SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
Current Report Pursuant
to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of report (Date of earliest event reported) February 8, 2005
------------------------
UNOCAL CORPORATION
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware
--------------------------------------------------------------------------------
(State or Other Jurisdiction of Incorporation)
1-8483 95-3825062
--------------------------------------------------------------------------------
(Commission File Number) (I.R.S. Employer Identification No.)
2141 Rosecrans Avenue, Suite 4000, El Segundo, California 90245
--------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(310) 726-7600
--------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions:
|_| Written communications pursuant to Rule 425 under the Securities Act
|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act
|_| Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act
Item 1.01. Entry into a Material Definitive Agreement.
Executive Compensation
On February 8, 2005, the Management Development and Compensation Committee (the
"Compensation Committee") of the Board of Directors of Unocal Corporation
("Unocal") approved certain matters with respect to the compensation of Unocal's
named executive officers (as listed in the table below) and other executive
officers:
(1) 2004 annual bonus awards to be paid in 2005 pursuant to the Incentive
Compensation Plan ("ICP"),
(2) 2005 executive salary levels,
(3) 2005 Long Term Incentive Plan ("LTIP") equity awards, including awards
of performance shares, stock options and performance restricted stock,
and
(4) the performance criteria to be used in determining funding of the 2005
ICP annual bonuses payable in 2006, and to be used in determining
payouts of the 2005 Performance Share awards covering the 3-year
performance cycle of 2005-2007.
Both the ICP and LTIP are part of the 2004 Management Incentive Program approved
by Unocal stockholders at the 2004 annual meeting.
Our executive compensation program uses both absolute and relative share price
performance to determine the ICP bonus funding, payouts of the LTIP performance
shares and awards of performance restricted stock. The "Comparative Return to
Shareholders" compares Unocal's share price plus dividends (Total Shareholder
Return or "TSR") to that of a group of companies in energy-related businesses
(the "Peer Group"). The Peer Group is designed to have a composite business mix
that is similar to that of Unocal as of the beginning of the award period.
Therefore, the effects of commodity prices and other industry-related external
events upon Unocal should be approximately similar to Unocal and the Peer Group,
taken as a whole.
ICP Bonus Awards: The Compensation Committee determined the 2004 ICP bonus
funding based on TSR, which accounted for 25% of the determination, and internal
annual operating performance against target performance numbers ("AOP"), which
accounted for 75% of the funding determination. The AOP is determined on the
basis of factors such as return on capital employed, free cash flow (cash flow
from operating activities less cash flow used in investing activity), and
significant events or decisions that impact future value. The Compensation
Committee retains some discretion in making the AOP determination. For the
performance period ended December 31, 2004, Unocal's TSR was below the average
of the Peer Group but the AOP exceeded the target level. Consequently, the
Compensation Committee determined that the named executive officers set forth in
the table below will receive 2004 ICP bonuses set forth in the table. The
Compensation Committee also set the performance criteria for 2005 ICP bonuses,
which includes the Peer Group composition for 2005 and AOP component targets,
upon which ICP bonuses, if any, would be determined and paid out in 2006.
Executive Salary Increases: The Compensation Committee also approved salary
increases for the named executive officers and other executive officers
effective as of February 7, 2005. The annual base salary of Mr. Charles R.
Williamson, Chairman and CEO, was increased from $970,008 to $1,040,004. The
annual base salary of Mr. Joseph H. Bryant, President and Chief Operating
Officer, who joined Unocal in September 2004, was unchanged. The annual base
salary of Mr. Terry G. Dallas, Executive Vice President and Chief Financial
Officer, was increased from $500,004 to $520,008. The annual base salary of Mr.
Samuel H. Gillespie III, Senior Vice President, General Counsel and Chief Legal
Officer, was increased from $455,004 to $500,004. The annual base salary of Mr.
Randolph L. Howard, Senior Vice President, Global Gas, was increased from
$372,000 to $385,500.
LTIP Stock Option Awards: The Compensation Committee also granted non-qualified
stock options under the LTIP. The option price for these grants is the fair
market value on the date of grant. The Compensation Committee determined that
the named executive officers will receive the 2005 LTIP stock option awards set
forth in the table below. The form of the 2005 LTIP stock option award agreement
is attached as Exhibit 10.1 and incorporated herein by reference.
LTIP Performance Share Awards: The Compensation Committee also approved grants
of performance share units, which are equivalent in value to Unocal common
stock. These awards pay out, if at all, at the end of a three-year performance
period starting on January 1, 2005 and ending on December 31, 2007. The payout,
to be determined in 2008, may range from 0 to 200% of the initial grant,
depending on Unocal's performance relative to the Peer Group. The payout funding
mechanism is based 50% on TSR comparison to the Peer Group performance,
-1-
and 50% based on operating performance relative to the Peer Group's operating
performance, consisting of four factors: discretionary cash flow per share
(debt-adjusted), production growth per share (debt-adjusted), finding and
development costs per barrel of oil equivalent ("BOE") added, and production and
growth and acquisition costs per BOE produced. The Compensation Committee
determined that the named executive officers will be awarded the 2005
performance share awards set forth in the table below. The form of the 2005 LTIP
performance share award agreement is attached as Exhibit 10.2 and incorporated
herein by reference.
LTIP Performance Restricted Stock Awards: The Compensation Committee also
approved grants of restricted stock. A performance factor is used in determining
the size of the awards. This performance factor is based on the prior year's
company performance relative to AOP expectations. Key measures relative to AOP
expectations are: financial performance (return on capital employed and free
cash flow), and significant events or decisions that impact future value, which
is determined in the Compensation Committee's discretion. For the 2004
performance period, the 2004 AOP exceeded expectations. Consequently, the
Compensation Committee determined that the pool of target restricted shares to
be awarded would be increased by 13%. The Compensation Committee determined that
the named executive officers will be awarded the 2005 performance restricted
stock awards set forth in the table below. The form of the 2005 LTIP performance
restricted stock award agreement is attached as Exhibit 10.3 and incorporated
herein by reference.
---------------------------- --------------------- ------------------------ --------------------- --------------------
2005 LTIP
Performance
Named Executive Officer 2004 ICP Bonus 2005 LTIP Performance 2005 LTIP Stock Restricted Stock
Amount Share Award Option Award Award
============================ ===================== ======================== ===================== ====================
Charles R. Williamson, $1,236,760 50,987 113,475 40,331
Chairman and Chief
Executive Officer
---------------------------- --------------------- ------------------------ --------------------- --------------------
Joseph H. Bryant, $205,400 (a) 16,342 150,000 9,372
President and Chief
Operating Officer
---------------------------- --------------------- ------------------------ --------------------- --------------------
Terry G. Dallas, Executive
Vice President and Chief $425,000 9,805 18,913 7,436
Financial Officer
---------------------------- --------------------- ------------------------ --------------------- --------------------
Samuel H. Gillespie III,
Senior Vice President,
Chief Legal Officer and $212,700 8,171 18,185 6,463
General Counsel
---------------------------- --------------------- ------------------------ --------------------- --------------------
Randolph L. Howard, Senior $200,000 5,040 11,216 3,986
Vice President, Global Gas
---------------------------- --------------------- ------------------------ --------------------- --------------------
(a) The ICP allows for deferral of the ICP bonus amount into restricted stock
and/or into an interest bearing cash deferral program. Mr. Bryant, who joined
Unocal in September 2004, elected to defer $102,700 of his ICP bonus amount into
restricted common stock. In consideration for deferring cash compensation, the
Compensation Committee may make a restricted stock award under the terms of the
ICP, with a total dollar value greater than the amount deferred, not to exceed
100% of the dollar value of the amount deferred into restricted stock. For
deferrals of 2004 ICP awards into restricted stock, the Compensation Committee
approved an increase of 20% in restricted stock.
Adoption of New Non-Qualified Plans
The American Jobs Creation Act of 2004 (the "Act"), which added new Section 409A
to the Internal Revenue Code of 1986, as amended, (the "IRC") changes the income
tax treatment of nonqualified deferred compensation plans and imposes new
requirements on both the terms and operation of such plans. Principally in
response to the new provisions, on February 8, 2005, the Boards of Directors of
Unocal and its wholly-owned subsidiary, Union Oil Company of California,
approved the adoption of the Unocal Nonqualified Retirement Plan A1 (attached as
Exhibit 10.4), Unocal Nonqualified Retirement Plan B1 (attached as Exhibit
10.5), Unocal Nonqualified Retirement Plan C1 (attached as Exhibit 10.6)
(collectively, the "Nonqualified Retirement Plans"), and the Unocal Nonqualified
Savings Plan (attached as Exhibit 10.7) (the "Nonqualified Savings Plan"). The
following description is qualified in its entirety by Exhibits 10.4-10.7, which
are incorporated herein by reference.
-2-
The Nonqualified Retirement Plans and the Nonqualified Savings Plan apply to
active employees as of January 1, 2005, and thereafter who meet each plan's
eligibility requirements and are intended to facilitate the continuation of the
nonqualified deferred compensation benefits previously provided under
predecessor plans in compliance with the new tax provisions adopted by the Act.
Benefits for former employees are not subject to the Act and, as a result, these
benefits remain subject to the terms of the predecessor plans.
The following is a brief description of certain aspects of the Nonqualified
Retirement Plans and the Nonqualified Savings Plan:
1. The Nonqualified Retirement Plans are intended to supplement benefits
under the Unocal Retirement Plan, a tax-qualified pension plan under the IRC,
and the Nonqualified Savings Plan is intended to supplement benefits under the
Unocal Savings Plan, a tax-qualified defined contribution plan under the IRC.
2. Under the Nonqualified Retirement Plans, eligible participants include
those employees who are members of the Unocal Retirement Plan, have the
requisite salary grade classification and either have five years of benefit
service under the Unocal Retirement Plan or are entitled to a vested benefit
under that plan by reason of a change in control.
3. The Nonqualified Retirement Plans generally provide a retirement benefit
which is in the aggregate equal to the additional retirement benefit which would
be available under the benefit formula in the Unocal Retirement Plan (taking
into account the Change in Control provisions of that plan), but without regard
to the IRC limitations applicable to tax-qualified plans that limit the maximum
benefit payable and the maximum compensation that may be taken into account, and
by using the employee's highest three calendar years' of incentive awards and
including the employee's salary deferrals under the Unocal Deferred Compensation
Plan in compensation used for computing benefits. Benefits under the
Nonqualified Retirement Plans are payable following termination of employment.
4. The Nonqualified Savings Plan provides benefits to employees whose
compensation exceeds the IRC limitation on the maximum allowed to be considered
by the Unocal Savings Plan. The Nonqualified Savings Plan provides for a benefit
equal to six percent of an eligible employee's annual compensation less the
maximum matching contribution available under the Unocal Savings Plan. The
amounts are credited to a bookkeeping account and the balance is adjusted for
earnings at the ten-year U.S. Treasury bond rate plus 2%. Benefits under the
Nonqualified Savings Plan are payable following termination of employment.
5. Each participant is an unsecured general creditor of Unocal with respect
to his or her benefits under the Nonqualified Retirement Plans and Nonqualified
Savings Plan. Benefits are subject to the risk of corporate insolvency.
6. Revisions to the predecessor plans reflected in the Nonqualified
Retirement Plans to comply with new IRC Section 409A include (i) revising the
definition of "Change of Control" for payment purposes, (ii) the elimination of
accelerated distributions, (iii) restrictions regarding changes of distribution
elections; and (iv) a six month delay of distributions to "key employees" (as
defined in the IRC).
7. The Nonqualified Savings Plan reflects two primary revisions from the
predecessor plan. First, instead of a two-year vesting period for credits to an
employee's account, the credits are immediately vested upon crediting under the
Nonqualified Savings Plan. Second, distributions to "key employees" (as defined
in the IRC) are delayed until at least six months after the employee's
termination.
Item 9.01 Financial Statements & Exhibits.
(c) Exhibits.
Exhibit 10.1 - Form of 2005 Stock Option Award Agreement
Exhibit 10.2 - Form of 2005 Performance Share Award Agreement
Exhibit 10.3 - Form of 2005 Performance Restricted Stock Award Agreement
Exhibit 10.4 - Unocal Nonqualified Retirement Plan A1
Exhibit 10.5 - Unocal Nonqualified Retirement Plan B1
Exhibit 10.6 - Unocal Nonqualified Retirement Plan C1
Exhibit 10.7 - Unocal Nonqualified Savings Plan
-3-
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
UNOCAL CORPORATION
(Registrant)
Date: February 11, 2005 By: /s/Joe D. Cecil
----------------------- -------------------------------
Joe D. Cecil
Vice President and Comptroller
-4-