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 50, the discussion thereof in the Environmental Matters section of Management's Discussion and Analysis, on pages 25 through 27 and the information regarding contingent liabilities in Note 18 to the consolidated financial statements on pages 50 and 51 of this report.
(1) The matter previously reported regarding claimed violations concerning hazardous waste management at the company's Parachute Creek Oil Shale facility in Colorado has been settled.
(2) The matters previously reported regarding claimed NPDES permit violations in Cook Inlet have been settled. The company paid $140,000 to EPA; $499,000 to Greenpeace; and $36,524 to the Trustees for the State of Alaska.
(3) The matter previously reported regarding the complaint filed by the Ventura County District Attorney for several alleged violations related to discharges of crude oil into state waters has been settled for a total payment of $27,000.
(4) In December 1994, the company received notice of alleged violations from the EPA, Region IX, relating to New Source Performance Standards at its Los Angeles Refinery - Carson Plant. Civil penalties in excess of $100,000 could be imposed. Proceedings and negotiations are continuing.
(5) In the litigation previously reported as Forty-Niner Truck Plaza Inc., et -------------------------------- al. v. Unocal Corporation, et al. in Superior Court for Sacramento County, ------------------------------- the trial court granted the company's motion for a new trial. That order is now on appeal. This matter does not appear to have a potentially material effect on the company's financial condition or results of operations, and no further reports will be made.
(6) On April 13, 1995, Atlantic Richfield Company, Chevron U.S.A., Inc., Exxon Corporation, Mobil Oil Corporation, Shell Oil Products Company and Texaco Refining and Marketing, Inc. filed a lawsuit against the company regarding U.S. Letters Patent No. 5,288,393 issued to the company in 1994 and covering several patent claims for the composition of reformulated gasoline. (Atlantic Richfield Company, et al. v. Unocal Corporation, et ------------------------------------------------------------ al., U.S.D.C., C.D. California, No. CV-95-2379-RG). The plaintiffs allege ---- that the company's patent is invalid and unenforceable, and they seek declaratory relief for equitable estoppel and an injunction against enforcement. The company has filed its answer as well as a counterclaim for patent infringement, lost royalties and further injunctive relief. Discovery and pretrial proceedings are continuing.
(7) Between August 22 and September 6, 1994, a chemical known as "Catacarb" was released into the environment at the company's San Francisco Refinery near Rodeo, California. Persons in the surrounding area have claimed that they were exposed to the chemical in varying degrees. Since September 22, 1994, 42 lawsuits have been filed by or on behalf of all persons, alleged to be several thousand, claiming that they or their property were adversely affected by the releases. Thirty-nine of the lawsuits have been consolidated in the Superior Court for Contra Costa County under the caption In Re Unocal Refinery Litigation (Santos, et al. v. Unocal ---------------------------------------------------------- Corporation), Case No. 94-04141. The First Amended Model Complaint in this ------------ consolidated action, filed on February 1, 1996, on behalf of individual plaintiffs and purported classes of plaintiffs, alleges personal injury, emotional distress, and increased risk of future illness on behalf of the named plaintiffs and all persons present in and around or downwind from the San Francisco Refinery, and property damage and loss or diminution of property value on behalf of all owners of real and personal property in the vicinity of the Refinery, resulting from the release of Catacarb by the Refinery. Certain individual plaintiffs allege injury from alleged subsequent releases at the Refinery of hydrogen sulfide and other chemicals. The Model Complaint seeks compensatory and punitive damages in unspecified amounts, equitable relief including the creation of a fund for medical monitoring and treatment of plaintiffs and members of the purported classes, statutory penalties and other relief.
The company is also presently in discussions with the EPA to settle an administrative Complaint issued on November 28, 1995, seeking approximately $490,000 in civil penalties for failure to report timely the Catacarb release and a subsequent release of hydrogen sulfide. All state civil and criminal governmental investigations, claims and charges have been settled.
(8) Citizens for a Better Environment, et al. v. Union Oil Company of ----------------------------------------------------------------- California, No. C94-0712, U.S. D.C., N.D. California, filed on March 2, ---------- 1994, alleges that as of February 28, 1994, the company's San Francisco Refinery was in violation of the selenium limit in its NPDES permit. The company denies that any violations have 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 Citizens action was denied by the trial court. 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 appeal of the trial court decision. That appeal is now pending and oral arguments are scheduled for April 8, 1996.
(9) In September 1994, the California Regional Water Quality Control Board issued a Cleanup or Abatement Order relating to prior underground 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 Superior Court for San Luis Obispo County 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 and property owners for several years regarding the hydrocarbon presence in this location. Various related civil suits have been filed or threatened.
(10) On March 23, 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, 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.
Trial settings have been vacated on motion of the California Attorney General. The next status conference is scheduled for July 19, 1996.
(11) 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 negotiating with the MMS for a settlement of outstanding issues which could include this MMS assessment.
(12) 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 (TSCA) 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, even if the rules are applicable. The Gas Processors Association has urged an amnesty for past alleged violations and is seeking EPA clarification of application of these rules to natural gas streams for the next TSCA Inventory Update due later this year. The company has appealed this complaint.
(13) On February 9, 1996, Bridas Corporation filed a petition in the District Court of Fort Bend County, Texas alleging that the company and other defendants conspired to and did tortiously interfere with certain agreements and prospective business relations between Bridas and the government of Turkmenistan (Bridas Corporation v. Unocal Corporation, ----------------------------------------- et al., Case No. 94144, 268th Judicial District). The Plaintiff alleges ------ that as a result of the defendants' conduct, it has lost the ability to timely and reasonably develop, produce, transport, export and sell its interest in the Yashlar area of Turkmenistan, an area that includes the Yashlar field. The plaintiff also claims it has lost the opportunity to participate in a Turkmenistan-Pakistan pipeline project. The plaintiff seeks unspecified actual damages as well as punitive damages, plus interest at the highest lawful rate. On March 11, 1996, the defendants filed a notice of removal of the case to U.S. District Court, Southern District of Texas, Houston Division (Civ. No. H-906-0824).
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, 1996.
The bylaws of the company provide that each executive officer shall hold office until the annual organizational meeting of the Board of Directors held June 3, 1996 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, 1996, the high price per share was $32 and the low price per share was $31-5/8.
Unocal common stock is listed for trading on the New York, Pacific and Chicago Stock Exchanges in the United States, on the Stock Exchange of Singapore and on the Basel, Geneva and Zurich Stock Exchanges in Switzerland.
As of March 15, 1996, the approximate number of holders of record of Unocal common stock was 35,051 and the number of shares outstanding was 247,860,562.
Unocal's quarterly dividend 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 80 consecutive years.
ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA - SEE PAGE 67
ITEM 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The 1995 earnings excluding special items reflected lower margins for refined petroleum products due primarily to lower refinery production, lower worldwide crude oil production, lower average sales prices for natural gas and lower geothermal steam production. Partially offsetting these negative factors were higher worldwide average crude oil sales prices and higher average sales prices for agricultural products.
Comparing the 1994 operating results with 1993, the reduction in earnings reflected the adverse effects of lower average crude oil and natural gas prices and lower margins in 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.
In the above special items table, the Other category for 1995 included benefits of $34 million from a bankruptcy settlement with Columbia Gas Transmission Corporation (Columbia settlement) and $18 million from a settlement to recover lease bonus and rentals relating to Outer Continental Shelf leases offshore Florida and Alaska (OCS Settlement). Partially offsetting these benefits were charges of $18 million for a deferred tax adjustment and $14 million for a receivable write-down. For 1994, the amount 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.
REVENUES
Consolidated revenues in 1995 were $8.4 billion, up $460 million from year- end 1994 and up $81 million from 1993. The increase from 1994 was primarily due to higher petroleum product sales volumes, agricultural products average sales prices and gains on sales of assets. The decrease in 1994 from 1993 was mainly due to lower refined product prices and volumes.
COSTS AND OTHER DEDUCTIONS
Adjusted to exclude special items, crude oil and product purchases, operating expense, and selling, administrative and general expense totaled $5.3 billion in 1995, compared with $5.0 billion in 1994 and $5.3 billion in 1993. The increase in 1995 was primarily due to increased expense for crude oil and product purchases resulting from higher average crude oil prices and increased purchases of refined products for resale due to extended maintenance activities at the refineries.
The higher depreciation, depletion and amortization expense in 1995 was due to an $87 million charge resulting from the adoption of Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to Be Disposed Of," as described in Note 2 to the consolidated financial statements.
The company's interest expense increased in 1995 due primarily to higher debt.
OIL AND GAS EXPLORATION AND PRODUCTION
This segment is engaged in the exploration for, and the production and marketing of crude oil, condensate, natural gas and natural gas liquids.
The 1995 earnings excluding special items reflected lower worldwide crude oil production and lower average domestic natural gas sales prices. Worldwide crude oil production in 1995 averaged 240,400 barrels per day, down from 259,800 in 1994 and 246,000 in 1993. The decrease was mainly due to natural production declines and the sale of nonstrategic domestic properties. The company's average domestic sales price for natural gas was $1.56 per thousand cubic feet, down from $1.78 in 1994 and $1.97 in 1993.
Positive factors in 1995 were higher average worldwide crude oil sales prices, lower effective foreign income tax rates and lower domestic operating expense. Unocal's average worldwide sales price for crude oil was $15.40 per barrel in 1995, up from $13.63 in 1994 and $14.21 in 1993. The decrease in domestic operating expense was primarily due to sales of nonstrategic domestic properties and cost reductions. In 1995, the company reduced its worldwide average production costs per barrel of oil equivalent to $2.94, compared with $3.00 for 1994 and $3.40 for 1993. Domestic natural gas production averaged 1,103 million cubic feet per day in 1995, up from 1,095 in 1994 and 952 in 1993. The accelerated development program initiated in 1993, primarily in the Gulf of Mexico, has allowed Unocal to keep its domestic natural gas production stable despite the continuing sales of oil and gas properties.
Comparing the adjusted 1994 results with 1993, the decrease reflected lower worldwide natural gas and crude oil sales prices and lower domestic crude oil production. The decrease in production was mainly due to asset sales and natural declines. Positive factors in 1994 were higher natural gas production, higher foreign crude oil production and lower domestic operating expense. The increase in foreign crude oil production 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, as described in Note 2. The pro forma effect of this accounting change on 1993 results would have been an increase in net earnings of $31 million.
REFINING, MARKETING AND TRANSPORTATION -- 76 PRODUCTS COMPANY
This business segment is principally responsible for the company's West Coast petroleum refining operations, marketing and transportation of refined petroleum products, and the manufacturing and marketing of petroleum coke.
The lower 1995 earnings excluding special items reflected lower refined product margins and lower refinery production volumes due to extended maintenance and modification activities early in the year. These negative factors were partially offset by California business tax credits of $18 million (net of federal tax effect) related to refinery modifications to produce reformulated fuels and by lower operating and selling expenses.
Petroleum product sales volumes were 269,000 barrels per day in 1995, up from 252,000 barrels per day in 1994. Due to scheduled refinery maintenance in 1995, the increased sales volumes and lower margins were principally related to the outside purchase and resale of refined petroleum products to other than retail customers.
Comparing 1994 results with 1993, the decrease was principally due to lower margins resulting from weak selling prices for refined products, which were partially offset by lower crude oil and product purchase costs.
GEOTHERMAL AND POWER OPERATIONS
This segment is involved in the exploration for, and the production and sale of geothermal resources for the generation of electricity.
The decreased 1995 earnings excluding special items resulted from lower steam production and prices at The Geysers in Northern California and lower steam production in the Philippines primarily due to damage to the Tiwi facilities caused by a November typhoon. The lower production at The Geysers was due to seven months of discretionary curtailments by the public utility company that purchases the steam to generate electricity. The curtailments were the product of abundant supplies of inexpensive hydro-power available from record rainfall in the western U.S. and depressed natural gas prices. These negative factors were partially offset by increased production and prices for Indonesian operations. The increased production resulted from a full year of supplying steam from the Gunung Salak field to power two 55-megawatt power plants that 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.
Comparing the 1994 operating results with 1993, the increase reflected higher domestic earnings, primarily due to reduced depreciation expense at The Geysers, and the start-up of Indonesian operations.
DIVERSIFIED BUSINESSES
Agricultural Products manufactures and markets nitrogen-based fertilizers for wholesale markets to the western United States and to the Pacific Rim. Carbon and Minerals produces and markets petroleum coke (other than on the West Coast), graphites, solvents and specialty minerals. Pipelines principally includes the company's equity interests in affiliated pipeline companies. Other includes the development and sale of real estate assets and the company's equity interest in The UNO-VEN Company, a refining and marketing partnership in the midwestern United States.
In 1995, Agricultural Products continued to benefit from significant increases in ammonia and urea product sales prices primarily due to high demand in international markets. This was partially offset by higher raw materials costs and higher manufacturing costs due to start-up expenses associated with an ammonia plant located in Finley, Washington. Plant improvements were completed and production began in December 1995. Production from the Finley plant is targeted for domestic markets. This will allow more of the Kenai, Alaska facility's marketable production of ammonia and urea to target international markets.
Comparing the 1994 Agricultural Products earnings with 1993, the increase reflected considerably higher margins on sales of ammonia and urea products, particularly in Asian markets.
In 1995, Carbon and Minerals benefited from higher petroleum coke and lanthanide earnings. The increase in 1994 from 1993 was primarily due to higher lanthanide earnings.
The higher Administrative and General expense in 1995 was primarily due to the income tax effect of allocable expenses to foreign operations for tax purposes and lower pension income.
Net interest expense represents interest income and expense, net of capitalized interest. The increase in 1995 was primarily due to higher debt, while the decrease in 1994 reflected the benefit of refinancing debt at lower interest rates.
The Other category includes all unallocated corporate items and miscellaneous operations. In addition, this category, especially in prior years, includes the earnings effects and close-down expenses of businesses that were sold or being phased-out, such as the company's Process, Technology and Licensing business (sold in 1995), national auto/truckstop system (sold in 1993), Imperial Valley geothermal operations (sold in 1993), PureGro chemical operations (sold in 1993), and Southeast marketing operations (phased-out beginning in 1992). This category also includes corporate items such as tax adjustments and certain special items noted in the above table.
Cash flow from operating activities, including working capital and other changes, was $1,277 million in 1995, $1,299 million in 1994 and $1,100 million in 1993. The 1995 amount included $200 million of proceeds from the sale of trade receivables (see Note 23 to the consolidated financial statements), $71 million from the Columbia settlement and $34 million from the OCS settlement. These benefits were more than offset by temporary working capital changes. The 1994 cash flow reflected decreased working capital requirements and significant income tax refunds received during the year. These benefits were partially offset by lower operational earnings. The 1993 amount reflected significant payments for legal and tax settlements and an adjustment for a 1992 crude oil forward sale.
During 1995, the company generated $204 million in pretax proceeds from sales of assets, primarily nonstrategic oil and gas properties and the company's Process, Technology and Licensing business. Proceeds from sales of assets in 1994 totaled $156 million, primarily from the sale of nonstrategic oil and gas properties. Proceeds of $586 million in 1993 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 nonstrategic oil and gas properties.
In 1995 and 1994, the company also generated approximately $55 million and $54 million, respectively, in cash from the sale of its common stock, primarily through the Dividend Reinvestment and Common Stock Purchase Plan.
The company's total debt at year-end 1995 increased by $240 million from a year ago to $3,706 million. The increase was primarily due to the carrying values of debt-related currency swaps in the amount of $137 million being classified as long-term receivables at December 31, 1995. As a result, the principal amounts of the company's foreign-currency debt, when stated at the current exchange rates, totaled $350 million, an increase of $130 million from year-end 1994. The difference between the carrying values of the currency swaps and the increase in the principal amounts of the related foreign-currency debt represents the net gain that would have occurred if the currency swaps and debt had been settled at the end of December 1995. This classification has no effect on the consolidated cash flow statement.
For 1996, the company expects cash generated from operational earnings and asset sales to be adequate to meet its operating requirements, capital spending and dividend payments. In addition, the company has substantial borrowing capacity to meet unanticipated cash requirements. At December 31, 1995, the company had approximately $1.5 billion of undrawn commitments under various credit facilities with major banks.
The company's foreign operations have limited exposures 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 amounts required for local currency-denominated obligations, are converted to U.S. dollars as soon as practicable and periodically remitted to the U.S. parent. 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 remitted to the U.S. parent.
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 less than one percent of the company's annual oil and gas production at year-end 1995. Authorization from the Board of Directors is needed before the company hedges more than 15% of its production of oil and gas, refined products, and of crude oil purchased for refinery supply.
Capital spending in 1995 on foreign oil and gas exploration and production was up 14 percent compared with 1994, primarily reflecting increased expenditures in Myanmar, Indonesia, the Netherlands and Azerbaijan. The $422 million spent by 76 Products Company during 1995 primarily reflected refinery upgrades to complete environmental requirements for reformulated gasoline required by the California Air Resources Board, and the addition of refinery units to increase production of higher value products. Capital spending on geothermal energy projects in 1995 primarily focused on development work at the Salak field on the island of Java and exploration drilling on the island of Sumatra, in Indonesia.
The forecasted 1996 capital expenditures will focus on development of overseas oil and gas projects, particularly in Myanmar, Thailand, Indonesia and Azerbaijan. This capital plan reflects Unocal's continued emphasis on energy development projects overseas with higher potential rates of return.
The foreign petroleum exploration and production capital spending plan is up 49 percent from the 1995 amount. A major focus of this spending will be the Yadana field development and pipeline project offshore Myanmar. This natural gas project is expected to be in operation by mid-1998. In Thailand, the company plans to develop its existing fields in order to increase natural gas production capacity, as a second pipeline from the Gulf of Thailand to shore is being constructed by the Thai government. In Indonesia, the company plans to further develop new oil and gas reserves offshore East Kalimantan and accelerate its successful exploratory drilling program by drilling 15 to 25 exploratory wells in known producing basins as the first phase of a 65-well, multi-year program. Another important overseas project is in the Caspian Sea, offshore Azerbaijan. Unocal is a member of an international consortium that is moving forward with a development program to begin initial oil production by mid-1997.
The Louisiana/Gulf of Mexico area accounts for 64 percent of the 1996 domestic capital budget, as the company moves ahead with development of key natural gas projects.
The capital spending plan for petroleum exploration and production includes $230 million for worldwide exploration. Of this, $170 million, or 74 percent, is planned for projects near existing operations that have a high potential for success.
Planned capital expenditures for 76 Products Company in 1996 are down 48 percent from 1995. The allocated capital for this segment has been significantly reduced since refinery modifications have been completed to manufacture California-mandated reformulated gasoline. Of the 1996 amount, about $95 million is planned for marketing operations, mostly for the addition of new profit centers to existing locations, such as convenience stores, car washes, quick- service restaurants and car maintenance services. Another $85 million is planned for the company's California refineries on projects to enhance profitability and meet environmental regulations.
Capital expenditures for Geothermal and Power Operations are expected to more than double in 1996, focusing on projects in Indonesia. The company expects to accelerate development of resource production facilities at the Salak field and conduct additional exploration at the Sarulla contract area on the island of Sumatra. The company also expects to be a 50 percent owner in a venture that expects to build and operate power plants at the Salak field that will utilize its steam production.
The decrease in Agricultural Products capital spending in 1996 reflects reduced expenditures for the startup of the Finley, Washington, ammonia manufacturing plant. The planned increase in capital spending for Carbon and Minerals reflects anticipated projects at the Mountain Pass, Chicago Carbon and Poco Graphite facilities.
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 1995, the company recorded approximately $230 million in environment- related capital expenditures, compared with an average of approximately $160 million per year for the prior three years. Estimated 1996 capital expenditures for environment-related costs are $90 million. The capital expenditures for 1994 and 1995 included significant amounts for refinery modifications to manufacture reformulated gasoline for the California market. No significant capital expenditures related to reformulated gasoline are anticipated in 1996.
The amount charged to 1995 earnings for remediation costs and for operating, maintenance and administrative costs to maintain environmental compliance was approximately $170 million, and such costs averaged approximately $270 million per year for the prior three years, including $370 million in 1994. The amount charged to 1994 earnings included provisions of $187 million for certain known future environmental remediation costs, of which $152 million was recorded in the fourth quarter of 1994. The 1994 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. In 1995, the company's continuing review identified additional future remediation costs which resulted in provisions of $45 million that were included in the amount charged to 1995 earnings.
At December 31, 1995, the company's reserves for environmental remediation obligations totaled $214 million, of which $83 million was included in other current liabilities. The total reserve amount is grouped into five categories and discussed below.
SUPERFUND AND SIMILAR SITES. At year-end 1995, Unocal had received notification from the federal Environmental Protection Agency that the company may be a potentially responsible party (PRP) at 40 sites and may share certain liabilities at these sites. In addition, various state agencies and private parties had identified 30 other similar PRP sites that may require investigation and remediation. Of the total, the company has denied responsibility at 2 sites and at another 13 sites the company's liability, although unquantified, appears to be de minimis. The total also includes 25 sites which are under investigation or in litigation, for which the company's potential liability is not presently determinable. Of the remaining 30 sites, where probable costs can be reasonably estimated, reserves of $32 million had been established for future remediation and settlement costs. These 70 sites are exclusive of 44 sites where the company's liability has been settled or where the company has no evidence of liability and there has been no further indication of liability by government agencies or third parties for at least a 12-month period.
Unocal does not consider the number of sites for which it has been named 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 had been established for this category of sites. Of the total, $14 million was for approximately 190 service station sites on leased properties at which operations have ceased and which the company is obligated to remediate before returning them to the owners. Also included was $12 million for approximately 230 service station sites that the company previously owned or leased. The current owners of such properties are holding the company responsible for environmental remediation costs.
COMPANY FACILITIES SOLD WITH RETAINED LIABILITIES. This category had reserves of $71 million for accrued environmental liabilities related to major company assets that were sold in prior years. Included are the company's former auto/truckstop facilities, a former mine site in Wyoming, industrial chemical and polymer sites and agricultural chemical sites. 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 reserves represent presently estimated future costs for investigation/feasibility studies and identified remediation work as a result of claims made by buyers of the properties.
Also included are reserves for the remediation of certain facilities which were transferred to The UNO-VEN Company in 1989 in connection with its formation. The facilities included the Chicago Refinery and related product terminals and service stations. Under the UNO-VEN Asset Purchase and Contribution Agreement, the company retained certain environmental liabilities that would require Unocal to either manage remediation work or reimburse UNO-VEN for remediation costs resulting from valid environmental claims. The agreement required all claims to be filed by November 30, 1995. The company has not completely evaluated the additional claims made by UNO-VEN near or on the November 30, 1995 deadline; however, it does not anticipate that any additional material liabilities beyond the current reserves will be incurred for these claims.
INACTIVE OR CLOSED COMPANY FACILITIES. Reserves of $57 million had been established for these types of facilities. Major sites included in this category are the former Beaumont refinery in Texas and the shale oil project and a chemical facility in Colorado. Also included in this category is the Questa molybdenum mine in New Mexico. In the second quarter of 1995, an additional $9 million was added to the reserve for the estimated costs of investigations and remedial activities for the Questa site.
This category also includes the cleanup at the Guadalupe oil field on the central California coast of underground releases of a diesel-like additive formerly used to produce the field's heavy crude oil. During 1995, an additional reserve of $8 million was provided for estimated costs to complete the beach cleanup and for assessing and investigating the inland portion of the field. At year-end 1995, the reserve that had been established for the above activities had been fully utilized. The company expects to incur additional, but indeterminate, costs for continuing assessment, investigation and remediation of the inland portion of the field.
Also included in this category is the Avila Beach, California site. In 1988, petroleum hydrocarbon contamination under the Front Street section of the town was discovered. It was determined that the source of the contamination had been leaking pipelines that ran between a tank farm and wharf operated by the company. The company has installed interim systems as an initial remediation measure until a final remedial action plan is completed and implemented. The company is currently developing a plan that will be submitted by mid-1996 to the Regional Water Quality Control Board for approval. The plan will outline the procedures that will be used to determine the desired alternatives for the site's final remediation. The future costs related to the final remediation will not be determined until these alternatives are identified. The year-end reserve included the estimated remaining cost for the excavation of one section of the beach where contaminants were detected close to the surface of the sand during the company's third quarter 1995 testing and monitoring of the site. The company completed the cleanup of this area in January 1996 as required by a state order.
ACTIVE COMPANY FACILITIES. The company had provided $19 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.
The company estimated, to the extent it was able to do so, that it could incur approximately $180 million of additional costs in excess of the $214 million accrued at December 31, 1995. 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 the near term, 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.
FUTURE ACCOUNTING CHANGE
The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." The new requirements under SFAS No. 123 are generally effective for 1996 financial statements. Companies must either expense the value of stock-based compensation or disclose in a footnote what the earnings and earnings per share would be had the value been expensed. The company expects to adopt the disclosure method. At adoption, the effect on earnings and earnings per share is not expected to be material.
OUTLOOK
Certain of the statements in this discussion, as well as other forward-looking statements within this document, contain estimates and projections of amounts of or increases in future revenues, earnings, cash flows, capital expenditures, assets, liabilities and other financial items and of future levels of or increases in reserves, production, sales including related costs and prices, and other statistical items; plans and objectives of management regarding the company's future operations, products and services; and certain assumptions underlying such estimates, projection plans and objectives. While these forward-looking statements are made in good faith, future operating, market, competitive, legal, economic, political, environmental, and other conditions and events could cause actual results to differ materially from those in the forward-looking statements.
Crude oil prices are expected to be unstable in 1996 because of the uncertain effect of the United Nations' seeming willingness to allow a partial resumption of oil exports from Iraq. However, domestic natural gas prices are expected to remain strong in early 1996, at least until the winter selling season is over and natural gas inventories within the industry are replenished.
The sale of the company's California oil and gas producing properties is expected to be completed in April 1996. The proceeds are expected to be used to reduce debt and fund capital projects overseas. The sale includes Unocal's interests in 68 oil and gas fields, including 11 producing platforms off the California coast in state and federal waters. Unocal's average net daily production from the properties in the proposed sale was 27,000 barrels of oil and 59 million cubic feet (mmcf) of natural gas during 1995, and proven reserves of 184 million barrels of oil equivalent at year-end 1995. For 1995, Unocal's California oil and gas producing properties generated pretax operating earnings and cash flow of approximately $14 million and $64 million, respectively. Unocal has approximately 600 employees involved in its California oil and gas operations. While many of those employees will be offered positions with the buyer or at other Unocal operations, some layoffs are expected (see Note 25 for additional information). The sale of these producing properties is not expected to have a material effect on Unocal's future operating results.
On a worldwide basis, 1996 daily natural gas production is expected to average nearly 1.8 billion cubic feet, up slightly from 1995. Crude oil and condensate production is expected to average 210,000 barrels per day, down from 240,000 last year.
The company anticipates an approximate 15 percent increase in foreign natural gas production in 1996. This improvement is expected mainly from a significant increase in the company's Gulf of Thailand production beginning in the second quarter of 1996, when the Petroleum Authority of Thailand's new pipeline comes on stream. Also, oil and gas production should continue to improve in Indonesia as a result of successful exploration and development programs that have revitalized operations.
For 1996, the company expects domestic crude oil and natural gas production to be lower, reflecting the expected completion of the sale of its California producing oil and gas properties and continued natural production declines. The company will continue to focus on domestic natural gas production in the Louisiana/Gulf Coast area.
The company is in the process of retaining an advisor to assist in the disposal of its oil and gas interests in the Netherlands sector of the North Sea as it continues to shift its strategic focus to Southeast Asia and other areas that offer greater opportunities for growth. Unocal's net daily production from its Netherlands operations in 1995 was 11,000 barrels of crude oil and condensate and 9 mmcf of natural gas.
In Thailand, the company expects to spend approximately $160 million on development projects that should allow the company to sustain gross production at 950 mmcf of natural gas per day once a second pipeline becomes operational in 1996. The planned production for 1996 is expected to average 825 mmcf per day (gross). Natural gas demand in Thailand is expected to continue its active growth over the next 10 to 15 years, providing a market for the increased production from the Gulf of Thailand.
Unocal is currently pursuing growth opportunities in Central and Southeast Asia. The main areas of oil and gas exploration and development opportunities are in Azerbaijan, Myanmar, Turkmenistan, Pakistan, China and Vietnam.
In Azerbaijan, Unocal is part of an international consortium participating in the development of three oil fields in the Caspian Sea offshore Azerbaijan. Unocal has a 9.5 percent interest in the project. Initial production is expected to begin in mid-1997. This is a major, long-term commitment for Unocal. There are still difficult issues to resolve as to the route and construction of permanent export pipelines for the oil.
A major focus of 1996 capital spending will be the Yadana project offshore Myanmar. This natural gas project, which is to include four offshore platforms, should be in operation by mid-1998. When fully developed, estimated gross production in 1999 is expected to reach 650 mmcf of natural gas per day. The majority of the production is to be sold under a 30-year gas sales contract and a pipeline agreement calling for natural gas deliveries of 525 mmcf per day to Thailand beginning in mid-1998. A separate sales agreement calls for 125 mmcf per day of natural gas to be supplied to Myanmar for its domestic use. Unocal has a 28.26 percent interest in the Yadana project.
In March 1996, Unocal announced the discovery of a potentially significant new gas field located about six miles south of the Yadana field in the Andaman Sea. Further studies are under way to prove the commerciality of this new offshore discovery. The field could be produced through the Yadana platform complex. Unocal has the same percentage ownership and partners in this discovery as it has in the Yadana project.
The United States Congress is currently considering legislation that could ban United States companies from all business activities associated with Myanmar. This action, if passed, would adversely effect the company's future prospects in that country.
The company will continue to expand its marketing operations at retail outlets with the addition of new businesses to certain existing locations, such as convenience stores, car washes, quick-service restaurants and car maintenance services. The company is also working to increase gasoline retail sales volumes by installing credit card readers at the dispensers and reconfiguring the service islands. In February 1996, Unocal entered into a strategic alliance with Fleetman, Inc. to market Fuelman Fleet Cards. Also, Unocal signed a Memorandum of Understanding with Southern Counties Oil Company/Cardlock Fuels System which could lead to joint construction, development and operation of unattended commercial fueling facilities throughout California. These agreements position the company as a leader in the West Coast commercial fleet fuel business.
To improve the company's standing in markets outside California and Hawaii, Unocal is actively pursuing joint ventures and alliances. In October 1995, Unocal and Circle K Corporation (Circle K), one of the nation's leading convenience store operators, signed a branding/licensing agreement for more than 400 Circle K sites in the Phoenix and Tucson, Arizona markets. In addition, the company plans to brand and supply 20 existing Circle K sites in Las Vegas, Nevada, and the two companies plan to co-develop new service station/convenience store sites in the Las Vegas area. In February 1996, Tosco Corporation, a petroleum refiner and marketer, announced that it had entered into a merger agreement with Circle K.
The upgrades to the company's refineries are now complete and higher valued products are being produced along with the new reformulated gasolines that meet California standards. On the retail marketing side, the company foresees improved margins on the California reformulated gasolines that must be sold at retail sites by June 1, 1996. In addition, the increased gasoline throughput and returns from its reformatted service stations are meeting or exceeding the company's forecasts. However, the ultimate effect on product margins of the new gasolines cannot be accurately predicted.
In February 1994, the company was granted a United States patent for reformulated gasolines that meet the 1996 California standards. Six refining companies filed suit against Unocal in April 1995 to invalidate the patent or declare it unenforceable. The company intends to aggressively defend its rights under this patent.
In Indonesia, the Geothermal and Power Operations segment expects to accelerate development of resource production facilities at the Salak field on the island of Java. The company also expects to be a 50 percent owner in a venture that expects to build and operate new power plants at this field. Unocal will supply steam for the power plants. The company also plans to conduct additional exploration in the Sarulla block on the island of Sumatra, after a discovery well indicated a highly productive geothermal resource. The company had previously negotiated a power sales agreement that allows it to develop up to 1,000 megawatts of generating capacity in the Sarulla block. The first of the Unocal power plants is expected to begin operation in 1999, assuming the commerciality of the field. The company is also pursuing other geothermal development and power generation opportunities throughout Indonesia.
The geothermal segment expects to benefit from improved earnings in 1996 from operations at The Geysers in Northern California. The 1995 earnings were adversely affected by seven months of discretionary curtailments by the public utility that purchases the steam. Such curtailments are not expected in 1996. In 1996, the company is scheduled to begin a project to inject waste water from municipal treatment plants to recharge the reservoir. This injection project should increase the productivity of the field.
In 1996, the Agricultural Products segment expects continued high sales volumes of ammonia and urea. Approximately 200,000 additional tons per year of ammonia is expected to be available for sale due to new production from the Finley, Washington plant and higher production from the Kenai, Alaska facility. The segment plans to expand sales efforts in its existing markets in South Korea, Japan, China and Vietnam. The company also plans to develop new markets in India.
The Carbon and Minerals segment will continue to expand specialty graphite products and will begin production of higher margin minerals. Also, primarily due to increased molybdenum prices, the Questa mine is expected to resume operations in late 1996, after being idle for approximately ten years. This mine is expected to produce about 14 million pounds of molybdenum per year when it reaches full production. Carbon and Minerals will continue to look for new products and expansion opportunities in order to provide earnings growth.
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, 1995, 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.
Roger C. Beach John F. Imle, Jr. Neal E. Schmale Charles S. McDowell Chief Executive President Chief Financial Vice President Officer Officer and Comptroller
February 14, 1996
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, 1995 and 1994, and the related consolidated statements of earnings, cash flows and stockholders' equity for each of the three years in the period ended December 31, 1995 and the related financial statement schedule. These financial statements 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 33 through 61 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, 1995 and 1994 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, 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 long-lived assets and long-lived assets to be disposed of in 1995; for recognizing the reduction in value of its producing oil and gas properties in 1994; and for postretirement benefits other than pensions and for postemployment benefits in 1993.
Coopers & Lybrand L.L.P. February 14, 1996, except for Note 25, as to which the date is February 16, 1996 Los Angeles, California
CONSOLIDATED EARNINGS UNOCAL CORPORATION
See Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEET UNOCAL CORPORATION
The company follows the successful efforts method of accounting for its oil and gas activities.
See Notes to Consolidated Financial Statements.
CONSOLIDATED CASH FLOWS UNOCAL CORPORATION
See Notes to Consolidated Financial Statements.
CONSOLIDATED STOCKHOLDERS' EQUITY UNOCAL CORPORATION
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.
USE OF ESTIMATES
The consolidated financial statements are prepared in conformity with generally accepted accounting principles, which require management to make estimates and assumptions that affect the amounts of assets and liabilities and the disclosures of contingent liabilities as of the financial statement date and the amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
INVENTORIES
Inventories are valued at lower of cost or market. The costs of crude oil, refined products and agricultural products inventories are determined using the last-in, first-out (LIFO) method. The costs of other inventories are determined by using various methods. Cost elements primarily consist of raw materials and production expenses.
IMPAIRMENT OF ASSETS
Oil and gas 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 charged to depreciation, depletion and amortization expense when the estimated discounted future cash flows are less than the current net book values of the properties in a field. See Note 2 for additional information.
Impairment charges are also made for the write-down of other long-lived assets when it is determined that the carrying values of the assets may not be recoverable. A long-lived asset is reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable.
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.
DEPRECIATION, DEPLETION AND AMORTIZATION
Depreciation, depletion and amortization related to proved oil and gas properties and estimated future abandonment and removal costs for offshore production platforms are calculated at unit-of-production rates based upon estimated proved recoverable reserves. Depreciation of other properties is generally on a straight-line method using various rates based on estimated useful lives.
MAINTENANCE AND REPAIRS
Expenditures for maintenance and repairs are expensed. In general, improvements are charged to the respective property accounts and such accounts are relieved of the original cost of property replaced.
RETIREMENT AND DISPOSAL OF PROPERTIES
Upon retirement of facilities depreciated on an individual basis, remaining book values are charged to 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 is established when deemed 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, accrued liabilities for Superfund and similar sites 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, exceed net aggregate 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. Gains and losses arising from currency swap agreements are recognized in income and offset the foreign exchange gains and losses on the underlying transactions. Gains and losses arising from commodity future contracts are deferred and included in the basis of the underlying transactions. Income or expense associated with interest rate swap agreements is recognized on the accrual basis over the life of the swap agreement as a component of interest income or interest expense.
See Note 16 for additional information.
OTHER
Earnings per share of common stock are based on net 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 costs of the assets.
Certain items in prior year financial statements have been reclassified to conform to the 1995 presentation.
NOTE 2 - ACCOUNTING CHANGES
Effective in the fourth quarter of 1995, the company adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of." The new accounting standard sets guidelines to be used for determining and measuring impairment of certain assets. As a result, the company recorded a charge to earnings of $87 million pretax ($53 million after tax or 22 cents per common share) for the write-down of several oil and gas producing properties where recent downward revisions in reserve estimates indicated future net cash flows would be insufficient to fully recover the carrying value of these properties. The carrying values were written down to estimated future discounted cash flows or fully written off in the case of negative future cash flows. The charge was recorded in depreciation, depletion and amortization expense and reflected the reduction in value of various properties located in the United States ($44 million), the Netherlands ($37 million) and Canada ($6 million).
Effective January 1, 1994, the company changed its accounting policy for recognizing the reduction in value of its producing oil and gas properties and commenced to evaluate properties for impairment on a field-by-field basis instead of a country-by-country basis which was previously used. 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 of 1994. 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 were 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 would have increased by $31 million to $244 million or 86 cents per common share as a result of the accounting change.
Effective January 1, 1993, the company adopted 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).
NOTE 3 - RESTRUCTURING COSTS
During the fourth quarter of 1994, as a result of an overhead study, the company began a two-year program to reduce its 1,540-person corporate staff by 630 positions and to eliminate another 126 positions in the operating groups. 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 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, 1995, approximately 541 employees had been terminated as a result of the program. The amount of unpaid benefits remaining on the consolidated balance sheet was $14 million.
NOTE 4 - WRITE-DOWNS OF ASSETS
In 1995, prior to the adoption of SFAS No. 121 in the fourth quarter, the company recorded a pretax charge of $13 million to write down the carrying values of certain domestic oil and gas properties and $5 million for miscellaneous asset write-downs.
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 write-downs 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.
NOTE 5 - DISPOSITIONS OF ASSETS
During 1995, the company received total proceeds from sales of assets of $204 million and recorded a pretax gain of $117 million. Of the total, $134 million was from the sale of nonstrategic oil and gas properties with a pretax gain of $52 million. In addition, the company recorded a pretax gain of $26 million on proceeds of $32 million from the sale of its Process, Technology and Licensing business.
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.
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.
The 1995 and 1994 cash flow statements excluded $30 million and $23 million, respectively, in non-cash transactions. These amounts primarily relate to the purchase of Unocal common stock by the trustee of the Unocal Savings Plan (the "Plan") from Unocal. The trustee used the company's matching contributions to the Plan, which were expensed in the company's consolidated earnings statements, to purchase the shares. In the consolidated cash flow statements, the issuance of Unocal common stock and the matching contribution expense were treated as non-cash transactions since the resulting effect on cash flow was zero.
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 non-cash 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.
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 $45 million in 1995 and $44 million in 1994 and 1993.
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.
NOTE 9 - INCOME TAXES (CONTINUED)
The significant components of deferred income tax assets and liabilities included in the consolidated balance sheet at December 31, 1995 and 1994 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 $759 million as of December 31, 1995.
At year-end 1995, the company had $66 million of unused foreign tax credits with various expiration dates through the year 2000. 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 federal business tax credit carryforwards and $28 million of California business tax credit carryforwards that will expire between the years 2001 and 2009. The 1995 federal net operating loss carryforward is expected to be fully utilized in 1996.
The current replacement cost of inventories exceeded the LIFO inventory value included above by $149 million and $142 million at December 31, 1995 and 1994, respectively.
NOTE 11 - PROPERTIES AND CAPITAL LEASES
Investments in owned and capitalized leased properties at December 31, 1995 and 1994 are set forth below. Total accumulated depreciation, depletion and amortization was $11,431 million and $11,096 million at December 31, 1995 and 1994, respectively.
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 1993 through 1995 as plan assets substantially exceeded the pension obligations. At year-end 1995, 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 not material.
NOTE 12 - RETIREMENT PLANS (CONTINUED)
Pension costs for the funded U.S. plans include the following components:
The following table sets forth the plans' funded status and amounts recognized in the consolidated balance sheet at December 31, 1995 and 1994:
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, $5 million and $2 million in 1995, 1994 and 1993, respectively. The accumulated obligation recognized in the consolidated balance sheet at December 31, 1995 was $21 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, 1995 and 1994 amounted to $14 million and $8 million, respectively.
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, 1995 and 1994:
Net periodic postretirement benefits cost is comprised of the following components:
The accumulated postretirement benefit obligation at December 31, 1995 was determined using a discount rate of 7.25 percent. The health care cost trend rates used in measuring the 1995 benefit obligations were 7.0 percent for under age 65 and 6.2 percent for age 65 and over, gradually decreasing to 5.0 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, 1995 by $24 million and net periodic benefits cost by $3 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 $16 million as of December 31, 1995 and $17 million as of December 31, 1994.
NOTE 14 - LONG-TERM DEBT AND CREDIT AGREEMENTS
The following table summarizes the company's long-term debt:
At December 31, 1995, the commercial paper, the Swiss Franc Bonds, $5 million of medium-term notes due in 1996 and short-term borrowings under various credit facilities due in 1996 were classified as long-term debt and included with the maturity amount due in the year 2000, 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 the year 2000. The amounts of long-term debt maturing in 1997, 1998, 1999 and 2000 are $118 million, $415 million, $171 million and $1,336 million, respectively.
In 1995, the company's new borrowings consisted of: (1) $350 million in medium-term notes with interest rates ranging from 6.70% to 8.15% and maturity dates ranging from March 2002 to April 2015; (2) $200 million of 7.20% Notes due 2005; (3) and $50 million under a $50 million revolving credit facility. The proceeds were used principally to retire the Eurodollar Notes and refinance other maturing debt.
The company also borrowed an additional $50 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, which had $80 million outstanding at December 31, 1995, terminates December 15, 2000. For the same purpose, the company has a $45 million revolving credit facility through April 19, 2000 in the Netherlands. The entire commitment amount was unborrowed at year-end 1995. During 1994, the company arranged an $85 million revolving credit facility with a Canadian Bank. This facility, which has a perpetual 364-day maturity date, was reduced to $25 million in 1995. The entire amount was available at year-end 1995. During 1995, the company arranged a $200 million 364-day credit facility, which matures March 1997 and is subject to annual renewal. The entire commitment amount was undrawn at year-end 1995. Borrowings under these four 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 June of the year 2000 at interest rates based on LIBOR and requires a facility fee on the total commitments. Of the total, $105 million had been drawn at December 31, 1995. This agreement is available for general corporate purposes, including the support of commercial paper. The company has other undrawn letters of credit for approximately $183 million. The majority are maintained for operational needs.
NOTE 14 - LONG-TERM DEBT AND CREDIT AGREEMENTS (CONTINUED)
The Bank Credit Agreement and certain of the other revolving credit facilities described above provide for the termination of the commitments and require the prepayment of all outstanding borrowings in the event (a) any person or group becomes the beneficial owner of more than 30 percent of the then outstanding voting stock of Unocal, otherwise than in a transaction having the approval of the Board of Directors of Unocal (the Board), at least a majority of which are continuing directors (as defined therein), or (b) continuing directors shall cease to constitute at least a majority of the Board.
NOTE 15 - LEASE RENTAL OBLIGATIONS
Future minimum rental payments for operating leases having initial or remaining noncancelable lease terms in excess of one year are as follows:
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.
Notional amounts are not included in the consolidated balance sheet and generally exceed the future cash requirements relating to the instruments.
The counterparties to the company's financial instruments are regulated exchanges or 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.
FOREIGN CURRENCY FORWARD AND SWAP CONTRACTS
Unocal enters into various foreign currency forward and swap contracts to manage its exposures to adverse impacts of foreign currency fluctuations under both debt and other obligations. Foreign currency gains or losses on the outstanding contracts essentially offset the foreign currency gains or losses of the underlying obligations.
NOTE 16 - FINANCIAL INSTRUMENTS (CONTINUED)
During 1986, the company entered into two currency swap agreements to hedge foreign currency exchange exposures related to the interest and principal payments on the company's Swiss Franc bonds due in 1996 and Deutsche Mark bonds due in 1998. These instruments have the same maturities as the related underlying debt. At year-end 1995 and 1994, the aggregate notional principal amounts of these agreements were $220 million. At year-end 1995, these currency swap agreements had an aggregate fair value of approximately $137 million, based on dealer quotes, which is included in long-term receivables on the consolidated balance sheet.
In addition, the company had two currency swap agreements outstanding on borrowings of its Canadian subsidiary, with notional amounts totaling $250 million at year end 1995, and three currency swap agreements outstanding with national amounts totaling $310 million at year-end 1994. The 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. The parent company also has two 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 1996 to 1999, which generally correspond to the related debt obligations. The net fair value of the currency swap agreements at year-end 1995 and 1994, based on dealer quotes, was approximately zero.
As of December 31, 1995, the company had 20 currency forward contracts outstanding to purchase 32 million Pounds Sterling for $48 million. At December 31, 1994, the company had eight currency forward contracts outstanding to purchase 17 million Pounds Sterling for $25 million. The objective is to hedge a series of known obligations denominated in Pounds Sterling which will come due during the period from January 1996 to July 2000. The fair value of these currency forward contracts at December 31, 1995 and 1994, based upon quoted market prices of comparable instruments, was approximately $0.4 million and $1.4 million, respectively, in assets.
INTEREST RATE SWAPS
Unocal enters into interest rate swap agreements to manage its 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 related amounts payable to, or receivable from, the counterparties are included in interest payable on the balance sheet. At year-end 1995 and 1994, the interest rate swap agreements had aggregate fair values of approximately $12 million and $15 million, respectively, in liabilities, based on quoted market prices of comparable instruments.
In 1986, the company entered into a 10-year interest rate swap agreement with a notional amount of $200 million. This swap was entered into to hedge $200 million floating-rate Eurodollar notes, which were redeemed early in March 1995. From March 1995 until its termination in March 1996, the agreement was used to hedge floating-rate debt consisting of $150 million of outstanding commercial paper and borrowing under the $50 million credit facility as discussed in Note 14. The company paid interest at a fixed rate of 9.28 percent and received interest at a floating rate based on LIBOR. At year-end 1995 and 1994, the floating-interest rates were 5.8 percent and 5.6 percent, respectively.
In 1994, the company entered into a three-year interest rate swap with a notional amount of $25 million. This swap was entered into to hedge $25 million in medium-term notes. 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 1995 and 1994, the floating interest rates were 5.8 percent and 6.0 percent, respectively.
OTHER
The company uses commodity futures contracts with maturities of one year or less to hedge the impact of fluctuations in prices of crude oil, natural gas and refined products. Realized and unrealized changes in the market value of futures contracts are deferred until the hedged transaction is recognized. At December 31, 1995, contracts covering 225 thousand barrels of crude oil, 4.2 million gallons of heating oil and 1.02 billion cubic feet of natural gas with notional amounts totaling $4 million for crude oil, $3 million for heating oil and $2 million for natural gas were outstanding. 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. The fair values of the contracts, based on quoted market prices, were insignificant at year-end 1995 and 1994.
NOTE 16 - FINANCIAL INSTRUMENTS (CONTINUED)
As of December 31, 1995 and 1994, the carrying amounts of certain financial instruments employed by the company, including cash, cash equivalents, and trade receivables and payables are representative of fair value because of the short- term maturity of these instruments.
The estimated fair value of the company's long-term debt was $3,983 million and $3,541 million at year-end 1995 and 1994, respectively. The fair values of debt instruments were 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 is a large number of customers in the company's customer base spread across many industries and geographic areas. As of December 31, 1995 and 1994, the company had no significant concentrations of credit risk.
NOTE 17 - ACCRUED ABANDONMENT, RESTORATION AND ENVIRONMENTAL LIABILITIES
At December 31, 1995, the company had accrued $476 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 $640 million to $780 million, of which the lower end of the range is used to calculate the amount to be amortized. These estimates are lower than those reported last year as a result of recent abandonment cost studies performed by an outside firm.
At December 31, 1995, the company's reserves for environmental remediation obligations totaled $214 million, of which $83 million was included in other current liabilities. The reserve includes estimated probable future costs of $32 million for federal Superfund and comparable state-managed multiparty disposal sites; $35 million for formerly-operated sites for which the company has remediation obligations; $71 million for sites related to businesses or operations that have been sold with contractual remediation or indemnification obligations; $57 million for company-owned or controlled sites where facilities have been closed or operations shut down; and $19 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 amounts of the company's liabilities are indeterminate due to the potentially large number of claimants for any given site or exposure, the unknown
magnitude of possible contamination, the imprecise and conflicting engineering evaluations and estimates of proper 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 1995 the company had accrued $214 million for estimated future environmental assessment and remediation costs at various sites where liabilities for such costs are probable. At those sites where investigations or feasibility studies have advanced to the stage of analyzing feasible alternative remedies and/or ranges of costs, the company estimates that it could incur additional remediation costs aggregating approximately $180 million.
Between August 22 and September 6, 1994, a chemical known as "Catacarb" was released into the environment at the company's San Francisco Refinery near Rodeo, California. Persons in the surrounding area have claimed that they were exposed to the chemical in varying degrees. Since September 22, 1994, forty two lawsuits have been filed by or on behalf of all persons, alleged to be several thousand, claiming that they or their property were adversely affected by the releases. Thirty nine of the lawsuits have been consolidated in the Superior Court for Contra Costa County. The First Amended Model Complaint in this consolidated action, filed on February 1, 1995, on behalf of individual plaintiffs and purported classes of plaintiffs, alleges personal injury, emotional distress and increased risk of future illness on behalf of the named plaintiffs and all persons present in and around or downwind from the San Francisco Refinery, and property damage and loss or diminution of property value on behalf of all owners of real and personal property in the vicinity of the Refinery, resulting from the release of Catacarb by the Refinery. Certain individual plaintiffs allege injury from alleged subsequent releases at the Refinery of hydrogen sulfide and other chemicals. The Model Complaint seeks compensatory and punitive damages in unspecified amounts, equitable relief including the creation of a fund for medical monitoring and treatment of plaintiffs and members of the purported classes, statutory penalties and other relief.
TAX MATTERS
In December 1994, the company received a Notice of Proposed Deficiency from the Internal Revenue Service (IRS) related to the years 1985 through 1987. In February 1995, the company filed a protest of the proposed tax deficiency with the appeals section of the IRS. Discussions with the Appeals Officer are ongoing, but it appears that two substantial issues will proceed to litigation.
The most significant issue relates to an IRS challenge of a $341 million deduction taken by the company in its 1985 tax return for amounts paid under a settlement agreement with Mesa Petroleum, T. Boone Pickens and Drexel Burnham Lambert, Incorporated and certain others which ended a hostile takeover attempt by that group. The IRS contends that the deduction is not allowable because the payment was related solely to the purchase of the company's common stock. Although the company did purchase shares under the settlement agreement, it properly reflected the purchase in its records at the fair market value of the shares purchased. The deduction at issue relates to that portion of the payment made under the settlement agreement that exceeded the value of the shares purchased. The company intends to vigorously dispute the IRS' assertions in court. If the IRS were ultimately to prevail, the company would owe $157 million of tax for 1985 plus tax deductible interest estimated at $235 million as of December 31, 1995. As this matter is not yet before a court, final resolution of this matter is likely to be several years away.
The second issue relates to an IRS challenge of a continued deferral of intercompany gains which arose from sales of property between subsidiaries in 1982 and 1983. The IRS contends that the $201 million balance of deferred gain must be recognized in the company's taxable income for 1985 when the subsidiaries contributed the property to a wholly owned master limited partnership. The company intends to vigorously dispute the IRS' assertions in court. If the IRS were ultimately to prevail, the company would owe $92 million in tax for 1985, but would receive credits or refunds for offsetting deductions in later years. For 1986 and 1987 the credits or refunds would total $35 million. In addition to tax, the company would owe tax deductible interest estimated at $96 million as of December 31, 1995. As this matter is not yet before a court, final resolution of this matter is likely to be several years away.
The company believes it has adequately provided in its accounts for items and issues not yet resolved. In the opinion of management, a successful outcome of the litigation is reasonably likely. However, substantial adverse
decisions could have a material effect on the company's financial condition, operating results and liquidity in a given quarter and year 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
At December 31, 1995, there were approximately 16.7 million shares reserved for the conversion of preferred stock, 14.2 million shares for the company's employee benefit plans and Directors' Restricted Stock Plan and 5.7 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, 1995, 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 1993, 1994 and 1995:
Under the Long-Term Incentive Plan of 1991, there were 5,303,044 shares available at year-end 1995 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 $407 million, $391 million and $389 million at December 31, 1995, 1994 and 1993, respectively. Dividends or cash distributions received from these affiliates were $92 million, $88 million and $80 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, 1995 was $107 million.
The company has a 50% interest in The UNO-VEN Company (UNO-VEN), a refining and marketing partnership 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, 1995 was $57 million.
Summarized financial information for these equity investees is shown below.
NOTE 23 - SALE OF ACCOUNTS RECEIVABLE
On December 15, 1995, the company entered into an agreement to sell, on a revolving basis, an undivided interest in a defined pool of the company's trade receivables. As collections reduce the amount of receivables included in the pool, the company sells new receivables to bring the amount sold up to the $200 million maximum permitted by the agreement. Under the terms of the agreement, the company retains the risk of credit loss and the collection and administrative responsibilities for the receivables sold.
The $200 million proceeds from the sale were used to reduce borrowings and is reflected as a reduction of accounts receivable in the consolidated balance sheet and as operating cash flows in the consolidated statement of cash flows. The total cost of the program from December 15, 1995 through the end of the year was $0.8 million, which included a one-time charge of $0.3 million. The total amount was included in operating expense in the consolidated earnings statement.
NOTE 24 - SEGMENT AND GEOGRAPHIC DATA
The company's businesses include petroleum, geothermal, agricultural products, carbon and minerals. Petroleum involves the exploration for, and the production, transportation, purchase and sale of, crude oil and natural gas; and the manufacture, purchase, transportation and marketing of petroleum products and the manufacturing and marketing of petroleum coke. Geothermal involves the exploration for, and the production and sale of, geothermal resources and the construction and eventual operation of electrical generating plants served by the resources. Agricultural Products involves the manufacture, transportation and marketing of nitrogen-based fertilizers for agricultural uses. Carbon and Minerals operations involves the production and marketing of petroleum coke, graphites, solvents and specialty minerals. The company is also involved in other miscellaneous businesses.
Unocal has domestic oil and gas operations in the Louisiana/Gulf, California, Alaska and Central U.S. regions. The sale of California oil and gas producing properties is expected to be completed in April 1996 (see Note 25 for additional information). Most of the company's crude oil produced in the United States is sold to third parties. A substantial portion of the natural gas produced domestically is sold to third parties under contracts having terms of less than two years. The remainder is sold to third parties in the spot market, used in the company's agricultural products operations or as fuel in its refineries.
Unocal has oil and gas production in six foreign countries: Thailand, Indonesia, Canada, the Netherlands, United Kingdom and Zaire. The company sells most of its foreign natural gas production overseas to third parties under long-term contracts. The crude oil and condensate produced overseas are primarily sold to third parties at spot market prices.
Unocal pursues exploration opportunities and business development projects worldwide to sustain the long-term growth of the company. Currently, the main areas of oil and gas exploration and development opportunities are in Azerbaijan, Myanmar, Turkmenistan, Pakistan, China and Vietnam.
The company owns three refineries in California that are operated by the 76 Products Company business segment, which carries out the company's refining and marketing activities. The company manufactures a complete line of high-quality petroleum products, including automotive gasoline, jet and turbine fuels, kerosene, diesel oils, automotive and industrial lubricating oils and petroleum coke.
The company principally markets gasoline and other refined petroleum products in the western United States under the "Unocal 76" trade name. Gasoline is marketed to consumers at retail service stations, while jet fuels, diesel fuel, lube oil, and heavy fuel oil are marketed to commercial users.
The Geothermal and Power Operations segment supplies geothermal steam for power generation, with major operations in California, the Philippines and Indonesia. This segment is constructing power plants in Indonesia to be served by the geothermal resources it provides.
Agricultural Products manufactures and markets nitrogen-based fertilizers for wholesale markets to the western United States and to the Pacific Rim. Carbon and Minerals produces and markets petroleum coke (other than on the West Coast), graphites, solvents and specialty minerals. Pipelines principally includes the company's equity interests in affiliated pipeline companies. Other includes the development and sale of real estate assets and the company's equity interest in UNO-VEN.
The Corporate and Unallocated category includes all unallocated corporate items and miscellaneous operations. In addition, this category, especially in prior years, includes the financial data related to businesses that were sold or being phased-out.
Financial data by business segments and geographic areas of operation are shown below. 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
BUSINESS SEGMENT DATA (continued)
(a) 1991 includes the write-down of the Los Angeles Refinery for $73 million. (b) 1994 includes a $161 million provision for environmental remediation costs. (c) 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
NOTE 25 - SUBSEQUENT EVENT
On February 16, 1996, Unocal and Nuevo Energy Company (Nuevo) signed an asset purchase agreement for the sale of nearly all of Unocal's crude oil and natural gas producing properties in California. Torch Energy Advisors, Inc. (Torch) negotiated the sale and will operate the properties on behalf of Nuevo, a company Torch formed in 1990. The sales agreement is subject to certain regulatory consents, approvals and waiting periods.
Under the terms of the agreement, Unocal will receive approximately $500 million from the sale of the properties. The final cash settlement will be set at the closing, which is expected in April 1996. In addition, beginning in 1998, the company could receive further payments that are contingent upon the price per barrel from the properties' future oil production. The company expects to use the proceeds from the sale to reduce debt and fund projects in Central and Southeast Asia.
SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES
Results of Operations
Results of operations of oil and gas exploration and production activities are shown below. Sales revenues are net of royalty payments, net profits interests and marketing related purchases. 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 6.0 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 1995, 1994 and 1993 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 with 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 596 million barrels of crude oil and 6,308 billion cubic feet of natural gas at December 31, 1995.
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 83, 91 and 95 million barrels at December 31, 1995, 1994 and 1993, 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.
ESTIMATED PROVED RESERVES OF CRUDE OIL AND CONDENSATE
(a) Excludes 7 million barrels produced in 1993 but sold under forward contracts in 1992.
OIL AND GAS RESERVE DATA (UNAUDITED) (CONTINUED)
ESTIMATED PROVED RESERVES OF NATURAL GAS
(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 1995, 1994 and 1993 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.
(b) Includes dismantlement and abandonment costs.
CHANGES IN PRESENT VALUE OF FUTURE NET CASH FLOW (UNAUDITED) (CONTINUED)
(a) Purchases of reserves were valued at $23 million, $26 million and $39 million in 1995, 1994 and 1993, respectively. Sales of reserves, including the sale of future production, were valued at $74 million, $48 million and $91 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.
QUARTERLY FINANCIAL AND MARKET PRICE DATA (Unaudited) - -----------------------------------------------------
The net loss 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.
SELECTED FINANCIAL DATA
(a) Net earnings (loss) included 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) Employee benefits are net of pension income recognized in accordance with current accounting standards for pension costs. For years 1995, 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 to Unocal's Proxy Statement for its 1996 Annual Meeting of Stockholders (the "1996 Proxy Statement") (File No. 1-8483), as indicated below. The 1996 Proxy Statement is expected to be filed with the Securities and Exchange Commission on or about April 22, 1996.
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 1996 Proxy Statement. Also, see 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 17.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
See the 1996 Proxy Statement for information regarding executive compensation to appear under the captions "Summary Compensation Table," "Option Grants in 1995," "Aggregated Option/SAR Exercises in 1995 and December 31, 1995 Option Values," "Long-Term Incentive Plans - Awards in 1995," "Pension Plan Benefits - Estimated Annual Retirement Benefits," "Employment and Change of Control Agreements" and for information regarding directors' compensation to appear under the caption "Directors' Compensation."
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See the 1996 Proxy Statement for information regarding security ownership to appear under the captions "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management."
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 30 of this report.
(2) Financial Statement Schedules: See the Index to Consolidated Financial Statements and Financial Statement Schedules under Item 8 on page 30 of this report.
(3) Exhibits: The Exhibit Index on pages 73 and 74 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 1995:
(1) Current Report on Form 8-K dated and filed October 26, 1995, for the purpose of reporting, under item 5, third quarter and year-to-date earnings.
During the first quarter of 1996 to the date hereof:
(1) Current Report on Form 8-K dated and filed January 25, 1996, for the purpose of reporting, under item 5, the company's fourth quarter and full-year 1995 earnings.
(2) Current Report on Form 8-K dated and filed February 20, 1996 for the purpose of reporting, under item 5, the company's sale of its California oil and gas producing properties.
(3) Current Report on Form 8-K dated and filed February 23, 1996 for the purpose of reporting, under item 5, the company's crude oil and natural gas reserve data.
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 25, 1996 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 25, 1996.
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
UNOCAL CORPORATION
EXHIBIT INDEX (CONTINUED)