, products and
services; and certain assumptions underlying such estimates, projection plans
and objectives. While these forward-looking statements are made in good faith,
future operating, market, competitive, legal, economic, political,
environmental, and other conditions and events could cause actual results to
differ materially from those in the foward-looking statements. See pages 51
through 53 of Management's Discussion and Analysis in Item 7 of the Company's
2001 Annual Report on Form 10-K for a discussion of certain of such conditions
and events.
Volatile energy prices are expected to continue to impact financial results in
the year 2002. The Company expects energy prices to remain volatile due to
changes in climate conditions, worldwide demand, crude oil and natural gas
inventory levels, production quotas set by OPEC, current and future worldwide
political instability and security and other factors.
The economic situation in Asia, where most of the Company's international
activity is centered, is still recovering with positive signs showing in the
region. The Company looks at the natural gas market in Asia as its primary
investment and believes that the governments in the region are committed to
undertaking the reforms and restructuring necessary to enable their nations to
continue their recoveries from the downturn.
The Company estimates that its net worldwide daily production for 2002 will
average between 490,000 and 500,000 barrels-of-oil equivalent (BOE). The Company
forecasts its net earnings per share to be between $1.60 and $1.85 in 2002. This
forecast assumes average NYMEX benchmark prices of $24.80 per barrel of crude
oil and $3.35 per million British thermal units (MMBtus) for North America
natural gas. These price assumptions are based on year-to-date actual prices and
the NYMEX strip for the remainder of the year. Earnings are expected to change
16 cents per share for every $1 change in the Company's average worldwide
realized price for crude oil and 8 cents per share for every 10-cent change in
the Company's average realized North America natural gas price. The full-year
forecast also includes pre-tax dry hole costs of $120 to $130 million.
U.S. Lower 48: In the Gulf of Mexico deep water, the Company is continuing its
appraisal of the Trident discovery and is planning to drill a second appraisal
well later in 2002. In addition, the Company is continuing its participation in
the development of the Mad Dog discovery.
The Company is continuing to optimize its production portfolio on the Gulf of
Mexico shelf by its exploration focus on deeper prospects with significantly
higher resource potential.
Alaska: In April 2002, the Company announced the successful completion and
testing of two additional exploration wells in the Ninilchik Exploration Unit on
Alaska's Kenai Peninsula. The Grassim Oskolkoff #2 well tested at a combined
flow rate of 11.9 MMcf/d from three zones. The Falls Creek #1RD was also
recently tested from a single zone at a rate of 6.8 MMcf/d. In January 2002, the
Company announced a discovery of a new natural gas reservoir in the Ninilchik
Exploration Unit with the Grassim Oskolkoff #1 well, which tested 11.2 MMcf/d
from one zone. The Company holds a 40 percent working interest in the
25,000-acre Ninilchik Exploration Unit. Marathon Oil Company is operator and
holds the remaining interest. The Ninilchik Exploration Unit is located about 35
miles south of Kenai, Alaska. The two companies also formed Kenai Kachemak
Pipeline LLC to develop a natural gas pipeline that would connect the producing
area with the existing south central Alaska pipeline system. The Company failed
to find commercial quantities of natural gas in a three-well program on the
southern Kenai Peninsula. Due to the lack of commercial success in South Kenai,
the Kenai Kachemak Pipeline LLC pipeline project was revised and will now be
approximately 33 miles in length between Kenai and Ninilchik.
-24-
In April 2002, a fire damaged the Company's King Salmon Platform, located in the
Cook Inlet in Alaska. The fire was put out and no oil spilled in the Cook Inlet.
Four workers sustained injuries that were not life threatening. The platform
resumed operations in late April. The Company's current estimate of property
losses and lost production revenues from this incident is approximately $3
million after-tax.
Canada: In May 2002, the Company's Northrock subsidiary entered into an
agreement to acquire all of the issued and outstanding common shares of Corsair
Exploration Inc. ("Corsair"). Corsair is a Canadian exploration and production
company primarily engaged in activity in West Central Alberta, Canada. The total
consideration for the offer is approximately $35 million, including the
assumption of outstanding debt and working capital deficiency. The agreement and
the offer are subject to a number of conditions, including obtaining all
required regulatory approvals and receiving tenders for a minimum of 66 2/3
percent of the outstanding shares. The transaction is expected to close by the
end of the second quarter of 2002.
Thailand: In 2002, the Company's Unocal Thailand, Ltd., subsidiary and its
partners agreed to cut the price of natural gas it sells to PTT Public Co., Ltd.
"PTT"), the partially privatized state energy company. The discount covers
natural gas supplies produced in the Gulf of Thailand under three gas sales
contracts ("GSAs"). The effective date of the discount for GSA 1 (Erawan field)
is July 2002, with October 2002 being the start of the new pricing arrangement
under GSAs 2 and 3. As part of the agreement, PTT has agreed to extend the GSA
for the Erawan field by five-and-one-half years to 2012. The current expected
realized price for all of Unocal's Thailand GSAs in 2002 is about $2.45 per Mcf.
For 2003 through 2012, the Company's sales price will be discounted by an
average of approximately 5 cents per Mcf, or 2 percent. The Company's net
working interest share of daily contract quantities of natural gas sold from
the Gulf of Thailand during the period of 2003 through 2012 is anticipated
to be approximately 575 MMcf/d.
The Company began crude oil production in May 2002 from its Yala field in the
Gulf of Thailand. The Company began initial production of crude oil from the
neighboring Plamuk field in 2001. The Company expects production from the
Plamuk, Yala and a third field (Surat) to reach 15 MBbl/d (gross) in 2002.
The Company has a 71.25 percent working interest in these fields.
Vietnam: In May 2002, the Company's Vietnam subsidiaries filed a declaration of
commercial discovery with PetroVietnam, the national oil company, for three
natural gas fields offshore southwest Vietnam. The declaration followed the
drilling of 10 successful exploration wells on Blocks B and 52/97,
including four wells that were drilled in 2001. The declaration is the first
step toward signing a gas sales agreement, which is required before any field
development can begin. As a result of the declaration of commercial discovery,
PetroVietnam may exercise its option to convert its carried participating
interests into paying working interests. Should PetroVietnam opt to convert to
normal working interests, the Company would hold a 42 percent working interest
in Block B and Block 48/95 and a 43 percent working interest in Block 52/97.
Indonesia: The Company's Unocal Rapak, Ltd. ("Unocal Rapak"), subsidiary
successfully tested two appraisal wells in the deepwater Ranggas oil prospect
offshore East Kalimantan, Indonesia. The Ranggas-4 appraisal well flowed at a
daily rate of 8,158 barrels of oil and 6.4 million cubic feet of gas from a
single interval between 10,174 feet and 10,224 feet true vertical depth subsea
(TVD). The Ranggas-4 well encountered 181 feet of net oil pay and 57 feet of net
gas pay. The well was drilled in 5,208 feet of water to 11,252 feet TVD. The
well is located 2.4 miles north of the Ranggas-1 discovery well and 1.2 miles
south of the Ranggas-3 appraisal well. In addition, the Company successfully
completed the Ranggas-5 appraisal well, also on the main Ranggas structure. The
Ranggas-5 well encountered 203 feet of net oil pay and 618 feet of net gas pay.
The well was drilled in 5,412 feet of water to 11,858 TVD. The well is located
1.5 miles north of the Ranggas-1 discovery well and 0.7 mile south of the
Ranggas-4 well. The Company has initiated engineering and development studies
for the prospect, in light of the successful appraisal program. Unocal Rapak is
operator of the Rapak Production-Sharing Contract (PSC) area and holds an 80
percent working interest.
The Company is also evaluating early development options for the condensate
discovered at its deepwater Genadalo-Gandang discovery in the Ganal PSC,
offshore Indonesia. The Company is the operator of the Ganal PSC and holds an
80 percent working interest.
-25-
Bangladesh: The Company continues to work with the government of Bangladesh and
Petrobangla, the national oil and gas company, to develop additional reserves
and export natural gas to markets in neighboring India. At March 31, 2002, the
Company's business unit in Bangladesh had a gross receivable balance of
approximately $32 million relating to invoices billed for natural gas and
condensate sales to Petrobangla. Approximately $27 million of the outstanding
balance represented past due amounts and accrued interest for invoices covering
September 2001 through March 2002. In April 2002, payments were received for
natural gas sales covering billings for September and the remaining unpaid
portion of August 2001. In May 2002, payments were received for natural gas
sales covering billings for October 2001 and payments for condensate sales for
September 2001. Generally, invoices, when paid, have been paid in full.
The Company is working with Petrobangla and the government of Bangladesh
regarding the collection of the outstanding receivables.
Brazil: The Company anticipates that the drilling of an exploratory well on the
BM-ES-1 Block in the Espirito Santo Basin will begin by the end of the second
quarter of 2002. The Company acquired a 25 percent non-operating working
interest in the Block earlier in 2002. Drilling in the adjacent BM-ES-2 Block
will wait on results from the BM-ES-1 Block and is projected to commence in the
first quarter of 2003 at the earliest. The Company holds a 40.5 percent working
interest in the BM-ES-2 Block.
Geothermal and Power Operations: As of March 31, 2002, the Company's Indonesian
Geothermal business unit had a gross receivable balance of approximately $435
million. Approximately $184 million was related to Gunung Salak electric
generating Units 1, 2, and 3, of which $181 million represented past due amounts
and accrued interest resulting from partial payments for March 1998 through
March 2002. Although invoices generally have not been paid in full, amounts that
have been paid have been received in a timely manner in accordance with the
steam sales contract. The remaining $251 million is primarily related to Salak
electric generating Units 4, 5 and 6. Provisions covering substantial portions
of these receivables have been recorded from 1998 through March 2002. The
Company believes that it will be able to collect the net outstanding
receivables. Efforts to renegotiate geothermal steam sales and electrical energy
sales contracts at Gunung Salak are continuing. The Company believes that
significant progress has been made towards an agreement that is acceptable to
all parties to resolve the issues.
FUTURE ACCOUNTING CHANGES
In August 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No 143, "Accounting for Asset
Retirement Obligations". It is effective for fiscal years beginning after June
15, 2002, and it requires entities to record the fair value of a liability for
an asset retirement obligation in the period in which it is incurred, as a
capitalized cost of the long-lived asset and to depreciate it over the useful
life of the asset. The Company is currently in the process of evaluating the
impact that SFAS No. 143 will have on its financial position and results of
operations.
Other proposed accounting changes considered from time to time by the FASB, the
U.S. SEC, the American Institute of Certified Public Accountants and the United
States Congress could materially impact the Company's reported financial
position and results of operations.
-26-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk generally represents the risk that losses may occur in the values of
financial instruments as a result of movements in interest rates, foreign
currency exchange rates and commodity prices. As part of its overall risk
management strategies, the Company uses derivative financial instruments to
manage and reduce risks associated with these factors. The Company also pursues
outright pricing positions in certain hydrocarbon derivative instruments, such
as futures contracts, swaps and options.
The Company determines the fair values of its derivative financial instruments
primarily based upon market quotes of exchange traded instruments. Most futures
and options contracts are valued based upon direct exchange quotes or industry
published price indices. Some instruments with longer maturity periods require
financial modeling to accommodate calculations beyond the horizons of available
exchange quotes. These models calculate values for outer periods using current
exchange quotes (forward curve) and assumptions regarding interest rates,
commodity and interest rate volatility and, in some cases, foreign currency
exchange rates. While the Company feels that current exchange quotes and
assumptions regarding interest rates and volatilities are appropriate factors to
measure the fair value of its longer termed hydrocarbon derivative instruments,
other pricing assumptions or methodologies may lead to materially different
results in some instances.
Interest Rate Risk - From time to time the Company temporarily invests its
excess cash in short-term interest-bearing securities issued by high-quality
issuers. Company policies limit the amount of investment in securities of any
one financial institution. Due to the short time the investments are outstanding
and their general liquidity, these instruments are classified as cash
equivalents in the consolidated balance sheet and do not represent a material
interest rate risk to the Company. The Company's primary market risk exposure
for changes in interest rates relates to the Company's long-term debt
obligations. The Company manages its exposure to changing interest rates
principally through the use of a combination of fixed and floating rate debt.
Interest rate risk sensitive derivative financial instruments, such as swaps
or options may also be used depending upon market conditions.
The Company evaluated the potential effect that near term changes in interest
rates would have had on the fair value of its interest rate risk sensitive
financial instruments at March 31, 2002. Assuming a ten percent decrease in the
Company's weighted average borrowing costs at March 31, 2002, the potential
increase in the fair value of the Company's debt obligations and associated
interest rate derivative instruments, including the Company's net interests in
the debt obligations and associated interest rate derivative instruments of its
subsidiaries, would have been approximately $106 million at March 31, 2002.
Foreign Exchange Rate Risk - The Company conducts business in various parts of
the world and in various foreign currencies. To limit the Company's foreign
currency exchange rate risk related to operating income, foreign sales
agreements generally contain price provisions designed to insulate the Company's
sales revenues against adverse foreign currency exchange rates. In most
countries, energy products are valued and sold in U.S. dollars and foreign
currency operating cost exposures have not been significant. In other countries,
the Company is paid for product deliveries in local currencies but at prices
indexed to the U.S. dollar. These funds, less amounts retained for operating
costs, are converted to U.S. dollars as soon as practicable. The Company's
Canadian subsidiaries are paid in Canadian dollars for their crude oil and
natural gas sales.
From time to time the Company may purchase foreign currency options or enter
into foreign currency swap or foreign currency forward contracts to limit the
exposure related to its foreign currency debt or other obligations. At March 31,
2002, the Company had various foreign currency swaps and foreign currency
forward contracts outstanding related to operations in Canada, Thailand and The
Netherlands. The Company evaluated the effect that near term changes in foreign
exchange rates would have had on the fair value of the Company's combined
foreign currency position related to its outstanding foreign currency swaps and
forward contracts.
-27-
Assuming an adverse change of ten percent in foreign exchange rates at March 31,
2002, the potential decrease in fair value of the Company's foreign currency
forward contracts, foreign-currency denominated debt, foreign currency swaps and
foreign currency forward contracts of its subsidiaries, would have been
approximately $18 million at March 31, 2002.
Commodity Price Risk - The Company is a producer, purchaser, marketer and trader
of certain hydrocarbon commodities such as crude oil and condensate, natural gas
and refined products and is subject to the associated price risks. The Company
uses hydrocarbon price-sensitive derivative instruments (hydrocarbon
derivatives), such as futures contracts, swaps, collars and options to mitigate
its overall exposure to fluctuations in hydrocarbon commodity prices. The
Company may also enter into hydrocarbon derivatives to hedge contractual
delivery commitments and future crude oil and natural gas production against
price exposure. The Company also actively trades hydrocarbon derivatives,
primarily exchange regulated futures and options contracts, subject to internal
policy limitations.
The Company uses a variance-covariance value at risk model to assess the market
risk of its hydrocarbon derivatives. Value at risk represents the potential loss
in fair value the Company would experience on its hydrocarbon derivatives, using
calculated volatilities and correlations over a specified time period with a
given confidence level. The Company's risk model is based upon historical data
and uses a three-day time interval with a 97.5 percent confidence level. The
model includes offsetting physical positions for hydrocarbon derivatives related
to the Company's fixed price pre-paid crude oil and pre-paid natural gas sales.
The model also includes the Company's net interests in its subsidiaries' crude
oil and natural gas hydrocarbon derivatives and forward sales contracts. Based
upon the Company's risk model, the value at risk related to hydrocarbon
derivatives held for purposes other than hedging was approximately $3 million at
March 31, 2002. The value at risk related to hydrocarbon derivatives held for
hedging purposes was approximately $9 million at March 31, 2002.
In order to provide a more comprehensive view of the Company's commodity price
risk, a tabular presentation of open hydrocarbon derivatives is also provided.
The following table sets forth the future volumes and price ranges of
hydrocarbon derivatives held by the Company at March 31, 2002, along with the
fair values of those instruments.
-28-
Open Hydrocarbon Hedging Derivative Instruments (a)
(Thousands of dollars)
Fair Value
Asset
2002 2003 2004 2005 2006-2009 (Liability)(b)
--------------------------------------------------------------------------------------------------------------
Natural Gas Futures Positions
Volume (MMBtu) 3,210,000 - - - - $ 875
Average price, per MMBtu $ 3.29
--------------------------------------------------------------------------------------------------------------
Natural Gas Swap Positions
Pay fixed price (c)
Volume (MMBtu) 8,578,500 7,298,000 7,241,000 7,218,000 21,677,000 $ 31,196
Average swap price, per MMBtu $ 2.76 $ 2.31 $ 2.33 $ 2.37 $ 2.47
Receive fixed price (d)
Volume (MMBtu) 14,034,842 131,508 95,438 - - $ (4,805)
Average swap price, per MMBtu $ 2.92 $ 1.97 $ 1.97
--------------------------------------------------------------------------------------------------------------
Natural Gas Basis Swap Positions
Volume (MMBtu) - - - - - $ (199)
Average price received, per MMBtu
Average price paid, per MMBtu
--------------------------------------------------------------------------------------------------------------
Natural Gas Collar Positions
Volume (MMBtu) 33,455,000 891,000 112,500 - - $ (9,325)
Average ceiling price, per MMBtu $ 3.41 $ 5.42 4.65
Average floor price, per MMBtu $ 2.23 $ 3.06 2.90
--------------------------------------------------------------------------------------------------------------
Natural Gas Option (Listed)
Call Volume (MMBtu) 2,300,000 180,000 - - - $ 731
Average Call price, per MMBtu $ 3.19 $ 6.35
Put Volume (MMBtu) (38,100) (180,000) - - - $ 283
Average Put Price $ 3.56 $ 3.25
--------------------------------------------------------------------------------------------------------------
Natural Gas Option (OTC)
Put Volume (MMBtu) - - - - - $ (28)
Average Put Price
--------------------------------------------------------------------------------------------------------------
Crude Oil Future position
Volume (Bbls) 791,000 - - - - $ 5,034
Average price, per Bbl $21.30
--------------------------------------------------------------------------------------------------------------
Crude Oil Option
Put Volume (Bbls) (800,000) - - - - $ (2)
Average price, per Bbl $ 31.06
Call Volume (Bbls) - - - - - $ (65)
Average price, per Bbl
--------------------------------------------------------------------------------------------------------------
Crude Oil Swap Positions
Pay fixed price
Volume (Bbls) 59,500 - - - - $ ( 33)
Average swap price, per Bbl $ 26.40
Receive fixed price (e)
Volume (Bbls) 119,000 - - - - $ (845)
Average swap price, per Bbl $ 18.71
--------------------------------------------------------------------------------------------------------------
Crude Oil Collars
Volume (Bbls) 88,421 156,802 47,778 - - $ (477)
Average ceiling price, per Bbl $ 27.15 $ 25.33 $ 23.84
Average floor price, per Bbl $ 20.61 $ 19.77 $ 18.00
--------------------------------------------------------------------------------------------------------------
(a) Positions reflect long (short) volumes.
(b) Includes $ 2,157 thousand net claims against counterparties with
non-investment grade credit ratings.
(c) Includes $147 thousand in assumed liabilities which were capitalized as
acquisition costs.
(d) Includes $10,239 thousand in assumed liabilities which were capitalized as
acquisition costs.
(e) Includes $603 thousand in assumed liablities which were capitalized as
acquisitions costs.
-29-
Open Hydrocarbon Non-Hedging Derivative Instruments (a)
(Thousands
of dollars)
Fair Value
Asset
2002 2003 (Liability)(b)
--------------------------------------------------------------------------------
Natural Gas Futures Positions
Volume (MMBtu) 2,710,000 - $ 382
Average price, per MMBtu $ 3.36
--------------------------------------------------------------------------------
Natural Gas Swap Positions
Pay fixed price
Volume (MMBtu) 166,225 828,400 $(15,676)
Average swap price, per MMBtu $ 3.27 $ 3.27
--------------------------------------------------------------------------------
Natural Gas Basis Swap Positions
Volume (MMBtu) - - $ 1,142
Average price received, per MMBtu
Average price paid, per MMBtu
--------------------------------------------------------------------------------
Natural Gas Option (Listed)
Call Volume (MMBtu) (6,500,000) - $ 90
Average Call price, per MMBtu $ 3.57
--------------------------------------------------------------------------------
Natural Gas Option (Over the Counter)
Call Volume (MMBtu) (3,613,050) (3,055,200 $ (5,707)
Average Call price,per MMBtu $ 2.97 $2.55
Put Volume (MMBtu) (2,140,000) - $ 86
Average Put price, per MMBtu $ 2.90
--------------------------------------------------------------------------------
Natural Gas Spread Option (Over the Counter)
NYMEX / IFERC (c)
Put Volume (MMBtu) (23,440,000) - $ 646
Average Strike price, per MMbtu $ 0.32
--------------------------------------------------------------------------------
Crude Oil Future position
Volume (Bbls) (231,494) - $ 2,872
Average price, per Bbl $ 23.95
--------------------------------------------------------------------------------
Crude Oil Option
Put Volume (Bbls) - - $ (1,092)
Average price, per Bbl
Call Volumes (Bbls) - - $ ( 158)
Average price, per Bbl
--------------------------------------------------------------------------------
Crude Oil Swap Positions
Pay Fixed price
Volume (Bbls) 499,972 - $ (1,684)
Average price, per Bbl 21.34
Receive fixed price
Volume (Bbls) 1,071,000 - $ (7,259)
Average swap price, per Bbl $ 18.85
--------------------------------------------------------------------------------
(a) Positions reflect long (short) volumes.
(b) Includes $1,062 thousand net claims against counterparties with
non-investment grade credit ratings.
(c) Prices quoted from the New York Mercantile Exchange (NYMEX) and Insight
FERC Gas Report (IFERC).
-30-
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There is incorporated by reference: the information with respect to certain
legal proceedings pending or threatened against the Company previously reported
in Item 3 of Unocal's Annual Report on Form 10-K for the year ended December 31,
2001 (2001 Form 10-K); the information regarding environmental remediation
reserves in note 9 to the consolidated financial statements in Item 1 of Part I
of this report; the discussion of such reserves in the Environmental Matters
section of Management's Discussion and Analysis in Item 2 of Part I; and the
information regarding certain legal proceedings and other contingent liabilities
in note 10 to the consolidated financial statements. Information with respect to
recent developments in certain of such proceedings is set forth below:
1. In April 2002, the U.S. District Court for the District of Hawaii approved
the settlement agreement submitted to it in the action captioned Anzai
[formerly Bronster] (State of Hawaii) v. Unocal Corporation, et al.,
described in Paragraph 4 of Item 3 of the 2001 Form 10-K. The Company paid
its $3.3 million share of the settlement in May 2002.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits: The Exhibit Index on page 33 of this report lists
the exhibits that are filed as part of this report.
(b) Reports on Form 8-K:
Filed during the first quarter of 2002:
(1) Current Report on Form 8-K, dated and filed January
24, 2002, for the purpose of reporting, under Item 5,
the Company's fourth quarter 2001 impairment charge
and other special items.
(2) Current Report on Form 8-K, dated January 22, 2002,
and filed January 31, 2002, for the purpose of
reporting, under Item 5, the Company's fourth quarter
2001 earnings and related information, the Company's
2001 reserve replacement and finding development and
acquisition results, the Company's 2002 earnings
forecast and other operational activity updates.
(3) Current Report on Form 8-K, dated March 27, 2002, and
filed March 28, 2002, for the purpose of reporting,
under Item 5, the amendment, effective March 27,
2002, of the Company's Rights Agreement, dated as of
January 5, 2000.
Filed during the second quarter of 2002 to the date hereof:
(1) Current Report on Form 8-K, dated and filed April 8,
2002, for the purpose of reporting, under Item 5, the
Company's drilling results in Indonesia and a first
quarter 2002 provision for environmental remediation.
(2) Current Report on Form 8-K, dated and filed April 25,
2002, for the purpose of reporting, under Item 5, the
Company's first quarter 2002 earnings and related
information and the Company's 2002 earnings forecast.
-31-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNOCAL CORPORATION
(Registrant)
Dated: May 15, 2002 By: /s/JOE D. CECIL
---------------------------------
Joe D. Cecil
Vice President and Comptroller
(Duly Authorized Officer
Principal Accounting Officer)
-32-
EXHIBIT INDEX
12.1 Statement regarding computation of ratio of earnings to fixed charges
of Unocal Corporation for the three months ended March 31, 2002
and 2001.
12.2 Statement regarding computation of ratio of earnings to fixed
charges of Union Oil Company of California for the three months
ended March 31, 2002 and 2001.
Copies of exhibits will be furnished upon request. Requests should be addressed
to the Corporate Secretary.