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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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1999
FORM 10-K/A
Amendment No. 2
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-13108
Vastar Resources, Inc.
(Exact name of registrant as specified in its charter)
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Delaware 95-4446177
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
15375 Memorial Drive
Houston, Texas 77079
(Address of principal executive (Zip Code)
offices)
(281) 584-6000
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock, Par Value $.01 Per Share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the registrant's common equity held by non-
affiliates on March 1, 2000, based on the closing price on the New York Stock
Exchange composite tape on that date of $54 3/4, was $965,424,489.
As of March 1, 2000, there were 97,649,450 shares of Common Stock
outstanding.
The registrant hereby amends the following items, financial statements,
exhibits or other portions of its Annual Report or Form 10-K for the fiscal
year ended December 31, 1999 as set forth in the pages attached hereto:
Part II, Items 6, 7, and 8
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PART II
Item 6. Selected Financial Data.
The selected financial data set forth below for the five years ended
December 31, 1999 should be read in conjunction with our Consolidated Financial
Statements and the Notes to Consolidated Financial Statements included in this
Form 10-K.
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(millions of dollars,
except per share amounts and
ratios)
Sales and other operating revenues.......... $1,895 $1,602 $3,307 $3,382 $1,993
Total expenses (excluding income taxes)..... 1,778 1,622 3,099 3,190 1,974
Net income.................................. 213 136 240 220 103
Basic earnings per share.................... 2.19 1.40 2.47 2.26 1.06
Diluted earnings per share.................. 2.16 1.39 2.46 2.26 1.05
Cash dividends per common share............. 0.30 0.30 0.30 0.30 0.30
Total assets................................ 2,710 2,574 1,925 1,939 1,552
Long-term debt.............................. 975 1,289 672 778 759
Ratio of earnings to fixed charges*......... 3.2 1.8 5.9 5.1 2.0
- --------
* The ratios of earnings to fixed charges were computed by dividing earnings
by fixed charges. For this purpose, earnings include income before income
taxes and fixed charges. Fixed charges include interest, amortization of
debt expense and the estimated interest component of rental expense.
1
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following information should be read in connection with the information
contained in our Consolidated Financial Statements and the Notes to
Consolidated Financial Statements in this Form 10-K.
General
In March 1999, Atlantic Richfield Company (ARCO), who currently owns
80,000,001 (81.9 percent) shares of our outstanding common stock, entered into
a merger agreement with BP Amoco p.l.c. which provides for the merger of a
subsidiary of BP Amoco p.l.c. with and into ARCO. On February 3, 2000, the
members of the United States Federal Trade Commission (FTC) voted 3-2 to oppose
the merger. On February 5, 2000, the FTC filed suit in United States District
Court seeking a preliminary injunction to halt the merger. In addition, the
state governments of California, Oregon and Washington have also filed suit in
United States District court to halt the merger. The closing of the merger will
depend on, among other things, the outcome of these lawsuits.
In October 1998, we acquired interests in an additional 23 producing fields
on the Gulf of Mexico shelf through a three-company transaction involving
Vastar, ARCO and Mobil Exploration & Producing U.S. Inc.
In August 1997, Vastar and Southern Energy, Inc., combined most of their
natural gas and power trading and marketing operations forming Southern Company
Energy Marketing L.P. We currently hold, through subsidiaries, a 40 percent
interest in Southern Company Energy Marketing. Southern Energy, through its
subsidiaries, currently holds a 60 percent interest. Southern Company Energy
Marketing began gas marketing on September 1, 1997, and power marketing on
January 1, 1998.
We account for our interest in Southern Company Energy Marketing using the
equity method of accounting. Therefore, for periods after September 1, 1997,
our consolidated results no longer reflect gas marketing activities in the
individual line items of the financial statements.
Sales and production volumes and price statistics for the specified periods
were as follows:
For the Years Ended
December 31,
--------------------
1999 1998 1997
------ ------ ------
Total Production (MMcfed)................................. 1,438 1,289 1,186
Natural Gas:
Sales (MMcfd)............................................. 1,447 1,399 2,684
Average production (MMcfd)................................ 1,078 988 882
Average sales price (per Mcf)............................. $ 2.07 $ 1.89 $ 2.38
Average wellhead price (per Mcf).......................... $ 2.01 $ 1.85 $ 2.03
Crude Oil:
Sales (MBbld)............................................. 115.6 117.4 103.1
Average production (MBbld)................................ 45.0 36.9 34.7
Average realized price (per Bbl).......................... $16.67 $14.47 $20.93
NGLs:
Average production (MBbld)................................ 15.0 13.2 16.0
Average realized price (per Bbl).......................... $12.64 $ 9.40 $13.24
2
Below are the statements of income for the years ended December 31, 1999,
1998 and 1997. These statements of income are based on our audited Consolidated
Financial Statements included in this Form 10-K.
For the Years Ended
December 31,
----------------------------
1999 1998 1997
-------- ------- ---------
(Millions of Dollars)
REVENUES
Natural gas
Sales.......................................... $1,094.6 $ 964.7 $ 2,331.3
Purchases...................................... (312.6) (313.4) (1,634.4)
Delivery expense............................... (17.7) (4.3) (51.5)
-------- ------- ---------
Net sales.................................... 764.3 647.0 645.4
Crude oil
Sales.......................................... 712.6 580.8 747.4
Purchases...................................... (433.5) (380.9) (476.7)
Delivery expense............................... (5.4) (5.1) (5.9)
-------- ------- ---------
Net sales.................................... 273.7 194.8 264.8
NGLs and other
Sales.......................................... 87.9 56.9 227.9
Purchases/other................................ (18.7) (11.7) (151.7)
-------- ------- ---------
Net sales.................................... 69.2 45.2 76.2
-------- ------- ---------
Net sales and other operating revenues........... 1,107.2 887.0 986.4
Earnings from equity affiliate................... 18.1 16.1 4.7
Other revenues................................... 50.2 54.2 22.6
-------- ------- ---------
Net revenues................................. 1,175.5 957.3 1,013.7
EXPENSES
Operating expenses............................... 194.0 166.3 153.9
Exploration expenses............................. 184.6 210.6 175.5
Selling, general and administrative expenses..... 54.7 69.6 63.3
Taxes other than income taxes.................... 49.1 47.3 50.0
Depreciation, depletion and amortization......... 430.7 352.0 288.6
Interest......................................... 77.3 60.3 47.8
-------- ------- ---------
Total expenses............................... 990.4 906.1 779.1
-------- ------- ---------
Income before income taxes....................... 185.1 51.2 234.6
Income tax benefit............................... (28.0) (85.2) (5.9)
-------- ------- ---------
Net income................................... $ 213.1 $ 136.4 $ 240.5
======== ======= =========
Results of Operations
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998.
Our net income for 1999 was $213.1 million, up 56 percent, compared to
$136.4 million for 1998. This increase was primarily due to higher average
sales prices for all commodities, higher production and lower exploration
expenses. Total production increased 12 percent in 1999 to 1,438 MMcfed.
Our natural gas sales revenues increased by 13 percent to $1,094.6 million
for 1999 as compared to 1998. The increase in revenues was a result of a 10
percent increase in average sales price and a 9 percent growth in gas
production.
Our average natural gas wellhead prices for 1999 increased approximately 16
cents per Mcf as compared to 1998. The average price for natural gas sold at
Henry Hub, Louisiana (a benchmark from
3
which general natural gas price trends can be analyzed) during 1999 was $2.29
per Mcf compared to $2.13 per Mcf for 1998. In addition to this general market
increase in natural gas prices in 1999 as compared to 1998, two offsetting
factors are reflected in our average wellhead price. We experienced widening
basis differentials between Henry Hub and the locations where we sold our gas
production (effectively lower prices) in 1999 as compared to 1998. Offsetting
the higher price differentials was a $16.5 million gain associated with our
hedging activity for 1999. Hedging activity for 1998 resulted in a $1.0 million
gain.
Our average natural gas production for 1999 increased by 90 MMcfd to 1,078
MMcfd as compared to 1998. The higher production level was a result of (1)
natural gas production volumes added from our interests in 23 Gulf of Mexico
shelf fields we acquired October 31, 1998 and (2) production increases we
achieved from new field startups and operational improvements at West Cameron
645, Mississippi Canyon 148, the San Juan Basin and other fields. These
increases more than offset the impact of (1) natural production declines that
normally occur in oil and gas fields over time and (2) property sales we
completed in 1999.
Our crude oil sales revenues for 1999 increased by 23 percent to $712.6
million as compared to 1998. This increase was due to higher average market
prices for the year. During 1999 crude oil prices were volatile, as reflected
in the range of crude oil prices for NYMEX-WTI-at-Cushing from a low of $11.38
per Bbl during February 1999 to a high of $27.98 per Bbl in November 1999.
The average price for 1999 for NYMEX-WTI-at-Cushing was $17.82 per Bbl, an
increase of 18 percent when compared to the average price in 1998 of $15.10 per
Bbl. As a result of an agreement by OPEC countries to limit production, crude
oil prices began to improve late in the first quarter of 1999. Our realized
price for crude oil did not recognize the full extent of the general market
price increase because of a widening of the basis differential between the Gulf
Coast crude market and the NYMEX-WTI-at-Cushing benchmark (effectively lowering
the price we received) and a $3.2 million hedging loss we incurred in 1999.
Our average crude oil production for 1999 increased 22 percent to 45.0 MBbl
per day as compared to 1998. Our crude oil production increased primarily as a
result of volumes produced from our interests in 23 Gulf of Mexico shelf fields
that we acquired October 31, 1998. In addition, 1998 production levels were
negatively impacted by the storm-related shut-in of production at selected
fields during the third quarter of 1998. Production increases in 1999 more than
offset the impact of natural field declines.
Net sales revenues for NGLs and other for 1999 were 53 percent higher as
compared to 1998. Our net NGL and other sales revenues for 1999 reflect both an
increase in commodity prices and an increase in NGL production as compared to
1998. NGL prices often fluctuate with the price of crude oil, and as crude oil
prices increased in 1999, NGL prices generally followed the same trend. As
prices improved, the economics of extracting natural gas liquids were more
favorable than bypassing the processing plants and selling the wet gas stream
as natural gas. As a result, our NGL production improved 14 percent in 1999 as
compared to 1998.
Our other revenues for 1999 were $12.2 million higher as compared to 1998.
The 1999 amount included net gains of $29.7 million associated with the sale of
our interests in selected fields. The 1998 amount included net gains of $37.5
million, including $33.9 million associated with the formation of Southern
Company Energy Marketing.
Our 1999 selling, general and administrative expenses decreased $14.9
million as compared to 1998. The 1998 expense includes $16.2 million associated
with forming the gas marketing joint venture.
Our 1999 operating expenses were $194.0 million, 17 percent higher than
1998, due to the additional operating costs associated with our interests in 23
Gulf of Mexico shelf fields that we acquired October 31, 1998. On a cost per
unit basis, the impact of the cost increase was somewhat mitigated by the
higher production level. Operating expenses were 37 cents per Mcfe in 1999
compared to 35 cents per Mcfe in 1998, a 6 percent increase.
Our exploration expenses for 1999 were $26.0 million lower than 1998,
primarily as a result of lower dry hole expenses. Our dry hole expenses for
1999 were $66.8 million, as compared to $84.2 million for 1998. This reduction
in dry hole expense was due to a higher success rate (40 successes of 59 gross
wells decisioned) in 1999 compared to our
4
1998 program (32 successes of 56 gross wells decisioned).
Our depreciation, depletion and amortization expenses increased 22 percent
for 1999 as compared to 1998. The increase resulted primarily from increased
production and higher average depletive write-off rates. Depreciation,
depletion and amortization expenses for 1999 included $8.1 million for
impairment of proved properties compared to $32.8 million for 1998. Impairment
of assets in the oil and gas business tends to be a normal, recurring business
event, which is usually a result of (i) producing reservoirs depleting quicker
than estimated, (ii) mechanical problems with producing wells or (iii) market
conditions that dictate uneconomic operations. Vastar's impairment charges for
1999 and 1998 were predominately driven by reservoirs depleting quicker than
estimated.
Our interest expense for 1999 increased $17.0 million as a result of higher
average outstanding long-term debt levels during 1999 compared to the prior
year. The increase in average outstanding long-term debt is associated with the
financing of our acquisition of interests in 23 Gulf of Mexico shelf fields on
October 31, 1998. The following table summarizes our debt outstanding at the
dates indicated:
1999 1998
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(Millions of
Dollars)
March 31...................................................... $1,267.1 $ 715.7
June 30....................................................... $1,248.0 $ 770.9
September 30.................................................. $1,067.7 $ 867.2
December 31................................................... $ 975.0 $1,288.6
Average for year.............................................. $1,139.5 $ 910.6
Our income tax benefit for 1999 decreased as compared to 1998 as a result of
higher pre-tax income. The income tax benefit for 1999 includes the net benefit
of $92.5 million of Section 29 tax credits. The income tax benefit for 1998
includes $104.0 million for Section 29 tax credits. Section 29 tax credits for
1999 were lower than 1998 as a result of accounting adjustments and lower tax
credit eligible production.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Our net income for 1998 was $136.4 million, compared to $240.5 million for
1997. This 43 percent earnings decrease was primarily due to lower commodity
prices for all of our products and increased depreciation, depletion and
amortization expense. Increased natural gas production partially offset the
decrease.
Natural gas sales decreased to $964.7 million for 1998 as compared to
$2,331.3 million for 1997. Our revenues were lower by $1,224.9 due to the
transfer of our natural gas marketing operations to Southern Company Energy
Marketing (SCEM). Also contributing to the decrease was lower commodity prices
partially offset by an increase in our natural gas production. Natural gas
purchases during 1998 decreased by 81 percent from 1997, again primarily due to
the transfer of our natural gas marketing operations to SCEM and lower
commodity prices.
Average natural gas wellhead prices for 1998 decreased 18 cents per Mcf from
1997 levels to $1.85 per Mcf. This was due to lower commodity prices. The 1998
average price for gas sold at Henry Hub, Louisiana (a benchmark from which
general natural gas price trends can be analyzed) was $2.13 per Mcf compared to
$2.62 per Mcf in 1997. Our 1998 wellhead price decline was less than the
general market at Henry Hub because (1) the prices for our production in the
San Juan Basin did not decline as much as at Henry Hub and (2) our natural gas
hedging activity for 1998 resulted in a $1.0 million gain as compared to a
$49.0 million loss in 1997.
Our average 1998 natural gas production increased by 106 MMcfd from 1997. We
increased gas production in (1) many of our offshore fields, including
Mississippi Canyon 148, High Island 117 and Ship Shoal 126 and (2) several
onshore fields, including the Ignacio Blanco Fruitland fields in Colorado and
the Deep Anadarko trend in Oklahoma. Contributing to this increase was our
acquisition of 23 Gulf of Mexico properties. These increases more than offset
the impact of natural decline in production that occurs in oil and gas fields
and the decrease in production due to the storm-related shut-ins in the Gulf of
Mexico in the third quarter of 1998.
Crude oil sales for 1998 decreased $166.6 million from 1997, primarily due
to lower commodity prices. The market price declined
5
significantly in 1998 as reflected in the 1998 average price for NYMEX-WTI-at-
Cushing (a crude oil price benchmark from which general crude oil price trends
can be analyzed) of $15.10 per Bbl compared to the 1997 average price of $21.29
per Bbl.
Our average crude oil production in 1998 increased from 1997 levels. This
increase was primarily a result of the addition of production from the 23 Gulf
of Mexico properties acquired October 31, 1998, successful exploitation efforts
at the Eugene Island 175 field and production increases at the West Cameron 66
and Ship Shoal 126 fields. These increases were partially offset by the shut-in
of production at selected Gulf of Mexico fields related to hurricanes and
tropical storms during the third quarter of 1998.
Net sales for NGLs (natural gas liquids) and other products were lower in
1998 as compared to 1997. Net NGL sales were affected by a decrease in NGL
commodity prices and a decrease in our NGL production. NGL prices often
fluctuate with the price of crude oil and as crude oil prices decreased in
1998, NGL prices generally followed the same trend. Our lower NGL production
was primarily due to selective decisions by us and other operators to bypass
the NGL extraction process in order to capture a higher value in the natural
gas price. Other product sales were impacted by the transfer of our power
marketing operations to SCEM.
Other revenues increased during 1998 as compared to 1997 primarily due to a
$33.9 million pre-tax gain associated with the $40.0 million payment received
in 1998 as a result of the formation of Southern Company Energy Marketing.
Exploration expenses for 1998 increased as compared to 1997. The increase in
expenses was primarily due to higher expenses associated with the drilling of
wells in which we did not find oil and gas in commercially producible
quantities (dry holes). Dry hole expenses were $84.2 million in 1998, as
compared to $56.5 million in 1997. This increase was primarily due to two
unsuccessful partner-operated deepwater wildcat wells at Garden Banks 258 and
Atwater Valley 136. In addition, we also experienced higher drilling rig rates
in the first three quarters of 1998 compared to 1997.
Selling, general and administrative (SG&A) expenses were $69.6 million in
1998, up $6.3 million from 1997. In 1998, our natural gas and power marketing
operations were transferred to SCEM reducing SG&A expenses by approximately $10
million. These cost savings were more than offset by $16.2 million associated
with the formation of the gas marketing joint venture.
Depreciation, depletion and amortization expense increased in 1998 by $63.4
million. The increase included higher expenses as a result of higher production
volumes and an impairment writedown (a determination that the value of oil and
gas which may ultimately be produced from a property is less than the
unamortized historical cost of that property in our financial records) of $32.8
million in 1998, primarily associated with three offshore fields and one
onshore field. Impairment of assets in the oil and gas business tends to be a
normal, recurring business event, which is usually a result of (i) producing
reservoirs depleting quicker than estimated, (ii) mechanical problems with
producing wells or (iii) market conditions that dictate uneconomic operations.
Vastar's impairment charges for 1998 were predominantly driven by reservoirs
depleting quicker than estimated. We also had higher average write-off
depletion rates in 1998 associated with the start-up of higher cost wells.
Interest expense for 1998 increased $12.5 million as compared to 1997. The
increase is the result of higher average outstanding debt levels during 1998 as
compared to 1997. The increase in debt levels was primarily due to additional
borrowings used to finance the acquisition of the 23 Gulf of Mexico properties
in October 1998.
The income tax benefit of $85.2 million for 1998 was greater than the income
tax benefit for 1997 because of lower pre-tax earnings and higher tax credits.
The income tax benefit for 1998 and 1997 included the net benefit of $104.0
million and $91.7 million, respectively, of Internal Revenue Code Section 29
tax credits for non-conventional fuels.
Liquidity and Capital Resources
Operating Activities
In 1999, our operating activities provided cash flows of $940.3 million as
compared to $447.9 million for 1998. This increase was primarily due to (1)
higher production volumes and product prices, (2) the effect of monetizing the
value of one of our long-term gas sales contracts (described below) and
6
(3) a decrease in our working capital position during 1999 as compared to an
increase in the prior year.
In July 1999, we entered into price swap agreements with unrelated third
parties that have the effect of monetizing the value of one of our long-term
gas sales contracts. This particular contract is associated with gas sales to a
certain cogeneration facility, has a remaining life of approximately 11 years
and had an expected average price of approximately $3.00 per Mcf for 1999.
Pursuant to these agreements, we received an immediate payment of $88.0 million
(net of transaction costs) that has been recorded as a deferred liability and
will be amortized as the underlying contract volumes are delivered.
Investing Activities
Our net cash used in investing activities in 1999 was $568.1 million, which
was lower when compared to 1998. Our 1999 capital spending decreased as a
result of our decision to defer some capital projects in the first half of the
year because of the uncertainty in the low commodity price environment
experienced during the early part of the year.
Proceeds from asset sales were $64.9 million in 1999, compared to $47.7
million received in 1998.
The following table summarizes our capital investments in the past three
years:
For the Years Ended
December 31,
----------------------
1999 1998 1997
------ -------- ------
(Millions of Dollars)
Exploratory drilling................................ $197.2 $ 161.4 $149.2
Development drilling................................ 241.3 317.9 242.3
Property acquisitions............................... 75.1 515.9 160.9
Other additions..................................... 117.4 98.9 77.1
------ -------- ------
Total additions to property, plant and
equipment........................................ 631.0 1,094.1 629.5
Geological and geophysical.......................... 32.9 39.3 42.4
------ -------- ------
Total capital program............................. $663.9 $1,133.4 $671.9
====== ======== ======
The 1998 property acquisitions included the acquisition of 23 Gulf of Mexico
shelf fields (also referred to as Vastar Offshore) for approximately $437.0
million. We paid $137.0 million in cash and assumed $300.0 million debt owing
to ARCO. In our Statement of Cash Flows for the year ended December 31, 1998,
the $300.0 million debt to ARCO is reflected as a non-cash financing and
investing activity. We repaid the $300.0 million debt to ARCO in the first
quarter of 1999.
Financing Activities
Our financing activities used $335.9 million of cash flow during 1999. These
financing activities included a $313.6 million net decrease in long-term debt.
In March 1999, we issued $300.0 million (face amount) of 6.5 percent
unsecured notes, due March 2009. During the first quarter of 1999, we repaid
$300.0 million of debt to ARCO.
In April 1998, we issued $100.0 million of 6.0 percent Putable/Callable
Notes due April 2000/2010. These notes are subject to a put and a call on April
20, 2000. The net proceeds of $99.9 million we received from the sale of the
notes were used to pay down debt incurred under our commercial paper program.
The holders of these notes have the right to require us to purchase the notes
on April 20, 2000 under certain terms and conditions. This right is called a
"put." The terms of the notes included a provision under which we may require
the holders to sell the notes to us on April 20, 2000 under certain terms and
conditions. The term for this right is a "call." We sold this call right to
Union Bank of Switzerland, London branch, for $2.5 million.
Vastar periodically enters into interest rate swap agreements with the
objective of managing interest rate risk. In 1998, we entered into an interest
rate swap covering $100.0 million related to the putable/callable notes. The
swap effectively changed the 6.0 percent fixed rate to a floating rate. In
1999, the effective interest rate we paid on these notes was 5.3 percent. The
financial impact of settling this swap in 1999 was $0.5 million favorable. The
fair
7
value (our unrealized pre-tax gain or loss) for this swap was $0.1 million loss
at December 31, 1999.
We are party to an amended and restated revolving credit agreement dated as
of March 31, 1997, which permits us to borrow $1.1 billion under a committed
bank line of credit. The agreement expires March 31, 2002. As of December 31,
1999, we had no debt outstanding under this agreement.
Under our Commercial Paper Program, which we established in 1996, we can
sell up to $1.1 billion (outstanding at any one time) of unsecured notes with
maturities of up to 270 days. Sales of our notes are made in non-public
transactions to qualified institutional and other sophisticated investors. In
the agreements relating to this program, we agreed to maintain credit lines
sufficient to support payment of the notes. At December 31, 1999, we had $226.3
million outstanding under this program as compared to $219.0 million
outstanding as of December 31, 1998. The interest rate on the notes fluctuates
during the year as notes are repaid and reissued at market interest rates. The
average interest rate on all our commercial paper borrowing during 1999 was 5.3
percent. The interest rate on our commercial paper borrowings at December 31,
1999 was 6.6 percent.
Other Activities
In September 1996, we entered into a contract with Diamond Offshore Drilling
Company (Diamond) for the major upgrade and operation of a semisubmersible
drilling rig, Ocean Victory, for a three-year deepwater drilling program in the
Gulf of Mexico, which began in November 1997. Since November 1997, scheduled
increases in the day rates and our request of Diamond to make improvements to
the rig have resulted in higher costs during the remaining contract term. This
contract has a remaining life of 1.2 years as of December 31, 1999. Our
estimated remaining costs for this contract and related contracts for support
boats are approximately $72.0 million. This amount does not take into
consideration any reimbursements we might receive from partners or potential
partners. We have three one-year options to renew the term of the contract,
subject to renegotiating the day rates.
In December 1998, we entered into an agreement with R&B Falcon Drilling Co.
for the operation of a semisubmersible, ultra-deepwater drilling rig, Deepwater
Horizon, for a three-year deepwater-drilling program in the Gulf of Mexico. The
drilling program is scheduled to commence in 2001. This contract has an
anticipated cost of approximately $220.0 million, before any reimbursements
from partners or potential partners and operating cost escalations. We have
several options relating to the term and pricing of the contract, including the
option to extend the term of the contract for up to five additional years.
We announced a 2000 capital-spending program of $850.0 million, which we
expect to fund primarily from internally generated cash flows. In addition, we
believe our internally generated cash flow together with access to external
capital resources can provide adequate financial flexibility to take advantage
of any potential strategic business opportunities we would consider in 2000.
These projections are subject to various risks and uncertainties described in
our "Cautionary Statement for Purposes of the Private Litigation Reform Act of
1995" contained in Items 1 and 2 in this Form 10-K. Actual capital spending
could differ materially from our projections.
Vastar's ratios of earnings to fixed charges was 3.2 for December 31, 1999,
1.8 for December 31, 1998, and 5.9 for December 31, 1997. For this calculation,
earnings include income before income taxes and fixed charges. Fixed charges
include interest, amortization of debt expenses and the estimated interest
component of rental expense.
Risk Management and Market-Sensitive Instruments
The following discussion of our risk-management activities includes
"forward-looking statements" that involve various risks and uncertainties.
Actual results could differ materially from those projected in the forward-
looking statements. For further information on these risks and uncertainties,
refer to the "Cautionary Statement for Purposes of the Private Litigation
Reform Act of 1995" in Items 1 and 2 in this report on Form 10-K.
We use various financial instruments for non-trading purposes in the normal
course of our business to manage and reduce price volatility and other market
risks associated with our natural gas and petroleum liquids production. This
activity is referred to as hedging. We structure these arrangements to reduce
our exposure to commodity
8
price decreases, but they can also limit the benefit we might otherwise receive
from commodity price increases. Our risk management activity is generally
accomplished by purchasing and/or selling exchange-traded futures and over-the-
counter options.
As a result of all of our hedging transactions for natural gas and crude
oil, we realized a pre-tax gain of approximately $13.3 million in 1999, and a
pre-tax gain of approximately $1.8 million in 1998 and a pre-tax loss of
approximately $48.9 million in 1997.
The following table summarizes our open hedging positions as of December 31,
1999:
Financial Average Weighted
Product Instrument Time Period Volume Average Prices
------- ---------- ------------- --------- ---------------------
Gas................ Collars Jan--Mar 2000 400 MMcfd $ 2.54/Mcf-$ 3.27/Mcf
Gas................ Puts Sold Jan--Mar 2000 400 MMcfd $2.12/Mcf
Oil................ Collars Jan--Dec 2000 23 MBbld $18.80/Bbl-$23.31/Bbl
Oil................ Puts Sold Jan--Dec 2000 23 MBbld $15.80/Bbl
A "collar" is a financial instrument or a combination of financial
instruments which establishes a range of prices to be received relating to a
set commodity volume. This arrangement, in effect, allows us to receive no less
than a stated minimum or floor price per unit of volume and no more than a
stated maximum or ceiling price per unit of volume.
A "put" is an option contract that gives the holder the right to sell a
stated volume of the underlying commodity at a specified price for a certain
fixed period of time.
A "call" is an option contract that gives the holder the right to buy a
stated volume of the underlying commodity at a specified price for a certain
fixed period of time.
The hedging instruments which we had in place as of December 31, 1999, have
the effect of providing a market price not to exceed the ceiling price of the
collar or a market price plus a premium when the market price is less than the
floor price of the collar.
The fair value (our unrealized pre-tax gain or loss for our 2000 hedged
transactions in place as of December 31, 1999, was $6.9 million gain for
natural gas and a $7.0 million loss for crude oil. This hypothetical gain/loss
is calculated based on brokers' forward price quotes and NYMEX forward price
quotes as of December 31, 1999, which, for the year 2000, averaged $2.41 per
Mcf for natural gas and $22.73 per Bbl for crude oil. The actual gains or
losses we will realize from our hedge transactions may vary significantly due
to the fluctuation of prices in the commodity markets. For example, a
hypothetical 10 percent increase in the forward price quotes would decrease the
unrealized gain for natural gas hedges by approximately $2.4 million and
increase the unrealized loss for crude oil hedges by approximately $10.1
million. In order to calculate the hypothetical gain/loss, the relevant
variables are (1) the type of commodity, (2) the delivery price and (3) the
delivery location. We do not take into account the time value of money because
of the short-term nature of our hedging instruments. These calculations may be
used to analyze the gains and losses we might realize on our financial hedging
contracts and do not reflect the effects of price changes on our actual
physical commodity sales. During 1999, natural gas prices fluctuated between
$1.65 per Mcf and $3.08 per Mcf (Henry Hub) and crude oil prices fluctuated
between $11.38 per Bbl and $27.98 per Bbl (NYMEX-WTI-at-Cushing).
We also have long-term natural gas sales contracts with certain cogeneration
facilities. Approximately 62 MMcfd of the approximately 87 MMcfd of natural gas
volumes related to these contracts are for a fixed price of approximately $2.45
per Mcf for 2000. In July 1999, we entered into agreements with an unrelated
third party that have the effect of monetizing the remaining 25 MMcfd. As of
December 31, 1999, these contracts have a remaining life of approximately 11
years.
During 1999, our long-term sales commitments did not exceed the total of our
proprietary production and the other natural gas production we control through
call rights with third-party producers and marketing agreements with royalty
owners.
Our borrowings under our commercial paper program and $1.1 billion committed
bank line of credit are subject to the risk of interest rate
9
fluctuation. Assuming the principal amount of our 1999 borrowings had remained
unchanged, higher interest rates would have increased our interest expense. For
example, a 10 percent increase in the London Interbank Offered Rate (a
benchmark pursuant to which the Company's interest rates may be set) would have
increased our 1999 interest expense by $1.5 million.
Vastar periodically enters into interest rate swap agreements with the
objective of managing interest rate risk. In 1998, we entered into an interest
rate swap covering $100.0 million related to the putable/callable notes. The
swap effectively changed the 6.0 percent fixed rate to a floating rate. In
1999, the effective interest rate we paid on these notes was 5.3 percent. The
financial impact of settling this swap in 1999 was $0.5 million favorable. The
fair value (our unrealized pre-tax gain or loss) for this swap was $0.1 million
loss at December 31, 1999.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This standard requires us to recognize all
of our derivative and hedging instruments in our statements of financial
position as either assets or liabilities and measured at fair value. In
addition, all hedging relationships must be designated, documented and
reassessed periodically. On July 7, 1999, the Financial Accounting Standards
Board delayed the effective date of SFAS 133 for one year. The delay, published
as SFAS No. 137, applies to quarterly and annual financial statements. SFAS No.
133, as revised by SFAS No. 137, is effective for all fiscal quarters of all
fiscal years beginning after June 15, 2000. We are continuing to evaluate the
impact the provisions of these standards will have on us.
Environmental Matters
At December 31, 1999, we had accrued $138.8 million for (1) the total
estimated cost, net of salvage value, of plugging and abandoning our oil and
gas wells, and dismantling our oil and gas platforms and facilities as required
by contract, regulation or law and (2) the estimated costs of restoration and
reclamation of land associated with these facilities. This accrual for
dismantlement and restoration costs includes a component for compliance with
environmental laws and regulations. These costs include expenses that may be
incurred for the removal of contaminants and site restoration. For more
information on this accrual, see Note 10 of the Notes to Consolidated Financial
Statements in this Form 10-K.
At December 31, 1999, we did not have a separate environmental remediation
reserve for superfund or similar clean-up sites. During 1999, 1998 and 1997, we
did not incur any significant charges to income for environmental remediation
costs and made no related payments. For further information on environmental
and remediation costs, see Notes 2 and 10 of the Notes to Consolidated
Financial Statements in this Form 10-K.
We estimate our environment-related capital expenditures have averaged
approximately $25 million per year over the past three years. Our operating
expenses include ongoing costs of controlling or disposing of pollutants, and
we estimate these costs have averaged approximately $10 million per year.
On the basis of our management's assessment of the ultimate amount and
timing of the contingencies associated with environmental matters, while no
assurances can be given, we do not expect that any expenses or judgments
related to these matters will have a material adverse effect on our financial
condition, results of operations or cash flows.
Impact of the Year 2000
The Year 2000 issue stemmed from computer programs and embedded computer
chips being unable to distinguish between the year 1900 and the year 2000,
resulting in system failures or miscalculations that could cause operational
disruptions. It appears that planning and mitigating steps taken by us and
others were successful in that no major problems occurred. The few incidents
that did occur during the actual transition from 1999 to 2000 were quickly
analyzed and resolved and had only minimal business impacts. Since the start of
the project, we incurred and expensed approximately $4.9 million related to our
assessment of Year 2000 issues and the development and implementation of our
remediation plan. The total cost of the Year 2000 project, including expenses
we will incur in 2000, is currently estimated at approximately $5.0 million.
10
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants....................................... 12
Consolidated Statement of Income for Each of the Three Years in the
Period Ended December 31, 1999......................................... 13
Consolidated Balance Sheet as of December 31, 1999 and 1998............. 14
Consolidated Statement of Cash Flows for Each of the Three Years in the
Period Ended December 31, 1999......................................... 15
Consolidated Statement of Stockholders' Equity for Each of the Three
Years in the Period Ended December 31, 1999............................ 16
Notes to Consolidated Financial Statements.............................. 17
Supplemental Information-Oil and Gas Producing Activities (Unaudited)... 37
11
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Vastar Resources, Inc.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of cash flows and of stockholders' equity
present fairly, in all material respects, the financial position of Vastar
Resources, Inc. and its subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
February 22, 2000
12
VASTAR RESOURCES, INC.
CONSOLIDATED STATEMENT OF INCOME
For the Years Ended
December 31,
----------------------------
1999 1998 1997
-------- -------- --------
(Millions of Dollars,
except per share amounts)
REVENUES
Sales and other operating revenues............... $1,895.1 $1,602.4 $3,306.6
Earnings from equity affiliate................... 18.1 16.1 4.7
Other revenues................................... 50.2 54.2 22.6
-------- -------- --------
Total revenues................................. 1,963.4 1,672.7 3,333.9
-------- -------- --------
EXPENSES
Purchases........................................ 762.0 704.3 2,254.5
Operating expenses............................... 194.0 166.3 153.9
Exploration expenses............................. 184.6 210.6 175.5
Selling, general and administrative expenses..... 54.7 69.6 63.3
Delivery expense................................. 25.9 11.1 65.7
Taxes other than income taxes.................... 49.1 47.3 50.0
Depreciation, depletion and amortization......... 430.7 352.0 288.6
Interest......................................... 77.3 60.3 47.8
-------- -------- --------
Total expenses................................. 1,778.3 1,621.5 3,099.3
-------- -------- --------
Income before income taxes....................... 185.1 51.2 234.6
Income tax benefit............................... (28.0) (85.2) (5.9)
-------- -------- --------
Net income..................................... $ 213.1 $ 136.4 $ 240.5
======== ======== ========
Basic earnings per share......................... $ 2.19 $ 1.40 $ 2.47
======== ======== ========
Diluted earnings per share....................... $ 2.16 $ 1.39 $ 2.46
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
13
VASTAR RESOURCES, INC.
CONSOLIDATED BALANCE SHEET
December 31,
-----------------
1999 1998
-------- --------
(Millions of
Dollars)
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 40.6 4.3
Accounts receivable:
Trade.................................................... 130.5 110.0
Related parties.......................................... 86.9 130.9
Inventories................................................ 7.0 10.2
Prepaid expenses and other................................. 42.1 37.5
-------- --------
Total current assets................................... 307.1 292.9
Oil and gas properties and equipment, net.................... 2,320.2 2,220.8
Other long-term assets....................................... 82.7 60.3
-------- --------
Total assets........................................... $2,710.0 $2,574.0
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade.................................................... $ 258.8 $ 179.2
Related parties.......................................... 6.3 9.8
Accrued liabilities........................................ 77.8 61.5
-------- --------
Total current liabilities.............................. 342.9 250.5
Long-term debt............................................... 975.0 1,288.6
Deferred liabilities and credits............................. 313.2 205.4
Deferred income taxes........................................ 272.9 214.3
-------- --------
Total liabilities...................................... 1,904.0 1,958.8
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common Stock, $0.01 par value: authorized, 110,000,000
shares; issued and
outstanding, 97,644,950 shares at December 31, 1999 and
97,403,340 shares
at December 31, 1998........................................ 1.0 1.0
Additional paid-in capital................................... 464.3 457.4
Accumulated earnings......................................... 340.7 156.8
-------- --------
Total stockholders' equity............................. 806.0 615.2
-------- --------
Total liabilities and stockholders' equity............. $2,710.0 $2,574.0
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
14
VASTAR RESOURCES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended
December 31,
-------------------------
1999 1998 1997
------- ------- -------
(Millions of Dollars)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income......................................... $ 213.1 $ 136.4 $ 240.5
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization......... 430.7 352.0 288.6
Net change in deferred taxes..................... 58.6 40.2 71.9
Dry hole expense and amortization of unproved
properties...................................... 101.8 119.2 86.5
Gain on asset sales.............................. (29.7) (37.5) (14.6)
Earnings from equity affiliate................... (18.1) (16.1) (4.7)
Cash dividends from equity affiliate............. 5.8 2.9 --
Net change in accounts receivable, inventories
and accounts payable............................ 102.8 (117.4) 95.7
Other............................................ 75.3 (31.8) (8.7)
------- ------- -------
Net cash provided by operating activities...... 940.3 447.9 755.2
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to oil and gas properties and equipment,
including dry hole costs.......................... (631.0) (794.1) (629.5)
Proceeds from asset sales.......................... 64.9 47.7 18.3
Other.............................................. (2.0) 2.8 (21.0)
------- ------- -------
Net cash used by investing activities.......... (568.1) (743.6) (632.2)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock........................... 6.9 2.5 0.8
Proceeds from long-term debt....................... 604.9 474.3 145.5
Repayment of long-term debt........................ (918.5) (157.8) (251.8)
Dividends paid..................................... (29.2) (29.2) (29.2)
------- ------- -------
Net cash provided (used) by financing
activities.................................... (335.9) 289.8 (134.7)
------- ------- -------
Net increase (decrease) in cash and cash
equivalents....................................... 36.3 (5.9) (11.7)
Cash and cash equivalents at beginning of year..... 4.3 10.2 21.9
------- ------- -------
Cash and cash equivalents at end of year........... $ 40.6 $ 4.3 $ 10.2
======= ======= =======
Supplemental cash flow information:
Cash paid for interest........................... $ 74.3 $ 55.9 $ 47.9
======= ======= =======
Cash received for income tax refunds............. $ 110.0 $ 85.5 $ 66.7
======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
15
VASTAR RESOURCES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Common
Stock Additional Accumulated
Shares Common Paid-in Earnings
Issued Stock Capital (Deficit)
---------- ------ ---------- -----------
(Millions of Dollars)
Balance, January 1, 1997.............. 97,260,551 $1.0 $454.1 $(161.7)
Exercise of stock options........... 43,576 -- 0.8 --
Cash dividends declared ($0.30 per
share)............................. -- -- -- (29.2)
Net income.......................... -- -- -- 240.5
---------- ---- ------ -------
Balance, December 31, 1997............ 97,304,127 1.0 454.9 49.6
Exercise of stock options........... 99,213 -- 2.5 --
Cash dividends declared ($0.30 per
share)............................. -- -- -- (29.2)
Net income.......................... -- -- -- 136.4
---------- ---- ------ -------
Balance, December 31, 1998............ 97,403,340 1.0 457.4 156.8
Exercise of stock options........... 241,610 -- 6.9 --
Cash dividends declared ($0.30 per
share)............................. -- -- -- (29.2)
Net income.......................... -- -- -- 213.1
---------- ---- ------ -------
Balance, December 31, 1999............ 97,644,950 $1.0 $464.3 $ 340.7
========== ==== ====== =======
The accompanying notes are an integral part of the consolidated financial
statements.
16
VASTAR RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Formation of the Company and Basis of Presentation.
Vastar Resources, Inc. is an independent (non-integrated) oil and gas
company in the United States. We operate our business and report our operations
as one business segment. We are engaged in the exploration, development and
production of natural gas, crude oil and natural gas liquids. Our four
principal producing areas are offshore in the Gulf of Mexico and onshore in the
Gulf Coast region (south Texas, southeast Texas and south Louisiana), the San
Juan/Rockies region (northwest New Mexico, southwest Colorado and Wyoming) and
the Mid-Continent region (northeast Texas, Oklahoma, northern Louisiana,
Arkansas and Kansas). Effective September 1, 1997, we began marketing most of
our natural gas through Southern Company Energy Marketing L.P., a limited
partnership, owned by subsidiaries of Vastar and The Southern Company. We
currently own a 40 percent interest in Southern Company Energy Marketing. We
directly market our proprietary crude oil and NGLs nationwide.
2. Summary of Significant Accounting Policies.
Principles of Consolidation
Our consolidated financial statements include the accounts of all
subsidiaries and ventures in which we hold a controlling interest. All material
intercompany balances and transactions are eliminated. Investments in
affiliates over which we can exercise influence and in which we own between 20
percent and 50 percent are accounted for using the equity method.
Cash Equivalents
Our cash equivalents consist of highly liquid investments, such as time
deposits, certificates of deposit and marketable securities other than equity
securities with original maturities of three months or less. We state our cash
equivalents at cost, which approximates market value.
Oil and Gas Properties
We use the successful efforts method to account for our oil and gas
properties. Under this method, all development costs and acquisition costs of
proved properties are capitalized and amortized on a unit-of-production basis
over the remaining life of proved developed reserves and proved reserves,
respectively. Costs of drilling exploratory wells are initially capitalized,
and later charged to expense upon the determination that the well does not
justify commercial development. Our policy is to expense exploration wells
within a one-year time frame if drilling in the exploration area is not in
process or firmly planned or if the well has not found a commercially
producible quantity of reserves. Based upon the specific facts and
circumstances surrounding a given well, a well may remain on the books for
longer than one year. Oil and gas unproved property costs are capitalized and
amortized on a composite basis, considering past success experience and average
property life.
Impairment of assets in the oil and gas business tends to be a normal,
recurring business event, which is usually a result of (i) producing reservoirs
depleting quicker than estimated, (ii) mechanical problems with producing wells
or (iii) market conditions that dictate uneconomic operations. Vastar's
impairment charges for 1999, 1998 and 1997 were predominately driven by
reservoirs depleting quicker than estimated. These factors are described in
Vastar's "Cautionary Statement for Purposes of the Private Securities
Litigation Reform Act of 1995" on page 12 and 13 of Vastar's Form 10-K for the
year ended December 31, 1999, under the headings: (i) Volatility and Level of
Hydrocarbon Commodity Prices, (ii) Production Rates and Reserve Replacement,
and (iii) Reserve Estimates. We review oil and gas properties for potential
impairment whenever circumstances indicate that the carrying amount of the
asset may not be recoverable. We determine whether the carrying amount is
recoverable by comparing the estimated undiscounted future net cash flows
expected to result from use of an asset and its eventual disposition to the
carrying amount of the asset to determine if the carrying amount is
recoverable. For those oil and gas properties for which the carrying amount
exceeds the undiscounted estimated future cash flows, an impairment loss may be
determined to exist. If an impairment is
17
VASTAR RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
determined to exist, the carrying amount of such properties is adjusted to
their estimated fair market value, net of plugging and abandonment liabilities.
When determining fair value, we consider several factors including (i) the
price we could receive on the open market, (ii) the remaining discounted net
cash flows from the property and (iii) other potential uses for the property.
The costs of retired, sold or abandoned properties that constitute a part of
an amortization base are charged or credited, net of proceeds, to the
accumulated depreciation, depletion and amortization reserve. Gains or losses
from the disposal of other properties are recognized in the current period.
Expenditures for maintenance, repairs and minor renewals necessary to maintain
properties in operating condition are expensed as incurred. Major replacements
and renewals are capitalized.
General Plant
General plant includes gas plants, pipelines, buildings, boats, vehicles,
office furniture and equipment and other fixed assets. These items are recorded
at cost and are written off on the straight-line method based on the expected
lives of the individual assets or groups of assets. The estimated asset lives
of general plant equipment is depicted in the following table.
Estimated
Average
Description Life
----------- ---------
Computer, Vehicles, Office Furniture.................................. 2-5
Transportation & Telecommunication Equipment.......................... 7-9
Buildings and Transportation Equipment................................ 10
Gas Plants and Technical Equipment.................................... 15
Pipelines & Buildings................................................. 20
Inventories
Inventories are comprised principally of materials and supplies, and are
stated at the lower of cost (determined on an average basis) or market. Product
inventories are stated at the lower of current market value or cost and
represent approximately 16 percent of total year-end inventory. Cost is
determined under the last-in, first-out (LIFO) method.
Dismantlement, Restoration and Reclamation Costs
The estimated costs, net of salvage value, of (1) dismantling facilities or
projects with limited lives, or (2) facilities that are required to be
dismantled by contract, regulation or law and (3) the estimated costs of
restoration and reclamation of land associated with these projects are accrued
on a unit-of-production basis during operations and classified as a deferred
liability. These costs are accrued on an undiscounted basis. Such costs are
included in depreciation, depletion and amortization charges in the current
period.
Income Taxes
Vastar and its subsidiaries join with ARCO and its domestic subsidiaries in
filing a consolidated federal income tax return. Vastar and ARCO are parties to
a tax sharing agreement which requires Vastar as a member of ARCO's
consolidated tax group to pay its share of the group's federal income taxes and
certain state taxes to ARCO. Vastar's share of these taxes is the amount of
federal income tax it would have to pay if Vastar and its subsidiaries filed
tax returns as a separate tax group with the exception of the method for
utilizing Section 29 tax credits. Under the tax sharing agreement, Vastar is
able to use its Section 29 tax credits to reduce its federal income tax
payments to ARCO by the greater of (1) the amount of these credits which could
be used by Vastar if its consolidated tax liability was calculated on a stand-
alone tax basis and (2) the amount of these credits used by the ARCO
consolidated tax group, in each case, less a 3.25 percent discount on certain
credits. Section 29 tax credits that are not used by Vastar in the current year
under the tax sharing agreement can generally be carried forward and used in
subsequent tax years.
Pursuant to the Internal Revenue Code, Section 29 tax credits can be used to
reduce the ARCO consolidated tax group's regular income tax liability after
foreign tax credits (the "Regular Tax"), but not below the ARCO consolidated
tax group's tentative minimum tax liability. If Section 29 tax credits are not
used by the ARCO consolidated tax group due to this limitation, the unused
credits are
18
VASTAR RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
generally carried forward by us to be used in a subsequent year. To the extent
that the Section 29 tax credits generated in a year exceed the Regular Tax, the
excess Section 29 tax credits are not allowed to be carried forward. For more
information on taxes, see Note 11 of the Notes to Consolidated Financial
Statements in this Form 10-K.
State tax expense is computed using the applicable average tax rates for
both unitary and nonunitary state filings. State franchise taxes are also
calculated on a stand-alone basis.
We follow the asset and liability method of accounting for income taxes.
Under this method, deferred tax assets and liabilities are recorded for the
estimated future tax consequences attributable to the differences between the
financial book basis of existing assets and liabilities and their respective
tax basis.
Revenue Recognition
Revenue is normally recognized from jointly owned properties as oil and gas
is produced and sold for our account. An overlift (i.e., when we sell gas in
excess of our entitlement) is recorded as a liability if it is significant in
quantity and the remaining underground reserves are not sufficient to satisfy
the deficiency. Underlifts (i.e., when we sell less gas than our entitlement)
are recorded only when contracts specify that lifting imbalances be settled in
cash. Overlifts and underlifts to be settled in cash are recorded as
adjustments to revenue. The recorded lifting imbalances at December 31, 1999
and 1998, were insignificant.
Hedging and Related Activities
We use various financial instruments for non-trading purposes in the normal
course of our business to manage and reduce price volatility and other market
risks associated with our natural gas and petroleum liquids production. This
activity is referred to as hedging. Our hedging instruments have the effect of
locking in the prices we will receive for the volumes and the time periods
identified in the instruments. These arrangements are structured to reduce our
exposure to commodity price decreases, but they can also limit the benefit we
might otherwise receive from commodity price increases. Our risk management
activity is generally accomplished through exchange-traded futures and over-
the-counter options. These agreements are accounted for as hedges using the
deferral method of accounting. Gains and losses resulting from these
transactions are deferred and included in other assets or accrued liabilities,
as appropriate, until the physical production required by the contracts is
delivered. At the time of delivery, the resulting gains and losses are
recognized as operating income in our Consolidated Statement of Income.
The cash flows related to any recognized gains or losses associated with
these hedges are reported as cash flows from operations. If the hedge is
terminated prior to maturity, gains or losses are deferred and included in
income in the same period as the physical production required by the contracts
is delivered.
We also use derivative instruments in the form of interest rate swaps. These
swaps primarily serve to hedge against interest rate exposure. These agreements
are accounted for as hedges using the accrual method of accounting. The
differences to be paid or received on swaps designated as hedges are included
in interest expense during the period to which the payment or receipt relates.
The related amounts payable to, or receivable from, the counterparties are
included in other assets or accrued liabilities. The cash flows related to any
recognized gains or losses associated with these hedges are reported as cash
flows from operations.
The conditions to be met for a derivative instrument to qualify as a hedge
are the following: (1) the item to be hedged exposes us to price or interest
rate risk; (2) the derivative reduces our risk exposure and is designated as a
hedge at the time the derivative contract is entered into; and (3) at the
inception of the hedge and throughout the hedge period there is a high
correlation of changes in the market value of the derivative instrument and the
fair value of the underlying item being hedged.
When the designated item associated with a derivative instrument matures, is
sold, extinguished or terminated, derivative gains or losses are recognized as
part of the gain or loss on sale or
19
VASTAR RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
settlement of the underlying item. When a derivative instrument is associated
with an anticipated transaction that is no longer expected to occur or if
correlation no longer exists, the gain or loss on the derivative is recognized
in income to the extent the future results have not been offset by the effects
of price or interest rate changes on the hedged item since the inception of the
hedge.
Stock-Based Compensation
We account for employee stock options in the manner prescribed by the
Accounting Principles Board Opinion No. 25.
Use of Estimates
Preparing financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Estimates with regard to these financial statements include the estimate of
proved oil and gas reserve volumes and the estimated future development,
dismantlement and abandonment costs used in determining amortization
provisions.
Reclassifications
Certain previously reported amounts have been restated to conform to
classifications adopted in 1999. These restatements did not impact our net
income or shareholders' equity.
3. Net Sales and Other Operating Revenues.
Net sales and other operating revenues were as follows for the years ended
December 31:
1999 1998 1997
-------- ------- --------
(Millions of Dollars)
Sales and other operating revenues:
Unrelated parties................................ $1,085.8 778.5 $2,782.5
Related parties(1)............................... 809.3 823.9 524.1
-------- ------- --------
Total.......................................... 1,895.1 1,602.4 3,306.6
Less:
Purchases(2)..................................... (762.0) (704.3) (2,254.5)
Delivery expense................................. (25.9) (11.1) (65.7)
-------- ------- --------
Net sales and other operating revenues............. $1,107.2 $ 887.0 $ 986.4
======== ======= ========
- --------
(1)Average costs of related-party sales............ $ 722.2 $ 696.1 $ 409.0
(2)Related-party purchase cost..................... $ 77.7 $ 116.4 $ 196.7
4. Relationship with Atlantic Richfield Company (ARCO).
ARCO owns 80,000,001 shares (81.9 percent) of our outstanding common stock.
Vastar and ARCO have entered into an agreement granting ARCO certain rights as
a stockholder of Vastar. In order to allow ARCO to continue to include Vastar
as part of its "affiliated group" for federal income tax purposes, this
agreement gives ARCO the cumulative, continuing right to purchase from us, at
the then-current market price, the number of shares of common stock or
preferred stock, or both, as may be necessary to preserve that status.
Services Agreements
Vastar and ARCO (including ARCO subsidiaries) have entered into a number of
agreements under which Vastar and ARCO provide services to each other. The
principal agreements are as follows: (1) the ARCO Exploration and Production
Technical Services Agreement, effective as of October 1, 1993; and (2) the
Corporate
20
VASTAR RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Services Agreement, effective as of January 1, 1994. These agreements were
developed in connection with the establishment of Vastar by ARCO, and,
therefore, were not the result of arm's-length negotiations between independent
parties.
The technical services agreement includes a variety of oil and gas technical
services. The term of the technical services agreement is indefinite. Under the
corporate services agreement, ARCO provides us various telecommunications,
computer, financial, legal, insurance, internal audit and other administrative
services and we provide ARCO with certain financial and other services as
agreed. This agreement provides for an indefinite term. Charges under each of
these service agreements are determined based on usage or other methods that we
believe to be reasonable.
In connection with the technical services agreement on October 27, 1999,
Vastar and ARCO entered into an Assignment of Rights Agreement under which ARCO
assigned to us rights to intellectual property which had been developed by ARCO
on our behalf under the agreement. No additional consideration was paid to ARCO
for this assignment.
All services provided by ARCO to us are billed at ARCO's cost. Although the
cost of these services are not regularly tested against third party data, it is
management's belief that they approximate the same cost that would be available
in the market place.
All intercompany service charges from ARCO are settled in cash on a monthly
basis. ARCO provides no funding to Vastar in providing these services.
Crude Oil and NGL Purchase and Sale Agreements
As part of its marketing efforts, Vastar has and will in the future engage
in crude oil and NGL purchase and sale transactions with ARCO on a month-to-
month basis at market-based prices. These transactions are settled in cash on a
monthly basis.
Acquisition of Gulf of Mexico Properties
During October 1998, we purchased from ARCO 100 percent of the capital stock
of Vastar Offshore, Inc., formerly named Western Midway Company, for
approximately $437.0 million in cash and debt. We paid $137.0 million in cash
and assumed Vastar Offshore's $300.0 million outstanding debt to ARCO. In the
first quarter of 1999, we repaid ARCO the $300.0 million of outstanding debt
assumed from the purchase of Vastar Offshore, Inc.
This acquisition was accomplished through a three-company transaction
involving Vastar, ARCO and Mobil Exploration & Producing U.S. Inc. At the time
we acquired Vastar Offshore, Vastar Offshore traded certain California
properties to Mobil for their interest in 23 producing fields in the Gulf of
Mexico and other related assets. Following the exchange, ARCO sold to Vastar
100 percent of the capital stock of Vastar Offshore.
The purchase price was negotiated between ARCO and us. A special committee
of our Board of Directors also approved the transaction. No member of the
special committee was an officer or employee of the Company or a director,
officer or employee of ARCO.
The acquisition has been accounted for as a purchase. The operating results
of Vastar Offshore have been included in our consolidated financial statements
since the date of acquisition.
The following pro forma information is presented for informational purposes
only and is not indicative of the results of future operations or the results
of historical operations had the acquisition of Vastar Offshore occurred as of
January 1, 1997.
Unaudited Pro
Forma Information
for the Year End
December 31,
-----------------
1998 1997
-------- --------
(Millions of
Dollars, except
per share
amounts)
Net sales and other operating revenues....................... $1,075.1 $1,256.8
Net income................................................... $ 138.9 $ 271.4
Basic earnings per share..................................... $ 1.43 $ 2.79
Diluted earnings per share................................... $ 1.42 $ 2.78
21
VASTAR RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ARCO's Merger Agreement with BP Amoco
In March 1999, ARCO entered into a merger agreement with BP Amoco p.l.c.
that provides for the merger of a subsidiary of BP Amoco p.l.c. with and into
ARCO. On February 3, 2000, the members of the United Stated Federal Trade
Commission ("FTC") voted 3-2 to oppose the merger. On February 5, 2000, the FTC
filed suit in U.S. District Court seeking a preliminary injunction to halt the
merger. In addition, the state governments of California, Oregon and Washington
have filed suit in U.S. District court to halt the merger. As described above,
ARCO and Vastar have entered into a number of agreements, including technology
assignments and licenses, services agreements and insurance agreements. Copies
of many of these agreements have been filed with the SEC. We do not anticipate
that the rights and obligations of the parties under these agreements,
including any termination rights, will be materially affected by the merger.
Any amendments to these agreements would have to be negotiated and agreed to by
us. We do not believe that the termination of any or all of the above-listed
agreements with ARCO would have a material adverse effect on our financial
condition, results of operations or cash flows.
Vastar and ARCO are also parties to a tax sharing agreement (which we
discuss in Note 2 of the Notes to Consolidated Financial Statements contained
in this Form 10-K), which requires Vastar, as a member of ARCO's consolidated
tax group, to pay its share of the group's federal and certain state income
taxes to ARCO. If the merger is consummated, we expect that the agreement would
continue to govern consolidated tax matters involving Vastar and ARCO. If any
amendments become necessary as a result of the merger, they will have to be
negotiated and agreed to by us.
5. Southern Company Energy Marketing L.P.
In August 1997, we entered into an agreement with Southern Energy, Inc. to
create a new energy services company by combining most of the natural gas and
power trading and marketing operations of the two companies. The new company is
named Southern Company Energy Marketing L.P. Southern Company Energy Marketing
is owned by subsidiaries of Southern Energy and Vastar. Southern Company Energy
Marketing's core business is trading and marketing natural gas, electricity and
other energy-related commodities. It also provides energy and energy-related
commodities, products and services to customers in North America. It began gas
marketing on September 1, 1997, and power marketing on January 1, 1998.
Under the Formation Agreement, Southern Energy paid Vastar a cash payment of
$40 million and has an initial 60 percent ownership interest in Southern
Company Energy Marketing, with Vastar holding an initial 40 percent interest.
Vastar recorded a pre-tax gain of $33.9 million resulting from this transaction
in the first quarter of 1998. Vastar also recorded $16.2 million of expenses in
connection with a retention bonus program necessary for delivering an intact
workforce to the venture and other costs associated with the formation of the
venture.
For the first five years of operation, we are entitled to receive minimum
cash distributions from Southern Company Energy Marketing of $20 million for
the year 1998, $20 million for the year 1999, $25 million for the year 2000,
$30 million for the year 2001 and $30 million for the year 2002. Our receipt of
these cash distributions is subject to certain exceptions.
We follow the equity method of accounting for our interest in SCEM and
recognize into income the greater of our interest in SCEM's earnings or our
minimum cash distribution. In 1999 and 1998, we recognized our accrued share of
minimum distributions, net of any applicable exceptions. In 1997, we recognized
our equity share of earnings for the four month period ending December 31,
1997.
Southern Company Energy Marketing did not pay Vastar its $20 million minimum
distribution amount for 1998 and has advised us that they believe an exception
to our receipt of the 1998 minimum distribution applies. This alleged exception
relates to contract defaults by certain third parties with which Southern
Company Energy Marketing did business. On the basis of current information,
Vastar disagrees with Southern Energy's position. In light of the dispute, in
1998 we recognized only $15.0 million of the $20 million minimum cash
distribution. In 1999 we received a cash distribution of $5.8 million relating
to the 1998 minimum distribution amount. We are continuing to work with
Southern Energy in an effort to appropriately resolve the remaining disputed
amount.
22
VASTAR RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For 1999, Vastar has recorded and expects to receive approximately $16.8
million of the $20 million minimum distribution amount. The $3.2 million
reduction relates to our share of retention payments made to employees and
transition costs relating to Southern Company Energy Marketing's move of its
natural gas marketing activities from Houston to Atlanta. These items were
identified as "exclusion amounts" in the partnership agreement.
Our interest in Southern Company Energy Marketing, can be reduced by any one
or a combination of the following:
. on July 1, 2001, Southern Energy's interest will automatically increase,
for no additional consideration, to 75 percent and our interest will
decrease to 25 percent;
. during the year 2002, Southern Energy has an option to purchase an
additional five percent interest in Southern Company Energy Marketing
from Vastar for $80 million (the "Southern Call Option");
. on January 1, 2003, Vastar has an option to sell to certain subsidiaries
of Southern Energy its remaining interest for $210 million (or $130
million if the Southern Call Option has been exercised);
. under limited conditions, Southern Energy has an option, which expires
December 31, 2007, to purchase our entire interest in the Venture for
$580 million (or $500 million if the Southern Call Option has been
exercised) or a certain multiple of earnings, whichever is higher; and
. upon a change of control of either Vastar or Southern Energy (as
applicable, the "COC Party"), the other party may have the right to
purchase the percentage interest of the COC Party in Southern Company
Energy Marketing.
Vastar and Southern Energy have agreed to guarantee some of the obligations
of Southern Company Energy Marketing. The Board of Governors of Southern
Company Energy Marketing sets the total amount of guarantees that can be
issued. Vastar and Southern Energy have agreed, subject to certain limitations,
to indemnify each other for their share of any amounts paid under these
guarantees. Each company's share is equal to its ownership percentage in
Southern Company Energy Marketing at the time Southern Company Energy Marketing
incurs the guaranteed obligation. In any year, our obligation to indemnify
Southern Energy is limited to the amount that we have received from Southern
Company Energy Marketing in excess of the minimum cash distributions described
above for that year. Similarly, if we have not received our minimum cash
distribution from Southern Company Energy Marketing in any year, Southern
Energy has agreed to indemnify us for all amounts we pay under these guarantees
for that year.
We have also entered into a long-term Gas Purchase and Sale Agreement with
Southern Company Energy Marketing for a primary term expiring on December 31,
2007. Under this agreement we committed to sell, and Southern Company Energy
Marketing committed to purchase (subject to certain partial releases or early
termination provisions), substantially all the natural gas produced and owned
or controlled by us within the lower 48 states of the United States, Canada and
Mexico, at market-based prices. This agreement excludes certain volumes of our
natural gas production from the commitment, and we have reserved certain
additional rights, including gas processing rights. The agreement requires that
we make available to Southern Company Energy Marketing a minimum monthly
quantity of natural gas, which can be purchased by us on the open market if
necessary. Natural gas sales under this contract began September 1, 1997.
Southern Company Energy Marketing's obligations to pay us under the Gas
Purchase and Sale Agreement, our minimum cash distributions described above and
amounts due to us on the exercise of our option described above are guaranteed
by Southern Energy. If Southern Energy does not maintain in effect an
investment grade rating from Moody's or Standard & Poors, Southern Energy has
agreed to provide credit enhancement to secure the payment of these guaranteed
obligations. As of February 22, 2000, Southern Energy maintains the required
investment grade rating.
Our equity investment in Southern Company Energy Marketing was $46.9 million
as of December 31, 1999 and $34.6 million as of December 31, 1998.
23
VASTAR RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Related Party Transactions and Cost Allocations.
An analysis of related party settlements were as follows for the years ended
December 31:
1999 1998 1997
----- ------ ------
(Millions of
Dollars)
Transactions with ARCO:
Sales to ARCO and its affiliates......................... $ 2.3 $119.9 $206.3
Purchases from ARCO...................................... 0.5 32.9 25.8
Administrative fees paid to ARCO (net)................... 12.3 15.9 16.2
Tax settlements received from ARCO....................... 109.7 86.4 68.7
Debt owed to ARCO (as of end of year).................... -- 300.0 --
Miscellaneous fees paid to ARCO.......................... 0.9 -- --
Transactions with Southern Company Energy Marketing:
Sales to Southern Company Energy Marketing............... 807.0 704.0 317.8
Purchases from Southern Company Energy Marketing......... 77.2 83.5 170.9
Loans to Southern Company Energy Marketing (as of end of
year)................................................... -- -- 9.6
7. Oil and Gas Properties and Equipment.
Oil and gas properties and equipment, at cost, and related accumulated
depreciation, depletion and amortization were as follows at December 31:
1999 1998
-------- --------
(Millions of
Dollars)
Proved properties............................................ $5,789.2 $5,665.8
Unproved properties.......................................... 263.7 284.2
General plant................................................ 235.0 225.9
-------- --------
Total oil and gas properties and equipment................... 6,287.9 6,175.9
Less accumulated depreciation, depletion and amortization.... 3,967.7 3,955.1
-------- --------
Net.......................................................... $2,320.2 $2,220.8
======== ========
We recognized a non-cash pre-tax charge of $8.1 million in 1999, $32.8
million in 1998 and $13.1 million in 1997 related to the impairment of oil and
gas properties which is included in depreciation, depletion and amortization
expense. Impairment of assets in the oil and gas business tends to be a normal,
recurring business event, which is usually a result of (i) producing reservoirs
depleting quicker than estimated, (ii) mechanical problems with producing wells
or (iii) market conditions that dictate uneconomic operations. Vastar's
impairment charges for 1999, 1998 and 1997 were predominately driven by
reservoirs depleting quicker than estimated.
Our expenses for maintenance and repairs were $63.4 million in 1999, $57.4
million in 1998 and $55.0 million in 1997.
24
VASTAR RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Leased Equipment
We lease buildings and computers. These leases are primarily buildings which
have terms ranging between five and ten years and options to renew at market
rates at the end of the current lease terms. The following table summarizes our
estimated future minimum payments under operating leases that have remaining
noncancelable lease terms in excess of one year as of December 31, 1999:
(Millions of Dollars)
2000................................................... $ 6.4
2001................................................... 5.3
2002................................................... 4.0
2003................................................... 3.2
2004................................................... 3.5
2005 and later years................................... $16.7
Our operating lease rental expense was approximately $7.3 million in 1999,
$6.2 million in 1998 and $6.2 million in 1997.
8. Accrued Liabilities.
Accrued liabilities were as follows at December 31:
1999 1998
---------- ----------
(Millions of Dollars)
Unrealized hedging gains.............................. $ 7.7 $ 15.6
Hedging payable....................................... 13.6 --
Property and production taxes......................... 14.2 9.0
Payroll liabilities................................... 10.0 9.4
Interest.............................................. 15.0 11.7
Other................................................. 17.3 15.8
---------- ----------
Total............................................... $ 77.8 $ 61.5
========== ==========
9. Long-Term Debt.
Long-term debt was comprised of the following at December 31:
1999 1998
------ --------
(Millions of
Dollars)
8.75% Notes, issued February 1995, due 2005................ $149.6 $ 149.6
6.95% Notes, issued November 1996, due 2006*............... 75.0 75.0
6.96% Notes, issued February 1997, due 2007*............... 75.0 75.0
6.39% Notes, issued January 1998, due 2008*................ 50.0 50.0
6.50% Notes, issued March 1999, due 2009................... 299.1 --
6.00% Putable/Callable Notes, issued April 1998, due
2000/2010................................................. 100.0 100.0
Notes due to ARCO, due 2003................................ -- 300.0
Revolving Credit Agreement................................. -- 320.0
Commercial Paper........................................... 226.3 219.0
------ --------
Total.................................................... $975.0 $1,288.6
====== ========
- --------
* Issuances pursuant to our Medium-Term Note Program.
25
VASTAR RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revolving Credit Agreement
In December 1993, Vastar entered into an unsecured, revolving credit
agreement with a group of banks. As of December 31, 1999, commitments under
this facility, as amended to date, totaled $1.1 billion and the commitments
expire March 31, 2002. There was no debt outstanding under this facility as of
December 31, 1999. The revolving credit agreement contains certain covenants,
the most restrictive of which (1) require Vastar to maintain minimum levels of
tangible stockholders' equity and maintain certain financial ratios, (2)
restrict our ability to encumber our assets and (3) may restrict, under certain
circumstances, our ability to pay dividends.
Commercial Paper Program
Under our $1.1 Billion Commercial Paper Program, which we established in
1996, we can sell up to $1.1 billion (outstanding at any one time) of unsecured
notes with maturities of up to 270 days. Sales of our notes are made in non-
public transactions to qualified institutional and other sophisticated
investors. In the agreements relating to this program, we agreed to maintain
credit lines sufficient to support payment of the notes. At December 31, 1999,
we had $226.3 million of commercial paper notes outstanding under the program
as compared to $219.0 million on December 31, 1998. The interest rate on the
notes fluctuates during the year as notes are repaid and reissued at market
interest rates. The average interest rate on all of our commercial paper
borrowing during 1999 was 5.3 percent. The interest rate on the debt that was
outstanding on December 31, 1999 was 6.6 percent. The interest rate on the debt
that was outstanding on December 31, 1998 was 6.0 percent.
$500 Million Shelf Registration for Debt Securities
On November 14, 1994, Vastar filed a registration statement with the
Securities and Exchange Commission covering the issuance of up to $500 million
of debt securities. In 1995, we issued $150 million of 8.75 percent unsecured
notes, due in 2005, pursuant to this registration statement.
In the second quarter of 1995, we established a $250 Million Medium-Term
Note Program pursuant to this registration statement. Under the medium term
note program, we have issued $75.0 million of 6.95 percent unsecured ten-year
Notes due November 2006, $75.0 million of 6.96 percent unsecured ten-year Notes
due February 2007 and $50.0 million of 6.39 percent unsecured ten-year Notes
due January 2008. The net proceeds from these issuances were used for the
general obligations of Vastar.
In April 1998, we issued $100.0 million of 6.00% Putable/Callable Notes due
April 20, 2000/2010 pursuant to this registration statement. These notes are
subject to a put and a call on April 20, 2000. The notes were issued under the
Indenture, dated as of January 1, 1995, as supplemented. The $99.9 million in
net proceeds received from the sale of the notes were used to pay down debt
incurred under our commercial paper program. The holders of these notes have
the right to require us to purchase the notes on April 20, 2000 under certain
terms and conditions. This right is called a "put." The holders may be required
to sell the notes to us on April 20, 2000 under certain terms and conditions.
The term for this right is a "call." We sold our call right to Union Bank of
Switzerland, London branch, and received $2.5 million, which was also used to
pay down debt we incurred under our commercial paper program.
$300 Million Shelf Registration for Debt Securities
On May 27, 1999, Vastar filed a registration statement with the Securities
and Exchange Commission covering the issuance of up to $300 million of debt
securities. No debt has been issued pursuant to this registration statement.
Related Party Debt
In October 1998, we acquired Vastar Offshore, which owed $300.0 million to
ARCO. The debt was due March 9, 2003 and was repaid in the first quarter of
1999. The interest rate on this debt averaged 5.4 percent during the period it
was outstanding in 1999.
26
VASTAR RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Additional Information
The estimated fair value of total long-term debt was $956.4 million at
December 31, 1999 and $1,320.4 million at December 31, 1998. The fair value of
Vastar's long-term debt was based on quoted market prices.
Vastar periodically enters into interest rate swap agreements with the
objective of managing interest rate risk. In 1998, we entered into an interest
rate swap covering $100.0 million related to the putable/callable notes. The
swap effectively changed the 6.0 percent fixed rate to a floating rate. In
1999, the effective interest rate we paid on these notes was 5.3 percent. The
financial impact of settling this swap in 1999 was $0.5 million favorable.
10. Deferred Liabilities and Credits.
Deferred liabilities and credits were as follows at December 31:
1999 1998
------ ------
(Millions of
Dollars)
Dismantlement and restoration................................. $138.8 $126.8
Deferred revenue on long term gas sales contract.............. 88.2 --
Pension and postretirement benefits........................... 29.2 25.8
Deferred compensation......................................... 17.3 14.0
Self insurance................................................ 12.5 12.5
Severance, sales and use taxes................................ 7.2 12.0
Other......................................................... 20.0 14.3
------ ------
Total......................................................... $313.2 $205.4
====== ======
We accrue amounts for the dismantling of facilities and plugging and
abandonment of wells on a unit-of-production basis. We accrued expenses of
approximately $34.1 million in 1999, $13.2 million in 1998 and $7.1 million in
1997. We paid approximately $22.1 million in 1999, $22.1 million in 1998 and
$17.1 million in 1997 to plug and abandon wells, dismantle fields, facilities
or projects and restore, reclaim and rehabilitate the land associated with
those projects. We estimate our ultimate liability for the dismantling of
facilities and plugging and abandonment of wells to be approximately $300
million.
In July 1999, we entered into agreements with an unrelated third party that
have the effect of monetizing the value of approximately 25 MMcfd to be sold
under one of the long-term gas sales contracts with a cogeneration facility.
This long-term gas sales contract has a remaining life of approximately 11
years. Pursuant to the agreements, we received an immediate payment of
approximately $88 million (net of transaction costs) that is recorded as a
deferred liability and will be amortized as the underlying contract volumes are
delivered.
11. Taxes.
Income Taxes
In the determination of the income tax provision, the fact that Vastar is
the only member of the ARCO consolidated tax group generating Section 29 tax
credits provides a rational basis for the inclusion of these tax credits in our
income tax provision. Under the terms of the tax sharing agreement, ARCO pays
us in cash for these Section 29 tax credits as they are generated and utilized.
27
VASTAR RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of the income tax benefit were comprised of the following
for the years ended December 31:
1999 1998 1997
------ ------- ------
(Millions of Dollars)
Federal:
Current............................................. $(87.2) $(124.5) $(80.7)
Deferred............................................ 54.8 38.0 69.9
------ ------- ------
Total federal....................................... (32.4) (86.5) (10.8)
------ ------- ------
State:
Current............................................. 0.6 (0.9) 2.9
Deferred............................................ 3.8 2.2 2.0
------ ------- ------
Total state......................................... 4.4 1.3 4.9
------ ------- ------
Income tax benefit.................................. $(28.0) $ (85.2) $ (5.9)
====== ======= ======
Reconciliation of income tax expense with tax at the federal statutory rate
is as follows for the years ended December 31:
1999 1998 1997
------- ------ -------
(Millions of Dollars)
Income before income taxes....................... $185.1 $51.2 $234.6
======= ====== =======
Tax at statutory rate............................ 64.8 17.9 82.1
Increase in taxes resulting from state income
taxes (net of federal effect)................... 2.8 0.9 3.2
Tax credits...................................... (92.5) (104.0) (91.7)
Other............................................ (3.1) -- 0.5
------- ------ -------
Income tax benefit............................... $ (28.0) $(85.2) $ (5.9)
======= ====== =======
The major components of the net deferred tax liability were comprised of
the following at December 31:
1999 1998
------ ------
(Millions of
Dollars)
Depreciation, depletion and amortization......................... $353.4 $284.1
Other............................................................ 7.3 9.4
------ ------
Total deferred tax liabilities................................. 360.7 293.5
------ ------
Tax credits carried forward(1)................................... 17.2 16.1
Dismantlement and restoration.................................... 43.7 39.5
Pension and postretirement benefits.............................. 10.3 9.0
Deferred compensation............................................ 6.1 4.9
Self insurance................................................... 4.4 4.4
Other............................................................ 6.1 5.3
------ ------
Total deferred tax assets...................................... 87.8 79.2
------ ------
Net deferred income tax liability.............................. $272.9 $214.3
====== ======
- --------
(1) See Note 2 of the Notes to Consolidated Financial Statements in this Form
10-K for additional information on tax credits.
28
VASTAR RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Taxes Other Than Income Taxes
Taxes other than income taxes were comprised of the following for the years
ended December 31:
1999 1998 1997
----- ----- -----
(Millions of
Dollars)
Production/severance....................................... $32.5 $29.2 $34.4
Property................................................... 11.1 12.9 9.8
Payroll and other.......................................... 5.5 5.2 5.8
----- ----- -----
Total.................................................... $49.1 $47.3 $50.0
===== ===== =====
12. Stockholders' Equity.
Dividends
During 1999, 1998 and 1997, Vastar paid quarterly cash dividends on its
common stock of $0.075 per share, totaling $0.30 per share, or $29.2 million,
each year.
13. Commitments and Contingencies.
Our operations and financial position continue to be affected from time to
time in varying degrees by domestic and foreign political developments as well
as legislation and regulations pertaining to restrictions on oil and gas
production, imports and exports, natural gas regulation, tax increases,
environmental regulations and cancellation of contract rights. Both the
likelihood of such occurrences and their overall effect on us vary greatly and
are not predictable. These uncertainties are part of a number of items that we
have taken and will continue to take into account in periodically establishing
accounting reserves.
Vastar and ARCO have agreements whereby we have agreed to indemnify ARCO
against certain claims or liabilities. Our indemnity obligations cover claims
and liabilities that could be made against ARCO relating to ARCO's historical
ownership and operation of the properties transferred by ARCO to us upon the
formation of Vastar. They also included liabilities under laws relating to the
protection of the environment and the workplace and liabilities arising out of
certain litigation described in the agreement. ARCO has agreed to indemnify us
with respect to other claims and liabilities and other litigation matters not
related to our business or properties as reflected in our consolidated
financial statements.
In September 1996, we entered into a contract with Diamond Offshore Drilling
Company for the major upgrade and operation of a semisubmersible drilling rig,
Ocean Victory, for a three-year deepwater drilling program in the Gulf of
Mexico, which began in November 1997. Since November 1997, scheduled increases
in the day rates and our request of Diamond to make improvements to the rig
resulted in higher costs during the remaining contract term. This contract has
a remaining life as of December 31, 1999 of 1.2 years. Our estimated remaining
costs for this contract and related contracts for support boats are
approximately $72.0 million. This amount does not take into consideration any
reimbursement that we might receive from partners or potential partners. We
have three one-year options to renew the term of the contract, subject to
renegotiating the day rates.
In December 1998, we entered into an agreement with R&B Falcon Drilling Co.
for the operation of a semisubmersible, ultra-deepwater drilling rig for a
three-year deepwater drilling program in the Gulf of Mexico. This drilling
program is scheduled to commence in 2001. This contract has an anticipated cost
of approximately $220.0 million, before any reimbursement from partners or
potential partners and operating cost escalations. We have several options
relating to the term and pricing of the contract including the option to extend
the term of the contract for up to five additional years.
Vastar and Southern Energy have agreed to guarantee certain obligations of
Southern Company Energy Marketing. Refer to Note 5 of these Notes to
Consolidated Financial Statements in this Form 10-K for a description of these
obligations.
29
VASTAR RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Vastar has significant credit risk exposure to Southern Company Energy
Marketing and Southern Energy. The credit risk exposure consists of three
principal items. First, Southern Company Energy Marketing has promised to make
certain minimum cash distributions to Vastar. Southern Energy has guaranteed
this obligation as well as the amounts due to Vastar upon the exercise of
Vastar's option to sell its remaining interest on January 1, 2003. Second,
Southern Company Energy Marketing is obligated to pay, and Southern Energy has
guaranteed payment, for gas purchased under the Gas Purchase and Sale Agreement
between Vastar and Southern Company Energy Marketing, pursuant to which Vastar
has agreed to sell substantially all of its production to Southern Company
Energy Marketing. Third, Vastar has been indemnified by Southern Energy, with
certain limitations, with respect to amounts that Vastar may be required to pay
under guarantees that Vastar has issued to secure certain obligations of
Southern Company Energy Marketing. If Southern Energy does not maintain in
effect an investment grade rating from Moody's or Standard & Poors, Southern
Energy has agreed to provide credit enhancement to secure the payment of these
guaranteed obligations. As of February 22, 2000, Southern Energy maintains the
required investment grade rating.
We have performed and continue to perform ongoing credit evaluations of our
other customers and generally do not require collateral on our credit sales.
Any amounts anticipated as uncollectible are charged to income and credited to
a valuation account. The amounts included in the allowance for uncollectible
accounts at December 31, 1999, 1998 and 1997 were insignificant.
Prices for oil and natural gas are subject to wide fluctuation in response
to changes in the supply of and demand for oil and natural gas, market
uncertainty, weather conditions, governmental regulations, political conditions
and overall economic conditions.
We and our subsidiaries are involved in a number of lawsuits, all of which
have arisen in the ordinary course of our business. We believe that any
ultimate liability resulting from any of these suits will not have a material
adverse effect on our financial condition, results of operations or cash flows.
14. Exploration Expense.
Exploration expense was comprised of the following for the years ended
December 31:
1999 1998 1997
------ ------ ------
(Million of Dollars)
Dry hole costs............................................. $ 66.8 $ 84.2 $ 56.5
Geological and geophysical................................. 32.9 39.3 42.4
Unproved properties amortization........................... 35.0 35.0 30.0
Staff...................................................... 41.6 42.4 39.0
Lease rentals.............................................. 8.3 9.7 7.6
------ ------ ------
Total.................................................... $184.6 $210.6 $175.5
====== ====== ======
15. Earnings Per Share (EPS).
The following table reflects earnings per share data for the years ended
December 31:
1999 1998 1997
------------ ------------ ------------
(Millions, except per share amounts)
Basic earnings per share:
Income available to common
shareholders.......................... $ 213.1 $ 136.4 $ 240.5
Average shares of stock outstanding.... 97.5 97.4 97.3
Basic earnings per share............... $ 2.19 $ 1.40 $ 2.47
Diluted earnings per share:
Income available to common
shareholders.......................... $ 213.1 $ 136.4 $ 240.5
Incremental shares assuming the
exercise of stock options............. 0.9 0.5 0.3
Average shares of stock outstanding
plus effect of dilutive securities.... 98.4 97.9 97.6
Diluted earnings per share............. $ 2.16 $ 1.39 $ 2.46
30
VASTAR RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
16. Employee Benefit Plans.
We sponsor postretirement benefit plans. Our defined benefit pension plans
provide pension benefits to substantially all of our employees. The benefits
are based on years of service and the employee's compensation, primarily during
the last three years of service. With respect to future benefits which have not
yet been accrued, we have the right to modify the plans at any time.
Other postretirement benefit plans provide health care and life insurance to
substantially all of our employees who retire with Vastar having rendered the
required years of service, along with their spouses and eligible dependents.
Health care benefits are provided primarily through comprehensive indemnity
plans. Currently, we pay approximately 80 percent of the cost of such plans.
Life insurance benefits are based primarily on the employee's final
compensation and are also partially paid for by retiree contributions, which
vary based on coverage chosen by the retiree. We have the right to modify the
plans at any time.
Pension Other
Benefits Benefits
------------- --------------
1999 1998 1999 1998
------ ----- ------ ------
(Millions of Dollars)
Plan obligations:
Benefit obligation at January 1............... $ 75.7 $67.2 $ 16.6 $ 14.2
Service cost................................ 4.6 3.8 1.2 1.1
Interest cost............................... 5.2 4.7 1.2 1.0
Actuarial loss (gain)....................... (17.6) 3.3 (3.4) 0.4
Transfers in................................ 0.7 -- -- --
Benefits paid............................... (1.0) (3.3) (0.2) (0.1)
------ ----- ------ ------
Benefit obligation at December 31............. $ 67.6 $75.7 $ 15.4 $ 16.6
====== ===== ====== ======
Plan assets:
Fair value of assets at January 1............. $ 72.1 $66.4 $ -- $ --
Actual return on assets..................... 11.7 8.8 -- --
Company contributions....................... -- 0.2 -- --
Transfers in................................ 1.9 -- -- --
Benefits paid............................... (1.0) (3.3) -- --
------ ----- ------ ------
Fair value of assets at December 31........... $ 84.7 $72.1 $ -- $ --
====== ===== ====== ======
Funded status:
Funded status of the plan................... $ 17.1 $(3.6) $(15.4) $(16.6)
Unrecognized transition obligation (asset).. (4.1) (4.5) -- --
Unrecognized prior service cost............. 2.0 2.2 -- --
Unrecognized actuarial loss (gain) and
other...................................... (24.1) (2.0) (4.7) (1.3)
------ ----- ------ ------
Total recognized (deferred liability)........... $ (9.1) $(7.9) $(20.1) $(17.9)
====== ===== ====== ======
The projected benefit obligations, accumulated benefit obligations and fair
value of plan assets for pension plans with accumulated benefit obligations in
excess of the fair value of plan assets were as follows:
December 31,
--------------
1999 1998
------ ------
(Millions of
Dollars)
Projected benefit obligations................................ $5.4 $6.5
Accumulated benefit obligations.............................. $2.5 $3.0
Fair value of plan assets.................................... -- --
31
VASTAR RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Weighted-average assumptions for both the pension and postretirement plans
as of December 31:
1999 1998 1997
----- ----- -----
Discount rate................................................. 8.00% 6.90% 7.00%
Expected return on plan assets................................ 10.5% 10.5% 10.5%
Rate of salary progression.................................... 4.0% 4.0% 4.0%
The weighted average annual assumed rate of increase in the per capita cost
of health care benefits was assumed to be 7.0 percent for 1997 to 2001, after
which the rate was assumed to decrease to 5.0 percent and remain at that level
thereafter.
Pension
Benefits Other Benefits
----------------- --------------
1999 1998 1997 1999 1998 1997
----- ---- ---- ---- ---- ----
(Millions of Dollars)
Components of net periodic benefit cost:
Service cost............................... $ 4.6 $3.8 $4.0 $1.2 $1.1 $0.9
Interest cost.............................. 5.2 4.7 4.4 1.2 1.0 0.9
Expected return on plan assets............. (7.6) (6.9) (5.4) -- -- --
Amortization of unrecognized obligation at
transition................................ (0.4) (0.4) (0.4) -- -- --
Amortization of unrecognized prior service
cost...................................... 0.2 0.2 0.2 -- -- --
Recognized net actuarial loss (gain) and
other..................................... 0.2 0.1 (0.3) -- -- --
----- ---- ---- ---- ---- ----
Net periodic benefit cost.................. $ 2.2 $1.5 $2.5 $2.4 $2.1 $1.8
===== ==== ==== ==== ==== ====
If a one-percentage-point change is assumed, health care cost trend rates
would have the following effects:
1-Percentage 1-Percentage
point point
Decrease Increase
------------ ------------
(Millions of Dollars)
Total of service and interest costs................... $(0.3) $0.4
Postretirement benefit obligation..................... $(1.7) $2.1
We also make contributions to the Vastar Resources, Inc. Capital
Accumulation Plan, a 401(k) plan, which is a voluntary and contributory plan
for eligible employees. Our contributions, which are based on a percentage of
matching employee contributions, totaled $5.3 million in 1999, $5.0 million in
1998 and $4.9 million in 1997.
17. Financial Instruments.
We use various financial instruments for non-trading purposes in the normal
course of our business to manage and reduce price volatility and other market
risks associated with our natural gas and petroleum liquids production. This
activity is referred to as hedging. Hedging instruments have the effect of
locking in the prices that we will receive for the volumes and the time
periods identified in the instruments. These arrangements are structured to
reduce our exposure to commodity price decreases, but they can also limit the
benefit we might otherwise receive from commodity price increases. Our risk
management activity is generally accomplished through exchange-traded futures
and over-the-counter options. The counterparties to these transactions are
principally major financial institutions and major oil and gas and other
industrial companies. We monitor the creditworthiness of the counterparties
and do not anticipate material nonperformance by the counterparties.
As a result of all of our hedging transactions for natural gas and crude
oil, we realized a pre-tax gain of approximately $13.3 million in 1999, a pre-
tax gain of approximately $1.8 million in 1998 and a pre-tax loss of
approximately $48.9 million in 1997.
We hedged 25 percent of our gas production in 1999 and 28 percent in 1998
and 1997. We hedged
14 percent of our crude oil production in 1999, 3 percent in 1998 and 32
percent in 1997.
32
VASTAR RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes our open hedging positions as of December 31,
1999.
Financial Average Weighted
Product Instrument Time Period Volume Average Prices
- ------- ---------- ----------- ------- --------------
Gas Collars Jan--Mar 2000 400 MMcfd $2.54/Mcf--$3.27/Mcf
Gas Puts Sold Jan--Mar 2000 400 MMcfd $2.12/Mcf
Oil Collars Jan--Dec 2000 23 MBbld $18.80/Bbl--$23.31/Bbl
Oil Puts Sold Jan--Dec 2000 23 MBbld $15.80/Bbl
A "collar" is a financial instrument or a combination of financial
instruments which establishes a range of prices to be received relating to a
set commodity volume. This arrangement, in effect, allows us to receive no less
than a stated minimum or floor price per unit of volume and no more than a
stated maximum or ceiling price per unit of volume.
A "put" is an option contract that gives the holder the right to sell the
underlying commodity at a specified price for a certain fixed period of time.
A "call" is an option contract that gives the holder the right to buy the
underlying commodity at a specified price for a certain fixed period of time.
The fair value (our unrealized pre-tax gain or loss) for 2000 hedged
transactions in place as of December 31, 1999 would be a $6.9 million gain for
natural gas and a $7.0 million loss for crude oil. This hypothetical loss is
calculated based on brokers' forward price quotes and NYMEX forward price
quotes as of December 31, 1999, which for 2000 averaged $2.41 per Mcf for
natural gas and $22.73 per Bbl for crude oil. The actual gains or losses we
realize from our hedge transactions may vary significantly due to the
fluctuation of prices in the commodity markets. For example, a hypothetical 10
percent increase in the forward price quotes would decrease the unrealized gain
by approximately $2.4 million for natural gas and increase the unrealized loss
by approximately $10.1 million for crude oil. In order to calculate the
hypothetical gain/loss, the relevant variables are (1) the type of commodity,
(2) the delivery price and (3) the delivery location. We do not take into
account the time value of money because of the short-term nature of our hedging
instruments. These calculations may be used to analyze the gains and losses we
might realize on our financial hedging contracts and do not reflect the effects
of price changes on our actual physical commodity sales. Natural gas prices
fluctuated between $1.65 per Mcf and $3.08 per Mcf (Henry Hub) and crude oil
prices fluctuated between $11.38 per Bbl and $27.98 per Bbl (NYMEX-WTI-at-
Cushing) during 1999.
18. Stock Options.
Options to purchase shares of our common stock have been granted to
executives, outside directors and key employees. Generally, the exercise price
of each stock option is equal to or greater than the fair market value of our
common stock at the date of grant and stock options vest one year after the
date of grant, become exercisable in increments of 25 percent per year and
expire ten years after the date of grant. However, certain stock options
granted to certain executive officers under Stock Option Conversion Agreements
in connection with our 1994 initial public offering were granted at less than
the $28.00 offering price and/or were exercisable upon the closing date of this
offering. In addition, stock options granted to outside directors vest 30 days
after grant and are exercisable six months after the date of grant.
Transactions during 1999, 1998 and 1997 were as follows:
Weighted
Average
Exercise
Shares Price
--------- --------
Balance, January 1, 1997..................................... 1,351,891 $29.41
Granted.................................................... 509,250 29.78
Exercised.................................................. (43,576) 18.53
Forfeited/Canceled......................................... (15,000) 30.90
---------
Balance, December 31, 1997................................... 1,802,565 $30.83
Granted.................................................... 427,500 39.14
Exercised.................................................. (99,213) 25.85
Forfeited/Canceled......................................... (12,250) 34.38
---------
Balance, December 31, 1998................................... 2,118,602 $31.95
Granted.................................................... 458,430 39.93
Exercised.................................................. (241,610) 28.75
Forfeited/Canceled......................................... (13,250) 34.97
---------
Balance, December 31, 1999................................... 2,322,172 $33.74
=========
33
VASTAR RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table shows the shares of common stock available for option
grants and the weighted average fair value for options granted as of December
31:
1999* 1998 1997
------- -------- --------
Shares of common stock available for option grants... 36,120 281,300 686,500
Weighted average fair value for options granted...... $ 17.52 $ 16.94 $ 12.49
- --------
* On April 27, 1999, we filed with the SEC a Form S-8 registering an additional
200,000 shares of common stock under our Amended and Restated Executive Long-
Term Incentive Plan and thus made these shares available for option grants
under this plan.
A summary of the status of Vastar's fixed stock options as of December 31,
1999 and 1998 were as follows:
Options Outstanding Options Exercisable
--------------------------------------------- ----------------------------
Number Weighted Average Number
Range of Outstanding Remaining Weighted Average Exercisable Weighted Average
Exercise Prices at 12/31 Contractual Life Exercise Price at 12/31 Exercise Price
--------------- ----------- ---------------- ---------------- ----------- ----------------
1999:
$14.00 to $27.99...... 167,022 5.2 years $25.06 167,022 $25.06
$28.00 to $46.66...... 2,155,150 7.0 years $34.41 1,030,295 $31.79
1998:
$14.00 to $27.99...... 250,390 6.1 years $24.20 185,878 $23.90
$28.00 to $46.66...... 1,868,212 6.8 years $32.86 791,875 $31.02
Vastar applies Accounting Principles Board Opinion No. 25 in accounting for
its fixed stock options. Accordingly, no compensation cost for options granted
has been recognized in the financial statements. Had compensation cost for
stock options been determined consistent with Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," our net income
and earnings per share for the years ended December 31, 1999, 1998 and 1997
would have been the pro forma amounts indicated below:
1999 1998 1997
------ ------ ------
Net income (millions):
As reported............................................. $213.1 $136.4 $240.5
Pro forma............................................... $210.2 $133.3 $238.3
Basic earnings per share:
As reported............................................. $ 2.19 $ 1.40 $ 2.47
Pro forma............................................... $ 2.16 $ 1.37 $ 2.45
Diluted earnings per share:
As reported............................................. $ 2.16 $ 1.39 $ 2.46
Pro forma............................................... $ 2.13 $ 1.36 $ 2.44
For purposes of determining the pro forma amounts presented above, the fair
value of each stock option grant is estimated on the American binomial option
pricing model with the following approximate weighted average assumptions:
1999 1998 1997
------------ ------------ ------------
Dividend yield........................... 0.75 percent 0.75 percent 1.0 percent
Expected volatility...................... 30.6 percent 27.1 percent 23.3 percent
Interest rate............................ 5.6 percent 5.8 percent 6.6 percent
Expected term............................ 8 years 8 years 8 years
34
VASTAR RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Set forth in the table below are all of our outstanding stock options
granted under all of our stock option plans and programs for directors,
officers and employees as of December 31, 1999. The exercise price of stock
options ranges from $14.00 to $46.66 per share.
Vested and exercisable(1)........................................... 1.2 million
Vested and unexercisable............................................ 0.6 million
Non-vested.......................................................... 0.5 million
-----------
Total............................................................... 2.3 million
===========
- --------
(1) Stock options generally vest one year after the date of grant, become
exercisable in increments of 25 percent per year during the first four
years after the grant and expire ten years after the date of grant.
Our board of directors has adopted various arrangements that will become
operative upon a change of control of Vastar. One of these arrangements, our
Amended and Restated Executive Long-Term Incentive Plan, provides that, if a
change of control occurs, all unexercisable and/or unvested stock options
granted under the plan will become immediately vested and exercisable. All
stock options granted under our other stock option plans and programs are
vested and exercisable.
In March 1999, ARCO, which owns approximately 81.9 percent of our common
stock, entered into a merger agreement with BP Amoco p.l.c. that provides for
the merger of a subsidiary of BP Amoco p.l.c. with and into ARCO. If this
transaction is consummated it would constitute a change of control under the
above-described arrangements, including our Amended and Restated Executive
Long-Term Incentive Plan.
For additional information on the change of control arrangements, refer to
our proxy statement relating to our 2000 annual meeting of stockholders, which
pursuant to SEC rules, we will file within 120 days of December 31, 1999.
Stock Repurchase Program
In January 2000, the Executive Committee of the Board of Directors, approved
a stock repurchase program to provide the common stock necessary to meet our
obligations under our stock option and other employee benefit plans. We have
been authorized to purchase common stock and to retain such stock as treasury
shares. However, the number of shares of stock that we can retain in treasury
at any one time is limited to 100,000 shares.
19. New Accounting Standards.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This standard requires us to recognize all
of our derivative and hedging instruments in our statements of financial
position as either assets or liabilities and measured at fair value. In
addition, all hedging relationships must be designated, documented and
reassessed periodically. On July 7, 1999, the Financial Accounting Standards
Board delayed the effective date of SFAS 133 for one year. The delay, published
as SFAS No. 137, applies to quarterly and annual financial statements. SFAS No.
133, as revised by SFAS No. 137, is effective for all fiscal quarters of all
fiscal years beginning after June 15, 2000. We are continuing to evaluate the
impact the provisions of these standards will have on us.
20. Subsequent Events (Unaudited).
On January 19, 2000, Vastar declared a cash dividend of $0.075 per share on
the common stock to be paid on March 7, 2000, to stockholders of record as of
February 11, 2000.
Under Vastar's Amended and Restated Long-Term Incentive Plan, Compensation
Subcommittee of the Board of Directors granted 387,325 stock options to our
company officers and other key personnel on March 1, 2000. For additional
information, see Note 18 to these Notes to Consolidated Financial Statements in
this Form 10-K.
35
VASTAR RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
21.Summary of Quarterly Results (Unaudited).
1999 1998
-------- --------
(Millions of
Dollars, except
per share
amounts)
Revenues
Quarter ended:
March 31................................................. $ 372.0 $ 450.1
June 30.................................................. 483.7 421.2
September 30............................................. 513.1 385.9
December 31.............................................. 594.6 415.5
-------- --------
Total.................................................... $1,963.4 $1,672.7
======== ========
Income (loss) before income taxes
Quarter ended:
March 31................................................. $ (5.4) $ 32.6
June 30.................................................. 40.0 11.6
September 30............................................. 75.3 21.5
December 31.............................................. 75.2 (14.5)
-------- --------
Total.................................................... $ 185.1 $ 51.2
======== ========
Net income
Quarter ended:
March 31................................................. $ 19.0 $ 48.0
June 30.................................................. 48.3 32.8
September 30............................................. 71.1 37.6
December 31.............................................. 74.7 18.0
-------- --------
Total.................................................... $ 213.1 $ 136.4
======== ========
Basic earnings per share
Quarter ended:
March 31................................................. $ 0.20 $ 0.49
June 30.................................................. 0.49 0.34
September 30............................................. 0.73 0.39
December 31.............................................. 0.77 0.18
-------- --------
Total.................................................... $ 2.19 $ 1.40
======== ========
Diluted earnings per share
Quarter ended:
March 31................................................. $ 0.19 $ 0.49
June 30.................................................. 0.49 0.34
September 30............................................. 0.72 0.38
December 31.............................................. 0.76 0.18
-------- --------
Total.................................................... $ 2.16 $ 1.39
======== ========
36
Supplemental Information
Oil and Gas Producing Activities
(Unaudited)
The SEC defines proved oil and gas reserves as those estimated quantities of
crude oil, natural gas and NGLs that geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions. Proved
developed oil and gas reserves are reserves that can be expected to be
recovered through existing wells with existing equipment and operating methods.
These estimates of petroleum reserves do not include probable or possible
reserves.
With regard to our reserve estimates for natural gas and NGLs, we own
interests in nine gas processing plants in the Gulf of Mexico, Gulf Coast and
Mid-Continent producing areas. As a result of this ownership interest, we have
natural gas processing rights for proved reserves contractually or economically
committed to these plants. These processing rights stem from a variety of
contracts, including wet gas purchase, Btu keep-whole and processing type
agreements, that we are a party to as a plant owner. NGL quantities include
those volumes allocated to our leasehold interest (equity) in gas that is
processed and those volumes attributable to our plant ownership resulting from
processing equity and third-party gas. The related shrinkage in natural gas
volumes resulting from processing has been excluded from the natural gas
reserve quantities. Approximately 5 percent of our total reserves are
attributable to our ownership in gas processing plants.
Proved oil and gas reserve quantities are based on estimates prepared by our
engineers in accordance with guidelines established by the SEC and
approximately 59 percent were reviewed by Ryder Scott Company Petroleum
Engineers, who are independent petroleum engineers. There are numerous
uncertainties inherent in estimating quantities of proved reserves and
projecting future rates of production and timing of development expenditures.
The following reserve data represents estimates only and should not be
construed as being exact. Estimated net quantities of proved oil and gas
reserves of Vastar were as follows:
Crude and Natural Gas Natural
Condensate Liquids Gas
(MMBbl) (MMBbl) (Bcf)
---------- ----------- -------
January 1, 1997
Proved reserves................................ 67.5 47.8 2,224
Proved developed reserves...................... 43.6 44.3 1,801
December 31, 1997
Proved reserves................................ 77.5 51.5 2,379
Proved developed reserves...................... 48.2 47.8 1,954
December 31, 1998
Proved reserves................................ 128.0 57.0 2,590
Proved developed reserves...................... 59.8 49.3 2,071
December 31, 1999
Proved reserves................................ 177.7 59.4 2,651
Proved developed reserves...................... 56.1 52.2 2,057
37
Supplemental Information
Oil and Gas Producing Activities
(Unaudited)
The changes in proved reserves for each of the three years in the period
ended December 31, 1999, were as follows:
Crude and Natural Gas Natural
Condensate Liquids Gas
(MMBbl) (MMBbl) (Bcf)
---------- ----------- -------
Reserves at January 1, 1997...................... 67.5 47.8 2,224
Revisions of estimates........................... 0.3 4.7 100
Improved recovery................................ 0.6 -- 16
Purchases of minerals-in-place................... 4.3 4.0 163
Extension and discoveries........................ 17.5 2.0 210
Production....................................... (12.7) (5.8) (322)
Consumed in production........................... -- -- (5)
Sales of minerals-in-place....................... -- (1.2) (7)
----- ---- -----
Reserves at December 31, 1997.................... 77.5 51.5 2,379
Revisions of estimates........................... 4.1 6.0 42
Improved recovery................................ 0.1 -- 5
Purchases of minerals-in-place................... 22.3 3.1 262
Extension and discoveries........................ 37.5 2.6 289
Production....................................... (13.5) (4.8) (361)
Consumed in production........................... -- -- (6)
Sales of minerals-in-place....................... -- (1.4) (20)
----- ---- -----
Reserves at December 31, 1998.................... 128.0 57.0 2,590
Revisions of estimates........................... (1.7) 4.2 4
Improved recovery................................ 0.0 0.1 46
Purchases of minerals-in-place................... 4.4 2.6 109
Extension and discoveries........................ 68.5 1.3 343
Production....................................... (16.4) (5.5) (394)
Consumed in production........................... -- -- (7)
Sales of minerals-in-place....................... (5.1) (0.3) (40)
----- ---- -----
Reserves at December 31, 1999.................... 177.7 59.4 2,651
===== ==== =====
Costs, both capitalized and expensed, incurred in oil and gas producing
activities (including operating overhead) were as follows for the years ended
December 31:
1999 1998 1997
------ ------ ------
(Millions of
Dollars)
Property acquisition costs:
Proved................................................... $ 61.1 $463.4 $ 71.2
Unproved................................................. 14.0 52.5 89.7
Exploration costs.......................................... 267.9 241.0 228.1
Development costs.......................................... 354.8 411.7 315.5
38
Supplemental Information
Oil and Gas Producing Activities
(Unaudited)
Results of operations for oil and gas producing activities (including
operating overhead) were as follows for the years ended December 31:
1999 1998 1997
-------- ------ --------
(Millions of Dollars)
REVENUES
Sales............................................. $1,121.6 $903.3 $1,046.1
Other revenues.................................... 48.6 18.4 20.9
-------- ------ --------
Total revenues.................................. 1,170.2 921.7 1,067.0
EXPENSES
Production costs.................................. 243.1 213.6 203.9
Exploration expenses.............................. 184.6 210.6 175.5
Depreciation, depletion and amortization.......... 430.7 352.0 288.6
Other operating expenses.......................... 27.7 18.2 31.7
-------- ------ --------
Income before income taxes........................ 284.1 127.3 367.3
Provision (benefit) for income taxes.............. 8.0 (57.3) 42.4
-------- ------ --------
Results of operations for oil and gas producing
activities......................................... $ 276.1 $184.6 $ 324.9
======== ====== ========
The difference between the above results of operations and the amounts
reported in our Consolidated Statement of Income is primarily attributable to
excluding (1) marketing and risk management related activities, (2) general
and administrative expense and (3) interest expense.
The standardized measure of discounted estimated future net cash flows and
changes therein related to proved oil and gas reserves were as follows for the
years ended December 31:
1999 1998 1997
--------- -------- --------
(Millions of Dollars)
Future cash inflows............................... $11,513.1 $6,891.7 $7,106.2
Future development and production costs........... 3,711.0 2,853.0 2,245.1
Future income tax expense......................... 2,149.0 799.8 1,159.6
--------- -------- --------
Future net cash flows............................. 5,653.1 3,238.9 3,701.5
10% annual discount............................... 2,177.8 1,092.4 1,264.3
--------- -------- --------
Standardized measure of discounted estimated
future net cash flows............................ $3,475.3 $2,146.5 $2,437.2
========= ======== ========
Primary changes in the standardized measure of discounted estimated future
net cash flows are as follows:
1999 1998 1997
-------- -------- ----------
(Millions of Dollars)
Sales of oil and gas net of production
costs........................................ $(878.3) $(689.7) $ (842.2)
Extensions, discoveries and improved recovery
less related costs........................... 928.1 371.7 338.0
Purchases/Sales............................... 117.9 256.0 181.3
Revisions of estimates of reserves proved in
prior years:
Quantity estimates............................ 22.3 71.4 127.7
Net changes in price and production costs..... 1,418.1 (1,203.4) (2,671.2)
Accretion of discount......................... 256.9 308.4 502.1
Development costs incurred during the
period....................................... 354.8 411.7 315.4
Net change in income taxes.................... (775.5) 224.5 714.2
Other......................................... (115.5) (41.3) 111.8
-------- -------- ----------
Net change.................................... $1,328.8 $(290.7) $(1,222.9)
======== ======== ==========
39
Supplemental Information
Oil and Gas Producing Activities
(Unaudited)
Vastar's estimate of future cash inflows was generated by applying year-end
prices to the projected future sale of proved reserves, plus incremental
revenue from long-term contractual arrangements existing at year end. Year-end
cash market natural gas prices for eight trading hubs for the week of December
27, 1999, formed the basis for regional natural gas pricing standards. The
year-end cash market crude oil price for West Texas Intermediate on the last
trading day of 1999 formed the basis for the crude oil price standard.
Individual wellhead prices were generated against these pricing standards using
historical processing and transportation differentials.
Estimated future development and production costs are determined by
estimating the expenditures to be incurred in developing and producing the
proved oil and gas reserves at the end of the year, based on year-end costs and
assuming continuation of existing economic conditions.
Estimated future income tax expense is calculated by applying the year-end
statutory tax rate (adjusted for permanent differences and tax credits) to
estimated future pre-tax net cash flow related to proved oil and gas reserves,
less the tax basis of the properties involved.
These estimates are furnished and calculated in accordance with requirements
of the Financial Accounting Standards Board and the SEC. Estimates of future
net cash flows presented do not represent management's assessment of future
profitability or future cash flow to Vastar. Management's investment and
operating decisions are based on reserve estimates that include proved reserves
as well as probable reserves, and on different price and cost assumptions from
those used here.
It should be recognized that applying current costs and prices and a 10
percent standard discount rate does not convey absolute value. The discounted
amounts arrived at are only one measure of the value of proved reserves.
40
SIGNATURE
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.
VASTAR RESOURCES, INC.
(Registrant)
/s/ Joseph P. McCoy
By:__________________________________
Joseph P. McCoy
Vice President and Controller
(Duly Authorized Officer
and Principal Accounting Officer)
Date: August 17, 2000
41