ITEM 3 - LEGAL PROCEEDINGS
( 1 ) The company may face potentially significant financial exposure from possible civil penalty citations, claims and lawsuits regarding environmental matters. These matters include, for example, properties requiring presently undeterminable amounts of cleanup efforts and expenses, soil or water contamination, and claims for personal injuries allegedly caused by exposure to toxic materials manufactured or used by the company.
Within this category, there are various sites for which the company could be liable, either alone or in some proportionate amount with other defendants, for civil penalties, claims and lawsuits:
The present state of the law which imposes joint and several liability on defendants, the potentially large number of claimants for any given site or exposure, the uncertainty attendant to the possible award of punitive damages, the inprecise and conflicting engineering evaluations and estimates of proper cleanup methods and costs, and the recent judicial recognition of new causes of action, all contribute to the practical impossibility of making any reasonable estimate of the company's potential liability for most of these environmental matters.
The company is usually just one of several companies cited as a potentially responsible party. Although potential aggregate monetary damages might be substantial, Union Oil's share of any liability is likely to be relatively small. Settlements and costs incurred in those matters that have been previously resolved have not been materially significant to the company's operating results or financial position.
Except for specific sites discussed later, the company does not believe that the ultimate share of its liability at the above sites or other presently unknown sites will be material to its financial condition. Even though unlikely, an adverse decision awarding punitive damages to numerous plaintiffs or imposing joint and several liability for the cleanup obligations of other equally responsible parties, however, could have a material effect on the company's financial condition. Also, if liabilities are aggregated and assumed to occur in a single fiscal year, they could be material to the company's operating results.
( 2 ) In the Exxon Valdez litigation, Alyeska and its owners, including ------------ Unocal Pipeline company, have reached a settlement for $98 million with the remaining private plaintiffs in the litigation. The settlement will resolve all outstanding private damage claims against Alyeska and its owner companies as a result of the spill. The settlement was approved by both the state and federal courts overseeing the litigation. Union Oil's share of the settlement amount is about $1.3 million. Exxon has filed appeals seeking to enjoin Alyeska's settlement for the private damage claims.
The parties have settled the remaining claims of the State of Alaska in State ----- of Alaska v. Exxon, et al., No. A92-175, U.S.D.C. Alaska (originally filed in - - - -------------------------- Superior Court, Third Judicial District, No. 89-6852) and the United States in United States of America v. Exxon, et al., No. A91-082, U.S.D.C. Alaska, without - - - ----------------------------------------- admitting liability. The defendants agreed to pay $31.7 million to settle the lawsuits, of which Unocal Pipeline company's share is $600,086.
( 3 ) The judgment against the company in Angelina Hardwood Lumber Company -------------------------------- v. Prairie Producing Co., Cause No. 24, 654-91-01, in the District Court of - - - ------------------------ Angelina County, Texas, is still on appeal. The judgment holds the company liable for approximately $23.5 million in compensatory damages, $50 million in punitive damages, and $5.5 million in prejudgment interest and attorneys' fees. This case involves complicated factual and legal questions regarding a title dispute to natural gas producing properties in Louisiana. The company firmly believes that the judgment in this case is not justified and that a successful outcome on appeal is reasonably likely.
( 4 ) On March 15, 1994, the company entered a plea of no contest to three misdemeanor counts of a criminal complaint: a) California Water Code S 13272 - failure to report the discharge of petroleum product to State waters; b) California Water Code SS 13376 and 13387 (a) (1) - negligent failure to report the discharge of petroleum product to navigable waters; and c) California Fish and Game Code S 5650 - deposit of petroleum product where it could pass into State waters. (People v. Unocal Corporation, et al., DA #930004569, San Luis ------------------------------------- Obispo Country Municipal Court, State of California). All remaining charges against the company and six of its current and former employees were dismissed. The charges concern the failure to report contamination in the Guadalupe Oil Field that may have occurred at various times in the 1960s, 1970s and 1980s.
The company agreed to pay $1.5 million in restitution and civil penalties. Most of the monetary sanctions were paid under a Stipulation for Judgment and Judgment Pursuant to Business & Professions Code 17200, et seq. in the case for civil penalties (People v. Unocal Corporation, CV 75157, Superior Court of the ------------------------------ State of California, County of San Luis Obispo).
Under the terms of a three-year probation, the company must investigate and remediate the hydrocarbon contamination at the Guadalupe Oil Field to the satisfaction of the lead regulatory agency and also undertake a program of mandatory education and training concerning environmental regulations for its employees.
A civil suit seeking various forms of penalties and restitution was filed on March 23, 1994 (People v. Unocal Corporation, Superior Court of San Luis Obispo ------------------------------ County, Civil No. 75194) by the California Attorney General on behalf of the Department of Fish and Game, the Regional Water Quality Control Board, and the Department of Toxic Substances Control. The complaint alleges several categories of violations, namely, discharge into marine and state waters, failure to report discharge, destruction of natural resources, failure to warn and exposure to known carcinogens (benzene/toluene), public nuisance, unauthorized disposal of hazardous waste, and labeling violations for "recycled" diluent material. Injunctive relief and civil penalties are demanded for the various claimed violations as well as prejudgment and postjudgment interest, costs, and reasonable attorney fees.
Cleanup and remediation of the Field are continuing. The ultimate cost of that effort and the outcome of civil litigation are presently undetermined. In the opinion of management, however, the likely financial outcome of this event and the ensuing litigation could be substantial but will not result in any loss which would materially affect the company's financial position or operations.
( 5 ) In the McColl dumpsite litigation, the defendants have reached a partial tentative settlement of $18 million of claims for past costs by the EPA. The company's share of the settlement is 18.75%, and the settlement is awaiting final language and judicial approval, U.S.A., et al. v. Shell Oil company, et ----------------------------------------- al., CV-91-0589 RKJ (EX), United States District Court, Central District of - - - --- California. Still remaining is the EPA determination on the parameters of the final remedy at the site. The defendants' counterclaims also remain.
Predesign and design of the proposed remedial solution (soft material solidification) continues as the result of an agreed order.
( 6 ) The company was cited by the EPA as one of 14 respondents to an Administrative Order issued under Section 106 of CERCLA ("Superfund") regarding the Gulf Coast Vacuum Site in Abbeville, Louisiana, which is an abandoned oil and gas exploration and production waste site. Under this Order, the company is required to conduct an "interim remedial action" at the Gulf Coast Site in accordance with a Statement of Work and an earlier Record of Decision. Compliance with the Order was completed in December, 1993. A consent decree signed by the parties for performance of the final remediation was entered with the EPA and is awaiting judicial approval. The company's share of the estimated $16.4 million final remediation costs is 11 percent.
( 7 ) The company is still defending the EPA Region 9 administrative order issued under Section 106(a) of CERCLA requiring the company and eight other companies to conduct a prescribed Remedial Design and Remedial Action to address groundwater contamination at the Purity Oil Sales Superfund Site near Fresno, California. A consent order to perform the Remedial Design for the soils remedy has been negotiated. Execution of the remedy covered by the design will be negotiated later.
( 8 ) A final settlement was made with the City of Heath, Ohio, in 1993 in the lawsuit filed by the City against the company and Ashland Petroleum concerning an Ashland terminal, an alleged source of pollution which was formerly a company refinery until sold to Ashland in 1970.
In related matters, the joint investigation of pollution which may be related to the terminal/refinery site, as required by a consent order, is now complete. Negotiations are pending with the state over further required actions which will define the scope of the company's future liability at the Heath site.
The allegations against the company in all of the above matters have been denied. Although management does not believe that an award of punitive or treble damages is justified in any of these cases, any award of substantial punitive or treble damages, however remotely possible, could have a material effect upon the company's operating results or financial condition.
The company believes that its challenges to notices of environmental violations will be upheld or will result in a significant reduction in the amount of penalties sought. The company has or is in the process of instituting remedial measures necessary to avoid similar future incidents.
ITEM 4
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
PART II
ITEM 5
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
All of Union Oil's outstanding common stock is owned by Unocal. Accordingly, there is no established public trading market for Union Oil's stock. The company declared dividends to Unocal totaling $227 million in 1993, $176 million in 1992 and $156 million in 1991.
ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA - Not required.
ITEM 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CONSOLIDATED RESULTS
Union Oil's net earnings for 1993 were $214 million, compared with $221 million in 1992 and $75 million in 1991. Earnings for the three years included the following special items:
Excluding the effect of accounting changes and other special items, net earnings were $348 million in 1993, $235 million in 1992 and $119 million in 1991. The significant improvement in 1993 operating earnings reflected higher domestic natural gas prices and production, improved West Coast refining and marketing margins, lower worldwide exploration expenses and lower interest expense. In addition, the company benefited from continued cost reductions as a result of its 1992 restructuring efforts. These favorable factors were partially offset by lower crude oil prices.
In 1993, the company completed the sale of its geothermal operations in the Imperial Valley of California and its national auto/truckstop system. Major asset sales in 1992 included the company's retail chemical distribution and polymers businesses.
Comparing 1992 results with 1991, the increase was mainly due to improved margins for refined products, higher natural gas sales prices and volumes, and lower domestic exploration costs. Partially offsetting these positive factors were lower crude oil production and reduced earnings from chemical operations.
REVENUES
Consolidated revenues continued to decline in 1993, down by $1.7 billion from 1992 and $2.6 billion from 1991. This trend reflects the company's divestments in recent years and the phase-out of its marketing operations in the southeastern United States. The decrease in 1993 also reflects lower crude oil prices. Divestments planned for 1994 are not expected to have a significant effect on revenues.
COSTS AND OTHER DEDUCTIONS
Crude oil and product purchases, operating expense, and selling, administrative and general expense totaled $5.4 billion in 1993, compared with $7.0 billion in 1992 and $7.8 billion in 1991. The decline was mainly the result of business divestments and the phase-out of Southeastern marketing operations. Lower crude purchase costs and cost reduction efforts also contributed to the decrease. Administrative and general expense in 1992 included a $55 million charge related to the company's restructuring efforts.
Dry hole and exploration expenses declined in 1993 reflecting highly focused worldwide exploration activities. Lower interest expense in 1993 was mainly due to the debt reduction efforts in late 1992.
OIL AND GAS EXPLORATION AND PRODUCTION
The results for all three years reflected continued improvement in the U.S. natural gas market. The company's average sales price for domestic natural gas was $1.97 per thousand cubic feet, up from $1.74 in 1992 and $1.66 in 1991. Domestic daily natural gas production in 1993 was up two percent from 1992 and six percent from 1991. The results also reflected continued decreases in exploration expenses and other cost reductions. While these gains were significant, they were partially offset by a decrease in crude oil prices and lower crude oil production due to natural decline and lost production resulting from property sales. The company's average worldwide sales prices of crude oil were $14.21 per barrel in 1993, $15.99 in 1992 and $16.50 in 1991.
Special items for 1993 consisted primarily of gains from the sale of nonstrategic properties; for 1992, a $44 million deferred income tax benefit related to foreign exploration expenses; and for 1991, a $24 million earnings benefit from natural gas contract settlements.
REFINING, MARKETING AND TRANSPORTATION
The company's West Coast refining and marketing margins continued to improve in 1993. Although selling prices for refined products were lower than a year ago, the impact was more than offset by lower crude oil and product purchase costs. The phase-out of the company's Southeastern retail operations in late 1991 also had a favorable impact on 1993 results.
Comparing 1992 results with 1991, the significant increase in earnings before special items was principally due to improved margins in West Coast operations, including the benefits from the integration of the Los Angeles Refinery with the Carson Plant, and strong earnings from the company's UNO-VEN joint venture in the Midwest.
Special items for 1993 principally included charges for asset write-offs which were partially offset by gains from various asset sales. Special items for 1992 reflected charges related to restructuring and a write-down of surplus equipment; and for 1991, a gain from the sale of refined product inventories in the Southeastern market.
CHEMICALS
Net earnings for this segment were $42 million in 1993, $23 million in 1992 and $47 million in 1991. The lower 1992 earnings were principally caused by residual expenses associated with the retail chemical distribution and polymers manufacturing businesses that were sold in early 1992. These businesses posted a small loss in 1991.
With the sale of its retail agricultural business in 1993, this segment's primary sources of income are derived from its manufacturing of nitrogen-based fertilizer and petroleum cokes. Higher earnings were recorded for the petroleum coke operations in 1993.
GEOTHERMAL
Geothermal energy earnings in 1993 were $46 million, which included a $19 million gain from the sale of the Imperial Valley operations. Net earnings were $38 million in 1992 and $37 million in 1991, including Imperial Valley operating earnings of $19 million in 1992 and $18 million in 1991. Geothermal steam production in Indonesia is scheduled to come on stream in the second quarter of 1994.
CORPORATE AND OTHER
Corporate expense includes general corporate overhead and other unallocated items. Other operations include the results of shale oil, mineral and real estate businesses. The 1993 results continued to reflect the favorable impact of discontinuing the company's shale oil and molybdenum operations. The company also recorded higher earnings from its lanthanide operations.
Net interest expense represents interest income and expense, net of capitalized interest. The decrease in 1993 reflects the full-year impact of more than $1 billion reduction in debt in 1992. Interest expense is expected to be slightly lower in 1994 due to refinancing a portion of debt at lower interest rates, and continued debt reduction.
Special items for all three years primarily include provisions for litigation. The 1992 and 1991 amounts included asset write-downs of $6 million and $67 million, respectively. The 1993 amount did not include any asset write- downs.
FINANCIAL CONDITION
Cash flow from operating activities, including working capital changes, was $1,104 million in 1993, $1,150 million in 1992 and $1,036 million in 1991. Cash generated from operations was up $301 million in 1993, but this was more than offset by working capital changes, payments for legal and tax settlements, and an adjustment for a 1992 crude oil forward sale.
During 1993, the company generated $586 million in pretax proceeds from various asset sales, compared with $469 million in 1992 and $132 million in 1991. The 1993 proceeds included $205 million from the sale of geothermal Imperial Valley assets, $172 million from the sale of the company's national auto/truckstop system, and $106 million from the sale of various oil and gas properties.
The 1993 operating cash flow and proceeds from asset sales totaled $1,686 million, which provided sufficient cash for capital spending, dividend payments and a $176 million reduction in debt. Consolidated working capital was $357 million at year-end 1993, which included $114 million of refundable income taxes expected to be received in 1994.
In February 1994 the company issued $200 million of 6-3/8% notes due 2004. Proceeds will be used to retire certain notes due in early 1994.
For 1994, the company expects cash generated from operations and asset sales, including the tax refunds, to be sufficient to finance its operating requirements, capital spending and dividend payments.
Capital expenditures increased significantly in 1993 from the prior year as more cash was spent on worldwide oil and gas activities.
The 1993 spending on domestic oil and gas exploration and production was up by 54 percent compared with 1992, primarily reflecting the first year of a three-year accelerated drilling program to produce proved undeveloped reserves in the United States. The increase in foreign spending was due to the continued development of offshore gas fields in Thailand and a new oil field in the Netherlands.
The $236 million spent on refining, marketing and transportation operations during 1993 primarily reflected refinery upgrades to meet environmental requirements and the addition of units to increase
production of higher value products. Capital spending on geothermal energy projects in 1993 primarily included expenditures in Indonesia for development and exploration. The increase in other capital expenditures from 1992 reflected environmental remediation of properties held for sale by the Real Estate Division.
The $1.46 billion capital budget for 1994 is based on West Texas Intermediate spot market crude oil price of $18 per barrel. In light of current crude prices, capital spending will be kept in line with spot market prices of $15 to $16 per barrel at least for the first six months. If crude prices remain below $15 per barrel, spending should be about the same as in 1993. Approximately $911 million, or 63 percent of the 1994 plan, is directed toward the company's worldwide petroleum exploration and production.
The company plans to spend $521 million on exploration and production of crude oil and natural gas resources in the U.S., down slightly from $562 million in 1993. The major focus will be on Louisiana and the Gulf of Mexico, Alaska's Cook Inlet, California and the Permian Basin in west Texas. The spending plan includes $49 million for projects near existing operations that are classified as exploratory but have potential for rapid development.
Capital spending for foreign petroleum exploration and production is expected to total $390 million, an 18 percent increase from $330 million in 1993. The 1994 budget includes continued development of natural gas reserves offshore Thailand and field development work in Indonesia and the Netherlands. This budget includes $34 million for exploration work in Indonesia, most of which is recoverable under the company's production sharing contract with Pertamina, Indonesia's state-owned oil company.
Refining, marketing and transportation capital spending is budgeted at $388 million, up from $236 million in 1993. This includes more than $290 million for refinery projects, including modifications required to manufacture reformulated gasoline. Approximately $40 million is dedicated to the upgrade of marketing facilities.
Planned capital spending for geothermal energy totals $73 million, compared with $53 million last year. The higher spending reflects increased development work on geothermal projects on the island of Java and exploratory drilling on the island of Sumatra in Indonesia.
ENVIRONMENTAL MATTERS
In 1993, the company spent approximately $368 million for environmental protection and for compliance with federal, state and local laws and provisions regulating the discharge of materials into the environment. Of this amount $133 million was for capital expenditures and $235 million was recorded as expense. The amount charged to earnings includes expenditures to remediate past contamination and for Union Oil's operating, maintenance and administrative costs to maintain environmental compliance. Estimated 1994 expenditures for environmental-related costs are $296 million in capital and $242 million in expense. The increase in capital is primarily due to expenditures for refinery projects to produce reformulated gasoline mandated by government agencies.
The Air Quality Management Plan for the Los Angeles Basin, as adopted, and the Clean Air Act Amendments could, by the year 2000, significantly and adversely affect all of the company's petroleum operations in the Los Angeles area, including its refining operations located near the Los Angeles harbor and in Carson. The company believes it can continue to meet the requirements of existing laws and regulations, although changes in operating procedures and the acquisition of additional pollution control facilities may be necessary.
The company is subject to federal, state and local environmental laws and regulations, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, and the Resource Conservation and Recovery Act (RCRA). Under these laws, the company is subject to possible obligations to remove or mitigate the environmental effects of the disposal or release of certain chemical and petroleum substances at various sites.
Corrective investigations and actions pursuant to RCRA are being performed at the San Francisco Refinery, Beaumont facility, Los Angeles Refinery-Carson Plant and Molycorp Inc. Mountain Pass Plant. The company also must guarantee future closure and post-closure costs of its RCRA permitted facilities. The company believes that these obligations are not likely to have an adverse material effect on the company's operating results or financial condition.
The company is a defendant in several lawsuits, as are most other companies within our industry, brought by government agencies seeking to impose cleanup liability for environmental contamination. The company has been notified that it may be a potentially responsible party (PRP) by the federal EPA at 67 sites and may share liability at certain of these sites. Various state agencies, private parties, and the company itself have identified other sites that may require investigation or remediation.
Union Oil does not consider the number of sites for which it has been named a PRP as a relevant measure of liability. The company is usually just one of several companies designated as a PRP. For example, all but a small percentage of the 67 sites mentioned above are sites where the company has denied liability to the EPA, and/or which are still under investigation, and/or which the company estimates it has one percent or less of any potential liability. The company is uncertain as to its involvement in many of the sites and is unable to estimate with any certainty the potential loss that may arise from environmental liabilities. The solvency of other parties and disputes regarding responsibilities may also impact the company's ultimate liability. Settlements and costs incurred in matters that have been resolved have not been materially significant to the company's operating results or financial condition. Management believes that Union Oil's costs will not vary proportionally from those of our competitors.
For sites where it is probable that future costs will be incurred, and such costs can be reasonably estimated, reserves have been recorded in the consolidated balance sheet. At December 31, 1993, the company's environmental reserve for those sites was $87 million, which represents the company's estimate of the future liability for these costs. In addition, the company has accrued $432 million for the future costs to abandon and remove wells and production facilities.
Future changes in technology, government regulations and practices, will affect the company's ultimate liability for environmental remediation and abandonment costs.
On March 4, 1994, the company announced that if negotiations with the land owner permit the company to do so, it will permanently cease production at its Guadalupe Oil Field (central coast of California). The company will continue to concentrate on the cleanup of a diesel-like additive formerly used to help produce the heavy crude oil. The field is currently producing 170 barrels of oil per day. The field has been under study for some time to determine the extent of the underground contamination. Although the cleanup cost has not been determined, such cost is not expected to have a material effect on the company's operating results or financial condition
See Note 16 to the consolidated financial statements for information on contingent liabilities relating to environmental matters.
OUTLOOK
The 1994 outlook for the petroleum industry is uncertain since financial results are sensitive to product prices. Negative factors affecting crude prices include current oversupply, the possible re-entry of Iraq into the world oil markets and OPEC's strategy of defending its market share. Demand for natural gas is expected to remain strong. On the West Coast, the sluggish economy continues to affect demand for refined products.
The company's current operating strategy is to increase cash flow from operations by increasing resource production and emphasizing cost control in all areas.
Over the next three years, the company expects to increase natural gas production by about 25 percent and crude oil production about 14 percent. The centerpiece of this effort is the accelerated development drilling program in North America launched during 1993. The 1994 capital budget includes approximately 535 wells, with 410 in North America. However, lower than expected oil prices at the beginning of 1994, has
caused the company to slow down development of crude oil and focus more on natural gas development. This shift and reduction in capital may delay achievement of the production goal for crude oil.
Union Oil also continues to seek a role in the development of vast oil and gas resources in the Caspian Sea. Negotiations are ongoing with Azerbaijan and the international consortium of oil companies of which Union Oil is a member.
The company's refining and marketing operations will continue to focus on improving refining efficiencies and strengthening its Western marketing. Union Oil expects to spend approximately $210 million in 1994 and $175 million in 1995, in capital, to modify its refineries in order to produce reformulated gasoline that will meet specifications mandated by the California Air Resources Board and the 1990 Federal Clean Air Act Amendments.
The company has made significant progress toward debt reduction and asset sales goals established in April 1992. Total debt was reduced in 1993 by $176 million, which brings the total debt reduction to 80 percent of the $1.5 billion five-year target. The company is also 80 percent of the way toward meeting its two-year goal of generating $700 million in after-tax proceeds from asset sales. Toward this goal, at year-end 1993, the company had realized proceeds of $560 million from asset sales.
The company will continue to work toward the debt reduction and asset sales targets. Total debt is expected to be reduced by an additional $50 million in 1994. Planned asset sales in 1994 are expected to generate more than $200 million in after-tax proceeds.
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
All other financial statement schedules have been omitted as they are not applicable, not material or the required information is included in the financial statements or notes thereto.
REPORT ON MANAGEMENT'S RESPONSIBILITIES
Union Oil's management is responsible for the integrity and objectivity of the financial information contained in this Annual Report. The financial statements included in this report have been prepared in accordance with generally accepted accounting principles and, where necessary, reflect the informed judgments and estimates of management.
The financial statements have been audited by the independent accounting firm of Coopers & Lybrand. Management has made available to Coopers & Lybrand all of the company's financial records and related data, minutes of the company's executive committee meetings and directors' meetings and all internal audit reports. The independent accountants conduct a review of internal accounting controls to the extent required by generally accepted auditing standards and perform such tests and procedures as they deem necessary to arrive at an opinion of the fairness of the financial statements presented herein.
Management maintains and is responsible for systems of internal accounting controls designed to provide reasonable assurance that the company's assets are properly safeguarded, transactions are executed in accordance with management's authorization and the books and records of the company accurately reflect all transactions. The systems of internal accounting controls are supported by written policies and procedures and by an appropriate segregation of responsibilities and duties. The company maintains an extensive internal auditing program that independently assesses the effectiveness of these internal controls with written reports and recommendations issued to the appropriate levels of management. Management believes that the existing systems of internal controls are achieving the objectives discussed herein.
Union Oil assessed its internal control systems in relation to criteria for effective internal control over financial reporting following the Treadway Commission's Committee of Sponsoring Organizations "Internal Control - Integrated Framework." Based on this assessment, Union Oil believes that, as of December 31, 1993, its systems of internal controls over financial reporting met those criteria.
Union Oil's Accounting, Auditing and Ethics Committee, consisting solely of directors who are not employees of Union Oil, is responsible for: reviewing the company's financial reporting, accounting and internal control practices; recommending the selection of independent accountants (which in turn are approved by the Board of Directors and annually ratified by Unocal's stockholder's); monitoring compliance with applicable laws and company policies; and initiating special investigations as deemed necessary. The independent accountants and the internal auditors have full and free access to the Accounting, Auditing and Ethics Committee and meet with it, with and without the presence of management, to discuss all appropriate matters.
February 14, 1994
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS OF UNION OIL COMPANY OF CALIFORNIA:
We have audited the accompanying consolidated balance sheet of Union Oil Company of California and its subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of earnings, cash flows and Shareholder's equity for each of the three years in the period ended December 31, 1993 and the related financial statement schedules. These financial statements and financial statement schedules are the responsibility of Union Oil Company of California's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, which appear on pages 28 through 48 of this Annual Report on Form 10-K, present fairly, in all material respects, the consolidated financial position of Union Oil Company of California and its subsidiaries as of December 31, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein.
As discussed in Notes 1 and 12 to the consolidated financial statements, Union Oil Company of California and its subsidiaries changed their method of accounting for income taxes in 1992 and for postretirement benefits other than pensions and for postemployment benefits in 1993.
/s/ Coopers & Lybrand COOPERS & LYBRAND Los Angeles, California February 14, 1994
CONSOLIDATED EARNINGS UNION OIL COMPANY OF CALIFORNIA
See Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEET UNION OIL COMPANY OF CALIFORNIA
The company follows the successful efforts method of accounting for its oil and gas activities.
See Notes to Consolidated Financial Statements.
CONSOLIDATED CASH FLOWS UNION OIL COMPANY OF CALIFORNIA
See Notes to Consolidated Financial Statements.
CONSOLIDATED SHAREHOLDER'S EQUITY UNION OIL COMPANY OF CALIFORNIA
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
For the purpose of this report Union Oil Company of California (Union Oil) and its consolidated subsidiaries will be referred to as the company. Union Oil is a wholly owned subsidiary of Unocal Corporation (Unocal or the Parent).
The consolidated financial statements of the company include the accounts of subsidiaries more than 50 percent owned. Investments in affiliates owned 50 percent or less are accounted for by the equity method. Under the equity method, the investments are stated at cost plus the company's equity in undistributed earnings after acquisition. Income taxes estimated to be payable when earnings are distributed are included in deferred income taxes.
Inventories
Inventories are valued at lower of cost or market. The cost of crude oil, refined products and chemicals inventories is determined using the last-in, first-out (LIFO) method. The cost of other inventories is determined by using various methods. Cost elements primarily consist of raw materials and production expenses.
Capitalized Leased Properties
Facilities and lands leased by the company under firm, long-term obligations are capitalized as assets and depreciated in the same manner as owned properties. Future minimum rental payments are discounted to present value using the company's incremental borrowing rate in effect at the time of leasing and such value is recorded as a liability. Earnings are charged for depreciation of the facilities and the imputed interest on the rental obligations in lieu of actual rental payments.
Oil and Gas Exploration and Development Costs
The company follows the successful efforts method of accounting for its oil and gas activities.
Acquisition costs of exploratory acreage are capitalized. Full amortization of the nonproductive portion of such costs is provided over the shorter of the exploratory period or the lease holding period. Costs of successful leases are transferred to proved properties. Exploratory drilling costs are initially capitalized. If exploratory wells are determined to be commercially unsuccessful, the related costs are expensed. Geological and geophysical costs for exploration and leasehold rentals for unproved properties are expensed.
Development costs of proved properties are capitalized.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization related to proved oil and gas properties and estimated future abandonment and removal costs for offshore production platforms are calculated at unit of production rates based upon estimated proved recoverable reserves.
Depreciation of other properties is generally on a straight-line method using various rates based on estimated useful lives.
Maintenance and Repairs
Expenditures for maintenance and repairs are expensed. In general, improvements are charged to the respective property accounts and such accounts are relieved of the original cost of property replaced.
Retirement and Disposal of Properties
Upon retirement of facilities depreciated on an individual basis, remaining book values are charged to current depreciation expense. For facilities depreciated on a group basis, remaining book values are charged to accumulated allowances. Gains or losses on sales of properties are included in current earnings.
Income Taxes
Effective January 1, 1992, the company adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." This statement superseded SFAS 96, which the company adopted in 1988. SFAS 109 continues to require the use of the liability method for reporting income taxes in which current or deferred tax liabilities or assets are recorded in accordance with enacted tax laws and rates. Under this method, the amount of deferred tax liabilities or assets at the end of each period is determined using the tax rate expected to be in effect when taxes are actually paid or recovered.
SFAS 109 changed, among other things, the recognition criteria for deferred tax assets. Future tax benefits are recognized to the extent that realization of such benefits is more likely than not. Upon adoption, the company was able to record certain deferred foreign income tax benefits not previously recognized. The favorable cumulative effect of this accounting change for the periods prior to January 1, 1992, was $24 million.
Deferred income taxes are provided for the estimated income tax effect of temporary differences between financial and tax bases in assets and liabilities. Deferred tax assets are also provided for certain tax credit carryforwards. A valuation allowance to reduce deferred tax assets will be established if appropriate. See Note 8 for the principal temporary differences and unused tax credits.
Foreign Currency Translation
Foreign exchange gains and losses as a result of translating a foreign entity's financial statements from its functional currency into U.S. dollars are included as a separate component of shareholders' equity. The functional currency for all foreign operations, except Canada, is the U.S. dollar. Gains or losses incurred on currency transactions in other than a country's functional currency are included in net earnings.
Environmental Costs
Environmental expenditures are expensed or capitalized in accordance with generally accepted accounting principles. Expenditures that relate to existing conditions caused by past operations and have no future economic benefit are expensed. Liabilities are recognized for those superfund sites and facilities previously owned by the company where it is probable that the company is obligated for environmental expenditures, and the amounts can be reasonably estimated. The timing of liability recognition generally coincides with the formulation and commitment to an appropriate plan of action.
Environmental liabilities are not discounted or reduced by possible recoveries from third parties. However, accrued liabilities reflect anticipated allocation of liabilities among settling participants in multi-party sites.
Environmental remediation costs required for properties held for sale are capitalized. A valuation allowance will be established if the aggregate book value of those properties including capitalized remediation costs exceed net realizable value.
See Notes 6 and 16 for additional environmental information.
Other
Interest is capitalized on major construction and development projects as part of the cost of the asset.
Certain items in prior year financial statements have been reclassified to conform to the 1993 classification.
NOTE 2 - RESTRUCTURING COSTS
In 1992, as part of its efforts to improve cash flow and operating results, the company underwent work force reductions and operational changes. Voluntary retirement and severance packages were accepted by 1,145 employees. A $55 million provision, net of reduced pension obligations, was included in administrative and general expenses.
NOTE 3 - WRITE-DOWNS OF ASSETS
Earnings in 1993 included a pretax charge of $19 million for the write-off of refining projects, primarily due to the cancellation of a portion of work associated with the reformulated fuels program at the company's Los Angeles Refinery.
In 1992, the company recorded a pretax charge of $50 million for the write- down of its interest in a Canadian partnership and various assets that were shut down or sold.
In 1991, the company recorded several write-downs of assets. Pretax charges to earnings included $73 million for the Los Angeles Refinery due to the suspension of the hydrotreater project as a result of the company's purchase of a major portion of the Shell Oil Company's refinery in Carson, California. Also included were $25 million for nitric acid and urea ammonium nitrate manufacturing plants in West Sacramento, California, due to the reduction in scope of an expansion project, and $8 million for certain mineral assets.
NOTE 4 - DISPOSITIONS OF ASSETS
In 1993, the sale of the company's geothermal assets in the Imperial Valley of California and other geothermal exploration leases resulted in a $40 million pretax gain on proceeds of $218 million. An $11 million pretax gain on proceeds of $172 million was recorded from the sale of the company's national auto/truckstop system. In addition, various oil and gas properties were sold which generated total proceeds of $106 million with a pretax gain of $42 million. The company also sold its retail agricultural businesses with a pretax loss of $1 million on proceeds of $31 million.
In 1992, the company recorded a pretax loss of $1 million on the sales of its retail chemical distribution and polymer businesses, and Southeast marketing terminals. The total proceeds from the sales of these businesses, net of certain related costs, were approximately $250 million. In addition, the company realized a pretax gain of $53 million and proceeds of approximately $158 million from the sale of various oil and gas properties in North America and the Netherlands.
NOTE 5 - CASH FLOW INFORMATION
The company considers cash equivalents to be all highly liquid investments purchased with a maturity of three months or less. All income taxes paid are included in determining cash flows from operating activities. As a result, income taxes expected to be paid on the taxable income from the sales of assets are not included in cash flows from investing activities.
In the consolidated statement of cash flows for 1993, other changes related to operations principally included $106 million of payments for Alaska tax and geothermal energy sales contract settlements. Also included was a cash flow reduction of $125 million relating to the settlement of crude oil forward sales contracts, for which revenue was recognized in 1993, but cash was received in 1992.
The consolidated statement of cash flows for 1992 excluded the effect of noncash activities related to the merger of Unocal Exploration Corporation into Union Oil. The effect on the balance sheet was to increase properties, deferred income taxes and shareholders' equity by $173 million, $64 million and $142 million, respectively, and to decrease minority interest liability by $33 million.
NOTE 6 - OTHER FINANCIAL INFORMATION
Consolidated earnings include the following:
The consolidated balance sheet at December 31 includes the following:
*Includes $45 million for estimated future remediation costs for properties divested in 1993.
NOTE 7 - EXCISE, PROPERTY AND OTHER OPERATING TAXES
In addition, social security and unemployment insurance taxes, which are charged to earnings and included with salaries and wages, totaled $44 million in 1993, $48 million in 1992 and $49 million in 1991.
NOTE 8 - INCOME TAXES
Union Oil files a consolidated federal income tax return with the Parent, which includes essentially all U.S. subsidiaries. All income taxes are included in the accounts of Union Oil and its subsidiaries. The components of pretax earnings and the provision for income taxes are as follows:
Due to an operating loss carryback in 1993, the company expects a $114 million income tax refund in 1994.
The following table is a reconciliation of income taxes at the federal statutory income tax rates to income taxes as reported in the Consolidated Earnings Statement.
The significant components of deferred income tax assets and liabilities included in the Consolidated Balance Sheet as of December 31, 1993 and 1992 are as follows:
The above net deferred income tax liabilities are classified in the Consolidated Balance Sheet as follows:
No deferred U.S. income tax liability has been recognized on the undistributed earnings of foreign subsidiaries or affiliates that have been retained for reinvestment. If distributed, no additional U.S. tax is expected due to the availability of foreign tax credits. Such undistributed earnings for tax purposes, excluding previously taxed earnings, are estimated at $955 million as of December 31, 1993.
At year-end 1993, the company had $60 million of unused foreign tax credits with various expiration dates through 1997. No deferred tax asset for these foreign tax credits is recognized for financial statement purposes.
The federal alternative minimum tax credits are available to offset future U.S. federal income taxes on an indefinite basis. In addition, the company has approximately $28 million of business tax credit carryforwards that will expire between 2001 and 2008.
NOTE 9 - INVENTORIES
Current cost of inventories exceeded the LIFO inventory value included above by $147 million and $176 million at December 31, 1993 and 1992, respectively. The LIFO profits included in earnings were insignificant in 1993 and 1992 while 1991 earnings included $90 million due to the sale of the company's southeastern U.S. marketing inventory.
NOTE 10 - PROPERTIES AND CAPITALIZED LEASES
Investments in owned and capitalized leased properties at December 31, 1993 and 1992 are set forth below. Total accumulated depreciation, depletion and amortization was $11,667 million and $11,579 million at December 31, 1993 and 1992, respectively.
Capitalized leased properties principally consist of service stations and petroleum facilities. Capital leases have expiration dates ranging from 1994 to 2009, and include purchase options and favorable renewal options.
* Includes mineral and real estate assets.
NOTE 11 - RETIREMENT PLANS
The company and its subsidiaries have several non-contributory retirement plans covering substantially all employees. Plan benefits are primarily based on years of service and employees' compensation near retirement.
All U.S. plans are administered by corporate trustees. There was no company contribution to any of the U.S. plans during the years 1991 through 1993 as plan assets substantially exceeded the pension obligations. At year-end 1993, plan assets principally consist of equity securities, U.S. government and agency issues, corporate bonds and cash.
Employees of certain foreign subsidiaries of the company are covered by separate plans. Total costs for all foreign plans were insignificant for each period.
Pension costs for the funded U.S. plans include the following components:
The 1992 net gain from partial settlement of obligation was the result of the voluntary retirement and severance packages accepted by employees and those employees who left the company due to the sale of business units in 1992.
The following table sets forth the plans' funded status and amounts recognized in the Consolidated Balance Sheet at December 31, 1993 and 1992:
The assumed rates used to measure the projected benefit obligation and the expected earnings on plan assets were as follows:
The amount of benefits which can be covered by the funded plans described above are limited by the Employee Retirement Security Act of 1974 and the Internal Revenue Code. Therefore, the company has an unfunded supplemental retirement plan designed to maintain benefits for all employees at the plan formula level. The amounts expensed for this plan were $2 million, $23 million and $1 million in 1993, 1992 and 1991, respectively. The 1992 amount included a one-time charge of $21 million as a result of the company's restructuring program. The accumulated obligation recognized in the Consolidated Balance Sheet at December 31, 1993 was $19 million.
NOTE 12 - POSTRETIREMENT AND POSTEMPLOYMENT BENEFIT PLANS
The company's medical plan provides health care benefits for eligible employees and retired employees. Employees may become eligible for postretirement benefits if they reach the normal retirement age while working for the company. The plan is contributory and the benefits are subject to deductibles and co-payments.
Effective January 1, 1993, the company adopted Statement of Financial Accounting Standards (SFAS) No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." This new accounting standard requires the company to recognize its obligation to provide postretirement health care benefits and to accrue such costs rather than recording them on a cash basis. The actuarial present value of the accumulated postretirement health care obligation existing at January 1, 1993 was recognized in the Consolidated Earnings Statement as a cumulative effect of an accounting change, resulting in a charge to the first quarter 1993 earnings of $192 million before tax ($121 million after tax).
The following table sets forth the postretirement benefit obligation recognized in the Consolidated Balance Sheet at December 31, 1993:
Net periodic postretirement benefits cost includes the following components:
The pay-as-you-go cost for postretirement medical benefits was $13 million each in 1992 and 1991.
The accumulated postretirement benefit obligation at December 31, 1993 was determined using a discount rate of 7.25 percent. The health care cost trend rates used in measuring the 1993 benefit obligations were 9 percent for under age 65 and 7 percent for age 65 and over, gradually decreasing to 5 percent by the year 2001 and remaining at that level thereafter. The rates are subject to change in the future. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, an increase in the assumed health care cost trend rate by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1993 by $20 million and net periodic benefits cost by $3 million.
The company also adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits," effective January 1, 1993. This statement requires the company to recognize its obligation to provide benefits, such as workers' compensation and disabled employees' medical care, to former or inactive employees after employment but before retirement. The charge to earnings for the cumulative effect of the company's unfunded obligation prior to 1993 was $14 million before tax ($9 million after tax). The accumulated postemployment benefit obligation was $17 million as of December 31, 1993.
NOTE 13 - LONG-TERM DEBT AND CREDIT AGREEMENTS
The following table summarizes the company's long-term debt:
* Weighted average interest rate at December 31, 1993.
At December 31, 1993, the commercial paper borrowings and the two notes due 1994 were classified as long-term debt. The company has both the ability and intent to refinance these borrowings on a long-term basis through existing lines of credit. The current portion of long-term debt at year-end 1993 represents the net amount of debt expected to be reduced in 1994. The amounts of long-term debt maturing in 1995, 1996, 1997 and 1998 are $282 million, $318 million, $303 million and $300 million, respectively.
During 1993, the company prepaid in full $120 million of 8-5/8% Debentures due 2006, $23 million of 6-5/8% Debentures due 1998 and $65 million of 7-1/4% Pollution Control Bonds due 1997. The redemption premium on the retired debentures and bonds totaled $3 million and $1 million, respectively. In addition, the company retired $250 million of 9% notes and paid down the $250 million loan under the Bank Credit Agreement. The debt repayments were funded with the issuance of commercial paper and cash on hand.
The company borrowed $41 million under a revolving credit facility that was established in 1993 for the purpose of funding its oil and gas development program in the Netherlands. Also, a $250 million revolving credit facility was established in December 1993 for the same purpose in Thailand. Both facilities require a fee of 1/4 of 1 % on the total commitments.
The Bank Credit Agreement provides a revolving credit of $1.2 billion through 1996 at interest rates based on London Interbank Offered Rates. This agreement is available for general corporate purposes, including the support of commercial paper issued by Union Oil. At December 31, 1993, the company had available undrawn commitments of $1.2 billion. The company pays a facility fee of 1/4 of 1% on the total commitments. The company also has reimbursement agreements with a major bank providing for the reimbursement of amounts drawn under irrevocable direct-pay letters of credit issued by such bank for the payment of $23 million on certain industrial development revenue bonds issued in 1988. The company pays a facility fee of .525% on these outstanding letters of credit. The company has other letters of credit for approximately $142 million. The majority are maintained for operational needs.
NOTE 14 - LEASE RENTAL OBLIGATIONS
Future minimum rental payments for capitalized leased properties and for operating leases having initial or remaining noncancelable lease terms in excess of one year are as follows:
* The current portion of these obligations amounted to $2 million. There were no material contingent rentals applicable to capital leases.
Net operating rental expense included in consolidated earnings is as follows:
NOTE 15 - FINANCIAL INSTRUMENTS
FAIR VALUE
The company had $205 million in cash and cash equivalents at year-end 1993, which approximates fair value because of the short maturity of these investments.
The estimated fair value of the company's long-term debt, including currency and interest rate swaps, was $3.8 billion at year-end 1993. This fair value was estimated based upon the discounted amount of future cash outflows using the rates offered to the company for debt of the same remaining maturities.
OFF-BALANCE-SHEET RISK
The company is a party to financial instruments with off-balance-sheet risk in the normal course of business to reduce its exposure to fluctuations in interest and currency exchange rates and petroleum-related prices. These financial instruments include interest rate and currency swaps and forward currency and futures contracts, which involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. The company believes that the actual exposure to loss is minimal and immaterial. As of December 31, 1993, the company had no financial instruments with significant off-balance-sheet risk.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the company to concentrations of credit risk consist primarily of temporary cash investments and trade receivables. The company places its temporary cash investments with high credit quality financial institutions and, by policy, limits the amount of credit exposure to any one financial institution. Concentrations of credit risks with respect to trade receivables are limited because there are a large number of customers in the company's customer base spread across many industries and geographic areas. As of December 31, 1993, the company had no significant concentrations of credit risk.
NOTE 16 - CONTINGENT LIABILITIES
The company has certain contingent liabilities with respect to existing or potential claims, lawsuits and other proceedings, including those involving environmental, tax and other matters. Management is of the opinion, based on developments to date, that such contingencies are not likely to have a material effect on the company's financial condition (including shareholders' equity, liquidity and capital resources). Although unlikely, substantial adverse decisions could have a material effect on the company's financial condition. Also, if liabilities are aggregated and assumed to occur in a single fiscal year, they could be material to the company's operating results; the likelihood of such occurrences is considered remote.
The company may face potentially significant financial exposure from possible claims and lawsuits regarding environmental matters. These matters include, for example, designation of the company as a "potentially responsible party" under the federal Comprehensive Environmental Response, Compensation, and Liability Act; properties requiring presently undeterminable amounts of cleanup efforts and expenses; soil or water contamination; and claims for personal injuries allegedly caused by exposure to toxic materials manufactured or used by the company.
The present state of the law which imposes joint and several liability on defendants, the potentially large number of claimants for any given site or exposure, the uncertainty attendant to the possible award of punitive damages, the imprecise and conflicting engineering evaluations and estimates of proper cleanup methods and costs, the uncertainty of potential recovery from third parties and the recent judicial recognition of new causes of action, all contribute to the practical impossibility of making any reasonable estimate of the company's potential liability for most of these environmental matters.
The company is usually just one of several companies cited as a potentially responsible party. Settlements and costs incurred in those matters that have been resolved have not been materially significant to the company's operating results or financial condition, and the company does not believe that future similar liability will be material to its financial condition. Even though unlikely, a substantial adverse decision awarding punitive damages to several plaintiffs or imposing several liability for the cleanup obligations of other equally responsible parties, however, could have a significant effect on the company's financial condition. Also, if liabilities are aggregated and assumed to occur in a single fiscal year, they could be material to Union Oil's operating results; the likelihood of such occurrences is considered remote.
The company also has certain other contingent liabilities with respect to litigation, claims and contractual agreements arising in the ordinary course of business. In the opinion of management, such contingent liabilities are not likely to result in any loss that would materially affect the company's operating results or financial condition. However, they could have a material effect on the company's operating results in a given quarter or year when such matters are resolved; the likelihood of such occurrence is considered remote.
NOTE 17- SEGMENT AND GEOGRAPHIC DATA
The company is engaged principally in petroleum, chemical and geothermal operations. Petroleum involves the exploration, production, transportation and sale of crude oil and natural gas; and the manufacture, transportation and marketing of petroleum products. Chemicals involves the manufacture, purchase, transportation and marketing of chemicals for agricultural and industrial uses. Geothermal involves the exploration, production and sale of geothermal resources. Other business activities currently include the production and marketing of lanthanides and niobium, and real estate development and sales. The company's shale oil and molybdenum operations were suspended in 1991.
Financial data by business segment and geographic area of operation are shown on the following two pages. Intersegment revenue eliminations in business segment data are mainly transfers from exploration and production operations to refining, marketing and transportation operations, and in geographic areas of operations essentially represent transfers from foreign countries to the United States. Intersegment sales prices approximate market prices.
NOTE 18 INVESTMENTS IN AFFILIATES
Investments in affiliated companies accounted for by the equity method were $389 million, $387 million and $377 million at December 31, 1993, 1992 and 1991, respectively. Dividends or cash distributions received from these affiliates were $80 million, $74 million and $62 million for the same years, respectively. These affiliated companies are primarily engaged in pipeline ventures, refining and marketing operations, and the manufacture of needle coke.
The excess of the company's investments in Colonial Pipeline Company and West Texas Gulf Pipeline Company over its share in the related underlying equity in net assets is being amortized on a straight-line basis over a period of 40 years. The remaining unamortized balance at December 31, 1993 was $113 million.
The company has a 50% interest in The UNO-VEN Company (UNO-VEN), a refining and marketing joint venture in the midwestern United States. The company's share of the underlying equity in the net assets of UNO-VEN over the carrying value of its investment is amortized on a straight-line basis over a period of 25 years. The remaining unamortized balance at December 31, 1993 was $63 million.
Summarized financial information for these equity investees is shown below.
* Reflects a significant provision for a tariff settlement and associated interest costs recorded by Kuparuk Pipeline Company, of which Union Oil's share is five percent.
BUSINESS SEGMENT DATA
BUSINESS SEGMENT DATA (CONTINUED)
(a) Includes asset write-downs as described in the footnotes (e) and (f) on the previous page.
OIL AND GAS FINANCIAL DATA
RESULTS OF OPERATIONS
Results of operations of oil and gas exploration and production activities are shown below. Sales revenues are net of royalty and net profits interests. Other revenues primarily include gains on sales of oil and gas properties, natural gas contract settlements and miscellaneous rental income.
Production costs include lifting costs and taxes other than income. Other operating expenses primarily include administrative and general expense. Exploration expenses consist of geological and geophysical costs, leasehold rentals and dry hole costs. Income tax expense is based on the tax effects arising from the operations. Results of operations do not include general corporate overhead and interest costs.
COSTS INCURRED
Costs incurred in oil and gas property acquisition, exploration and development activities, either capitalized or charged to expense, are shown below. Data for the company's capitalized costs related to petroleum production and exploration activities are presented in Note 10.
AVERAGE SALES PRICE AND PRODUCTION COSTS PER UNIT (UNAUDITED)
The average sales price is based on sales revenues and volumes attributable to net working interest production. The average production costs per barrel presented below are based on equivalent petroleum barrels, including natural gas converted at a ratio of 5.3 MCF to one barrel of oil which represents the energy content of the wet gas.
OIL AND GAS RESERVE DATA (UNAUDITED)
Estimates of physical quantities of oil and gas reserves, determined by company engineers, for the years 1993, 1992 and 1991 are as shown below. As defined by the Securities and Exchange Commission, proved oil and gas reserves are the estimated quantities of crude oil, natural gas and natural gas liquids that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Accordingly, these estimates do not include probable or possible reserves. Estimated oil and gas reserves are based on available reservoir data and are subject to future revision. Proved reserve quantities exclude royalties owned by others but include net profits type agreements on a gross basis.
Natural gas reserves are reported on a wet-gas basis, which include natural gas liquids reserves. For informational purposes, natural gas liquids reserves in the U.S. were 95, 97 and 103 million barrels at December 31, 1993, 1992 and 1991, respectively. Foreign natural gas liquids reserves were insignificant for the above periods. The domestic reserve quantities for natural gas liquids are on a leasehold basis and are derived from the natural gas reserves by applying a national average shrinkage factor obtained from the Department of Energy published statistics.
(a) Includes 10 million barrels acquired through exchanges of property. (b) Includes the sale of 8 million barrels of future production under forward contracts and 10 million barrels due to exchanges of properties. (c) Includes the sale of 7 million barrels of future production under forward contracts. (d) Excludes 8 million barrels produced in 1992 but sold under forward contracts in 1991. (e) Excludes 7 million barrels produced in 1993 but sold under forward contracts in 1992.
OIL AND GAS RESERVE DATA (UNAUDITED) (CONTINUED)
(a) Includes 8 BCF acquired through exchanges of properties. (b) Includes dispositions of 12 BCF due to exchanges of properties.
PRESENT VALUE OF FUTURE NET CASH FLOW RELATED TO PROVED OIL AND GAS RESERVES (UNAUDITED)
The present value of future net cash flows from proved oil and gas reserves for the years 1993, 1992 and 1991 are presented below. Revenues are based on estimated production of proved reserves from existing and planned facilities and on average prices of oil and gas at year-end. Development and production costs related to future production are based on year-end cost levels and assume continuation of existing economic conditions. Income tax expense is computed by applying the appropriate year-end statutory tax rates to pretax future cash flows less recovery of the tax basis of proved properties, and reduced by applicable tax credits.
The company cautions readers that the data on the present value of future net cash flow of oil and gas reserves are based on many subjective judgments and assumptions. Different, but equally valid, assumptions and judgments could lead to significantly different results. Additionally, estimates of physical quantities of oil and gas reserves, future rates of production and related prices and costs for such production are subject to extensive revisions and a high degree of variability as a result of economic and political changes. Any subsequent price changes will alter the results and the indicated present value of oil and gas reserves. It is the opinion of the company that this data can be highly misleading and may not be indicative of the value of underground oil and gas reserves.
CHANGES IN PRESENT VALUE OF FUTURE NET CASH FLOW (UNAUDITED)
(a) Purchases of reserves were valued at $39 million, $56 million and $168 million in 1993, 1992 and 1991, respectively. Sales of reserves, including the sale of future production, were valued at $91 million, $175 million and $210 million for the same years, respectively.
(b) Excludes the 1992 sale of future production for which income was recognized in 1993 but cash was received in 1992.
(c) Excludes the 1991 sale of future production for which income was recognized in 1992 but cash was received in 1991.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(a) The fourth quarters of 1993 and 1992 exclude $16 million and $27 million for asset write-downs, respectively.
(b) The first quarters of 1993 and 1992 include a charge of $130 million and a gain of $24 million for the cumulative effect of accounting changes, respectively.
REVENUE DATA
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE: None
----------------------------
PART IV
ITEM 14
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial statements, financial statement schedules and exhibits filed as part of this annual report:
(1) Financial Statements: See Item 8 on page 25 of this Annual Report on Form 10-K
(2) Financial Statement Schedules: See Item 8 on page 25 of this Annual Report on Form 10-K
(3) Exhibits
The Exhibit Index on page 60 of this Annual Report on Form 10-K lists the exhibits that are filed as part of this report.
(b) Two reports on Form 8-K were filed:
(1) Filed December 8, 1993, Union Oil announced the May 1, 1994, retirement of Richard J. Stegemeier, the Chief Executive Officer of the company.
(2) Filed March 2, 1994, the company announced a change in its bylaws which reduces the number of directors from 14 to 12, effective April 25, 1994.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
UNION OIL COMPANY OF CALIFORNIA (Registrant)
Date: March 28, 1994 By THOMAS B. SLEEMAN ------------------------- Thomas B. Sleeman Senior Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 28, 1994.
UNION OIL COMPANY OF CALIFORNIA AND CONSOLIDATED SUBSIDIARIES
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
SCHEDULE VI - ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
(MILLIONS OF DOLLARS)
- - - --------------------------------------------
(a) Includes minerals, oil shale and real estate properties (b) Includes dry hole costs and land relinquishments. (c) Includes land relinquishments. (d) Consists mainly of intersegment transfers and foreign currency translation adjustments.
UNION OIL COMPANY OF CALIFORNIA AND CONSOLIDATED SUBSIDIARIES
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
SCHEDULE VI - ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
(MILLIONS OF DOLLARS)
- - - --------------------------------------------
(a) Includes minerals, oil shale and real estate properties (b) Includes dry hole costs and land relinquishments. (c) Includes land relinquishments. (d) Consists mainly of intersegment transfers, foreign currency translation adjustments, and the effect of the UXC merger.
UNION OIL COMPANY OF CALIFORNIA AND CONSOLIDATED SUBSIDIARIES
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
SCHEDULE VI - ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
(MILLIONS OF DOLLARS)
- - - --------------------------------------------
(a) Includes minerals, oil shale and real estate properties (b) Includes dry hole costs and land relinquishments. (c) Includes land relinquishments. (d) Consists mainly of intersegment transfers and foreign currency translation adjustments.
UNION OIL COMPANY OF CALIFORNIA AND CONSOLIDATED SUBSIDIARIES
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS (MILLIONS OF DOLLARS)
-------------------------------- (a) Represents receivables written off, net of recoveries, reinstatements, and losses sustained.
UNION OIL COMPANY OF CALIFORNIA
EXHIBIT INDEX
Exhibit 3.1 Certificate of Incorporation of Union Oil (incorporated by reference to Exhibit 3 to Union Oil's Annual Report on Form 10-K for the year ended December 31, 1988, File No. 1-554).
Exhibit 3.2 Bylaws of Union Oil (incorporated by reference to Exhibit 3 to Union Oil's Quarterly Report on Form 10-Q for the quarter ended March 31, 1992, File No. 1-8483. Amendments to bylaws to be effective on and after April 25, 1994 are incorporated by reference to Union Oil's Current Report on Form 8-K, dated March 2, 1994, File No. 1-554).
Exhibit 4 Instruments Defining the Rights of Security Holders, Including Indentures.
The following Exhibits 10.1 through 10.7 are compensatory plans or agreements required to be filed by Item 601 (b) (10) (iii) (A) of Regulation S-K.
Exhibit 10.1 The Management Incentive Program (incorporated by reference to Unocal Corporation's Registration Statement on Form S-8, File No. 33-43231, filed October 8, 1991).
Exhibit 10.2 The Long-Term Incentive Plan of 1985 (incorporated by reference to Unocal Corporation's Registration Statement on Form S-8, File No. 2-93452, filed September 28, 1984).
Exhibit 10.3 Supplemental Retirement Plan for Key Management Personnel, as amended and effective January 1, 1989 (incorporated by reference to Exhibit 10.3 to Union Oil's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-554).
Exhibit 10.4 Other Compensatory Arrangements (incorporated by reference to Exhibit 10.4 to Union Oil's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-554).
Exhibit 10.5 Directors' Restricted Stock Plan of 1991 (incorporated by reference to Exhibit B to Unocal's Proxy Statement for its 1991 Annual Meeting of Shareholders, File No. 1-8483).
Exhibit 10.6 Form of Indemnity Agreement between Union Oil and each of its directors (incorporated by reference to Exhibit A to Unocal's Proxy Statement for its 1987 Annual Meeting of Shareholders, File No. 1-8483).
Exhibit 10.7 Consulting Agreement, dated April 26, 1993, between Union Oil Company of California, dba Unocal, and Claude S. Brinegar.
Exhibit 12 Computation of Ratio of Earnings to Fixed Charges
Exhibit 23 Consent of Coopers & Lybrand