ITEM 3 - LEGAL PROCEEDINGS
There is incorporated by reference the information regarding environmental remediation reserves in Note 17 to the consolidated financial statements on page 49, the discussion thereof in the Environmental Matters section of Managements' Discussion and Analysis, and the information regarding contingent liabilities in Note 18 to the consolidated financial statements on pages 49 and 50 of this report.
(1) Between August 22 and September 6, 1994, a chemical, known as "Catacarb", was released into the atmosphere at the company's San Francisco Refinery in Rodeo, California. Residents in the surrounding area were exposed to the chemical in varying degrees. Seven lawsuits have been filed in the Superior Court for Contra Costa County by persons claiming that they were affected by the releases. Among them, Calli Santos, et al. v. Unocal Corporation, et al., Case ------------------------------------------------- No. 94-04141, filed in September 1994, alleges damages on behalf of individuals who were allegedly exposed to the releases and asserts more than $1 billion in actual and compensatory damages and seeks punitive damages, as well as other relief. Garbis, et al. v. Union Oil Company of California d/b/a Unocal, Case No. -------------------------------------------------------------- C95-00894, filed in February 1995, seeks compensatory and punitive damages on behalf of purported classes of property owners, catacarb class claimants and hydrogen sulfide class claimants, all of whom claim exposure and injury from toxic chemical releases. The Contra Costa County District Attorney and the Bay Area Air Quality Management District have conducted investigations, and the District Attorney is evaluating whether to file criminal charges against the company or individuals, or both.
(2) In August 1994, the approximate $80 million judgment against the company in Angelina Hardwood Lumber Company v. Prairie Producing Co., awarded in -------------------------------------------------------- the District Court of Angelina County, Texas, was reversed and rendered by the Court of Appeals, Ninth District of Texas at Beaumont (No. 09-93-184 CV). Under the appellate court's decision, Angelina is not entitled to any recovery against the company. The Texas Supreme Court denied Angelina's application for a writ of error on March 23, 1995. Angelina has 15 days to petition for a rehearing. The case involves factual and legal questions regarding a title dispute with respect to natural gas producing properties in Louisiana.
(3) In March 1994, a civil suit seeking various forms of penalties, restitution and remediation regarding contamination at the Guadalupe oil field was filed against the company 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 (People v. Union Oil Company of ------------------------------ California, Superior Court for San Luis Obispo County, Civil No. 75194). 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, 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. Several related follow-on private civil actions have been filed, including a purported class action, or threatened, each seeking damages and various other forms of relief similar to those sought by the Attorney General.
(4) In September 1994, the U.S. Minerals Management Service (MMS) issued an administrative compliance order assessing the company approximately $21 million in royalty fees and interest associated with FERC Order No. 94. The company is presently in informal negotiations with the MMS for a settlement of outstanding issues which could include this MMS assessment.
(5) In June 1994, the EPA filed an administrative complaint against the company seeking $252,000 in civil penalties for alleged late filing of certain reports regarding gas processing plant inventories under the Toxic Substances Control Act Inventory Update Rule. The company notified the EPA that no reports for the gas processing facilities had been filed in 1991. Reports, due every four years, were filed in March 1994. No public safety or environmental harm could be associated with these delayed reports or any alleged technical violation of the reporting rules, if the rules are applicable. The company has appealed this complaint, and settlement discussions are ongoing.
(6) In April 1994, the State of Arizona filed suit against the company in the Superior Court of Maricopa County, Arizona, seeking civil penalties of $10,000 per day for each underground storage tank allegedly violating the underground storage tank regulations. Such penalties could exceed $100,000.
(7) In February 1995, EPA Region X issued nine Administrative Complaints against the company regarding alleged NPDES permit violations at platforms operated by the company in the Cook Inlet, Alaska. Proposed penalties sought total $800,000. The company has received from several environmental groups statutory notices of intent to file citizens' actions with respect to these alleged violations. One such action has been filed but not yet served on the company.
(8) In November 1994, the company received notice of alleged violations from the Colorado Department of Health relating to hazardous waste management at its Parachute Creek Oil Shale facility in Colorado. Civil penalties in excess of $100,000 are being discussed as part of the settlement negotiations.
(9) In December 1994, the company received notice of alleged violations from the U.S. EPA, Region IX, relating to New Source Performance Standards of its Los Angeles Refinery - Carson Plant. Civil penalties in excess of $100,000 could be imposed.
(10) The company and the State of Ohio negotiated an Agreed Addendum to the Consent Order for further investigation and interim remedies at the Company's former refinery site in Heath, Ohio (now an Ashland Petroleum terminal). The Agreed Addendum to the Consent Order was entered effective in April 1994. The State's complaint, filed in May 1991, also seeks past costs, damages, an injunction ordering clean-up and civil penalties.
(11) In September 1994, the California Regional Water Quality Control Board issued a Cleanup or Abatement Order relating to prior petroleum leaks along Front Street and vicinity in the town of Avila Beach, California. In October 1994, the company initiated an administrative appeal proceeding and a related civil suit in the California Superior Court for the County of San Luis Obispo for declaratory and injunctive relief and writ of mandate with respect to the soil and shallow ground water standard to be applied to the remediation. The company has been working with local agencies for several years regarding the hydrocarbon presence in this location, and with property owners. Various related civil suits have been filed or threatened.
(12) In November 1993, the California EPA Department of Toxic Substances Control (DTSC) filed a civil action (People of the State of California, et al v. ------------------------------------------ Molycorp, Inc. No. BC 093683) in the Superior Court for Los Angeles County ------------- against Molycorp for alleged continuing hazardous waste permitting and management violations at its plant at Mountain Pass, California. The parties have agreed in principle to a settlement of this matter pursuant to which Molycorp will treat, store and remove specific hazardous wastes from the plant site and pay to the DTSC $510,000 in civil penalties and $180,000 for administrative costs.
(13) In August 1994, the Mountain Pass facility and two of its current employees received a misdemeanor criminal complaint from the District Attorney of San Bernardino County, filed in the County Municipal Court, involving seven alleged releases into the environment. The complaint contains nine counts alleging the failure to timely report releases, the unlawful deposit of hazardous materials into the
environment, and violation of the Regional Water Quality Control Board Waste Discharge Order. The parties have agreed in principle to a settlement of this matter pursuant to which the misdemeanor charges against Molycorp and the employees will be dismissed and Molycorp will pay to the County $95,000 in civil penalties. (People of the State of California v. Molycorp, Inc., et -------------------------------------------------------- al.,Case No. MSB 10746). ------------------------
(14) In January 1993, four California truckstop operators filed a complaint captioned Forty-Niner Truck Plaza Inc., et al. v. Unocal Corporation, et al. in ----------------------------------------------------------------- California Superior Court for Sacramento County. It alleged primarily that the company had violated a franchise law by failing to offer each of the operators a right of first refusal of a bona fide offer by National Auto Truckstops, Inc. for the company's interests in the truckstops during the course of the sale of the company's nationwide network of truckstops to National. The operators also asserted various tort claims against the company and against National, seeking compensatory and punitive damages and equitable relief. Under the terms of the sale, National is indemnified by the company for certain such third-party compensatory damages. The litigation has been resolved as to two of the operators. Trial has begun as to the two remaining plaintiffs.
(15) In March, 1994, Citizens for a Better Environment, et al. v. Union Oil ----------------------------------------------------- Company of California, No. C94-0712, was filed in the United States District --------------------- Court for the Northern District of California, alleging that as of February 28, 1994, the company's refinery at Rodeo, California, was in violation of the selenium limit in its NPDES permit. The company denied that violations had occurred. By a prior Cease and Desist Order, issued after notice and hearing, the permitting agency, the California Regional Water Quality Control Board, deferred to July 1998 the effective date of the selenium limitation in question. The company's motion to dismiss the action was denied by the trial court in July 1994. The company believes that the court's ruling is in error and that it conflicts with precedent from two different federal circuits. The Ninth Circuit Court of Appeals has accepted the company's appeal from the trial court's decision. The appeal is pending.
ITEM 4
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the executive officers of Unocal Corporation as of March 1, 1995.
The bylaws of the company provide that each executive officer shall hold office until the annual organizational meeting of the Board of Directors held May 22, 1995 and until his successor shall be elected and qualified, unless he shall resign or shall be removed or otherwise disqualified to serve.
PART II
ITEM 5
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Prices in the foregoing table are from the New York Stock Exchange Composite Transactions listing. On March 15, 1995, the high price per share was $28-3/8 and the low price per share was $27-7/8.
Unocal common stock is listed for trading on the New York, Pacific and Chicago stock exchanges in the United States, and on the Basel, Geneva and Zurich stock exchanges in Switzerland.
As of March 15, 1995, the approximate number of holders of record of Unocal common stock was 35,475 and the number of shares outstanding was 245,234,398.
Unocal's quarterly dividend rate declared has been $.20 per common share since the third quarter of 1993. The previous quarterly dividend rate was $.175 per share since the third quarter of 1989. The company has paid a quarterly dividend for 79 consecutive years.
ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA - see page 63.
ITEM 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consolidated Results
Unocal recorded a net loss for 1994 of $153 million, compared with earnings of $213 million in 1993 and $220 million in 1992. The net results for the three years included the following special items:
Excluding the cumulative effect of accounting changes (see Note 2) and other special items, net earnings were $300 million in 1994, $347 million in 1993 and $234 million in 1992. The reduction in 1994 operating earnings reflected lower crude oil and natural gas prices, and lower margins in the West Coast refining and marketing operations. These negative factors were partially offset by higher natural gas production, higher foreign crude oil production, stronger agricultural products earnings, and lower domestic oil and gas operating and depreciation expenses.
Comparing 1993 results with 1992, the significant improvement in 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 1993 results benefited from cost reductions as a result of restructuring efforts in 1992. These favorable factors were partially offset by lower crude oil prices in the second half of 1993.
In the above special items table, the Other category for 1994 included a $24 million gain from the settlement of a lawsuit against Mesa Petroleum and a $9 million benefit related to the cancellation of the lease on the Unocal headquarters building in downtown Los Angeles. For 1993, the amount included a $14 million charge for the effect of the federal tax rate change on deferred taxes and a $4 million provision for the closure of the company's credit card center. The 1992 amount reflected a $44 million deferred tax benefit related to foreign exploration expenses.
REVENUES
Consolidated sales and operating revenues continued to decline in 1994, down by $280 million from 1993 and $2.1 billion from 1992. The decrease from 1993 was primarily due to lower refined product prices and volumes. The decline from 1992 reflected the company's business and asset divestments in recent years and the phase-out of its retail marketing operations in the southeastern United States .
The phase-out of the retail marketing operations in the southeastern United States should be completed in early 1995 as the last remaining supply contract expires.
COSTS AND OTHER DEDUCTIONS
Adjusted for special items, crude oil and product purchases, operating expense, and selling, administrative and general expense totaled $5.0 billion in 1994, compared with $5.3 billion in 1993 and $6.8 billion in 1992. The decline mainly reflected business divestments, the phase-out of southeastern U.S. retail marketing operations and general cost reductions.
Higher dry hole costs in 1994 were primarily the result of higher costs associated with exploratory drilling in the North Slope of Alaska and offshore Louisiana. The company's interest expense declined in 1994 due primarily to refinancing debt at lower interest rates.
OIL AND GAS EXPLORATION AND PRODUCTION
The adjusted 1994 results reflected decreased worldwide natural gas and crude oil prices and lower domestic crude oil production. The company's average worldwide sales price for natural gas was $1.86 per thousand cubic feet, down from $2.01 in 1993 and $1.91 in 1992. For crude oil, Unocal's average worldwide sales price was $13.63 per barrel in 1994, down from $14.21 in 1993 and $15.99 in 1992. Domestic crude oil production in 1994 averaged 137,300 barrels per day, down from 147,500 per day in 1993 and 151,300 per day in 1992. The decrease in production was mainly due to asset sales and natural decline.
The positive factors in 1994 were higher natural gas production, higher foreign crude oil production and lower domestic operating expense. Domestic natural gas production averaged 1,095 million cubic feet per day in 1994, up from 952 per day in 1993 and 933 per day in 1992. The increase was the result of an accelerated development program initiated in 1993, primarily in the Gulf of Mexico. However, due to lower natural gas prices, some domestic natural gas production was curtailed toward the end of 1994. Foreign crude oil production averaged 122,400 barrels per day in 1994, compared with 98,500 per day in 1993 and 100,000 per day in 1992. The increase was due to new production in Indonesia and the Netherlands.
The 1994 results also benefited from a $38 million reduction in depreciation and depletion expense as a result of the change in accounting policy for recognizing the reduction in value of the company's producing properties. The pro forma effect on prior-year results would have been increases in 1993 and 1992 net earnings of $31 million and $27 million, respectively.
Special items for 1994 consisted primarily of the write-down of the company's investment in, and provisions for the abandonment and remediation of, the Guadalupe oil field on the central coast of California, while special items for 1993 consisted primarily of gains from the sale of nonstrategic properties. The 1992 special items included a $44 million deferred income tax benefit related to foreign exploration expenses.
REFINING, MARKETING AND TRANSPORTATION
The earnings decrease in 1994 was principally due to lower margins in the company's West Coast refining and marketing operations. The lower margins were primarily due to weak selling prices for refined products, which were partially offset by lower crude oil and product purchase costs.
Petroleum product sales volumes, including 50 percent of the volumes of The UNO-VEN Company, were 316,000 barrels per day in 1994, down from 345,000 barrels per day in 1993. The decline was mainly due to the sale of the auto/truckstop system in 1993 and the continued phase-out of the southeastern marketing operations. However, the company's West Coast petroleum product sales volumes in 1994 rose 6 percent from the prior year.
Comparing 1993 results with 1992, the increase was due to improved West Coast refining and marketing margins. While selling prices for refined products were lower in 1993, the impact was more than offset by lower crude oil and product purchase costs. The phase-out of the company's southeastern marketing operations also had a favorable impact on the 1993 results.
The 1994 special items principally included write-downs of assets related to marine transportation activities and provisions for environmental remediation. Special items for 1993 principally included charges for asset write-offs and deferred income taxes, 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.
CHEMICALS
Net earnings for this segment were $53 million in 1994, $42 million in 1993 and $23 million in 1992. With the sale of other chemical businesses in 1993 and 1992, this segment's primary sources of income are derived from its manufacturing and wholesale marketing of nitrogen-based fertilizers and petroleum cokes. The 1994 results reflected considerably higher margins on sales of agricultural ammonia and urea products, particularly in the Asian markets. This gain was partially offset by lower earnings from petroleum coke operations. The lower 1992 earnings were principally caused by residual expenses associated with the retail chemical distribution and polymer manufacturing businesses that were sold in the first half of 1992.
Due to improved international market conditions for nitrogen-based fertilizers, the company has decided to restart the ammonia plant located in Finley, Washington. Plant improvements are expected to be completed in the fourth quarter of 1995. By then, estimated production of 165,000 tons per year will go to domestic markets while output from the company's Kenai plant in Alaska will target the Asian market.
GEOTHERMAL
Net earnings from geothermal energy operations were $33 million in 1994, compared with $46 million in 1993, which included a $19 million gain from the sale of the Imperial Valley operations. The 1994 results reflected higher domestic earnings, primarily due to reduced depreciation expense at The Geysers in Northern California, and the start-up of Indonesian operations. Net earnings in 1992 were $38 million, which included Imperial Valley operating earnings of $19 million.
In Indonesia, Unocal began supplying geothermal steam from the Gunung Salak field to power two 55-megawatt power plants which began commercial operation during the third quarter of 1994. The power plants are located on the island of Java and are operated by Indonesia's state utility company.
CORPORATE AND OTHER
Corporate expense includes general corporate overhead and other unallocated items. Other operations principally include the results of mineral and real estate businesses. Higher corporate expense in 1994 reflected a provision for the initiation of a companywide pay-for-performance program. The program rewards employees for helping to meet overall company cash flow targets, as well as specific operational goals within each business unit. Since the cash flow targets were met, a cash payment was made in March 1995. Corporate expense in 1993 included the favorable impact of various tax adjustments.
Net interest expense represents interest income and expense, net of capitalized interest. The decrease in 1994 reflected the benefit of refinancing debt at lower interest rates. The decrease in 1993 reflected the full-year impact of a $1 billion reduction in debt in 1992.
Special items in 1994 included provisions of $87 million for environmental remediation and $30 million for litigation; and charges of $15 million for restructuring costs and $9 million for the write-down of assets. Also included was a $24 million gain from the settlement of a lawsuit against Mesa Petroleum. The special items in 1993 consisted primarily of a $40 million provision for litigation and environmental remediation. The 1992 special items included provisions of $44 million for litigation and $13 million for environmental remediation, and asset write-downs of $6 million.
FINANCIAL CONDITION
Cash flow from operating activities, including working capital and other changes, was $1,299 million in 1994, $1,100 million in 1993 and $1,157 million in 1992. The 1994 cash flow reflected lower operational earnings, which were more than offset by decreased working capital requirements and a significant amount of income tax refunds received during the year. Despite higher cash flow from operational earnings than in 1992, the 1993 amount was adversely affected by higher working capital requirements, significant payments for legal and tax settlements, and an adjustment for a 1992 crude oil forward sale.
During 1994, the company generated $156 million in pretax proceeds from asset sales, primarily nonstrategic oil and gas properties, compared with $586 million in 1993 and $469 million in 1992. The 1993 proceeds included $218 million from the sale of the Imperial Valley and other geothermal 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 1992 proceeds primarily reflected the sale of the chemical distribution and polymer businesses.
In 1994, the company also generated approximately $52 million in cash from the sale of its common stock through the Dividend Reinvestment and Common Stock Purchase Plan.
The company's total debt was reduced by $56 million from a year ago to $3,466 million at year-end 1994. Total debt is not expected to change significantly in 1995. In March 1995, the company redeemed early its $200 million floating-rate Eurodollar Notes. Floating-rate commercial paper was used to refinance the callable debt.
For 1995, the company expects cash generated from operational earnings and asset sales to be essentially adequate to meet its operating requirements, capital spending and dividend payments. However, the company has substantial borrowing capacity to meet unanticipated cash requirements. At December 31, 1994, the company had approximately $1.2 billion of undrawn commitments under various credit facilities with major banks. In February 1995, the company completed a shelf registration with the Securities and Exchange Commission which permits the company to issue $1.2 billion of debt and equity securities for general corporate purposes. In March 1995, the entire amount available was dedicated to a new medium-term note program.
The company's foreign operations have a limited exposure to foreign currency risks. In most countries, energy products are valued and sold in U.S. dollars, and foreign currency operating cost exposures have not been significant. In the Philippines and Thailand, the company is paid for product deliveries in the local currencies, but at prices indexed to U.S. dollar valuations. Such funds, less funds required for local currency-denominated obligations, are converted to U.S. dollars as soon as practicable and periodically remitted to the U.S. The company's Canadian subsidiary is paid in Canadian dollars for its crude oil and natural gas sales. Excess Canadian funds generally have been invested in other Unocal foreign operations rather than converted to U.S. dollars and remitted to the U.S.
The company has only limited involvement with derivative financial instruments. The majority are debt-related and are used to manage interest rate and foreign currency exchange rate risks. The company also uses futures contracts to hedge its exposure to fluctuations in petroleum commodity prices. Such contracts covered only a small percentage of the company's annual oil and gas production.
CAPITAL EXPENDITURES
Spending in 1994 on domestic oil and gas exploration and production was down by 14 percent compared with 1993, primarily reflecting reduced activity due to low natural gas and crude oil prices. The 6 percent decrease in foreign spending was due to reduced activity in both the development of offshore gas fields in Thailand and the new offshore oil field in the Netherlands which began production in 1993.
The $372 million spent on refining, marketing and transportation operations during 1994 primarily reflected refinery upgrades to meet environmental requirements for reformulated gasoline and the addition of units to increase production of higher value products. Capital spending on geothermal energy projects in 1994 primarily included development work on the island of Java in Indonesia.
Unocal expects its 1995 capital spending to total approximately $1.4 billion, a 10 percent increase over expenditures of $1.27 billion in 1994. Actual spending for 1995 could range from $1.3 billion to $1.5 billion depending upon the progress of various projects and oil and gas prices.
Approximately $855 million, or 61 percent of the 1995 capital spending plan, is directed toward the company's worldwide petroleum exploration and production. This plan includes nearly $200 million for worldwide exploration. Of this, more than one-half is targeted for projects near existing operations that have the potential for rapid development. The balance, about $90 million, is slated for new trend exploration.
The total 1995 budget for domestic oil and gas activities included approximately $360 million for development work. The Louisiana/Gulf of Mexico area accounts for nearly 60 percent of the domestic budget as the company moves ahead with development of various key projects, including natural gas development in the Fresh Water Bayou field and offshore oil development on Ship Shoal Block 208. In the Cook Inlet of Alaska, the company is in the first phase of developing new oil production from the Anna platform in the Granite Point field.
Of the total 1995 budget for foreign oil and gas activities, approximately $240 million is dedicated to development work. Major projects include the development of gas reserves in several fields offshore Thailand, as well as further delineation of the Pailin field. Also included is development of the Halfweg gas field on the Q1 block offshore the Netherlands. Another $50 million is dedicated to development work on new, high potential, overseas oil and gas ventures. These projects primarily include the Yadana natural gas project offshore Myanmar and an oil project in the Caspian Sea offshore Azerbaijan.
Refining, marketing and transportation capital spending is budgeted at $390 million in 1995, up from $372 million in 1994. The 1995 capital budget includes approximately $305 million for West Coast refinery projects, of which $240 million is for refinery modifications to manufacture reformulated gasoline for the California market in 1996 as mandated by the California Air Resources Board. Another $25 million is for projects to enhance profitability in other refining areas. The capital budget has approximately $50 million dedicated to the upgrade of marketing facilities, mostly reformatting service stations in the western United States. In 1995, the company expects to improve pumpability at about 120 retail sites by adding credit card readers at the dispensers and reconfiguring pump islands. More than half of these projects include new formats, such as convenience stores and fast food restaurants.
Planned 1995 capital spending for geothermal power projects totals $80 million, compared with $35 million in 1994. The higher spending focuses on additional development of geothermal resources and construction of electrical generating plants in the Gunung Salak field in Indonesia, which are expected to come on-line in 1997.
The capital budget for chemicals and other businesses reflects planned spending on various projects in the company's agricultural products and carbon and minerals businesses, as well as environmental costs related to properties held for sale.
ENVIRONMENTAL MATTERS
Unocal continues to make substantial capital and operating expenditures for environmental protection and to comply with federal, state and local laws and provisions regulating the discharge of materials into the environment. In many cases, investigatory or remedial work is now required at various sites even though past operations followed practices and procedures that were considered acceptable under environmental laws and regulations, if any, existing at the time.
In 1994, the company recorded approximately $228 million in environment- related capital expenditures, compared with an average of approximately $120 million per year for the prior three years. The higher expenditures in 1994 primarily reflected costs related to refinery projects to produce reformulated fuels mandated by government agencies. Estimated 1995 capital expenditures for environment-related costs are $340 million. The amount charged to 1994 earnings for remediation costs and for operating, maintenance and administrative costs to maintain environmental compliance was approximately $370 million, and such costs averaged approximately $240 million per year for the prior three years. Included in the amount for 1994 were provisions of $187 million for certain known future environmental assessment/remediation costs, of which $152 million was recorded in the fourth quarter. The fourth quarter provision was primarily the result of an extensive and ongoing review by the company of its reserves for environmental assessment/remediation costs and its procedures for monitoring such reserves.
At December 31, 1994, the company's reserves for environmental remediation obligations totaled $262 million, of which $97 million was included in other current liabilities. The total reserve amount is broken down into five categories and discussed below.
SUPERFUND AND SIMILAR SITES. At year-end 1994, Unocal had received notification from the federal EPA that the company may be a potentially responsible party (PRP) at 60 sites and may share certain liabilities at these sites. In addition, various state agencies and private parties had identified 30 other sites that may require investigation and remediation. Of the total, the company has denied responsibility at 30 sites and at another 13 sites the company's liability, although unquantified, appears to be de minimis. The total also includes 19 sites which are under investigation or in litigation, for which the company's potential liability is not presently determinable. Of the remaining 28 sites, where probable costs can be reasonably estimated, reserves of $43 million have been established for future remediation and settlement costs. Included in this amount is $15 million for the McColl site in Fullerton, California, which reflects the company's share of the estimated costs of a remedy proposed to the EPA in the fourth quarter of 1994 by the PRPs.
Unocal does not consider the number of sites for which it has been named as a PRP as a relevant measure of liability. Although the liability of a PRP is generally joint and several, the company is usually just one of several companies designated as a PRP. The company's ultimate share of the remediation costs at those sites often is not determinable due to many unknown factors as discussed in Note 18 to the consolidated financial statements. The solvency of other responsible parties and disputes regarding responsibilities may also impact the company's ultimate costs.
FORMER COMPANY-OPERATED SITES. Reserves of $35 million were established for this category of sites. Of the total, $14 million was for approximately 170 service station sites on leased property at which operations have ceased and which the company is obligated to remediate before returning them to current landowners. Also included is a $12 million reserve for approximately 190 service station sites that the company previously owned or leased, in many cases years ago, where current owners of such properties are presently holding the company responsible for environmental remediation costs.
COMPANY FACILITIES SOLD WITH RETAINED LIABILITIES. This category had reserves of $88 million for accrued environmental liabilities related to major company assets that were sold in recent years. Included are the company's former auto/truckstop facilities, agricultural and industrial chemical sites, and polymer sites. Also included are facilities which were transferred to The UNO- VEN Company in 1989 in connection with its formation. In each sale, the company retained a contractual remediation or indemnification obligation and is responsible only for certain environmental problems associated with its past operations. The current reserves represent presently estimated future costs for investigation/feasibility studies and identify remediation work as a result of claims made by buyers of the properties.
INACTIVE OR CLOSED COMPANY FACILITIES. Reserves of $74 million were established for these types of facilities. Major sites included in this category are the former Beaumont refinery in Texas, the Parachute Creek shale oil project and a chemical facility in Colorado, the Questa molybdenum mine in New Mexico and a related processing facility in Pennsylvania. Under various laws, including the Resource Conservation and Recovery Act, remediation obligations arose when the company ceased or suspended operations at these facilities. A provision of $23 million was recorded in 1994 for remedial work at the Beaumont refinery, principally due to increased cost estimates and the company's decision to undertake the remediation of additional areas within the refinery. This category also includes the beach cleanup at the Guadalupe oil field of underground releases of a diesel-like additive formerly used to produce the field's heavy crude oil. At year-end 1994, the remaining reserves for beach cleanup and abandonment of wells and facilities at the field totaled $10 million. The company expects to incur additional, but presently indeterminate, costs at this site for the remediation of the inland portion of the field. A reserve of $8.9 million was provided for the Questa mine's estimated costs of investigations and remedial activities covered under plans for both the mine area and ponds proposed or expected to be proposed in 1995 to the State of New Mexico Environmental Department. Additional work may be required following the State's review of these plans. Reopening of the mine could also affect the amount and/or timing of various costs.
ACTIVE COMPANY FACILITIES. The company provided $22 million for estimated future costs of remedial orders, corrective actions and other investigation, remediation and monitoring obligations at certain operating facilities and producing oil and gas fields. The operating facilities primarily consist of refineries, marketing terminals and bulk plants.
The total environmental remediation reserves recorded on the consolidated balance sheet represent the company's estimate of assessment and remediation costs based on currently available facts, existing technology, and presently enacted laws and regulations. The remediation cost estimates, in many cases, are based on plans recommended to the regulatory agencies for approval and are subject to future revisions. The ultimate costs to be incurred will likely exceed the total amounts reserved, since many of the sites are relatively early in the remedial investigation or feasibility study phase. Additional liabilities may be accrued as the assessment work is completed and formal remedial plans are formulated.
In connection with the fourth quarter review of its reserves for environmental remediation costs, the company also estimated, to the extent it was able to do so, that it could incur approximately $120 million of additional costs in excess of the $262 million accrued at December 31, 1994. The amount of such possible additional costs reflects, in most cases, the high end of the range of costs of feasible alternatives identified by the company for those sites with respect to which investigation or feasibility studies have advanced to the stage of analyzing such alternatives. However, such estimated possible additional costs are not an estimate of the total remediation costs beyond the amounts reserved, since at a large number of sites the company is not yet in a position to estimate such possible additional costs.
Both the amounts reserved and estimates of possible additional costs may change, in some cases, substantially, as additional information becomes available regarding the nature and extent of site contamination, required or agreed upon remediation methods, and other actions by governmental agencies and private parties.
See Notes 17 and 18 to the consolidated financial statements for additional information.
REORGANIZATION
On June 27, 1994, Unocal's Board of Directors approved a major reorganization of the company's management and formed the 76 Products Company. Since then, divisions and departments have been realigned into four functions or groups: operations, growth, finance and support.
The Operations Group consists of the company's worldwide oil and gas producing activities, geothermal resource production and related power operations, diversified businesses and the new 76 Products Company. The 76 Products Company encompasses Unocal's West Coast refining, marketing and transportation activities. Petroleum coke sales from refineries in California are also part of this company. On a pro forma basis, 76 Products earned $70 million (pretax) on revenues of $3.4 billion in 1994. Diversified businesses consist principally of the company's agricultural chemicals, carbon products and specialty minerals operations. Also included are real estate development, and the company's investments in The UNO-VEN Company and various affiliated pipeline companies outside California. On a pro forma basis, diversified businesses earned $205 million (pretax) on revenues of $840 million in 1994.
The Growth Group principally includes worldwide petroleum exploration, commercialization of oil, gas and power projects, joint ventures with other firms, business development, and marketing of natural gas and other produced hydrocarbons. Its primary function is to oversee the company's growth activities related to finding new energy resources and exploring different business opportunities.
Under the new structure, corporate staff functions have been divided into two groups - Finance and Staff Support. The Finance Group conducts the company's finance activities, which include the treasury, comptroller, tax and risk management functions. The Staff Support Group consolidates activities related to human resources, planning, health-environment-safety, and employee development. However, the support personnel are primarily based at the business unit level to achieve efficiency through centralized coordination and decentralized implementation.
OUTLOOK
Unocal's financial results are sensitive to product prices. The company does not expect significant improvements in prices or margins during 1995. Crude oil prices are expected to remain at current levels and domestic natural gas prices are expected to remain weak through much of 1995. On the West Coast, intense competition and increased environmental compliance requirements will continue to impact the company's margins for refined products. However, the company's operating strategy is to increase cash flow from operations by increasing resource production and continuing to emphasize cost control in all areas.
In Thailand, the company plans continual increases in natural gas production through early 1999. The development plan focuses on delineating and developing the eight fields operated by Unocal under the existing gas sales contracts and developing a new field. While the company's production is currently constrained by pipeline capacity, a second major pipeline, scheduled to begin operation in 1996, will increase capacity by 65 percent, thus expanding gas sales potential.
In early 1995, the company signed an agreement to develop the Yadana natural gas field offshore Myanmar. The contract calls for production to begin in mid-1998, and the gas will be sold to Thailand, and potentially Myanmar, over a 30-year period. Unocal holds a minimum interest of 28.26 percent in the project, for which Total of France is the operator.
In Indonesia, the company signed amended contracts with the state energy company to develop and produce geothermal resources and build and operate three new 55-megawatt electrical generating plants at the Gunung Salak geothermal project. The three new power plants are expected to begin operation in the second half of 1997. With the addition of the power plants plus another plant to be built by the Indonesia state energy company, Unocal anticipates supplying geothermal steam to power plants with an installed capacity of 330 megawatts by the end of 1997.
In addition to the above long-term projects in Southeast Asia, Unocal is currently pursuing business opportunities in China, Vietnam and Pakistan.
The company's West Coast refining and marketing operations will continue to focus on improving efficiencies to reduce operating costs. On the marketing side, the company will continue to upgrade its retail outlets to increase pumpability by installing credit card readers at the dispensers and reconfiguring the service islands. Also, new lines of business will be introduced at many locations to expand each site's potential revenue.
During the fourth quarter of 1994, the company completed a study of overhead costs which resulted in a program to reduce its 1,540-person corporate staff by 630 positions over the next two years. Additionally, another 126 positions in the operating groups will be eliminated. When the reductions are complete, the company expects to realize pretax savings of approximately $50 million per year.
In early 1995, the company sold its process technology and licensing business. The sale included approximately 200 U.S. patents and about 300 licenses with third parties who use various process technologies developed by Unocal. A pretax gain of $26 million on net proceeds of $32 million will be recorded in the first quarter of 1995.
In February 1994, the company was granted a United States patent for reformulated gasolines that meet the 1996 California state standards for reduced emissions. The company expects to announce terms of a licensing program in April 1995.
Unocal continues to evaluate the potential sale of the company's crude oil and natural gas assets in California. The company expects to receive bids from prospective buyers by mid-1995.
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
To the Stockholders of Unocal Corporation:
Unocal'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 L.L.P. Management has made available to Coopers & Lybrand L.L.P. all the company's financial records and related data, minutes of the company's executive and management 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 on 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.
Unocal 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, Unocal believes that, as of December 31, 1994, its systems of internal controls over financial reporting met those criteria.
Unocal's Accounting, Auditing and Ethics Committee, consisting solely of directors who are not employees of Unocal, 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 the stockholders); 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, 1995
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of Unocal Corporation:
We have audited the accompanying consolidated balance sheets of Unocal Corporation and its subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of earnings, cash flows and stockholders' equity for each of the three years in the period ended December 31, 1994 and the related financial statement schedule. These financial statements and the related financial statement schedule are the responsibility of Unocal Corporation'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 32 through 57 of this Annual Report on Form 10-K, present fairly, in all material respects, the consolidated financial position of Unocal Corporation and its subsidiaries as of December 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
As discussed in Note 2 to the consolidated financial statements, Unocal Corporation and its subsidiaries changed their method of accounting for the impairment of producing oil and gas properties in 1994; for postretirement benefits other than pensions and for postemployment benefits in 1993; and for income taxes in 1992.
/s/ COOPERS & LYBRAND LLP Coopers & Lybrand L.L.P. February 14, 1995 Los Angeles, California
See Notes to Consolidated Financial Statements.
The company follows the successful efforts method of accounting for its oil and gas activities.
See Notes to Consolidated Financial Statements.
See Notes to Consolidated Financial Statements.
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, Unocal Corporation (Unocal) and its consolidated subsidiary, Union Oil Company of California (Union Oil) and its consolidated subsidiaries, will be referred to as the company.
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.
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 such costs related to the portion of unproved properties 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, including unsuccessful development wells, are capitalized. Proved producing properties are regularly assessed for possible impairment on a field-by-field basis using the estimated undiscounted future cash flows of each field. Impairment loss is recognized when the estimated undiscounted future cash flows are less than the current net book values of the properties. See Note 2 for additional information.
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.
Additional depreciation charges are made for the write-down of long-lived assets when it is determined that the carrying value of assets may not be recoverable. This determination is usually attributable to the occurrence of events such as discontinued operations and project cancellations or when expected future net cash flows become less than the carrying value of an asset.
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 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
The company uses 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. Future tax benefits are recognized to the extent that realization of such benefits is more likely than not.
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 9 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 stockholders' 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 EXPENDITURES
Environmental expenditures that create future benefits or contribute to future revenue generation are capitalized. Expenditures that relate to existing conditions caused by past operations are expensed.
Liabilities related to environmental assessment and future remediation costs are recorded when such liabilities are probable and the amounts can be reasonably estimated. The company considers a site to present a probable liability when an investigation has identified environmental remediation requirements for which the company is responsible. The timing of accruing for remediation costs generally coincides with the company's completion of investigation or feasibility work and its recommendation of a remedy or commitment to an appropriate plan of action.
Environmental liabilities are not discounted or reduced by possible recoveries from third parties. However, for Superfund and similar sites, accrued liabilities reflect anticipated allocations of liabilities among settling participants.
Environmental remediation expenditures required for properties held for sale are capitalized. A valuation allowance is established when the aggregate book values of the properties, including capitalized remediation costs, exceeds net realizable values.
See Notes 17 and 18 for additional information.
FINANCIAL INSTRUMENTS
The company has only limited involvement with derivative financial instruments and does not use them for trading purposes. They are used to manage well-defined interest rate, foreign currency exchange rate and commodity price risks.
See Note 16 for additional information.
Other
Earnings per share of common stock are based on earnings less preferred stock dividend requirements, divided by the weighted average shares of common stock outstanding during each period.
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 1994 classification, including the accumulated reserves for future abandonment and restoration costs which have been reclassified on the consolidated balance sheet from the properties account to accrued abandonment, restoration and environmental liabilities.
Note 2 - ACCOUNTING CHANGES
Effective January 1, 1994, the company changed its accounting policy for recognizing the reduction in value of its producing oil and gas properties. Under the new policy, the company evaluates properties for impairment on a field-by-field basis instead of the country-by-country basis previously used. In the opinion of management, the use of a lower level of aggregation for applying the impairment test to producing oil and gas properties is preferable. The cumulative effect of the accounting change resulted in a charge to earnings of $447 million pretax ($277 million after tax or $1.14 per common share) in the first quarter. The charge reflected the reduction in value of certain oil and gas properties in the U.S. from which the estimated undiscounted future cash flows are less than the current net book values of the properties. As a result of the property write-downs, the company's depreciation and depletion expense in 1994 was reduced by approximately $61 million ($38 million after tax). On a pro forma basis, net earnings for 1993 and 1992 would have increased by $31 million and $27 million, respectively, as a result of the accounting change. Pro forma net earnings would have been $244 million (86 cents per common share) in 1993 and $247 million (97 cents per common share) in 1992.
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 or 50 cents per common share).
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 or 4 cents per common share).
Effective January 1, 1992, the company adopted SFAS No. 109, "Accounting for Income Taxes." 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, or 10 cents per common share.
NOTE 3 - RESTRUCTURING COSTS
During the fourth quarter of 1994, as a result of an overhead study, the company began a program to reduce its 1,540-person corporate staff by 630 positions and to eliminate another 126 positions in the operating groups over the next two years. A pretax charge of $25 million was recorded in administrative and general expense for net costs associated with the staff reductions. This charge included $34 million of estimated benefits, primarily termination allowance, to be paid to ex-employees over a period of time. Partially offsetting this charge was an estimated credit of $9 million for reduced pension obligations. At December 31, 1994, approximately 40 employees were terminated as a result of the program, and the amount of unpaid benefits remaining on the consolidated balance sheet was $33 million.
In 1992, the company also underwent work force reductions and operational changes as part of its efforts to improve cash flow and operating results. Voluntary retirement and severance packages were accepted by 1,145 employees. A pretax provision of $55 million, net of reduced pension obligations, was included in administrative and general expense. The majority of the termination benefits and the retirement benefits not covered by the pension plan have been paid.
NOTE 4 - WRITE-DOWNS OF ASSETS
During 1994, the company recorded a pretax charge of $25 million to write down the carrying value of the Guadalupe oil field due to its decision to shut down the field for environmental reasons. The company also closed certain facilities used in refining and marketing operations and research activities, which resulted in an asset write-down of $39 million. Due to project modifications, the company wrote off an additional $7 million in 1994 for costs related to the reformulated fuels program at the company's Los Angeles Refinery.
The 1993 earnings 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.
The 1992 earnings included a pretax charge of $50 million for the write- down of the company's interest in a Canadian partnership and various assets that were shut down or sold.
NOTE 5 - DISPOSITIONS OF ASSETS
In 1994, asset sales generated total proceeds of $156 million with a pretax loss of $2 million. Of the total proceeds, $118 million was from the sale of oil and gas properties.
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 6 - 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 paid on taxable income from sales of assets are not included in cash flows from investing activities.
In the consolidated statement of cash flows for 1994, the $217 million adjustment to reconcile the net loss to net cash provided by operating activities principally included noncash charges to earnings of $170 million for future environmental remediation costs.
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.
Excluded from the consolidated statement of cash flows for 1992 was 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 stockholders' equity by $173 million, $64 million and $142 million, respectively, and to decrease minority interest liability by $33 million.
NOTE 7 - OTHER FINANCIAL INFORMATION
Consolidated earnings include the following:
The consolidated balance sheet at December 31 includes the following:
NOTE 8 - 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 1994 and 1993 and $48 million in 1992.
NOTE 9 - INCOME TAXES
Unocal files a consolidated federal income tax return that includes essentially all U.S. subsidiaries. The components of pretax earnings and the provision for income taxes are as follows:
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 at December 31, 1994 and 1993 are as follows:
No deferred U.S. income tax liability has been recognized on the undistributed earnings of foreign subsidiaries 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 $470 million as of December 31, 1994.
At year-end 1994, the company had $33 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 $15 million of business tax credit carryforwards that will expire between 2003 and 2008.
NOTE 10 - INVENTORIES
The current cost of inventories exceeded the LIFO inventory value included above by $142 million and $147 million at December 31, 1994 and 1993, respectively.
NOTE 11 - PROPERTIES AND CAPITALIZED LEASES
Investments in owned and capitalized leased properties at December 31, 1994 and 1993 are set forth below. Total accumulated depreciation, depletion and amortization was $11,096 million and $11,215 million at December 31, 1994 and 1993, respectively.
Capitalized leased properties principally consist of service stations and petroleum facilities. Capital leases have expiration dates ranging from 1995 to 2009, and include purchase options and favorable renewal options.
* Includes mineral and real estate assets.
NOTE 12 - 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 1992 through 1994 as plan assets substantially exceeded the pension obligations. At year-end 1994, plan assets principally consisted 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 obligations for all foreign plans are insignificant.
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, 1994 and 1993:
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 Income Security Act of 1974 and the Internal Revenue Code. Therefore, the company has a supplemental retirement plan designed to maintain benefits for all employees at the plan formula level. The amounts expensed for this plan were $5 million, $2 million and $23 million in 1994, 1993 and 1992, 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, 1994 was $19 million.
The company has established a grantor trust to provide funding for the benefits payable under the supplemental retirement plan. Total assets held in the trust at December 31, 1994 amounted to $8 million.
NOTE 13 - 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.
The following table sets forth the postretirement benefit obligation recognized in the consolidated balance sheet at December 31, 1994 and 1993:
Net periodic postretirement benefits cost is comprised of the following components:
The pay-as-you-go cost for postretirement medical benefits was $13 million in 1992.
The accumulated postretirement benefit obligation at December 31, 1994 was determined using a discount rate of 8.5 percent. The health care cost trend rates used in measuring the 1994 benefit obligations were 8 percent for under age 65 and 6.6 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 of one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1994 by $17 million and net periodic benefits cost by $2 million.
The company also provides benefits such as workers' compensation and disabled employees' medical care to former or inactive employees after employment but before retirement. The accumulated postemployment benefit obligation was $17 million as of December 31, 1994 and 1993.
NOTE 14 - LONG-TERM DEBT AND CREDIT AGREEMENTS
The following table summarizes the company's long-term debt:
* Weighted average interest rate at December 31, 1994
At December 31, 1994, the commercial paper, the 9-5/8% Notes due 1995, $29 million of medium-term notes due in 1995 and short-term borrowings under various credit facilities due in 1995 were classified as long-term debt and included with the 1999 maturity amount listed below. The company has the intent to refinance these borrowings on a long-term basis and has the ability to do so, if necessary, through existing lines of credit extending to 1999. The current portion of long-term debt at year-end 1994 represents the net amount of debt expected to be reduced in 1995. The amounts of long-term debt maturing in 1996, 1997, 1998 and 1999 are $318 million, $118 million, $330 million and $1,261 million, respectively.
In 1994, the company's new borrowings consisted of: (1) $179 million in medium-term notes with interest rates ranging from 6.33% to 7.24% and maturity dates ranging from February 1997 to March 2001; (2) $200 million of 6-3/8% notes due 2004; (3) $250 million under the Bank Credit Agreement; and (4) $60 million under an $85 million revolving credit facility. The proceeds were used principally to refinance maturing and certain callable debt.
The company also borrowed $30 million under a $250 million revolving credit facility that was established in 1993 for the purpose of funding its oil and gas development program in Thailand. This credit facility terminates December 15, 1998. For the same purpose, the company has a $45 million revolving credit facility through 1999 in the Netherlands. The entire commitment amount was outstanding at year-end 1994. During 1994, the company arranged an $85 million revolving credit facility with a Canadian bank. This facility has a perpetual 364 day maturity date. Borrowings under these three credit facilities bear interest at different margins above London Interbank Offered Rates (LIBOR) and the agreements call for facility fees on either the total or undrawn commitment.
The Bank Credit Agreement provides a revolving credit of $1.2 billion through 1999 at interest rates based on LIBOR and requires a facility fee on the total commitments. Of the total, $250 million had been drawn at December 31, 1994. This agreement is available for general corporate purposes, including the support of commercial paper. The company has other undrawn letters of credit for approximately $176 million. The majority are maintained for operational needs.
NOTE 15 - 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 $3 million. There were no material contingent rentals applicable to capital leases.
Net operating rental expense included in consolidated earnings is as follows:
NOTE 16 - FINANCIAL INSTRUMENTS
Unocal does not hold or issue financial instruments for trading purposes.
FOREIGN CURRENCY FORWARD AND SWAP CONTRACTS
Unocal enters into various foreign currency forward and swap contracts to manage its exposure to adverse impacts of foreign currency fluctuations. Foreign currency gains or losses on the outstanding contracts essentially offset the foreign currency losses or gains of the debt obligations.
During 1986, the company entered into two currency swap agreements to hedge foreign currency exchange exposure related to the interest and principal payments of the company's Swiss Franc bonds due in 1996 and Deutsche Mark bonds due in 1998. These instruments have the same maturity as the related underlying debt. The aggregate notional principal amounts of these agreements were $220 million at December 31, 1994. At year-end 1994, these currency swap agreements had an aggregate fair value of approximately $77 million in assets based on dealer quotes.
In addition, the company had three currency swap agreements outstanding on borrowings of its Canadian subsidiary, with notional amounts totaling $310 million at year-end 1994. The currency swap agreements entered into by the subsidiary have the effect of changing the subsidiary's U.S. dollar denominated borrowings into its functional Canadian currency. The objective of these agreements is to limit the subsidiary's exposure to currency exchange gains and losses. At the same time, the parent company entered into three currency swap agreements to offset the subsidiary's currency swaps with the objective of maintaining the underlying debt in U.S. dollars for reporting in the consolidated financial statements. The maturities of the agreements range from 1995 to 1999,
which correspond to the related debt obligations. The net fair value of the currency swap agreements at year-end 1994 was approximately zero.
During 1994, the company entered into eight currency forward contracts to purchase 17 million Pounds Sterling for $25 million U.S. dollars. The objective is to hedge a series of known obligations denominated in Pound Sterling which will come due during the period from January 1995 to October 1996. The fair value of these currency forward contracts at December 31, 1994, was approximately $1.4 million in assets.
INTEREST RATE SWAPS
Unocal enters into interest rate swap agreements to manage its floating- rate debt with the objective of minimizing the company's borrowing costs. Net payments or receipts under the agreements are recorded in interest expense on a current basis. The following interest rate swap agreements were entered into at the time the debt obligations were issued, and have the same maturity as the underlying debt. At year-end 1994, the interest rate swap agreements had an aggregate fair value of approximately $15 million in liabilities based on quoted market prices of comparable instruments.
In 1986, the company entered into an interest rate swap agreement with a notional amount of $200 million. The agreement converts the interest rate on the floating-rate Eurodollar notes due 1996 to an effective interest rate of 9.77 percent. The company pays interest at the fixed rate of 9.28 percent and receives interest at a floating rate based on LIBOR. At year-end 1994, the floating interest rate was 5.56 percent.
During 1994, the company entered into a $25 million, three-year interest rate swap agreement. Under this agreement, the company pays interest at a floating rate based on LIBOR and receives interest at a fixed rate of 6.7 percent. At year-end 1994, the floating interest rate was 6.0 percent.
The counterparties to the company's financial instruments are major international financial institutions with high credit ratings. Even though the company may be exposed to losses in the event of non-performance by these counterparties, it does not anticipate losses due to non-performance by the counterparties. In the opinion of management, the off-balance-sheet risk associated with these instruments is minimal and immaterial.
OTHER
The company uses commodity future contracts with maturities of one year or less to hedge the impact of fluctuations in prices of crude oil, natural gas and refined products. The resulting gains or losses are recorded as part of the transactions being hedged. At December 31, 1994, the company had outstanding contracts covering 419 thousand barrels of crude oil and 9 billion cubic feet of natural gas with notional amounts totaling $7 million for crude oil and $16 million for natural gas. At December 31, 1993, the company had outstanding contracts covering 988 thousand barrels of crude oil with notional amounts totaling $15 million. The fair values of the contracts, based on quoted market prices, were insignificant at year-end 1994 and 1993.
The company had $148 million in cash and cash equivalents at year-end 1994, which approximates fair value because of the short maturity of these investments.
The estimated fair value of the company's long-term debt was $3,541 million at year-end 1994. The fair value of debt instruments was based on the discounted amount of future cash outflows using the rates offered to the company for debt of the same remaining maturities.
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 risk 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, 1994, the company had no significant concentrations of credit risk.
NOTE 17 - ACCRUED ABANDONMENT, RESTORATION AND ENVIRONMENTAL LIABILITIES
At December 31, 1994, the company had accrued $457 million for the estimated future costs to abandon and remove wells and production facilities, primarily related to worldwide offshore operations. The total costs for abandonments are estimated to be $850 million to $990 million, of which the lower end of the range is used to calculate the amount to be amortized.
At December 31, 1994, the company's reserves for environmental remediation obligations totaled $262 million, of which $97 million was included in other current liabilities. The reserve included estimated probable future costs of $43 million for federal Superfund and comparable state-managed multiparty disposal sites; $35 million for formerly-operated sites for which the company has remediation obligations; $88 million for sites related to businesses or operations that have been sold with contractual remediation or indemnification obligations; $74 million for company-owned or controlled sites where facilities have been closed or operations shut down; and $22 million for sites owned and/or controlled by the company and utilized in its ongoing operations.
NOTE 18 - CONTINGENT LIABILITIES
The company has certain 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 and local 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 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, if liability is probable, to quantify the liability or estimate a range of possible exposure. In such cases, the amount of the company's liabilities is 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 cleanup 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, and the fact that the company is usually just one of a number of companies identified as a PRP.
As disclosed in Note 17, at year-end 1994, the company had accrued $262 million for estimated future environmental assessment and remediation costs at various sites where liability for such costs is 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 additional remediation costs aggregating approximately $120 million.
TAX MATTERS
The company has received a Notice of Proposed Deficiency from the Internal Revenue Service (IRS) related to a 1985 takeover attempt and efforts undertaken to defeat it. The proposed deficiency, if sustained, would increase the company's 1985 taxable income by up to $607 million, of which $201 million would result in decreases in taxable income in subsequent years. The company believes it has substantial legal defenses to the proposed deficiency. In February 1995, the company filed a protest of the proposed deficiency with the Appeals section of the IRS. In the opinion of management, a successful outcome in these disputes is reasonably likely. Although considered unlikely, substantial adverse decisions could have a material effect on the company's financial condition or operating results in a given year or quarter when such matters are resolved.
OTHER MATTERS
The company also has certain 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.
NOTE 19 - CAPITAL STOCK
COMMON STOCK
At December 31, 1994, there were reserved approximately 16.7 million shares for the conversion of preferred stock, 14.1 million shares for the company's employee benefit plans and Directors' Restricted Stock Plan and 2.1 million shares for the company's Dividend Reinvestment and Common Stock Purchase Plan.
PREFERRED STOCK
The company has authorized 100,000,000 shares of preferred stock with a par value of $0.10 per share. In July 1992, the company issued 10,250,000 shares of $3.50 convertible preferred stock. The convertible preferred stock is redeemable on and after July 15, 1996, in whole or in part, at the option of the company, at a redemption price of $52.10 per share declining to $50 per share on and after July 15, 2002, together with accumulated but unpaid dividends. The convertible preferred stock has a liquidation value of $50 per share and is convertible at the option of the holder into common stock of the company at a conversion price of $30.75 per share, subject to adjustment in certain events. Dividends on the preferred stock at an annual rate of $3.50 per share are cumulative and are payable quarterly in arrears, when and as declared by Unocal's Board of Directors (the Board). Holders of the preferred stock have no voting rights. However, there are certain exceptions including the right to elect two additional directors if the equivalent of six quarterly dividends payable on the preferred stock are in default.
Stockholder Rights Plan
In January 1990, the Board adopted a stockholder rights plan (Rights Plan) and declared a dividend of one preferred stock purchase right (Right) for each share of common stock outstanding. The Board also authorized the issuance of one Right for each common share issued after February 12, 1990, and prior to the earlier of the date on which the rights become exercisable, the redemption date, or the expiration date.
The Board has designated 3,000,000 shares of preferred stock as Series A Junior Participating Cumulative Preferred Stock (Series A Preferred Stock) in connection with the Rights Plan. The Rights Plan provides that in the event any person, or group of affiliated persons, becomes, or commences a tender offer or exchange offer pursuant to which such person or group would become, the beneficial owner of 15 percent or more of the outstanding common shares, each Right (other than Rights held by the 15 percent stockholder) will be exercisable, on and after the close of business on the tenth business day following such event, unless the Rights are redeemed by the Board of Directors of the company, to purchase units of Series A Preferred Stock (each consisting of one one-hundredth of a share) having a market value equal to two times the then-current exercise price (initially $75). The Rights Plan further provides that if, on or after the occurrence of such event, the company is merged into any other corporation or 50 percent or more of the company's assets or earning power are sold, each Right (other than Rights held by the 15 percent stockholder) will be exercised to purchase shares of the acquiring corporation having a market value equal to two times the exercise price.
The Rights expire on January 29, 2000, unless previously redeemed by the Board. The Rights do not have voting or dividend rights and, until they become exercisable, have no diluting effect on the earnings of the company. As of December 31, 1994, none of the Series A Preferred Stock had been issued nor had the Rights become exercisable.
NOTE 20 - STOCK OPTION PLANS
Under the company's Long-Term Incentive Plans of 1991 and 1985, stock options are granted to executives and key employees to purchase shares of the company's common stock. The option price per share will not be less than the fair market value of a share of common stock on the date granted. No options will be exercisable more than 10 years after the date of grant. Restrictions may be imposed for a period of five years on certain shares acquired through exercise of options granted after 1990.
The following is a summary of stock option transactions for 1992, 1993 and 1994:
NOTE 20 - STOCK OPTION PLANS (CONTINUED)
Under the Long-Term Incentive Plan of 1991, there were 6,434,825 shares available at year-end 1994 for stock option awards as well as other awards. No additional shares will be granted under the 1985 Plan.
NOTE 21 - SUMMARIZED FINANCIAL DATA OF UNION OIL
Unocal Corporation is the parent of Union Oil Company of California, a fully integrated energy resources company. Virtually all operations are conducted by Union Oil and its subsidiaries. Summarized financial information for Union Oil and its consolidated subsidiaries is presented below:
NOTE 22 - INVESTMENTS IN AFFILIATES
Investments in affiliated companies accounted for by the equity method were $391 million, $389 million and $387 million at December 31, 1994, 1993 and 1992, respectively. Dividends or cash distributions received from these affiliates were $88 million, $80 million and $74 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, 1994 was $110 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 being amortized on a straight-line basis over a period of 25 years. The remaining unamortized balance at December 31, 1994 was $60 million.
Summarized financial information for these equity investees is shown below.
NOTE 23 - SEGMENT AND GEOGRAPHIC DATA
The company is engaged principally in petroleum, chemical and geothermal operations. Petroleum involves the exploration for, and the production, transportation and sale of, crude oil and natural gas; and the manufacture, purchase, transportation and marketing of petroleum products. Chemicals involves the manufacture, transportation and marketing of chemicals for agricultural and industrial uses. Geothermal involves the exploration for, and the production and sale of, geothermal resources. Other business activities currently include the production and marketing of specialty minerals, and real estate development and sales.
Financial data by business segments and geographic areas 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.
BUSINESS SEGMENT DATA
(d) The recent decline generally reflects the effects of asset sales which began in 1992. (e) 1990 includes a gain of $128 million on the sale of the company's Norwegian oil and gas subsidiary. (f) The 1991 write-down of the Los Angeles Refinery for $73 million is included in Corporate and Other. (g) The 1991 write-down of the West Sacramento fertilizer manufacturing plant for $25 million is included in Corporate and Other. (h) 1993 includes a gain of $40 million from the sale of the company's Imperial Valley geothermal operations and other exploration assets. (i) 1994 includes a $161 million provision for environmental remediation costs and 1990 includes a $127 million writedown of molybdenum assets. (j) The decline in 1994 is primarily due to the write-down of impaired producing oil and gas properties as discussed in Note 2.
BUSINESS SEGMENT DATA (Continued)
GEOGRAPHIC AREAS OF OPERATIONS
(a) 1990 excludes the acquisition of Prairie Producing Company valued at approximately $340 million. (b) Includes asset write-downs as described in the footnotes (f), (g), and (i) 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 or losses on sales of oil and gas properties and miscellaneous rental income.
Production costs include lifting costs and taxes other than income. Exploration expenses consist of geological and geophysical costs, leasehold rentals and dry hole costs. Other operating expenses primarily include administrative and general expense. 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 11.
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 1994, 1993 and 1992 are 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, however, foreign reserves held under certain production sharing agreements, principally Indonesia, are reported on a gross basis. The gross basis includes the company's net working interest and host country's interest. Unocal's estimated net worldwide reserves, excluding the host country's share under these production sharing agreements, would have been 628 million barrels of crude oil and 6,525 billion cubic feet of natural gas at December 31, 1994.
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 91, 95 and 97 million barrels at December 31, 1994, 1993 and 1992, respectively. They are derived from the natural gas reserves by applying a national average shrinkage factor obtained from the Department of Energy published statistics. Foreign natural gas liquids reserves were insignificant for the above periods.
(a) Includes the sale of 7 million barrels of future production under forward contracts. (b) Excludes 8 million barrels produced in 1992 but sold under forward contracts in 1991. (c) Excludes 7 million barrels produced in 1993 but sold under forward contracts in 1992.
Oil and Gas Reserve Data (Unaudited) (Continued)
(a) Includes 115 billion cubic feet due to property exchanges. (b) Includes 105 billion cubic feet due to property exchanges.
Present Value of Future Net Cash Flow (Unaudited)
The present value of future net cash flows from proved oil and gas reserves for the years 1994, 1993 and 1992 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.
(a) Average prices at year end used in this calculation are as follows:
(b) Includes dismantlement and abandonment costs.
Changes in Present Value of Future Net Cash Flow (Unaudited) (Continued)
(a) Purchases of reserves were valued at $26 million, $39 million and $56 million in 1994, 1993 and 1992, respectively. Sales of reserves, including the sale of future production, were valued at $48 million, $91 million and $175 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.
QUARTERLY FINANCIAL DATA (Unaudited)
(c) Gross margin equals sales and operating revenues less crude oil and product purchases, operating and selling expenses, depreciation, depletion and amortization, dry hole costs, exploration expense, consumer excise taxes and other operating taxes.
Net earnings for the fourth quarter of 1994 included charges of $94 million ($152 million pretax) for environmental remediation costs, $22 million ($35 million pretax) for litigation expenses, $22 million ($35 million pretax) for asset write-downs and $15 million ($25 million pretax) for restructuring costs. Fourth quarter charges for environmental remediation and litigation are principally due to changes in estimates. Included in the $94 million for environmental remediation costs was $16 million ($26 million pretax) which relates to incremental obligations incurred over a number of prior periods but which would not have been material to any such period.
(c) Gross margin equals sales and operating revenues less crude oil and product purchases, operating and selling expenses, depreciation, depletion and amortization, dry hole costs, exploration expense, consumer excise taxes and other operating taxes.
SELECTED FINANCIAL DATA
(a) Net earnings (loss) include the cumulative effect of accounting changes which consisted of a charge of $277 million ($1.14 per common share) in 1994, a charge of $130 million ($.54 per common share) in 1993 and a gain of $24 million ($.10 per common share) in 1992.
(b) Total assets prior to 1994 have been restated to classify the accumulated reserve for future abandonment costs to a liability account rather than as a reduction of the properties.
(c) Employee benefits are net of pension income recognized in accordance with current accounting standards for pension costs. For years 1994 and 1993, such benefits also include the accrued postretirement medical benefits cost.
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE: None
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PART III
The information required by Items 10 through 12 (except for information regarding the company's executive officers) is incorporated by reference from Unocal's Proxy Statement for its 1995 Annual Meeting of Stockholders (the "1995 Proxy Statement") (File No. 1-8483), as indicated below. The Proxy Statement will be filed with the Securities and Exchange Commission on or about April 11, 1995.
ITEM 10
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See the information regarding Unocal's directors and nominees for election as directors to appear under the caption "Item 1. Election of Directors" in the 1995 Proxy Statement. See also the list of Unocal's executive officers and related information under the caption "Executive Officers of the Registrant" in Part I of this report on page 18.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
See the information regarding executive compensation to appear under the captions "Summary Compensation Table", "Option Grants in 1994", "Aggregated Option/SAR Exercises in 1994 and December 31, 1994 Option Values", "Long-Term Incentive Plans -- Awards in 1994", "Pension Plan Benefits" and "Employment and Change of Control Agreements" and the information regarding directors' compensation to appear under the caption "Directors' Compensation" in the 1995 Proxy Statement.
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See the information regarding security ownership to appear under the captions "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" in the 1995 Proxy Statement.
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS: Not required.
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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 the Index to Consolidated Financial Statements and Financial Statement Schedules under Item 8 on page 29 of this report.
(2) Financial Statement Schedules: See the Index to Consolidated Financial Statements and Financial Statement Schedules under Item 8 on page 29 of this report.
(3) Exhibits: The Exhibit Index on pages 69 and 70 of this report lists the exhibits that are filed as part of this report.
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (continued)
(b) Reports filed on Form 8-K:
During the fourth quarter of 1994:
(1) Current Report on Form 8-K dated and filed October 31, 1994, for the purpose of reporting, under item 5, third quarter and year-to- date earnings.
(2) Current Report on Form 8-K dated and filed November 2, 1994, for the purpose of reporting, under item 5, a reduction in corporate staff.
(3) Current Report on Form 8-K dated and filed December 5, 1994, for the purpose of reporting, under item 5, a change in accounting policy and various anticipated charges to the fourth quarter earnings.
During the first quarter of 1995 to the date hereof:
(1) Current Report on Form 8-K dated and filed January 30, 1995, for the purpose of reporting, under item 5, the company's fourth quarter and full-year 1994 earnings.
(2) Current Report on Form 8-K dated and filed January 31, 1995, for the purpose of reporting, under item 5, the granting to the company of a patent for certain reformulated gasolines.
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.
UNOCAL CORPORATION (Registrant)
Date: March 27, 1995 By /s/ NEAL E. SCHMALE ----------------------- Neal E. Schmale 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 27, 1995.
Signature Title -------------------------- ---------------------------------
/s/ RICHARD J. STEGEMEIER Chairman of the Board ------------------------- Richard J. Stegemeier
/s/ ROGER C. BEACH Director, and Chief Executive ------------------------- Officer Roger C. Beach
/s/ JOHN F. IMLE, JR. Director, and President ------------------------- John F. Imle, Jr.
/s/ NEAL E. SCHMALE Director, and Chief Financial ------------------------- Officer Neal E. Schmale
/s/ CHARLES S. McDOWELL Vice President and Comptroller ------------------------- (Principal Accounting Officer) Charles S. McDowell
Signature Title -------------------------- ---------------------------------
/s/ JOHN W. AMERMAN Director -------------------------- John W. Amerman
/s/ MacDONALD G. BECKET Director -------------------------- MacDonald G. Becket
/s/ CLAUDE S. BRINEGAR Vice Chairman of the Board -------------------------- Claude S. Brinegar
/s/ MALCOLM R. CURRIE Director -------------------------- Malcolm R. Currie
/s/ FRANK C. HERRINGER Director -------------------------- Frank C. Herringer
/s/ DONALD P. JACOBS Director -------------------------- Donald P. Jacobs
/s/ CHARLES R. WEAVER Director -------------------------- Charles R. Weaver
/s/ MARINA v.N. WHITMAN Director -------------------------- Marina v.N. Whitman
UNOCAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (Millions of Dollars)
---------------------- (a) Represents receivables written off, net of recoveries, reinstatements, and losses sustained.
UNOCAL CORPORATION
EXHIBIT INDEX
Exhibit 3.1 Certificate of Incorporation of Unocal, as amended through July 23, 1992, and currently in effect (incorporated by reference to Exhibit 3.1 to Amendment No. 2 on Form 10-K/A to Unocal's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-8483).
Exhibit 3.2 Bylaws of Unocal, as amended though July 25, 1994, and currently in effect (incorporated by reference to Exhibit 4.2 to the Registration Statement on Form S-3 of Union Oil Company of California and Unocal, Nos. 33-54861 and 33-54861-01.
Exhibit 4 Instruments Defining the Rights of Security Holders, Including Indentures.
Exhibit 10.1 Rights Agreement, dated as of January 29, 1990, between the Unocal and Chemical Trust Company of California, as Rights Agent (incorporated by reference to Exhibit 1 to Unocal's Current Report on Form 8-K dated January 29, 1990, File No. 1-8483).
The following Exhibits 10.2 through 10.9 are management contracts or compensatory plans, contracts or arrangements required to be filed by Item 601 (b) (10) (iii) (A) of Regulation S-K.
Exhibit 10.2 Management Incentive Program (incorporated by reference to Exhibit A to Unocal's Proxy Statement dated March 18, 1991 for its 1991 Annual Meeting of Stockholders, File No. 1-8483).
Exhibit 10.3 Long-Term Incentive Plan of 1985 (incorporated by reference to Unocal's Proxy Statement dated March 24, 1984 for its 1984 Annual Meeting of Stockholders, File No. 1-8483).
Exhibit 10.4 Supplemental Retirement Plan for Key Management Personnel, as amended and effective January 1, 1989 (incorporated by reference to Exhibit 10.3 to Unocal's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-8483).
Exhibit 10.5 Other Compensatory Arrangements (incorporated by reference to Exhibit 10.4 to Unocal's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-8483).
Exhibit 10.6 Directors' Restricted Stock Plan of 1991 (incorporated by reference to Exhibit B to Unocal's Proxy Statement dated March 18, 1991 for its 1991 Annual Meeting of Stockholders, File No. 1-8483).
Exhibit 10.7 Form of Indemnity Agreement between Unocal and each of its directors (incorporated by reference to Exhibit A to Unocal's Proxy Statement dated March 20, 1987 for its 1987 Annual Meeting of Stockholders, File No. 1-8483).
Exhibit 10.8 Compensation and perquisites for R. J. Stegemeier as nonemployee Chairman of the Board (incorporated by reference to Exhibit 10 to Unocal's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994, File No. 1-8483).
Exhibit 10.9 Employment Agreement, effective July 1, 1994, between Union Oil Company of California and Lawrence M. Higby (incorporated by reference to Exhibit 10 to Unocal's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, File No. 1-8483).
Exhibit 11 Statement regarding computation of earnings per common share for the five years ended December 31, 1994.
UNOCAL CORPORATION
EXHIBIT INDEX (continued)
Exhibit 12.1 Statement regarding computation of ratio of earnings to fixed charges of Unocal for the five years ended December 31, 1994.
Exhibit 12.2 Statement regarding computation of ratio of earnings to combined fixed charges and preferred stock dividends of Unocal for the five years ended December 31, 1994.
Exhibit 12.3 Statement regarding computation of ratio of earnings to fixed charges of Union Oil Company of California for the five years ended December 31, 1994.
Exhibit 18 Letter from Coopers & Lybrand L.L.P. regarding change in accounting policy.
Exhibit 21 Subsidiaries of Unocal Corporation.
Exhibit 23 Consent of Coopers & Lybrand L.L.P.
Exhibit 27 Financial data schedule for the year ended December 31, 1994 (included only in the copy of this report filed electronically with the Commission).