Unocal Corp. said Friday that an arbitration panel has ruled that it owes Agrium U.S. Inc. $36 million plus $2 million in interest for underdelivery of natural gas to Agrium’s fertilizer plant in Alaska. As a result, Unocal said it expects to take a charge against earnings in the second quarter.

Unocal sold the Kenai, AK, fertilizer plant to Agrium in 2000 with an agreement to continue providing gas to the facility from dedicated gas reserves. Although the panel agreed that the feedstock sales agreement is a reserves-based contract, it ruled that production from dedicated properties did not meet the schedule of deliveries under the contract. The ruling concerns gas deliveries between July 2002 and April 2004.

The panel’s decision also laid out the methodology for determining past and future gas delivery quantities and for calculating liquidated damages related to underdeliveries to the plant. Unocal said the methodology sets a cap of $50 million on liquidated damages for the life of the contract and it believes the cap will be enforceable. The sales contract runs through June 2009.

The award does not include amounts that are owed for May through July 2004, or that may be owed from August 2004 through the end of the contract, the company said. Based on current delivery projections from certain dedicated fields, Unocal expects to reach the cap for liquidated damages over time.

The arbitration panel also ordered Agrium to reimburse Unocal $5 million for excess royalties that have been paid by Unocal to the state of Alaska. Unocal expects to record a special item charge in its second quarter 2004 results based on the arbitration ruling.

Additional litigation related to the agreement is pending in California Superior Court in Los Angeles County. Trial on those issues is expected to begin late this year.

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