1
REGISTRATION STATEMENT NO. 333-74823
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CONOCO INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 2911 51-0370352
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
600 NORTH DAIRY ASHFORD
HOUSTON, TEXAS 77079
TEL: (281) 293-1000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
HOWARD J. RUDGE, ESQ. RICK A. HARRINGTON, ESQ.
SENIOR VICE PRESIDENT AND GENERAL COUNSEL SENIOR VICE PRESIDENT, LEGAL, AND
E. I. DU PONT DE NEMOURS GENERAL COUNSEL
AND COMPANY CONOCO INC.
1007 MARKET STREET 600 NORTH DAIRY ASHFORD
WILMINGTON, DELAWARE 19898 HOUSTON, TEXAS 77079
TEL: (302) 774-1000 TEL: (281) 293-1000
FAX: (302) 773-5176 FAX: (281) 293-1440
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
LOU R. KLING, ESQ. WALTER J. SMITH, ESQ. JOHN W. WHITE, ESQ.
MATTHEW J. MALLOW, ESQ. BAKER & BOTTS, L.L.P. CRAVATH, SWAINE & MOORE
EILEEN NUGENT SIMON, ESQ. ONE SHELL PLAZA 825 EIGHTH AVENUE
SKADDEN, ARPS, SLATE, 910 LOUISIANA NEW YORK, NEW YORK 10019
MEAGHER & FLOM LLP HOUSTON, TEXAS 77002 TEL: (212) 474-1000
919 THIRD AVENUE TEL: (713) 229-1234 FAX: (212) 474-3700
NEW YORK, NEW YORK 10022 FAX: (713) 229-1522
TEL: (212) 735-3000
FAX: (212) 735-2000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: Upon
completion of the exchange offer referred to in this document.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [ ]
If this Form is filed to register additional securities for an offering under
Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed under Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering: [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM AGGREGATE
TITLE OF SECURITIES BEING REGISTERED OFFERING PRICE (1)(2) AMOUNT OF REGISTRATION FEE
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Class B common stock, $.01 par value (3)............... $5,244,192,273 $1,457,886(4)
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(1) The maximum number of shares of Class B common stock of Conoco Inc. offered
in exchange for shares of common stock, $.30 par value, of E. I. du Pont de
Nemours and Company, as described in the Offering Circular-Prospectus filed
as part of this Registration Statement.
(2) Estimated solely for purposes of calculating the registration fee and
computed under Rule 457(f)(1) under the Securities Act of 1933, as amended,
based on $55.50, the average of the high and low sale prices reported on the
New York Stock Exchange Composite Tape on March 17, 1999 for the DuPont
common stock to be received by DuPont in exchange for shares of Conoco Class
B common stock.
(3) Includes the associated preferred share purchase rights, which (a) are not
currently separable from the shares of Conoco Class B common stock and (b)
are not currently exercisable. See "Description of Conoco Capital
Stock -- Anti-Takeover Effects of Certificate and By-law Provisions."
(4) Previously paid.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING UNDER SAID SECTION 8(a), MAY
DETERMINE.
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2
THE INFORMATION IN THIS DOCUMENT IS NOT COMPLETE AND MAY BE CHANGED. CONOCO
CLASS B COMMON STOCK MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED UNTIL THE
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS DOCUMENT IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE
IS NOT PERMITTED.
(Subject to Completion)
Issued July 2, 1999
E. I. du Pont de Nemours and Company
Offer to Exchange
Shares of Class B Common Stock
of
Conoco Inc.
for each share of
Common Stock
of
E. I. du Pont de Nemours and Company
THE EXCHANGE OFFER WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON
, 1999, UNLESS THE OFFER IS EXTENDED.
DuPont stockholders who elect to participate will receive from DuPont
shares of Conoco Class B common stock for each DuPont share tendered. DuPont
will accept up to an aggregate of DuPont shares under the exchange
offer.
The exchange offer is available only to DuPont stockholders who are United
States persons, as explained on page 25. DuPont stockholders who are not United
States persons are ineligible to participate in the exchange offer. Instead, we
are extending a substantially concurrent cash offer to purchase DuPont shares
from stockholders who are not United States persons. If you are not a United
States person, you should contact D.F. King & Co., Inc. at the telephone number
shown below or your broker for more information regarding the cash offer. United
States persons are not eligible to participate in the cash offer.
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The terms and conditions of the exchange offer are described in this document,
which you should read carefully. Neither DuPont, Conoco nor any of their
directors makes any recommendation as to whether or not you should tender your
shares. You must make your own decision after reading this document and
consulting with your advisors based on your own financial position and
requirements.
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This is the initial public offering of Conoco Class B common stock, and no
public market currently exists for the Class B shares. The Conoco Class B common
stock has been approved for listing on the New York Stock Exchange under the
symbol "COC.B."
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Investing in the Conoco Class B common stock involves risks. See "Risk Factors"
beginning on page 18.
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The Securities and Exchange Commission and any state securities regulators have
not approved or disapproved of these securities or determined if this document
is truthful or complete. Any representation to the contrary is a criminal
offense.
DuPont has retained the services of D.F. King as information agent to assist you
in connection with the exchange offer. You may call D.F. King at (800) 755-3105
(toll free) in the United States to request additional documents and to ask any
questions or at (212) 269-5550 (collect) elsewhere.
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The Dealer Manager for the Exchange Offer is:
MORGAN STANLEY DEAN WITTER
, 1999
3
TABLE OF CONTENTS
Questions and Answers About the
Exchange Offer........................... 4
Summary.................................... 7
E. I. du Pont de Nemours and Company..... 7
Conoco Inc. ............................. 8
Terms of the Exchange Offer.............. 9
Summary Historical and Pro Forma
Financial Data of DuPont............... 12
Summary Historical and Pro Forma
Financial Data of Conoco............... 14
Risk Factors............................... 18
Tendering and nontendering stockholders
are affected differently by the
exchange offer......................... 18
The IRS may treat the transaction as
taxable to DuPont and its stockholders
if representations made to the IRS were
inaccurate or if undertakings made to
the IRS are not complied with.......... 18
Tendering stockholders may not receive
any premium............................ 18
Market prices for Conoco Class B common
stock may vary from market prices for
Conoco Class A common stock............ 18
The split-off will cause DuPont's assets
and total capitalization to decrease... 19
Low oil and gas prices have negatively
affected Conoco's financial results and
may continue to do so in the future.... 19
Global political and economic
developments may hurt Conoco's
operations............................. 19
Conoco and DuPont may have conflicts of
interest............................... 20
The oil and gas reserves data in this
document are only estimates, and may
prove to be inaccurate................. 20
Conoco's growth depends on finding new
reserves............................... 20
Risk of Future Acquisitions and Other
Transactions by DuPont and Conoco...... 21
Conoco may incur material costs to comply
with environmental regulations......... 21
Changes in government regulations may
impose price controls and limitations
on production of oil and gas........... 21
Potential year 2000 problems may
adversely affect Conoco's business..... 21
Provisions in Conoco's by-laws,
certificate of incorporation, and
Delaware law could deter takeover
attempts............................... 22
There is no public market for Conoco
Class B common stock and an active
trading market may not develop......... 22
Conoco may not pay dividends on its
common stock........................... 22
The Transaction............................ 23
Background and Purpose................... 23
Effects.................................. 23
No Appraisal Rights...................... 23
Regulatory Approvals..................... 24
Accounting Treatment..................... 24
The Exchange Offer......................... 25
Terms of the Exchange Offer.............. 25
Proration; Tenders for Exchange by
Holders of Fewer Than 100 Shares of
DuPont Common Stock.................... 26
Fractional Shares........................ 26
Exchange of Shares of DuPont Common
Stock.................................. 26
Procedures for Tendering DuPont Shares... 27
DuPont's Interpretations are Binding..... 29
Lost or Destroyed Certificates........... 29
Guaranteed Delivery Procedure............ 29
Withdrawal Rights........................ 30
Book-Entry Accounts...................... 30
Extension of Tender Period; Termination;
Amendment.............................. 31
Conditions for Completion of the Exchange
Offer.................................. 31
Fees and Expenses........................ 33
Legal Limitation......................... 34
Price Range of DuPont Common Stock and
Dividends................................ 35
Price Range of Conoco Class A Common Stock
and Dividends............................ 36
Special Note on Forward-Looking
Information.............................. 37
Selected Historical and Pro Forma Financial
Data of DuPont........................... 38
Selected Historical and Pro Forma Financial
Data of Conoco........................... 40
Unaudited Pro Forma Consolidated Financial
Statements of DuPont..................... 43
Unaudited Pro Forma Financial Statements of
Conoco................................... 52
Management's Discussion and Analysis of
Financial Condition and Results of
Operations of Conoco..................... 61
Liquidity and Capital Resources.......... 62
Investment Activities.................... 62
Financing Activities..................... 66
Results of Operations.................... 68
Upstream Segment Results................. 73
Downstream Segment Results............... 75
Corporate and Other Segment Results...... 76
Environmental Expenditures............... 77
Tax Matters.............................. 78
Year 2000................................ 79
European Monetary Union.................. 80
Restructuring............................ 81
New Accounting Standards................. 81
Market Risks............................. 82
Business of DuPont......................... 86
General.................................. 86
Reportable Segments...................... 86
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Recent Developments........................... 88
Business of Conoco.............................. 89
General....................................... 89
Business Strategy............................. 89
Conoco History................................ 90
Financial Information -- Operating Segment and
Geographic Information...................... 90
Upstream...................................... 90
Downstream.................................... 104
Power......................................... 114
Core Values................................... 115
Environmental Regulation...................... 116
Sources of Supply............................. 118
Research and Development...................... 119
Patents and Trademarks........................ 119
Operating Hazards and Insurance............... 119
Properties.................................... 119
Employees..................................... 119
Legal Proceedings............................. 120
Management...................................... 121
Directors and Executive Officers.............. 121
Election and Compensation of Directors........ 124
Committees of the Board of Directors.......... 125
Stock Ownership of Directors and Executive
Officers.................................... 126
Compensation of Executive Officers............ 127
Retirement Benefits........................... 129
Severance Arrangements........................ 130
Principal Stockholders of Conoco Common Stock... 131
Principal Stockholders of DuPont Common Stock... 132
Shares Eligible for Future Sale................. 132
Description of Conoco Capital Stock............. 133
General....................................... 133
Common Stock.................................. 133
Preferred Stock............................... 134
Anti-Takeover Effects of Certificate and
By-law Provisions........................... 135
Contractual Relations among Conoco, DuPont and
Related Entities............................ 139
Delaware Business Combination Statute......... 140
Limitations on Directors' Liability........... 140
Listing....................................... 141
Transfer Agent and Registrar.................. 141
Comparison of Rights of Holders of DuPont Common
Stock and Conoco Common Stock................. 142
Authorized Capital Structure and Liquidation
Rights...................................... 142
Dividend Policy............................... 142
Voting Rights................................. 142
Anti-Takeover Provisions...................... 143
Listing....................................... 145
Arrangements Between Conoco and DuPont.......... 146
Restructuring, Transfer and Separation
Agreement................................... 146
Intercompany Notes............................ 148
Tax Sharing Agreement......................... 148
Employee Matters Agreement.................... 149
Transitional Services Agreements.............. 150
Information Systems and Telecommunication
Carrier Transitional Services Agreements and
Facilities Lease Agreements................. 150
Natural Gas Supply Agreement.................. 150
Feedstock for DuPont's Sabine River Works
Plant....................................... 150
Motor Carrier Agreement....................... 150
Registration Rights Agreement................. 151
United States Federal Income Tax Consequences... 152
Legal Matters................................... 153
Experts......................................... 153
Where You Can Find More Information............. 154
Conoco Inc. Index to Consolidated Financial
Statements.................................... F-1
Schedule A -- Transactions Concerning Common
Stock of DuPont............................... A-1
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QUESTIONS AND ANSWERS
ABOUT THE EXCHANGE OFFER
Q1. WHY HAS DUPONT DECIDED TO SEPARATE CONOCO FROM THE REST OF DUPONT?
A1. As part of our increased focus on our materials and life sciences
businesses, in September 1998 our board of directors approved a plan to separate
our oil and gas business, operated through Conoco, from our other businesses.
We believe that separating Conoco from DuPont will:
- allow each company to independently access the capital markets;
- permit DuPont to expand its life sciences business, while at the same
time allowing Conoco to pursue its investment program in new and
capital-intensive oil and gas projects;
- facilitate future partnerships, combinations and other arrangements
between Conoco and other entities in the oil and gas business;
- allow each company to offer incentives to its employees that are more
closely linked to its performance;
- permit each company to focus its managerial and financial resources on
the growth of its business; and
- enhance both DuPont's and Conoco's abilities to engage in future
acquisitions in which their own stock is issued as consideration.
Q2. WHY DID DUPONT CHOOSE THE EXCHANGE OFFER AS THE WAY TO SEPARATE
CONOCO?
A2. DuPont believes the exchange offer is a tax efficient way to achieve
the goals outlined above. It allows you to adjust your investment between DuPont
and Conoco on a tax-free basis and provides you with the opportunity to receive
the anticipated premium referred to in question 11.
Q3. MAY I PARTICIPATE IN THE EXCHANGE OFFER?
A3. You may participate in the exchange offer only if you are a United
States person that holds DuPont shares. You are a United States person if you
are:
- an individual who is a United States citizen or United States resident
for United States federal income tax purposes;
- a corporation, partnership, limited liability company or other entity
created or organized in the United States or under the laws of the United
States or of any state within the United States;
- an estate which is subject to United States income tax on all of its
income, regardless of the source of such income; or
- a trust if a United States court is able to exercise primary supervision
over the administration of the trust, and one or more United States
persons have the authority to control all substantial decisions of the
trust. Such a trust includes, without limitation, any United States
pension trust organized under Section 401(a) of the Internal Revenue
Code.
You are urged to consult your tax advisor regarding your status as a United
States person to determine your eligibility to participate in the exchange
offer.
Q4. IF I AM NOT A UNITED STATES PERSON, MAY I STILL EXCHANGE MY DUPONT
SHARES?
A4. No. If you are not a United States person, you may not exchange your
DuPont shares for Conoco shares in the exchange offer. You may, however, sell
your DuPont shares in a substantially concurrent cash offer in which we are
offering to purchase for cash DuPont shares held by non-United States persons.
If you are not a United States person, you should contact D.F. King or your
broker for more information regarding the cash offer. United States persons are
not eligible to participate in the cash offer.
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Q5. HOW MANY SHARES OF CONOCO CLASS B COMMON STOCK WILL I RECEIVE FOR EACH
SHARE OF DUPONT COMMON STOCK THAT I TENDER?
A5. You will receive shares of Conoco Class B common stock for each
share of DuPont common stock that you validly tender in the exchange offer. This
is sometimes referred to in this document as the exchange ratio.
Q6. WHEN DOES THE EXCHANGE OFFER EXPIRE?
A6. The exchange offer period and withdrawal rights will expire at 12:00
midnight, New York City time, on , 1999, unless extended by DuPont.
You must tender your DuPont shares prior to this date if you wish to
participate.
Q7. HOW DO I PARTICIPATE IN THE EXCHANGE OFFER?
A7. The procedures you must follow to participate in the exchange offer
will depend on whether you hold your DuPont shares in certificated form, through
a bank or broker, through an employee benefit plan or through a Blueprint
brokerage account held at Merrill Lynch. For specific instructions about how to
participate, see "Summary -- Terms of the Exchange Offer -- Procedures for
tendering" on page 10, and "The Exchange Offer -- Procedures for Tendering
DuPont Shares" on page 27.
Q8. CAN I TENDER ONLY A PORTION OF MY DUPONT SHARES IN THE EXCHANGE OFFER?
A8. Yes. You may tender some or all of your DuPont shares.
Q9. WHAT DO I DO IF I WANT TO RETAIN MY DUPONT SHARES?
A9. If you want to retain your DuPont shares, you do not need to take any
action.
Q10. CAN I CHANGE MY MIND AFTER I TENDER MY DUPONT SHARES?
A10. Yes. You may withdraw tenders of your shares any time before the
exchange offer expires. If you change your mind again, you can retender your
DuPont shares by following the tender procedures again prior to the expiration
of the exchange offer.
Q11. WHAT IS THE ANTICIPATED PREMIUM?
A11. Based on the closing trading prices for shares of DuPont common stock
(NYSE: DD) and Conoco Class A common stock (NYSE: COC) on , 1999,
and assuming that Conoco Class B common stock trades at the same or a greater
price as Conoco Class A common stock, the exchange ratio would result in a
DuPont stockholder receiving Conoco shares with a market value greater than the
market value of the DuPont shares tendered. The Conoco Class B common stock may,
however, trade at a different price than the Conoco Class A common stock.
Because of this and because market prices for Conoco Class A common stock and
DuPont common stock may fluctuate over the course of the exchange offer, we
cannot predict what the amount of the premium, if any, will be at the closing of
the exchange offer or the prices at which Conoco or DuPont shares will trade
over time.
You can calculate the anticipated premium using the following formula:
(Exchange ratio) X (price of one share of
Conoco Class A common stock) - 1 X 100%
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Price of one DuPont share
For example: Assume a price of $ for a DuPont share and a price of
$ for a Conoco share -- the closing trading prices on the NYSE for shares of
DuPont common stock and Conoco Class A common stock on , 1999. At
an exchange ratio of shares of Conoco Class B common stock for each
5
7
DuPont share, and assuming the Class B common stock trades at the same price as
Conoco Class A common stock, the anticipated premium would be approximately
percent of the DuPont share price.
Q12. ARE THERE ANY CONDITIONS TO DUPONT'S OBLIGATION TO COMPLETE THE
EXCHANGE OFFER?
A12. Yes. We do not have to complete the exchange offer unless the
conditions outlined on pages 31-33 are satisfied. In particular, we will not
close the exchange offer unless enough DuPont shares are tendered so that at
least shares of Conoco Class B common stock can be exchanged. DuPont
may at any time waive any or all of the conditions to the exchange offer.
Q13. WHAT HAPPENS IF FEWER THAN DUPONT SHARES ARE TENDERED SUCH
THAT FEWER THAN 436.5 MILLION CONOCO SHARES WOULD BE EXCHANGED?
A13. We may choose from several alternatives, including divesting some or
all of our remaining shares in a spin-off, secondary sale or other disposition,
or retaining some of our Conoco shares. In a spin-off, some or all of the Conoco
shares still held by DuPont after the exchange offer is completed would be
distributed to the remaining DuPont stockholders on a pro rata basis. In a
secondary sale, we would sell all or a portion of any remaining shares in an
offering that would close following the exchange offer. Alternatively, we may
retain all or a portion of any remaining shares for no longer than five years on
terms consistent with the representations made to the Internal Revenue Service
in connection with the ruling discussed in question 15. However, shares of
Conoco Class B common stock representing at least 80 percent of the total voting
power of Conoco must be distributed in the exchange offer and any subsequent
spin-off taken together.
Q14. WHAT HAPPENS IF MORE THAN DUPONT SHARES ARE TENDERED, I.E., THE
EXCHANGE OFFER IS OVERSUBSCRIBED?
A14. If the exchange offer is oversubscribed, all DuPont shares that are
properly tendered will be accepted for exchange on a pro rata basis, except that
tenders by persons who own fewer than 100 shares of DuPont common stock, or
odd-lots, will not be subject to proration. Shares you own in a DuPont or DuPont
affiliated savings plan are not eligible for this preferential treatment.
Proration will be based on the number of DuPont shares each stockholder has
tendered in the offer, and not on the stockholder's aggregate ownership of
DuPont. Any shares not accepted for exchange as a result of proration will be
returned to tendering stockholders in book-entry form. Any fractional shares or
shares not tendered but represented by stock certificates sent in will be
returned in book-entry form. For information on book-entry, see "Book-Entry
Accounts" on page 30.
Q15. WILL I BE TAXED ON THE SHARES OF CONOCO THAT I RECEIVE IN THE
EXCHANGE OFFER?
A15. DuPont has received a tax opinion from Skadden, Arps, Slate, Meagher
& Flom LLP and a ruling from the IRS to the effect that, for United States
federal income tax purposes, the exchange offer and any subsequent spin-off will
generally be tax-free to DuPont stockholders. The tax opinion and the ruling do
not address state, local or foreign tax consequences that may be applicable to
DuPont stockholders. You should consult your tax advisor as to the particular
tax consequences to you of the exchange offer and any subsequent spin-off.
Q16. WHO SHOULD I CALL IF I HAVE QUESTIONS OR WANT COPIES OF ADDITIONAL
DOCUMENTS?
A16. You may call the information agent, D.F. King, at (800) 755-3105
(toll free) in the United States to ask any questions or to request additional
documents or (212) 269-5550 (collect) elsewhere.
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SUMMARY
As used in this document, unless the context requires otherwise, (1)
references to DuPont or "we" include E. I. du Pont de Nemours and Company and
its consolidated subsidiaries and (2) references to Conoco include Conoco Inc.,
its consolidated subsidiaries and its ownership interest in equity affiliates.
Unless the context otherwise indicates, we have assumed throughout this document
that the exchange offer is fully subscribed and that all shares of Conoco Class
B common stock held by DuPont are distributed through the exchange offer. This
summary highlights selected information from this document but may not contain
all the information that is important to you. To fully understand the exchange
offer and for a more complete description of the legal terms of the exchange
offer, you should read carefully this entire document and the documents to which
we have referred you. To find out how to obtain copies of these documents, see
"Where You Can Find More Information" on page 154.
E. I. DU PONT DE NEMOURS AND COMPANY
DuPont is a world leader in science and technology in a range of
disciplines, including high-performance materials, specialty chemicals,
pharmaceuticals and biotechnology. DuPont has a portfolio of 2,000 trademarks
and brands, including such well-known consumer brands as Lycra(R), Teflon(R),
Stainmaster(R), Kevlar(R), Nomex(R), Tyvek(R), Dacron(R), Cordura(R), Corian(R),
SilverStone(R), and Mylar(R). DuPont operates 200 manufacturing and processing
facilities in 65 countries worldwide.
DuPont presents its results in eight reportable segments:
- Agriculture & Nutrition,
- Nylon Enterprise,
- Performance Coating & Polymers,
- Pharmaceuticals,
- Pigments & Chemicals,
- Polyester Enterprise,
- Specialty Fibers, and
- Specialty Polymers.
The balance of DuPont's continuing operations is reported in another segment
consisting of DuPont's photomasks, safety resources and global services
businesses. DuPont also has petroleum operations conducted through Conoco, which
are reported in DuPont's financial statements as discontinued operations. DuPont
expects to divest the petroleum business from its operations through the
exchange offer. DuPont and its subsidiaries, excluding Conoco, employ
approximately 92,000 people worldwide and have annual revenues of approximately
$25 billion.
On March 10, 1999, DuPont announced the proposed creation of a tracking
stock for its life sciences businesses, which would be issued to all of its
stockholders. The amendment of DuPont's certificate of incorporation to create
this tracking stock, which is intended to provide investors an opportunity to
invest in a security the terms of which more closely track the economic
performance of DuPont's life sciences businesses, must be approved by DuPont
stockholders. After the issuance of the tracking stock, the existing DuPont
common stock is expected to more closely mirror the performance of its materials
businesses. DuPont anticipates that stockholder approval will be sought in the
first quarter of 2000. In February 1999, the Clinton administration proposed
changes to the federal income tax laws, as part of its budget package, that, if
enacted, could adversely affect the tax consequences relating to the issuance of
tracking stock and, as a result, could adversely affect DuPont's ability to
issue the tracking stock for its life sciences businesses. It is presently
unclear whether this proposal will be enacted into law and, if so, what form it
would take. In the event that the tracking stock proposal is not implemented,
DuPont is unable to estimate what effect, if any, this would have on the trading
price of DuPont common stock.
7
9
On March 15, 1999, DuPont agreed to effect a business combination with
Pioneer Hi-Bred International, Inc., the world's largest seed company, in a
stock and cash merger valued at approximately $7.7 billion. DuPont currently has
a 20 percent equity interest in Pioneer, as well as joint venture and other
arrangements with Pioneer. The merger is expected to close during the summer of
1999. For further details, see footnote 1 to "Unaudited Pro Forma Consolidated
Financial Statements of DuPont" on page 48.
For more details about DuPont's business, see page 86.
DuPont's principal executive office is located at 1007 Market Street,
Wilmington, Delaware 19898 and its telephone number is (302) 774-1000.
CONOCO INC.
Conoco is a major, integrated, global energy company operating in 40
countries worldwide. Conoco was founded in 1875 and acquired by DuPont in 1981
and is involved in both the upstream and downstream operating segments of the
petroleum industry. Upstream activities include exploring for, and developing,
producing and selling crude oil, natural gas and natural gas liquids. Downstream
activities include refining crude oil and other feedstocks into petroleum
products, buying and selling crude oil and refined products and transporting,
distributing and marketing petroleum products. Conoco is also engaged in
developing and operating power facilities.
As of December 31, 1998, Conoco had proved worldwide reserves of 2,622
million barrels of oil equivalent, 39 percent of which were natural gas. In this
document, natural gas volumes have been converted to barrels-of-oil-equivalent
using a ratio of 6,000 cubic feet of natural gas to one
barrel-of-oil-equivalent. Based on 1998 annual production of 213 million
barrels-of-oil-equivalent, excluding natural gas liquids from gas plant
ownership, Conoco had a reserve life of 12.3 years as of December 31, 1998. Over
the last five years, Conoco has replaced an average of 195 percent of the oil
and gas it produced each year. Conoco owns or has equity interests in nine
refineries worldwide, with a total crude oil and condensate processing capacity
of approximately 807,000 barrels per day. Conoco also has a marketing network of
approximately 7,900 outlets in the United States, Europe and Asia.
Based on public filings, for the year ended December 31, 1998, Conoco
ranked eighth in worldwide production of petroleum liquids by U.S.-based
companies, eleventh in natural gas production and eighth in refining throughput.
Over that same period, Conoco reported net income of $450 million, which
includes a net charge for special items of $271 million, on total revenues of
approximately $23 billion. For the first quarter of 1999, Conoco had net income
of $83 million on total revenues of $5.3 billion. For more details about
Conoco's business, see page 89.
Conoco's principal executive office is located at 600 North Dairy Ashford,
Houston, Texas 77079 and its telephone number is (281) 293-1000.
8
10
TERMS OF THE EXCHANGE OFFER
Terms of the exchange offer
(see page 25)................We are offering to exchange shares of Conoco
Class B common stock for each share of DuPont
common stock held by United States persons, up to
an aggregate of shares of DuPont common
stock tendered. You may tender all, some, or none
of your DuPont shares.
The exchange offer is available only to United
States persons, as explained on page 25. You are
urged to consult your tax advisor regarding your
status as a United States person.
All DuPont shares held by United States persons
properly tendered and not withdrawn will be
exchanged at the exchange ratio, on the terms and
subject to the conditions of the exchange offer,
including the proration provisions. We will
promptly return to stockholders any DuPont shares
not accepted for exchange following the
expiration of the exchange offer.
Expiration date; extension;
termination (see pages 25 and
31)..........................The exchange offer and withdrawal rights will
expire at 12:00 midnight, New York City time, on
, 1999, unless extended by DuPont.
You must tender your DuPont shares prior to this
date if you wish to participate. We may also
terminate the exchange offer in the circumstances
described on page 31.
Proration; odd-lots (see page
26)............................If more than DuPont shares are tendered,
we will accept all DuPont shares properly
tendered on a pro rata basis. We will announce
the preliminary proration factor by press release
promptly after the exchange offer expires. We
expect to announce any final proration factor
approximately seven business days after the
expiration date.
If you own fewer than 100 shares of DuPont common
stock as of , 1999, and tender all of
these shares for exchange, you may request
preferential treatment by completing the box
captioned "Odd-Lot Shares" on the letter of
transmittal and, if applicable, on the notice of
guaranteed delivery. If your odd-lot shares are
held by a broker for your account, you can
contact the broker and request the preferential
treatment. All of your shares will be accepted
for exchange without proration if the exchange
offer is completed. Shares you own in a DuPont or
DuPont affiliated savings plan are not eligible
for this preferential treatment. However, shares
you own in a Blueprint brokerage account at
Merrill Lynch are eligible for this preferential
treatment.
Divestment of any remaining
Conoco shares..................If the number of DuPont shares tendered is such
that fewer than 436.5 million shares of Conoco
Class B common stock would be exchanged for those
DuPont shares, some or all of the Conoco Class B
common stock still held by us after the exchange
offer is completed may be distributed to the
remaining DuPont stockholders on a pro rata basis
through a spin-off, sold in a secondary offering
or otherwise disposed of. Alternatively, we may
retain all or a portion of any
9
11
remaining Conoco shares for up to five years on
terms consistent with representations made to the
IRS.
Withdrawal rights (see page
29)............................You may withdraw tenders of your DuPont shares at
any time before the exchange offer expires. If
you change your mind again, you may retender your
DuPont shares by following the exchange offer
procedures again prior to the expiration of the
exchange offer.
Conditions of the exchange
offer (see page 30)............The exchange offer is subject to various
conditions, including that at least DuPont
shares are tendered.
Procedures for tendering (see
pages 26-27).................If you hold certificates for DuPont shares, you
must complete and sign the letter of transmittal
designating the number of DuPont shares you wish
to tender. Send it, together with your DuPont
share certificates and any other documents
required by the letter of transmittal, by
registered mail, return receipt requested, so
that it is received by the exchange agent at one
of the addresses listed on the back cover of this
document before the expiration of the exchange
offer on , 1999.
If you hold DuPont shares through a broker, you
should receive instructions from your broker on
how to participate. In this situation, you do not
need to complete the letter of transmittal.
Please contact your broker directly if you have
not yet received instructions. Some financial
institutions may also effect tenders by
book-entry transfer through The Depository Trust
Company.
If you hold certificates for DuPont shares or if
you hold DuPont shares through a broker, you may
also comply with the procedures for guaranteed
delivery.
If you participate in a DuPont or a DuPont
affiliated company savings plan listed on page
28, or hold shares in a Blueprint brokerage
account at Merrill Lynch, you will receive
separate instructions from the trustee or Merrill
Lynch on how to tender these DuPont shares. You
may not use the letter of transmittal to tender
shares held under any such plan.
Delivery of Conoco Class B
common stock.................We will deliver shares of Conoco Class B common
stock by book-entry transfer as soon as
practicable after acceptance of DuPont shares for
exchange.
Comparative per share market
price information (see pages 34
and 35)......................The Conoco Class B common stock has been approved
for listing on the NYSE under the symbol "COC.B."
Shares of DuPont and Conoco Class A common stock
are currently listed and traded on the NYSE. The
DuPont common stock is traded under the symbol
"DD," and the Conoco Class A common stock is
traded under the symbol "COC." Upon the closing
of the exchange offer, the symbol for the Conoco
Class A common stock will be changed to "COC.A."
Holders of Conoco Class A common stock and Class
B common stock generally have identical rights,
including dividend and liquidation rights, except
that holders of Conoco Class A common stock are
10
12
entitled to one vote per share, while holders of
Conoco Class B common stock are entitled to five
votes per share. The Conoco Class B common stock
is anticipated to trade in a similar price range
as the Class A common stock. We cannot, however,
assure that this will occur.
On March 19, 1999, the last trading day before
the initial filing of the registration statement
relating to the exchange offer, the closing sale
price of DuPont common stock on the NYSE was
$56 5/8 and the closing sale price of Conoco Class
A common stock was $24. On , 1999,
the last trading day before the start of the
exchange offer, the closing sale price of DuPont
common stock on the NYSE was $ , and the
closing sale price of Conoco Class A common stock
on the NYSE was $ .
United States federal income
tax consequences (see page
151).........................We have received a tax opinion from Skadden,
Arps, Slate, Meagher & Flom LLP and a ruling from
the IRS to the effect that the exchange offer and
any subsequent spin-off generally will be
tax-free to DuPont and its stockholders. Each
stockholder should consult his or her tax advisor
as to the particular tax consequences of the
exchange offer and any subsequent spin-off.
No appraisal rights............No appraisal rights are available to stockholders
of DuPont or Conoco in connection with the
exchange offer.
Exchange agent.................First Chicago Trust Company of New York
Information agent..............D.F. King & Co., Inc.
Dealer manager.................Morgan Stanley & Co. Incorporated
Risk factors (see page 17).....You should consider carefully the matters
described under the caption "Risk Factors," as
well as the other information set forth in this
document.
Determining whether to
participate in the exchange
offer........................Neither DuPont nor Conoco nor any of their
directors makes any recommendation as to whether
you should tender your DuPont shares. You must
make your own decision whether to tender and, if
so, how many shares to tender after reading this
document and consulting with your advisors based
on your own financial position and requirements.
In addition, you should consult your tax advisor
regarding your status as a United States person
to determine your eligibility to participate in
the exchange offer. We urge you to read this
document very carefully.
11
13
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA OF DUPONT
The following table contains summary consolidated historical and pro forma
financial data of DuPont's continuing operations as of the dates and for the
periods indicated. The pro forma information is provided to aid in your analysis
of the financial aspects of the exchange offer and cash offer. This information
may not necessarily reflect the results of operations, financial position and
cash flows of DuPont in the future. The information is only a summary and you
should read it together with the pro forma unaudited consolidated financial
statements of DuPont included elsewhere in this document and with the
consolidated financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" located in the DuPont 1998 Form
10-K and the DuPont Form 10-Q for the quarter ended March 31, 1999, which we
have filed with the SEC, and which we have incorporated in this document by
reference. To find out where you can obtain copies of DuPont's SEC filings, see
"Where You Can Find More Information" on page 154.
The pro forma financial data for DuPont give effect to the following
transactions and events:
- the split-off of Conoco through an exchange of 100 percent of Conoco
Class B common stock held by DuPont for DuPont common stock held by
United States persons.
- a cash offer to purchase a predetermined number of shares of DuPont
common stock held by persons that are not United States persons.
- various payments received by DuPont from Conoco in connection with
Conoco's repayment of intercompany indebtedness to DuPont as part of the
separation:
-- receipt by DuPont of Conoco's initial public offering proceeds of
$4.2 billion in October 1998.
-- receipt by DuPont in April 1999 of $3,970 million from Conoco's sale
of senior debt securities.
-- receipt by DuPont in May 1999 of $1,022 million from Conoco's sales
of commercial paper.
The historical financial statements of DuPont reflect these payments as of
the dates received. To the extent these events are not reflected in the
historical income statements, the unaudited pro forma income statements for
DuPont assume that these transactions occurred as of the beginning of the
periods presented. To the extent these events are not reflected in the
historical balance sheet, the unaudited pro forma balance sheet assumes that
these transactions occurred as of March 31, 1999.
12
14
DUPONT
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
---------------- -----------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
(UNAUDITED)
STATEMENT OF INCOME DATA: (IN MILLIONS, EXCEPT PER SHARE DATA)
Sales......................................... $6,295 $6,194 $24,767 $24,089 $23,644 $24,500 $22,518
Other Income.................................. 18(1) 297 981 1,005 1,101 797 674
------ ------ ------- ------- ------- ------- -------
Total...................................... 6,313 6,491 25,748 25,094 24,745 25,297 23,192
Cost of Goods Sold and Other Operating
Charges...................................... 3,873 4,049 15,664 15,564 15,314 15,572 14,498
Selling, General and Administrative
Expenses..................................... 535 479 2,115 2,061 2,119 2,283 2,215
Depreciation and Amortization................. 335 332 1,452 1,361 1,526 1,643 1,748
Research and Development Expense.............. 358 264 1,308 1,072 990 1,031 1,004
Interest Expense.............................. 96 127 520 389 409 449 343
Purchased In-Process Research and
Development.................................. 40 60 1,443 1,478 -- -- --
Employee Separation Costs and Write-down of
Assets....................................... -- 118 633 340 -- -- --
------ ------ ------- ------- ------- ------- -------
Total.................................. 5,237 5,429 23,135 22,265 20,358 20,978 19,808
Income from Continuing Operations Before
Income Taxes and Minority Interests.......... 1,076 1,062 2,613 2,829 4,387 4,319 3,384
Provision for Income Taxes.................... 432 417 941 1,354 1,416 1,432 1,164
Minority Interests in Earnings of Consolidated
Subsidiaries................................. 16 8 24 43 40 29 15
------ ------ ------- ------- ------- ------- -------
Income from Continuing Operations.......... $ 628 $ 637 $ 1,648 $ 1,432 $ 2,931 $ 2,858 $ 2,205
====== ====== ======= ======= ======= ======= =======
PRO FORMA AS PRO FORMA FOR
OF AND FOR THE THE YEAR ENDED
THREE MONTHS ENDED DECEMBER 31,
MARCH 31, 1999 1998
------------------ --------------
(UNAUDITED) (UNAUDITED)
STATEMENT OF INCOME DATA:
Sales......................................... $6,295 $24,767
Other Income.................................. 18 981
------ -------
Total...................................... 6,313 25,748
Cost of Goods Sold and Other Operating
Charges...................................... 3,873 15,664
Selling, General and Administrative
Expenses..................................... 535 2,115
Depreciation and Amortization................. 335 1,452
Research and Development Expense.............. 358 1,308
Interest Expense.............................. 119 516
Purchased In-Process Research and
Development.................................. 40 1,443
Employee Separation Costs and Write-down of
Assets....................................... -- 633
------ -------
Total.................................. 5,260 23,131
Income from Continuing Operations Before
Income Taxes and Minority Interests.......... 1,053 2,617
Provision for Income Taxes.................... 422 917
Minority Interests in Earnings of Consolidated
Subsidiaries................................. 16 24
------ -------
Income from Continuing Operations.......... $ 615 $ 1,676
====== =======
Basic Earnings Per Share of Common Stock --
Continuing Operations. $ .55 $ .56 $ 1.45 $ 1.26 $ 2.60 $ 2.43 $ 1.61
Diluted Earnings Per Share of Common Stock --
Continuing Operations........................ $ .55 $ .55 $ 1.43 $ 1.24 $ 2.56 $ 2.41 $ 1.60
Dividends Per Common Share.................... $ .35 $ .315 $ 1.365 $ 1.23 $ 1.115 $ 1.015 $ .91
Weighted Average Number of Shares Outstanding
(millions):
Basic........................................ 1,127 1,128 1,129 1,131 1,121 1,170 1,360
Diluted...................................... 1,138 1,146 1,145 1,150 1,140 1,183 1,371
OTHER DATA:
Cash Provided by Continuing
Operations................................... $ 147 $ 152 $ 4,132 $ 4,027 $ 4,109 $ 5,170 $ 3,697
Cash Used for Investment Activities of
Continuing Operations........................ (2,086) (1,040) (178) (4,022) (987) (1,286) (1,744)
Cash Used for Financing Activities............ 2,242 2,103 (3,053) (451) (4,018) (3,571) (2,878)
BALANCE SHEET DATA:
Cash and Cash Equivalents..................... $1,003 $2,024 $ 1,059 $ 1,004 $ 1,066 $ 1,408 $ 856
Working Capital............................... (3,872) (2,374) (2,374) (2,110) 15 (2,116) 3,208
Net Property, Plant and Equipment............. 14,817 13,092 14,131 12,601 10,959 11,389 11,385
Total Assets.................................. 41,967 39,797 38,536 36,689 32,342 32,748 32,577
Long-Term Borrowings and Capital Lease
Obligations.................................. 4,566 6,402 4,495 5,897 5,052 5,646 6,338
Minority Interests............................ 464 381 407 361 315 223 192
Stockholders' Equity.......................... 14,133 11,629 13,954 11,270 10,593 8,323 12,743
Basic Earnings Per Share of Common Stock --
Continuing Operations. $ .66(2) $ 1.79(2)
Diluted Earnings Per Share of Common Stock --
Continuing Operations........................ .65(2) 1.76(2)
Dividends Per Common Share....................
Weighted Average Number of Shares Outstanding
(millions):
Basic........................................ 931(2) 933(2)
Diluted...................................... 942(2) 948(2)
OTHER DATA:
Cash Provided by Continuing
Operations...................................
Cash Used for Investment Activities of
Continuing Operations........................
Cash Used for Financing Activities............
BALANCE SHEET DATA:
Cash and Cash Equivalents..................... $ 908
Working Capital............................... 104
Net Property, Plant and Equipment............. 14,817
Total Assets.................................. 33,222
Long-Term Borrowings and Capital Lease
Obligations.................................. 4,566
Minority Interests............................ 464
Stockholders' Equity.......................... 9,459
- ------------
(1) Includes an exchange loss of $131 on forward exchange contracts purchased in
1998 to fix in U.S. dollars the cash required to acquire Herberts, the
automotive coatings business of Hoechst AG. The purchase price for Herberts
was negotiated in German marks.
(2) Pro forma data are provided for illustrative purposes based on an assumed
exchange ratio as described on page 49.
13
15
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA OF CONOCO
The following table contains summary historical and pro forma financial
data of Conoco as of the dates and for the periods indicated. The pro forma
information is provided to aid in your analysis of the financial aspects of the
exchange offer. The information may not necessarily reflect the results of
operations, financial position and cash flows of Conoco in the future or what
the results of operations, financial position and cash flows would have been had
Conoco been a separate, stand-alone entity during all of the periods presented.
The information is only a summary and you should read it together with the
consolidated financial statements of Conoco, the pro forma financial statements
of Conoco and the other information about Conoco included elsewhere in this
document. You should also read the "Risk Factors" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations of Conoco" and
"Business of Conoco" sections of this document, which describe Conoco's
business, as well as a number of factors that have affected Conoco's financial
results, including declining crude oil and natural gas prices.
The pro forma financial data for Conoco give effect to the following
transactions and events:
- the split-off of Conoco through an exchange of 100 percent of Conoco
Class B common stock held by DuPont for DuPont common stock held by
United States persons; and
- various payments made by Conoco to DuPont in connection with Conoco's
repayment of intercompany indebtedness to DuPont as part of the
separation:
-- payment by Conoco to DuPont in October 1998 of $4.2 billion from
Conoco's initial public offering proceeds.
-- payment by Conoco to DuPont in April 1999 of $3,970 million from
Conoco's sale of senior debt securities.
-- payment by Conoco to DuPont in May 1999 of $1,022 million from Conoco's
sales of commercial paper.
To the extent these events are not reflected in the historical consolidated
income statements of Conoco, the unaudited pro forma consolidated income
statements assume that these transactions occurred as of the beginning of the
periods presented. To the extent these events are not reflected in the
historical balance sheet, the unaudited pro forma balance sheet assumes that
these transactions occurred as of March 31, 1999.
Except where otherwise indicated, reserve and production information in the
following tables includes Conoco's share of equity affiliates. Oil includes
crude oil, condensate and natural gas liquids expected to be removed for
Conoco's account from its natural gas production.
14
16
CONOCO
PRO FORMA AS
THREE MONTHS ADJUSTED FOR THE PRO FORMA AS
ENDED THREE MONTHS ADJUSTED FOR
MARCH 31, YEAR ENDED DECEMBER 31, ENDED THE YEAR ENDED
--------------- ----------------------------------------------- MARCH 31, DECEMBER 31,
1999 1998 1998 1997 1996 1995 1994 1999 1998
---- ---- ---- ---- ---- ---- ---- ---------------- --------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA:
Total Revenues(1)............. $5,335 $5,834 $23,168 $26,263 $24,416 $20,518 $19,433 $5,335 $23,110
Cost of Goods Sold and Other
Operating Expenses........... 3,005 3,393 13,840 16,226 14,560 11,146 10,640 3,005 13,840
Selling, General and
Administrative Expenses...... 186 183 736 726 755 728 679 186 736
Stock Option Provision........ -- -- 236 -- -- -- -- -- 236
Exploration Expenses(2)....... 46 67 380 457 404 331 357 46 380
Depreciation, Depletion and
Amortization................. 302 267 1,113 1,179 1,085 1,067 1,244 302 1,113
Taxes Other Than on
Income(1).................... 1,591 1,417 5,970 5,532 5,637 5,823 5,477 1,591 5,970
Interest and Debt Expense..... 71 1 199 36 74 74 63 71 225
------ ------ ------- ------- ------- ------- ------- ------ -------
Income Before Income Taxes.... 134 506 694 2,107 1,901 1,349 973 134 610
Provision for Income Taxes.... 51 190 244 1,010 1,038 774 551 51 218
------ ------ ------- ------- ------- ------- ------- ------ -------
Net Income(3).............. $ 83 $ 316 $ 450 $ 1,097 $ 863 $ 575 $ 422 $ 83 $ 392
====== ====== ======= ======= ======= ======= ======= ====== =======
Segment Net Income:
Upstream:
United States................ $ 40 $ 88 $ 219 $ 445 $ 314 $ 258 $ 248
International................ 68 143 283 439 367 234 250
Downstream:
United States................ 17 34 135 216 172 112 104
International................ 23 57 156 91 117 121 137
Corporate and Other(3)........ (65) (6) (343) (94) (107) (150) (317)
------ ------ ------- ------- ------- ------- -------
$ 83 $ 316 $ 450 $ 1,097 $ 863 $ 575 $ 422
====== ====== ======= ======= ======= ======= =======
Earnings Per Share
Basic........................ $ .13 $ .72 $ .95 $ 2.51 $ 1.98 $ 1.32 $ .97 $ .13 $ .62
Diluted...................... $ .13 $ .72 $ .95 $ 2.51 $ 1.98 $ 1.32 $ .97 $ .13 $ .62
Weighted Average Shares
Outstanding
Basic........................ 628 437 474 437 437 437 437 628 628
Diluted...................... 635 437 475 437 437 437 437 635 637
Dividends Per Share of Common
Stock(4)..................... $ .14 $ -- $ -- $ -- $ -- $ -- $ --
OTHER DATA:
Cash Provided By Operations... $ 393 $ 12 $ 1,373 $ 2,876 $ 2,396 $ 1,924 $ 2,143
Capital Expenditures and
Investments.................. 415 431 2,516 3,114 1,944 1,837 1,665
Cash Used for Investing
Activities................... 547 165 1,598 2,037 1,647 1,677 1,364
Cash Used for (Provided from)
Financing Activities......... (188) 262 555 499 187 313 773
Cash Exploration Expense...... 28 43 217 286 262 204 200
- ------------
(1) Includes petroleum excise taxes of $5,801, $5,349, $5,461, $5,655, and
$5,291 for 1998, 1997, 1996, 1995 and 1994, and of $1,546 and $1,373 for the
first three months of 1999 and 1998. Petroleum excise taxes for pro forma
presentation are the same as in the applicable historical periods presented.
(2) Includes cash exploration overhead and operating expense, DD&A, dry hole
costs and impairments of unproved properties.
(3) Includes after-tax exchange gains (losses) of $32, $21, $(7), $(40) and
$(143) for 1998, 1997, 1996, 1995 and 1994, $2 and $7 for the first three
months of 1999 and 1998 and $23 for the pro forma as adjusted for the year
ended December 31, 1998 and $2 pro forma as adjusted for the three months
ended March 31, 1999.
(4) Conoco's initial dividend was determined on a pro rata basis covering the
period from October 27, 1998, the closing date of Conoco's initial public
offering, to December 31, 1998, and is equivalent to $.19 per share for a
full quarter.
15
17
CONOCO
THREE MONTHS PRO FORMA
ENDED AS ADJUSTED
MARCH 31, DECEMBER 31, AS OF
------------ ----------------------------------------------- MARCH 31,
1999 1998 1998 1997 1996 1995 1994 1999
---- ---- ---- ---- ---- ---- ---- ------------
(IN MILLIONS)
BALANCE SHEET DATA:
Cash and Cash Equivalents................... $ 425 $ 729 $ 394 $ 1,147 $ 846 $ 286 $ 319 $ 399
Working Capital............................. (706)(1) 569 45 567 862 999 1,790 (706)(1)
Net Property, Plant and Equipment........... 11,230 10,831 11,413 10,828 10,082 9,758 9,522 11,230
Total Assets................................ 16,080 16,716 16,075 17,062 15,226 14,229 15,271 16,082
Long-Term Borrowings -- Related Parties..... 3,970 1,567 4,596 1,450 2,287 2,141 2,279 --
Other Long-Term Borrowings and Capital Lease
Obligations............................... 93 103 93 106 101 65 342 4,091
Total Stockholders' Equity/Owner's Net
Investment................................ 4,342 7,936 4,438 7,896 6,579 6,754 7,274 4,342
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
OPERATING DATA:
Proved Reserves at December 31:
Oil (MMbbls).............................................. 1,591 1,624 973 977 988
Natural Gas (Bcf)......................................... 6,183 5,861 5,396 5,048 4,674
Total Proved Reserves (MMBOE)............................. 2,622 2,601 1,872 1,818 1,767
International Proved Reserves (% of Total).................. 73% 73% 65% 63% 61%
Reserve Replacement Ratio................................... 110% 448% 126% 127% 157%
Reserve Life (years)(2)..................................... 12.3 12.4 8.9 9.3 8.2
Finding and Development Costs
per BOE(3)................................................ $ 4.03 $ 3.63 $ 4.84 $ 5.39 $ 6.24
Average Daily Production:
Oil (Mbbls/day)........................................... 348 374 374 346 367
Natural Gas (MMcf/day).................................... 1,411 1,203 1,211 1,126 1,327
Total Production (MBOE/day)............................... 583 575 576 534 588
Average Production Costs per BOE(4)......................... $ 3.95 $ 4.21 $ 3.84 $ 3.92 $ 3.59
Refinery Capacity at December 31 (Mbbls/day)(5)............. 807 754 743 621 602
Refinery Utilization(5)..................................... 92% 91% 83% 97% 99%
Total Refinery Inputs (Mbbls/day)(6)........................ 823 780 732 721 697
Sales of Refined Products (Mbbls/day)....................... 1,049 1,048 998 983 931
Retail Marketing Outlets at December 31(7):
United States............................................. 4,897 4,903 4,976 5,125 5,196
International............................................. 3,023 2,971 2,874 2,390 2,438
- ------------
(1) The working capital deficit results from the issuance of short-term
commercial paper to repay the remaining related-party debt owed to DuPont.
For detailed information, see Conoco's unaudited pro forma financial
statements on page 52.
(2) Total proved reserves at December 31 divided by annual production, excluding
natural gas liquids from gas plant ownership.
(3) Finding and development costs per barrel-of-oil-equivalent represent a
trailing five-year average for each year displayed.
(4) Excludes equity affiliates and processed natural gas liquids.
(5) Based on rated capacity to process crude oil and condensate excluding other
feedstocks.
(6) Includes crude oil, condensate and other feedstocks. This does not include
Conoco's indirect 1.2 percent interest in a 95,000 barrel per day refinery
in Mersin, Turkey, acquired as a result of Conoco's marketing joint venture
in Turkey.
(7) Represents outlets owned by Conoco and others that sell Conoco's refined
products.
16
18
RECENT RESULTS
Although Conoco's results from operations for the second quarter of 1999
are not finalized, the following statements reflect Conoco's expectations based
on currently available information.
Crude oil prices have risen globally in the second quarter of 1999 due
primarily to supply reductions resulting from the lower production rates
implemented by OPEC countries during the first quarter of 1999. Conoco's
worldwide net realized crude oil price for the second quarter of 1999 will be
higher than the $11.00 per barrel price realized in the first quarter of 1999
and the $12.45 per barrel price realized in the second quarter of 1998. By
contrast, lower seasonal demand, particularly outside the U.S., is expected to
result in worldwide net realized natural gas prices being lower than the $2.08
per thousand cubic feet price realized in the first quarter of 1999 and the
$2.15 per thousand cubic feet realized in the second quarter of 1998.
Worldwide crude oil production in the second quarter of 1999 will be
slightly lower than the 326,000 barrels per day of production in the first
quarter of 1999 but at similar levels versus the second quarter of 1998. Lower
seasonal demand, primarily from outside of the U.S., is expected to result in
reduced worldwide natural gas deliveries in the second quarter of 1999 versus
the 1,816 million cubic feet per day produced in the previous quarter. However,
natural gas production is much higher (approximately 15 percent) than the second
quarter of 1998, due to the start-up of the Britannia field in the U.K. sector
of the North Sea and higher production from the Lobo field in south Texas.
Downstream refining volumes will be slightly higher than in the first
quarter of 1999, and also higher than the second quarter of 1998, due primarily
to the startup of the Melaka refinery in Malaysia. Refining margins continue to
be depressed in the second quarter of 1999.
Additionally, non-operating expenses will be slightly higher than the first
quarter of 1999, but significantly higher than the second quarter of 1998 due to
higher interest expense resulting from Conoco's separation from DuPont.
Based on these factors, Conoco expects 1999 second quarter net income to be
slightly higher than the $83 million reported in the first quarter of 1999.
These expectations include an approximate $19 million charge related to a
recently completed but unsuccessful exploration well drilled in New Zealand.
Actual results may differ materially from these second quarter estimates.
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RISK FACTORS
You should consider carefully all of the information set forth or
incorporated by reference in this document and, in particular, the following
risk factors in considering whether or not to tender your DuPont shares under
the exchange offer. In addition, for a discussion of additional uncertainties
associated with (1) the businesses of DuPont and Conoco and (2) forward-looking
statements in this document, please see "Special Note on Forward-Looking
Information" on page 37.
TENDERING AND NONTENDERING STOCKHOLDERS ARE AFFECTED DIFFERENTLY BY THE EXCHANGE
OFFER
Your investment will be subject to different risks as a result of the
exchange offer, regardless of whether you tender your DuPont shares. DuPont will
no longer have access to the cash flow, assets and operations of Conoco, which
may adversely affect its ability to finance:
- its research and development activities,
- capital expenditures,
- working capital,
- dividends and
- other general corporate requirements.
Whether you tender your shares or not, the shares you hold after the exchange
offer will be in a company which is very different from the company in which you
held shares before the exchange offer.
THE IRS MAY TREAT THE TRANSACTION AS TAXABLE TO DUPONT AND ITS STOCKHOLDERS IF
REPRESENTATIONS MADE TO THE IRS WERE INACCURATE OR IF UNDERTAKINGS MADE TO THE
IRS ARE NOT COMPLIED WITH
DuPont has received a ruling from the IRS to the effect that, for United
States federal income tax purposes, the exchange offer and any subsequent
spin-off will generally be tax-free to DuPont stockholders and to DuPont. DuPont
and its stockholders that receive Conoco shares could be subject to a material
amount of taxes as a result of the exchange offer, or any subsequent spin-off,
if Conoco and DuPont do not comply with the undertakings they made to the IRS in
connection with obtaining the ruling, or if the representations made by Conoco
and DuPont to the IRS in connection with obtaining the ruling are determined to
be inaccurate. Conoco will be liable to DuPont for any corporate level taxes
incurred by DuPont to the extent such taxes are attributable to specified
actions or failures to act by Conoco, or to specified transactions involving
Conoco following the exchange offer and any subsequent spin-off. For a
description of material United States federal income tax consequences to DuPont
stockholders of the exchange offer and any subsequent spin-off, see "United
States Federal Income Tax Consequences" on page 152. For a summary of DuPont's
and Conoco's obligations in connection with obtaining the ruling and potential
tax liabilities if the transaction is held to be taxable, see "Arrangements
Between Conoco and DuPont -- Tax Sharing Agreement" on page 148.
TENDERING STOCKHOLDERS MAY NOT RECEIVE ANY PREMIUM
DuPont cannot predict whether there will be a premium at the end of the
exchange offer. Accordingly, if you tender your DuPont shares, you may not
receive any premium. The anticipated premium is based on the market prices for
Conoco Class A common stock and DuPont common stock immediately prior to the
commencement of the exchange offer. Any premium to be received by DuPont
stockholders participating in the exchange offer will depend on the prices for
DuPont shares and Conoco Class B common stock at the closing of the exchange
offer. DuPont also cannot predict the prices at which shares of Conoco or DuPont
will trade over time.
MARKET PRICES FOR CONOCO CLASS B COMMON STOCK MAY VARY FROM MARKET PRICES FOR
CONOCO CLASS A COMMON STOCK
Market prices for Conoco Class B common stock may not be the same as market
prices for Conoco Class A common stock. Although the Conoco Class B common stock
has substantially identical rights to the Class A common stock, other than
voting rights, it is nevertheless possible that market prices for the Conoco
Class B common stock could be lower than those of the Conoco Class A common
stock.
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THE SPLIT-OFF WILL CAUSE DUPONT'S ASSETS AND TOTAL CAPITALIZATION TO DECREASE
Assuming the exchange offer is fully subscribed, DuPont will no longer own
any of the outstanding stock of Conoco. Accordingly, DuPont's balance sheet and
income statement will no longer reflect the assets and operations of Conoco, and
the total market capitalization of DuPont is expected to decrease considerably.
Upon completion of the exchange offer, DuPont will no longer have access to the
cash flow provided by Conoco. In the past, DuPont has utilized this cash flow to
finance research and development activities, capital expenditures, working
capital, dividends and for other general corporate purposes. For more
information on the financial effect on DuPont of the split-off, see "Unaudited
Pro Forma Consolidated Financial Statements of DuPont" on page 43.
LOW OIL AND GAS PRICES HAVE NEGATIVELY AFFECTED CONOCO'S FINANCIAL RESULTS AND
MAY CONTINUE TO DO SO IN THE FUTURE
Crude oil prices declined substantially in 1998 and in early 1999 and these
depressed prices could reoccur. Decreases in crude oil and natural gas prices
and refined product margins adversely affect Conoco. Lower crude oil and natural
gas prices had a significant negative impact on Conoco's financial results in
1998 and in the first quarter of 1999. Conoco's net income fell 59 percent in
1998 compared to 1997. As a result of reduced crude oil and petroleum product
price levels in 1998, Conoco wrote down its inventories by $97 million in the
fourth quarter of 1998 in accordance with Conoco's inventory valuation policy.
Future declines in commodity prices could necessitate further write-downs. Lower
crude oil and natural gas prices may reduce the amount of oil and natural gas
reserves Conoco can produce economically, and existing contracts that Conoco has
entered into may become uneconomic.
Conoco has no control over many factors affecting prices for its products.
Prices for crude oil, natural gas, and refined products may fluctuate widely in
response to changes in global and regional supply, political developments and
the ability of the Organization of Petroleum Exporting Countries and other
producing nations to set and maintain production levels and prices. Prices for
crude oil, natural gas and refined products are also affected by changes in
demand for these products, which may result from global events, as well as
supply and demand in industrial markets, such as the steel and aluminum markets.
For a discussion of recent oil and gas prices and their effect on Conoco, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Conoco" on pages 69-70 and 72-73.
GLOBAL POLITICAL AND ECONOMIC DEVELOPMENTS MAY HURT CONOCO'S OPERATIONS
Local political and economic factors in international markets may have a
material adverse effect on Conoco. Approximately 43 percent of Conoco's sales in
1998 were derived from markets outside the United States, and approximately 73
percent of Conoco's proved reserves at December 31, 1998 were located outside of
the United States.
There are many risks associated with operations in international markets,
including changes in foreign governmental policies relating to crude oil,
natural gas or refined product pricing and taxation, other political, economic
or diplomatic developments, changing political conditions and international
monetary fluctuations. These risks include:
- political and economic instability or war;
- the possibility that a foreign government may seize Conoco's property
with or without compensation;
- confiscatory taxation;
- a foreign government attempting to renegotiate or revoke existing
contractual arrangements; and
- fluctuating currency values, hard currency shortages and currency
controls.
Recent turmoil in regions such as Russia, Southeast Asia and South America has
subjected Conoco's operations in these regions to increased risks.
Actions of the United States government through tax and other legislation,
executive order and commercial restrictions could adversely affect Conoco's
operating profitability both in the U.S. and overseas. The United States
government can prevent or restrict Conoco from doing business in foreign
countries. These restrictions and those of foreign governments have in the past
limited Conoco's ability to operate in or gain access to
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opportunities in various countries. Various agencies of the United States and
other governments have from time to time imposed restrictions on Conoco's
ability to operate in or gain attractive opportunities in various countries.
Actions by both the United States and host governments have affected operations
significantly in the past and will continue to do so in the future.
Conoco is also exposed to risks associated with fluctuations in foreign
currency exchange rates as indicated in "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Conoco -- Market
Risks -- Foreign Currency Risk" on page 85.
CONOCO AND DUPONT MAY HAVE CONFLICTS OF INTEREST
Conflicts of interest may arise between Conoco and DuPont in a number of
areas relating to their past and ongoing relationships including the nature,
quality and pricing of services rendered by the parties to each other. A
majority of Conoco's current board of directors are designees of DuPont. In
addition, several current members of Conoco's board hold positions with DuPont.
Following the exchange offer it is expected that only one person will be a
director on both DuPont's and Conoco's board of directors, although depending on
the level of any remaining shareholdings in Conoco, DuPont may retain the right
to designate up to two directors on Conoco's board. The director holding
positions in both companies, as well as the other directors designated by
DuPont, may face conflicts of interest with respect to such matters as
acquisitions, finances and other corporate opportunities that might be suitable
for both Conoco and DuPont. For more information on the connections between
Conoco's directors and DuPont, see "Management -- Directors and Executive
Officers" on page 121.
For purposes of governing their ongoing relationship, Conoco and DuPont
have entered into various agreements involving the provision of services such as
natural gas and gas liquids supply, technical, processing, purchasing, legal and
computer services. These agreements were negotiated in the context of a
parent-subsidiary relationship. As a result, these agreements or the related
transactions may have been on terms less favorable to Conoco than could have
been obtained from unaffiliated third parties. For more information on these
intercompany agreements, see "Arrangements Between Conoco and DuPont" on page
146.
THE OIL AND GAS RESERVES DATA IN THIS DOCUMENT ARE ONLY ESTIMATES, AND MAY PROVE
TO BE INACCURATE
The reserve data included in this document represent estimates only. Actual
production, revenues and expenditures with respect to Conoco's reserves will
probably vary from these estimates, and such variances may be material. Many of
the factors, assumptions and variables involved in estimating reserves are
beyond the control of Conoco, and may prove to be incorrect over time.
The reliability of reserve estimates depends on the quality and quantity of
technical and economic data, the production performance of the reservoirs and
extensive engineering judgment. Results of drilling, testing and production
after the date of the estimates may require substantial upward or downward
revisions. Adverse changes in economic conditions, including a drop in crude oil
or natural gas prices, may render it uneconomical to produce reserves that are
more expensive to produce. For more information on Conoco's oil and gas reserves
data, see "Business of Conoco -- Upstream" on page 90.
CONOCO'S GROWTH DEPENDS ON FINDING NEW RESERVES
Conoco's ability to achieve its growth objectives depends upon its success
in finding, acquiring or gaining access to additional reserves. Conoco's future
drilling, exploration and acquisition activities may not be successful. If these
activities are unsuccessful, this failure would have an adverse effect on
Conoco's future results of operations and financial condition.
In general, production from oil and natural gas properties declines as
reserves are depleted, with the rate of decline depending on reservoir
characteristics. If Conoco does not conduct successful exploration and
development activities, or acquire properties containing proved reserves, its
total proved reserves will decline.
Conoco's exploration and development activities expose it to inherent
drilling risks, including the risk that it will not find any economically
productive natural gas or oil reservoirs. The costs of drilling, completing and
operating wells are often uncertain, and numerous factors beyond Conoco's
control may cause drilling operations to be curtailed, delayed or cancelled.
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RISK OF FUTURE ACQUISITIONS AND OTHER TRANSACTIONS BY DUPONT AND CONOCO
Each of DuPont and Conoco, in the ordinary course and on a regular basis,
engages in discussions with other companies in their respective industries
concerning possible acquisitions, divestitures, mergers, joint ventures,
research alliances and other types of transactions, many of which are or could
be material to DuPont or Conoco. Such transactions are often dilutive to
earnings, particularly on a pro forma basis and in the early years following
their completion. In particular, DuPont is currently engaged in discussions in a
number of different areas, including pharmaceuticals, with other companies
relating to transactions of the types described above. In this regard, DuPont
announced at its annual meeting of stockholders in April 1999 that it would seek
to enter into an alliance to strengthen its pharmaceutical business.
DuPont has also entered into a merger agreement to acquire the portion of
Pioneer it does not currently own for approximately $7.7 billion in cash and
DuPont stock. In the year 2000, the first full year of combined operations with
Pioneer, DuPont expects fully diluted earnings per share, excluding the impact
of nonrecurring items, to be reduced by about seven percent as the result of
increased interest expense and purchase price amortization associated with the
acquisition. Preliminary analysis indicates that 1999 pro forma earnings,
assuming the merger took place on January 1, 1999, could show even more dilution
due to the required exclusion under pro forma rules of future operating benefits
DuPont expects to realize from the combined operations. Actual dilution will be
dependent on many factors including earnings of DuPont and Pioneer after the
merger, allocations of purchase price, including amounts assigned to purchased
in-process research and development, the number of DuPont shares acquired under
the exchange offer and cash offer, and the number of DuPont shares issued to
acquire Pioneer.
CONOCO MAY INCUR MATERIAL COSTS TO COMPLY WITH ENVIRONMENTAL REGULATIONS
Compliance with environmental regulations could have a material adverse
effect on Conoco. Conoco incurs, and expects to continue to incur, substantial
capital and operating costs to comply with increasingly complex laws and
regulations covering the protection of the environment, including costs to
remediate contamination at various owned and previously owned facilities and at
third-party sites where Conoco's products or wastes have been handled or
disposed.
New laws and regulations, the imposition of tougher requirements in
permits, increasingly strict enforcement of existing laws and regulations or the
discovery of previously unknown contamination may require future expenditures
to:
- modify operations;
- install pollution control equipment;
- perform site clean ups; or
- curtail Conoco's operations.
These future expenditures or curtailments could have a material adverse effect
on Conoco. For more information about environmental risks, see "Business of
Conoco -- Environmental Regulation" on page 116.
CHANGES IN GOVERNMENT REGULATIONS MAY IMPOSE PRICE CONTROLS AND LIMITATIONS ON
PRODUCTION OF OIL AND GAS
Conoco's operations are subject to extensive government regulations. From
time to time, regulatory agencies have imposed price controls and limitations on
production by restricting the rate of flow of oil and natural gas wells below
actual production capacity in order to conserve supplies of oil and natural gas.
Because legal requirements are frequently changed and subject to interpretation,
Conoco cannot predict the effect of these requirements.
POTENTIAL YEAR 2000 PROBLEMS MAY ADVERSELY AFFECT CONOCO'S BUSINESS
Many existing computer programs were designed and developed using only two
digits to represent the year of a date. This failure to consider the upcoming
change in the century could lead to the failure of computer applications or
create erroneous results by or at the year 2000. Failure by Conoco, its business
associates or other constituents, such as governments, to ensure their computer
systems are Year 2000 compliant on a timely basis could have a material adverse
effect on Conoco's financial position and results of operations. For more
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information about Year 2000 risks, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Conoco -- Year 2000" on page
79.
PROVISIONS IN CONOCO'S BY-LAWS, CERTIFICATE OF INCORPORATION, AND DELAWARE LAW
COULD DETER TAKEOVER ATTEMPTS
Conoco's certificate of incorporation and by-laws contain a number of
provisions that may discourage, delay or prevent a merger or acquisition of
control of Conoco without the approval of Conoco's board of directors.
Provisions of Delaware law may also discourage, delay or prevent someone from
acquiring or merging with Conoco. For a detailed explanation of these
provisions, see "Description of Conoco Capital Stock -- Anti-Takeover Effects of
Certificate and By-law Provisions."
THERE IS NO PUBLIC MARKET FOR CONOCO CLASS B COMMON STOCK AND AN ACTIVE TRADING
MARKET MAY NOT DEVELOP
Prior to the exchange offer, there has been no public market for the shares
of Conoco Class B common stock. Although the Conoco Class B common stock has
been approved for listing on the NYSE, an active trading market may not develop.
CONOCO MAY NOT PAY DIVIDENDS ON ITS COMMON STOCK
Conoco's shareholders may not receive future dividends. The amount of cash
dividends, if any, to be declared and paid will depend upon declaration by
Conoco's board of directors and upon Conoco's financial condition, results of
operations, cash flow, the level of its capital and exploration expenditures,
its future business prospects and other related matters that Conoco's board of
directors deems relevant.
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THE TRANSACTION
BACKGROUND AND PURPOSE
As part of DuPont's increased focus on its materials and life sciences
businesses, in May 1998 DuPont announced its intention to separate its oil and
gas business, operated by Conoco, from its other businesses.
In September 1998, following a thorough review of the various alternatives
for divesting its oil and gas business, DuPont's board of directors approved an
initial public offering for Conoco. In October 1998, Conoco completed its
initial public offering, selling to the public 191.5 million shares of Conoco
Class A common stock, representing approximately 30 percent of its total shares
outstanding and approximately eight percent of the total voting power of Conoco.
DuPont, through its ownership of all of the 436.5 million shares of Conoco Class
B common stock, retained approximately 70 percent of the total shares in, and
approximately 92 percent of the total voting power of, Conoco. Holders of Class
A common stock are entitled to one vote per share, while holders of Class B
common stock are entitled to five votes per share.
DuPont now intends to divest its remaining ownership interest in Conoco
through the exchange offer in which DuPont stockholders that are United States
persons may exchange some or all of their DuPont shares for the remaining Conoco
shares held by DuPont. If fewer than all of the Conoco shares held by DuPont are
distributed because too few DuPont shares are tendered, DuPont may pursue one of
several alternatives, including spinning off, selling or otherwise disposing of
or retaining some of its Conoco shares.
In a spin-off, DuPont would distribute some or all of its remaining Conoco
shares on a pro rata basis to all of its remaining stockholders. In a secondary
sale, DuPont would sell some or all of the remaining shares in an offering that
would close following the exchange offer. Alternatively, DuPont could retain all
or a portion of these remaining shares for no longer than five years on terms
that would comply with the representations made to the IRS in connection with
obtaining the ruling.
EFFECTS
If the exchange offer is fully subscribed, DuPont will no longer own any of
the outstanding stock of Conoco. Accordingly, DuPont's balance sheet and income
statement will no longer reflect the assets and operations of Conoco and the
total market capitalization of DuPont will decrease considerably.
DuPont stockholders will be affected by the exchange offer as follows:
- holders who tender all of their shares will, if all such shares are
accepted for exchange, no longer have an ownership interest in DuPont and
will no longer participate in any change in the value of DuPont;
- holders who exchange some, but not all, of their shares will have a
diminished ownership interest in DuPont and an increased ownership
interest in Conoco; and
- holders who do not tender any of their shares for exchange under the
exchange offer will have an increased ownership interest, on a percentage
basis, in DuPont.
Persons who remain DuPont stockholders after the exchange offer will own
shares in a company that no longer owns the Conoco oil and gas enterprise.
Conoco operations represented approximately 22 percent of total DuPont earnings
over the last five years.
DuPont may reissue any shares acquired by it in the exchange offer and
retained in treasury without further stockholder action for general or other
corporate purposes, including stock splits or dividends, acquisitions, raising
additional capital for use in DuPont's business and under DuPont savings plans.
NO APPRAISAL RIGHTS
Appraisal is a statutory remedy available to corporate minority
stockholders who object to extraordinary actions taken by their corporation.
This remedy allows dissenting stockholders to require the corporation to
repurchase their stock at a price equivalent to its value immediately prior to
the extraordinary corporate action. No appraisal rights are available to
stockholders of DuPont in connection with the exchange offer.
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REGULATORY APPROVALS
No filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976
are required in connection with the exchange offer generally. If a stockholder
of DuPont decides to participate in the exchange offer and consequently acquires
enough Conoco shares to exceed the $15 million threshold stated in the
regulations under this act, and if an exemption under those regulations does not
apply, the stockholder and DuPont would be required to make filings under this
act. A filing requirement could delay exchanges with that stockholder for
several months or more.
ACCOUNTING TREATMENT
The DuPont shares received by DuPont in the exchange offer will be recorded
as a decrease in DuPont's stockholders' equity, reflecting the decrease in
DuPont common stock outstanding at the market value of the Conoco shares
distributed as of the expiration date. The exchange offer will result in a net
financial gain to DuPont, after direct expenses of the disposition, and will be
reported as a gain on the disposal of the discontinued business. The gain from
the exchange offer will result from the difference between the market value and
the carrying value of the shares of Conoco Class B common stock distributed.
DuPont shares received by DuPont in connection with the cash offer will be
recorded as a decrease in DuPont's stockholders' equity, reflecting the decrease
in DuPont common stock outstanding at the cash amount paid for DuPont common
stock. The cash offer will not result in a gain or loss to DuPont.
In the event DuPont sells any Conoco Class B common stock, the gain on the
sale will be the difference between sale proceeds and DuPont's basis in the
shares sold, net of applicable expenses and taxes.
Any shares of Conoco Class B common stock that are distributed through a
possible spin-off will be accounted for as a dividend through a direct charge to
reinvested earnings. The amount of the dividend will be equal to DuPont's
carrying value of the shares of Conoco Class B common stock distributed. In
addition, reinvested earnings will also be charged for taxes paid, if any, on
the value of Conoco shares distributed in a spin-off to holders of DuPont common
stock that are not United States persons.
DuPont's disposition of Conoco shares will not in and of itself affect the
financial position or results of operations of Conoco.
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THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER
DuPont is offering to exchange shares of Conoco Class B common stock
for each share of DuPont common stock held by a United States person that is
validly tendered on the terms and subject to the conditions described below by
12:00 Midnight, New York City time, on , , 1999. DuPont may
extend this deadline under specified circumstances. The last day on which
tenders will be accepted, whether on or any later date to which the
exchange offer may be extended, is referred to as the expiration date. DuPont
stockholders may tender all, some or none of their shares.
The exchange offer is available only to United States persons. You are a
United States person if you are:
- an individual who is a United States citizen or United States resident
for United States federal income tax purposes;
- a corporation, partnership, limited liability company or other entity
created or organized in the United States or under the laws of the United
States or of any State within the United States;
- an estate which is subject to United States income tax on all of its
income, regardless of the source of such income; or
- a trust if a United States court is able to exercise primary supervision
over the administration of the trust, and one or more United States
persons have the authority to control all substantial decisions of the
trust. Such a trust includes, without limitation, any United States
pension trust organized under Section 401(a) of the Internal Revenue
Code.
You are urged to consult your tax advisor regarding your status as a United
States person to determine your eligibility to participate in the exchange
offer. DuPont reserves the right to exclude from the category of United States
persons individuals who have addresses in foreign jurisdictions where delivery
of the exchange offer may be prohibited by law. If you are not a United States
person, a substantially concurrent cash offer in which you can sell your DuPont
shares for cash is being made available to you. The cash offer is being made
only to non-United States persons. For more information regarding the cash
offer, you should contact D.F. King or your broker.
If you are a participant in an eligible DuPont or DuPont affiliated company
savings plan including an eligible Conoco savings plan, or have a Blueprint
account at Merrill Lynch, you may have an earlier cut-off date to decide to
tender your DuPont shares in order to allow the trustees, plan administrators or
Merrill Lynch sufficient time to process all the instructions and submit them to
the exchange agent prior to the exchange offer expiration. Please carefully
review the instructions being sent to you from the trustees or administrators of
the plans or Merrill Lynch to determine the cut-off date.
DuPont will accept up to shares of DuPont common stock for
exchange. This number of shares multiplied by the exchange ratio equals the
436,543,573 shares of Conoco Class B common stock held by DuPont. If more than
DuPont shares are validly tendered, the tendered shares will be
subject to proration when the exchange offer expires. DuPont's obligation to
complete the exchange offer is subject to important conditions that are
described under the heading "Conditions for Completion of the Exchange Offer" on
page 31.
In determining the exchange ratio, DuPont considered, among other things:
- recent market prices on the NYSE for DuPont shares and Conoco Class A
common stock; and
- advice from the dealer manager as to what exchange ratio might attract
enough DuPont stockholders to participate in the exchange offer.
DuPont is sending this document and related documents to persons believed
to be United States persons who held DuPont common stock on or about ,
1999. On that date, there were shares of DuPont common stock outstanding,
which were held of record by approximately stockholders. DuPont is also
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sending this document to persons eligible to participate in the DuPont or DuPont
affiliated company savings plans listed on page 28. DuPont will also furnish
this document and related documents to brokers, banks and similar persons whose
names or the names of whose nominees appear on DuPont's stockholder list or, if
applicable, who are listed as participants in a clearing agency's security
position listing for subsequent transmittal to beneficial owners of shares of
DuPont common stock that are United States persons.
PRORATION; TENDERS FOR EXCHANGE BY HOLDERS OF FEWER THAN 100 SHARES OF DUPONT
COMMON STOCK
If on the expiration date, DuPont stockholders have validly tendered more
than DuPont shares so that more than 436,543,573 shares of Conoco
Class B common stock would be exchanged, DuPont will accept on a pro rata basis
all shares properly tendered and not withdrawn, except as described in this
section.
Except as otherwise provided in this paragraph, holders of an aggregate of
less than 100 DuPont shares who validly tender ALL of their shares will not be
subject to proration if the exchange offer is oversubscribed. DuPont shares held
in a DuPont or DuPont affiliated company savings plan, including Conoco plans,
are not eligible for this preference. However, DuPont shares held by United
States persons in a Blueprint account at Merrill Lynch are eligible for this
preferential treatment. Beneficial holders of 100 or more DuPont shares are not
eligible for this preference, even if such holders have separate stock
certificates or accounts representing fewer than 100 DuPont shares.
Any holder of less than 100 DuPont shares who wishes to tender all of these
shares must complete the box captioned "Odd-Lot Shares" on the letter of
transmittal and, if applicable, on the notice of guaranteed delivery. If your
odd-lot shares are held by a broker or Merrill Lynch for your account, you can
contact them and request the preferential treatment.
DuPont will announce preliminary results of the exchange offer by press
release promptly after the expiration date. Because of the difficulty in
determining the number of DuPont shares validly tendered for exchange, DuPont
expects that the final results, including proration, if any, will not be
determined until approximately seven business days after the expiration date.
FRACTIONAL SHARES
Holders who are United States persons, including participants in eligible
DuPont or DuPont affiliated company savings plans, including eligible Conoco
savings plans, may tender fractional DuPont shares in the exchange offer. Any
fractional shares of DuPont common stock or of Conoco Class B common stock
resulting from the exchange of DuPont shares will be distributed to holders by
book-entry transfer. See " -- Book Entry Accounts," on page 30.
EXCHANGE OF SHARES OF DUPONT COMMON STOCK
If all of the conditions of the exchange offer are met, DuPont will
exchange shares of Conoco Class B common stock for each properly tendered DuPont
share that was not properly withdrawn or deemed withdrawn prior to the
expiration date, except as described in "-- Proration; Tenders for Exchange by
Holders of Fewer than 100 Shares of DuPont Common Stock" on page 26 and
"Extension of Tender Period; Termination; Amendment" on page 31. DuPont may,
subject to the rules under the Securities Exchange Act, delay accepting or
exchanging any DuPont shares in order to comply in whole or in part with any
applicable law. For a description of DuPont's right to delay, terminate or amend
the exchange offer, see "-- Extension of Tender Period; Termination; Amendment"
on page 31.
If DuPont notifies the exchange agent either orally or in writing that it
has accepted the tenders of DuPont shares for exchange, the exchange of these
shares will be complete. Promptly following the announcement by DuPont of any
final proration factor, the exchange agent will deliver the tendered DuPont
shares to DuPont. Simultaneously, the exchange agent, as agent for the tendering
stockholders, will receive from DuPont, the shares of Conoco Class B common
stock that correspond to the number of DuPont shares tendered. The exchange
agent will then credit such shares to book-entry accounts maintained by the
transfer agent for the benefit of the holders. The date on which this is
effective is referred to as the exchange date.
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If any tendered DuPont shares are not exchanged for any reason, or if fewer
shares are exchanged due to proration, these unexchanged or untendered DuPont
shares will be credited to book-entry accounts for the shares maintained by the
transfer agent for the benefit of the holders.
Holders who tender their DuPont shares for exchange will generally not be
obligated to pay any transfer tax in connection with the exchange offer. DuPont
will not pay interest under the exchange offer, regardless of any delay in
making the exchange or crediting or delivering shares.
PROCEDURES FOR TENDERING DUPONT SHARES
To tender your DuPont shares, you must complete the following procedures
before the expiration date:
IF YOU HAVE STOCK CERTIFICATES FOR YOUR DUPONT SHARES, you should send to
the exchange agent by registered mail, return receipt requested, the following
documents:
- a completed and executed letter of transmittal indicating the number of
shares to be tendered and any other documents required by the letter of
transmittal, and
- the actual certificates representing the DuPont shares.
The exchange agent's address is listed on the back cover of this document. The
certificate must be endorsed or accompanied by an appropriate stock power if:
- a certificate representing DuPont shares is registered in the name of a
person other than the signer of a letter of transmittal;
- delivery of shares of Conoco Class B common stock is to be made to
Conoco's transfer agent on behalf of a person other than the registered
owner; or
- DuPont shares not accepted for exchange are to be delivered to DuPont's
transfer agent on behalf of a person other than the registered owner.
The signature on the certificate or stock power must appear exactly as the
name of the registered owner appears on the certificate with the signature on
the certificate or stock power guaranteed by an eligible institution unless the
tendering stockholder itself is an eligible institution. An eligible institution
is a member of a registered national securities exchange or a member of the
National Association of Securities Dealers, Inc. or a commercial bank or trust
company having an office or a correspondent in the United States. Most banks and
financial institutions are eligible institutions.
IF YOU HOLD YOUR DUPONT SHARES THROUGH A BROKER, you should follow the
instructions sent to you separately by your broker. You should not use the
letter of transmittal to direct the tender of your DuPont shares. Your broker
must notify The Depository Trust Company and cause it to transfer the shares
into the exchange agent's account in accordance with The Depository Trust
Company's procedures. The broker must also ensure that the exchange agent
receives an agent's message from The Depository Trust Company confirming the
book-entry transfer of your DuPont shares. An agent's message is a message,
transmitted by The Depository Trust Company and received by the exchange agent,
that forms a part of a book-entry confirmation, which states that The Depository
Trust Company has received an express acknowledgment from the participant in The
Depository Trust Company tendering the shares that such participant has received
and agrees to be bound by the terms of the letter of transmittal.
IF YOU ARE AN INSTITUTION WHICH IS A PARTICIPANT IN THE DEPOSITARY TRUST
COMPANY'S BOOK-ENTRY TRANSFER FACILITY, you should follow the same procedures
that are applicable to persons holding shares through a broker as described
above.
IF YOU HOLD YOUR DUPONT SHARES AS A PARTICIPANT IN DUPONT'S DIVIDEND
REINVESTMENT PLAN, you may tender some or all of the DuPont shares attributable
to your plan account in the same manner described above.
IF YOU HOLD YOUR DUPONT SHARES AS A PARTICIPANT IN A DUPONT OR A DUPONT
AFFILIATED COMPANY SAVINGS PLAN BASED IN THE UNITED STATES, INCLUDING CONOCO
SAVINGS PLANS BASED IN THE UNITED STATES, OR YOU ARE A
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UNITED STATES PERSON AND HOLD YOUR SHARES IN A BLUEPRINT BROKERAGE ACCOUNT AT
MERRILL LYNCH, you should follow the instructions sent to you separately by the
plan trustees, administrator of the plan or Merrill Lynch. You should not use
the letter of transmittal to direct the tender of your DuPont shares.
The DuPont or DuPont affiliated company savings plans eligible to
participate in the exchange offer are:
DuPont Flooring Systems 401(k) Saving Plan Protein Technology International Inc.
DuPont Photomasks, Inc. 401(k) Savings
Retirement Plan Investment Plan
DuPont Savings and Investment Plan Qualicon Retirement and Savings Plan
Optimum Quality Grains, L.L.C. Retirement Thrift Plan for Employees of Conoco Inc.
and Savings Plan Thrift Plan for Retail Employees of Conoco
Inc.
Thrift Plan for Employees of Sentinel
Transportation Company
Also, employees of DuPont and its affiliates who are United States persons
and who hold DuPont shares received as variable compensation or upon the
exercise of stock options in a Blueprint brokerage account are eligible to
participate in the exchange offer.
Holders of vested but unexercised options to purchase DuPont common stock
who are United States persons may exercise these options in accordance with the
terms of the stock option plans of DuPont and tender the DuPont shares received
upon such exercise under the general instructions for tendering shares discussed
above.
In addition, holders of vested but unexercised "incentive stock options" as
defined in Section 422 of the Internal Revenue Code, as amended, to purchase
DuPont common stock who are United States persons may exercise these options in
accordance with the terms of the stock option plans of DuPont and tender the
DuPont shares received upon such exercise under the general instructions for
tendering shares discussed above. Holders of shares of DuPont common stock that
were acquired upon the exercise of an incentive stock option generally will not
be taxed at the time of tender of such shares, but rather will be taxed at the
time of the disposition of the shares of Conoco Class B common stock that were
acquired in exchange for such shares of DuPont common stock.
Restricted stock granted under DuPont's Stock Performance Plan or acquired
in connection with a stock option exercise resulting in the grant of reload
options is not eligible for tender into the exchange offer.
Trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity who
sign the letter of transmittal, notice of guaranteed delivery or any
certificates or stock powers must indicate the capacity in which they are
signing, and must submit evidence of their power to act in that capacity unless
waived by DuPont.
If you validly tender your DuPont shares and the shares are accepted by
DuPont, there will be a binding agreement between you and DuPont on the terms
and subject to the conditions set forth in this document and in the accompanying
letter of transmittal. A person who tenders DuPont shares for his own account
violates federal securities law unless the person owns:
- DuPont shares;
- other securities convertible into or exchangeable for such DuPont shares;
or
- an option, warrant or right to purchase such DuPont shares and intends to
acquire DuPont shares for tender by conversion or exchange of such
securities or by exercise of such option, warrant or right.
Federal securities law provides a similar restriction applicable to the tender
or guarantee of a tender on behalf of another person.
DO NOT SEND LETTERS OF TRANSMITTAL AND CERTIFICATES FOR DUPONT SHARES TO
DUPONT, CONOCO, MORGAN STANLEY, D.F. KING OR ANY SOLICITING DEALER.
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IT IS UP TO YOU TO DECIDE HOW TO DELIVER YOUR DUPONT SHARES AND ALL OTHER
REQUIRED DOCUMENTS. IT IS YOUR RESPONSIBILITY THAT ALL NECESSARY MATERIALS GET
TO THE EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE. IF THE EXCHANGE AGENT DOES
NOT RECEIVE ALL OF THE MATERIALS REQUIRED BY THIS SECTION BEFORE THE EXPIRATION
DATE, YOUR SHARES WILL NOT BE VALIDLY TENDERED.
DUPONT'S INTERPRETATIONS ARE BINDING
DuPont will determine at its own discretion all questions as to the form of
documents, including notices of withdrawal, and the validity, form, eligibility,
including time of receipt, and acceptance for exchange of any tender of DuPont
shares. This determination will be final and binding on all tendering
stockholders. DuPont reserves the absolute right to:
- determine whether a tendering stockholder is a United States person;
- reject any and all tenders of any DuPont shares not properly tendered;
- waive any defects or irregularities in the tender of DuPont shares or any
conditions of the exchange offer either before or after the expiration
date; and
- request any additional information from any record or beneficial owner of
DuPont shares that DuPont deems necessary, including information with
respect to the status as a United States person of any such person or any
of its partners, shareholders, beneficiaries, principals or participants.
None of DuPont, Conoco, First Chicago Trust Company of New York, Morgan
Stanley, D.F. King, the soliciting dealers and any other person will be under
any duty to notify tendering stockholders of any defect or irregularity in
tenders or notices of withdrawal.
LOST OR DESTROYED CERTIFICATES
If your certificate representing DuPont shares has been mutilated,
destroyed, lost or stolen and you wish to tender your shares, please call the
First Chicago Trust Company of New York at 1-888-983-8766. You will receive an
affidavit to complete, and you will be informed of the amount needed to pay for
a surety bond for your lost shares. Upon receipt of the completed affidavit and
surety bond payment and the completed letter of transmittal, your shares will be
included in the exchange offer. If you wish to participate in the exchange
offer, you will need to act quickly to ensure that the lost certificates can be
replaced and delivered to the exchange agent prior to expiration of the exchange
offer.
GUARANTEED DELIVERY PROCEDURE
If you wish to tender your DuPont shares but the shares are not immediately
available, or time will not permit the shares or other required documentation to
reach the exchange agent before the expiration date, or the procedure for
book-entry transfer cannot be completed on a timely basis, you may still tender
your DuPont shares if:
- the tender is made through an eligible institution;
- the exchange agent receives from the eligible institution before the
expiration date, a properly completed and duly executed notice of
guaranteed delivery, substantially in the form provided by DuPont; and
- the exchange agent receives the certificates for all physically tendered
DuPont shares, in proper form for transfer, or a book-entry confirmation,
as the case may be, and a properly completed letter of transmittal, or a
facsimile of a letter of transmittal and all other documents required by
the letter of transmittal, within three NYSE trading days after the date
of execution of the notice of guaranteed delivery.
You may deliver the notice of guaranteed delivery by hand, telegram,
facsimile transmission or mail to the exchange agent and you must include a
guarantee by an eligible institution in the form set forth in the notice.
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WITHDRAWAL RIGHTS
You may withdraw tenders of DuPont shares at any time prior to the
expiration date and, unless DuPont has accepted your tender as provided in this
document, after the expiration of 40 business days from the commencement of the
exchange offer. If DuPont:
- delays its acceptance of DuPont shares for exchange or
- is unable to accept DuPont shares for exchange under the exchange offer
for any reason,
then, without prejudice to DuPont's rights under the exchange offer, the
exchange agent may, on behalf of DuPont, retain DuPont shares tendered, and such
DuPont shares may not be withdrawn except as otherwise provided in this
document, subject to provisions under the Securities Exchange Act that provide
that an issuer making an exchange offer shall either pay the consideration
offered or return tendered securities promptly after the termination or
withdrawal of the exchange offer.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the exchange agent at one of its addresses set forth on the back
cover of this document. The notice of withdrawal must:
- specify the name of the person having tendered the DuPont shares to be
withdrawn;
- identify the number of DuPont shares to be withdrawn; and
- specify the name in which physical DuPont share certificates are
registered, if different from that of the withdrawing holder.
If certificates for the DuPont shares have been delivered or otherwise
identified to the exchange agent, then, before the release of such certificates,
the withdrawing holder must also submit the serial numbers of the particular
certificates to be withdrawn and a signed notice of withdrawal with signatures
guaranteed by an eligible institution unless such holder is an eligible
institution.
If the DuPont shares have been tendered pursuant to the procedure for
book-entry transfer, any notice of withdrawal must specify the name and number
of the account at The Depository Trust Company to be credited with the withdrawn
shares and otherwise comply with the procedures of such facility.
Any DuPont shares withdrawn will be deemed not to have been validly
tendered for exchange for purposes of the exchange offer. Properly withdrawn
shares may be retendered by following one of the procedures described under
"-- Procedures for Tendering DuPont Shares" at any time on or before the
expiration date.
Except as otherwise provided above, any tender of DuPont shares made under
the exchange offer is irrevocable.
BOOK-ENTRY ACCOUNTS
Physical certificates representing shares of Conoco Class B common stock or
DuPont common stock will not be issued as a result of the exchange offer. Rather
than issuing physical certificates for either DuPont shares returned due to
proration or shares of Conoco Class B common stock, the exchange agent will
credit such shares to book-entry accounts maintained by the transfer agent for
the benefit of the respective holders. This method of holding stock eliminates
the need for actual stock certificates to be issued, facilitates the holding of
fractional shares, and eliminates the requirements for physical movement of
stock certificates at the time of sale. Promptly following the crediting of
shares to your respective book-entry accounts, you will receive a Stock
Distribution Statement from the exchange agent evidencing your holdings, as well
as general information on the book-entry form of ownership.
You are not required to maintain a book-entry account and you may obtain a
stock certificate for all or a portion of your DuPont or Conoco shares received
as part of the exchange offer at no cost to you. Instructions describing how you
can obtain stock certificates will be included with the Stock Distribution
Statement mailed
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to you. However, stock certificates for fractional shares will not be issued by
either DuPont or Conoco. If you request stock certificates and you hold
fractional shares, any fractional shares will be sold for your account by the
transfer agent, which will then deliver to you a certificate for the whole
number of shares you own and the proceeds from the sale of the fractional
shares.
EXTENSION OF TENDER PERIOD; TERMINATION; AMENDMENT
DuPont expressly reserves the right, in its discretion, for any reason,
including the non-satisfaction of any of the conditions for completion set forth
below, to extend the period of time during which the exchange offer is open or
to amend the exchange offer in any respect, including changing the exchange
ratio. DuPont also expressly reserves the right to extend the period of time
during which the exchange offer is open in the event the exchange offer is
undersubscribed. In any of these cases, DuPont will make a public announcement
of the extension or amendment.
If DuPont materially changes the terms of or information concerning the
exchange offer, DuPont will extend the exchange offer. The SEC has stated that,
as a general rule, it believes that an offer should remain open for a minimum of
five business days from the date that notice of the material change is first
given. The length of time will depend on the particular facts and circumstances.
Subject to the preceding paragraph, the exchange offer will be extended so that
it remains open for a minimum of ten business days following the announcement
if:
- DuPont increases or decreases the number of Conoco shares offered in
exchange for each DuPont share, the number of DuPont shares eligible for
exchange, the minimum condition, or the dealer manager or solicitation
fee, and
- the exchange offer is scheduled to expire within ten business days of
announcing an increase or decrease.
If any of the conditions indicated in the next section have not been met,
DuPont reserves the right, in its sole discretion, so long as DuPont shares have
not been accepted for exchange, to delay acceptance for exchange of or exchange
for any DuPont shares or to terminate the exchange offer and not accept for
exchange any DuPont shares.
If DuPont extends the exchange offer, is delayed in accepting any DuPont
shares or is unable to accept for exchange any DuPont shares under the exchange
offer for any reason, then, without affecting DuPont's rights under the exchange
offer, the exchange agent may, on behalf of DuPont, retain all DuPont shares
tendered. These DuPont shares may not be withdrawn except as provided in
"-- Withdrawal Rights" above. DuPont's reservation of the right to delay
acceptance of any DuPont shares is subject to applicable law, which requires
that DuPont pay the consideration offered or return the DuPont shares deposited
promptly after the termination or withdrawal of the exchange offer.
DuPont will issue a press release or other public announcement no later
than 9:00 a.m., New York City time, on the next business day following any
extension, amendment, non-acceptance or termination of the previously scheduled
expiration date.
CONDITIONS FOR COMPLETION OF THE EXCHANGE OFFER
DuPont will not complete the exchange offer unless at least DuPont
shares are validly tendered and not withdrawn. This number of shares, referred
to as the "minimum condition," represents approximately
percent of the outstanding DuPont shares as of , 1999 and is
enough shares to ensure that at least 50 percent of the shares of Conoco Class B
common stock owned by DuPont are exchanged under the exchange offer.
DuPont may also not accept shares for exchange and may terminate or not
complete the exchange offer if:
- any action, proceeding or litigation seeking to enjoin, make illegal or
delay completion of the exchange offer or otherwise relating in any
manner to the exchange offer is instituted or threatened;
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- any order, stay, judgment or decree is issued by any court, government,
governmental authority or other regulatory or administrative authority
and is in effect, or any statute, rule, regulation, governmental order or
injunction shall have been proposed, enacted, enforced or deemed
applicable to the exchange offer, any of which would or might restrain,
prohibit or delay completion of the exchange offer or impair the
contemplated benefits of the exchange offer to DuPont or Conoco;
- the IRS notifies DuPont that the ruling has been withdrawn or invalidated
in whole or in part or the DuPont board of directors determines that any
of the representations and assumptions underlying the ruling or any
portion of the ruling are not true and correct in all respects.
- any of the following occurs and the adverse effect of such occurrence
shall, in the reasonable judgment of DuPont, be continuing:
-- any general suspension of trading in, or limitation on prices for,
securities on any national securities exchange or in the
over-the-counter market in the United States,
-- any extraordinary or material adverse change in U.S. financial
markets generally, including, without limitation, a decline of at
least twenty percent in either the Dow Jones Average of Industrial
stocks or the Standard & Poor's 500 Index from , 1999,
-- a declaration of a banking moratorium or any suspension of payments
in respect of banks in the United States,
-- any limitation, whether or not mandatory, by any governmental entity
on, or any other event that would reasonably be expected to
materially adversely affect, the extension of credit by banks or
other lending institutions,
-- a commencement of a war or other national or international calamity
directly or indirectly involving the United States, which would
reasonably be expected to affect materially and adversely, or to
delay materially, the completion of the exchange offer, or
-- if any of the situations above exist at the time of commencement of
the exchange offer, the situation deteriorates materially;
- any tender or exchange offer, other than this exchange offer, with
respect to some or all of the outstanding Conoco common stock or DuPont
common stock or any, merger, acquisition or other business combination
proposal involving DuPont or Conoco, shall have been proposed, announced
or made by any person or entity;
- any event or events occur that have resulted or may result, in DuPont's
judgment, in an actual or threatened change in the business condition,
income, operations, stock ownership or prospects of DuPont and its
subsidiaries, taken as a whole, or of Conoco and its subsidiaries, taken
as a whole; or
- as the term "group" is used in Section 13(d)(3) of the Securities
Exchange Act,
-- any person, entity or group acquires more than five percent of the
outstanding shares of DuPont common stock or Conoco common stock,
other than a person, entity or group which had publicly disclosed
such ownership with the SEC prior to , 1999,
-- any such person, entity or group which had publicly disclosed such
ownership prior to such date shall acquire additional DuPont common
stock or Conoco common stock constituting more than two percent of
the outstanding DuPont shares or Conoco common stock, or
-- any new group shall have been formed that beneficially owns more than
five percent of the outstanding shares of DuPont common stock or
Conoco common stock which in the judgment of DuPont in any such case,
and regardless of the circumstances, makes it inadvisable to proceed
with the exchange offer or with such acceptance for exchange of
shares.
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If any of the above events occur, DuPont may:
- terminate the exchange offer and as promptly as practicable return all
tendered DuPont shares to tendering stockholders;
- extend the exchange offer and, subject to the withdrawal rights described
in "-- Withdrawal Rights" on page 29, retain all tendered DuPont shares
until the extended exchange offer expires;
- amend the terms of the exchange offer; or
- waive the unsatisfied condition and, subject to any requirement to extend
the period of time during which the exchange offer is open, complete the
exchange offer.
These conditions are for the sole benefit of DuPont. DuPont may assert
these conditions with respect to all or any portion of the exchange offer
regardless of the circumstances giving rise to them. DuPont may waive any
condition in whole or in part at any time in its reasonable discretion. DuPont's
failure to exercise its rights under any of the above conditions does not
represent a waiver of these rights. Each right is an ongoing right which may be
asserted at any time. Any determination by DuPont concerning the conditions
described above will be final and binding upon all parties.
If a stop order issued by the SEC is in effect with respect to the
registration statement of which this document is a part, DuPont will not accept
any DuPont shares tendered and will not exchange Conoco shares for any DuPont
shares.
FEES AND EXPENSES
Morgan Stanley is acting as the dealer manager in connection with the
exchange offer. Morgan Stanley will receive a fee of $ for its services
as dealer manager, in addition to being reimbursed by DuPont for its
out-of-pocket expenses, including attorneys' fees, in connection with the
exchange offer. Morgan Stanley is also acting as DuPont's financial advisor in
connection with the separation of Conoco from DuPont, for which Morgan Stanley
is receiving customary compensation. Morgan Stanley has provided investment
banking services to DuPont and Conoco in the past, including acting as the lead
manager of the Conoco initial public offering, for which Morgan Stanley received
customary compensation.
DuPont and Conoco have each agreed to indemnify Morgan Stanley against
specified liabilities related to this transaction, including civil liabilities
under the federal securities laws, and to contribute to payments which Morgan
Stanley may be required to make in respect thereof. However, in the opinion of
the SEC, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. Morgan Stanley may from time to
time hold DuPont shares in its proprietary accounts, and to the extent it owns
shares in these accounts at the time of the exchange offer, Morgan Stanley may
tender these shares.
DuPont will pay each soliciting dealer a solicitation fee of $0.75 per
share, for up to 1,000 shares per tendering stockholder, for each DuPont share
tendered and accepted for exchange under the exchange offer if that soliciting
dealer has affirmatively solicited and obtained the tender. DuPont will not pay
a solicitation fee in connection with a tender of DuPont common stock by a
stockholder who tenders:
- more than 10,000 DuPont shares; or
- from a country outside of the United States.
"Soliciting dealer" includes the following organizations:
- any broker or dealer in securities that is a member of any national
securities exchange in the United States or of the National Association
of Securities Dealers, Inc., or
- any bank or trust company located in the United States.
In order for a soliciting dealer to receive a solicitation fee with respect
to the tender of shares of DuPont common stock, the exchange agent must have
received by three NYSE trading days after the expiration date, a properly
completed and duly executed "Notice of Solicited Tenders". If a "Notice of
Solicited Tenders" is not
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received by the exchange agent by three NYSE trading days after the expiration
date, no solicitation fee will be paid to such soliciting dealer.
Under no circumstances shall a fee be paid to a soliciting dealer more than
once with respect to any DuPont shares. No soliciting dealer is required to make
a recommendation to holders of DuPont shares as to whether to tender or refrain
from tendering in the exchange offer.
Soliciting dealers should take care to ensure proper record-keeping to
document their entitlement to any solicitation fee. DuPont and the exchange
agent reserve the right to require additional information, as deemed warranted.
All questions as to the validity, form, and eligibility, including time of
receipt of notices of solicited tenders will be determined by the exchange agent
and DuPont, in their discretion, which determination will be final and binding.
Neither the exchange agent nor any other person will be under any duty to give
notification of any defects or irregularities in a notice of solicited tender or
incur any liability for failure to give such notification.
DuPont will not pay a solicitation fee to a soliciting dealer who for any
reason must transfer the fee to a tendering holder. Soliciting dealers are not
entitled to a solicitation fee with respect to DuPont shares beneficially owned
by them or with respect to any shares that are registered in the name of a
soliciting dealer unless the shares are held by such soliciting dealer as
nominee and are tendered for the benefit of beneficial holders. No broker,
dealer, bank, trust company or fiduciary shall be deemed to be the agent of
DuPont, Conoco, First Chicago Trust Company of New York, Morgan Stanley or D.F.
King for purposes of the exchange offer.
DuPont has retained D.F. King to act as the information agent and the First
Chicago Trust Company of New York to act as the exchange agent in connection
with the exchange offer. The information agent may contact holders of DuPont
shares by mail, telephone, facsimile transmission and personal interviews and
may request brokers, dealers and other nominee stockholders to forward materials
relating to the exchange offer to beneficial owners. The information agent and
the exchange agent each will receive reasonable compensation for their
respective services, will be reimbursed for reasonable out-of-pocket expenses
and will be indemnified against liabilities in connection with their services,
including liabilities under the federal securities laws.
Neither the information agent nor the exchange agent has been retained to
make solicitations or recommendations. The fees they receive will not be based
on the number of DuPont shares tendered under the exchange offer; however, the
exchange agent will be compensated in part on the basis of the number of letters
of transmittal received and the number of stock distribution statements
distributed.
DuPont will not pay any fees or commissions to any broker or dealer or any
other person, other than Morgan Stanley and the soliciting dealers, for
soliciting tenders of DuPont shares under the exchange offer. Brokers, dealers,
commercial banks and trust companies will, upon request, be reimbursed by DuPont
for reasonable and necessary costs and expenses incurred by them in forwarding
materials to their customers.
LEGAL LIMITATION
This document is not an offer to sell and it is not soliciting any offer to
buy any Conoco common stock in any jurisdiction in which, except as provided
below, the offer or sale is not permitted. DuPont is not aware of any United
States jurisdiction where the making of the exchange offer or its acceptance
would not be legal. If DuPont learns of any jurisdiction where making the
exchange offer or its acceptance would not be permitted, DuPont currently
intends to make a good faith effort to comply with the relevant law. If, after
such good faith effort, DuPont cannot comply with such law, DuPont will
determine whether the exchange offer will be made to, and whether tenders will
be accepted from or on behalf of, United States persons who are holders of
shares of DuPont common stock residing in the jurisdiction.
In any jurisdiction where the securities or blue sky laws require the
exchange offer to be made by a licensed broker or dealer, the exchange offer may
be made on DuPont's behalf by one or more registered brokers or dealers licensed
under the laws of such jurisdiction.
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PRICE RANGE OF DUPONT COMMON STOCK AND DIVIDENDS
DuPont Common Stock is listed and traded on the NYSE under the symbol "DD."
The following table contains, for the periods indicated, the high and low sale
prices per share of DuPont common stock as reported on the NYSE composite tape
and the cash dividends paid per share of DuPont common stock:
CASH
HIGH LOW DIVIDENDS
---- --- ---------
1997
First Quarter(1).................................... $57 5/8 $46 3/8 $0.285
Second Quarter(1)................................... 62 7/8 49 3/4 0.315
Third Quarter....................................... 69 3/4 60 11/16 0.315
Fourth Quarter...................................... 64 15/16 50 3/16 0.315
1998
First Quarter....................................... $70 7/16 $52 5/8 $0.315
Second Quarter...................................... 84 7/16 67 1/8 0.350
Third Quarter....................................... 79 1/2 52 1/4 0.350
Fourth Quarter...................................... 66 1/2 51 11/16 0.350
1999
First Quarter....................................... $60 1/8 $50 1/16 $0.350
Second Quarter...................................... 75 3/16 57 3/16 0.350
Third Quarter (through July 1, 1999)................ 70 1/8 68 3/8 (2)
- ------------
(1) Restated to reflect a two-for-one split of DuPont common stock effective May
15, 1997.
(2) DuPont and Conoco's third quarter dividends have not yet been declared. It
is expected that DuPont and Conoco will have the same record date for their
third quarter dividends. If the record date is prior to or on the expiration
date of the exchange offer, persons tendering DuPont shares in the exchange
offer will receive the DuPont dividend with respect to the tendered shares,
and will not receive the Conoco dividend with respect to any Conoco Class B
common stock received in the exchange offer. If the dividend record date is
after the expiration date of the exchange offer, persons tendering DuPont
shares in the exchange offer will receive the Conoco dividend for the Conoco
Class B common stock received in the exchange offer, and the DuPont dividend
for any DuPont shares returned due to proration.
The number of holders of record of DuPont common stock as of June 30, 1999
was 142,240.
On March 19, 1999, the last full day of trading prior to the initial filing
of the registration statement, the closing price per DuPont share as reported on
the NYSE composite tape was $56 5/8. On , 1999, the last full day of
trading prior to commencement of the exchange offer, the closing price per
DuPont share as reported on the NYSE composite tape was $ . You
should obtain current market quotations for the shares of DuPont common stock
before deciding to tender. No assurance can be given concerning the market price
of DuPont common stock in the future.
Stockholders who exchange shares of DuPont common stock under this exchange
offer will not be entitled to any dividends on such shares. DuPont stockholders
will continue to receive the regular quarterly dividend with respect to shares
of DuPont common stock that are not exchanged under the exchange offer.
The board of directors of DuPont may declare dividends on DuPont common
stock after considering many factors, including DuPont's competitive position,
available cash, financial conditions, earnings and capital requirements. DuPont
may choose not to pay dividends in the future.
35
37
PRICE RANGE OF CONOCO CLASS A COMMON STOCK AND DIVIDENDS
The Conoco Class B common stock has been approved for listing on the NYSE
under the symbol "COC.B." Conoco Class A common stock is currently listed and
traded on the NYSE under the symbol "COC." Upon the closing of the exchange
offer, the symbol for Conoco Class A common stock will be changed to "COC.A."
Class A common stock began trading on October 22, 1998 following the Conoco
initial public offering. The following table contains, for the periods
indicated, the high and low sale prices per share of Conoco Class A common stock
as reported on the NYSE composite tape and the cash dividends per share of
Conoco Class A common stock:
CASH
HIGH LOW DIVIDENDS
---- --- ---------
1998
Fourth Quarter (from October 22 through December 31,
1998).................................................. $25 3/4 $19 3/8 $ --
1999
First Quarter............................................. $25 7/16 $19 3/8 $0.14(1)
Second Quarter............................................ 31 1/4 22 15/16 0.19
Third Quarter (through July 1, 1999)...................... 27 7/8 27 1/4 (2)
- ------------
(1) The initial dividend was determined on a pro rata basis covering the period
from October 27, 1998, the closing date of the Conoco initial public
offering, to December 31, 1998, and is equivalent to $.19 per share for a
full quarter.
(2) DuPont and Conoco's third quarter dividends have not yet been declared. It
is expected that DuPont and Conoco will have the same record date for their
third quarter dividends. If the record date is prior to or on the expiration
date of the exchange offer, persons tendering DuPont shares in the exchange
offer will receive the DuPont dividend with respect to the tendered shares,
and will not receive the Conoco dividend with respect to any Conoco Class B
common stock received in the exchange offer. If the dividend record date is
after the expiration date of the exchange offer, persons tendering DuPont
shares in the exchange offer will receive the Conoco dividend for the Conoco
Class B common stock received in the exchange offer, and the DuPont dividend
for any DuPont shares returned due to proration.
The number of holders of record of Conoco's Class A common stock as of June
30, 1999 was 1,787. DuPont currently owns all of the outstanding shares of
Conoco Class B common stock.
On March 19, 1999, the last full day of trading prior to the initial filing
of the Registration Statement relating to the exchange offer, the closing price
per share of Conoco Class A common stock as reported on the NYSE composite tape
was $24. On , 1999, the last full day of trading prior to
commencement of the exchange offer, the closing price per share of Conoco Class
A common stock as reported on the NYSE composite tape was $ . You
should obtain current market quotations for the shares of Conoco Class A common
stock before deciding to tender your DuPont shares. No assurance can be given
concerning the market price of Conoco Class A or Class B common stock in the
future and, in particular, no assurance can be given that the market price of
Conoco Class B common stock will be the same as that of Conoco Class A common
stock.
Conoco's board of directors may declare dividends on Conoco common stock
after considering many factors, including Conoco's competitive position,
available cash, financial condition, earnings and capital requirements. Conoco
may choose not to pay dividends in the future.
36
38
SPECIAL NOTE ON FORWARD-LOOKING INFORMATION
This document contains or incorporates by reference statements which may
constitute "forward-looking statements." You can identify forward-looking
statements by the words "plans," "believes," "expects," "will," "anticipates,"
"intends," "projects," "estimates" or similar expressions. Forward-looking
statements may address, among other things, DuPont's or Conoco's strategy for
growth, product development, market position, expenditures and financial
results.
For a discussion identifying some important factors that could cause actual
results to vary materially from those anticipated in the forward-looking
statements, see "Risk Factors" on page 18, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Conoco" on page 61.
Also see DuPont's and Conoco's SEC filings, including the cautionary statements
included on page 39 of DuPont's 1998 Annual Report to Stockholders, which were
incorporated by reference into DuPont's Annual Report on Form 10-K for the year
ended December 31, 1998, pages 12 and 13 of DuPont's Form 10-Q for the quarter
ended March 31, 1999, and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages 14 through 39 of DuPont's 1998
Annual Report, which is incorporated by reference in this document.
Conoco and DuPont caution that any forward-looking statements contained in
this document or incorporated in this document by reference or made by
management of DuPont or Conoco involve risks and uncertainties, and may change
based on various important factors. Conoco and DuPont have based many of these
forward-looking statements on current expectations, estimates and projections
about each company and the petroleum, life sciences and chemical industries in
general. In addition, many of these forward-looking statements are based on
assumptions about future events that may prove to be inaccurate. Accordingly,
actual outcomes and results may differ materially from what Conoco and DuPont
have expressed or forecast in the forward-looking statements. Any differences
could result from a variety of factors including the following:
- fluctuations in crude oil and natural gas prices and refining and
marketing margins;
- failure or delays in achieving expected production from development
projects;
- uncertainties inherent in predicting oil and gas reserves and oil and gas
reservoir performance;
- lack of exploration success;
- disruption or interruption of production facilities due to accidents or
political events;
- international monetary conditions and exchange controls;
- liability for remedial actions under environmental regulation;
- disruption to operations due to untimely or incomplete resolution of Year
2000 issues;
- liability resulting from litigation;
- world economic and political conditions; and
- changes in tax and other laws.
37
39
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA OF DUPONT
The following table contains selected consolidated historical and pro forma
financial data of DuPont's continuing operations as of the dates and for the
periods indicated. The pro forma information is provided to aid in your analysis
of the financial aspects of the exchange offer and cash offer. This information
may not necessarily reflect the results of operations, financial position and
cash flows of DuPont in the future. The information is only a summary and you
should read it together with the pro forma unaudited consolidated financial
statements of DuPont included elsewhere in this document and with the
consolidated financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" located in the DuPont 1998 Form
10-K and the DuPont Form 10-Q for the quarter ended March 31, 1999, which we
have filed with the SEC, and which we have incorporated in this document by
reference. To find out where you can obtain copies of DuPont's SEC filings, see
"Where You Can Find More Information" on page 154.
The pro forma financial data for DuPont give effect to the following
transactions and events:
- the split-off of Conoco through an exchange of 100 percent of Conoco
Class B common stock held by DuPont for DuPont common stock held by
United States persons.
- a cash offer to purchase a predetermined number of shares of DuPont
common stock held by persons that are not United States persons.
- various payments received by DuPont from Conoco in connection with
Conoco's repayment of intercompany indebtedness to DuPont as part of the
separation:
-- receipt by DuPont of Conoco's initial public offering proceeds of
$4,228 million in October 1998.
-- receipt by DuPont in April 1999 of $3,970 million from Conoco's sale
of senior debt securities.
-- receipt by DuPont in May 1999 of $1,022 million from Conoco's sales
of commercial paper.
The historical financial statements of DuPont reflect these payments as of
the dates received. To the extent these events are not reflected in the
historical income statements, the unaudited pro forma income statements for
DuPont assume that these transactions occurred as of the beginning of the
periods presented. To the extent these events are not reflected in the
historical balance sheet, the unaudited pro forma balance sheet assumes that
these transactions occurred as of March 31, 1999.
38
40
DUPONT
THREE MONTHS PRO FORMA AS PRO FORMA FOR
ENDED MARCH 31, YEAR ENDED DECEMBER 31, OF AND FOR THE THE YEAR ENDED
---------------- ------------------------------------------------ THREE MONTHS ENDED DECEMBER 31,
1999 1998 1998 1997 1996 1995 1994 MARCH 31, 1999 1998
---- ---- ---- ---- ---- ---- ---- ------------------ --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
STATEMENT OF
INCOME DATA: (IN MILLIONS, EXCEPT PER SHARE DATA)
Sales............. $6,295 $6,194 $24,767 $24,089 $23,644 $24,500 $22,518 $6,295 $24,767
Other Income...... 18(1) 297 981 1,005 1,101 797 674 18 981
------ ------ ------- ------- ------- ------- ------- ------ -------
Total.......... 6,313 6,491 25,748 25,094 24,745 25,297 23,192 6,313 25,748
Cost of Goods Sold
and Other
Operating
Charges.......... 3,873 4,049 15,664 15,564 15,314 15,572 14,498 3,873 15,664
Selling, General
and
Administrative
Expenses......... 535 479 2,115 2,061 2,119 2,283 2,215 535 2,115
Depreciation and
Amortization..... 335 332 1,452 1,361 1,526 1,643 1,748 335 1,452
Research and
Development
Expense.......... 358 264 1,308 1,072 990 1,031 1,004 358 1,308
Interest
Expense.......... 96 127 520 389 409 449 343 119 516
Purchased
In-Process
Research and
Development...... 40 60 1,443 1,478 -- -- -- 40 1,443
Employee
Separation Costs
and Write-down of
Assets........... -- 118 633 340 -- -- -- -- 633
------ ------ ------- ------- ------- ------- ------- ------ -------
Total...... 5,237 5,429 23,135 22,265 20,358 20,978 19,808 5,260 23,131
Income from
Continuing
Operations Before
Income Taxes and
Minority
Interests........ 1,076 1,062 2,613 2,829 4,387 4,319 3,384 1,053 2,617
Provision for
Income Taxes..... 432 417 941 1,354 1,416 1,432 1,164 422 917
Minority Interests
in Earnings of
Consolidated
Subsidiaries..... 16 8 24 43 40 29 15 16 24
------ ------ ------- ------- ------- ------- ------- ------ -------
Income from
Continuing
Operations... $ 628 $ 637 $ 1,648 $ 1,432 $ 2,931 $ 2,858 $ 2,205 $ 615 $ 1,676
====== ====== ======= ======= ======= ======= ======= ====== =======
Basic Earnings Per
Share of Common
Stock --
Continuing
Operations....... $ .55 $ .56 $ 1.45 $ 1.26 $ 2.60 $ 2.43 $ 1.61 $ .66(2) $ 1.79(2)
Diluted Earnings
Per Share of
Common Stock --
Continuing
Operations....... $ .55 $ .55 $ 1.43 $ 1.24 $ 2.56 $ 2.41 $ 1.60 $ .65(2) $ 1.76(2)
Dividends Per
Common Share..... $ .35 $ .315 $ 1.365 $ 1.23 $ 1.115 $ 1.015 $ .91
Weighted Average
Number of Shares
Outstanding
(millions):
Basic............ 1,127 1,128 1,129 1,131 1,121 1,170 1,360 931(2) 933(2)
Diluted.......... 1,138 1,146 1,145 1,150 1,140 1,183 1,371 942(2) 948(2)
OTHER DATA:
Cash Provided by
Continuing
Operations....... $ 147 $ 152 $ 4,132 $ 4,027 $ 4,109 $ 5,170 $ 3,697
Cash Used for
Investment
Activities of
Continuing
Operations....... (2,086) (1,040) (178) (4,022) (987) (1,286) (1,744)
Cash Used for
Financing
Activities....... 2,242 2,103 (3,053) (451) (4,018) (3,571) (2,878)
BALANCE SHEET
DATA:
Cash and Cash
Equivalents...... $1,003 $2,024 $ 1,059 $ 1,004 $ 1,066 $ 1,408 $ 856 $ 908
Working Capital... (3,872) (2,374) (2,374) (2,110) 15 (2,116) 3,208 104
Net Property,
Plant and
Equipment........ 14,817 13,092 14,131 12,601 10,959 11,389 11,385 14,817
Total Assets...... 41,967 39,797 38,536 36,689 32,342 32,748 32,577 33,222
Long-Term
Borrowings and
Capital Lease
Obligations...... 4,566 6,402 4,495 5,897 5,052 5,646 6,338 4,566
Minority
Interests........ 464 381 407 361 315 223 192 464
Stockholders'
Equity........... 14,133 11,629 13,954 11,270 10,593 8,323 12,743 9,459
- ------------
(1) Includes an exchange loss of $131 on forward exchange contracts purchased in
1998 to fix in U.S. dollars the cash required to acquire Herberts, the
automotive coatings business of Hoechst AG. The purchase price for Herberts
was negotiated in German marks.
(2) Pro forma data are provided for illustrative purposes based on an assumed
exchange ratio as described on page 49.
39
41
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA OF CONOCO
The following table contains selected historical and pro forma financial
data of Conoco as of the dates and for the periods indicated. The pro forma
financial information is provided to aid in your analysis of the financial
aspects of the exchange offer. This information may not necessarily reflect the
results of operations, financial position and cash flows of Conoco in the future
or what the results of operations, financial position and cash flows would have
been had Conoco been a separate, stand-alone entity during all of the periods
presented. The information is only a summary and you should read it together
with the consolidated financial statements of Conoco and the "Unaudited Pro
Forma Financial Statements of Conoco" and the other information about Conoco
included elsewhere in this document. You should also read the "Risk Factors",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Conoco" and "Business of Conoco" sections of this document, which
describe Conoco's business as well as a number of factors that have affected
Conoco's financial results, including declining crude oil and natural gas
prices.
The pro forma financial data for Conoco give effect to the following
transactions and events:
- the split-off of Conoco through an exchange of 100 percent of Conoco
Class B common stock held by DuPont for DuPont common stock held by
United States persons; and
- various payments made by Conoco to DuPont in connection with Conoco's
repayment of intercompany indebtedness to DuPont as part of the
separation:
-- payment by Conoco to DuPont in October 1998 of $4,228 million from
Conoco's initial public offering proceeds.
-- payment by Conoco to DuPont in April 1999 of $3,970 million from
Conoco's sale of senior debt securities.
-- payment by Conoco to DuPont in May 1999 of $1,022 million from Conoco's
sales of commercial paper.
The historical financial statements of Conoco reflect these payments as of
the date made. To the extent these events are not reflected in the historical
consolidated income statements of Conoco, the unaudited pro forma consolidated
income statements assume that these transactions occurred as of the beginning of
the periods presented. To the extent these events are not reflected in the
historical balance sheet, the unaudited pro forma balance sheet assumes that
these transactions occurred as of March 31, 1999.
Except where otherwise indicated, reserve and production information in the
following tables includes Conoco's share of equity affiliates. Oil includes
crude oil, condensate and natural gas liquids expected to be removed for
Conoco's account from its natural gas production.
40
42
CONOCO
THREE
MONTHS PRO FORMA AS PRO FORMA AS
ENDED ADJUSTED FOR THE ADJUSTED FOR
MARCH 31, YEAR ENDED DECEMBER 31, THREE MONTHS THE YEAR ENDED
--------------- ----------------------------------------------- ENDED DECEMBER 31,
1999 1998 1998 1997 1996 1995 1994 MARCH 31, 1999 1998
---- ---- ---- ---- ---- ---- ---- ---------------- --------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA:
Total Revenues(1)......... $5,335 $5,834 $23,168 $26,263 $24,416 $20,518 $19,433 $5,335 $23,110
Cost of Goods Sold and
Other Operating
Expenses................ 3,005 3,393 13,840 16,226 14,560 11,146 10,640 3,005 13,840
Selling, General and
Administrative
Expenses................ 186 183 736 726 755 728 679 186 736
Stock Option Provision.... -- -- 236 -- -- -- -- -- 236
Exploration Expenses(2)... 46 67 380 457 404 331 357 46 380
Depreciation, Depletion
and Amortization........ 302 267 1,113 1,179 1,085 1,067 1,244 302 1,113
Taxes Other Than on
Income(1)............... 1,591 1,417 5,970 5,532 5,637 5,823 5,477 1,591 5,970
Interest and Debt
Expense................. 71 1 199 36 74 74 63 71 225
------ ------ ------- ------- ------- ------- ------- ------ -------
Income Before Income
Taxes................... 134 506 694 2,107 1,901 1,349 973 134 610
Provision for Income
Taxes................... 51 190 244 1,010 1,038 774 551 51 218
------ ------ ------- ------- ------- ------- ------- ------ -------
Net Income(3)......... $ 83 $ 316 $ 450 $ 1,097 $ 863 $ 575 $ 422 $ 83 $ 392
====== ====== ======= ======= ======= ======= ======= ====== =======
Segment Net Income:
Upstream:
United States........... $ 40 $ 88 $ 219 $ 445 $ 314 $ 258 $ 248
International........... 68 143 283 439 367 234 250
Downstream:
United States........... 17 34 135 216 172 112 104
International........... 23 57 156 91 117 121 137
Corporate and Other(3).... (65) (6) (343) (94) (107) (150) (317)
------ ------ ------- ------- ------- ------- -------
$ 83 $ 316 $ 450 $ 1,097 $ 863 $ 575 $ 422
====== ====== ======= ======= ======= ======= =======
Earnings Per Share
Basic................... $ .13 $ .72 $ .95 $ 2.51 $ 1.98 $ 1.32 $ .97 $ .13 $ .62
Diluted................. $ .13 $ .72 $ .95 $ 2.51 $ 1.98 $ 1.32 $ .97 $ .13 $ .62
Weighted Average Shares
Outstanding
Basic................... 628 437 474 437 437 437 437 628 628
Diluted................. 635 437 475 437 437 437 437 635 637
Dividends Per Share of
Common Stock(4)......... $ .14 $ -- $ -- $ -- $ -- $ -- $ --
OTHER DATA:
Cash Provided By
Operations.............. $ 393 $ 12 $ 1,373 $ 2,876 $ 2,396 $ 1,924 $ 2,143
Capital Expenditures and
Investments............. 415 431 2,516 3,114 1,944 1,837 1,665
Cash Used for Investing
Activities.............. 547 165 1,598 2,037 1,647 1,677 1,364
Cash Used for (Provided
from) Financing
Activities.............. (188) 262 555 499 187 313 773
Cash Exploration
Expense................. 28 43 217 286 262 204 200
- ------------
(1) Includes petroleum excise taxes of $5,801, $5,349, $5,461, $5,655, and
$5,291 for 1998, 1997, 1996, 1995 and 1994, and of $1,546 and $1,373 for the
first three months of 1999 and 1998. Petroleum excise taxes for pro forma
presentation are the same as in the applicable historical periods presented.
(2) Includes cash exploration overhead and operating expense, DD&A, dry hole
costs and impairments of unproved properties.
(3) Includes after-tax exchange gains (losses) of $32, $21, $(7), $(40) and
$(143) for 1998, 1997, 1996, 1995 and 1994, $2 and $7 for the first three
months of 1999 and 1998 and $23 for the pro forma as adjusted for the year
ended December 31, 1998 and $2 pro forma as adjusted for the three months
ended March 31, 1999.
(4) Conoco's initial dividend was determined on a pro rata basis covering the
period from October 27, 1998, the closing date of Conoco's initial public
offering, to December 31, 1998, and is equivalent to $.19 per share for a
full quarter.
41
43
CONOCO
PRO FORMA
MARCH 31, DECEMBER 31, AS ADJUSTED
--------- ----------------------------------------------- MARCH 31,
1999 1998 1998 1997 1996 1995 1994 1999
---- ---- ---- ---- ---- ---- ---- -----------
(IN MILLIONS)
BALANCE SHEET DATA:
Cash and Cash Equivalents................... $ 425 $ 729 $ 394 $ 1,147 $ 846 $ 286 $ 319 $ 399
Working Capital............................. (706)(1) 569 45 567 862 999 1,790 (706)(1)
Net Property, Plant and Equipment........... 11,230 10,831 11,413 10,828 10,082 9,758 9,522 11,230
Total Assets................................ 16,080 16,716 16,075 17,062 15,226 14,229 15,271 16,082
Long-Term Borrowings -- Related Parties..... 3,970 1,567 4,596 1,450 2,287 2,141 2,279 --
Other Long-Term Borrowings and Capital Lease
Obligations............................... 93 103 93 106 101 65 342 4,091
Total Stockholders' Equity/Owner's Net
Investment................................ 4,342 7,936 4,438 7,896 6,579 6,754 7,274 4,342
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
OPERATING DATA:
Proved Reserves at December 31:
Oil (MMbbls).............................................. 1,591 1,624 973 977 988
Natural Gas (Bcf)......................................... 6,183 5,861 5,396 5,048 4,674
Total Proved Reserves (MMBOE)............................. 2,622 2,601 1,872 1,818 1,767
International Proved Reserves (% of Total).................. 73% 73% 65% 63% 61%
Reserve Replacement Ratio................................... 110% 448% 126% 127% 157%
Reserve Life (years)(2)..................................... 12.3 12.4 8.9 9.3 8.2
Finding and Development Costs
per BOE(3)................................................ $ 4.03 $ 3.63 $ 4.84 $ 5.39 $ 6.24
Average Daily Production:
Oil (Mbbls/day)........................................... 348 374 374 346 367
Natural Gas (MMcf/day).................................... 1,411 1,203 1,211 1,126 1,327
Total Production (MBOE/day)............................... 583 575 576 534 588
Average Production Costs per BOE(4)......................... $ 3.95 $ 4.21 $ 3.84 $ 3.92 $ 3.59
Refinery Capacity at December 31 (Mbbls/day)(5)............. 807 754 743 621 602
Refinery Utilization(5)..................................... 92% 91% 83% 97% 99%
Total Refinery Inputs (Mbbls/day)(6)........................ 823 780 732 721 697
Sales of Refined Products (Mbbls/day)....................... 1,049 1,048 998 983 931
Retail Marketing Outlets at December 31(7):
United States............................................. 4,897 4,903 4,976 5,125 5,196
International............................................. 3,023 2,971 2,874 2,390 2,438
- ------------
(1) The working capital deficit results from the issuance of short-term
commercial paper to repay the remaining related-party debt owed to DuPont.
For detailed information, see Conoco's unaudited pro forma financial
statements on page 52.
(2) Total proved reserves at December 31 divided by annual production, excluding
natural gas liquids from gas plant ownership.
(3) Finding and development costs per barrel-of-oil-equivalent represent a
trailing five-year average for each year displayed.
(4) Excludes equity affiliates and processed natural gas liquids.
(5) Based on rated capacity to process crude oil and condensate excluding other
feedstocks.
(6) Includes crude oil, condensate and other feedstocks. This does not include
Conoco's indirect 1.2 percent interest in a 95,000 barrel per day refinery
in Mersin, Turkey, acquired as a result of Conoco's marketing joint venture
in Turkey.
(7) Represents outlets owned by Conoco and others that sell Conoco's refined
products.
42
44
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF DUPONT
The following unaudited pro forma consolidated financial statements of
DuPont for the year ended December 31, 1998, the three months ended March 31,
1999 and 1998, and as of March 31, 1999 were prepared by DuPont to illustrate
the estimated effects of the exchange offer, the cash offer and the transactions
directly associated with Conoco's initial public offering and separation from
DuPont, principally:
- the effect to DuPont of the exchange offer relates to the reduction in
DuPont common stock outstanding resulting from the exchange of Conoco Class B
common stock owned by DuPont for DuPont common stock held by United States
persons.
- the effect to DuPont of the cash offer relates to the reduction of DuPont
common stock outstanding resulting from the cash purchase of DuPont common stock
held by persons that are not United States persons.
- the effect to DuPont of the initial public offering. In October 1998,
DuPont received Conoco's initial public offering proceeds, in repayment of a
portion of Conoco's intercompany indebtedness to DuPont.
- the effect to DuPont of Conoco debt issuances. On April 20, 1999, Conoco
completed the sale of senior debt securities, and DuPont received from Conoco
its net proceeds in repayment of a portion of Conoco's indebtedness to DuPont.
In May 1999, Conoco issued commercial paper and used the proceeds to repay its
remaining indebtedness to DuPont.
These transactions and their effect on DuPont are further described in the
notes to these unaudited pro forma financial statements. To the extent these
events are not reflected in the historical consolidated income statements of
DuPont, the unaudited pro forma consolidated income statements assume that these
transactions occurred as of the beginning of the periods presented. To the
extent these events are not reflected in the historical balance sheet, the
unaudited pro forma balance sheet assumes that these transactions occurred as of
March 31, 1999.
DuPont believes that the assumptions used provide a reasonable basis for
presenting the significant effects directly attributable to the exchange offer,
the cash offer and the transactions associated with the initial public offering
and separation. The pro forma consolidated financial statements do not purport
to represent what the results of operations or financial position of DuPont
would actually have been if the exchange offer, the cash offer and the
transactions associated with the initial public offering and separation had in
fact occurred on such dates or to project the results of operations or financial
position of DuPont for any future period or date. These statements should be
read in connection with, and are qualified by reference to, the consolidated
financial statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," located in DuPont's 1998 Form 10-K and the
DuPont's Form 10-Q for the quarter ended March 31, 1999, which we have filed
with the SEC, and which we have incorporated in this document by reference. To
find out where you can get copies of DuPont's SEC filings see "Where You Can
Find More Information" on page 154.
43
45
PRO FORMA CONSOLIDATED INCOME STATEMENT OF DUPONT
YEAR ENDED DECEMBER 31, 1998
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
Sales....................................................... $24,767 $24,767
Other Income................................................ 981 981
------- ------ -------
Total..................................................... 25,748 25,748
Cost of Goods Sold and Other Operating Charges.............. 15,664 15,664
Selling, General & Administrative Expenses.................. 2,115 2,115
Depreciation and Amortization............................... 1,452 1,452
Research and Development Expense............................ 1,308 1,308
Interest Expense............................................ 520 (4)(a) 516
Purchased In-Process Research and Development............... 1,443 1,443
Employee Separation Costs and Write-down of Assets.......... 633 633
------- ------ -------
Total..................................................... 23,135 (4) 23,131
------- ------ -------
Income from Continuing Operations Before Income
Taxes and Minority Interests.............................. 2,613 4 2,617
Provision for Income Taxes.................................. 941 (24)(b) 917
Minority Interests in Earnings of Consolidated
Subsidiaries.............................................. 24 24
------- ------ -------
Income from Continuing Operations........................... $ 1,648 $ 28 $ 1,676
======= ====== =======
Earnings Per Share -- Continuing Operations:
Basic..................................................... $ 1.45
Diluted................................................... $ 1.43
Weighted Average Number of Shares Outstanding (millions):
Basic..................................................... 1,129
Diluted................................................... 1,145
PRO FORMA EARNINGS PER SHARE FROM CONTINUING OPERATIONS
BASED ON ALTERNATIVE LEVELS OF PARTICIPATION IN THE EXCHANGE
OFFER AND CASH OFFER (SHARES IN MILLIONS)(C):
Basic --
100% (195.9 DuPont shares tendered)..................... $ 1.79
75% (146.9 DuPont shares tendered; 55 Conoco shares
sold; 54.1 Conoco shares distributed in a
spin-off)............................................ $ 1.72
50% (98 DuPont shares tendered; 55 Conoco shares sold;
163.3 Conoco shares distributed in a spin-off)....... $ 1.64
Diluted --
100% (195.9 DuPont shares tendered)..................... $ 1.76
75% (146.9 DuPont shares tendered; 55 Conoco shares
sold; 54.1 Conoco shares distributed in a
spin-off)............................................ $ 1.69
50% (98 DuPont shares tendered; 55 Conoco shares sold;
163.3 Conoco shares distributed in a spin-off)....... $ 1.62
PRO FORMA WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
BASED ON ALTERNATIVE LEVELS OF PARTICIPATION IN THE EXCHANGE
OFFER AND CASH OFFER (SHARES IN MILLIONS)(C):
Basic --
100% (195.9 DuPont shares tendered)..................... 933
75%(146.9 DuPont shares tendered; 55 Conoco shares sold;
54.1 Conoco shares distributed in a spin-off......... 982
50% (98 DuPont shares tendered; 55 Conoco shares sold;
163.3 Conoco shares distributed in a spin-off)....... 1,031
Diluted --
100% (195.9 DuPont shares tendered)..................... 948
75% (146.9 DuPont shares tendered; 55 Conoco shares
sold; 54.1 Conoco shares distributed in a
spin-off)............................................ 997
50% (98 DuPont shares tendered; 55 Conoco shares sold;
163.3 Conoco shares distributed in a spin-off)....... 1,046
See Notes to Unaudited Pro Forma Consolidated Financial Statements.
44
46
PRO FORMA CONSOLIDATED INCOME STATEMENT OF DUPONT
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
Sales....................................................... $6,194 $6,194
Other Income................................................ 297 297
------ ------
Total..................................................... 6,491 6,491
Cost of Goods Sold and Other Operating Charges.............. 4,049 4,049
Selling, General & Administrative Expenses.................. 479 479
Depreciation and Amortization............................... 332 332
Research and Development Expense............................ 264 264
Interest Expense............................................ 127 (11)(a) 116
Purchased In-Process Research and Development............... 60 60
Employee Separation Costs and Write-down of Assets.......... 118 118
------ ---- ------
Total..................................................... 5,429 (11) 5,418
------ ---- ------
Income from Continuing Operations Before Income
Taxes and Minority Interests.............................. 1,062 11 1,073
Provision for Income Taxes.................................. 417 (2)(b) 415
Minority Interests in Earnings of Consolidated
Subsidiaries.............................................. 8 8
------ ---- ------
Income from Continuing Operations........................... $ 637 $ 13 $ 650
====== ==== ======
Earnings Per Share -- Continuing Operations:
Basic..................................................... $ .56
Diluted................................................... $ .55
Weighted Average Number of Shares Outstanding (millions):
Basic..................................................... 1,128
Diluted................................................... 1,146
PRO FORMA EARNINGS PER SHARE FROM CONTINUING OPERATIONS
BASED ON ALTERNATIVE LEVELS OF PARTICIPATION IN THE
EXCHANGE OFFER AND CASH OFFER (SHARES IN MILLIONS)(C):
Basic --
100% (195.9 DuPont shares tendered).................. $ .69
75% (146.9 DuPont shares tendered; 55 Conoco shares
sold; 54.1 Conoco shares distributed in a
spin-off).......................................... $ .66
50% (98 DuPont shares tendered; 55 Conoco shares
sold; 163.3 Conoco shares distributed in a
spin-off).......................................... $ .63
Diluted --
100% (195.9 DuPont shares tendered).................. $ .68
75% (146.9 DuPont shares tendered; 55 Conoco shares
sold; 54.1 Conoco shares distributed in a
spin-off).......................................... $ .65
50% (98 DuPont shares tendered; 55 Conoco shares
sold; 163.3 Conoco shares distributed in a
spin-off).......................................... $ .62
PRO FORMA WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
BASED ON ALTERNATIVE LEVELS OF PARTICIPATION IN THE
EXCHANGE OFFER AND CASH OFFER (SHARES IN MILLIONS)(C):
Basic --
100% (195.9 DuPont shares tendered).................. 933
75% (146.9 DuPont shares tendered; 55 Conoco shares
sold; 54.1 Conoco shares distributed in a
spin-off).......................................... 982
50% (98 DuPont shares tendered; 55 Conoco shares
sold; 163.3 Conoco shares distributed in a
spin-off).......................................... 1,030
Diluted --
100% (195.9 DuPont shares tendered).................. 948
75% (146.9 DuPont shares tendered; 55 Conoco shares
sold; 54.1 Conoco shares distributed in a
spin-off).......................................... 997
50% (98 DuPont shares tendered; 55 Conoco shares
sold; 163.3 Conoco shares distributed in a
spin-off).......................................... 1,046
See Notes to Unaudited Pro Forma Consolidated Financial Statements.
45
47
PRO FORMA CONSOLIDATED INCOME STATEMENT OF DUPONT
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
Sales....................................................... $ 6,295 $ 6,295
Other Income................................................ 18 18
------- ---- -------
Total..................................................... 6,313 6,313
Cost of Goods Sold and Other Operating Charges.............. 3,873 3,873
Selling, General & Administrative Expenses.................. 535 535
Depreciation and Amortization............................... 335 335
Research and Development Expense............................ 358 358
Interest Expense............................................ 96 23(a) 119
Purchased In-Process Research and Development............... 40 40
------- ---- -------
Total..................................................... 5,237 23 5,260
------- ---- -------
Income from Continuing Operations Before Income
Taxes and Minority Interests.............................. 1,076 (23) 1,053
Provision for Income Taxes.................................. 432 (10)(b) 422
Minority Interests in Earnings of Consolidated
Subsidiaries.............................................. 16 16
------- ---- -------
Income from Continuing Operations........................... $ 628 $(13) $ 615
======= ==== =======
Earnings Per Share -- Continuing Operations:
Basic..................................................... $ .55
Diluted................................................... $ .55
Weighted Average Number of Shares Outstanding (millions):
Basic..................................................... 1,127
Diluted................................................... 1,138
PRO FORMA EARNINGS PER SHARE FROM CONTINUING OPERATIONS
BASED ON ALTERNATIVE LEVELS OF PARTICIPATION IN THE EXCHANGE
OFFER AND CASH OFFER (SHARES IN MILLIONS)(C):
Basic --
100% (195.9 DuPont shares tendered)..................... $ .66
75% (146.9 DuPont shares tendered; 55 Conoco shares
sold; 54.1 Conoco shares distributed in a
spin-off)............................................ $ .64
50% (98 DuPont shares tendered; 55 Conoco shares sold;
163.3 Conoco shares distributed in a spin-off)....... $ .61
Diluted --
100% (195.9 DuPont shares tendered)..................... $ .65
75% (146.9 DuPont shares tendered; 55 Conoco shares
sold; 54.1 Conoco shares distributed in a
spin-off)............................................ $ .63
50% (98 DuPont shares tendered; 55 Conoco shares sold;
163.3 Conoco shares distributed in a spin-off)....... $ .60
PRO FORMA WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
BASED ON ALTERNATIVE LEVELS OF PARTICIPATION IN THE EXCHANGE
OFFER AND CASH OFFER (SHARES IN MILLIONS)(C):
Basic --
100% (195.9 DuPont shares tendered)..................... 931
75% (146.9 DuPont shares tendered; 55 Conoco shares
sold; 54.1 Conoco shares distributed in a
spin-off)............................................ 980
50% (98 DuPont shares tendered; 55 Conoco shares sold;
163.3 Conoco shares distributed in a spin-off)....... 1,029
Diluted --
100% (195.9 DuPont shares tendered)..................... 942
75% (146.9 DuPont shares tendered; 55 Conoco shares
sold; 54.1 Conoco shares distributed in a
spin-off)............................................ 991
50% (98 DuPont shares tendered; 55 Conoco shares sold;
163.3 Conoco shares distributed in a spin-off)....... 1,040
See Notes to Unaudited Pro Forma Consolidated Financial Statements
46
48
PRO FORMA CONSOLIDATED BALANCE SHEET OF DUPONT
MARCH 31, 1999
(IN MILLIONS)
(UNAUDITED)
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
ASSETS
Cash and Cash Equivalents................................ $ 1,003 $ (95)(b) $ 908
Marketable Securities.................................... 11 11
Accounts and Notes Receivable............................ 5,399 5,399
Inventories.............................................. 3,566 3,566
Prepaid Expenses......................................... 216 216
Deferred Income Taxes.................................... 596 596
------- -------- --------
Total Current Assets................................ 10,791 (95) 10,696
Property, Plant and Equipment............................ 35,469 35,469
Less: Accumulated Depreciation and Amortization.......... 20,652 20,652
------- -------- --------
Net Property, Plant and Equipment................... 14,817 -- 14,817
Investment in Affiliates................................. 1,801 1,801
Other Assets............................................. 5,908 5,908
Net Assets of Discontinued Operations.................... 8,650 (8,650)(a,b) --
------- -------- --------
TOTAL ASSETS............................................. $41,967 $ (8,745) $ 33,222
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts Payable......................................... $ 1,900 $ -- $ 1,900
Short-Term Borrowings and Capital Lease Obligations...... 9,232 (4,071)(a) 5,161
Income Taxes............................................. 374 -- 374
Other Accrued Liabilities................................ 3,157 -- 3,157
------- -------- --------
Total Current Liabilities........................... 14,663 (4,071) 10,592
Long-Term Borrowings and Capital Lease Obligations....... 4,566 -- 4,566
Other Liabilities........................................ 7,663 -- 7,663
Deferred Income Taxes.................................... 478 -- 478
------- -------- --------
Total Liabilities................................... 27,370 (4,071) 23,299
Minority Interests....................................... 464 -- 464
Preferred Stock.......................................... 237 -- 237
Common Stock............................................. 342 -- 342
Additional Paid-In Capital............................... 7,866 -- 7,866
Reinvested Earnings...................................... 6,933 8,735(b,c) 15,668
Accumulated Other Comprehensive Loss..................... (526) 349(c) (177)
Common Stock Held in Trust for Unearned Employee
Compensation and Benefits (Flexitrust), at Market...... (719) -- (719)
Treasury Stock........................................... -- (13,758)(a,d) (13,758)
------- -------- --------
Total Stockholders' Equity.......................... 14,133 (4,674) 9,459
------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............... $41,967 $ (8,745) $ 33,222
======= ======== ========
See Notes to Unaudited Pro Forma Consolidated Financial Statements.
47
49
DUPONT
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF DUPONT
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited pro forma consolidated income statement for the year ended
December 31, 1998 and for the three months ended March 31, 1999 and 1998 and the
unaudited pro forma consolidated balance sheet as of March 31, 1999 have been
prepared from the consolidated financial statements of DuPont for the year ended
December 31, 1998 and for the quarters ended March 31, 1999 and 1998, included
in DuPont's Form 10-K for the year ended December 31, 1998 and DuPont's Form
10-Q for the period ended March 31, 1999. The financial statements of DuPont as
set forth in its Form 10-K for the year ended December 31, 1998 and in its Form
10-Q for the period ended March 31, 1999 present Conoco's petroleum operations
as discontinued operations.
The pro forma financial statements give effect to the exchange offer, the
cash offer and, as described below, the transactions directly associated with
the initial public offering and separation of Conoco from DuPont. These
transactions and their effect on DuPont are described in the notes to these
unaudited pro forma financial statements. To the extent these events are not
reflected in the historical consolidated income statements of DuPont, the
unaudited pro forma consolidated income statements assume that these
transactions occurred as of the beginning of the periods presented. To the
extent these events are not reflected in the historical balance sheet, the
unaudited pro forma balance sheet assumes that these transactions occurred as of
March 31, 1999.
The initial public offering of the Class A common stock of Conoco,
previously a wholly owned subsidiary of DuPont, commenced on October 21, 1998,
and the Class A common stock began trading on the New York Stock Exchange on
October 22, 1998. The initial public offering consisted of 191,456,427 shares of
Class A common stock issued at a price of $23 per share, for net proceeds of
$4,228, after deducting the underwriting discounts and commissions payable by
Conoco. The initial public offering represented DuPont's first step in the
planned divestiture of its entire petroleum business. Through DuPont's ownership
of 100 percent of Conoco Class B common stock, a total of 436,543,573 shares,
DuPont owned approximately 70 percent of Conoco's common stock representing
approximately 92 percent of the combined voting power of all classes of voting
stock of Conoco at March 31, 1999.
In July 1998, a dividend of $7,500 was declared and paid in the form of a
promissory note by Conoco to DuPont. In September 1998, Conoco declared a
dividend of $700 representing a reduction of notes receivable from DuPont. In
connection with the initial public offering and as a part of the separation of
Conoco from DuPont, DuPont transferred to Conoco the ownership of a number of
subsidiaries, which consisted of oil and gas businesses and operations including
the associated assets and liabilities. The transactions related to the
separation were included in the provisions of the separation agreement between
Conoco and DuPont and primarily included the following:
- structuring Conoco on a stand-alone basis by transferring between DuPont
and Conoco a number of subsidiaries and assets and liabilities;
- settling, to the extent specified, intercompany loans in existence prior
to the initial public offering;
- delivering a promissory note to DuPont as settlement for DuPont stock
options held by Conoco employees and other employee benefits related
liabilities;
- using the net proceeds of the initial public offering to repay DuPont a
portion of intercompany indebtedness; and
- entering into agreements with respect to employee benefit arrangements,
information management, provision of interim services, financing
arrangements, tax sharing, environmental liabilities and various
commercial arrangements.
48
50
DUPONT
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF DUPONT --(CONTINUED)
(UNAUDITED)
Conoco used the net proceeds from the initial public offering to repay
indebtedness owed to DuPont or to purchase a portion of the indebtedness owed by
subsidiaries of Conoco to DuPont as follows:
- to pay accrued interest ($124) on the $7,500 promissory notes and then to
repay principal ($2,654) on the note to the extent necessary to reduce
the principal amount to $4,846;
- to purchase intercompany notes denominated in Norwegian Kroner with an
aggregate principal amount of approximately $461 after conversion to U.S.
dollars, together with accrued interest ($9);
- to pay accrued interest ($8) and a portion of the principal ($820) on
another intercompany note to the extent necessary to reduce the principal
amount to $7; and
- to pay a portion of the principal ($152) on an intercompany demand note.
The sum of these payments to DuPont in October 1998 was $4,228.
In April 1999, Conoco sold $4,000 in senior debt securities. Conoco used
the net proceeds of $3,970, after deducting debt issuance costs and note
discount, to reduce the related party debt and accrued interest owed to DuPont.
In May 1999, Conoco issued commercial paper and used the proceeds of $1,022 to
repay its remaining indebtedness to DuPont.
Under the terms of the exchange offer, DuPont will offer to exchange 436.5
million shares of Conoco Class B common stock owned by DuPont for a
predetermined number of DuPont shares held by United States persons based on the
actual exchange ratio. The pro forma financial information contained in this
document has been compiled, in part, on the basis of an assumed exchange ratio
of 2.37131 shares of Conoco Class B common stock for each share of DuPont common
stock. This assumed ratio is equal to the ratio of the closing sale price of
DuPont common stock to that of Conoco Class A common stock on June 4, 1999 and
does not include any projected premiums. THIS ASSUMED EXCHANGE RATIO IS FOR
ILLUSTRATIVE PURPOSES ONLY. Applying this illustrative exchange ratio to the
436.5 million shares of Conoco Class B common stock owned by DuPont results in a
maximum of 184.1 million shares of DuPont common stock received in exchange for
Conoco stock.
The actual exchange ratio applicable to the exchange offer will be
determined shortly before commencement of the exchange offer, and will be
calculated on the basis of the relative trading prices of the two securities at
such time, adjusted, it is anticipated, to reflect a premium to tendering
stockholders. THE ACTUAL EXCHANGE RATIO WILL BE SET FORTH IN THE FINAL OFFERING
CIRCULAR-PROSPECTUS, AND IS LIKELY TO BE DIFFERENT THAN THE ASSUMED EXCHANGE
RATIO USED IN THESE PRO FORMA FINANCIAL STATEMENTS, ALTHOUGH NEITHER DUPONT NOR
CONOCO CAN PREDICT AT THIS TIME WHETHER IT WILL BE HIGHER OR LOWER THAN SUCH
AMOUNT.
Under the terms of the cash offer DuPont would offer to purchase a maximum
of 11.8 million shares of DuPont common stock held by persons that are not
United States persons at an assumed cash purchase price of $70.25 a share. The
number of shares to be purchased in the cash offer is calculated by multiplying
the estimated number of shares owned by persons who are not United States
persons by the percentage of all outstanding DuPont shares held by United States
persons that will be exchanged for shares of Conoco Class B common stock if the
exchange offer is fully subscribed. The assumed cash purchase price is
determined by multiplying the illustrative exchange ratio of 2.37131 times the
closing sale price of Conoco Class A common stock on June 4, 1999 of $29 5/8.
THIS ASSUMED CASH PURCHASE PRICE IS FOR ILLUSTRATIVE PURPOSES ONLY.
The DuPont shares received in the exchange offer and cash offer will be
recorded as an increase to treasury stock at the market value of the shares of
Conoco Class B common stock distributed on the expiration date in the exchange
offer and at the cash price paid for DuPont shares in the cash offer. The
exchange offer will result in a net gain to DuPont, after direct expenses of the
disposition, and will be reported as a component of the gain on disposal of
discontinued business. The gain from the exchange offer will result from the
difference between the market value and the carrying value of the shares of
Conoco Class B common stock distributed. There will be no gain from the cash
offer.
49
51
DUPONT
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF DUPONT --(CONTINUED)
(UNAUDITED)
On March 15, 1999, DuPont agreed to effect a business combination with
Pioneer Hi-Bred International, Inc. The merger is expected to close during the
summer of 1999. While the effects of this transaction are not required for pro
forma purposes, in the year 2000, the first full year of combined operations
with Pioneer, DuPont expects fully diluted earnings per share, excluding the
impact of nonrecurring items, to be reduced by about seven percent as the result
of increased interest expense and purchase price amortization of intangible
assets associated with the acquisition. Preliminary analysis indicates that 1999
pro forma earnings, assuming the merger took place on January 1, 1999, could
show even more dilution due to the required exclusion under the pro forma rules
of future operating benefits DuPont expects to realize from the combined
operations. Actual dilution will be dependent on many factors including earnings
of DuPont and Pioneer after the merger, allocations of purchase price including
amounts assigned to purchased in-process research and development, the number of
DuPont shares acquired under the exchange offer and cash offer, and the number
of DuPont shares issued to acquire Pioneer. See "Risk Factors -- Risk of Future
Acquisitions and Other Transactions by DuPont and Conoco."
The unaudited pro forma consolidated financial statements were prepared
assuming the exchange of 100 percent of Conoco Class B common stock owned by
DuPont for DuPont common stock and 100 percent acceptance of the cash offer. It
is believed that the financial statements presented on this basis are likely to
be substantially representative of the outcome of the offers. However, in order
to give effect to a full range of results, pro forma earnings per share and
weighted average number of shares outstanding are presented assuming a pro rata
reduction from the 100 percent case to 75 percent and 50 percent. The chance of
the latter case occurring is believed to be slight. In the unexpected case the
exchange offer is undersubscribed DuPont will distribute at least a sufficient
number of Conoco shares through a spin-off so that Conoco stock representing at
least 80 percent of the total combined voting power of all of the outstanding
Conoco stock is distributed pursuant to the exchange offer and any subsequent
spin-off.
The pro forma adjustments are based upon currently available information
and contain estimates and assumptions. DuPont believes the estimates and
assumptions provide a reasonable basis for presenting the significant effects of
the initial public offering, the separation of Conoco from DuPont, the exchange
offer and the cash offer, and that the pro forma adjustments give appropriate
effect to these estimates and assumptions and are properly applied in the
unaudited pro forma consolidated financial statements.
2. PRO FORMA ADJUSTMENTS
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENTS
(a) Interest expense for continuing operations in the historical income
statements reflected an allocation to discontinued operations as provided under
EITF Issue 87-24. The pro forma basis interest expense results from the assumed
repayment of DuPont's short-term commercial paper borrowings with actual
proceeds received from Conoco in connection with the initial public offering and
separation of Conoco from DuPont. This is consistent with DuPont's actual use of
proceeds received from Conoco as a result of the transaction. Pro forma interest
also reflects assumed additional commercial paper borrowings of $825 required to
purchase DuPont common stock under the cash offer. Pro forma interest
calculations are based on historical interest rates paid by DuPont on short-term
commercial paper borrowings for the periods presented. For the year ended
December 31, 1998 and for the three months ended March 31, 1999 and 1998,
average commercial paper rates were 5.6 percent, 5.1 percent and 5.7 percent,
respectively. To the extent Conoco's payments to DuPont were in excess of
commercial paper borrowings, the excess was not assumed to benefit pro forma
results.
In the event 75 percent or 50 percent of the maximum number of DuPont
shares (11.8 million shares) are purchased under the cash offer, assumed
additional commercial paper borrowings required are $619 in the 75 percent case
and $413 in the 50 percent case, versus the $825 required if 100 percent of
DuPont shares are purchased. In the event 75 percent or 50 percent of the
maximum number of DuPont shares (184.1 million
50
52
DUPONT
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF DUPONT --(CONTINUED)
(UNAUDITED)
shares) are received in exchange for Conoco shares, 55 million shares of Conoco
are assumed to be sold resulting in a reduction to commercial paper borrowings
of $1,087.
The effect of the cash offer on pro forma results is not material in that
pro forma earnings per share data are essentially the same if all DuPont shares
are received in the cash offer or none are received. The benefit from the
reduction in shares outstanding is offset by additional interest expense
associated with debt incurred to finance the repurchase.
(b) The pro forma provision for income taxes reflects a benefit due to
increased utilization of foreign tax credits when DuPont's provision for income
taxes is computed on a stand-alone basis.
(c) Presented for illustrative purposes, see page 48.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(a) Reflects $4,896 received from Conoco in the second quarter 1999 in full
payment of notes receivable outstanding from Conoco at March 31, 1999 net of
assumed additional borrowings of $825 required to purchase DuPont common stock
under the cash offer.
Assuming the exchange offer and cash offer result in 75 percent and 50
percent of the maximum DuPont shares that may be received under these offers,
pro forma borrowings of $5,161 would be reduced by $1,293 in the 75 percent case
and $1,499 in the 50 percent case, due to proceeds from sale of Conoco stock and
a reduction in cash required under the cash offer.
(b) The gain on the disposition of Conoco will vary with the number of
Conoco Class B common shares exchanged for DuPont common shares. The pro forma
balance sheet assumes that 100 percent or 436.5 million Conoco shares are
exchanged for 184.1 million DuPont shares. This results in an anticipated net
gain of $8,735, which is net of $95 in direct expenses.
If 75 percent of Conoco shares are exchanged, the net gain is $7,053 and
includes a net gain of $614 for the sale of 55 million shares of Conoco at the
closing sale price of Conoco Class A common stock on June 4, 1999. Reinvested
earnings are reduced by the book value, $465, of the 54.1 million Conoco shares
assumed distributed through a spin-off. If 50 percent of Conoco shares are
exchanged, the net gain is $4,759 and includes a net gain of $614 for the sale
of 55 million shares of Conoco. Reinvested earnings are reduced by the book
value, $1,404, of the 163.3 million Conoco shares assumed distributed through a
spin-off. To the extent taxes are required to be paid on the value of Conoco
shares distributed to holders of DuPont common stock that are not United States
persons, the indicated net gain on the transaction, assuming 75 percent or 50
percent of Conoco shares are exchanged, would be reduced by $32 and $96.
Borrowings would increase by like amounts.
(c) Reflects the elimination from accumulated other comprehensive loss of
amounts pertaining to Conoco's operations as of March 31, 1999. Amounts
represent cumulative translation adjustment (loss) of $270 and minimum pension
liability adjustment (loss) of $79. The total adjustment reduces the gain on the
transaction by $349.
(d) The increase in treasury stock of $13,758 assumes that the maximum
number of DuPont shares are received in the exchange offer (184.1 million DuPont
shares for a total of $12,933) and cash offer (11.8 million DuPont shares for a
total of $825).
If 75 percent (146.9 million shares) or 50 percent (98 million shares) were
received in the exchange offer and the cash offer, the pro forma increase in
treasury stock would be reduced by $3,440 in the 75 percent case and $6,879 in
the 50 percent case.
51
53
UNAUDITED PRO FORMA FINANCIAL STATEMENTS OF CONOCO
The following unaudited pro forma financial statements of Conoco for the
year ended December 31, 1998, the three months ended March 31, 1998 and 1999,
and as of March 31, 1999, were prepared by Conoco to illustrate the estimated
effects of the transactions directly associated with Conoco's initial public
offering and separation from DuPont, principally:
- the effect to Conoco of the initial public offering. In October 1998,
Conoco paid its initial public offering proceeds in repayment of a
portion of Conoco's intercompany indebtedness to DuPont.
- the effect to Conoco of debt issuances. On April 20, 1999, Conoco
completed the sale of senior debt securities, and Conoco paid to DuPont
its proceeds in repayment of a portion of Conoco's indebtedness to
DuPont. In May 1999, Conoco issued commercial paper and used the proceeds
to repay its remaining indebtedness to DuPont.
The exchange offer, the cash offer and the possible spin-off or cash sale
of any remaining Conoco Class B common stock as a result of an undersubscription
of shares in the exchange offer, will have no impact on Conoco's historical
capital structure. Conoco's Class B common stock, as reported in its historical
balance sheet, will remain issued and outstanding under any of these outcomes.
These transactions and their effect on Conoco are further described in the
notes to these unaudited pro forma financial statements. To the extent these
events are not reflected in the historical consolidated income statements of
Conoco, the unaudited pro forma consolidated income statements assume that these
transactions occurred as of the beginning of the periods presented. To the
extent these events are not reflected in the historical balance sheet, the
unaudited pro forma balance sheet assumes that these transactions occurred as of
March 31, 1999.
Conoco management believes that the assumptions used provide a reasonable
basis for presenting the significant effects directly attributable to the
exchange offer and the transactions associated with the initial public offering
and separation of Conoco from DuPont. The pro forma financial statements do not
purport to represent what the results of operations or financial position of
Conoco would actually have been if the exchange offer and the transactions
associated with the initial public offering and separation had in fact occurred
on such dates or to project the results of operations or financial position of
Conoco for any future period or date. These statements should be read in
connection with, and are qualified by reference to the consolidated financial
statements of Conoco and "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Conoco," included elsewhere in this
document.
52
54
PRO FORMA STATEMENT OF INCOME OF CONOCO
YEAR ENDED DECEMBER 31, 1998
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
INITIAL
PUBLIC PRO FORMA
PRO FORMA OFFERING AS
HISTORIC ADJUSTMENTS PRO FORMA ADJUSTMENTS ADJUSTED
-------- ----------- --------- ----------- ---------
Revenues............................ $23,168 $ (43)(a) $23,116 $ (6)(d) $23,110
(9)(b)
Cost of Goods Sold and Other
Operating Expenses................ 13,840 -- 13,840 -- 13,840
Selling, General and Administrative
Expenses.......................... 736 -- 736 -- 736
Stock Option Provision.............. 236 -- 236 -- 236
Exploration Expenses................ 380 -- 380 -- 380
Depreciation, Depletion and
Amortization...................... 1,113 -- 1,113 -- 1,113
Taxes Other Than on Income.......... 5,970 -- 5,970 -- 5,970
Interest and Debt Expense........... 199 263(a) 462 (237)(e) 225
------- ----- ------- ----- -------
Income Before Income Taxes.......... 694 (315) 379 231 610
Provision for Income Taxes.......... 244 (91)(c) 153 65(e) 218
------- ----- ------- ----- -------
Net Income.......................... $ 450 $(224) $ 226 $ 166 $ 392
======= ===== ======= ===== =======
Pro Forma Earnings Per Share (Note
4)
Basic............................. $ 0.95 $ 0.62
Diluted........................... $ 0.95 $ 0.62
Pro Forma Weighted Average Shares
Outstanding (Note 4)
Class A........................... 37 154 191
Class B........................... 437 -- 437
------- ----- -------
Total Basic.................... 474 154 628
Stock Options....................... 1 8 9
------- ----- -------
Total Diluted.................. 475 162 637
======= ===== =======
See Notes to Unaudited Pro Forma Financial Statements.
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PRO FORMA STATEMENT OF INCOME OF CONOCO
THREE MONTHS ENDED MARCH 31, 1998
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
INITIAL
PUBLIC PRO FORMA
PRO FORMA OFFERING AS
HISTORIC ADJUSTMENTS PRO FORMA ADJUSTMENTS ADJUSTED
-------- ----------- --------- ----------- ---------
Revenues............................. $5,834 $ (16)(a) $5,818 $(16)(d) $5,802
Cost of Goods Sold and Other
Operating Expenses................. 3,393 -- 3,393 -- 3,393
Selling, General and Administrative
Expenses........................... 183 -- 183 -- 183
Exploration Expenses................. 67 -- 67 -- 67
Depreciation, Depletion and
Amortization....................... 267 -- 267 -- 267
Taxes Other Than on Income........... 1,417 -- 1,417 -- 1,417
Interest and Debt Expense............ 1 105(a) 106 (59)(e) 47
------ ----- ------ ---- ------
Income Before Income Taxes........... 506 (121) 385 43 428
Provision for Income Taxes........... 190 (34)(c) 156 9(e) 165
------ ----- ------ ---- ------
Net Income........................... $ 316 $ (87) $ 229 $ 34 $ 263
====== ===== ====== ==== ======
Pro Forma Earnings Per Share (Note 4)
Basic.............................. $ 0.72 $ 0.42
Diluted............................ $ 0.72 $ 0.41
Pro Forma Weighted Average Shares
Outstanding (Note 4)
Class A............................ -- 191 191
Class B............................ 437 -- 437
------ ---- ------
Total Basic..................... 437 191 628
Stock Options........................ -- 9 9
------ ---- ------
Total Diluted................... 437 200 637
====== ==== ======
See Notes to Unaudited Pro Forma Financial Statements.
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PRO FORMA STATEMENT OF INCOME OF CONOCO
THREE MONTHS ENDED MARCH 31, 1999
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
PRO FORMA
PRO FORMA AS
HISTORIC ADJUSTMENTS ADJUSTED
-------- ----------- ---------
Revenues.................................................... $5,335 -- $5,335
Cost of Goods Sold and Other Operating Expenses............. 3,005 -- 3,005
Selling, General and Administrative Expenses................ 186 -- 186
Exploration Expenses........................................ 46 -- 46
Depreciation, Depletion and Amortization.................... 302 -- 302
Taxes Other Than on Income.................................. 1,591 -- 1,591
Interest and Debt Expense................................... 71 -- 71
------ ------ ------
Income Before Income Taxes.................................. 134 -- 134
Provision for Income Taxes.................................. 51 -- 51
------ ------ ------
Net Income.................................................. $ 83 -- $ 83
====== ====== ======
Pro Forma Earnings Per Share (Note 4)
Basic..................................................... $ 0.13 $ 0.13
Diluted................................................... $ 0.13 $ 0.13
Pro Forma Weighted Average Shares Outstanding (Note 4):
Class A................................................... 191 191
Class B................................................... 437 437
------ ------
Total Basic............................................ 628 628
Stock Options............................................... 7 7
------ ------
Total Diluted.......................................... 635 635
====== ======
See Notes to Unaudited Pro Forma Financial Statements.
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PRO FORMA BALANCE SHEET OF CONOCO
MARCH 31, 1999
(IN MILLIONS)
(UNAUDITED)
PRO FORMA
PRO FORMA AS
HISTORIC ADJUSTMENTS ADJUSTED
-------- ------------ ---------
ASSETS
Cash and Cash Equivalents................................... $ 425 $ (26)(g) $ 399
Accounts and Notes Receivable............................... 1,228 -- 1,228
Inventories................................................. 899 -- 899
Prepaid Expenses............................................ 305 -- 305
------- ------- -------
Total Current Assets................................... 2,857 (26) 2,831
Net Property, Plant and Equipment........................... 11,230 -- 11,230
Investment in Affiliates.................................... 1,445 -- 1,445
Other Assets................................................ 548 28(f) 576
------- ------- -------
Total Assets................................................ $16,080 $ 2 $16,082
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 1,355 $ -- $ 1,355
Short-Term Borrowings -- Related Parties.................... 926 122(f) --
(26)(g)
(1,022)(h)
Other Short-Term Borrowings and Capital Lease Obligations... 29 1,022(h) 1,051
Income Taxes................................................ 171 -- 171
Other Accrued Liabilities................................... 1,082 (122)(f) 960
------- ------- -------
Total Current Liabilities.............................. 3,563 (26) 3,537
------- ------- -------
Long-Term Borrowings -- Related Parties..................... 3,970 (3,970)(f) --
Other Long-Term Borrowings and Capital Lease Obligations.... 93 3,998(f) 4,091
Deferred Income Taxes....................................... 1,658 -- 1,658
Other Liabilities and Deferred Credits...................... 2,144 -- 2,144
------- ------- -------
Total Liabilities...................................... 11,428 2 11,430
------- ------- -------
Minority Interests.......................................... 310 -- 310
Stockholders' Equity........................................ 4,342 -- 4,342
------- ------- -------
Total Liabilities and Stockholders' Equity.................. $16,080 $ 2 $16,082
======= ======= =======
See Notes to Unaudited Pro Forma Financial Statements.
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CONOCO
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
(UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited pro forma statements of income for the year ended December
31, 1998, the three months ended March 31, 1998 and 1999 and the unaudited pro
forma balance sheet as of March 31, 1999 have been prepared from the
consolidated financial statements of Conoco for the year ended December 31, 1998
and the interim consolidated financial statements of Conoco for the three months
ended March 31, 1999 and 1998 as included in this document.
The pro forma financial statements give effect to the exchange offer and,
as described in note 2 below, the transactions directly associated with the
initial public offering and separation of Conoco from DuPont. These transactions
and their effect on Conoco are described in the notes to these unaudited pro
forma financial statements. To the extent these events are not reflected in the
historical consolidated income statements of Conoco, the unaudited pro forma
consolidated income statements assume that these transactions occurred as of the
beginning of the periods presented. To the extent these events are not reflected
in the historical balance sheet, the unaudited pro forma balance sheet assumes
that these transactions occurred as of March 31, 1999.
The pro forma financial statements do not purport to represent what the
results of operations or financial position of Conoco would actually have been
if the exchange offer, the transactions associated with the initial public
offering and separation from DuPont, and the sale of senior debt securities and
commercial paper had in fact occurred on such dates or to project the results of
operations or financial position of Conoco for any future date or period. The
pro forma financial statements should be read together with, and are qualified
by reference to, the consolidated financial statements of Conoco and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Conoco," included elsewhere in this document.
The pro forma adjustments are based upon currently available information
and contain estimates and assumptions. Should DuPont's ownership interest fall
below 50 percent, pro forma selling, general and administrative expenses and
guarantee and letter of credit fees would increase by approximately $15 to $20
on a full year basis. In addition, changes were made in services historically
provided to DuPont by Conoco. These changes primarily included ceasing to
provide insurance coverage to DuPont which historically had been provided
through a company-owned captive insurance company, entering into new contractual
commitments related to fees charged by Conoco for services provided to DuPont
such as research and development and securing supplies of natural gas for
various DuPont facilities. The effect of these changes were not material to
Conoco's results of operations and were not reflected in the pro forma
statements of income.
Conoco management believes the estimates and assumptions provide a
reasonable basis for presenting the significant effects of the exchange offer,
initial public offering and separation of Conoco from DuPont, and that the pro
forma adjustments give appropriate effect to these estimates and assumptions and
are properly applied in the pro forma financial statements.
2. INITIAL PUBLIC OFFERING AND SEPARATION
The initial public offering of Class A common stock of Conoco commenced on
October 21, 1998, and the Class A common stock began trading on the New York
Stock Exchange on October 22, 1998. The initial public offering consisted of
191,456,427 shares of Class A common stock issued at a price of $23 per share,
for net proceeds of $4,228, after deducting the underwriting discounts and
commissions payable by Conoco. Through DuPont's ownership of 100 percent of
Conoco Class B common stock, representing a total of 436,543,573 shares, DuPont
owned approximately 70 percent of Conoco's common stock representing
approximately 92 percent of the combined voting power of all classes of voting
stock of Conoco at March 31, 1999.
In July 1998, a dividend of $7,500 was declared and paid in the form of a
promissory note by Conoco to DuPont. In September 1998, Conoco declared a
dividend of $700 representing a reduction of notes receivable
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CONOCO
NOTES TO PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
(UNAUDITED)
from DuPont. In connection with the initial public offering, DuPont transferred
to Conoco the ownership of subsidiaries consisting of oil and gas businesses and
operations including the associated assets and liabilities.
The transactions related to the separation of Conoco from DuPont primarily
included the following:
- structuring Conoco on a stand-alone basis by transferring between DuPont
and Conoco a number of subsidiaries and assets and liabilities;
- settling, to the extent specified, intercompany loans in existence prior
to the initial public offering;
- delivering a promissory note to DuPont as settlement for DuPont stock
options held by Conoco employees and other employee benefits related
liabilities;
- using the net proceeds of the initial public offering to repay a portion
of the long-term borrowings -- related parties; and
- entering into agreements with respect to employee benefit arrangements,
information management, the provision of interim services, financing
arrangements, tax sharing, environmental liabilities and various
commercial arrangements.
Conoco used the net proceeds from the initial public offering to repay
indebtedness owned to DuPont or to purchase a portion of the indebtedness owed
by subsidiaries of Conoco to DuPont as follows:
- to pay accrued interest ($124) on the $7,500 promissory notes and then to
repay principal ($2,654) on such note to the extent necessary to reduce
the principal amount to $4,846;
- to purchase intercompany notes denominated in Norwegian Kroner with an
aggregate principal amount of approximately $461 after conversion to U.S.
dollars, together with accrued interest ($9);
- to pay accrued interest ($8) and a portion of the principal ($820) on
another intercompany note to the extent necessary to reduce the principal
amount to $7; and
- to pay a portion of the principal ($152) on an intercompany demand note.
The sum of these payments to DuPont in October 1998 was $4,228.
In connection with the initial public offering, Conoco and DuPont gave
current employees of Conoco the option, subject to specific country tax and
legal requirements, to participate in a program that involved the cancellation
of all or part of their options to purchase DuPont common stock or stock
appreciation rights with respect to DuPont common stock and the issuance by
Conoco, upon such cancellation, of comparable Conoco Class A common stock
options, or stock appreciation rights with respect to Conoco Class A common
stock. This program was deemed a change in the terms of the affected awards
granted to Conoco employees. As a result, Conoco incurred a non-cash charge to
compensation expense in the fourth quarter of 1998 of $236 pre-tax or $183
after-tax.
3. PRO FORMA ADJUSTMENTS
Unaudited Pro Forma Statements of Income
(a) Reflects a decrease in interest income due to settlement of notes
receivable -- related parties and incremental interest expense resulting from
Conoco's new debt structure. The incremental interest expense was calculated by
multiplying long-term borrowings -- related parties ($7,500), intercompany notes
denominated in Norwegian Kroner ($461) and other intercompany notes ($820) by an
annual interest rate of 6.0125 percent on those borrowings and subtracting the
associated historical related party interest cost of $264 for the year ended
December 31, 1998 and $27 for the three months ended March 31, 1998. The
associated historical-related party
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CONOCO
NOTES TO PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
(UNAUDITED)
interest cost excludes capitalized interest of $72 for the year ended December
31, 1998 and $28 for the three months ended March 31, 1998.
On April 20, 1999, Conoco completed its public offering and sale of $4,000
of multi-tranche senior debt, which included:
- $1,350 in 5.9 percent five-year notes priced at 99.856 to yield 5.934
percent;
- $750 in 6.35 percent ten-year notes priced at par; and
- $1,900 in 6.95 percent 30-year notes priced at par.
The three tranches had a weighted average interest rate of 6.49 percent.
In May 1999, Conoco sold $1,022 of commercial paper through a commercial
paper program. This program provides Conoco with up to $2,000 of borrowing
capacity and gives Conoco the ability to issue commercial paper at any time with
various maturities not to exceed 270 days. The proceeds from the commercial
paper resulted from multiple placements, and the average interest rate from all
sales was representative of short-term market rates.
The net proceeds from senior debt of $3,970 and commercial paper of $1,022
were used to repay all remaining related party debt and accrued interest owed to
DuPont. Despite an incrementally higher interest rate from the senior debt
securities versus the promissory note with DuPont, offset partially by
incrementally lower interest rates from commercial paper sales, pro forma
interest and debt expense continues to be representative of expected interest
and debt expense for all periods presented.
(b) Reflects the impact of changes in currency exchange rates on
intercompany loans denominated in foreign currencies purchased by Conoco from
DuPont as part of the restructuring and settlement of notes prior to the initial
public offering as provided for in the separation of Conoco from DuPont. These
loans are to Western European petroleum operations for which the local currency
has been designated as the functional currency.
(c) Reflects the impact of the pro forma adjustments primarily consisting
of increased interest expense resulting from Conoco's new debt structure and a
separate return income tax calculation method on the provision for income taxes.
The historic tax provision for the period prior to the initial public offering
was calculated on a loss benefit method. In accordance with SEC Staff Accounting
Bulletin No. 55, the pro forma provision for income taxes is calculated using a
separate return method.
The adjustment to the pro forma statement of income for the year ended
December 31, 1998 includes an increase of $6 in the pro forma provision for
income taxes due to the change to the separate return method presentation. The
increase is attributable to a reduction in tax benefits resulting from the
transfer of international exploration subsidiaries from one tax jurisdiction to
another, partially offset by utilization of additional foreign credits against
the provision of U.S. taxes. The pro forma statement of income for the three
months ended March 31, 1998 includes a reduction in the pro forma provision for
income taxes of $5, also due to the change to the separate return method
presentation. This decrease results from the utilization of additional foreign
tax credits to offset U.S. taxes.
Initial Public Offering Adjustments
(d) Reflects the impact of changes in currency exchange rates on
intercompany loans denominated in foreign currencies purchased by Conoco from
DuPont after the initial public offering. These loans are to Western European
petroleum operations for which the local currency has been designated as the
functional currency.
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CONOCO
NOTES TO PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
(UNAUDITED)
(e) Represents the reduction of interest expense and the associated
increase in income taxes resulting from the payment to DuPont of the borrowings
described in note 2 relating to the use of net proceeds and the tax impact of
the adjustment described in (d) above.
Unaudited Pro Forma Balance Sheet
Exchange Offer Adjustments
(f) Represents the issuance on April 20, 1999 of senior debt securities,
after deducting debt issuance costs and note discount, and the payment of a
portion of the related party debt and accrued interest to DuPont. The remaining
portion of long-term borrowings -- related parties, including accrued interest,
have been reclassified to short-term borrowings -- related parties.
(g) Represents a payment to DuPont in April 1999 on the revolving credit
facility.
(h) Represents the sale of $1,022 of commercial paper, through multiple
placements, from a commercial paper program in May 1999. The proceeds were used
to repay the remaining short-term borrowings -- related parties and accrued
interest to DuPont.
4. EARNINGS PER SHARE
Unaudited pro forma basic earnings per share include the shares of Conoco
Class A and Class B common stock outstanding immediately after the initial
public offering. Pro forma diluted earnings per share includes the dilutive
effect of the 8.5 million shares of Class A common stock issuable upon exercise
of Conoco stock options, after applying the treasury stock method, which were
issued in the option program upon cancellation of outstanding DuPont stock
options. The adjustments for the basic and diluted pro forma weighted average
shares give effect to the above.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF CONOCO
The discussion and analysis of Conoco's financial condition and results of
operations should be read together with the consolidated financial statements of
Conoco included in this document.
At the time of its initial public offering, Conoco's capital structure was
established and the transfer to Conoco of subsidiaries previously owned by
DuPont was substantially completed, resulting in direct ownership of those
subsidiaries. Accordingly, for periods subsequent to Conoco's initial public
offering, financial information is presented on a consolidated basis.
Prior to the date of Conoco's initial public offering, operations were
conducted by Conoco Inc., subsidiaries of Conoco Inc. and, in some cases,
subsidiaries of DuPont. The accompanying consolidated financial statements of
Conoco for these periods are presented on a carve-out basis prepared from
DuPont's historical accounting records, and include the historical operations of
both entities owned by Conoco and operations transferred to Conoco by DuPont at
the time of the initial public offering. In this context, no direct ownership
relationship existed among all the various units comprising Conoco. Accordingly,
DuPont and its subsidiaries' net investment in Conoco, presented as owner's net
investment, is shown in lieu of stockholders' equity in the consolidated
financial statements for periods prior to the initial public offering.
Conoco's consolidated statement of income includes all revenues and costs
directly attributable to Conoco, including costs for facilities, functions and
services used by Conoco at shared sites and costs for functions and services
performed by centralized DuPont organizations and directly charged to Conoco
based on usage. In addition, services performed by Conoco on DuPont's behalf are
directly charged to DuPont. The results of operations also include allocations
of DuPont's general corporate expenses through the date of the initial public
offering.
Prior to the date of the initial public offering, all charges and
allocations of cost for facilities, functions and services performed by DuPont
organizations for Conoco have been deemed to have been paid by Conoco to DuPont,
in cash, in the period in which the cost was recorded in Conoco's consolidated
financial statements. Allocations of current income taxes receivable or payable
are similarly deemed to have been remitted, in cash, by or to DuPont in the
period the related income taxes were recorded. Subsequent to the initial public
offering, such costs are billed directly under transitional service agreements,
and income taxes are paid directly to the taxing authorities, or to DuPont, as
appropriate.
Conoco has four reporting segments for its upstream and downstream
businesses, reflecting geographic division between the United States and
international. Activities of the upstream business include exploring for, and
developing, producing and selling, crude oil, natural gas and natural gas
liquids. Activities of the downstream business include refining crude oil and
other feedstocks into petroleum products, buying and selling crude oil and
refined products and transporting, distributing and marketing petroleum
products. Corporate and other includes general corporate expenses, financing
costs and other non-operating items, and results for electric power and
related-party insurance operations.
Conoco considers portfolio optimization to be an ongoing business strategy
and continuously seeks to improve the balance of properties in its investment
portfolio in order to maximize profitability. Over the past five years, Conoco
has generated proceeds of approximately $2,126 million, averaging about $425
million a year, through the disposal of marginal and non-strategic producing
properties, by upgrading and redirecting its exploration portfolio and by
increasing its ownership in large scale properties. As a result, Conoco has
maintained production essentially constant on a barrel-of-oil-equivalent basis
while undergoing these changes in its properties. Conoco's policy is to report
material gains and losses from individual asset sales as special items when
reporting consolidated net income.
Conoco conducts its activities through wholly and majority owned
subsidiaries and, increasingly, through investments in corporate entities,
partnerships and limited liability companies in which Conoco exerts significant
influence, generally having a 20-50% ownership interest. Conoco refers to such
investments in this document as "equity affiliates". This trend of conducting
business in the petroleum industry through equity affiliates is
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expected to increase in the future as Conoco attempts to minimize either the
capital or political risks associated with new large-scale, high-impact
projects.
LIQUIDITY AND CAPITAL RESOURCES
CASH PROVIDED BY OPERATIONS
Cash provided by operations in the first three months of 1999 increased
$381 million to $393 million versus $12 million in the first three months of
1998. Cash provided by operations before changes in operating assets and
liabilities decreased $234 million compared to the first three months of 1998.
The decrease was primarily due to lower net realized crude oil and natural gas
prices, weaker refined product margins and increased interest expense resulting
from separation-related debt to DuPont incurred in the second half of 1998, and
was partly offset by higher volumes. Positive changes to net operating assets
and liabilities of $615 million were due to timing of payments on other
operating liabilities, lower 1999 tax payments and higher 1999 accrued interest,
offset by an increase in accounts receivable due to higher crude oil prices late
in the first quarter of 1999.
Cash provided by operations in 1998 decreased $1,503 million to $1,373
million versus $2,876 million in 1997. Cash provided by operations before
changes in operating assets and liabilities decreased $303 million compared to
1997. The decrease was primarily due to lower net realized crude oil and natural
gas prices, partially offset by higher natural gas volumes and improved
international downstream margins. Negative changes to net operating assets and
liabilities of $1,200 million were due to higher tax payments attributable to
1997 asset sales and a decrease in accounts payable, offset by a decrease in
accounts receivable due to lower crude oil prices.
Cash provided by operations increased $480 million, or 20 percent, to
$2,876 million during 1997 versus $2,396 million in 1996. Positive changes to
net operating assets and liabilities of $446 million were principally due to the
$303 million received from a contract for future sales of natural gas to
Centrica, a United Kingdom gas marketing company.
INVESTMENT ACTIVITIES
CAPITAL EXPENDITURES AND INVESTMENTS
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31
------------ --------------------------
1999 1998 1998 1997 1996
---- ---- ------ ------ ------
(IN MILLIONS)
Upstream:
United States....................................... $113 $149 $ 788 $1,534 $ 400
International....................................... 198 187 1,177 999 864
---- ---- ------ ------ ------
Total Upstream.............................. $311 $336 $1,965 $2,533 $1,264
Downstream:
United States....................................... $ 32 $ 30 $ 201 $ 227 $ 218
International....................................... 70 65 332 331 462
---- ---- ------ ------ ------
Total Downstream............................ $102 $ 95 $ 533 $ 558 $ 680
Corporate and Other................................... 2 -- 18 23 --
---- ---- ------ ------ ------
Total Capital Expenditures and
Investments............................... $415 $431 $2,516 $3,114 $1,944
==== ==== ====== ====== ======
United States......................................... $147 $179 $1,007 $1,761 $ 618
International......................................... 268 252 1,509 1,353 1,326
---- ---- ------ ------ ------
Total....................................... $415 $431 $2,516 $3,114 $1,944
==== ==== ====== ====== ======
Total capital expenditures and investments were $415 million in the first
quarter of 1999, a decrease of $16 million, or four percent, versus $431 million
in the first quarter of 1998. The first quarter of 1999 excluded amounts paid
for the completion of 1998 acquisitions. The decrease is primarily due to lower
spending on upstream capital projects in the United States.
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Total capital investments in 1998 were $2,516 million, a decrease of 19
percent versus 1997 capital investments of $3,114 million, which included a $929
million acquisition of natural gas properties and transportation assets in the
Lobo trend in South Texas. Approximately 60 percent of 1998 capital investments
were outside the United States. About 78 percent of 1998 capital investments
were spent in upstream, with a majority of this devoted to development projects
in South Texas, deepwater Gulf of Mexico, Venezuela, the United Kingdom and
Norway. Approximately $312 million was spent on exploratory drilling and
leasing. Downstream capital investments in 1998 included completion of the
Melaka refinery in Malaysia, expansion of retail marketing operations,
particularly in Europe, and upgrades and maintenance of existing facilities.
Conoco also spent approximately $18 million for corporate software in 1998.
Total capital investments, including investments in affiliates and
acquisitions, were $3,114 million in 1997, a 60 percent increase over 1996
capital investments of $1,944 million. This increase primarily reflects the Lobo
acquisition.
Discussed below is a more detailed analysis of capital expenditures and
investments by operating segments within the U.S. and international. Capital
expenditures and investments do not include expensed exploration costs.
UPSTREAM
--------
Upstream capital expenditures and investments, excluding amounts paid in
the first quarter of 1999 for the completion of 1998 acquisitions, totaled $311
million in the first three months of 1999. The decrease of $25 million, or
approximately seven percent, compared to $336 million for the first three months
of 1998, was primarily a result of an overall reduction in the 1999 capital
expenditure program, including exploration, partly offset by 1999 investments in
Petrozuata, a joint venture in Venezuela.
Upstream capital investments totaled $1,965 million in 1998, a decrease of
$568 million, or 22 percent, compared to $2,533 million in 1997, which included
the $929 million Lobo acquisition.
Upstream capital investments totaled $2,533 million in 1997, an increase of
$1,269 million, or 100 percent, compared to $1,264 million in 1996, primarily as
a result of the Lobo acquisition. The Lobo acquisition added significant
reserves and 1,150 miles of natural gas gathering and transportation pipeline,
providing direct access to major Texas intrastate and interstate pipelines. As a
result, Conoco is the largest natural gas producer in the area and the second
largest natural gas producer in Texas.
Conoco adjusts its capital expenditure budgets on an annual basis. Conoco
currently has long-term commitments to fund the following upstream projects:
- $275 million in equity advances for Petrozuata;
- $250 million for three major projects in Norway;
- $170 million for the West Natuna gas development project in Indonesia;
and
- $490 million for charter fees for Conoco's two new drillships.
United States
During the first three months of 1999, Conoco spent $113 million on capital
projects in the United States, a decrease of $36 million, or 24 percent, from
$149 million in the first three months of 1998. Expenditures in the first three
months of 1999 focused on the continued development of the Lobo field in South
Texas and the completion of the Ursa field in the deepwater Gulf of Mexico.
In 1998, U.S. capital investments were $788 million, a decrease of $746
million, or 49 percent, compared to 1997 U.S. capital investments of $1,534
million, which included the $929 million Lobo acquisition. Expenditures in 1998
focused on continuing operations and development. This included
- the development of the Lobo field and the Ursa field in the deepwater
Gulf of Mexico;
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- the construction of two deepwater drillships, the first of which went
into service in January 1999 in the Gulf of Mexico, and the second of
which went into service in April 1999 in New Zealand;
- the acquisition of exploratory acreage, and
- the expansion of onshore natural gas operations.
The Ursa field development represents a major development project in the Gulf of
Mexico. The project involved installing a new generation tension leg platform in
approximately 3,900 feet of water. Initial production began in March 1999.
During 1997, Conoco spent $1,534 million on capital projects in the United
States, an increase of $1,134 million, or 284 percent, compared to 1996 U.S.
capital investments of $400 million. Besides the $929 million Lobo acquisition
and exploratory drilling, expenditures focused on
- development of the Ursa field in deepwater Gulf of Mexico;
- construction of two deepwater drillships;
- acquisition of additional reserves and exploratory acreage in the San
Juan Basin; and
- expansion of onshore natural gas operations.
In 1996, U.S. capital investments focused on continuing operations and
development.
International
International capital expenditures and investments totaled $198 million in
the first three months of 1999, an increase of $11 million, or six percent, from
$187 million in the first three months of 1998. The 1999 expenditures include
investment in Petrozuata, as well as continued development of various fields in
the U.K. and Norwegian sector of the North Sea.
In 1998, international capital investments were $1,177 million, an increase
of $178 million, or 18 percent, compared to $999 million in 1997. The 1998
increase reflects expenditures to complete the multi-year development program in
the Britannia gas field in the U.K. North Sea, with first production in August
1998. Other significant capital investments were made for exploratory drilling
and development projects such as:
- the Petrozuata joint venture in Venezuela, which also began production in
August 1998;
- the Visund field in the Norwegian North Sea; and
- the Viking Phoenix project in the U.K. North Sea.
Conoco increased its natural gas holdings in the U.K. sector of the North Sea
through its acquisition of the British subsidiary of Canadian Occidental
Petroleum Ltd., which held an interest in the South Valiant, Vulcan and Caister
fields, as well as interests in the Murdoch and Esmond gas transportation
systems.
International capital investments totaled $999 million in 1997, an increase
of $135 million, or 16 percent, compared to international capital investments of
$864 million in 1996. Conoco continued to develop the Britannia gas field in the
U.K. North Sea. Other significant capital investments were made for exploratory
drilling and development projects such as:
- the Petrozuata joint venture in Venezuela;
- the Ukpokiti field offshore Nigeria;
- the Visund field in the Norwegian North Sea;
- a methanol plant in Norway; and
- the Boulton gas field in the U.K. North Sea.
In 1996, international capital investments were $864 million, reflecting
expenditures to develop the Britannia field and $67 million to fund Conoco's
share of losses incurred by a European gas marketing joint venture.
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DOWNSTREAM
--------
Downstream capital expenditures and investments totaled $102 million in the
first three months of 1999, an increase of $7 million, or seven percent, versus
$95 million in the first three months of 1998, primarily reflecting increased
expenditures for European and Asia-Pacific refining operations.
Downstream capital investments were $533 million in 1998, a decrease of $25
million, or four percent, versus $558 million in 1997, primarily as a result of
lower investments in equity affiliates.
Downstream capital investments totaled $558 million in 1997, a decrease of
$122 million, or 18 percent, versus $680 million in 1996, primarily reflecting
completion of the acidic crude vacuum unit at Conoco's Humber refinery in the
U.K., as well as the acquisition of an equity interest in two refineries in the
Czech Republic during 1996.
Conoco currently has long-term commitments to fund the following downstream
projects:
- $150 million to comply with clean fuels specifications at the Humber
refinery in the U.K.; and
- $165 million to facilitate the processing of Petrozuata synthetic crude
at the Lake Charles refinery.
United States
During the first three months of 1999, Conoco spent $32 million on
downstream capital projects in the United States, up $2 million, or seven
percent, from $30 million in the first three months of 1998. The majority of the
funds spent were used to support continuing refining operations.
Investments in 1998 totaled $201 million, a decrease of $26 million, or 11
percent, versus 1997 investments of $227 million. Investments in 1998 included
costs for continued operations and optimization of retail marketing operations.
Conoco also invested $8 million for an increased ownership interest in Penreco,
a joint venture with Pennzoil-Quaker State that produces and markets highly
refined specialty petroleum products.
During 1997, Conoco spent $227 million on downstream capital projects in
the United States, an increase of $9 million, or four percent, compared to
investments of $218 million in 1996. The majority of the 1997 funds were used to
support continuing operations and optimization of retail marketing operations.
Conoco also invested funds for an initial equity interest in Penreco.
Capital investments in 1996 totaled $218 million. The most significant
investments related to the completion of the 45,000 barrel per day expansion of
the Lake Charles refinery's sour crude oil processing capability to support the
Excel Paralubes lube oil hydrocracker joint venture with Pennzoil. The lube oil
hydrocracker converts low quality, high sulphur vacuum gas oil into base oil of
extremely high purity and enhances the value of Conoco's finished lubricants
business by producing improved motor oils, transmission fluids and industrial
lubes blended from hydrocracked base oils.
International
During the first three months of 1999, Conoco spent $70 million on
downstream international capital expenditures and investments, up $5 million, or
eight percent, from $65 million in the first three months of 1998. Expenditures
in the first three months of 1999 focused on strengthening Conoco's retail
marketing position, as well as investment in the Melaka Refinery in Malaysia and
the Humber Refinery in the U.K.
In 1998, Conoco made capital investments of $332 million including
investments in Conoco's retail marketing position in core markets such as
Germany and Austria, and newer retail markets such as Thailand, as well as
investments for completing the construction of the Melaka refinery, a joint
venture with Petronas and Statoil, which began operation in the third quarter of
1998.
During 1997, Conoco spent $331 million on downstream international capital
investments, a decrease of $131 million, or 28 percent, from 1996 capital
investments of $462 million. The decrease was due to expenditures in 1996
relating to costs for the acidic crude vacuum unit at Conoco's Humber refinery.
The installation of the vacuum unit at the Humber refinery allowed the refinery
to process acidic crude oil, including
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equity crude oil from the Heidrun field. Expenditures in 1997 focused on
strengthening Conoco's retail marketing position in core markets such as
Germany, Austria and the Nordic countries, expanding in targeted retail growth
markets in Central and Eastern Europe, Spain, Turkey and the Asia Pacific
region, and continuing the construction of the Melaka refinery.
Capital investments in 1996 totaled $462 million and included costs for the
acidic crude vacuum unit at Conoco's Humber refinery, construction expenditures
related to the Melaka refinery, acquisition of equity interests in two Czech
refineries, and expansion of retail marketing operations, particularly in
Eastern Europe. The acquisition of the equity interests in the two Czech
refineries supported the expansion of Conoco's retail marketing operations in
the emerging markets in Eastern Europe, including the Czech Republic, Poland,
Hungary and Slovakia.
CORPORATE AND OTHER
--------
Corporate and other capital expenditures totaled $2 million in the first
three months of 1999, and were associated with the capitalization of new
computer software.
Capital investments in 1998 were $18 million and were primarily associated
with corporate software.
Capital investments in 1997 were $23 million, most of which represent
Conoco's investment in electric power generation projects through international
equity affiliates. Because of deregulation within this industry, Conoco expects
to continue to pursue projects that leverage the economic advantages of Conoco's
energy production activities and the demand for energy in DuPont or third party
manufacturing operations.
There were no capital investments in corporate and other during 1996.
PROCEEDS FROM SALES OF ASSETS AND SUBSIDIARIES
Conoco's investment activities also include proceeds of $18 million for the
first three months of 1999, a decrease of $257 million from the first three
months of 1998, which included $54 million from the sale of North Sea producing
and non-producing properties and $156 million from the sale of various
downstream assets in the U.S. These proceeds are a result of Conoco's ongoing
strategic portfolio realignment.
Conoco's 1998 investment activities included proceeds of $721 million, a 28
percent increase over $565 million in 1997. The 1998 proceeds included $245
million from the sale of upstream U.S. and North Sea properties, $156 million
from the sale of various downstream assets in the U.S., as well as $54 million
from the sale of an office building in Europe.
These and other proceeds are a result of Conoco's ongoing strategic
portfolio management program designed to improve profitability. In recent years,
Conoco has consolidated its exploration and production operations by selling
hundreds of smaller, less efficient properties, while acquiring an increased
interest in its larger producing areas. As a result, Conoco has reduced the
number of producing fields while maintaining production essentially constant on
a barrel-of-oil-equivalent basis. 1997 proceeds were $565 million, an increase
of $237 million versus 1996 proceeds of $328 million.
FINANCING ACTIVITIES
Conoco's ability to maintain and grow its operating income and cash flow
depends upon continued capital spending. Conoco believes its future cash flow
from operations and its borrowing capacity should be sufficient to fund
dividends, debt service, capital expenditures and working capital requirements
and to service debt.
Prior to the separation from DuPont, the businesses transferred to Conoco
were funded through DuPont. Apart from limited recourse project financing
related to various joint ventures, equipment lease facilities and financing of
refinery equipment and other small financings, Conoco has had limited
indebtedness to third parties. Since the time of its initial public offering,
Conoco's operations have been funded through internally generated funds, related
party debt with DuPont and third party borrowings.
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In July 1998, Conoco issued a promissory note to DuPont in the aggregate
principal amount of $7,500 million bearing interest at a rate of 6.0125 percent
per annum. In October 1998, Conoco raised net proceeds of $4,228 million in its
initial public offering. The net proceeds from the initial public offering were
used to repay a portion of the $7,500 million promissory note and other
intercompany notes with DuPont. Total indebtedness owed to DuPont, following
application of the net proceeds of the initial public offering and the
determination of Conoco's cash and cash equivalents in excess of $225 million,
was $4,853 million, consisting of $4,846 million related to the $7,500 million
promissory note described in the above paragraph and $7 million remaining on an
$827 million promissory note, due January 2, 2000, and bearing interest at a
rate equal to the six-month LIBOR plus 0.375 percent per annum.
On October 27, 1998, Conoco and DuPont entered into a revolving credit
agreement under which DuPont provides Conoco with a revolving credit facility in
principal amount of up to $500 million. Total indebtedness owed to DuPont was
$4,896 million as of March 31, 1999, consisting of $926 million in short-term
borrowings and $3,970 million in long-term borrowings. The short-term borrowings
consisted of $300 million due on the revolving credit agreement and $626 million
representing the short-term portion of the $4,596 million promissory notes due
to DuPont.
In April 1999, Conoco issued $4,000 million in senior fixed-rate debt
securities with a weighted average interest rate of 6.49%. The net proceeds of
this offering of $3,970 million were used to repay a portion of the outstanding
principal and accrued interest on the $7,500 million promissory note.
In May 1999, Conoco instituted a commercial paper program with a borrowing
capacity up to $2,000 million that gives Conoco the ability to issue commercial
paper at any time with various maturities not to exceed 270 days. Also in May
1999, Conoco made multiple placements aggregating $1,022 million under this
program, and the average interest rate from all sales was representative of
short-term market rates. The proceeds were used to repay all related party debt
owed to DuPont. Upon the repayment of the indebtedness to DuPont, Conoco and
DuPont terminated the revolving credit agreement.
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RESULTS OF OPERATIONS
CONSOLIDATED RESULTS
THREE MONTHS
ENDED MARCH 31 YEAR ENDED DECEMBER 31
--------------- ---------------------------
1999 1998 1998 1997 1996
------ ------ ------- ------- -------
(IN MILLIONS) (IN MILLIONS)
SALES AND OTHER OPERATING REVENUES
Upstream
United States.................................. $ 706 $ 863 $ 3,200 $ 3,348 $ 2,783
International.................................. 479 456 1,601 1,906 1,943
------ ------ ------- ------- -------
Total Upstream............................ $1,185 $1,319 $ 4,801 $ 5,254 $ 4,726
Downstream
United States.................................. $1,962 $2,185 $ 8,949 $11,394 $10,545
International.................................. 2,143 2,028 8,297 8,639 8,880
------ ------ ------- ------- -------
Total Downstream.......................... $4,105 $4,213 $17,246 $20,033 $19,425
Corporate and Other 21 204 749 509 79
------ ------ ------- ------- -------
Total Sales and Other Operating
Revenues................................ $5,311 $5,736 $22,796 $25,796 $24,230
====== ====== ======= ======= =======
AFTER-TAX OPERATING INCOME
Upstream
United States.................................. $ 40 $ 88 $ 219 $ 445 $ 314
International.................................. 68 143 283 439 367
------ ------ ------- ------- -------
Total Upstream............................ $ 108 $ 231 $ 502 $ 884 $ 681
Downstream
United States.................................. $ 17 $ 34 $ 135 $ 216 $ 172
International.................................. 23 57 156 91 117
------ ------ ------- ------- -------
Total Downstream.......................... $ 40 $ 91 $ 291 $ 307 $ 289
Corporate and Other Operating..................... (15) (20) (271) (82) (74)
------ ------ ------- ------- -------
Total After-Tax Operating Income.......... $ 133 $ 302 $ 522 $ 1,109 $ 896
Interest and Other Non-Operating Income Expense
Net of Tax................................ (50) 14 (72) (12) (33)
------ ------ ------- ------- -------
CONSOLIDATED NET INCOME................... $ 83 $ 316 $ 450 $ 1,097 $ 863
====== ====== ======= ======= =======
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SPECIAL ITEMS
Consolidated net income includes the following non-recurring special items
on an after-tax basis:
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31
------------ -----------------------
1999 1998 1998 1997 1996
----- ---- ------ ------ -----
(IN MILLIONS)
UPSTREAM
Asset sales................................................. -- $23 $ 95 $ 240 $ 16
Property impairments........................................ -- -- (38) (112) (63)
Tax rate changes............................................ -- -- -- 19 --
Employee separation costs................................... -- -- (42) -- (11)
Inventory write-downs....................................... -- -- (4) -- --
----- --- ----- ----- ----
Total Upstream Special Items...................... -- 23 $ 11 $ 147 $(58)
===== === ===== ===== ====
DOWNSTREAM
Asset sales................................................. -- -- $ 12 $ -- $ 19
Property impairments........................................ -- -- -- (55) --
Tax rate changes............................................ -- -- -- 11 --
Environmental insurance litigation recoveries............... -- -- -- -- 44
Employee separation costs................................... -- -- (10) -- (11)
Inventory write-downs....................................... -- -- (59) -- --
Environmental litigation settlements........................ -- -- (28) (23) --
----- --- ----- ----- ----
Total Downstream Special Items.................... -- -- $ (85) $ (67) $ 52
===== === ===== ===== ====
CORPORATE AND OTHER
Stock option provision...................................... -- -- $(183) $ -- $ --
Environmental litigation settlements........................ -- -- (14) -- --
----- --- ----- ----- ----
Total Corporate and Other Special Items........... -- -- $(197) $ -- $ --
===== === ===== ===== ====
TOTAL SPECIAL ITEMS......................................... -- $23 $(271) $ 80 $ (6)
===== === ===== ===== ====
There were no special items for the first three months of 1999. Special
items for the first three months of 1998 reflect a $23 million gain from the
sale of properties in the North Sea.
Special items in 1998 include $107 million in gains from several unrelated
asset sales. The gains consist of:
- $54 million from the sale of producing and non-producing international
upstream properties;
- $41 million from U.S. upstream producing properties and assets; and
- $12 million in downstream from the sale of an office building in Europe.
The upstream sales are a normal part of Conoco's ongoing strategic portfolio
management program designed to improve profitability by disposing of marginal
properties and concentrating operations on core properties. Offsetting the gains
were:
- property impairments of $38 million;
- inventory write-downs of $63 million to market prices;
- restructuring and employee separation costs of $52 million; and
- other losses of $42 million for environmental litigation settlements.
The after-tax property impairments of $38 million were made in accordance
with Conoco's policy on impairment of long-lived assets, and relate to a $32
million after-tax writedown of United States upstream properties and a $6
million after-tax writedown of an international upstream property. The United
States
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properties include various oil and gas producing properties in Texas and in the
Gulf of Mexico, as well as a non-operating natural gas plant in Texas. The
writedown of the oil and gas properties became necessary because of reductions
to Conoco's price forecast in light of deteriorating pricing conditions. The
international property is an exploration license in Norway and was written down
after the decision was made to discontinue further investment in the license.
The fair value of oil and gas producing properties subject to the write-down was
based on the present value of estimated future net cash flows from the
properties using Conoco's projections of future prices, which were higher than
year-end prices, and costs.
The $63 million write-down at year-end 1998 was the result of significant
declines in crude oil and petroleum product prices occurring primarily in the
fourth quarter of 1998. On a quarterly basis, Conoco evaluates whether the book
value of its crude oil, natural gas, and petroleum products inventories exceeds
the market value of such inventories. This evaluation is made on a region by
region basis for each pool of inventory. For the purpose of this evaluation, the
inventories are grouped into United States, Europe and Asia Pacific regions and
grouped into as many as twelve different pools per region based on relative
values. Conoco writes down its inventories for each region when the book value
of the inventory within a region exceeds the market value of such inventory. The
average book value of inventories on a price per barrel basis across all pools
decreased from $16.68 to $13.80 in the United States region, from $20.99 to
$18.54 in the European region and from $46.75 to $29.56 in the Asia Pacific
region. The significantly larger difference in value in the Asia Pacific region
resulted from Conoco's more recent acquisition of inventories in that region as
well as the recent dramatic economic decline in the region.
With respect to the likelihood of future write downs, Conoco optimizes its
inventory levels to minimize operating inventories and typically operates at or
near the same levels of inventories. Conoco is unaware of any strategic or
operating plans that would affect its inventory volumes such that a write-down
would be likely. Furthermore, based on the recent strengthening of energy prices
at the end of the first quarter of 1999 versus the market conditions at the time
of the year-end write-down, no further write-downs are anticipated in 1999. For
a discussion of the $52 million after-tax charge for restructuring and employee
related costs, see page 80.
The $42 million environmental settlement relates to the settlement in 1998
of lawsuits and a number of group and individual claims for alleged property
damage, personal injury, and medical monitoring. In each of these settlements,
Conocco was and is bound to confidentiality agreements with the settling
parties, most of which involved court approval.
The $183 million stock option provision is a one-time non-cash charge for
stock option employee compensation expenses related to the replacement of
outstanding DuPont stock options held by Conoco employees with Conoco stock
options in connection with the initial public offering.
Upstream special items in 1997 include $240 million in gains from asset
sales consisting of $191 million associated with producing and non-producing
properties in the North Sea and $49 million in the United States. Such asset
sales are part of Conoco's ongoing strategic portfolio management program. A
United Kingdom tax rate change also provided a $19 million benefit in 1997.
Offsetting these benefits were property impairments of $112 million relating to
international non-revenue producing properties. Downstream special items in 1997
include a United Kingdom tax rate change benefit of $11 million. Offsetting this
benefit were property impairments of $55 million attributable to the write-down
of an office building held for sale in Europe. Other losses of $23 million
include environmental litigation charges.
Upstream special items in 1996 include a gain of $16 million from the sale
of producing and non-producing properties in the United States. Offsetting this
gain was a $63 million impairment associated with a write-down of an investment
in a European gas marketing joint venture and employee separation costs of $11
million. Downstream special items in 1996 include a gain of $19 million
associated with the sale of Conoco's retail marketing business in Ireland.
Environmental insurance litigation recoveries also resulted in a $44 million
benefit. Offsetting these benefits were employee separation costs of $11
million.
Consolidated net income before special items, or "earnings before special
items", was $721 million in 1998, $1,017 million in 1997 and $869 million in
1996.
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First Quarter 1999 versus First Quarter 1998
Conoco had first quarter consolidated net income of $83 million in 1999,
down 74 percent from $316 million in the first quarter of 1998. Conoco had
earnings before special items of $83 million in the first quarter of 1999, down
72 percent from $293 million in the first quarter of 1998. Lower earnings
primarily reflect lower net realized crude oil and natural gas prices, weaker
refined product margins and higher interest expenses related to Conoco's debt
owed to DuPont, partly offset by higher crude oil and natural gas volumes,
higher refinery throughputs and lower exploration costs.
Sales and other operating revenues for the first quarter of 1999 were
$5,311 million, down seven percent from $5,736 million in the first quarter of
1998, primarily due to lower crude oil and natural gas prices, lower refined
product prices and reduced power trading revenues, all of which were partly
offset by increased production volumes and refinery throughputs. Conoco's
worldwide net realized crude oil price was $11.00 per barrel for the quarter,
down $2.70 per barrel, or 20 percent, from $13.70 per barrel in the first
quarter of 1998. Worldwide net realized natural gas prices averaged $2.08 per
thousand cubic feet for the quarter, compared with $2.64 per thousand cubic feet
in the same period in 1998, a reduction of 21 percent.
Worldwide crude oil and condensate production in the first quarter of 1999
was 326,000 barrels per day versus 321,000 barrels per day in the first quarter
of 1998, a two percent increase primarily attributable to new production of
condensate from the Britannia field, crude oil from the Banff field and crude
oil from Petrozuata. Worldwide natural gas deliveries in the first quarter of
1999 were up 40 percent to 1,816 million cubic feet per day from 1,298 million
cubic feet per day in the first quarter of 1998. U.S. natural gas deliveries
were up 20 percent, primarily as a result of continued development drilling in
the Lobo field of South Texas. International natural gas deliveries were up 71
percent due to the new production from the Britannia and Viking Phoenix gas
fields in the U.K. Worldwide refined product sales were 1,093,000 barrels per
day, up 12 percent versus 1998. Crude oil and refined product buy/sell and
natural gas and electric power resale activities in the first quarter of 1999
totaled $957 million, down 20 percent compared to $1,200 million in the first
quarter of 1998, primarily due to lower crude oil prices and a reduction in
power trading revenues.
Cost of goods sold and other operating expenses for the first quarter of
1999 totaled $3,005 million, a decrease of $388 million, or 11 percent, compared
to $3,393 million in the first quarter of 1998, primarily due to the reduction
in power trading activities and lower refinery feedstock costs.
Exploration expenses for the first quarter of 1999 totaled $46 million, a
decline of $21 million, or 31 percent, compared to $67 million in the first
quarter of 1998, due to lower dry hole costs and lower seismic expenditures.
Depreciation, depletion and amortization for the first quarter of 1999
totaled $302 million, an increase of $35 million, or 13 percent, compared to
$267 million in the first quarter of 1998, primarily due to increased production
volumes.
1998 Versus 1997
Consolidated net income for 1998 of $450 million was down 59 percent from
$1,097 million in 1997. Conoco had earnings before special items of $721 million
in 1998, down 29 percent from $1,017 million in 1997. Lower earnings before
special items primarily reflect lower net realizable crude oil and natural gas
prices and refined product prices. The lower prices were partly offset by higher
natural gas volumes, lower exploration expenses, improved international
downstream marketing margins and the favorable resolution of tax issues.
Sales and other operating revenues of $22,796 million in 1998 were down 12
percent compared to $25,796 million in 1997, primarily due to a decrease in
worldwide crude oil and natural gas prices and lower refined product prices.
Downstream sales and other operating revenues were $17,246 million, down 14
percent compared to $20,033 million in 1997. Crude oil and refined product
buy/sell and natural gas and electric power resale activities in 1998 totaled
$5,004 million, down 9 percent compared to $5,509 million in 1997.
Cost of goods sold and other operating expenses in 1998 totaled $13,840
million, down 15 percent compared to $16,226 million in 1997. This reduction is
primarily due to lower feedstock prices.
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Selling, general and administrative expenses for 1998 totaled $736 million,
an increase of $10 million, or one percent, compared to $726 million in 1997,
primarily due to environmental litigation charges related to a discontinued
business assumed by Conoco under the separation agreement with DuPont.
Included in 1998 is a pretax charge of $236 million, labeled "Stock Option
Provision" on the income statement. This expense is a one-time non-cash charge
for employee stock option compensation relating to the replacement of
outstanding DuPont stock options held by Conoco employees with Conoco stock
options in connection with the initial public offering.
Exploration expenses in 1998 totaled $380 million, a decline of $77
million, or 17 percent, compared to $457 million in 1997. The decrease is
primarily a result of a more focused exploration program. Also contributing to
the decrease were lower amortization of non-producing leasehold properties in
the United States and lower exploration overhead and operating expenses compared
to 1997, which included seismic surveys conducted in the Gulf of Paria, located
between Venezuela and Trinidad, and in the Merida Andes foothills in Venezuela.
Depreciation, depletion and amortization for 1998 totaled $1,113 million, a
decrease of $66 million, or six percent, compared to $1,179 million in 1997.
Provision for income taxes for 1998 totaled $244 million, down 76 percent
compared to $1,010 million for 1997. This reflects an effective tax rate of
approximately 35 percent in 1998 compared to 48 percent in 1997. The lower
effective tax rate in 1998 is due to the increased impact of the U.S.
alternative fuels tax credit, realization of a tax benefit on the sale of a
subsidiary and a greater percentage of earnings in countries with lower
effective tax rates.
1997 versus 1996
Consolidated net income for 1997 of $1,097 million was up 27 percent from
$863 million in the prior year. Conoco had earnings before special items of
$1,017 million in 1997, up 17 percent from $869 million in 1996. The increase
was attributable to improved U.S. natural gas prices and higher international
natural gas volumes in addition to stronger worldwide downstream product margins
and increased worldwide refinery production.
Sales and other operating revenues of $25,796 million in 1997 were up six
percent compared to $24,230 million in the prior year, as higher downstream
product prices and volumes, increased international natural gas volumes and
stronger domestic natural gas prices more than compensated for lower crude oil
prices. Crude oil and refined product buy/sell and natural gas and electric
power resale activities in 1997 totaled $5,509 million, up 32 percent compared
to $4,167 million in 1996.
Cost of goods sold and other operating expenses in 1997 totaled $16,226
million, up 11 percent compared to $14,560 million in 1996, due to higher
refined product volumes and crude oil and refined product buy/sell contract
activity and natural gas and electric power resale activities.
Selling, general and administrative expenses in 1997 totaled $726 million,
a decrease of $29 million, or four percent, compared to $755 million in 1996,
primarily due to one-time costs in 1996 for retail expansion activities in the
U.S.
Exploration expenses in 1997 totaled $457 million, an increase of $53
million, or 13 percent, compared to $404 million in 1996, due to higher
international exploration overhead and operating costs primarily from seismic
surveys conducted in the Gulf of Paria, located between Venezuela and Trinidad,
and in the Merida Andes foothills in Venezuela, higher international dry hole
costs and an adjustment of non-producing U.S. leasehold properties.
Depreciation, depletion and amortization in 1997 totaled $1,179 million, an
increase of $94 million, or nine percent, compared to $1,085 million in 1996 due
to higher depreciation resulting from a write-down of an office building held
for sale in the United Kingdom and an impairment of some international
non-revenue producing properties partially offset by lower depreciation in U.S.
downstream operations.
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Provision for income taxes totaled $1,010 million in 1997, down three
percent compared to $1,038 million in 1996. The lower provision reflects an
effective tax rate of approximately 48 percent in 1997 compared to 55 percent in
1996. The decrease in the effective tax rate was primarily due to a lower
proportion of earnings from operations in countries with higher effective tax
rates.
UPSTREAM SEGMENT RESULTS
THREE MONTHS
ENDED YEAR ENDED
MARCH 31 DECEMBER 31
------------- -------------------
1999 1998 1998 1997 1996
----- ----- ---- ----- ----
(IN MILLIONS)
After-Tax Operating Income
United States............................................. $ 40 $ 88 $219 $ 445 $314
International............................................. 68 143 283 439 367
---- ---- ---- ----- ----
After-Tax Operating Income............................. $108 $231 $502 $ 884 $681
Special Items
United States............................................. $ -- $ -- $ 14 $ (49) $ (9)
International............................................. -- (23) (25) (98) 67
---- ---- ---- ----- ----
Special Items.......................................... -- $(23) $(11) $(147) $ 58
Earnings Before Special Items
United States............................................. $ 40 $ 88 $233 $ 396 $305
International............................................. 68 120 258 341 434
---- ---- ---- ----- ----
Earnings Before Special Items.......................... $108 $208 $491 $ 737 $739
==== ==== ==== ===== ====
First Quarter 1999 versus First Quarter 1998
Upstream earnings before special items were $108 million in the first
quarter of 1999, down 48 percent from $208 million in the first quarter of 1998.
U.S. upstream earnings before special items totaled $40 million in the first
quarter of 1999, down 55 percent from $88 million in the comparable period of
1998. Lower U.S. upstream earnings were due to lower crude oil and natural gas
prices and lower crude oil volumes due to natural declines and sale of various
small, non-strategic properties in 1998. These factors more than offset
increased natural gas production and lower exploration expenses. Natural gas
volumes in the United States were up 20 percent, as production from the South
Texas fields increased more than production declined elsewhere. International
upstream earnings before special items were $68 million, down 43 percent, from
$120 million in the comparable period in 1998, primarily attributable to lower
prices for crude oil and natural gas, partly offset by increased natural gas and
condensate production from the Britannia field.
1998 versus 1997
Upstream after-tax operating income was $502 million in 1998, down 43
percent from $884 million in 1997, principally due to lower crude oil and
natural gas prices. Upstream earnings before special items were $491 million in
1998, down 33 percent from $737 million in 1997.
Conoco's worldwide net realized crude oil price was $12.37 per barrel for
1998, down $6.21 per barrel, or 33 percent, from $18.58 per barrel in 1997.
Excess supply caused by weak Asian demand, higher crude oil production from OPEC
producing countries and warmer winter weather caused the sharp drop in crude oil
prices. Worldwide natural gas prices averaged $2.24 per thousand cubic feet for
1998, compared with $2.44 per thousand cubic feet in 1997, primarily because of
warmer winter weather. Lower worldwide natural gas prices were primarily driven
by lower natural gas prices inside the United States. In the U.S., natural gas
prices averaged $1.96 per thousand cubic feet, down 10 percent, while
internationally they remained steady at $2.72 per thousand cubic feet. Worldwide
crude oil and condensate production in 1998 was 315,000 barrels per day versus
337,000 barrels per day in 1997. Worldwide natural gas production in 1998 was up
17 percent to 1,411 million cubic feet per day from 1,203 million cubic feet per
day in 1997.
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U.S. upstream earnings before special items totaled $233 million in 1998,
down 41 percent from $396 million in 1997. Lower U.S. upstream earnings before
special items were due to lower crude oil and natural gas prices and lower crude
oil volumes resulting from asset dispositions and crude oil production declines.
These reductions more than offset benefits from increased natural gas
production, gains on property sales and lower exploration expenses. Natural gas
volumes were up 22 percent as increased production from the holdings in the
South Texas Lobo trend, acquired in 1997, more than offset the decline in
natural gas production elsewhere. U.S. production costs were $3.69 per
barrel-of-oil-equivalent, down $0.54 per barrel-of-oil-equivalent, or 13
percent, compared to $4.23 per barrel-of-oil-equivalent in 1997, due to lower
production taxes and higher gas volumes.
Outside the United States, upstream earnings before special items were $258
million, down 24 percent, from $341 million in the comparable period in 1997,
primarily due to lower crude oil and natural gas prices, offset by higher
natural gas volumes, lower exploration expenses and the favorable resolution of
some tax issues. International crude volumes, which comprise over 80 percent of
Conoco's oil production, were down five percent to 265,000 barrels per day due
to the sale of Conoco's interest in the mature Ula and Gyda fields in Norway and
natural production declines. However, earnings benefited from higher production
in countries with relatively lower tax rates, primarily the United Kingdom and
Nigeria. International gas volume was up nine percent. International production
costs were $4.13 per barrel-of-oil-equivalent, down $0.06 per
barrel-of-oil-equivalent, or one percent, compared to $4.19 per
barrel-of-oil-equivalent in 1997, due to reduced costs from asset dispositions
and other operating costs in 1998, partly offset by lower international crude
oil production.
1997 versus 1996
Upstream after-tax operating income was $884 million in 1997, up 30
percent, compared to $681 million in 1996. Upstream earnings before special
items totaled $737 million in 1997, essentially unchanged from the previous
year.
Worldwide natural gas prices were up 15 percent to $2.44 per thousand cubic
feet in 1997 from $2.12 per thousand cubic feet in 1996, resulting primarily
from higher U.S. industry demand. Worldwide net realized crude oil prices were
$18.58 per barrel, down $1.53 per barrel, or eight percent, from $20.11 per
barrel in 1996. Crude oil prices declined despite higher crude oil demand and
strong crude oil production growth, which included initial exports of Iraqi
crude oil. Worldwide crude oil and condensate production averaged 337,000
barrels per day for the year, up slightly versus 1996. Worldwide natural gas
deliveries in 1997 of 1,203 million cubic feet per day were essentially
unchanged from 1,211 million cubic feet per day in 1996 as higher international
natural gas volumes were offset by lower domestic natural gas volumes.
U.S. upstream earnings before special items totaled $396 million, up 30
percent from $305 million in 1996, due to higher gas prices which more than
offset lower crude oil prices. U.S. production costs per barrel-of-oil-
equivalent were $4.23, up $0.12 per barrel-of-oil-equivalent or 3 percent,
compared to $4.11 per barrel-of-oil-equivalent in 1996, due to higher production
taxes.
Outside the United States, earnings before special items were $341 million,
down 21 percent from $434 million in 1996 due to lower crude oil prices, partly
offset by increased crude oil and natural gas volumes associated with the first
year of oil production from Nigeria and increased production from the Heidrun
and Troll fields in Norway and the Canadian Foothills. International production
costs per barrel-of-oil-equivalent were $4.19 per barrel-of-oil-equivalent, up
$0.51 per barrel-of-oil-equivalent, or 14 percent, compared to $3.68 per
barrel-of-oil-equivalent in 1996, resulting from floating production storage
offtake lease costs on new fields in the United Kingdom and costs incurred on
development projects that had not yet begun production.
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DOWNSTREAM SEGMENT RESULTS
THREE
MONTHS
ENDED
MARCH 31 YEAR ENDED DECEMBER 31
----------- ------------------------
1999 1998 1998 1997 1996
---- ---- ------ ------ ------
(IN MILLIONS)
After-Tax Operating Income
United States............................................. $17 $34 $135 $216 $172
International............................................. 23 57 156 91 117
--- --- ---- ---- ----
After-Tax Operating Income............................. $40 $91 $291 $307 $289
Special Items
United States............................................. $-- $-- $ 73 $ 23 $(36)
International............................................. -- -- 12 44 (16)
--- --- ---- ---- ----
Special Items.......................................... $-- $-- $ 85 $ 67 $(52)
Earnings Before Special Items
United States............................................. $17 $34 $208 $239 $136
International............................................. 23 57 168 135 101
--- --- ---- ---- ----
Earnings Before Special Items.......................... $40 $91 $376 $374 $237
=== === ==== ==== ====
First Quarter 1999 versus First Quarter 1998
Downstream earnings before special items were $40 million for the first
three months of 1999, down 56 percent from $91 million in the comparable period
in 1998. U.S. downstream earnings before special items were $17 million for the
first three months of 1999, down 50 percent from $34 million for the first three
months of 1998, due to weaker refined product margins, partly offset by higher
refinery volumes. International downstream earnings before special items were
$23 million for the first three months of 1999, down 60 percent from $57 million
in the comparable period in 1998, reflecting significantly lower refinery and
marketing margins that were only partly offset by higher refining volumes.
1998 versus 1997
Downstream after-tax operating income was $291 million in 1998, down five
percent compared to $307 million in 1997. Downstream earnings before special
items totaled $376 million in 1998, up one percent from $374 million in 1997.
United States downstream earnings before special items were $208 million in
1998, compared to $239 million in 1997, a decrease of 13 percent. The decline
was mainly attributable to weaker refinery margins, which were partly offset by
record refinery runs, lower feedstock and operating costs and higher marketing
margins.
International downstream earnings before special items were $168 million in
1998, up 24 percent from $135 million in the comparable period in 1997,
reflecting higher European marketing margins, lower cost and 11 percent higher
refinery runs.
Conoco's refineries, excluding the Melaka refinery, operated at 95 percent
capacity in 1998, four percent higher than 1997. The increase was primarily due
to refinery upgrades in Europe in 1997, increased reliability throughout the
system and increased rates at the Lake Charles refinery subsequent to
debottlenecking work completed in February 1998.
1997 versus 1996
Downstream after-tax operating income was $307 million, up six percent from
$289 million in 1996. Downstream earnings before special items increased 58
percent to $374 million in 1997, compared with
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$237 million in the prior year. Worldwide refined product sales volumes were
1,048,000 barrels per day in 1997, up five percent versus 1996.
In the United States, downstream earnings before special items were $239
million versus $136 million in 1996, an increase of 76 percent. The improvement
was attributable to strong refining margins, reduced operating costs and higher
refined product volumes from the new Lake Charles, Louisiana, hydrocracker
expansion project.
International downstream earnings before special items were $135 million,
up 34 percent from $101 million in the comparable period in 1996, primarily due
to higher European refining margins and increased refinery production from the
Humber refinery's new vacuum unit in the United Kingdom.
Conoco's refineries operated at 91 percent capacity in 1997, ten percent
higher than 1996. The increase was primarily due to less downtime incurred in
1997, compared to 1996 when major expansions were taking place at the Lake
Charles and Humber refineries.
CORPORATE AND OTHER SEGMENT RESULTS
CORPORATE AND OTHER OPERATING
THREE MONTHS
ENDED YEAR ENDED
MARCH 31 DECEMBER 31
------------- -------------------
1999 1998 1998 1997 1996
----- ----- ----- ---- ----
(IN MILLIONS)
After-Tax Operating Income.................................. $(15) $(20) $(271) $(82) $(74)
Special Items............................................... -- -- 197 -- --
---- ---- ----- ---- ----
Earnings Before Special Items............................... $(15) $(20) $ (74) $(82) $(74)
==== ==== ===== ==== ====
First Quarter 1999 versus First Quarter 1998
Corporate and other operating losses were $15 million for the first quarter
of 1999, improved 25 percent from a loss of $20 million for the comparable
period in 1998, resulting from lower administrative costs.
1998 versus 1997
Corporate and other segment after-tax operating income was a loss of $271
million in 1998, an impairment of $189 million from a loss of $82 million in
1997, primarily as a result of the one-time stock option provision. Corporate
and other earnings before special items were a loss of $74 million, an
improvement of $8 million from the 1997 loss of $82 million as a result of lower
compensation costs.
1997 versus 1996
Corporate and other segment after-tax operating income was a loss of $82
million, an impairment of $8 million from a loss of $74 million in 1996 due to
higher compensation costs.
INTEREST AND OTHER NON-OPERATING INCOME (EXPENSES) NET OF TAX
THREE MONTHS
ENDED YEAR ENDED
MARCH 31 DECEMBER 31
------------- ------------------
1999 1998 1998 1997 1996
----- ----- ---- ---- ----
(IN MILLIONS)
Interest Expenses on Debt................................... $(46) $ -- (128) (26) (50)
Interest Income............................................. 4 19 $ 66 $ 61 $ 78
Exchange Gains (Losses)..................................... 2 7 32 21 (7)
Other Corporate Expenses(1)................................. (10) (12) (42) (68) (54)
---- ---- ---- ---- ----
Total............................................. $(50) $ 14 $(72) $(12) $(33)
==== ==== ==== ==== ====
- ---------------
(1) Includes other non-operating items.
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First Quarter 1999 versus First Quarter 1998
Interest and other non-operating expenses for the first quarter of 1999
were a loss of $50 million compared to income of $14 million in the comparable
period in 1998, primarily reflecting an increase in interest expense resulting
from separation-related debt to DuPont incurred in the second half of 1998 and
lower interest income.
1998 versus 1997
Interest and other non-operating expenses for 1998 were $72 million, an
increase of $60 million versus $12 million in 1997. The increase is primarily
attributable to higher interest expense from debt incurred in the second half of
the year, which more than offset interest income earned in the first half of the
year.
1997 versus 1996
Interest and other non-operating expenses were a loss of $12 million in
1997, an improvement of $21 million from 1996 results. Net interest income
(expense) in 1997 was improved by $7 million versus 1996, primarily due to
increased after-tax capitalized interest on major upstream business development
projects. Conoco incurred an after-tax exchange gain of $21 million in 1997
compared with a loss of $7 million in 1996, primarily reflecting the impact of
Norwegian Kroner and British Pound exchange rate movements on U.S.
dollar-denominated working capital balances. Other expenses of $68 million in
1997 were $14 million higher than 1996.
ENVIRONMENTAL EXPENDITURES
The costs to comply with environmental laws and regulations, as well as
internal voluntary programs, are significant and will continue to be so in the
foreseeable future. Conoco anticipates substantial expenditures will be
necessary to comply with Maximum Achievable Control Technology standards
proposed by EPA under the Clean Air Act and specifications for motor fuels
designed to reduce emissions of some types of pollutants from vehicles using
such fuels.
Estimated pre-tax environmental expenses charged to current operations
totaled about $131 million in 1998, as compared to approximately $136 million in
1997 and $162 million in 1996. These expenses include the remediation accruals
discussed below, operating, maintenance and depreciation costs for pollution
control facilities and the costs of other environmental activities. The largest
of these expenses resulted from the operation of pollution control facilities.
Approximately 80 percent of 1998 total environmental expenses resulted from the
operations of Conoco's business in the United States.
Capital expenditures for pollution control facilities totaled approximately
$53 million in 1998, as compared to approximately $50 million in 1997 and $78
million in 1996. Conoco estimates that capital expenditures will increase by
$100 million in 1999 and by an additional $100 million in 2000 due to
regulations in Europe requiring cleaner burning fuels.
REMEDIATION EXPENDITURES
The Resource Conservation and Recovery Act extensively regulates the
treatment, storage and disposal of hazardous waste and requires a permit to
conduct such activities. RCRA requires permitted facilities to undertake an
assessment of environmental conditions at the facility. If conditions warrant,
Conoco may be required to remediate contamination caused by prior operations. In
contrast to the Comprehensive Environmental Response, Compensation, and
Liability Act, often referred to as "Superfund," the cost of remediation under
RCRA is typically borne solely by Conoco. Conoco anticipates that significant
ongoing expenditures for RCRA remediation may be required over the next decade,
although Conoco does not expect that annual expenditures for the near term will
vary significantly from the range of such expenditures over the past few years.
Conoco's expenditures associated with RCRA and similar remediation activities
conducted voluntarily or under state law were approximately $27 million in 1998,
$31 million in 1997 and $34 million in 1996. In the long term, expenditures are
subject to considerable uncertainty and may fluctuate significantly.
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EPA and state environmental agencies from time to time allege that Conoco
is a potentially responsible party under CERCLA or an equivalent state statute
for contamination at various sites that typically are not owned by Conoco but
allegedly contain wastes attributable to Conoco's past operations. These
agencies and private parties have also sued Conoco on occasion for the recovery
of costs incurred to remediate the contaminated sites. As of December 31, 1998,
Conoco had been notified of potential liability under CERCLA or state law at
about 16 sites in the United States, with active remediation under way at six of
those sites. Conoco received notice of potential liability at three new sites as
of June 15, 1999, one new site during 1998, which was resolved, compared with
four similar notices in 1997 and one in 1996. Conoco's expenditures associated
with CERCLA and similar state remediation activities were not significant in
1998, 1997 or 1996.
For most Superfund sites, Conoco's costs likely will be significantly less
than the total site remediation costs, because the percentage of waste
attributable to Conoco versus that attributable to all other potentially
responsible parties has been relatively low. Other potentially responsible
parties at sites where Conoco is a party typically have had the financial
strength to meet their obligations and, where they have not, or where
potentially responsible parties could not be located, Conoco's own share of
liability has not materially increased. There are relatively few sites where
Conoco is a major participant, and Conoco does not expect that remediation at
those sites, or at all Superfund sites in the aggregate, will have a material
adverse effect on Conoco's financial condition, results of operation or
liquidity.
Cash expenditures not charged against income for previously accrued
remediation activities under CERCLA, RCRA and similar state and foreign laws
were $17 million in 1998, $19 million in 1997 and $19 million in 1996. Although
future remediation expenditures in excess of current reserves are possible, the
effect of any such excess on future financial results is not subject to
reasonable estimation because of the considerable uncertainty regarding the cost
and timing of expenditures.
REMEDIATION ACCRUALS
Conoco accrues for remediation activities when it is probable that a
liability has been incurred and reasonable estimates of the liability can be
made. These accrued liabilities exclude claims against Conoco's insurers or
other third parties and are not discounted. Many of these liabilities result
from CERCLA, RCRA and similar state laws that require Conoco to investigate and
remediate contamination at sites where it conducts or once conducted operations
or at sites where company-generated waste was disposed. The accrual also
includes a number of sites identified by Conoco that may require environmental
remediation, but which are not currently the subject of CERCLA, RCRA or state
enforcement activities. Over the next decade, Conoco may incur significant costs
under both CERCLA and RCRA. Considerable uncertainty exists with respect to
these costs and under adverse changes in circumstances, potential liability may
exceed amounts accrued as of December 31, 1998.
Remediation activities vary substantially in duration and cost from site to
site depending on site characteristics, evolving remediation technologies,
diverse regulatory agencies, enforcement policies and the presence of
potentially liable third parties. Therefore, it is difficult to develop
reasonable estimates of future site remediation costs. At December 31, 1998,
Conoco's balance sheet included an accrued liability of $129 million as compared
to $144 million at year-end 1997. Approximately 89 percent of Conoco's
environmental reserve at December 31, 1998, was attributable to RCRA and similar
remediation liabilities and 11 percent to Superfund liabilities. Voluntary
remediations are not included in this reserve. During 1998, remediation accruals
resulted in a $2 million charge, compared to credits of $41 million in 1997 and
$70 million in 1996, both of which resulted from insurance recoveries. No
significant additional recoveries are expected.
TAX MATTERS
As a result of the separation from DuPont and the initial public offering,
Conoco is no longer able to combine the results of its operations with those of
DuPont in reporting income for U.S. federal income tax purposes and for state
and non-U.S. income tax purposes in some states and foreign countries. Conoco
believes this will not have a material adverse effect on its earnings.
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During the period ended March 31, 1999, Conoco's net deferred tax assets
increased primarily as a result of the recognition of $62 million of
carryforwards related to foreign tax credits, alternative fuels tax credits and
the U.S. alternative minimum tax. Conoco believes it is more likely than not
that the additional deferred tax assets related to these foreign tax credits and
alternative fuels tax credits will be realized in the current year. Further,
Conoco believes it is more likely than not that the alternative minimum tax
credits will be realized in future years.
As of December 31, 1998, Conoco had deferred tax assets in the amount of
$1,238 million. Of this amount, $496 million related to tax benefits from
operating losses incurred in start-up operations, including exploration and U.S.
foreign tax credit carry forwards. These benefits were substantially offset by a
valuation reserve. Conoco believes it is more likely than not that the balance
of the deferred tax assets will be realized in future years.
YEAR 2000
Historically, many computerized systems have used two digits rather than
four digits to define the applicable year, which could result in recognizing a
date using "00" as the year 1900 rather than the year 2000. This could result in
major failures or miscalculations.
Conoco recognizes that the impact of the Year 2000 issue extends beyond
traditional computer hardware and software to automated plant systems and
instrumentation, as well as to third parties. The Year 2000 issue is being
addressed within Conoco by its individual business units, and progress is
reported periodically to management and the board of directors.
Conoco has committed resources to conduct risk assessments and to take
corrective action, where required, within each of the following areas:
information technology, plant systems and external parties. Information
technology includes telecommunications as well as traditional computer software
and hardware in the mainframe, midrange and desktop environments. Plant systems
include all automation and embedded chips used in production, plant,
transportation and marketing facilities. External parties include any third
party with whom Conoco interacts. Most of the resources committed to this work
are internal.
Managing Year 2000 risk is being handled in three tiers -- through Year
2000 compliance plans, mitigation plans and emergency recovery plans. The Year
2000 compliance plans include inventorying and assessing risk, and outlining
action to be taken for each of these items. Year 2000 compliance plans have been
developed and are being implemented for all business units. Mitigation plans
outline a list of actions that will be taken at specified times to further
minimize risk. These plans are currently being developed for areas in which the
Year 2000 compliance plans may not adequately address all of the relevant risk
issues. For example, Conoco cannot be guaranteed that external partners will be
Year 2000 compliant. Therefore, operations that rely heavily on external
partners will develop mitigation plans. Mitigation plans will be developed, as
needed, for all business units by the end of the third quarter of 1999.
Emergency recovery plans already exist in many of Conoco's operations to
address other issues such as oil tanker spills and plant explosions. Typically,
the emergency recovery plans address the results of single events. These plans
are designed to facilitate the resumption of normal operations following a
disruption. In contrast to a "normal" disruption, the scope of Year 2000 issues
may cause multiple concurrent events. Accordingly, the emergency recovery plans
will be reviewed and supplemented to address Year 2000 risks for all business
units by the end of the third quarter of 1999. The progress reported below
covers only the replacement or upgrade of existing non-compliant systems.
Replacement projects planned and managed outside of the Year 2000 Program have
been excluded. Approximately 79 percent of the work required to fix Year 2000
issues identified by the Year 2000 Program has been completed.
In the information technology area, inventory and assessment audits have
been completed. Corrective action in the mainframe and midrange environments
will be completed by the end of the second quarter of 1999, in the
telecommunications and desktop areas by the end of the third quarter of 1999 and
in business application software by the end of the fourth quarter of 1999.
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In the plant systems area, all but one of Conoco's business units have
completed their inventory and assessment audits; the remaining unit is expected
to complete this work by the end of the second quarter of 1999. Conoco is
relying on vendor testing of hardware, software and embedded chips, with
certification and validation through limited internal testing and/or industry
test results. Downtime for normally scheduled plant maintenance will be used to
conduct testing, with corrective action expected to be completed by the end of
the third quarter of 1999.
With respect to external parties, the inventory of critical external
parties is complete. Risks are being assessed and will be addressed in
contingency plans. Monitoring of risk in this area will continue throughout
1999.
The total cost of Year 2000 activities is not expected to be material to
Conoco's operations, liquidity or capital resources. Costs are being managed
within each business unit. The total estimated cost for Conoco's Year 2000 work
is $46 million. 1997 costs were $5 million, 1998 costs were $25 million and
first quarter 1999 costs were $4 million. This includes costs for the
replacement or upgrade of existing non-compliant systems. Replacement projects
planned and managed outside of the Year 2000 program have been excluded.
There can be no guarantee that third parties of business importance to
Conoco will successfully reprogram or replace, and test, all of their own
computer hardware, software and process control systems to ensure such systems
are Year 2000 compliant. Failure to address a Year 2000 issue could result in
business disruption that could materially affect Conoco's operations, liquidity
or capital resources. There is still uncertainty around the scope of the Year
2000 issue. At this time Conoco cannot quantify the potential impact of these
failures. Conoco is developing contingency plans to address issues within its
control. The program minimizes, but does not eliminate, the issues of external
parties.
EUROPEAN MONETARY UNION
Within Europe, the European Economic and Monetary Union introduced a new
currency, the euro, on January 1, 1999. The new currency is in response to the
European Monetary Union's policy of economic convergence to harmonize trade
policy, eliminate business costs associated with currency exchange and to
promote the free flow of capital, goods and services.
Conoco has undertaken a review of the euro implementation and has
concentrated on areas such as operations, finance, treasury, legal, information
management, procurement and others, both in participating and nonparticipating
European Union countries where Conoco operates. Existing legacy accounting and
business systems and other business assets have been reviewed for euro
compliance. Progress regarding euro implementation is reported periodically to
management. Amounts spent to date and expected to be spent in the future are not
material.
Because of the staggered introduction of the euro regarding non-cash and
cash transactions, Conoco has developed its plans to address first its
accounting and business systems and second, its business assets. Conoco
undertook steps to be euro compliant within its accounting and business systems
by the end of 1998 relative to the conversion rules when performing translations
between European Monetary Union currencies. The accounting systems were modified
so that European Monetary Union legacy currencies are converted to other
European Monetary Union legacy currencies via the euro rather than directly.
Conoco has an implementation plan to convert its accounting and reporting
systems from legacy currency to the euro by January 1, 2002, for those
operations that are in European Monetary Union countries. The plan also
incorporates steps to ensure the corresponding business assets are fully
compliant by that date, in preparation for being able to conduct business
involving euro notes and coins.
Consistent with regulations and steps the industry is taking to get the
public familiar with the euro, conversion at retail outlets has already begun.
The conversion program varies between countries, and includes:
- displaying conversion tables between European Monetary Union legacy
currencies and the euro at gasoline stations;
- placing stickers on the gasoline pumps with the equivalent euro price per
liter;
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- installing "euro corners" in the shop part of the station with calculators
and examples so that customers can practice converting their European
Monetary Union legacy currency to the euro; and
- showing the euro equivalent total at the bottom of receipts issued from
cash registers.
The business assets conversion program will continue throughout the
transition period, and in its final stages will include new or modified pole
price signs, electronic euro price displays at the pump, new or modified
automatic cash machines, and receipts which give detailed itemized breakdown in
euros.
Conoco does not currently expect to experience any significant operational
disruptions or to incur any significant costs, including any currency risk,
which could materially affect its liquidity or capital resources. Conoco is
preparing plans to address issues within the transitional period when both
legacy and euro currencies may be tendered.
Because of the competitive business environment within the petroleum
industry, Conoco does not anticipate any long-term competitive implications or
the need to materially change its mode of conducting business as a result of
increased price transparency.
RESTRUCTURING
In December 1998, Conoco announced that as a result of a comprehensive
review of its assets and long-term strategy, Conoco was making organizational
realignments consistent with furthering the efficiency of operations and taking
advantage of synergies created by the upgrading of its asset portfolio. The
announced plans are being implemented in 1999 and will result in a reduction of
approximately 775 upstream positions and 200 downstream positions worldwide.
About three quarters of the upstream positions and about half of the downstream
positions affected will be in the United States. These reductions largely
reflect the elimination of redundancies at all levels resulting from past and
ongoing consolidation of assets into operations requiring less employee support,
as well as better sharing of common services and functions across regions.
Associated with these announcements, Conoco recorded a charge of $82
million pre-tax, or $52 million after-tax, nearly all of which represents
termination payments and related employee benefits to be made to persons
affected. During the first quarter of 1999, approximately 134 persons in
upstream and 28 persons in downstream left Conoco under implementation of these
realignment plans. The following table shows the status of, and changes to, the
restructuring reserve for the first quarter of 1999.
UPSTREAM DOWNSTREAM
-------------------- --------------------
U.S. INTERNATIONAL U.S. INTERNATIONAL TOTAL
---- ------------- ---- ------------- -----
Reserve at December 31, 1998............................. $31 $36 $8 $7 $82
Expenditures........................................... (3) (1) -- -- (4)
New accruals........................................... -- -- -- -- --
--- --- -- -- ---
Reserve at March 31, 1999................................ $28 $35 $8 $7 $78
=== === == == ===
Conoco expects the restructuring efforts provided for in December 1998 will
be completed by year-end 1999.
NEW ACCOUNTING STANDARDS
Effective January 1, 1999, Conoco adopted Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities," issued by the American
Institute of Certified Public Accountants. This statement requires that costs
related to start-up activities, including organization costs, be expensed as
incurred. Conoco's policy has been one of expensing organization and other
similar costs of start-up operations. Accordingly, Conoco has no cumulative
charge to earnings from a write-off of deferred start-up costs as a result of
adoption of this accounting standard.
Conoco adopted the Financial Accounting Standards Board's Statement No. 131
"Disclosures About Segments of an Enterprise and Related Activities." for the
year ended December 31, 1998, and has disclosed segment information on the same
basis used internally for evaluating segment performance and deciding how to
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allocate resources to segments. Conoco has assessed the effect of the new
disclosure, and adoption of Statement No. 131 had no financial impact.
In February 1998, the Financial Accounting Standards Board issued Statement
No. 132, "Employers' Disclosure About Pension and Other Postretirement
Benefits," which revised disclosure requirements for pension and other
postretirement benefits. It does not affect the measurement of the expense of
Conoco's pension and other postretirement benefits. Conoco adopted this
Statement for the year ended December 31, 1998.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
requires that companies recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
Statement No. 133 provides, if specified conditions are met, that a derivative
may be specifically designated as:
- a hedge of the exposure to changes in the fair value of a recognized asset
or liability or an unrecognized firm commitment;
- a hedge of the exposure to variable cash flows of a forecasted transaction;
or
- a hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security
or a foreign-currency-denominated forecasted transaction.
Under Statement No. 133, the accounting for changes in fair value of a
derivative depends on its intended use and designation. For a fair value hedge,
the gain or loss is recognized in earnings in the period of change together with
the offsetting loss or gain on the hedged item. For a cash flow hedge, the
effective portion of the derivative's gain or loss is initially reported as a
component of other comprehensive income and subsequently reclassified into
earnings when the forecasted transaction affects earnings. For a foreign
currency hedge, the gain or loss is reported in other comprehensive income as
part of the cumulative translation adjustment. For all other items not
designated as hedging instruments, the gain or loss is recognized in earnings in
the period of change.
MARKET RISKS
Conoco operates in the worldwide crude oil, refined product, natural gas,
natural gas liquids and electric power markets and is exposed to fluctuations in
hydrocarbon prices, electric power prices, foreign currency rates, and interest
rates that can affect the revenues and cost of operating, investing and
financing. Conoco's management has used and intends to use financial and
commodity-based derivative contracts to reduce the risk in overall earnings and
cash flow when the benefits provided are anticipated to more than offset the
risk management costs involved.
Conoco has established a financial risk management policy framework that
provides guidelines for entering into contractual arrangements to manage
Conoco's commodity price, foreign currency rate, and interest rate risks. The
Conoco risk management committee has ongoing responsibility for the content of
this policy and has principal oversight responsibility to ensure Conoco is in
compliance with the policy and that procedures and controls are in place for the
use of commodity, foreign currency and interest rate instruments. These
procedures clearly establish derivative control and valuation processes, routine
monitoring and reporting requirements and counterparty credit approval
procedures. Additionally, Conoco's internal audit group conducts reviews of
these risk management activities to assess the adequacy of internal controls.
The audit results are reviewed by the Conoco risk management committee and by
management.
The counterparties to these contractual arrangements are limited to major
financial institutions and other established companies in the petroleum
industry. Although Conoco is exposed to credit loss in the event of
nonperformance by these counterparties, this exposure is managed through credit
approvals, limits and monitoring procedures, and limits to the period over which
unpaid balances are allowed to accumulate. Conoco has not experienced
nonperformance by counterparties to these contracts, and no material loss would
be expected from any such nonperformance.
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Commodity Price Risk
Conoco enters into energy-related futures, forwards, swaps and options in
various markets to balance its physical systems, to meet customer needs and to
manage its price exposure on anticipated crude oil, natural gas, refined product
and electric power transactions. These instruments provide a natural extension
of the underlying cash market and are used to physically acquire a portion of
supply requirements as well as to manage pricing of near term physical
requirements. The commodity futures market has underlying principles of
increased liquidity and longer trading periods than the cash market and is one
method of managing price risk in the energy business.
Conoco policy is to generally be exposed to market pricing for commodity
purchases and sales. From time to time, management may use derivatives to
establish longer-term positions to hedge the price risk for Conoco's equity
crude oil and natural gas production as well as refinery margins.
Under Conoco's policy, hedging includes only those transactions that offset
physical positions and reduce overall company exposure to price risk. Trading is
defined as any transaction that does not meet the definition of hedging. Much of
the portfolio is reported in the trading category and, thereby, receives
mark-to-market accounting. As a consequence, current revenues and costs reflect
the full effect of price movement on most of Conoco's trading activity. Those
activities that qualify as hedges use deferral accounting.
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The fair value gain (loss) of outstanding derivative commodity instruments
and the change in fair value that would be expected from a ten percent adverse
price change are shown in the table below:
CHANGE IN FAIR VALUE
FROM 10% ADVERSE
FAIR VALUE PRICE CHANGE
---------- --------------------
(IN MILLIONS)
AT MARCH 31, 1999
Crude Oil and Refined Products
Hedging................................................... $ (2) $ (1)
Trading................................................... 24 (3)
---- ----
Combined.................................................. $ 22 $ (4)
Natural Gas
Hedging................................................... $ (5) $(16)
Trading................................................... -- 1
---- ----
Combined.................................................. $ (5) $(15)
AT DECEMBER 31, 1998
Crude Oil and Refined Products
Hedging................................................... $ (1) $ (5)
Trading................................................... 3 3
---- ----
Combined.................................................. $ 2 $ (2)
Natural Gas
Hedging................................................... $(25) $(20)
Trading................................................... (2) (1)
---- ----
Combined.................................................. $(27) $(21)
AT DECEMBER 31, 1997
Crude Oil and Refined Products
Hedging................................................... $ (3) $ (8)
Trading................................................... (6) (18)
---- ----
Combined.................................................. $ (9) $(26)
Natural Gas
Hedging................................................... $ 8 $ (9)
Trading................................................... -- --
---- ----
Combined.................................................. $ 8 $ (9)
The fair values of the futures contracts are based on quoted market prices
obtained from the New York Mercantile Exchange or the International Petroleum
Exchange of London. The fair values of swaps and other over-the-counter
instruments are estimated based on quoted market prices of comparable contracts
and approximate the gain or loss that would have been realized if the contracts
had been closed out at the end of the reporting period.
All hedge positions offset physical positions exposed to the cash market;
none of these offsetting physical positions is included in the above table.
Price-risk sensitivities were calculated by assuming an across-the-board
ten percent adverse change in prices regardless of term or historical
relationships between the contractual price of the instrument and the underlying
commodity price. In the event of an actual ten percent change in prompt month
crude or natural gas prices, the fair value of Conoco's derivative portfolio
would typically change less than that shown in the table due to lower volatility
in out-month prices.
Additional details regarding accounting policy for these financial
instruments are set forth in note 2 to Conoco's consolidated financial
statements.
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Foreign Currency Risk
Conoco has foreign currency exchange rate risk resulting from operations in
approximately 40 countries around the world. Conoco does not comprehensively
hedge its exposure to currency rate changes, although it may choose to
selectively hedge exposure to foreign currency exchange rate risk. Examples
include firm commitments for capital projects, some local currency tax payments,
and cash returns from net investments in foreign affiliates to be remitted
within the coming year. At March 31, 1999 and at December 31, 1998, Conoco had
no open forward exchange contracts. At December 31, 1997, Conoco had open
forward exchange contracts designated as a hedge of firm foreign currency
commitments. The notional amount of these contracts was $50 million and the
estimated fair value was $38 million.
Interest Rate Risk
Prior to the initial public offering, Conoco had no significant interest
rate risk to manage. In March 1999, Conoco hedged interest rate exposure on a
portion of the public debt that was issued in April 1999. The hedge was
accomplished by purchasing put options on U.S. Treasury securities with a
maturity date matching the expected pricing date of the debt offering and having
a total notional amount of $2.5 billion spread over five-year, ten-year and
30-year maturities proportional to the expected tranches of Conoco debt to be
issued. Fair value of the put options at March 31, 1999 was $7 million. In April
1999, subsequent to purchasing the put options, U.S. Treasury interest rates
decreased and the put options expired out of the money. Before the public debt
issuance, Conoco entered into interest rate lock agreements proportional to the
expected tranches of debt to be issued. Overall, the two hedging transactions
resulted in an immaterial net gain that will be amortized against interest
expense over the life of the various debt maturities.
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BUSINESS OF DUPONT
GENERAL
DuPont is a world leader in science and technology in a range of
disciplines, including high-performance materials, specialty chemicals,
pharmaceuticals and biotechnology. DuPont has a portfolio of 2,000 trademarks
and brands, including such well-known consumer brands as Lycra(R), Teflon(R),
Stainmaster(R), Kevlar(R), Nomex(R), Tyvek(R), Dacron(R), Cordura(R), Corian(R),
SilverStone(R), and Mylar(R). DuPont operates 200 manufacturing and processing
facilities in 65 countries worldwide.
DuPont presents its results in eight reportable segments -- Agriculture &
Nutrition, Nylon Enterprise, Performance Coating & Polymers, Pharmaceuticals,
Pigments & Chemicals, Polyester Enterprise, Specialty Fibers, and Specialty
Polymers. The balance of DuPont's continuing operations is reported in an Other
segment and consists of DuPont's photomasks safety resources and global services
businesses. DuPont also has petroleum operations conducted through Conoco, which
are reported in DuPont's financial statements as discontinued operations. DuPont
expects the petroleum business will be divested from DuPont's operations if the
exchange offer is completed. DuPont and its subsidiaries, excluding Conoco,
employ approximately 92,000 people worldwide and have annual revenues of
approximately $25 billion.
REPORTABLE SEGMENTS
AGRICULTURE & NUTRITION
DuPont's agriculture & nutrition business consists of crop protection
products and the newly formed nutrition & health business. The agriculture &
nutrition business had revenues of approximately $3.2 billion in 1998. Crop
protection products includes herbicides, fungicides, and insect control sold
worldwide.
DuPont formed its nutrition & health business in 1998 to increase its
strong position in biotechnology across high value opportunities in animal
feeds, food ingredients, nutritional sciences and biosourced industrial
materials. Nutrition & health consists of both business and research development
efforts in agriculture, food and nutrition.
On March 15, 1999 DuPont agreed to effect a business combination with
Pioneer Hi-Bred International, Inc., the world's largest seed company, in a
stock and cash merger valued at approximately $7.7 billion. DuPont currently has
a 20 percent equity interest in Pioneer, as well as joint venture and other
arrangements with Pioneer. The merger is expected to close during the summer of
1999. For further details, see footnote 1 to "Unaudited Pro Forma Consolidated
Financial Statements of DuPont."
DuPont recently announced plans to improve the profitability of its crop
protection business and to better position the business for future growth in the
face of very competitive market conditions. Plans include consolidating
manufacturing capacity and refocusing research and development and marketing
activities toward the successful introduction of three new products and
achieving synergies with Pioneer. DuPont intends to eliminate approximately 800
jobs or about 15 percent of the crop protection global workforce. Estimated
annual pre-tax savings of approximately $200 million are expected to begin
accruing in the fourth quarter of 1999. Potential asset write-offs are under
review. A nonrecurring charge related to these measures is expected to be
recorded in the third quarter, 1999.
NYLON ENTERPRISE
DuPont's nylon enterprise business consists of nylon intermediates,
polymers and fibers for carpet and rug markets, apparel, tire reinforcement and
numerous other industrial applications. DuPont nylon had revenues of
approximately $4.6 billion in 1998 and includes the brands Stainmaster(R) and
Antron(R) fibers for carpets and Tactel(R) and Supplex(R) yarns for apparel. In
1998, DuPont completed investments to reduce emissions of nitrous oxide by more
than 90 percent at the five nylon sites worldwide that produce adipic acid, a
nylon intermediate chemical.
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PERFORMANCE COATINGS & POLYMERS
DuPont's performance coatings & polymers business manufactures and markets
engineering materials for automotive, electrical, electronic, consumer and
industrial applications. The automotive and electrical/electronics industries
are its largest markets. The performance coatings & polymers business had
revenues of approximately $4.6 billion in 1998. Polymers, commonly known as
plastics, are large molecules formed by combining many smaller molecules in a
regular pattern. The business unit supplies six families of engineering
resins -- Zytel(R) nylon, Delrin(R) acetal, Rynite(R) polyester PET, Crastin(R)
polyester PBT, Hytrel(R) thermoplastic elastomer and Zenite(TM) liquid crystal
polymer-plus Vespel(R) polymide parts and shapes, Tribon composites and Tynex(R)
filaments. DuPont performance coatings are used in automotive original equipment
coatings, automotive refinish and industrial coatings, and high-performance
coatings.
In February 1999, DuPont acquired Herberts GmbH, the coating business of
Hoechst AG, for about $1.9 billion. Herberts is the market leader in automotive
coatings in Europe with strong positions in the industrial coatings markets and
markets for emerging ultra-low emission powder coatings. The acquisition is
intended to add significant opportunities to increase worldwide market
penetration of powder and industrial coatings. Combined, the companies comprise
the world's third largest coatings company and are the leading automotive
coatings supplier with sales of about $4 billion.
PHARMACEUTICALS
DuPont pharmaceuticals focuses on research, development and delivery of
pharmaceuticals to treat HIV, cardiovascular disease, central nervous system
disorders, cancer and arthritis-related disorders. It is also a leader in
medical imaging. The pharmaceuticals business had revenues of approximately $1.1
billion in 1998. Pharmaceutical products include Sustiva(TM) for AIDS,
Coumadin(R) anticoagulant, Cozaar(R) for hypertension, Sinemet(R) for
Parkinson's disease, Symmetrol(R) antiviral and antiparkinsons, Cardilite(R)
cardiac imaging agents, and Neurolite(R) brain-imaging agents.
DuPont purchased Merck & Co. Inc.'s 50 percent interest in The DuPont Merck
Pharmaceutical Company in July 1998 for $2.6 billion. DuPont now owns 100
percent of the business, which operates as DuPont Pharmaceuticals.
PIGMENTS & CHEMICALS
DuPont's pigments & chemicals business manufactures and distributes a wide
range of commodity and specialty products, including titanium dioxide,
fluorochemicals and specialty chemicals used in the construction, oil and gas,
precious metal mining, transportation, paper, plastics, chemical processing,
refrigeration, textile and safety and environmental management industries. The
pigments & chemicals business had revenues of approximately $3.7 billion in
1998.
The pigments & chemicals business is the world's leading producer of
titanium dioxide, commonly referred to as white pigment, which imparts
whiteness, brightness and opacity to paper, paint and plastic. The
fluorochemicals segment of the pigments & chemicals business produces a wide
range of alternatives to chlorofluorocarbons, including refrigerants, foam
expansion agents, propellants and cleaning agents. The specialty chemicals
segment of the pigments & chemicals business produces a wide variety of
specialties, intermediates and industrial chemicals.
POLYESTER ENTERPRISE
DuPont's polyester enterprise includes DuPont Dacron(R) polyester,
high-performance polyester films and polyester resins and intermediates. The
polyester business had revenues of approximately $2.8 billion in 1998. DuPont's
polyester business produces polyester staples and fibers for apparel, home
furnishings, sleepwear, outdoor products, and transportation markets. DuPont's
Dacron(R) polyester includes the brands CoolMax(R) and ThermaStat(R)performance
fabrics, Comforel(R) sleep products, Thermolite(R) insulations,
Micromattique(TM) microfibers and the newest introduction, Supriva(TM) fabric.
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The polyester business also includes specialty, industrial, packaging,
electrical and electronics markets. Brand names include Melinex(R), Mylar(R),
Kaladex(R), and Cronar(R). Polyester resins and intermediates are used in soft
drink bottles and custom containers, as well as applications for packaging and
cups, thermoforms and shrink wrap film.
DuPont recently announced measures designed to improve the profitability of
its polyester business. Under the plan, polyester production capacity will be
better aligned to meet current market needs, some obsolete assets will be
permanently curtailed and the organizations will be streamlined to increase
competitiveness. The restructuring will result in the elimination of
approximately 800 DuPont positions and 600 contractor positions globally or
about 14 percent of the global polyester business work force.
SPECIALTY FIBERS
DuPont's speciality fibers business consists of DuPont Lycra(R) brand
elastane, nonwoven fibers and advanced fiber systems. The specialty fiber
business had revenues of approximately $3.3 billion in 1998. DuPont sells
Lycra(R) in its traditional markets of intimate apparel, swimwear, hosiery and
activewear as well as in new markets such as menswear, childrenswear, socks,
sweater knits, denims, wovens and shoes. Nonwoven products include Tyvek(R)
brand products, as well as Typar(R) and Sontara(R). Advanced fibers are
Kevlar(R) brand fiber, Nomex(R) brand fiber and paper, and Teflon(R) brand
fluropolymer fiber. Advanced fiber products are used in sporting goods and
sporting shoes.
SPECIALTY POLYMERS
DuPont's specialty polymers includes photopolymer & electronic materials,
packaging & industrial polymers, fluropolymers, and DuPont Corian(R). The
specialty polymers business had revenues of approximately $4.1 billion in 1998.
The photopolymer & electronic materials business markets [photoresists],
laminates and photoimageable technology for the printed, flexible and
microcircuit segments of the electronics industry. It also markets flexographic
printing plates and color proofing systems for the printing industry. The
packaging & industrial polymers business offers specialized, high-value polymers
in packaging and selected industrial markets.
The trademarks of fluropolymers include Teflon(R) and Tefzel(R)
fluropolymers, and SilverStone(R) and Autograph(R) non-stick finishes while
DuPont Corian(R) is used in building materials.
RECENT DEVELOPMENTS
On March 10, 1999, DuPont announced the proposed creation of a tracking
stock for its life sciences businesses, which would be issued to all of its
stockholders. The amendment of DuPont's certificate of incorporation to create
this tracking stock, which is intended to provide investors an opportunity to
invest in a security the terms of which more closely track the economic
performance of DuPont's life sciences businesses, must be approved by DuPont
stockholders. After the issuance of the tracking stock, the existing DuPont
common stock is expected to more closely mirror the performance of its materials
businesses. DuPont anticipates that stockholder approval will be sought in the
first quarter of 2000.
In February 1999, the Clinton administration proposed changes to the
federal income tax laws, as part of its budget package, that, if enacted, could
adversely affect the tax consequences relating to the issuance of tracking stock
and, as a result, could adversely affect DuPont's ability to issue the tracking
stock for its life sciences businesses. It is presently unclear whether this
proposal will be enacted into law and, if so, what form it would take. In the
event that the tracking stock proposal is not implemented, DuPont is unable to
estimate what effect, if any, this would have on the trading price of DuPont
common stock.
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BUSINESS OF CONOCO
GENERAL
Conoco, a major, integrated, global energy company, is involved in both the
upstream and downstream operating segments of the petroleum industry. Upstream
activities include exploring for, and developing, producing and selling crude
oil, natural gas and natural gas liquids. Downstream activities include refining
crude oil and other feedstocks into petroleum products, buying and selling crude
oil and refined products and transporting, distributing and marketing petroleum
products. In addition to upstream and downstream operations, Conoco also is
engaged in developing and operating power facilities. Conoco operates in
approximately 40 countries worldwide.
As of December 31, 1998, Conoco had proved worldwide reserves of 2,622
million barrels-of-oil-equivalent, 39 percent of which were natural gas. Based
on 1998 annual production of 213 million barrels-of-oil-equivalent, excluding
natural gas liquids from gas plant ownership, Conoco had a reserve life of 12.3
years as of December 31, 1998. Over the last five years, Conoco has replaced an
average of 195 percent of the oil and gas it has produced each year. Conoco owns
or has equity interests in nine refineries worldwide, with a total crude and
condensate processing capacity of approximately 807,000 barrels per day. Conoco
has a marketing network of approximately 7,900 outlets in the United States,
Europe and Asia.
Based on public filings, for the year ended December 31, 1998, Conoco
ranked eighth in the worldwide production of petroleum liquids by U.S.-based
companies, eleventh in the production of natural gas, and eighth in refining
throughput. For that same period, Conoco reported net income of $450 million,
which included a net charge for special items of $271 million, on total revenues
of $23,168 million. For the first quarter of 1999, Conoco had net income of $83
million, on total revenues of $5.3 billion.
BUSINESS STRATEGY
Conoco intends to pursue a growth-oriented business strategy by exploiting
opportunities where Conoco has existing major areas of operation, creating at
least two new major business areas in northern South America and the Caribbean,
and one of the Asia Pacific, West Africa, Middle East or Russia/Caspian Sea
regions, and continuing to improve the profitability, efficiency and
effectiveness of its existing operations. Specifically, Conoco intends to:
- manage its portfolio to increase the proportion of upstream assets
relative to downstream assets and the proportion of large-scale,
long-lived, early-life cycle assets relative to mature assets, which
could include forming joint ventures or alliances to optimize the
efficiency of operations or monetize a portion of the value of such
assets;
- achieve significant near-term production growth through large scale
projects such as Petrozuata, Britannia, Lobo and Ursa;
- seek opportunities created by worldwide privatizations and the opening of
new markets previously closed to private investment;
- apply its strengths in carbon upgrading, project management, deepwater
technology, natural gas processing, seismic processing and
interpretation, and in the ability to present integrated upstream/
downstream solutions to host governments and other institutions in new
and emerging markets;
- pursue exploration activities that have significant value creation
potential by concentrating on areas that are under-explored;
- capitalize on its ability to convert low cost, heavy, high sulfur and
acidic crude oils into high value light oil products; and
- continuously rationalize its asset base, contain costs, optimize its
investment portfolio, and improve operating reliability.
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In all of its activities, Conoco will strive to act in accordance with its
core values of operating safely, protecting the environment, acting ethically
and valuing all people.
CONOCO HISTORY
Conoco was founded in 1875 in Ogden, Utah, as the Continental Oil and
Transportation Company. In 1885, it was reincorporated with a new name,
Continental Oil Company, as part of the nationwide Standard Oil Trust. In its
early years, its principal operations were marketing oil and petroleum related
products, primarily in the Rocky Mountain area and in California. In 1913, two
years after the U.S. Supreme Court dissolved the Standard Oil Trust, Conoco was
again independently incorporated. From 1913 to 1929, Conoco evolved into a fully
integrated oil company, with operations in most states west of the Mississippi
River.
By 1929, Conoco had approximately 1,800 producing wells and had become one
of the largest retailers of gasoline in the Rocky Mountain area. In that year,
it merged with the Marland Oil Company, an oil and gas company with wells and
marketing operations from Oklahoma to Maryland. After World War II, Conoco was
an early participant in Gulf of Mexico exploration and production activities and
moved aggressively overseas with upstream assets in many parts of the world and
downstream assets in Western Europe. In 1981, Conoco was acquired by DuPont.
FINANCIAL INFORMATION -- OPERATING SEGMENT AND GEOGRAPHIC INFORMATION
See note 27 to the consolidated financial statements of Conoco for
operating segment and geographic information.
UPSTREAM
SUMMARY
Conoco is currently exploring for, developing or producing crude oil,
natural gas and/or natural gas liquids in 14 countries around the world. In
1998, production averaged 583,000 barrels-of-oil-equivalent per day, consisting
of 348,000 barrels per day of petroleum liquids, excluding natural gas liquids
from gas plant ownership, and 1,411 million cubic feet of natural gas per day.
The majority of this production came from fields located in the United States,
the United Kingdom and Norway, with the remaining production coming from
operations in Canada, the United Arab Emirates, Indonesia, Nigeria, Russia and
Venezuela.
In 1998, Conoco replaced nearly 110 percent of the oil and natural gas it
produced, adding 234 million barrels-of-oil-equivalent to Conoco's worldwide
reserves while producing 213 million barrels-of-oil-equivalent, excluding
natural gas liquids from gas plant ownership, for a net addition of 21 million
barrels-of-oil-equivalent. This marks the sixth consecutive year that Conoco has
replaced more reserves than it produced. Conoco replaced 163 percent of the
natural gas produced and 74 percent of the oil produced. On December 31, 1998,
Conoco had proved reserves of 2,622 million barrels-of-oil-equivalent,
consisting of 1,591 million barrels of petroleum liquids and 6,183 billion cubic
feet of natural gas, representing an increase of 48 percent on a barrel-
of-oil-equivalent basis since December 31, 1994.
Conoco's capital investment in upstream activities in 1998 was $1,965
million, including the continued development of the Lobo trend, Britannia, Ursa
and Petrozuata. These projects will contribute to Conoco's 1999 production and
significantly increase Conoco's production rates over current levels in future
years.
The majority of Conoco's exploration and production assets are located in
the United States and Canada, the United Kingdom and Norway. The producing
properties in these areas generate cash to fund growth opportunities around the
world. Outside of North America and Western Europe, Conoco's investment
activities are focused on areas that have the potential to become major business
areas in the future, such as northern South America and the Caribbean, and the
Asia Pacific, West Africa, Middle East and Russia/Caspian Sea regions.
Conoco is exploring for oil and/or natural gas in 14 countries. Since 1996,
Conoco has pursued and continues to implement an exploration strategy focused on
acquiring large acreage positions in areas that are
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relatively under-explored. The purpose of these acreage acquisitions has been to
establish Conoco at an early stage in areas that have the potential for large
discoveries. During the same period, Conoco acquired significant acreage
positions in the following regions:
- the deepwater Gulf of Mexico;
- the Atlantic Margin of Northwest Europe;
- northern South America;
- the Caribbean; and
- selected basins in the Asia Pacific region.
Conoco's global deepwater acreage position is the largest in the industry. In
1998, Conoco's exploratory success rate was its best in 15 years. Approximately
30 percent of the exploratory wells Conoco drilled, excluding appraisal wells,
were potentially commercial.
Conoco intends to manage its asset portfolio to increase the proportion of
upstream assets relative to downstream assets and the proportion of large-scale,
long-lived, early-life cycle assets relative to mature assets. In the course of
implementing such strategy, Conoco has in the past, and may from time to time in
the future, purchase or sell upstream assets. Conoco may also consider forming
alliances or joint ventures to hold and operate selected upstream assets, either
to optimize the efficiency of such operations through achieving economies of
scale or to monetize a portion of the value of such assets.
The following table sets forth information regarding Conoco's producing
properties. This table includes crude oil, condensate, and natural gas liquids
expected to be removed for Conoco's account from its natural gas production.
PROVED RESERVES
AS OF DECEMBER 31, 1998
1998 PRODUCTION
NATURE OF INTEREST (MMBOE) (MBOE PER DAY)
------------------ ------------------ --------------
REGION
UNITED STATES
Lobo.......................................... Lease 162 70
Gulf of Mexico................................ Lease 80 28
San Juan Basin................................ Lease 185 53
Permian Basin................................. Lease 133 31
Central Appalachian Basin..................... Partnership 63 2
Other......................................... 88 43
----- ---
Total United States................... 711 227
WESTERN EUROPE
Britannia..................................... License 242 18
Heidrun....................................... License 146 39
Statfjord..................................... License 100 54
Troll......................................... License 114 9
Other......................................... 317 111
----- ---
Total Western Europe.................. 919 231
NORTHERN SOUTH AMERICA AND THE CARIBBEAN
Petrozuata.................................... Equity Company 678 5
OTHER........................................... 314 120
----- ---
Total................................. 2,622 583
===== ===
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UNITED STATES
Production operations in the United States are principally located in the
following areas:
- the Lobo trend in South Texas;
- the Gulf of Mexico;
- the San Juan Basin in New Mexico;
- the Permian Basin in West Texas; and
- the Central Appalachian Basin in Virginia.
In 1998, United States operations contributed approximately 23 percent of
Conoco's worldwide petroleum liquids production and 63 percent of its worldwide
natural gas production. Proved reserves as of December 31, 1998, were 711
million barrels-of-oil-equivalent, consisting of 261 million barrels of
petroleum liquids and 2,700 billion cubic feet of natural gas.
In recent years, Conoco has consolidated its exploration and production
operations in the United States in order to increase profitability. Conoco sold
hundreds of smaller, less efficient properties, while acquiring an increased
interest in its largest producing areas such as the San Juan Basin and the Lobo
trend. As a result, Conoco has reduced the number of fields in its portfolio
from approximately 700 in 1990 to 104 as of December 31, 1998, while maintaining
production essentially constant on a barrel-of-oil-equivalent basis. Conoco has
also focused its exploration activities by reducing the number of exploration
plays being pursued in the United States from over 30 in 1995 to less than ten
as of December 31, 1998. Exploration activity in the United States is
concentrated in the deepwater Gulf of Mexico.
Conoco's objectives are to increase production from the Lobo trend and the
deepwater Gulf of Mexico, while maintaining production from other United States
assets and focusing on natural gas processing capabilities.
Lobo Trend in South Texas
Conoco is the largest natural gas producer in the Lobo trend, and a leading
producer, marketer and transporter of natural gas in South Texas. Conoco has 20
years of operating and drilling experience in the Lobo trend and currently holds
approximately 450,000 acres in the area under oil and gas leases. In 1997, in
accordance with its strategy to rapidly increase production through
participation in large development projects, Conoco substantially increased its
holdings in South Texas through the acquisition of $929 million of natural gas
properties and transportation assets. Assets acquired by Conoco in this
transaction included approximately 215,000 acres of leases, 800 wells and a
1,150-mile natural gas gathering and transportation pipeline. The pipeline
provides direct access to major Texas intrastate and interstate pipeline
systems. As a result of the Lobo acquisition, Conoco is currently the second
largest natural gas producer in Texas.
Conoco's average working interest in its leases in the Lobo trend is 92
percent. A large number of the producing wells acquired in the Lobo acquisition
were acquired subject to volumetric production payments. The holders of these
production payments are entitled to a specific volume of production from these
wells until the last of the production payments terminates in 2002. These
volumes averaged approximately 91 million cubic feet per day in 1998.
Since the 1997 acquisition of Lobo properties, Conoco has maintained
between two and 14 rigs working continuously in the region. As of May 1, 1999,
Conoco had seven rigs working. This development activity has resulted in an
increase in gross natural gas production in the region from approximately 510
million cubic feet per day for December 1997 to approximately 750 million cubic
feet per day for December 1998, an increase of approximately 47 percent. Conoco
anticipates spending $600 million between 1999 and 2002 to further develop its
leases in the Lobo trend. Conoco's 1998 Lobo trend development program included
the acquisition of new 3D seismic data and the drilling of over 200 wells.
As of June 1999, Conoco had completed 3-D seismic surveys on 90 percent of
its total acreage holdings in the Lobo trend, and drilled over 330 wells since
mid-year 1997. As a result of the progression of the seismic interpretations and
recent higher gas prices, Conoco intends to gradually increase the number of
drilling rigs
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during the balance of this year, with the objective of maintaining lower per
well drilling costs at increasing levels of activity. To date during 1999,
drilling and completion costs have been reduced approximately 10 percent on a
per well basis compared to 1998 and operating costs have been reduced by
approximately 10 percent on a unit of production basis compared to 1998.
Lobo Pipeline Company, a wholly owned subsidiary of Conoco, owns a 1,150
mile intrastate natural gas pipeline system in South Texas and expects to
implement an expansion plan designed to provide transportation for Conoco's gas
production and that of third party producers, laying 100 miles of pipeline per
year for the next five years. During the first two years, most of the pipeline
added will be high-pressure trunklines to support regional development.
Gulf of Mexico
Conoco's current portfolio of producing properties in the Gulf of Mexico
includes ten fields operated by Conoco and 14 operated by other companies. The
properties are in various stages of development, ranging from properties that
are fully developed to ones with considerable additional development potential.
Conoco also holds interests in various offshore platforms, pipelines and other
infrastructure.
Conoco currently has 13 leases in production or under development in the
deepwater Gulf of Mexico. Conoco's most important current development project in
the Gulf of Mexico is the Ursa field development. Ursa, operated by Shell, is
one of the largest discoveries to date in the deepwater Gulf of Mexico. Conoco
holds a 16 percent interest in the field, and the other owners are Shell, BP
Amoco and Exxon. The Ursa tension leg platform was installed in late 1998 in
approximately 3,900 feet of water. Initial production from Ursa began four
months ahead of schedule in March 1999, and Conoco projects that peak gross
production from the Ursa field will reach 150,000 barrels per day of petroleum
liquids and 400 million cubic feet of gas per day by 2001.
Conoco's most important exploration program in the United States is in the
deepwater Gulf of Mexico. Conoco is the seventh largest deepwater leaseholder in
the Gulf on an acreage basis, with interests in 295 leases. Conoco has a 100
percent interest in 104 of these leases, and jointly owns 76 of the remaining
leases on a 50-50 basis with Shell and 60 of the remaining leases on a 50-50
basis with Exxon. Since 1996, Conoco has acquired 3D seismic data over large
portions of the deepwater Gulf of Mexico to identify acreage to lease and to
select prospects for drilling. Seismic interpretation is now underway on many
leases and preparations for a multi-well drilling program are being made.
Conoco will carry out its deepwater Gulf of Mexico drilling program in
large part with a recently completed deepwater drillship, which is owned by a
joint venture between Conoco and R&B Falcon Corporation. This vessel, christened
the Deepwater Pathfinder, went into service in January 1999, commencing a
five-year, $400 million drilling program in the Gulf of Mexico. This highly
sophisticated drillship is capable of drilling in water depths of up to 10,000
feet and provides Conoco with the ability to explore in areas that were
previously inaccessible. In May 1999, Conoco announced a discovery on the
Magnolia prospect on Garden Banks Block 783, the first prospect drilled by the
Deepwater Pathfinder. Conoco is currently evaluating the results of the
discovery. The Deepwater Pathfinder is currently drilling another prospect in
Green Canyon Block 562.
Other U.S. Producing Properties
Outside of South Texas and the Gulf of Mexico, Conoco's largest producing
properties in the United States are located in the San Juan Basin of New Mexico,
the Permian Basin in West Texas and the Central Appalachian Basin in Virginia.
Conoco also has producing properties in the Williston Basin and the Hugoton
complex in the Oklahoma/Texas Panhandle.
Conoco has a significant acreage position in the San Juan Basin. Conoco's
average daily net production from the San Juan Basin in 1998 was approximately
15,500 barrels of petroleum liquids and 226 million cubic feet of natural gas.
Conoco believes significant additional hydrocarbons lie below the basin's
traditional producing formations, and Conoco is actively exploring for new
reserves. In 1998, Conoco conducted a 300-square-mile 3D seismic survey covering
the most promising deep areas of the basin. Early results have identified
several high-potential prospects, and two wells are planned to be drilled in
1999. Conoco will also continue to
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consider potential acquisitions in this basin to take advantage of synergies
resulting from its large asset base and gas plant in the area.
Conoco has an interest in 29 fields in the Permian Basin, which is one of
the largest producing areas in the United States. In the Permian Basin, Conoco's
average daily net production in 1998 was approximately 23,500 barrels of
petroleum liquids and approximately 44 million cubic feet of gas. Conoco is
using 3D seismic technology, horizontal wells and other innovative extraction
technologies in an effort to extend the productive life of many of the mature
fields in the Permian Basin.
Pocahontas Gas Partnership is a 50/50 partnership between Conoco and Consol
Energy Inc. Pocahontas produces and gathers coal bed methane prior to and during
coal mining operations in Virginia. Pocahontas produced and gathered
approximately 34 million gross cubic feet per day of coal bed methane from the
existing active mining area in 1998. Conoco recently approved an expansion of
the Pocahontas project to develop coal bed methane outside of the existing
mining area, which is expected to increase total Pocahontas production to
approximately 40 million gross cubic feet per day in 1999.
NATURAL GAS AND GAS PRODUCTS
In the United States, Conoco owns interests in 23 natural gas processing
plants located in Louisiana, New Mexico, Oklahoma and Texas as well as
approximately 10,000 miles of gathering lines. Conoco operates 16 of the plants.
Conoco gathers natural gas, extracts natural gas liquids and sells the
remaining residual gas. Most of Conoco's raw gas liquids are supplied to its
processing operations, which further separate them into natural gas liquid
products that are used as feedstocks for gasoline and chemicals production.
Conoco provides service to approximately 800 natural gas producers and sells
more than 500 million cubic feet per day of residue gas to approximately 120
customers.
Conoco's share of total natural gas liquids from natural gas processed at
the 23 plants in which it owns an interest averaged 66,300 barrels per day in
1998, of which approximately 11,000 barrels per day of natural gas liquids were
from Conoco owned reserves, which were reported, net of royalties, as United
States natural gas liquids production. In 1998, approximately 28,200 barrels per
day of additional natural gas liquids were attributable to processing of
Conoco's natural gas liquids in third-party-operated plants. Furthermore,
Conoco's 50 percent-owned equity affiliate, C&L Processors Partnership, has five
natural gas processing plants in Oklahoma and Texas. Conoco's pro rata share of
C&L's natural gas liquids production was approximately 7,600 barrels per day in
1998.
Conoco's other natural gas and gas products facilities in the United States
include:
- Lobo Pipeline Company's 1,150-mile intrastate natural gas pipeline system
in South Texas;
- an 800-mile intrastate natural gas pipeline system in Louisiana operated
by Conoco's wholly owned subsidiary, Louisiana Gas System, Inc.;
- natural gas and natural gas liquids pipelines in several other states;
- three underground natural gas liquids storage facilities;
- a natural gas liquids fractionating plant in Gallup, New Mexico with a
capacity of 25,000 barrels per day; and
- a 22.5 percent equity interest in Gulf Coast Fractionators, which owns a
natural gas liquids fractionating plant in Mt. Belvieu, Texas with a
capacity of 104,000 barrels per day.
In 1998 Conoco sold approximately 3.3 billion cubic feet per day of natural gas,
which included 873 million cubic feet per day of its U.S. natural gas
production.
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WESTERN EUROPE
Conoco has a significant portfolio of producing properties in the United
Kingdom and Norway. Proved Western Europe reserves, as of December 31, 1998,
were 919 million barrels-of-oil-equivalent, consisting of 410 million barrels of
petroleum liquids and 3,053 billion cubic feet of natural gas. In 1998,
operations in Western Europe contributed 44 percent of Conoco's worldwide
petroleum liquids production and 33 percent of its natural gas production.
Britannia Field
Conoco has a 42.4 percent interest in the Britannia field, which is one of
the largest natural gas/ condensate fields in the United Kingdom sector of the
North Sea. Britannia is a centerpiece of Conoco's strategy to increase
production and reserves through large, long-lived projects. First production
from Britannia occurred in August 1998 and Conoco estimates that the field will
have a production life of approximately 30 years. Conoco's proved reserves in
Britannia include 1.1 trillion cubic feet of natural gas and 56 million barrels
of petroleum liquids at December 31, 1998. As of June 8, 1999, Britannia was
producing 740 million gross cubic feet of gas per day and 50,000 gross barrels
of petroleum liquids. Production is expected to fluctuate due to seasonal
demand. Conoco and Chevron, the two largest interest holders in the field,
jointly operate Britannia.
Southern North Sea Producing Properties
Conoco has various equity interests in 13 producing gas fields in the
Southern North Sea, a major gas producing area on the United Kingdom continental
shelf. These fields mostly feed into the Conoco-operated Theddlethorpe gas
processing facility through three Conoco-operated pipeline systems: Viking,
LOGGS and CMS. In 1998, Conoco's net production from the Southern North Sea was
98 billion cubic feet of natural gas.
Conoco believes there are additional development opportunities in the
Southern North Sea. One example is the Viking Phoenix project, in which Conoco
targeted the development of additional reserves using existing infrastructure
and new drilling and completion technology. In November 1998, Conoco started
production from this development, for which its proved reserves were 73 billion
cubic feet of gas as of December 31, 1998. Conoco holds a 50 percent interest in
the Viking Field. In June 1999, Conoco announced a discovery on the E-Plus
exploration well in the Southern North Sea. This well is near existing Conoco
infrastructure in the Viking field and Conoco is currently evaluating the
commercial potential of the discovery.
At year-end 1998, Conoco acquired Canadian Petroleum UK Ltd., the British
subsidiary of Canadian Occidental Petroleum Ltd. The acquisition included:
- interests in the Vulcan (7.9 percent), South Valiant (12.5 percent), and
Caister (30 percent) gas producing fields;
- a 15 percent interest in the Caister Murdoch gas pipeline;
- a ten percent interest in the Eagles gas pipeline; and
- interests in eight exploration blocks.
As a result of this acquisition, Conoco increased its interest in the Vulcan and
South Valiant Fields to 50 percent from 42.1 percent and 37.5 percent, and
increased its stake in the Caister Murdoch gas pipeline to 42.25 percent. Conoco
currently operates the Vulcan and South Valiant fields.
Other United Kingdom Properties and Discoveries
Conoco also has interests in the following fields and discoveries:
- Miller (30 percent);
- Alba (12 percent);
- Statfjord (4.8 percent in the United Kingdom/10.3 percent in the
Norwegian sector);
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- MacCulloch (40 percent);
- Banff (32 percent); and
- Clair (21 percent).
Conoco operates the MacCulloch and Banff fields, both of which employ floating
production, storage and offtake technology. BP Amoco operates the Miller field
and the Clair discovery, which is one of the largest undeveloped oil discoveries
in Western Europe.
Interconnector Pipeline and Gas Sales
The Interconnector pipeline, which connects the United Kingdom and Belgium,
will facilitate marketing throughout Europe of the natural gas Conoco produces
in the United Kingdom. This pipeline commenced operation in October 1998.
Conoco's ten percent share of the Interconnector pipeline allows Conoco to ship
approximately 200 million cubic feet of gas per day to the markets in
continental Europe. Conoco has seven- to ten-year contracts to supply natural
gas to Gasunie in the Netherlands and Wingas in Germany, which fully utilizes
this capacity. Because the Interconnector pipeline provides flexibility to flow
in either direction, Conoco will be able to take advantage of the long-term and
short-term market conditions in both the United Kingdom and continental Europe.
Norwegian Producing Fields
Conoco is the sixth largest oil producer in Norway. Conoco has an ownership
interest in three of the largest fields in the country: Heidrun, Statfjord and
Troll. Conoco also has an interest in the following discoveries which are in
development:
- Oseberg South (7.7 percent);
- Visund (9.1 percent);
- Jotun (3.75 percent); and
- Huldra (23.3 percent).
Conoco also has an interest in the PL 203 discovery.
Production from the Heidrun field began in 1995 and is currently averaging
approximately 240,000 gross barrels of petroleum liquids per day. Conoco's share
of the proved reserves in the field, based on its 18.125 percent interest, is
119 million barrels of petroleum liquids and 159 billion cubic feet of natural
gas. Conoco was the operator for the construction and installation of Heidrun's
tension leg platform. Upon first production, Statoil assumed operatorship in
accordance with a pre-agreed arrangement. Associated gas from the Heidrun field
currently serves as feedstock for a methanol plant that became operational in
Norway in 1997. The plant, in which Conoco holds an 18.125 percent interest, is
operated by Statoil.
Conoco, which holds 10.3 and 4.8 percent interests in the Norwegian and
United Kingdom sectors of the Statfjord field, had total net proved reserves for
both the Norwegian and United Kingdom sectors of 84 million barrels of petroleum
liquids and 98 billion cubic feet of natural gas in the field as of December 31,
1998. Conoco is supporting work by Statoil, the operator of Statfjord, to
determine ways to slow the natural decline of the field and increase reserves.
Conoco also owns a 1.66 percent interest in the Troll gas field, operated by
Statoil, and has net proved reserves in the field of 576 billion cubic feet of
natural gas and 18 million barrels of petroleum liquids.
Exploration -- The Atlantic Margin
Exploration activity in Western Europe is focused on the deepwater Atlantic
Margin fairway, which runs from the Voring Basin off the coast of Norway to the
Porcupine Basin off the west coast of Ireland. Along the Atlantic Margin, Conoco
has significant acreage positions in the Voring Basin, the West of Shetlands and
North Rockall Trough areas in the United Kingdom and the Porcupine Basin. In
1997, the United Kingdom
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government awarded Conoco and three partners exploration licenses for two
deepwater blocks, Block 204/14 and 204/15, in the West of Shetlands area. These
blocks are adjacent to a discovery in BP Amoco-operated Block 204/19. Conoco, as
operator of Blocks 204/14 and 204/15, drilled two wells in 1998 to test the
potential of this acreage. The results of the wells are being currently
evaluated by Conoco and its partners.
NORTHERN SOUTH AMERICA AND THE CARIBBEAN
Petrozuata
Petrozuata is a key component of Conoco's strategy to increase production
and reserves through implementation of long-lived, large development projects
and to utilize its proprietary coking technology in other areas of its business.
Petrozuata is a joint venture between Conoco, which holds a 50.1 percent
non-controlling equity interest, and PDVSA Petroleo y Gas S.A., a subsidiary of
PDVSA, the national oil company of the Republic of Venezuela, which holds the
remaining interest.
Petrozuata, the first venture of its kind in Venezuela, is developing an
integrated operation to produce extra heavy crude oil from known reserves in the
Zuata region of the Orinoco Belt, transport it to the Jose industrial complex on
the north coast of Venezuela and upgrade it into synthetic crude, with
associated by-products of liquified petroleum gas, sulfur, petroleum coke and
heavy gas oil, a product slightly lighter than residual oil. Petrozuata's
synthetic crude is a lighter, partially processed refining feedstock similar to
crude oil. Conoco's recorded proved reserves related to its interest in
Petrozuata as of December 31, 1998, were 678 million barrels of oil. The joint
venture agreement has a 35-year term, commencing upon the completion of the
upgrading facility in 2000, and requires approval of both Conoco and PDVSA
Petroleo y Gas S.A. for major Petrozuata decisions.
The upgrading facility, which will employ Conoco's proprietary delayed
coking technology, will be located at Jose and is projected to become
operational in mid-2000. Diluted extra heavy crude oil will be transported via a
36-inch pipeline from the field to the Jose industrial complex. An adjacent
20-inch pipeline will return naphtha from the upgrading facility to the field
for use as a diluent. Petrozuata has also begun construction of field processing
and support facilities and marine facilities for shipping synthetic crude and
by-products.
As of May 31, 1999, Petrozuata has made significant progress toward project
completion. The upgrading facility is now approximately two-thirds complete and
most of the key process units have been installed. The dual pipeline system is
fully operational and early production and diluent volumes are currently being
shipped between Jose and the field. Production facilities are now substantially
complete and drilling of production wells continues. Current extra heavy oil
production is approximately 61,000 barrels per day. While many wells are
producing at expected rates, on average, individual well productivity has been
less than expected. As a result, Petrozuata will drill more wells than
anticipated in the original plans for the project. Due to drilling efficiencies,
Petrozuata is experiencing lower than expected per well drilling costs which
will mitigate the cost of the additional wells. Additionally, Conoco expects
that use of multi-lateral well technology will increase the per well producing
capability above current levels. Conoco expects Petrozuata to produce 120,000
barrels per day of extra heavy crude oil required for the planned start-up of
the upgrading facility in mid-2000.
Petrozuata began early production of extra heavy crude oil in August 1998.
Prior to completion of the upgrading facility, the extra heavy crude will be
blended with lighter oils and sold on world markets. Following completion of the
upgrading facility, the synthetic crude produced by Petrozuata will either be
used as a feedstock for Conoco's Lake Charles refinery and a refinery operated
by PDVSA, or will be sold to third parties.
Conoco has entered into an agreement to purchase up to 104,000 barrels per
day of the Petrozuata synthetic crude for a formula price over the term of the
joint venture if Petrozuata is unable to sell the production to third parties
for higher prices. All synthetic crude sales will be denominated in United
States dollars. By-products produced by the upgrading facility, principally coke
and sulfur, will be sold to a variety of domestic and foreign purchasers. The
loading facilities at Jose will transfer synthetic crude and some of the by-
products to ocean tankers for export. Synthetic crude sales are expected to
comprise more than 90 percent of the project's revenues.
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The La Luna Trend
Exploration activity in northern South America and the Caribbean is focused
on a geologic trend known as La Luna. In Venezuela, Conoco conducted seismic
surveys in 1997 on the shallow water Gulf of Paria West block, and on the
Guanare block in the Merida Andes foothills. In early 1999, Conoco drilled a
well in the Gulf of Paria West, which is a potentially commercial discovery that
flowed hydrocarbons from multiple zones in drill stem tests. Conoco is currently
drilling a second well on an adjacent structure. Conoco also drilled a well in
the Guanare block, which was a dry hole. Additional exploration and appraisal
work is currently planned for 1999. Conoco currently holds a 50 percent working
interest in both the Gulf of Paria West block, which it operates, and the
Guanare block, which is operated by Elf Aquitane. Conoco's interest in each case
is subject to dilution to 32.5 percent at the option of a PDVSA affiliate.
In northwestern Colombia, seismic surveys have been completed in
partnership with Texaco on three tracts that Conoco acquired through a 50
percent farm-in. In 1998, Texaco drilled two dry holes on the acreage and plans
to drill two additional wells in 1999. In addition, Conoco and Texaco acquired a
fourth tract in a joint bid in 1998.
In 1997, Conoco signed a production sharing contract for Blocks 4a and 4b,
two large prospective blocks off Trinidad's east coast. A 3D seismic survey was
acquired over the acreage in 1997, and Conoco is currently drilling a well to
test the potential of this acreage. Conoco is operator of both blocks and has a
50 percent working interest; Texaco holds the remaining working interest in both
blocks.
Seeking additional opportunities in the La Luna Trend, Conoco has conducted
a two-year study of the hydrocarbon potential of the entire offshore Barbados
area. Encouraged by the study, Conoco has entered into a commitment to acquire
seismic data over 50 percent of the original study area and has the option to
enter a drilling program to test the potential of this largely unexplored area.
Phoenix Park
Conoco holds a 39 percent equity interest in Phoenix Park Gas Processors
Limited, a joint venture with the National Gas Company of Trinidad and Tobago
Limited, that processes gas in Trinidad and markets in the eastern Caribbean.
Phoenix Park's facilities include:
- a gas processing plant;
- a fractionator producing propane, mixed butane and natural gasoline;
- storage tanks; and
- a liquified petroleum gas marine loading dock.
These facilities produce over 11,000 gross barrels per day of natural gas
liquids. Phoenix Park recently completed an expansion of its facilities to
process up to 1.4 billion cubic feet of gas per day, increase fractionation
capacity to 33,000 barrels per day, and add additional storage and marine export
facilities.
ASIA PACIFIC
Conoco has a 30-year operating history in Indonesia. The focus of Conoco's
effort in the Asia Pacific region is its operations in the Indonesian sector of
the Natuna Sea. In this area, Conoco is the operator of the Block B and North
West Natuna Sea Block II production sharing contracts. Conoco also has interests
in exploration blocks in Cambodia, Vietnam and New Zealand, where the second
deepwater drillship owned by a joint venture between Conoco and R&B Falcon, the
Deepwater Frontier, recently completed drilling its first exploratory well. The
well did not encounter commercial hydrocarbons.
West Natuna Gas Project
In 1996, Conoco, as operator of the South Natuna Sea Block B PSC, along
with the other participants in Block B and the interest holders in the Block A
and Kakap production sharing contracts, formed the "West Natuna Group", with the
aim of jointly marketing gas from the West Natuna Area to Singapore. In January
1999, the West Natuna Group, Pertamina, the Indonesian state-owned oil and gas
company and Sembgas, a
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company owned by Sembcorp Industries, entered into a definitive set of
agreements to sell the gas to Temasek and Tracetebel. These agreements provide
for the sale and purchase of natural gas from specified fields in the production
sharing contracts operated by the West Natuna Group.
These agreements provide for gas deliveries to begin by mid-2001 that will
rise to a sales rate of 325 million cubic feet per day. Sembgas will sell the
gas to a series of end users, including Tuas Power, Sembcorp Cogen and Esso
Chemicals, which will use the gas for industrial purposes, primarily power
generation. The West Natuna Group has entered into a gas supply agreement with
Pertamina in which they have undertaken to develop a series of fields and to
supply the gas produced to Pertamina for the sale to Sembgas. The agreements
provide for the supply of approximately one trillion cubic feet of natural gas
from fields in Block B to Sembgas. Block B's share of production will reach 140
million cubic feet of gas daily. Block B constitutes 43.1 percent of the West
Natuna Group and Conoco owns a 40 percent interest in Block B and has net proved
reserves of 197 billion cubic feet of natural gas. Conoco plans to drill five
wells in Block B in 1999 to begin development of these reserves. In addition,
each of the production sharing contracts has been extended to allow the West
Natuna Group to support Pertamina for the expected 22 year life of the contract
with Sembgas.
A 300-mile 28-inch submarine pipeline and smaller gathering pipelines will
be built by the West Natuna Group to transport the gas from the West Natuna Sea
fields to Singapore. Conoco will be the operator of the pipeline system,
including the receiving terminal in Singapore. The West Natuna Group, Pertamina
and Sembgas have entered into contracts governing the construction and operation
of the pipeline. Contracts for engineering, procurement, construction and
installation of the pipeline and platform based gas processing equipment were
recently awarded and approved by Pertamina.
Two delineation wells recently drilled by Conoco, the West Belut #2 and the
Belut #5, further delineated a natural gas discovery made by Conoco in 1998. The
Belut Complex is not dedicated to the West Natuna Group gas sales agreement, but
Conoco believes production from this area could be used to meet increased
Singaporean gas demand, and fill excess pipeline capacity, in the future.
Belida and Sembilang Fields, Indonesia
Conoco holds a 40 percent interest in and serves as operator of the Belida
and Sembilang oil fields in the Block B PSC. An ongoing infill drilling program
in the Belida Field maintained gross production for the Indonesian fields in the
range of 85,000 barrels per day in 1998.
CANADIAN ROCKIES
Conoco has had significant exploration success in the 1990's in the
foothills east of the Canadian Rockies. In this area, Conoco has an interest in
209,000 net acres, much of which has yet to be developed. Development plans for
1999/2000 include bringing on-stream two more of the foothills discoveries. In
addition to the discoveries in the foothills trend, Conoco has a significant
interest in the Peco Gas Field, located just east of the foothills. Conoco also
owns 100 percent of the Peco gas processing plant, which processes gas from the
Peco Field and two of the foothills discoveries.
RUSSIA
Conoco holds a 50 percent direct and a 4.7 percent indirect ownership
interest in Polar Lights Company, a Russian limited liability company
established in January 1992. Polar Lights, the first Russian-Western joint
venture to develop a major new oil field, was established to develop the Ardalin
oil field discovered in 1988 by the Russian state enterprise GP
Arkhangelskgeologia. Ardalin is located in the Arctic tundra approximately 1,000
miles northeast of Moscow. As of December 31, 1998, Conoco's share of proved
reserves was 42 million barrels of petroleum liquids, with an additional eight
million barrels of net proved reserves at the adjacent oil fields -- Kolva and
Dusushev. Polar Lights started producing oil in August 1994 and gross production
increased from an average 21,000 barrels per day in 1994 to an average 35,000
barrels per day in 1998. Average production during May 1999 reached a record
40,200 barrels per day. Oil is transported through the existing Russian pipeline
system and is then exported or sold on the domestic market.
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In March 1998, Conoco signed a memorandum of understanding with OAO Lukoil,
Russia's largest oil company, to jointly study the development of petroleum
reserves in the 1.2 million acre block known as the Northern Territories in the
Timan-Pechora region in northern Russia, which includes the large undeveloped
Yuzhno Khilchuyu oil field. The memorandum of understanding followed Lukoil's
purchase in December 1997 of a majority interest in OAO Arkhangelskgeoldobycha,
successor to GP Arkhangelskgeologia and Conoco's original partner in the
Northern Territories. In November 1998, Conoco and Lukoil signed a second
memorandum of understanding to work together to draw up and submit all documents
required by the Russian government to develop the Northern Territories under
production sharing agreement terms, to secure funding for the project and to
work together to resolve other outstanding issues.
In July 1998, Conoco acquired a 15.667 percent interest in OAO
Arkhangelskgeoldobycha for approximately $33 million. OAO Arkhangelskgeoldobycha
owns a 30 percent interest in Polar Lights.
WEST AFRICA
In 1997, Conoco, in partnership with Express Petroleum and Gas Company Ltd.
of Nigeria, announced the production of first oil from the shallow water
Ukpokiti field, located offshore in the western Niger delta. Conoco currently
has a 90 percent revenue interest in the field. Total production from the field
is currently 20,000 barrels per day of oil, and Conoco's net proved reserves as
of December 31, 1998 were 13.2 million barrels of oil. Express operates
Ukpokiti, and Conoco provides technical and operational assistance in the
field's development, which included three remote caisson-type structures, five
wells, and the conversion of the Conoco tanker "Independence" into a floating
production and storage offtake vessel. With a 1.7 million barrel storage
capacity, the vessel also serves as an export terminal.
In addition to its interest in the Ukpokiti field, Conoco has a 47.5
percent working interest in the deepwater OPL 220 license off the coast of
Nigeria, which is operated by Conoco and encompasses 600,000 acres. Conoco has
acquired a 3D seismic survey and drilled two wells on this license. The first
well, which was drilled in 1997, found only gas and was non-commercial. The
second well was drilled in 1998 and encountered both oil and gas-filled sands.
Conoco and its partner, Exxon, are currently evaluating results from this second
well.
MIDDLE EAST
In Dubai, United Arab Emirates, Conoco has operated four fields since their
discovery between 1966 and 1973. Currently, Conoco is using horizontal drilling
techniques and advanced reservoir drainage technology to enhance the efficiency
of the offshore production operations and improve recovery rates.
OIL AND NATURAL GAS RESERVES
Conoco's estimated proved reserves at December 31, 1998 were 2,622 million
barrels-of-oil-equivalent, consisting of 1,591 million barrels of oil and 6,183
billion cubic feet of natural gas.
Oil and gas proved reserves cannot be measured precisely. The reserve data
set forth in this report is only an estimate. Reservoir engineering is a
subjective and inexact process of estimating underground accumulations of oil
and natural gas. Reserve estimates are based on many factors related to
reservoir performance which require evaluation by engineers interpreting the
available data, as well as price and other economic factors. The reliability of
these estimates at any point in time depends on both the quality and quantity of
the technical and economic data, the production performance of the reservoirs as
well as extensive engineering judgment. Consequently, reserve estimates are
subject to revision as additional data become available during the producing
life of a reservoir. When a commercial reservoir is discovered, proved reserves
are initially determined based on limited data from the first well or wells.
Subsequent data may better define the extent of the reservoir and additional
production performance. Well tests and engineering studies will likely improve
the reliability of the reserve estimate.
At lower prices for crude oil and natural gas, it may no longer be economic
to produce reserves that are more expensive to produce. Actual production,
revenues and expenditures with respect to Conoco's reserves will likely vary
from estimates, and such variances may be material.
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The following table sets forth by region Conoco's proved oil reserves at
year-end for the past five years. Proved oil reserves comprise crude oil,
condensate and natural gas liquids expected to be removed for Conoco's account
from its natural gas production.
DECEMBER 31
----------------------------------
1998 1997 1996 1995 1994
----- ----- ---- ---- ----
(MILLIONS OF BARRELS)
PROVED OIL RESERVES
CONSOLIDATED COMPANIES
United States............................................... 261 277 299 294 336
Europe...................................................... 410 421 413 408 394
Other Regions............................................... 192 195 214 231 223
----- ----- --- --- ---
Worldwide................................................. 863 893 926 933 953
SHARE OF EQUITY AFFILIATES
Europe...................................................... 50 51 47 44 35
Other Regions(1)............................................ 678 680 -- -- --
----- ----- --- --- ---
Total Proved Oil Reserves......................... 1,591 1,624 973 977 988
===== ===== === === ===
- ---------------
(1) Represents Conoco's equity share of the Petrozuata venture in Venezuela.
The following table sets forth by region Conoco's proved natural gas
reserves at year-end for the past five years:
DECEMBER 31
-------------------------------------
1998 1997 1996 1995 1994
----- ----- ----- ----- -----
(BILLIONS OF CUBIC FEET)
PROVED NATURAL GAS RESERVES
CONSOLIDATED COMPANIES
United States............................................... 2,319 2,235 1,822 1,891 1,749
Europe...................................................... 3,053 3,060 3,068 2,649 2,431
Other Regions............................................... 430 196 173 169 150
----- ----- ----- ----- -----
Worldwide................................................. 5,802 5,491 5,063 4,709 4,330
SHARE OF EQUITY AFFILIATES
United States............................................... 381 370 333 339 344
----- ----- ----- ----- -----
Total Proved Natural Gas Reserves................. 6,183 5,861 5,396 5,048 4,674
===== ===== ===== ===== =====
PRODUCTION DATA
Conoco's oil and natural gas production, excluding natural gas liquids from
gas plant ownership, averaged 583,000 barrels-of-oil-equivalent per day in 1998,
compared with 575,000 barrels-of-oil-equivalent per day in 1997. As a percentage
of total production, natural gas production was 40 percent and 35 percent in
1998 and 1997.
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The table below shows Conoco's interests in average daily oil production
and natural gas production for the past three years. Oil production comprises
crude oil and condensate produced for Conoco's account, plus its share of
natural gas liquids removed from natural gas production from owned leases.
Natural gas production represents Conoco's share of production from leases in
which it has an ownership interest. Natural gas liquids processed represents
Conoco's share of natural gas liquids acquired through gas plant ownership.
1998 1997 1996
---- ---- ----
(THOUSANDS OF BARRELS
PER DAY)
NET AVERAGE DAILY OIL PRODUCTION
CONSOLIDATED COMPANIES
United States.......................................... 79 90 91
Europe................................................. 152 176 182
Other Regions.......................................... 95 92 88
--- --- ---
Total Net Production -- Consolidated Companies.... 326 358 361
SHARE OF EQUITY AFFILIATES
Europe................................................. 17 16 13
Other Regions.......................................... 5 -- --
--- --- ---
Total Net Production -- Equity Affiliates......... 22 16 13
--- --- ---
Total Net Oil Production Per Day.................. 348 374 374
=== === ===
1998 1997 1996
------ ------ ------
(MILLIONS OF CUBIC FEET
PER DAY)
NET AVERAGE DAILY NATURAL GAS PRODUCTION
CONSOLIDATED COMPANIES
United States.......................................... 873 709 738
Europe................................................. 470 432 416
Other Regions.......................................... 53 46 41
----- ----- -----
Total Net Production -- Consolidated Companies.... 1,396 1,187 1,195
SHARE OF EQUITY AFFILIATES
United States.......................................... 15 16 16
----- ----- -----
Total Net Natural Gas Production Per Day.......... 1,411 1,203 1,211
===== ===== =====
1998 1997 1996
----- ----- -----
(THOUSANDS OF BARRELS
PER DAY)
NET AVERAGE DAILY NATURAL GAS LIQUIDS PROCESSED
CONSOLIDATED COMPANIES
United States(1)....................................... 55 55 58
SHARE OF EQUITY AFFILIATES
United States.......................................... 8 8 8
Other Regions.......................................... 4 5 5
----- ----- -----
Total Net Processed -- Equity Affiliates.......... 12 13 13
----- ----- -----
Total Net Natural Gas Liquids Processed Per Day... 67 68 71
===== ===== =====
- ---------------
(1) 1997 and 1996 were restated to include only natural gas liquids received as
a processing fee.
See the supplemental petroleum data in the consolidated financial
statements of Conoco included in this document for the annual production volumes
of oil (crude oil, condensate and natural gas liquids) and natural gas from
proved reserves. Proved oil production volumes exclude natural gas liquids from
plant ownership.
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The following table sets forth Conoco's average production costs per
barrel-of-oil-equivalent produced, average sales prices per barrel of crude oil
and condensate sold and average sales prices per thousand cubic feet of natural
gas sold for the three-year period ended December 31, 1998. The table excludes
Conoco's share of equity affiliates. Average sales prices exclude proceeds from
sales of interests in oil and gas properties.
TOTAL UNITED OTHER
WORLDWIDE STATES EUROPE REGIONS
--------- ------ ------ -------
(UNITED STATES DOLLARS)
For the year ended December 31, 1998
Average production costs per barrel of oil equivalent of
petroleum produced..................................... $ 3.95 $ 3.69 $ 4.54 $ 3.21
Average sales prices of produced petroleum
Per barrel of crude oil and condensate sold............ 12.37 12.17 12.61 12.12
Per mcf of natural gas sold............................ 2.24 1.96 2.86 1.42
For the year ended December 31, 1997
Average production costs per barrel of oil equivalent of
petroleum produced..................................... 4.21 4.23 4.51 3.40
Average sales prices of produced petroleum
Per barrel of crude oil and condensate sold............ 18.58 17.93 18.93 18.35
Per mcf of natural gas sold(1)......................... 2.44 2.18 3.25 1.41
For the year ended December 31, 1996
Average production costs per barrel of oil equivalent of
petroleum produced..................................... 3.84 4.11 4.13 2.50
Average sales prices of produced petroleum
Per barrel of crude oil and condensate sold............ 20.11 18.68 20.94 19.47
Per mcf of natural gas sold(1)......................... 2.12 1.70 2.92 1.24
- ---------------
(1) 1997 and 1996 restated from wet gas price to dry gas price.
DRILLING AND PRODUCTIVE WELLS
The following table sets forth Conoco's drilling wells and productive wells
by region as of December 31, 1998. The table excludes Conoco's share of equity
affiliates.
TOTAL UNITED OTHER
WORLDWIDE STATES EUROPE REGIONS
--------- ------ ------ -------
(NUMBER OF WELLS)
Number of wells drilling(1)
Gross..................................................... 56 33 11 12
Net....................................................... 23 16 2 5
Number of productive wells(2)
Oil wells -- gross........................................ 7,553 6,989 236 328
-- net.......................................... 2,659 2,517 22 120
Gas wells -- gross........................................ 8,593 8,364 159 70
-- net......................................... 4,370 4,267 43 60
- ---------------
(1) Includes wells being completed.
(2) Approximately 182 gross (31 net) oil wells and 742 gross (275 net) gas wells
have multiple completions.
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DRILLING ACTIVITY
The following table sets forth Conoco's net exploratory and development
wells drilled by region for the three-year period ended December 31, 1998. The
table excludes Conoco's share of equity affiliates.
TOTAL UNITED OTHER
WORLDWIDE STATES EUROPE REGIONS
--------- ------ ------ -------
(NUMBER OF NET WELLS COMPLETED)
For the year ended December 31, 1998
Exploratory -- productive................................. 7.3 2.2 1.1 4.0
-- dry....................................... 14.0 5.4 1.9 6.7
Development -- productive................................. 234.8 215.9 2.8 16.1
-- dry..................................... 13.0 13.0 0.0 0.0
For the year ended December 31, 1997
Exploratory -- productive................................. 7.1 3.7 1.6 1.8
-- dry....................................... 18.4 11.7 4.9 1.8
Development -- productive................................. 142.6 126.9 5.4 10.3
-- dry..................................... 10.2 7.2 0.0 3.0
For the year ended December 31, 1996
Exploratory -- productive................................. 42.8 1.6 2.0 39.2
-- dry....................................... 20.5 10.3 4.0 6.2
Development -- productive................................. 89.9 73.1 6.1 10.7
-- dry..................................... 17.3 13.5 0.3 3.5
DEVELOPED AND UNDEVELOPED PETROLEUM ACREAGE
The following table sets forth Conoco's developed and undeveloped petroleum
acreage by region as of December 31, 1998. The table excludes Conoco's share of
equity affiliates.
TOTAL UNITED OTHER
WORLDWIDE STATES EUROPE REGIONS
--------- ------ ------ -------
(THOUSANDS OF ACRES)
Developed acreage
Gross..................................................... 7,691 3,253 1,023 3,415
Net....................................................... 3,121 1,534 265 1,322
Undeveloped acreage
Gross..................................................... 93,254 3,613 4,829 84,812
Net....................................................... 61,564 2,428 1,588 57,548
Conoco is not required to file, and has not filed on a recurring basis,
estimates of its total proved net oil and gas reserves with any U.S. or non-U.S.
governmental regulatory authority or agency other than the Department of Energy
and the SEC. The estimates furnished to the DOE have been consistent with those
furnished to the SEC. They are not necessarily directly comparable, however, due
to special DOE reporting requirements such as requirements to report in some
instances on a gross, net or total operator basis, and requirements to report in
terms of smaller units. In no instance have the estimates for the DOE differed
by more than five percent from the corresponding estimates reflected in total
reserves reported to the SEC.
DOWNSTREAM
SUMMARY
Downstream operations encompass refining crude oil and other feedstocks
into petroleum products, buying and selling crude oil and refined products and
transporting, distributing and marketing petroleum products. Downstream
operations are organized regionally with operations in the United States, Europe
and the Asia Pacific region. United States and European operations provided 55
and 56 percent of total downstream earnings in 1998, respectively, partially
offset by a small loss resulting from start-up activities in Asia Pacific.
Downstream's objective is to continue to provide an appropriate return on
investment by improving the
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competitiveness of the core business, while providing free cash flow to fund
growth in upstream, as well as in new downstream businesses. Consistent with
such objectives, Conoco has in the past, and may from time to time in the
future, purchase or sell downstream assets. Conoco may also consider forming
alliances or joint ventures to hold and operate all or a selected part of its
downstream assets, either to optimize the efficiency of such operations through
achieving economies of scale or to monetize a portion of the value of such
assets.
Conoco has made capital investments in downstream activities averaging
approximately $600 million per year for the last three years. 1998 capital
investments in downstream activities were approximately $530 million.
Conoco's downstream strengths are in the following areas:
- processing heavy, high sulfur and acidic crudes;
- upgrading bottom-of-the barrel feedstocks via coking technology;
- maintaining low cost, high volume retail marketing operations; and
- developing specialty products.
Approximately 50 percent of Conoco's worldwide refining capacity is designed to
process heavy, high sulfur crude. The Humber refinery in the United Kingdom can
process about 44 percent acidic crudes in its crude slate. Conoco has applied
its coking technology to nearly all of its refining operations throughout the
world. This has enabled Conoco to become a world leader in producing petroleum
coke products, such as high value graphite and anode coke, which are used in the
production of electrodes and anodes for the steel and aluminum industries.
Conoco has also licensed its fuel coking technology around the world, which has
in turn created other business development opportunities.
Conoco produces and markets a full range of refined petroleum products
including gasolines, diesel fuels, heating oils, aviation fuels, heavy fuel
oils, asphalts, lubricants, petroleum coke products and petrochemical
feedstocks.
Conoco owns and operates, or is a partner in the operation of nine refineries
worldwide with a total crude and condensate capacity of 807,000 barrels per
calendar day. Refining capacity is distributed 62 percent in the United States,
33 percent in Europe and 5 percent in the Asia Pacific region.
Capacity has risen by over 185,000 barrels per day, or 30 percent, since
year end 1995 as a result of:
- the expansion of the Lake Charles refinery;
- the upgrade of the Humber refinery;
- the acquisition of an interest in two refineries in the Czech Republic;
and
- an investment in the new Melaka refinery in Malaysia.
In the United States, Conoco primarily markets through low cost wholesale
operations. Conoco has a growing marketing presence in Europe and Asia Pacific,
where it is a leader in operating low cost, high volume retail stations. In
1998, refined product sales averaged 1,049,000 barrels per day, distributed 68
percent, 31 percent and one percent in the United States, Europe and the Asia
Pacific region.
UNITED STATES
Conoco's four U.S. refineries are high conversion facilities with design
capacity to process over 50 percent high sulfur crude oils, much of which is
also heavy crude. A principal factor affecting the profitability of Conoco's
U.S. operations is the price of refined products in relation to the cost of
crude oils and other feedstocks processed. Because Conoco is able to process a
relatively large portion of heavy, high sulfur crude oil, the cost advantage of
these crude oils, such as those from Mexico, Venezuela and Canada, over lighter,
low sulfur crude oils, such as West Texas Intermediate, is particularly
significant. Over half of Conoco's U.S. refining capacity is located in inland
markets and therefore benefits from the price differential for products produced
and sold inland versus those produced and sold on the Gulf Coast.
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Integration of refining, transportation and marketing, and continuous
improvement initiatives have provided increased profitability through
improvements in refinery reliability, utilization, product yield and energy
usage. Since the end of 1994, Conoco has increased refining input at its four
U.S. refineries by approximately 14 percent, while lowering average operating
expenses by approximately $2.00 per barrel of refinery input. Conoco has
improved market share through geographic concentration of markets.
Conoco intends to limit future downstream capital investments in the United
States, excluding large, non-discretionary, regulatory-driven projects and
selected growth projects, to a level that is less than half of downstream
operating cash flow in the United States. Capital expenditures were
approximately $201 million in 1998, a decline of approximately $26 million
compared to $227 million in 1997, reflecting the completion of major projects.
Conoco is positioned to make the necessary clean fuels investments at its
refineries over the next five years in support of changing motor fuel
specifications. Conoco also plans to make investments at the Lake Charles
refinery to facilitate processing of Petrozuata synthetic crude.
Refining
Conoco operates four wholly owned refineries in the United States. The
following tables outline the rated crude and condensate distillation capacity as
of December 31 for each of the past five years, and the average daily crude,
condensate and other inputs for each of the past five years. The refining input
table includes feedstocks in addition to crude and condensate on which rated
capacity is based, and includes actual crude and condensate runs, which may
exceed rated capacity.
DECEMBER 31
--------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(THOUSANDS OF BARRELS PER DAY)
REFINERY CRUDE AND CONDENSATE CAPACITY
Lake Charles, Louisiana..................................... 226 226 226 191 182
Ponca City, Oklahoma........................................ 168 155 155 150 140
Denver, Colorado............................................ 58 58 58 58 58
Billings, Montana........................................... 52 52 52 49 49
--- --- --- --- ---
Total............................................. 504 491 491 448 429
=== === === === ===
DECEMBER 31
--------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(THOUSANDS OF BARRELS PER DAY)
REFINERY INPUTS(1)
Lake Charles, Louisiana
Crude and condensate(2)................................... 216 211 177 179 183
Other feedstocks.......................................... 24 23 21 23 24
Ponca City, Oklahoma
Crude and condensate(2)................................... 167 161 150 151 144
Other feedstocks.......................................... 4 2 2 5 2
Denver, Colorado
Crude and condensate(2)................................... 50 53 49 49 47
Other feedstocks.......................................... 0 0 0 0 0
Billings, Montana
Crude and condensate(2)................................... 52 51 51 45 48
Other feedstocks.......................................... 3 3 3 3 3
Total crude and condensate........................ 485 476 426 424 422
Total other feedstocks............................ 31 27 26 31 30
Conoco's U.S. consolidated refined product yields by volume in 1998 were 49
percent motor gasoline, 40 percent middle distillates, including jet and diesel
fuel, 11 percent residual fuel oil and asphalt and other products, including
petroleum coke, lubricants and liquified petroleum gases.
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Lake Charles Refinery and Related Facilities
Conoco's Lake Charles refinery, located in Westlake, Louisiana, is a fully
integrated, high conversion facility which has a crude and condensate capacity
of 226,000 barrels per day and processes both heavy, high sulfur crude oil and
low sulfur crude oil. The refinery's Gulf Coast location provides access to
numerous cost effective domestic and international crude oil sources. The crude
design capacity is approximately 170,000 barrels per day of heavy, high sulfur
crudes with the remaining 56,000 barrels per day of local, domestically supplied
low sulfur crudes. While the types and origins of these lower priced, heavy,
high sulfur crudes can vary, the majority consists of Venezuelan and Mexican
crudes delivered via tanker. The Lake Charles refinery products can be delivered
by truck, rail or major common carrier product pipelines partially owned by
Conoco which serve the eastern and mid-continent United States. In addition,
refinery products can be sold into export markets through the refinery's marine
terminal.
The ability to refine both low sulfur and heavy, high sulfur crudes at the
Lake Charles refinery provides a competitive advantage to Conoco by enabling the
refinery to produce from relatively low-cost feedstocks a full range of products
including gasolines, jet fuel, diesel fuel, petroleum coke, lube oils, LPG and
other specialty products. The refinery facilities include fluid catalytic
cracking, delayed coking and hydrodesulfurization units which enable it to
maximize its upgrade of heavier crude oil. A crude unit expansion and a new
catalytic reformer were completed in conjunction with the Excel Paralubes
project to take advantage of synergies generated between the two facilities.
Conoco is making investments in the Lake Charles refinery so that in the future
it will be able to process Petrozuata synthetic crude.
Integration of fuels and specialty products plays an important role in
maximizing product value at the refinery. Intermediates produced from low sulfur
crude processing allow the refinery to supply the heaviest, highest boiling
range material in the crude to Conoco's 35-percent-owned Cit-Con lube plant for
base oils, finished lubes and wax production. Other intermediates are exchanged
with a neighboring chemical plant complex for further processing.
The refinery supplies high sulfur gas oil to Excel Paralubes, Conoco's
50/50 joint venture with Pennzoil-Quaker State. Excel Paralubes'
state-of-the-art hydrocracked lubricating base oil facility produces
approximately 21,000 barrels per day of high quality hydrocracked base oils,
representing approximately ten percent of U.S. lubricating base oil production.
Hydrocracked base oils are second in quality only to synthetic base oils, but
are produced at a much lower cost. The capacity of this facility was recently
increased to over 17 percent above the plant's design capacity. The refinery
produces other specialty intermediates for making solvents to supply the
recently formed Penreco joint venture company, which is also a joint venture
with Pennzoil-Quaker State. Penreco manufactures and markets highly refined
specialty petroleum products for global markets.
The Lake Charles facilities also include a specialty coker and calciner
that manufacture the more highly valued graphite and anode petroleum cokes for
the steel and aluminum industries, and provide a substantial increase in light
oils production by converting the heaviest part of the crude barrel into diesel
fuel and gasoline. In addition, green petroleum coke is supplied to a nearby
coke calcining venture.
Ponca City Refinery
Conoco's refinery located in Ponca City, Oklahoma has a crude and
condensate capacity of 168,000 barrels per day of light, high sulfur and light,
low sulfur crudes. Both foreign and domestic crudes are delivered by pipeline
from offshore, Oklahoma, Kansas, and North and West Texas fields. Finished
products are shipped by truck, rail and company-owned and common carrier
pipelines to markets throughout the mid-continent region.
The Ponca City refinery is a high conversion facility that produces a full
range of products, including gasoline, jet fuel, diesel, LPG and anode and fuel
grade petroleum cokes. The refinery's facilities include fluid catalytic
cracking, delayed coking and hydrodesulfurization units, which enable it to
produce high ratios of gasoline and diesel fuel from crude oil.
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Denver Refinery
Conoco's Denver refinery, located in Commerce City, Colorado, has a crude
and condensate capacity of 58,000 barrels per day, processing a mixture of
Canadian heavy, high sulfur crudes, and domestic heavy, high sulfur crude oils
and low sulfur crude oils. Almost all crude oil processed at the refinery is
transported via pipeline. Products are delivered predominantly through a local
truck loading terminal to the east side of the Rockies but also by rail and
pipelines to other Colorado markets. The refined gasoline products from the
Denver refinery help supply Conoco's marketing operations in the Rocky Mountain
states.
The Denver refinery is a high conversion refinery that produces a full
range of products including gasolines, jet fuels, diesel and asphalt. The
refinery's upgrading units enable it to process a crude slate containing nearly
50 percent heavy, high sulfur crude. Conoco has a processing agreement with a
refinery located in Cheyenne, Wyoming, that has coking capabilities from which
the refinery receives intermediate feedstocks for processing into finished
products. The Denver refinery also supplies KC Asphalt, its 50/50 joint venture
with Koch Industries, with high quality asphalt products. Both of these ventures
enable Conoco to turn relatively low value intermediates into higher margin
products.
Billings Refinery
Conoco's Billings, Montana refinery has a crude and condensate capacity of
52,000 barrels per day, processing a mixture of over 80 percent Canadian heavy,
high sulfur crude plus domestic high sulfur and low sulfur crude oils all
delivered by pipeline. Products from the refinery are delivered via
company-owned pipelines, rail, and trucks, thereby supplying Conoco's extensive
branded marketing operations in eastern Washington and the northern Rocky
Mountain states. The refinery's proximity to its primary source of crude and its
ability to refine both low sulfur and heavy sulfur crudes provides Conoco with
significant competitive advantages.
The Billings refinery is a high conversion refinery that produces a full
range of products including gasolines, jet fuels, diesel and fuel grade
petroleum coke. The Billings refinery has a very high conversion rate and the
capability to process less expensive, very heavy, high sulfur crudes. A delayed
coker converts heavy, high sulfur residue into higher value light oils. A gas
oil hydrotreating unit and hydrogen plant improve the light oil production
yields and remove the additional sulfur contained in these heavy, high sulfur
crudes.
Marketing
In the United States, Conoco markets gasoline, utilizing the Conoco brand,
in 33 states, 20 of which represent primary markets, in the southeast,
mid-continent and Rocky Mountain regions. Market growth continues to be targeted
to those areas where Conoco can obtain a strong market share and areas that
leverage supply from its U.S. refineries and those distribution systems in which
it has an ownership position. Increasing operating market share has resulted in
particularly strong brand recognition in the Rocky Mountain and mid-continent
markets.
Conoco gasoline is sold through approximately 4,900 branded stations in the
United States, 95 percent through retail outlets owned by independent wholesale
marketers and five percent through 255 company-owned stores at year end 1998.
Conoco markets gasoline primarily through the wholesale channel in the United
States because it requires a lower capital investment than company-owned retail
stations but still provides a secure, branded outlet for Conoco's products.
Conoco operates retail stations to establish brand standards and image as well
as to better understand the independent distributors in order to provide
programs and services to them and the consumer.
Building on this knowledge, Conoco has recently introduced "breakplace(R),"
a new concept in convenience store design. This new format, involving the
complete redesign of an outlet's exterior and interior, is intended to increase
the frequency and transaction size of customer visits by catering to the needs
of the "convenience connoisseur." There were 34 breakplace(R) locations as of
December 31, 1998, and Conoco is licensing the trademark to marketers. Many more
stores in the network have adopted comprehensive offerings patterned after the
format, thereby supporting wholesale marketing and elevating Conoco's brand
perception to the consumer.
At year-end 1998, CFJ Properties, a 50/50 joint venture between Conoco and
Flying J, owned and operated 83 truck travel plazas that carry both the Conoco
and Flying J brands and provide a secure outlet for Conoco's
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diesel production. In addition, bulk sales of all refined petroleum products are
made to commercial, industrial and spot market customers.
Transportation
Conoco has approximately 6,500 miles of crude and product mainline
pipelines in the United States, including those partially owned and/or operated
by affiliates. Conoco also owns and operates 38 finished product terminals, six
liquified petroleum gas terminals, one crude terminal and one coke-exporting
facility. Conoco's crude pipeline interests and terminals provide integral
logistical links between crude sources and refineries to lower crude costs. The
product pipelines serve as secure links between refineries and key products
markets. Conoco's U.S. pipeline system transported an average of 909,000 barrels
per day in 1998. Conoco's equity share of shipments on affiliate pipelines was
an additional 383,000 barrels per day.
Conoco currently operates a fleet of seven seagoing crude oil tankers,
principally of Liberian registry, including five double-hulled tankers. Conoco
operates a 100 percent double-hulled tanker and barge fleet in United States
waters. Four vessels are used to provide secure transportation to the Lake
Charles refinery, two others are in use in the Asia Pacific market and are
currently slated for disposition later this year, and another is on lease to a
third party for use as a shuttle tanker for the Heidrun field in the North Sea,
in which Conoco has an interest. An eighth vessel is being used as a floating
production storage and offtake vessel off the coast of Nigeria. Two additional
double-hulled tankers are currently under construction and will be joining the
fleet in the Gulf of Mexico in 1999.
EUROPE
Conoco's European refining and marketing activities are conducted in 17
countries. Conoco's primary European markets are in the United Kingdom and
Germany, which together accounted for 96 percent of its European downstream
after-tax earnings in 1998. Conoco also has marketing operations in Austria,
Belgium, Denmark, Finland, France, Luxembourg, Norway, Sweden, and Switzerland.
More recently Conoco has entered the faster growing markets in the Czech
Republic, Hungary, Poland, Slovakia, Spain and Turkey. The marketing operations
in Central and Eastern Europe are complemented by an equity interest in two
refineries in the Czech Republic.
Conoco's European downstream strategy has been to operate low cost, high
volume retail outlets in selected key markets where it has a competitive
advantage, pursue opportunities in growth regions, and maintain its Humber
refinery and the Mineraloel Raffinerie Oberrhein GmbH ("MiRO") joint venture
refinery, in the United Kingdom and Germany, as top performers in Europe. Conoco
plans to redirect cash generated by its mature European businesses to other
parts of upstream and downstream operations and to the identified European
growth markets.
Conoco invested approximately $180 million in its European downstream
operations in both 1997 and 1998 and expects to invest about $225 million in
1999. Conoco continues to implement relatively low-cost projects in its refining
operations designed to increase production and yields, while reducing feedstock
costs and operating expenses. Conoco plans to continue to direct capital
expenditures for marketing operations, which are expected to be approximately 50
percent of the European downstream total capital expenditures, toward
construction of new stations in growth markets, primarily in Central and Eastern
Europe and also in its areas of competitive strength in Germany, Austria and the
Nordic countries.
Conoco's European downstream profitability is affected by several factors.
As with all refining operations, the difference between the market price of
refined products and the cost of crude oil is the major factor. Conoco's
European refineries are able to process lower cost crudes or upgrade other
feedstocks into high value finished products. In addition, since the United
Kingdom refinery also processes fuel oil as a feedstock, the price difference
between low sulfur fuel oil and finished products is important to earnings.
European operations also include significant retail marketing volumes, and
therefore earnings are driven by retail margins, fuel and convenience product
sales and operating expenses in the various countries where Conoco operates.
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Refining
Conoco's principal European refining operations are located in the United
Kingdom, Germany and the Czech Republic. Since early 1996, Conoco's European
crude refining capacity has increased by approximately 52 percent, or 90,000
barrels per day, principally as a result of three factors:
- the expansion of Conoco's Humber refinery in the United Kingdom;
- the formation of the MiRO joint venture through consolidation with a
neighboring German refinery; and
- the purchase of a share in a joint venture owning two Czech Republic
refineries.
Conoco has continuously upgraded its refineries in Europe since the early 1990's
and the configuration and output of the refineries are two of Conoco's primary
sources of competitive advantage in Western Europe.
Conoco has undertaken a major capital investment program totaling
approximately $350 million from 1994 through 1998 to process lower cost
feedstocks and increase conversion capacity, product quality and energy
efficiency at the Humber refinery. Conoco plans to make more than $100 million
in capital expenditures at the Humber refinery in 1999 in order to continue to
improve reliability and efficiency and to make investments to meet clean fuel
specifications. Conoco is also participating in upgrading projects at its joint
venture owned refineries in Germany and the Czech Republic.
The following tables outline the rated crude and condensate distillation
capacity as of December 31 for each of the past five years and the annual
average daily crude and condensate and other inputs for each of the past five
years. The following table does not include Conoco's indirect 1.2 percent
interest in a 95,000 barrel per day refinery in Mersin, Turkey acquired as a
result of its marketing joint venture in Turkey. The refinery inputs table
includes feedstocks in addition to crude and condensate on which rated capacity
is based, and includes actual crude and condensate runs, which may exceed rated
capacity.
DECEMBER 31
----------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(THOUSANDS OF BARRELS PER DAY)
REFINERY CRUDE AND CONDENSATE CAPACITY
Humber, United Kingdom.................................... 180 180 180 130 130
MiRO, Germany(1).......................................... 54 54 43 43 43
Czech Republic(2)......................................... 29 29 29 -- --
--- --- --- --- ---
Total........................................... 263 263 252 173 173
=== === === === ===
- ---------------
(1) The 1998 and 1997 figures represent Conoco's 18.75 percent interest in the
MiRO refinery complex at Karlsruhe, Germany. For the years 1996 and earlier,
Conoco's interest was 25 percent of the OMW refinery.
(2) Represents Conoco's 16.33 percent interest in two Czech Republic refineries.
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DECEMBER 31
--------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(THOUSANDS OF BARRELS PER DAY)
REFINERY INPUTS
Humber, United Kingdom(1)
Crude and condensate...................................... 165 137 121 133 125
Other feedstocks.......................................... 57 56 76 74 59
MiRO, Germany(2)
Crude and condensate...................................... 54 51 47 46 46
Other feedstock........................................... 3 11 13 13 15
Czech Republic(3)
Crude and condensate...................................... 20 21 22 -- --
Other feedstocks.......................................... 1 1 1 -- --
Total crude and condensate........................ 239 209 190 179 171
Total other feedstocks............................ 61 68 90 87 74
- ---------------
(1) The tie-in of a major expansion project and a major refinery maintenance
turnaround significantly affected the Humber Refinery's utilization in 1997
and 1996.
(2) The 1998 and 1997 figures represent Conoco's 18.75 percent interest in the
MiRO refinery complex at Karlsruhe, Germany. For 1996 and earlier, Conoco's
interest was 25 percent of the OMW refinery.
(3) Represents Conoco's 16.33 percent interest in two refineries in the Czech
Republic.
The yield of Conoco's European refineries by product and country for the
year ended December 31, 1998, was as follows:
UNITED
KINGDOM GERMANY CZECH REPUBLIC
------- ------- --------------
PERCENT OF TOTAL YIELD(1)
Motor gasoline.............................................. 37 40 19
Middle distillate........................................... 42 44 31
Residual fuel oil and asphalt............................... 9 8 23
Other(2).................................................... 12 8 27
- ---------------
(1) Percentages are volume based, not weight based.
(2) Other products primarily include petroleum coke, lubricants and liquified
petroleum gases.
United Kingdom Refinery
Conoco's wholly owned Humber refinery is located in North Lincolnshire,
England, and has a crude and condensate capacity of 180,000 barrels per day.
Crude processed at the refinery is exclusively low or medium sulfur, supplied
primarily from the North Sea and includes lower cost, acidic crudes. The
refinery also processes up to 60,000 barrels per day of other intermediate
feedstocks, mostly vacuum gas oils and residual fuel oil, which many other
European refineries are not able to process. The refinery's location on the east
coast of England provides for cost-effective North Sea crude imports and product
exports to European and world markets.
The Humber refinery, one of the most sophisticated refineries in Europe, is
a fully integrated, high conversion refinery that produces a full slate of light
products and minimal fuel oil. In 1996, Conoco increased crude capacity at the
refinery and added a vacuum unit that allows the refinery to process up to
80,000 barrels per day of the less expensive, acidic North Sea crudes. The
refinery also has two coking units with associated calcining plants, which
upgrade the heavy "bottoms" and imported feedstocks into light oil products and
high value graphite and anode petroleum cokes. Approximately 50 percent of the
light oils produced in the refinery are marketed in the United Kingdom while the
other products are exported to the rest of Europe and the
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United States. This gives the refinery the flexibility to take full advantage of
inland and global export market opportunities.
Germany Refinery
The MiRO refinery in Karlsruhe, Germany, is a joint venture refinery with a
crude and condensate capacity of 285,000 barrels per day. The MiRO joint venture
arose from the combination in 1996 of the existing OMW refinery, in which Conoco
had a 25 percent share, with an adjacent Esso refinery. Conoco has an 18.75
percent interest in MiRO and Conoco's capacity share is 54,000 barrels per day.
The other owners of MiRO are DEA Mineraloel AG, Esso AG and Ruhr Oel GmbH, a
50/50 joint venture between Veba and PDVSA. Approximately 55 percent of the
refinery's crude feedstock is low cost, high sulfur crude. The MiRO refinery
complex is a fully integrated, high conversion refinery producing gasoline,
middle distillates, residual fuel oil and other products. The refinery has a
high capacity to convert lower cost feedstocks into high value products
primarily with a fluid catalytic cracker and delayed coker. The coker produces
both fuel grade and specialty calcined cokes.
The creation of the MiRO joint venture has improved the refinery's
competitiveness and was driven by the synergy that existed between the two
facilities. Integrated operations have yielded improved product slates, which
better match local demand, and increased processing efficiency, while retaining
operational flexibility for the partners. The refinery processes crude and
feedstock supplied by each of the partners in proportion to their respective
ownership interests. Streamlining the two operations has allowed Conoco to
eliminate less efficient processing units in both refineries, resulting in lower
operating costs.
Czech Republic Refineries
In late 1995, Conoco, through participation in the newly formed Czech
Refining Company, acquired an interest in two refineries in the Czech Republic.
The other owners of Czech Refining Company are Unipetrol A.S., Agip Petroli, and
Shell Overseas Investment B.V. The refinery at Litvinov has a crude and
condensate capacity of 109,800 barrels per day, and the Kralupy refinery has a
crude and condensate capacity of 67,500 barrels per day. Conoco's 16.33 percent
ownership share of the combined capacity is 29,000 barrels per day. Both
refineries process mostly high sulfur crude, with a large portion being Russian
export blend delivered by pipeline at an advantageous cost. The refineries have
an alternative crude supply via a pipeline from the Mediterranean.
Conoco expects that completion of a visbreaker project at the Litvinov
refinery scheduled for the year 2000 will increase conversion rates and
significantly reduce fuel oil production. The Kralupy refinery is currently a
hydroskimming facility, but Czech Refining Company has approved an investment in
major conversion facilities, to reduce fuel oil production and increase light
oil yields. The two Czech refineries are operated as a single entity with
intermediate streams moving between the two facilities. Czech Refining Company
markets finished products both inland and abroad. Conoco intends to use its
share of the light oil production to support an expanding retail marketing
network in Central and Eastern Europe.
Marketing
Conoco has marketing operations in 17 European countries. Conoco's European
marketing strategy is to sell primarily through owned, leased or joint venture
retail sites using a low cost, high volume, low price strategy. Conoco intends
to expand into identified growing markets, while concurrently strengthening its
market share in core markets such as Germany, Austria and the Nordic countries.
Conoco is standardizing its European retail operations in order to capture cost
savings and prepare for a more integrated Europe. Conoco is continuing to reduce
its cost structure for marketing activities while also optimizing the growing
income in the non-fuels sector. Conoco also markets aviation fuels, liquid
petroleum gases, heating oils, transportation fuels and marine bunkers to
commercial accounts and into the bulk or spot market.
Conoco uses the "Jet" brand name to market its retail products in its
wholly owned operations in Austria, Czech Republic, Denmark, Finland, Germany,
Hungary, Norway, Poland, Slovakia, Sweden and the United Kingdom. In Belgium and
Luxembourg, it markets under the "SECA" brand. Stations throughout Europe also
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display the "Conoco" brand. In addition, various joint ventures in which Conoco
has an equity interest market products in Spain under the "Jet" brand, in
Switzerland under the "OK Co-op" brand and in Turkey under the "Tabas" or
"Turkpetrol" brand names.
As of December 31, 1998, Conoco had 1,960 marketing outlets in its wholly
owned European operations, of which 1,424 were company-owned. Through its joint
venture operations in Turkey, Spain and Switzerland, Conoco also has an interest
in another 963 retail sites. The largest branded site networks are in Germany
and the United Kingdom, which account for 60 percent of the total branded units.
In Germany and Austria, 21 outlets were added during 1998. In the Nordic
countries, Conoco has expanded from its base of unmanned sites in Sweden and
Denmark into Norway and Finland with 11 new stations in the region. In response
to weak fuel margins in the United Kingdom over the past several years, Conoco
has restructured its operations, reducing the number of stations and focusing on
locations where Conoco has a competitive advantage, which has reduced its unit
breakeven cost structure.
Conoco has been expanding in targeted growth markets of the Czech Republic,
Poland, Hungary and Slovakia in Central and Eastern Europe, and has added 25
stations in the last year for a total of 126 stations at December 31, 1998.
Conoco expects to continue this expansion in order to capture the demand growth
and rising margins expected in these inland markets. This marketing expansion
allows Conoco to obtain further integration with products produced at the Czech
refineries. Similarly, Conoco has invested in the growing markets of Spain and
Turkey, where at the end of 1998, it had an interest through its joint ventures
in 115 and 761 sites. The joint venture marketing operation in Turkey also
provides Conoco with a strategic position and opportunity for upstream ventures
in this region.
ASIA PACIFIC
Conoco is looking to the Asia Pacific region for much of its long-term
downstream growth. Despite the recent economic downturn, Conoco expects the
Asian market, in the long-term, to grow faster than comparable markets. Conoco
intends to establish at least 100,000 barrels per day of equity refining
capacity in the region long-term and expand its marketing operations to
integrate with the refining supply and capitalize on market deregulation and
long-term regional demand growth.
The refinery in Melaka, Malaysia was built by a joint venture which is 40
percent owned by Conoco with partners Petronas, the Malaysian state oil company,
and Statoil and has a rated crude capacity of 100,000 barrels per day, of which
Conoco's share is 40,000 barrels per day. Start-up of the Melaka refinery was
initiated in August 1998 with the commissioning of the crude unit. Since
start-up of the refinery, all major operating units have proven their capability
to operate at design rates. After some early start-up adjustments, most units
are at full capacity and actual throughputs are being optimized according to
existing economic conditions. Initial crude unit operation was followed shortly
thereafter by the start-up of the reformer, hydrocracker and coker units. The
joint venture has a five-year tax holiday that commenced April 1, 1999. The
feedstocks for the refinery will consist of up to approximately 70 percent high
sulfur crude and 30 percent sweet crude.
This refinery capitalizes on Conoco's proprietary coking technology to
upgrade low-cost feedstocks to higher-margin products. Initial refinery units,
in addition to the fuels delayed coker, include:
- a crude and vacuum distillation unit;
- a vacuum gas oil hydrocracker;
- naphtha and diesel hydrotreater;
- catalytic reformer; and
- an isomerization unit.
The refinery is a high conversion facility that will produce a full range of
refined petroleum products.
Conoco intends to use its share of refined products from the refinery to
continue growing its retail marketing operations in Thailand, Malaysia and
throughout the Asia Pacific region. The balance of Conoco's
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share of production will be sold primarily in the spot market. Conoco has its
regional crude and product supply and disposition operations centrally located
in Singapore.
Conoco began marketing motor fuels in Thailand in 1993. Using a high
volume, low price strategy and marketing concepts and strategies that were new
to Thailand, Conoco has already established a significant presence in the Thai
retail market. Early in 1999, Conoco opened its 100th store in Thailand. Conoco
plans to build an additional 100 new retail outlets.
Conoco has launched a retail marketing joint venture in Malaysia with Sime
Darby Bhd., a company that has a major presence in the Malaysian business
sector. Capitalizing on the cost benefits of direct supply, the benefits of
being the first licensees since 1969 to establish retail marketing in Malaysia,
and the currently depressed prices of premium Malaysian real estate, Conoco will
initially target major markets within 125 miles of the Melaka refinery.
Construction commenced on the first of these stores in May 1999 and Conoco plans
to have six stores operating by the end of 1999.
SPECIALTY PRODUCTS
Conoco sells a variety of high value lubricants and specialty products to
commercial, industrial and wholesale accounts worldwide, including lubes such as
automotive and industrial lubricants and waxes, petroleum coke, solvents and
pipeline flow improvers. Conoco's experience has been that specialty products
are attractive because their premium prices generate higher margins and their
markets are generally less cyclical than commodity markets.
Conoco began marketing the HYDROCLEAR(R) brand of lubricants with the
start-up of the Excel Paralubes plant in 1997. The HYDROCLEAR(R) lubricants,
which are non-toxic, were designed to compete with synthetics for a range of
applications with difficult operating conditions. Conoco also produces specialty
petroleum products for global markets through Penreco.
Conoco's technical expertise in carbon upgrading positions it as a leader
in manufacturing and marketing specialty coke and coke products. Conoco
manufactures high quality graphite coke at its Lake Charles and Humber
refineries for use in the global steel industry. It also globally markets anode
and fuel coke produced at its Lake Charles, Ponca City, Billings and Humber
refineries. In addition, Conoco participates in the Asia Pacific coke market by
providing technical and marketing expertise to Conoco's PetroCokes joint venture
with Sumitomo and Japan Energy. In 1998, Conoco granted seven licenses for this
technology to other companies. Today Conoco's technology is used by more than
two dozen coking facilities -- a third of the world's delayed coking capacity.
Conoco is a leader in the worldwide market for pipeline flow improvers.
Conoco's "LiquidPower(R)" product is a flow improver for increasing petroleum
pipeline capacity by reducing friction loss. Conoco also uses "LiquidPower(R)"
in its own pipeline systems.
POWER
Conoco Global Power was founded in 1995 to leverage the economic advantages
of Conoco's energy production activities and offer integrated energy solutions
to customers by capitalizing on our strengths in managing major projects, risk
and industrial operations.
Conoco Global Power owns 37.5 percent of a Colombian joint venture located
in Barrancabermeja, Colombia along with Western Resources and five Colombian
companies. The joint venture built a natural gas-fired generation plant capable
of producing 160 megawatts of power, which became operational in August 1998.
The joint venture sells primarily to the local grid.
Conoco Global Power has entered into a joint venture agreement to build a
natural gas-fired cogeneration plant near Corpus Christi, Texas. Construction
has begun on the plant, which will be located adjacent to chemical complexes
owned by DuPont and OxyChem, Occidental Petroleum Corporation's chemicals
division and Conoco's partner in this joint venture. OxyChem will operate the
plant under a long-term contract and will purchase electricity and steam
production from the plant. The plant is designed to produce 440 megawatts of
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power and 1.1 million pounds per hour of process steam. The plant will be a
qualifying facility under the Public Utility Regulatory Policies Act and expects
to sell excess electricity in the Texas power markets. Commercial operation of
the plant is expected in the third quarter of 1999.
Conoco Global Power and DuPont have signed letters of intent to develop
natural gas-fired cogeneration facilities at DuPont chemical facilities in the
United States, Spain, Luxembourg, Germany and the United Kingdom. In the United
States, the cogeneration facility will be located at DuPont's Orange, Texas
chemical complex. The proposed facility would be owned by a joint venture
between Conoco and a yet to be selected partner. The facility would provide
electric and process steam to the chemical complex, with much of the electric
output being sold as merchant power. DuPont would be the contract operator of
the facility under a long-term operating agreement. The plant is planned to
produce 440 megawatts of power and 780 thousand pounds per hour of process
steam. Construction is expected to commence in mid-1999 with commercial
operation scheduled in mid-2001. In Europe, the four plants, with a total
capacity of 510 megawatts, will provide needed electricity and steam for various
DuPont operations. Conoco also will sell surplus electric power to other
customers, including the local utilities. All four plants are expected to be in
operation by 2002.
CORE VALUES
Conoco is committed to four core values:
- operating safely;
- protecting the environment;
- behaving ethically; and
- valuing all people.
Conoco is a recognized industry leader in safety performance and in
protecting employees' health and the environment.
In 1998, Conoco achieved its lowest recordable injury rate on record for
both employees and contractors. A similar performance in 1997 earned Conoco the
lowest injury rate among all major petroleum companies reporting to the American
Petroleum Institute, an achievement matched in ten out of the last 15 years.
Conoco is also an innovator both at recycling materials and at operating in
environmentally sensitive areas. In the United Kingdom, for example, Conoco
recycled over 99 percent of four Viking gas platforms, which it decommissioned
in the North Sea. Conoco has also operated in the Aransas National Wildlife
Refuge in South Texas for 60 years. In 1990, Conoco took a major step toward oil
spill prevention as the first petroleum company to voluntarily commit to build
only double-hulled tankers -- a decision made before U.S. law mandated such
technology. During 1998, Conoco began operating fleets of 100 percent
double-hulled crude oil tankers and tank barges in U.S. waters, more than a year
ahead of its target date of 2000. Also in 1998, Conoco marked the 30th
anniversary of implementing one of the industry's first environmental policies,
which predates both World Environmental Day and Earth Day in the United States.
In order to maintain the highest ethical standards, Conoco established
clear guidelines on business ethics which every employee agrees to follow.
Conoco has established annual President's Awards for performance in safety,
environmental protection and valuing all people. A President's Award for ethical
behavior will be added in 1999. Valuing all people includes:
- seeking diversity in the workforce;
- nationalizing a significant portion of Conoco's workforce in each country
where it operates as soon as practicable;
- responding to employee ideas and concerns;
- treating everyone with dignity and respect;
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- sharing the financial success of Conoco with substantially all employees
through the "Conoco Challenge" program; and
- helping employees contribute fully in achieving business goals.
Conoco believes these core values result in a motivated workforce with
values and goals firmly aligned with the strategic aims of the business. They
provide guidance to employees in working to meet the expectations of customers,
partners and host governments, and in respecting the communities in which Conoco
does business. In addition, Conoco believes its commitment to core values helps
to reduce liabilities, manage risks and improve business performance.
ENVIRONMENTAL REGULATION
As with other companies and industries engaged in similar businesses,
Conoco's operations are subject to numerous federal, state, local, European
Union and other foreign environmental laws and regulations concerning its oil
and gas operations, products and other activities, including laws that implement
international conventions or protocols. In particular, these laws and
regulations:
- require the acquisition of permits;
- restrict the type, quantities and concentration of various substances
that can be released into the environment;
- limit or prohibit activities on lands lying within wilderness, wetlands
and other protected areas;
- regulate the generation, handling, storage, transportation, disposal and
treatment of hazardous materials and wastes; and
- impose criminal or civil liabilities for pollution resulting from oil,
natural gas and petrochemical operations.
Conoco must obtain government permits to conduct its operations. The
duration and success of obtaining these permits are contingent upon numerous
variables, many of which are not within Conoco's control. To the extent these
permits are required and not obtained, operations may be delayed or curtailed,
or Conoco may be prohibited from proceeding with planned exploration or
operation of facilities.
Conoco expects that environmental laws and regulations will have an
increasing impact on Conoco's operations in most of the countries in which it
operates, although it is impossible to predict accurately the effect of future
developments in these laws and regulations on its future earnings and
operations. Some risk of environmental costs and liabilities is inherent in
particular operations and products of Conoco, and Conoco may incur material
costs and liabilities to comply with existing and future environmental laws and
regulations.
To meet future environmental obligations, Conoco is engaged in a continuing
program to develop effective measures to protect the environment. This program
includes:
- research into reducing sulfur levels in heavy fuel oils and diesel fuel;
- reducing benzene content in gasoline;
- reducing vapor emissions at service stations;
- developing more effective methods of preventing, containing and
recovering offshore oil spills;
- reducing the release of pollutants from Conoco's refineries and other
facilities; and
- developing and installing monitoring systems at its facilities.
AIR EMISSIONS
The operations of Conoco are subject to regulations controlling emissions
of air pollutants. The primary legislation affecting Conoco's U.S. air emissions
is the Federal Clean Air Act and its 1990 Amendments. Among other things, the
Clean Air Act requires all major sources of air emissions to obtain operating
permits.
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The Clean Air Act also revised the definition of "major source" such that
additional equipment involved in oil and gas production may now be covered by
the permitting requirements. Although the precise requirements of the Clean Air
Act are not yet known, Conoco may incur substantial capital, operating and
maintenance costs to comply with such requirements.
The Clean Air Act requires the EPA to promulgate regulations imposing
Maximum Achievable Control Technology standards to reduce emissions of hazardous
air pollutants from industrial facilities, such as Conoco's refineries,
transportation terminals and some crude oil production operations. The EPA has
promulgated standards that are applicable to some of Conoco's operations, and
Conoco's costs to comply with them have not been material. Maximum Achievable
Control Technology standards applicable to many of Conoco's other operations
have been proposed, but not finalized. Consequently, while it is not yet
possible to predict accurately the total expenditures that Conoco may incur to
comply with these standards, Conoco anticipates that these costs could be
substantial.
In May 1999, a federal appeals court remanded to the EPA for further
consideration two rules issued by the EPA in 1997 that revised the National
Ambient Air Quality Standards for ozone and particulate matter. These rules
would have required more stringent controls on stationary sources and
cleaner-burning fuels in some parts of the United States. The EPA plans to
appeal the court's decision. If these rules are ultimately reissued in
substantially the same form, Conoco may be required to incur substantial
expenditures to comply with the rules.
Under the Clean Air Act, the EPA has issued a number of standards that
regulate the composition of motor fuels, including gasoline and diesel fuels
produced and marketed by Conoco. These standards are designed to reduce
emissions of air pollutants from vehicles burning such fuels. In addition, many
other countries in which Conoco produces or markets motor fuels similarly
regulate the composition of such products or are proposing to do so. Conoco has
already incurred the costs of complying with such requirements that are
currently in effect.
The European Union recently enacted legislation that, among other things,
requires phased reductions of sulfur and aromatics content in gasoline and
diesel fuel and of benzene in gasoline. Conoco cannot yet predict accurately the
total actual expenditures that it may incur to comply with these requirements,
but it estimates capital expenditures to comply with the European Union
legislation will be $55 million in 1999, $80 million in 2000 and $160 million
between 2001 and 2004, depending on the nature of subsequent legislation. In the
U.S., the EPA has proposed regulations requiring a significantly lower level of
sulfur in gasoline. Conoco cannot predict the total actual expenditures that may
be incurred to produce motor fuels meeting specifications under any final rule
that may be issued, but such expenditures will likely be substantial.
In 1997, an international conference on global warming concluded an
agreement, known as the Kyoto Protocol, which called for reductions of emissions
that contribute to increases in atmospheric greenhouse gas concentrations. The
combustion of fossil fuels, such as crude oil, results in emissions of the type
sought to be reduced by the Kyoto Protocol. The treaty codifying the Kyoto
Protocol has not been ratified by the United States, but it may be in the
future. In addition, other countries where Conoco has interests, or may have
interests in the future, have made commitments to implement the Kyoto Protocol
and are in various stages of formulating applicable regulations. Although Conoco
cannot yet estimate accurately the total actual expenditures that may be
incurred by it as a result of the Kyoto Protocol, such expenditures could be
substantial.
HAZARDOUS WASTE
Conoco currently owns or leases numerous properties that have been used for
many years for hard minerals production or natural gas and crude oil production.
Although Conoco used operating and disposal practices that were standard in the
industry at the time, wastes may have been disposed of or released on or under
the properties it owned or leased. In addition, some of these properties have
been operated by third parties over whom Conoco had no control.
The Comprehensive Environmental Response, Compensation, and Liability Act
and comparable state statutes can impose liability for the entire cost of
clean-up upon each of the owners and operators of sites or on
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persons who disposed of or arranged for the disposal of hazardous waste found at
such sites. This liability can be imposed regardless of fault or the lawfulness
of the original disposal activity. The Resource Conservation and Recovery Act
and comparable state statutes govern the management and disposal of wastes.
Although CERCLA currently excludes petroleum from regulation, many state laws
affecting Conoco's operations impose clean-up liability for petroleum
contamination. In addition, although RCRA currently classifies some exploration
and production wastes as non-hazardous, such wastes could be reclassified as
hazardous wastes. If this occurs, exploration and production wastes would be
subject to more stringent requirements. If such a change in legislation were to
be enacted, it could have a significant impact on Conoco's operating costs, as
well as the gas and oil industry in general.
OIL SPILLS
Under the U.S. Federal Oil Pollution Act of 1990, the following can be held
liable regardless of fault for all removal costs and damage that result from a
discharge of oil into the navigable waters of the United States:
- owners and operators of onshore facilities and pipelines;
- lessees or permittees of an area in which an offshore facility is
located; and
- owners and operators of tank vessels.
These damages include, for example, natural resource damages, real and
personal property damages and economic losses. The Oil Pollution Act limits the
liability of owners and operators for removal costs and damages that result from
a discharge of oil to $350 million in the case of onshore facilities, $75
million plus removal costs in the case of offshore facilities, and in the case
of tank vessels, an amount based on gross tonnage of the vessel. However, these
limits do not apply if the discharge was caused by gross negligence or willful
misconduct, or by the violation of an applicable Federal safety, construction or
operating regulation by the owner or operator, its agent or subcontractor or in
specified other circumstances.
The Oil Pollution Act requires evidence of financial responsibility in an
amount of up to $150 million for some offshore facilities and also requires
offshore facilities, some onshore facilities and tank vessels to prepare spill
response plans, which Conoco has done, for responding to a "worst case
discharge" of oil. Failure to comply with these requirements or failure to
cooperate during a spill event may subject an owner or operator to civil or
criminal enforcement actions and penalties.
OFFSHORE PRODUCTION
Offshore oil and gas operations in U.S. waters are subject to regulations
of the United States Department of the Interior, which currently impose
liability regardless of fault upon the lessee under a Federal lease for the cost
of clean-up of pollution resulting from the lessee's operations, and such lessee
could be subject to liability for pollution damages. In the event of a serious
incident of pollution, the Department of the Interior may require a lessee under
Federal leases to suspend or cease operations in the affected areas.
SOURCES OF SUPPLY
During 1998, Conoco supplemented its own crude oil production to meet its
refining requirements by the purchase of crude oil from both domestic and
international sources. Approximately 49 percent of the crude oil processed in
Conoco's U.S. refineries in 1998 came from U.S. sources. The remainder of crude
processed came principally from Venezuela, Mexico and Canada. During 1998,
Conoco's Humber refinery in the United Kingdom processed principally North Sea
crude oils. In the joint venture MiRO refinery, Conoco processed primarily
Mediterranean crude oils in 1998. Conoco's joint venture refineries in the Czech
Republic processed primarily Russian crudes.
To assure availability, Conoco maintains multiple sources for most raw
materials, supplies, services and equipment, with no one company supplying a
substantial portion of Conoco's needs. Conoco also routinely leases or charters
equipment, such as drilling rigs, offshore supply boats, seismic boats, pipeline
laying equipment,
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derrick barges and cranes. Availability of supply and/or cost of such equipment
has been a factor in the past, and could have a detrimental impact on Conoco in
the future.
RESEARCH AND DEVELOPMENT
The objectives of Conoco's research and development programs are to
discover new products, processes and business opportunities in relevant fields,
and to improve existing products and processes. Research and development also
focuses on optimizing existing assets and improving efficiency, safety and
environmental protection. Worldwide expenditures for research and development
amounted to approximately $42 million in 1998, $44 million in 1997 and $41
million in 1996.
PATENTS AND TRADEMARKS
Conoco owns and is licensed under various patents, which expire from time
to time, covering many products, processes and product uses. No individual
patent is of material importance to Conoco's business as a whole. During 1998,
Conoco was granted seven U.S. and 28 non-U.S. patents. Conoco also has
individual trademarks and brands for its products and services which are
registered in various countries throughout the world. None of these trademarks
and brands is considered material other than the "Conoco" and "Jet" brands.
OPERATING HAZARDS AND INSURANCE
Conoco's operations are subject to operating hazards such as well blowouts,
collapsed wells, explosions, uncontrolled flows of oil, natural gas or well
fluids, fires, formations with abnormal pressures, pipeline ruptures or spills,
refinery explosions, surface or marine transportation incidents, pollution,
releases of toxic gas and other environmental hazards and risks. In accordance
with customary industry practices, Conoco maintains insurance against some, but
not all, of such risks and losses. Given Conoco's risk profile and in accordance
with the practices of a number of major integrated, international energy
companies, Conoco does not carry business interruption insurance. Conoco's
decision not to carry business interruption insurance is based on several
factors, including its spread of risk over five wholly owned refineries, a
favorable loss history and loss prevention and safety programs. Conoco's
ownership of five refineries provides it with some ability to replace product
during periods of business interruption. Conoco has elected to retain the risk
where management believes the cost of insurance, although available, is
excessive relative to the risks presented. In addition, pollution and
environmental risks are generally not fully insurable.
PROPERTIES
Conoco owns its corporate headquarters, consisting of 16 three-story
buildings on a 62-acre site in Houston, Texas. Conoco owns and leases petroleum
properties and operates production processing, refining, marketing,
power-generating and research and development facilities worldwide. In addition,
Conoco operates sales offices, regional purchasing offices, distribution centers
and various other specialized service locations throughout the world.
EMPLOYEES
Conoco had approximately 16,650 employees as of December 31, 1998.
Approximately 1,400 employees at Conoco's U.S. refineries are represented by the
Oil, Chemical and Atomic Workers International Union under separate bargaining
agreements for each refinery. These agreements cover wages, benefit matters,
grievance procedures and various employment conditions, and Conoco believes they
are typical of the refining industry in the U.S. In 1999, Conoco will reduce
staff by approximately 975 positions to improve operational efficiencies by
combining some functions in the United States and by more broadly sharing
services and more effectively deploying employees. For more information about
this restructuring, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Conoco -- Restructuring."
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LEGAL PROCEEDINGS
On March 6, 1996, the Department of Justice filed a complaint in the United
States District Court for the District of Montana against Yellowstone Pipeline
Company and the Conoco Pipe Line Company as a 40 percent owner and operator of
Yellowstone Pipeline Company. The complaint alleges discharges of oil from a
Yellowstone Pipeline Company pipeline in January 1993 and seeks civil penalties
of up to $25,000 per day for each violation or up to $1,000 for each barrel of
oil discharged. The parties have reached an agreement to settle the case that
requires the parties to pay a penalty of $165,000 and construct a fish
passageway in the Jocko River to enhance the Bull Trout population. Final
settlement documents were entered by the court, and Conoco is in the process of
implementing the terms of the settlement agreement.
On January 5, 1999, Conoco paid $105,000 in penalties and agreed to perform
remediation at a cost of $200,000 to settle allegations made on June 18, 1998 by
the New Mexico Environmental Department that Conoco had failed to obtain a Clean
Air Act permit and violated conditions in existing permits at the Maljamar Gas
Plant and the MCA field.
On August 31, 1998, the Louisiana Department of Environmental Quality
issued a Notice of Violation against Conoco for failure to maintain equipment to
control emissions from the sulfur pits at the Lake Charles Refinery. On November
11, 1998, the department notified Conoco that it is seeking a fine of $300,000.
Conoco is contesting these allegations and the proposed penalty and is seeking a
hearing in this matter.
On February 18, 1999, the Oklahoma Department of Environmental Quality
issued a Notice of Violation to Conoco's Ponca City refinery alleging violations
of the Oklahoma Air Pollution Control Rules. This Notice of Violation may result
in the Department seeking monetary sanctions in excess of $100,000. Conoco
intends to vigorously defend the matter.
Conoco is subject to various lawsuits and claims involving a variety of
matters including, along with other oil companies, actions challenging oil and
gas royalty and severance tax payments based on posted prices, and claims for
damages resulting from leaking underground storage tanks. As a result of its
separation from DuPont, Conoco has also assumed responsibility for current and
future claims related to some discontinued chemicals and agricultural chemicals
businesses operated by Conoco in the past. Conoco cannot reasonably estimate the
effect on future financial results, because considerable uncertainty exists.
Conoco believes the ultimate liabilities resulting from such lawsuits and claims
may be material to results of operations in the period in which they are
recognized but that they will not materially affect the consolidated financial
position of Conoco.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Following is information concerning the current executive officers and
directors of Conoco. Each director holds office until his successor is duly
elected and qualified or until his resignation or removal if earlier. The board
is divided into three classes with staggered terms. Officers serve at the
discretion of the board and serve in their positions on a full-time basis.
Conoco's directors hold various positions as directors and executives of other
organizations, in addition to their duties as directors of Conoco. For more
information about the possible effects of Conoco's staggered board, see
"Description of Conoco Capital Stock -- Anti-Takeover Effects of Certificate and
By-Law Provisions -- Board of Directors."
DIRECTORS TERM
NAME AGE(1) POSITION WITH CONOCO EXPIRING
- ---- ------ -------------------- --------------
Edgar S. Woolard, Jr. ............... 65 Chairman of the Board of Directors 2001
Archie W. Dunham..................... 60 President, Chief Executive Officer and
Director 2000
Ruth R. Harkin....................... 54 Director 2002
Frank A. McPherson................... 66 Director 2002
Gary M. Pfeiffer..................... 49 Director 2002
William K. Reilly.................... 59 Director 2000
William R. Rhodes.................... 63 Director 2001
Franklin A. Thomas................... 65 Director 2000
Gary W. Edwards...................... 57 Executive Vice President, Refining, Marketing,
Supply and Transportation
Robert E. McKee III.................. 53 Executive Vice President, Exploration
Production
Robert W. Goldman.................... 57 Senior Vice President, Finance, and Chief
Financial Officer
Rick A. Harrington................... 54 Senior Vice President, Legal, and General
Counsel
- ------------
(1) As of June 30, 1999.
EDGAR S. WOOLARD, JR. has been a director since July 1998. He retired as
Chairman of the Board of Directors of DuPont on October 29, 1997, having served
since 1989. He was named Chairman of the Board of Conoco in July 1998. He
remains a director of DuPont. Since he joined DuPont in 1957, he occupied many
technical and managerial positions at various locations across the United
States. From 1987 to 1989, Mr. Woolard served as President and Chief Operating
Officer of DuPont, and from 1989 to 1995, as Chairman and Chief Executive
Officer. Mr. Woolard is a director of Citigroup Inc. and Apple Computer, Inc.
and a member of The Business Council, the Board of Trustees of Winterthur
Museum, the Christiana Care Corporation, the Protestant Episcopal Theological
Seminary in Virginia and the North Carolina Textile Foundation. He is also a
member of the National Academy of Engineering and the Bretton Woods Committee.
ARCHIE W. DUNHAM has been a director since July 1998. He has been President
and Chief Executive Officer of Conoco since 1996. He joined Conoco in 1966 and
subsequently held a number of commercial and managerial positions within Conoco
and DuPont. He currently serves on both companies' boards of directors, but will
resign from DuPont's board upon the closing of the exchange offer. Mr. Dunham is
also a member of the boards of directors of Louisiana-Pacific Corporation and
Phelps Dodge Corporation. Mr. Dunham is a former Executive Vice President,
Exploration Production and Executive Vice President, Refining, Marketing, Supply
and Transportation for Conoco. He was also a Senior Vice President, Polymers and
Senior Vice President, Chemicals and Pigments for DuPont. He is a director of
the American Petroleum Institute, the U.S.-Russia Business Council and the
Greater Houston Partnership. He is Chairman of the United States Energy
Association, Vice-Chairman of the National Petroleum Council and a member of The
Business Council. Mr. Dunham is also a member of the Board of Visitors and the
Energy Center board of directors at the University of Oklahoma. He also serves
on the board of trustees of the Memorial Hermann Healthcare System
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in Houston, the Houston Grand Opera, the Houston Symphony, the George Bush
Presidential Library and the Smithsonian Institution.
RUTH R. HARKIN has been a director since October 1998. She is Senior Vice
President, International Affairs and Government Relations of United Technologies
Corporation and Chair of United Technologies International, UTC's international
representation arm. Previously, Mrs. Harkin was the President and Chief
Executive Officer of the Overseas Private Investment Corporation in the Clinton
administration from 1993 to 1997. Mrs. Harkin was elected as a prosecutor in the
office of the County Attorney of Story County, Iowa in 1973. She also served as
Deputy General Counsel at the U.S. Department of Agriculture and was Of Counsel
at the law firm of Akin, Gump, Strauss, Hauer & Feld. Mrs. Harkin is a member of
the Board of Visitors of the College of Business Administration, University of
Iowa. She also sits on the boards of the Center for National Policy and the
National Association of Manufacturers.
FRANK A. MCPHERSON has been a director since October 1998. He retired as
Chairman and Chief Executive Officer of Kerr-McGee Corporation on February 1,
1997. He joined Kerr-McGee in 1957 and held many technical, operational and
managerial positions, including President from 1980 to 1983. He is a past
director of the Federal Reserve Bank of Kansas City and the Oklahoma State
University foundation Board of Trustees. Mr. McPherson serves on the boards of
directors of Kimberly-Clark Corp., Bank of Oklahoma, Tri-Continental
Corporation, Seligman Quality Fund, Inc., Seligman Select Municipal Fund, Inc.
and the Seligman Group of Mutual Funds. He is also a member of the boards of the
American Petroleum Institute, Boys and Girls Clubs of America, Baptist Medical
Center, Oklahoma Chapter of Nature Conservancy, Oklahoma City Chamber of
Commerce, Oklahoma City Public School Foundation, Oklahoma Medical Research
Foundation and Oklahoma Foundation for Excellence in Education.
GARY M. PFEIFFER has been a director since July 1998. He has been Senior
Vice President, Finance and Chief Financial Officer of DuPont since 1997. From
1994 to 1997, Mr. Pfeiffer was Vice President and General Manager of DuPont
Nylon, North America, with responsibility for all of DuPont's nylon fiber and
intermediates business in North America. He has also served as Global Business
Director, Nylon Intermediates for DuPont Chemicals from 1992 to 1994, and as
Director -- Finance for DuPont Chemicals and Specialties Manufacturing from 1991
to 1992. Since he joined DuPont in 1974, Mr. Pfeiffer has held a number of
technical and managerial positions in the United States and overseas. He is also
on the board of the Hagley Museum and Library.
WILLIAM K. REILLY has been a director since October 1998. He is currently a
member of the board of directors of DuPont and is President and Chief Executive
Officer of Aqua International Partners, an investment group which finances water
improvements in developing countries. Formerly, Mr. Reilly was a visiting
professor at the Institute of International Studies at Stanford University and
served as Administrator of the U.S. Environmental Protection Agency from
February 1989 to January 1993. Mr. Reilly was president of the Conservation
Foundation from 1973 to 1989 and, after its affiliation with World Wildlife Fund
in 1985, served as President of both groups. He also serves on the boards of
Royal Caribbean International and Evergreen Holdings. He is Chairman of the
Board of the American Farmland Trust and serves on the boards of National
Geographic Society, World Wildlife Fund and Yale University. Mr. Reilly also
serves as a member of the board of the Presidio Trust of San Francisco.
WILLIAM R. RHODES has served as a director since October 1998. He is a Vice
Chairman of Citibank, N.A., a principal subsidiary of Citigroup Inc. Mr. Rhodes
is Vice Chairman of the Institute of International Finance, a director of the
Private Export Funding Corporation, a trustee and member of the Executive
Council of the Council of the Americas, an Executive Committee member of the
Bretton Woods Committee and the U.S.-Russia Business Council, and a founding
member of the U.S. National Advisory Council to the International Management
Center. Other board memberships include The Group of Thirty, the Americas
Society, The African-American Institute, CHIPCo, and the U.S.-Egypt Presidents'
Council. He is also a member of the Council on Foreign Relations, the Foreign
Policy Association, and The Bankers Roundtable. Mr. Rhodes is a past Chairman of
the U.S. Advisory Committee of the Export-Import Bank of the United States, past
Chairman of the U.S. section of the Venezuela-U.S. Business Council, past
President of the Venezuela-American Chamber of Commerce, and past President of
the Bankers Association for Foreign Trade. He is a Governor and
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Trustee of the New York and Presbyterian Hospital and a director of the New York
City Partnership and Chamber of Commerce. He serves as a trustee of Brown
University and Chairman of the Board of Trustees of the Northfield Mount Hermon
School.
FRANKLIN A. THOMAS has been a director since October 1998. He has been a
consultant to the TFF Study Group, a non-profit initiative assisting development
in southern Africa, since April 1996. Mr. Thomas was President and Chief
Executive Officer of The Ford Foundation from 1979 to 1996. He also serves as a
director of ALCOA, Inc., Citigroup Inc., Cummins Engine Company, Inc., Lucent
Technologies, Inc. and PepsiCo, Inc.
GARY W. EDWARDS has been Executive Vice President of Conoco since 1991,
with responsibility for worldwide refining, marketing, supply and transportation
and was a Senior Vice President of DuPont until October 27, 1998. He joined
Conoco in 1963, working at various locations throughout the United States and in
the United Kingdom, and was formerly Conoco's Vice President, Refining Marketing
Europe; Vice President Refining, Marketing and Transportation; and Vice
President North American Marketing. Mr. Edwards has held a number of managerial
positions in Conoco Pipeline, Transportation, Natural Gas and Gas Products,
Logistics and Marketing. He is a Director of the American Petroleum Institute
and a previous director and Vice President of the European Petroleum Industry
Association in Brussels, Belgium. Mr. Edwards is a member of the Kansas State
University Engineering advisory council, and serves on the boards of the
Yellowstone Park Foundation, Theatre Under the Stars, Junior Achievement, Inc.
(National) as well as Junior Achievement of Southeast Texas, Target Hunger,
Private Sector Initiative, and the Houston Music Hall Foundation.
ROBERT E. MCKEE III has been an Executive Vice President for Conoco since
1992, with responsibility for worldwide exploration and production and was a
Senior Vice President of DuPont until October 27, 1998. He was formerly Conoco's
Executive Vice President for Corporate Strategy and Development, Senior Vice
President for Administration, Vice President of North American Refining and
Marketing and Vice President, Chairman and Managing Director of Conoco (UK)
Limited. Since he joined Conoco in 1967, Mr. McKee has worked at various
locations and held numerous managerial, operating, administrative and technology
positions both in the United State and overseas. He currently serves on the
board of directors of the American Petroleum Institute and is a former director
of Consol Energy Inc. and Consol Inc. In addition, he is Chairman of the
Southern Regional Advisory Board of the Institute of International Education and
a member of the advisory committee of the University of Texas Engineering
Department. Mr. McKee also serves as Chairman of the President's Council of the
Colorado School of Mines.
ROBERT W. GOLDMAN has been Senior Vice President, Finance, and Chief
Financial Officer of Conoco since 1998 and was its Vice President, Finance from
1991 to 1998. Mr. Goldman began his career with DuPont in 1965 and subsequently
held many technical and managerial positions within the finance, tax and
treasury functions. He is the former Vice President-Finance of DuPont (Mexico),
Vice President, Remington Arms Company and served as Director and Comptroller of
several operating departments of DuPont in Wilmington, Delaware. Mr. Goldman
transferred to Conoco in 1988 as Vice President and Controller. He is
co-chairman of Conoco's Risk Management Committee and is a member of the
American Petroleum Institute, a former chairman of its Accounting Committee and
currently serves on its Executive Committee of the General Committee on Finance.
He is also a member of the Financial Executives Institute and the Executive
Committee of the Board of Directors of the Alley Theatre in Houston, Texas.
RICK A. HARRINGTON has been Senior Vice President, Legal, and General
Counsel of Conoco since 1998 and was Vice President and General Counsel of
Conoco and Vice President and Assistant General Counsel of DuPont from 1994
until October 27, 1998. He joined DuPont in 1979 as a Senior Attorney, and
subsequently held the positions of Managing Counsel, Special Litigation, and
Vice President and General Counsel of Consolidation Coal Company. Prior to
joining DuPont, he was a partner in the firm of Arent, Fox, Kintner, Plotkin and
Kahn in Washington, D.C. where he specialized in antitrust litigation. Mr.
Harrington is a member of the bar of the District of Columbia, the District of
Columbia Court of Appeals and the Fifth Circuit Court of Appeals. He is
co-chairman of Conoco's Risk Management Committee and a director of the American
Corporate Counsel Association and is a member of its Policy Committee. He is
also a member of the American Petroleum Institute General Committee on Law and
the University of Kansas School of Business Dean's Board.
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Under the terms of the separation agreement, DuPont has the right to
designate for nomination a majority of Conoco's board of directors so long as it
owns shares representing 50 percent of the voting power in Conoco. If after the
exchange offer DuPont retains Conoco Class B common stock representing more than
10 percent of the voting power in Conoco, it will have the right to designate
for nomination a number of Conoco directors proportionate to its voting power.
If DuPont retains Conoco Class B common stock representing 10 percent or less of
the voting power in Conoco, it will no longer be entitled to nominate any Conoco
directors.
DuPont's designees on the Conoco board are currently Messrs. Woolard,
Pfeiffer, Reilly, Rhodes and Thomas. Promptly after the closing of the exchange
offer, Messrs. Woolard and Pfeiffer will resign from the Conoco board. Mr.
Dunham has asked Messrs. Reilly, Rhodes and Thomas to continue to serve as
directors after the exchange offer. It is anticipated that Mr. Dunham will
become the Chairman of the Board upon Mr. Woolard's resignation. The resignation
of Messrs. Woolard and Pfeiffer will leave three vacancies on the Conoco board,
which will be filled as soon as practicable by a vote of the directors remaining
in office. Two directors will be elected to fill Messrs. Woolard and Pfeiffer's
unexpired terms, and one will be elected for a term expiring 2001.
ELECTION AND COMPENSATION OF DIRECTORS
Conoco's restated certificate of incorporation provides that the board of
directors will consist of not less than six nor more than 15 directors. The
board of directors is classified into three classes. Each class consists, as
nearly as may be possible, of one-third of the total number of directors
constituting the entire board of directors. The terms of office of the members
of one class of directors expire each year in rotation so that the members of
one class are elected at each annual meeting to serve for full three-year terms,
or until their successors are elected and qualified. The current number of
authorized directors is set at nine, but only eight positions are occupied.
Directors who are employees of Conoco or DuPont receive no additional
compensation for serving on the board of directors. At the time of the initial
public offering, each nonemployee member of the board of directors received a
special grant of stock options to purchase 3,900 shares of Class A common stock
and a grant of 4,135 restricted stock units with respect to Class A common
stock. Future nonemployee directors, upon election to the board, will receive a
grant of restricted stock units with an aggregate value on the date of grant
equal to $95,000. On an annual basis, nonemployee directors will receive a fee
of $30,000, a grant of restricted stock units with an aggregate value on the
date of grant of $20,000, and options to purchase common stock with a present
value on the date of grant of $30,000.
Conoco awards stock options and restricted stock units under the terms of
its 1998 Stock and Performance Incentive Plan. Stock options have a term of ten
years and become exercisable in increments of one-third of the total grant on
the first, second and third anniversaries of the grant. The present value of
stock options is determined using a generally accepted stock option valuation
methodology. Restricted stock units are grants of units representing common
stock. Shares underlying restricted stock units granted to directors may not be
sold or voted for a period of three years, but dividend equivalents in the form
of additional units are credited during such period. Restricted stock units vest
immediately upon grant and stock options vest after six months of service as a
director.
Annual fees and awards of restricted stock units may be deferred under the
terms of Conoco's Deferred Compensation Plan for Nonemployee Directors, which is
established under the 1998 Stock and Performance Incentive Plan. An election to
defer must generally be made before the fiscal year in which it will be earned.
Once made, the election is generally irrevocable for the first year. The
deferred amounts are deemed to be invested, under the election of the
participant, in common stock or in an interest-bearing account.
Each deferral election will indicate the time and form of payment for the
amounts to be deferred. Distributions will be made in cash or common stock to
the participant at the time irrevocably selected on the deferral form, or, in
the event of the participant's death, to the participant's designated
beneficiary. Upon a change in control of Conoco, at the director's election, all
deferred amount, including deferred restricted stock units, may be paid in full.
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Board members are also eligible to participate in the Directors' Charitable
Gift Plan. This plan provides that, upon a director's death, Conoco will donate
$200,000 per year for five years to tax-exempt educational institutions or
charitable organizations recommended by the director and approved by Conoco.
Each director will be fully vested in the Directors' Charitable Gift Plan after
completing one year of service as director. Conoco may fund the Directors'
Charitable Gift Plan through, among other vehicles, the purchase of life
insurance policies on the lives of the directors. Conoco will be the beneficiary
of and will own these policies. Employee directors may elect to participate in
the plan if they bear their allocable cost of the plan. Directors derive no
personal financial or tax benefit from the Directors' Charitable Gift Plan
because the charitable, tax-deductible donations and insurance proceeds, if any,
accrue solely to the benefit of Conoco.
A board member who serves as chairman of a standing board committee
receives a supplement of $5,000 annually. No additional fees are paid for
serving on board committees or for attending board or committee meetings.
In lieu of the compensation payable to nonemployee directors described
above, other than participation in the Directors' Charitable Gift Plan, Edgar S.
Woolard, Jr., Chairman of the Board, is entitled to receive an annual fee of
$300,000 and annual equity grants with a present value on the date of grant of
$700,000. Conoco granted Mr. Woolard 4,350 restricted stock units with respect
to Class A common stock and nonqualified options to purchase 170,000 shares of
Class A common stock at the closing of the initial public offering. This grant
covers Mr. Woolard's first two years of service as a director. Restricted stock
units and stock options are granted under the 1998 Stock and Performance
Incentive Plan and have provisions consistent with those of the other
nonemployee directors.
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT AND COMPLIANCE COMMITTEE
Members: Frank A. McPherson, Chairman
Ruth R. Harkin
Gary M. Pfeiffer
William R. Rhodes
Number of meetings in 1998:
Two
Principal Functions:
The Audit and Compliance Committee is responsible for:
- overseeing Conoco's internal control structure, financial
reporting, and legal and ethical compliance program,
including strategic oversight of corporate safety, health and
environmental policy and direction;
- selecting an independent accounting firm, subject to
stockholder ratification, to audit Conoco's financial
statements;
- requesting that Conoco's subsidiaries engage independent
accountants, as deemed appropriate by the committee, to audit
their respective financial statements;
- receiving and acting on reports and comments from Conoco's
independent accountants;
- reviewing significant accounting principles employed in
Conoco's financial reporting;
- reviewing and recommending approval of Conoco's annual
financial statements;
- maintaining direct lines of communication with the board of
directors and Conoco's management, internal auditing staff
and independent accountants; and
- reporting to the board of directors a summary of its findings
and recommendations.
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COMPENSATION COMMITTEE
Members: Franklin A. Thomas, Chairman
William K. Reilly
Edgar S. Woolard, Jr.
Number of Meetings in 1998:
Two
Principal Functions:
The Compensation Committee is responsible for:
- overseeing and administering Conoco's executive compensation
policies, plans and practices;
- approving and/or recommending to the board of directors
levels of compensation for the President and Chief Executive
Officer, as well as stock options; performance awards and
other stock-based awards for employee directors and senior
management;
- administering grants to management under Conoco's stock-based
compensation plans and adopting and/or recommending to the
full board of directors new plans or changes in these
programs; and
- overseeing succession planning for the Chief Executive
Officer and other key executives.
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the number of shares of Class A common stock
beneficially owned on May 31, 1999, by each Conoco director, executive officer
named in the summary compensation table below and all directors and executive
officers as a group. None of such individuals owns Class B common stock. The
persons named in the table have sole voting power and investment power with
respect to all shares of Class A common stock shown as beneficially owned by
them, subject to community property laws where applicable and the information
contained in the notes to the table.
BENEFICIAL OWNERSHIP TABLE
SHARES
BENEFICIALLY PERCENT OF
NAME OWNED(1)(2) CLASS
- ---- -------------- ----------
Edgar S. Woolard, Jr..................................... 12,376(3) *
Archie W. Dunham......................................... 2,677,620(4) 1.4%
Ruth R. Harkin........................................... 6,160 *
Frank A. McPherson....................................... 7,775 *
Gary M. Pfeiffer......................................... -- --
William K. Reilly........................................ 5,116 *
William R. Rhodes........................................ 4,160 *
Franklin A. Thomas....................................... 4,160 *
Gary W. Edwards.......................................... 1,262,134 *
Robert E. McKee III...................................... 1,001,421(5) *
Robert W. Goldman........................................ 305,269 *
Rick A. Harrington....................................... 307,887 *
Directors and Executive Officers as a Group (12
persons)............................................... 5,594,076 2.9%
- ---------------
* Less than 1%
(1) Includes restricted or deferred stock units credited under the 1998 Stock
and Performance Incentive Plan and the Deferred Compensation Plan for
Nonemployee Directors, the following number of which may be voted or sold
only upon the passage of time: Mr. Woolard -- 4,376; Mr. Dunham -- 81,064;
Ms. Harkin -- 4,160; Mr. McPherson -- 5,275; Mr. Reilly -- 5,116; Mr.
Rhodes -- 4,160; and Mr. Thomas -- 4,160.
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(2) Includes beneficial ownership of the following number of shares of Class A
Common Stock which may be acquired within 60 days of May 31, 1999 through
stock options awarded under compensation plans: Mr. Dunham -- 2,450,870; Mr.
Edwards -- 1,233,596; Mr. McKee -- 986,740; Mr. Goldman -- 298,583; and Mr.
Harrington -- 301,528. Of such options, the following number are subject to
stock price hurdles which have not yet been met: Mr. Dunham -- 392,846; Mr.
Edwards -- 182,324; Mr. McKee -- 173,427; Mr. Goldman -- 52,562; and Mr.
Harrington -- 80,349.
(3) Includes 3,000 shares owned by Mr. Woolard's wife.
(4) Includes 10,100 shares held in Dunham Management Trust, a revocable grantor
trust.
(5) Includes 200 shares owned by Mr. McKee's son.
COMPENSATION OF EXECUTIVE OFFICERS
Until October 1998, the executive officers named in the table below
participated in DuPont's compensation plans. The following table provides
information about the compensation of Conoco's chief executive officer and four
other most highly compensated executive officers during 1997 and 1998 without
regard to whether compensation was provided under DuPont's plans or Conoco's
plans. Two additional tables provide detailed information about these employees'
stock options.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION -----------------------
--------------------------------------- SHARES
OTHER RESTRICTED UNDERLYING
NAME AND ANNUAL STOCK OPTIONS ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION(2) AWARDS(3) GRANTED(4) COMPENSATION(5)
- ------------------ ---- -------- ---------- --------------- ---------- ---------- ---------------
Archie W. Dunham............... 1998 $901,261 $1,300,000 $29,946 $1,100,090 1,693,040 $51,750
President, Chief Executive 1997 667,500 1,450,000 33,075 794,936 39,950
Officer and Director
Gary W. Edwards................ 1998 469,460 389,000 16,347 567,974 27,620
Executive Vice President, 1997 431,320 725,000 24,044 364,648 25,715
Refining, Marketing, Supply
and Transportation
Robert E. McKee III............ 1998 418,775 372,000 30,573 561,677 24,563
Executive Vice President, 1997 374,400 718,000 16,612 346,854 22,247
Exploration Production
Robert W. Goldman.............. 1998 262,750 140,000 6,211 164,191 15,390
Senior Vice President, 1997 236,700 292,000 1,513 105,672 13,958
Finance, and Chief Financial
Officer
Rick A. Harrington............. 1998 264,500 172,000 1,760 198,411 15,600
Senior Vice President, Legal, 1997 229,500 325,000 4,703 163,716 13,598
and General Counsel
- ---------------
(1) On average, approximately 25% of 1998 variable compensation (i.e., bonus)
was paid in Class A common stock, and about 25% of 1997 variable
compensation was paid in DuPont common stock.
(2) Other annual compensation consists solely of the reimbursement for the
payment of taxes.
(3) For 1998, Mr. Dunham received 47,830 restricted stock units with respect to
Class A common stock valued at $23 per unit. The stock units vest two years
from the date of grant. During the two-year period, dividend equivalents
will be credited to Mr. Dunham's account in the form of additional units.
These restricted stock units had an aggregate value of $998,451 on December
31, 1998 based on the closing price on the New York Stock Exchange on such
date of $20.875.
(4) Reflects, for 1998, new grants of Conoco stock options and, for 1997 and
1998, replacement grants of Conoco stock options at the time of the initial
public offering resulting from the election of the officers to surrender
DuPont stock options granted in 1997 and 1998 and receive Conoco stock
options having an equivalent appreciated value at the time of the initial
public offering. The number of shares of Class A
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common stock covered by the replacement stock options was calculated by
multiplying the number of shares of DuPont common stock subject to the
original DuPont options by a factor of 2.7376, and the exercise price of the
options was decreased by dividing the original exercise price by the same
factor.
(5) 1998 amounts consist of matching contributions made under Conoco's Thrift
Plan and the following amounts credited under DuPont's savings restoration
plan: Mr. Dunham -- $42,150; Mr. Edwards -- $18,020; Mr. McKee -- $14,963;
Mr. Goldman -- $5,790 and Mr. Harrington -- $6,000.
OPTION GRANTS TABLE
INDIVIDUAL OPTION GRANTS IN 1998(1)(2) POTENTIAL REALIZABLE
----------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENT ANNUAL RATES OF STOCK
SHARES OF TOTAL APPRECIATION FOR OPTION
UNDERLYING OPTIONS TERM(5)
OPTIONS GRANTED EXERCISE EXPIRATION -------------------------
NAME GRANTED IN 1998(3) PRICE(4) DATE 5% 10%
- ---- ---------- ---------- -------- ---------- ----------- -----------
Archie W. Dunham.................................... 388,740 11.83% $21.73 02/03/2008 $ 5,313,532 $13,465,565
1,304,300 16.40 23.00 10/20/2008 18,866,178 47,810,551
Gary W. Edwards..................................... 132,774 4.04 21.73 02/03/2008 1,814,835 4,599,159
435,200 5.47 23.00 10/20/2008 6,294,994 15,952,735
Robert E. McKee III................................. 126,477 3.85 21.73 02/03/2008 1,728,764 4,381,037
435,200 5.47 23.00 10/20/2008 6,294,994 15,952,735
Robert W. Goldman................................... 40,791 1.24 21.73 02/03/2008 557,556 1,412,959
123,400 1.55 23.00 10/20/2008 1,784,932 4,523,363
Rick A. Harrington.................................. 75,011 2.28 21.73 02/03/2008 1,025,295 2,598,306
123,400 1.55 23.00 10/20/2008 1,784,932 4,523,363
- ---------------
(1) All options have a term of ten years and become exercisable in increments of
one-third of the total grant on the first, second and third anniversaries of
the grant. In addition, the options expiring on February 3, 2008 were to
become exercisable only upon a 20% increase in the price of DuPont's common
stock, which has occurred.
(2) The options expiring on February 3, 2008 were originally granted with
respect to DuPont common stock and the amounts shown represent the number of
shares of Conoco Class A common stock resulting from the replacement in
October 1998 of outstanding DuPont options with Conoco stock options, which
was intended to preserve the economic value of the DuPont options in
connection with the initial public offering. The number of shares of Conoco
Class A common stock covered by the replacement options was calculated by
multiplying the number of shares of DuPont common stock subject to the
original options by a factor of 2.7376, and the exercise price of the
options was decreased by dividing the original exercise price by the same
factor.
(3) Percent of total options granted to Conoco employees.
(4) The original exercise price for the options expiring on February 3, 2008 was
the average of the high and low prices of the DuPont common stock as
reported on the New York Stock Exchange Composite Transactions Tape on
February 4, 1998, the date of the grant. Such exercise price was adjusted by
dividing it by a factor of 2.7376 upon the replacement of the DuPont stock
options with Conoco stock options. The exercise price for the options
expiring on October 20, 2008 was the initial public offering price of
Conoco's Class A common stock on October 21, 1998, the date of the grant.
(5) Represents total appreciation over the exercise price at the assumed annual
appreciation rates of 5% and 10% compounded annually for the term of the
options.
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OPTION EXERCISES TABLE
(Aggregated Option Exercises in Last Fiscal Year
and Year-end Option Values)
NUMBER OF SHARES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
SHARES DECEMBER 31, 1998 AT DECEMBER 31, 1998(2)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
Archie W. Dunham........................ -- -- 1,928,446 2,085,886 $16,449,027 $666,895
Gary W. Edwards......................... -- -- 1,007,016 750,298 9,444,625 309,513
Robert E. McKee III..................... -- -- 771,156 735,104 6,502,665 294,410
Robert W. Goldman....................... -- -- 232,426 216,753 1,955,829 89,229
Rick A. Harrington...................... -- -- 196,177 278,760 1,166,709 136,400
- ---------------
(1) No Conoco stock options were exercised in 1998. DuPont stock options were
exercised by the following officers in the amounts indicated: Mr. McKee,
14,708 shares with a realized value of $487,878; Mr. Goldman, 8,406 shares
with a realized value of $292,078; and Mr. Harrington, 23,492 shares with a
realized value of $925,806. The realized value represents the pre-tax gain,
which is the difference between the market value of the shares on the date
of exercise of the options and the exercise price.
(2) Represents the closing price as reported on the New York Stock Exchange for
Class A common stock on December 31, 1998 of $20.875, less the exercise
price for all outstanding exercisable and unexercisable options for which
the exercise price is less than such closing price. Exercisable options have
been held at least one year from the date of grant and have met applicable
stock price hurdles. Unexercisable options have been held for less than one
year or have not met the applicable stock price hurdles.
RETIREMENT BENEFITS
Retirement benefits for Conoco employees are provided under the DuPont
Pension and Retirement Plan, and are based on an employee's years of service and
average monthly pay during the employee's three highest paid years. Average
monthly pay for this purpose includes regular compensation and 100% of annual
variable compensation payments, but excludes other bonuses and compensation in
excess of limits imposed by the Internal Revenue Code of 1986. The Code limits
the amount of annual benefits which may be payable from the pension trust.
Retirement benefits in excess of these limitations are paid from Conoco's
general revenues under separate, nonfunded pension restoration plans.
Effective as of the date DuPont owns securities representing less than 80%
of the voting power and 80% or more of the economic value of all outstanding
shares of common stock, Conoco will establish its own retirement plan. For
information about the transfer of assets from DuPont's retirement plan to
Conoco's retirement plan, see "Arrangements Between Conoco and
DuPont -- Employee Matters Agreement."
The table below illustrates the straight-life annuity amounts payable under
the DuPont Pension and Retirement Plan and retirement restoration plans to
Conoco employees retiring at age 65 in 1998. These amounts reflect an offset
based on Social Security benefits. The current years of service credited for
retirement benefits for the Named Officers are as follows: 33 years for Archie
W. Dunham; 35 years for Gary W. Edwards; 31 years for Robert E. McKee III; 33
years for Robert W. Goldman; and 19 years for Rick A. Harrington.
PENSION PLAN TABLE
ESTIMATED ANNUAL RETIREMENT BENEFITS ON SERVICE OF:
-------------------------------------------------------
SALARY AND VARIABLE COMPENSATION 30 YEARS 35 YEARS 40 YEARS 45 YEARS
-------------------------------- ---------- ---------- ---------- ----------
$ 450,000.................................. $ 208,000 $ 244,000 $ 280,000 $ 316,000
900,000................................. 424,000 496,000 568,000 640,000
1,350,000................................. 640,000 748,000 856,000 964,000
1,800,000................................. 856,000 1,000,000 1,144,000 1,288,000
2,250,000................................. 1,072,000 1,252,000 1,432,000 1,612,000
2,700,000................................. 1,288,000 1,504,000 1,720,000 1,936,000
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SEVERANCE ARRANGEMENTS
On May 10, 1998, Conoco entered into a severance agreement with Archie W.
Dunham. The severance agreement has an initial term of three years, which term
will be extended, if necessary, upon any "change in control," as such term is
defined in the severance agreement, so that the severance agreement will expire
no earlier than 24 months after such event. The severance agreement provides
that if, during the term of the severance agreement, Mr. Dunham's employment is
terminated by Conoco other than for cause, or by reason of Mr. Dunham's death or
disability, or if Mr. Dunham terminates his employment for "good reason", as
defined in the severance agreement, Mr. Dunham will be entitled to:
- a lump sum severance payment equal to three times the sum of his base
salary and previous year's bonus;
- 36 months of benefits continuation;
- a pro rata portion of the annual bonus for which he is eligible in the
year of termination; and
- vesting of any unvested equity-based awards from Conoco.
Mr. Dunham will also be entitled to terminate his employment and receive these
benefits if, prior to the second anniversary of the initial public offering or
after DuPont reduces its ownership to less than 50%, he is not appointed as
Chairman of the Board of Conoco, unless his employment had previously terminated
by reason of death, disability or for cause. Mr. Dunham will also be entitled to
receive an additional payment sufficient to compensate him for the amount of any
excise tax imposed on payments made under the severance agreement or otherwise
pursuant to Section 4999 of the Code and for any taxes imposed on that
additional payment.
Conoco has established the Conoco Inc. Key Employee Severance Plan, which
covers key employees of Conoco, including Gary W. Edwards, Robert E. McKee III,
Robert W. Goldman and Rick A. Harrington. The plan provides that if the
employment of a participant in the plan is terminated
- within two years of a "change in control" of Conoco; or
- after a "potential change in control" of Conoco but prior to a change in
control, whether or not a change in control ever occurs, in either case
by Conoco other than for "cause" or by the participant for "good reason",
as such terms are defined in the plan, the participant will be entitled
to:
(a) a lump sum severance payment equal to two or three times the sum of
his base salary and previous year's bonus;
(b) 24 or 36 months of benefits continuation; and
(c) a pro rata portion of the annual bonus for which he is eligible in
the year of termination and, if necessary, a gross-up payment
sufficient to compensate the participant for the amount of any
excise tax imposed on payment made under the plan or otherwise
pursuant to Section 4999 of the Code and for any taxes imposed on
such an additional payment.
The plan has a three-year term commencing on May 10, 1998, which term will
be extended, if necessary, upon a change in control so that it expires no
earlier than 24 months after such an event. Amounts payable under the plan will
be in lieu of any payments or benefits that may be payable to the severed
employee under any other plan, policy or program of Conoco relating to
severance.
Conoco has also established both the Conoco Inc. Key Employee Temporary
Severance Plan and the Conoco Inc. Temporary Severance Plan, each of which
covers key Conoco employees, including the officers named in the summary
compensation table. Under the Key Employee Temporary Severance Plan, if the
employment of a participant is involuntarily terminated due to a reduction in
force or if a participant experiences specified adverse employment changes,
including relocation and reductions in pay or position, the individual will be
entitled to one year's base salary and variable bonus. The Key Employee
Temporary Severance Plan expires in 2001. Under the Temporary Severance Plan,
benefits are paid to a participant upon termination of employment in the same
circumstances as are described under the Key Employee Temporary Severance Plan,
but only if such termination occurs after a "change in control", as defined in
the Temporary Severance Plan. Benefits under the Temporary Severance Plan are
equal to two weeks' pay for each completed year of service, up to a maximum of
52 weeks' pay. Amounts payable under both the Key Employee Temporary Severance
Plan and the Temporary Severance Plan are reduced by amounts payable pursuant to
any other severance plan, policy or program of Conoco.
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PRINCIPAL STOCKHOLDERS OF CONOCO COMMON STOCK
The following table sets forth information regarding the beneficial
ownership as of June 30, 1999 of shares of Class A and Class B common stock by
DuPont and each other person or entity known to Conoco to be a beneficial owner
of five percent or more of Conoco's voting securities.
PRINCIPAL STOCKHOLDERS TABLE
CLASS A COMMON STOCK CLASS B COMMON STOCK
--------------------- ----------------------
NUMBER PERCENT NUMBER PERCENT
NAME AND ADDRESS OF SHARES OF CLASS OF SHARES OF CLASS
- ---------------- ---------- -------- ----------- --------
E. I. du Pont de Nemours and Company................... -- -- 436,543,573 100%(1)
1007 Market Street
Wilmington, Delaware 19898
Putnam Investments, Inc. and related entities(2)....... 13,654,179 7.1% -- --
One Post Office Square
Boston, Massachusetts 02109
Ark Asset Management Co., Inc.(3)...................... 11,278,200 5.9% -- --
125 Broad Street
New York, New York 10004
Citigroup Inc.(4)
153 East 53rd Street
New York, New York 100043............................ 10,259,914 5.4% -- --
Scudder Kemper Investments, Inc.(5).................... 9,693,000 5.1% -- --
345 Park Avenue
New York, New York 10154
- ---------------
(1) Shares of Class B common stock have five votes per share. Accordingly,
DuPont's ownership of Class B common stock represents approximately 92% of
the combined voting power of the Class A and Class B common stock.
(2) Based on a Schedule 13G filed with the SEC on February 4, 1999 by Putnam
Investments, Inc. ("PI"), a subsidiary of Marsh & McLennan Companies, Inc.
("MMC"), on behalf of itself, MMC, Putnam Investment Management, Inc.
("PIM") and The Putnam Advisory Company, Inc. ("PAC"). Consists of
12,483,788 shares beneficially owned by PIM and 1,170,391 shares
beneficially owned by PAC, both wholly owned registered investment advisors
of PI. Both subsidiaries have dispositive power over the shares as
investment managers, but each of the mutual funds' trustees have voting
power over shares held by each fund, and PAC has shared voting power over
the shares held by institutional clients. The address of MMC is 1166 Avenue
of the Americas, New York, New York 10036.
(3) Based on a Schedule 13G filed with the SEC on February 4, 1999.
(4) Based on a Schedule 13G filed with the SEC on February 12, 1999. Consists
entirely of shares beneficially owned by subsidiaries of Citigroup Inc.
which individually qualify to file a Schedule 13G but whose beneficial
ownership does not exceed 5%. Citigroup Inc. has shared voting and
dispositive power over all these shares, but disclaims beneficial ownership
of all such shares.
(5) Based on a Schedule 13G filed with the SEC on February 11, 1999. Scudder
Kemper Investments, Inc. has sole voting power with respect to 3,253,300
shares, shared voting power with respect to 6,013,300 shares, sole
dispositive power with respect to 9,488,800 shares and shared dispositive
power with respect to 204,200 shares.
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PRINCIPAL STOCKHOLDERS OF DUPONT COMMON STOCK
As of June 30, 1999, Wilmington Trust Corporation, Wilmington, Delaware,
beneficially owned an aggregate of 70,883,079 shares of DuPont's common stock,
or 6.2 percent of such shares outstanding at the time. The shares held by
Wilmington Trust are held of record for trust, estate, custody or agency
accounts and at June 30, 1999 included 10,050,727 shares held in the DuPont
Flexitrust, a trust created by DuPont to satisfy obligations of DuPont under
various employee benefit and compensation plans. Based on public filings, there
is no reported stockholder that owns five percent or more of either series of
DuPont preferred stock.
SHARES ELIGIBLE FOR FUTURE SALE
Shares of Conoco Class B common stock distributed to stockholders of DuPont
will be freely transferable, except for shares received by persons who may be
deemed to be "affiliates" of Conoco under the Securities Act. Affiliates
generally include individuals or entities that control, are controlled by, or
are under common control with, Conoco. The directors and principal executive
officers of Conoco, as well as significant stockholders of Conoco will be
affiliates. Affiliates of Conoco may sell their shares of Conoco Class B common
stock only under an effective registration statement under the Securities Act or
an exemption from the registration requirements of the Securities Act.
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DESCRIPTION OF CONOCO CAPITAL STOCK
GENERAL
The authorized capital stock of Conoco consists of:
- 3.0 billion shares of Class A common stock, par value $.01 per share;
- 1.6 billion shares of Class B common stock, par value $.01 per share; and
- 250 million shares of preferred stock, par value $.01 per share.
There is no preferred stock outstanding on the date of this document. As of May
14, 1999, there were approximately 190.8 million shares of Class A common stock
and 436.5 million shares of Class B common stock outstanding. DuPont owns all
the Class B common stock.
The following is a description of the material terms of Conoco's
certificate of incorporation affecting the relative rights of Conoco's capital
stock. The following description of the capital stock of Conoco is intended as a
summary only. For complete information, you should read Conoco's certificate of
incorporation and by-laws incorporated by reference as an exhibit to the
registration statement of which this document forms a part. To find out where
you can get copies of these documents, see "Where You Can Find More Information"
on page 154.
COMMON STOCK
VOTING RIGHTS
The holders of Class A common stock and Class B common stock generally have
identical rights, except that holders of Class A common stock have one vote per
share while holders of Class B common stock have five votes per share.
Generally, matters to be voted on by stockholders, including amendments to the
certificate of incorporation, must be approved by a majority vote of the holders
of Conoco common stock, voting together as a single class, subject to any voting
rights granted to holders of any preferred stock. However, a majority vote of
the affected class, voting separately, is also necessary for amendments of the
certificate of incorporation that would adversely affect the rights of the Class
A common stock or the Class B common stock. Holders of Class A common stock may
not vote on any change in the rights of the Class B common stock that would not
adversely affect their rights. A change relating to any one-for-one conversion
or exchange of the Class B common stock into or for Class A common stock shall
be deemed not to adversely affect the rights of the Class A common stock. Any
amendment to the certificate of incorporation to increase the authorized shares
of any class of capital stock of Conoco requires the approval only of a majority
of the votes entitled to be cast by the holders of Conoco common stock voting
together as a single class.
Holders of shares of Conoco's common stock may not cumulate their votes in
the election of directors. In cumulative voting, a stockholder has a number of
votes equal to the number to which his stockholdings would entitle him,
multiplied by the number of directors being elected. A stockholder can then vote
all of those votes in favor of one or more directors. This improves a minority
stockholder's ability to influence the election of specific directors.
DIVIDENDS
All holders of Conoco common stock will share equally on a per share basis
in any dividend declared by the board of directors, subject to any rights of any
outstanding preferred stock to receive dividends. If the board declares a stock
dividend, stockholders of each class of common stock must receive shares of the
class of stock they already hold. Additionally, all common stockholders must
receive the same number of dividend shares on a per share basis.
Conoco may not reclassify, subdivide or combine shares of either class of
common stock without simultaneously doing the same to shares of the other class.
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CONVERSION
Each share of Conoco Class B common stock is currently convertible while
held by DuPont or any of its subsidiaries excluding Conoco, at the holder's
option, into one share of Class A common stock. Following the exchange offer,
shares of Class B common stock, including any shares retained by DuPont or its
affiliates because the exchange offer is undersubscribed, will no longer be
convertible into shares of Class A common stock.
Prior to the exchange offer, any shares of Class B common stock transferred
to a person other than DuPont or any of its subsidiaries, excluding Conoco, will
automatically convert into shares of Class A common stock upon the transfer.
Shares of Class B common stock transferred to stockholders of DuPont in the
exchange offer will not be converted into shares of Class A common stock.
Following the exchange offer, shares of Class B common stock will remain Class B
common stock when transferred and will not convert into Class A common stock.
If the exchange offer, or other transaction intended to qualify as a
tax-free distribution under Section 355 of the Internal Revenue Code of 1986,
does not occur, all shares of Class B common stock will automatically convert
into Class A common stock when the number of shares of Class B common stock
owned by DuPont falls below 50 percent of the total number of outstanding shares
of Conoco common stock. This provision prevents DuPont from owning less than 50
percent of Conoco's economic value while still retaining control of more than 80
percent of Conoco's voting power. Any time Class B common stock is converted
into Class A common stock, the holder of the Class B common stock will receive
an equal number of shares of Class A common stock.
OTHER RIGHTS
If Conoco merges or consolidates with another corporation and shares of
common stock are converted into or exchangeable for shares of stock, other
securities or property, all holders of common stock, regardless of class, will
be entitled to receive the same kind and amount of payment for their shares.
This requirement can be waived by a majority vote of each class of holders of
common stock.
If Conoco is liquidated, dissolved or wound up, after full payment of any
required amounts to preferred stockholders, all holders of common stock,
regardless of class, will receive the same amount per share of any assets
distributed to common stock holders.
No shares of either class of common stock have any right to be redeemed or
to purchase additional shares of common stock or other securities of Conoco.
All the outstanding shares of Conoco common stock are validly issued, fully
paid and nonassessable.
PREFERRED STOCK
At the direction of its board of directors, Conoco may issue preferred
stock from time to time in one or more series. Conoco's board of directors may,
without any action by holders of common stock, adopt resolutions to issue
preferred stock, which may include voting, dividend, redemption, conversion,
exchange and liquidation rights as well as other rights and features of any
series of preferred stock. The Conoco board of directors, without stockholder
approval, may issue preferred stock with voting and other rights that could
adversely affect the voting power of the holders of the common stock and that
could hinder takeovers. Conoco has no current plans to issue any shares of
preferred stock. The ability of the board of directors to issue preferred stock
without stockholder approval may delay, defer or prevent a change in control of
Conoco or the removal of existing management.
For purposes of the rights plan described below, Conoco's board of
directors has designated 1.0 million shares of Series A junior participating
preferred stock, par value $.01 per share. For a description of the rights plan,
see "-- Anti-Takeover Effects of Certificate and By-law Provisions -- Rights
Plan."
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ANTI-TAKEOVER EFFECTS OF CERTIFICATE AND BY-LAW PROVISIONS
GENERAL
The provisions of the certificate of incorporation and by-laws summarized
below may delay, deter, or prevent a tender offer or takeover attempt that a
stockholder might consider to be in its best interest, including offers or
attempts that might result in a premium being paid over the market price for the
common stock.
BOARD OF DIRECTORS
The certificate of incorporation and by-laws provide that the Conoco board
of directors is divided into three classes of directors, with the classes to be
as equal in number as possible. At the time of the initial public offering, the
classes were elected for one, two and three-year terms expiring at the annual
meeting of stockholders to be held in 1999, 2000 and 2001. Each director is to
hold office until his or her successor is duly elected and qualified. Beginning
with the 1999 annual meeting of stockholders, directors will be elected for
three-year terms.
The certificate of incorporation and by-laws provide that Conoco's board of
directors will initially consist of nine members. The certificate of
incorporation and by-laws also provide that Conoco shall have not less than six
nor more than 15 directors. A majority of the entire board of directors
determines the exact number of directors. The certificate of incorporation also
provides that any vacancies on the board will be filled by the majority vote of
the remaining directors, even if less than a quorum, or by a sole remaining
director. However, if a vacancy on the board of directors is caused by the
stockholders removing a director, then only the stockholders can fill the
vacancy, and the directors have no power to do so.
The certificate of incorporation and the by-laws provide that stockholders
can remove directors, with or without cause; provided that a two-thirds majority
vote of stockholders is required to remove directors during the period:
- beginning on the first date that DuPont does not beneficially own shares
representing 50 percent or more of the votes entitled to be cast by
Conoco's voting stock; and
- ending on the first date that DuPont does not beneficially own shares
representing 30 percent or more of the votes entitled to be cast by
Conoco's voting stock.
We refer to the date on which DuPont falls below the 50 percent voting threshold
as the first trigger date and the date on which DuPont falls below the 30
percent voting threshold as the second trigger date.
Notwithstanding the previous paragraph, from and after the second trigger
date, directors of Conoco may only be removed for cause by a majority vote of
stockholders.
"Cause" will exist if the board of directors has determined that removal of
a director is in the best interests of Conoco. If the board of directors has not
made that determination, then "cause" will exist only if:
- the director has been convicted, or when a director is granted immunity
to testify when another has been convicted, of a felony by a court and
such conviction is no longer subject to direct appeal;
- a majority of the directors or a court finds the director guilty of
willful misconduct in performing his duties to Conoco in a matter of
substantial importance to Conoco; or
- a court finds the director mentally incompetent, and the mental
incompetency directly affects his ability as a director of Conoco.
Whenever holders of preferred stock may elect directors of Conoco because
Conoco has not paid dividends or because of other defaults under the terms of
the preferred stock, any of those directors can only be removed as provided
under the terms of the preferred stock.
The by-laws provide that:
- prior to the first trigger date, a majority of the directors on the audit
and compliance committee and the compensation committee of the board of
directors must be directors chosen by DuPont; and
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- on and after the first trigger date, but so long as DuPont owns shares
representing 10 percent or more of the votes entitled to be cast by
Conoco's voting stock, each committee of the board of directors must
include at least one director chosen by DuPont.
ADVANCE NOTICE PROCEDURES
In general, a stockholder wishing to nominate directors or bring up other
matters for consideration at an annual meeting of stockholders must notify
Conoco in writing between 90 and 120 days prior to the anniversary of the
previous year's annual meeting of stockholders. The notice must contain required
information about the person to be nominated or the matters to be brought before
the meeting and about the stockholder submitting the proposal. The certificate
of incorporation and the by-laws provide that, as long as DuPont controls more
than 10 percent or more of the votes entitled to be cast by Conoco's voting
stock, DuPont does not have to comply with these notice procedures for director
nominations and stockholder proposals.
SPECIAL MEETINGS
The by-laws provide that currently only specified officers of Conoco or any
officer at the request of the board of directors or committee of the board may
call special meetings; stockholders may not call special meetings. The
certificate of incorporation and the by-laws provide that, after the second
trigger date, only the chairman of the board or the board of directors may call
special meetings of stockholders and stockholders may not call special meetings.
In addition, the certificate of incorporation and the by-laws provide that
currently stockholders may act by written consent, but that after the second
trigger date stockholders may only act at an annual or special meeting of
stockholders and not by written consent. No business other than that stated in
the notice of such meeting may be transacted at any special meeting.
FAIR PRICE PROVISION
The certificate of incorporation includes a "fair price" provision that
prohibits business combinations with related persons unless the following
conditions are met:
The holders of each class of common stock receive the same payment as the
other class and either:
- the payment is the same as the highest amount the related person
paid in a tender offer completed within one year of the date of the
definitive agreement for the business combination and the related
person purchased at least 50% of each class of common stock in the
tender offer; or
- the payment is not less than what the related person paid or agreed
to pay for any shares of Conoco's voting stock in a transaction
completed within one year of the date of the definitive agreement
for the business combination in which the related person became or
during which the related person was a 15% holder of any class of
Conoco's voting stock.
Alternatively, the transaction will be permitted if it is approved by a
majority of the continuing directors or:
- at least 66 2/3% of the votes entitled to be cast by the voting
stock;
- at least 50.01% of the votes entitled to be cast by the voting stock
other than votes entitled to be cast by the related person;
- from and after the first trigger date, a majority of the votes
entitled to be cast by each class of common stock, excluding the
common stock owned by the related person, with each class voting
separately as a class.
After the second trigger date, the required approval percentages set forth
in the first and second bullets in this paragraph increase to 80% and 66 2/3%.
The same percentage approvals are also required to amend the fair price
provisions. The fair price provision will not be applicable at such time as all
shares of Class B common stock have been converted into or exchanged for Class A
common stock.
Under the fair price provision, a related person is any person, other than
DuPont and its affiliates and associates, that beneficially owns 15 percent or
more of any class of Conoco's voting stock or is an affiliate of
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Conoco and at any time within the preceding two-year period was the beneficial
owner of 15 percent or more of any class of Conoco's voting stock.
The types of business combinations covered by the fair price provision are
- any merger or consolidation of Conoco or any of its subsidiaries with a
related person or an affiliate of a related person;
- any sale, lease, exchange, transfer or other disposition of all or
substantially all of the assets of Conoco to a related person or an
affiliate of a related person;
- reclassifications, recapitalizations and other corporate actions
requiring a stockholder vote that would increase by more than one percent
the proportionate share of any class of voting stock beneficially owned
by the related person or an affiliate of a related person; and
- a dissolution of Conoco caused or proposed by a related person or an
affiliate of a related person.
A continuing director is a director who is unaffiliated with the related
person and who was a director before the related person became a related person,
and any successor of a continuing director who is unaffiliated with a related
person and is recommended or nominated to succeed a continuing director by a
majority of the continuing directors.
AMENDMENT
A two-thirds majority vote of Conoco's voting stock is required to amend
provisions of Conoco's certificate of incorporation and by-laws relating to:
- stockholder action by written consent;
- the right to call special meetings of stockholders;
- advance notice procedures with respect to stockholder meetings, including
DuPont's exemption from those procedures;
- board of directors classification and removal provisions; and
- amendments changing the voting requirements for amendments;
provided that after the first trigger date, if there are any shares of Class B
common stock outstanding, approval by a majority of the votes entitled to be
cast by the holders of each class of common stock, voting separately by class,
is also required. After the second trigger date, the required vote to amend
these provisions increases to 80%.
The board of directors may also amend the by-laws.
EFFECT OF EXCHANGE OFFER ON THE FOREGOING PROVISIONS
If the exchange offer is completed, the date of completion will be the
second trigger date. Accordingly, from that time
- directors may only be removed for cause, by majority vote of Conoco's
voting stock;
- stockholders will no longer be able to take action by written consent;
- the stockholder approval percentages for business combinations with
related parties described in the Fair Price Provision section above, will
increase to 80 percent and 66 2/3 percent; and
- amendments by stockholders of the provisions described under the section
"Amendment" above will require 80 percent of the votes of Conoco's voting
stock and a majority vote of each class.
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RIGHTS PLAN
The board of directors has adopted a share purchase rights plan. Pursuant
to the rights plan, one preferred share purchase right accompanies each
outstanding share of Conoco common stock. We refer to these securities as
"rights". Each holder of a right is entitled to purchase from Conoco one
one-thousandth of a share of the junior participating preferred stock at a price
of $88, subject to adjustment. The description and terms of the rights are set
forth in a rights agreement between Conoco and First Chicago Trust Company of
New York. The following description is only a summary. For complete information
you should read the rights agreement, which has been incorporated by reference
as an exhibit to the registration statement of which this document is a part. To
find out where you can get a copy of the rights agreement, see "Where You Can
Find More Information" on page 154.
The rights are attached to all certificates representing the currently
outstanding common stock and will attach to all common stock certificates Conoco
issues prior to the "rights distribution date." That date would occur, except in
some cases, on the earlier of
(1) 10 business days following a public announcement that a person or group
of affiliated or associated persons (an "acquiring person") has acquired
beneficial ownership of
- 15 percent or more of the outstanding Class A common stock;
- 15 percent or more of the outstanding Class B common stock; or
- any combination of Class A common stock and Class B common stock
representing 15 percent or more of the votes of all shares entitled to
vote in the election of directors; or
(2) 10 business days, or such later date as the board of directors may
determine, following the start of a tender offer or exchange offer that would
result, if closed, in a person becoming an acquiring person,
Until the rights distribution date or earlier redemption or expiration of
the rights, the rights will only be transferred with the common stock. Until the
rights distribution date or earlier redemption or expiration of the rights, all
shares of common stock which are issued will have associated rights. As soon as
practicable following the rights distribution date, Conoco will mail separate
certificates evidencing the rights to holders of common stock, as of the close
of business on that date. From and after the rights distribution date, only
separate rights certificates will represent the rights.
The rights will not be exercisable until the rights distribution date. The
rights will expire on August 31, 2008, unless this date is extended or unless
Conoco redeems the rights earlier as described below.
If any person or group becomes an acquiring person, the rights held by the
acquiring person will become void. At that time each other holder of a right,
will from that time have the right to receive upon exercise that number of
shares of the class of common stock attributable to the right, having a
then-current market price of two times the exercise price of the right. If
Conoco is acquired in a merger or other business combination transaction or 50
percent or more of its consolidated assets or earning power are sold after a
person or a group becomes an acquiring person, each holder of a right will from
that time on have the right to receive, upon exercising the right at the
then-current exercise price, a number of shares of common stock of the acquiring
company which has a then-current market price of two times the exercise price of
the right.
At any time until the tenth business day following the public announcement
that a person or group has become an acquiring person, the board of directors
may redeem all of the rights at a price of $.01 per right. If the board timely
orders the redemption of the rights, the rights will terminate on the
effectiveness of that action.
The board of directors may amend the terms of the rights without the
consent of the holders of the rights prior to the rights distribution date.
After the rights distribution date, the board may amend the rights agreement to
cure any ambiguity, to make changes that do not adversely affect the interests
of holders of rights, or to shorten or lengthen any time period under the rights
agreement; provided, however, that the board may not amend the rights to
lengthen a time period relating to when the rights may be redeemed if the rights
are not redeemable at that time. All amendments require the consent of DuPont if
DuPont holds 30 percent of voting power of the outstanding shares of common
stock. No amendments to the definition of acquiring person can be
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made at any time without DuPont's consent, if DuPont holds 10 percent of voting
power of the outstanding shares of common stock.
Until a right is exercised, the holder of the right will have no rights as
a stockholder of Conoco, including, without limitation, the right to vote or to
receive dividends.
The board may adjust the number of outstanding rights and the number of
one-thousandths of a junior preferred share issuable upon exercise of each right
in the event of a stock split of or a common stock dividend on the common stock
or subdivisions, consolidations or combinations of the common stock occurring
prior to the rights distribution date.
The board may adjust the purchase price payable, and the number of junior
participating preferred stock or other securities or property issuable, upon
exercise of the rights from time to time to prevent dilution in the event of
some transactions affecting the junior participating preferred stock.
With some exceptions, the rights agreement does not require Conoco to
adjust the purchase price until cumulative adjustments amount to at least one
percent of the purchase price. No fractional junior participating preferred
stock will be issued, other than fractions which are integral multiples of one
one-thousandth of a junior preferred share, which may, at Conoco's option, be
evidenced by depositary receipts. Instead of issuing fractional shares, an
adjustment in cash will be made based on the market price of the junior
participating preferred stock on the last trading day prior to the date of
exercise.
Junior participating preferred stock purchasable upon exercise of the
rights will not be redeemable. Each junior preferred share will be entitled to a
minimum preferential quarterly dividend payment of $.01 per share but will be
entitled to an aggregate dividend of 1,000 times the dividend declared per share
of common stock. In the event of liquidation, the holders of the junior
participating preferred stock will be entitled to a minimum preferential
liquidation payment of $1,000 per share but will be entitled to an aggregate
payment of 1,000 times the payment made per share of common stock. Each junior
preferred share will have 1,000 votes voting together with the common stock.
Finally, in the event of any merger, consolidation or other transaction in which
shares of common stock are exchanged, each junior preferred share will be
entitled to receive 1,000 times the amount received per share of the common
stock. These rights are protected by customary anti-dilution provisions.
The rights have anti-takeover effects. The rights will cause substantial
dilution to any person or group that attempts to acquire Conoco without the
approval of the board of directors. The rights should not interfere with any
merger or other business combination approved by the board of directors prior to
the time that a person or group has acquired beneficial ownership of 15 percent
or more of the Class A common stock, Class B common stock or voting power of the
outstanding shares of common stock since the rights may be redeemed by Conoco
until such time.
DuPont is excluded from the definition of acquiring person and therefore
its ownership cannot trigger the distribution of rights under the rights plan.
CONTRACTUAL RELATIONS AMONG CONOCO, DUPONT AND RELATED ENTITIES
The certificate of incorporation provides that, if specified disclosure
conditions are satisfied and if fair as to Conoco as of the time it is
authorized, approved or ratified by the board of directors, by a committee
thereof or by the stockholders, no contract, agreement, arrangement or
transaction between:
- Conoco and DuPont,
- Conoco and one or more of the directors or officers of Conoco, DuPont or
a related entity, as defined below, or
- Conoco and any related entity
will be void or voidable solely because DuPont, any related entity or any one or
more of the officers or directors of Conoco, DuPont or any related entity are
parties to the contract, agreement, arrangement or transaction, or solely
because any such directors or officers are present at or participate in the
meeting of the board of directors
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or committee thereof that authorizes the contract, agreement, arrangement or
transaction or solely because his or their votes are counted for such purpose,
and DuPont, any related entity and such directors and officers:
- will have fully satisfied and fulfilled their fiduciary duties to Conoco
and its stockholders with respect to the contract, agreement, arrangement
or transaction;
- will not be liable to Conoco or its stockholders for any breach of
fiduciary duty by reason of the entering into, performance or completion
of any such contract, agreement, arrangement or transaction;
- will be deemed to have acted in good faith and in a manner such persons
reasonably believe to be in and not opposed to the best interests of
Conoco; and
- will be deemed not to have breached their duties of loyalty to Conoco and
its stockholders and not to have derived an improper personal benefit
therefrom.
A "related entity" is a corporation, partnership, association or other
organization in which one or more of Conoco's directors have a financial
interest.
DELAWARE BUSINESS COMBINATION STATUTE
Conoco is subject to Section 203 of the Delaware General Corporation Law,
which regulates corporate acquisitions. Section 203 prevents an "interested
stockholder," which is defined generally as a person owning 15% or more of a
corporation's voting stock or any affiliate or associate of that person, from
engaging in a broad range of "business combinations," with the corporation for
three years after becoming an interested stockholder unless:
- the board of directors of the corporation had previously approved either
the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder;
- upon completion of the transaction which resulted in the stockholder
becoming an interested stockholder, that person owned at least 85 percent
of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding shares owned by persons who are
directors and also officers and shares owned in employee stock plans in
which participants do not have the right to determine whether shares held
subject to the plan will be tendered; or
- following the transaction in which that person became an interested
stockholder, the business combination is approved by the board of
directors of the corporation and holders of at least 66 2/3 percent of
the outstanding voting stock not owned by the interested stockholder.
Under Section 203, the restrictions described above also do not apply to
specific business combinations proposed by an interested stockholder following
the announcement or notification of designated extraordinary transactions
involving the corporation and a person who had not been an interested
stockholder during the previous three years or who became an interested
stockholder with the approval of a majority of the corporation's directors, if
such extraordinary transaction is approved or not opposed by a majority of the
directors who were directors prior to any person becoming an interested
stockholder during the previous three years or were recommended for election or
elected to succeed such directors by a majority of such directors.
DuPont and its affiliates are excluded from the definition of interested
stockholder under the terms of Section 203. Section 203 makes it more difficult
for a person who would be an interested stockholder to effect various business
combinations with a corporation for a three-year period.
LIMITATIONS ON DIRECTORS' LIABILITY
The certificate of incorporation provides that no director of Conoco shall
be liable to Conoco or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability
- for any breach of the director's duty of loyalty to Conoco or its
stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
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- in respect of unlawful dividend payments or stock redemptions or
repurchases as provided in Section 174 of the Delaware General
Corporation Law; or
- for any transaction from which the director derived an improper personal
benefit.
These provisions eliminate the rights of Conoco and its stockholders suing
through stockholders' derivative suits on behalf of Conoco to recover monetary
damages against a director for breach of fiduciary duty as a director, including
breaches resulting from grossly negligent behavior, except in the situations
described above. Conoco's by-laws provide for indemnification of directors and
officers to the maximum extent permitted by Delaware law. Conoco has also
entered into indemnification agreements with each of its directors providing for
indemnification of such directors to the fullest extent permitted by applicable
law.
LISTING
The Conoco Class B common stock has been approved for listing on the NYSE
under the trading symbol "COC.B." The Class A common stock is listed on the NYSE
under the symbol "COC." When the exchange offer is completed, the symbol for the
Conoco Class A Common Stock will be changed to "COC.A."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for Conoco common stock is First Chicago
Trust Company of New York.
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COMPARISON OF RIGHTS OF HOLDERS OF DUPONT COMMON STOCK
AND CONOCO COMMON STOCK
Upon completion of the exchange offer, DuPont stockholders who exchange
their shares of DuPont common stock for Conoco Class B common stock will become
stockholders of Conoco. These holders' rights will continue to be governed by
Delaware law and will be governed by the Conoco certificate of incorporation and
by-laws. Because each of DuPont and Conoco is organized under the laws of
Delaware, differences in the rights of a Conoco stockholder from those of a
DuPont stockholder arise principally from provisions of the certificates of
incorporation and by-laws of each of DuPont and Conoco.
The following is a summary of the material differences between the
companies' certificates and by-laws. The summary is not a complete statement of
the rights of stockholders of the two companies or a complete description of the
specific provisions referred to below. The summary is qualified in its entirety
by reference to the governing corporate instruments of DuPont and Conoco which
you should read. Copies of the governing corporate instruments of DuPont and
Conoco have been filed with the SEC. To find out where you can get copies of
these documents, see "Where You Can Find More Information" on page 154.
CONOCO DUPONT
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AUTHORIZED CAPITAL STRUCTURE AND LIQUIDATION RIGHTS
(AS OF JUNE 30, 1999)
LIQUIDATION
CLASS OF SECURITY AUTHORIZED OUTSTANDING PREFERENCE
----------------- ---------- ----------- -----------
Class A common 3 billion 190.6 million None
Class B common 1.6 billion 436.5 million None
Preferred, $.01 par value 250 million None Not applicable
LIQUIDATION
CLASS OF SECURITY AUTHORIZED OUTSTANDING PREFERENCE
----------------- ---------- ----------- -----------
Common stock, 1.8 billion 1.1 billion None
$0.30 par value
Preferred stock 23 million
$4.50 DuPont Preferred 1.7 million $100 per share if
involuntary
$115 per share if
voluntary, plus
accrued dividends in
either case
$3.50 DuPont Preferred 0.7 million $100 per share if
involuntary
$107 per share if
voluntary, plus
accrued dividends in
either case
DIVIDEND POLICY
Conoco has no legal or contractual obligation DuPont has no legal or contractual obligation
to pay dividends. Conoco currently intends to to pay dividends. DuPont currently intends to
pay a quarterly dividend of $.19 per share on pay a quarterly dividend of $.35 per share on
its common stock, subject to financial results its common stock, subject to financial results
and declaration by its board of directors. and declaration by its board of directors.
There can be no assurance that these dividends There can be no assurance that these dividends
or any future dividends will be declared and or any future dividends will be declared and
paid. paid.
VOTING RIGHTS
Class A common stock -- 1 vote per share Common stock -- 1 vote per share
Class B common stock -- 5 votes per share
- Plurality vote for directors Plurality vote, unless required by law
- Majority vote for other matters.
- Both classes vote together unless required
by law or the certificate of
incorporation.
For more details, see, "Description of Conoco
Capital Stock -- Common Stock -- Voting
Rights."
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CONOCO DUPONT
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- ------------------------------------------------------
ANTI-TAKEOVER PROVISIONS
Shareholder Action by Written Consent
Shareholder action by written consent not Stockholder action by written consent
permitted after the second trigger date. permitted.
Board of Directors
Number of directors: Between six and 15 Number of Directors: More than 10
Expiration of director terms: one-third Expiration of director terms: all expire each
expires each year year
Votes required for removal: Vote required for removal: 50%
- 50% (currently)
- 66 2/3% (between first and second
trigger dates)
- 50% and only for cause (after second
trigger date)
Advance Notice Procedures
In general, a stockholder wishing to nominate No provisions regarding advance notice of
a director or raise another proposal must director nominations or stockholder proposals.
notify Conoco in writing between 90 and 120
days prior to the anniversary of the previous
year's annual meeting of stockholders. This
notice must contain required information
concerning the person to be nominated or the
matters to be brought before the meeting and
concerning the stockholder submitting the
proposal.
Special Meetings
Special meetings of stockholders generally may Special meetings of the stockholders of DuPont
be called only by specified officers of Conoco shall be called by the board of directors or
or by any officer at the request of the board by the secretary of DuPont at the request of
of directors or one of the board's committees. at least 25 percent of the outstanding stock
Special meetings cannot be called by of DuPont entitled to vote.
stockholders of Conoco and the certificate of
incorporation and the by-laws expressly deny
stockholders the right to call special
meetings after the exchange offer.
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CONOCO DUPONT
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ANTI-TAKEOVER PROVISIONS -- (CONTINUED)
Fair Price Provision
Conoco's certificate of incorporation includes No fair price provision.
a fair price provision that prohibits business
combinations with a person owning more than 15
percent of Conoco's common stock, unless the
transaction meets specified fairness criteria
or is approved by specified super-majority
voting criteria. For more details, see
"Description of Conoco Capital Stock -- Anti-
Takeover Effects of Certificate and By-Law
Provisions -- Fair Price Provision."
Amendment
Amendments to provisions of Conoco's No requirement for supermajority votes, except
certificate of incorporation and amendments to as provided by law.
its by-laws by stockholders relating to the
following matters require two-thirds majority
of all common stock votes, provided that after
the first trigger date, if there are any
shares of Class B common stock outstanding,
approval by a majority of the votes entitled
to be cast by the holders of each class of
common stock, voting separately by class, is
also required:
- - stockholder action by written consent;
- - the right to call special meetings of
stockholders;
- - advance notice procedures with respect to
stockholder meetings, including DuPont's
exemption from those procedures;
- - board classification and removal
provisions; and
- - amendments changing the voting requirements
for amendments.
After the second trigger date, the required
vote to amend those provisions increases to
80%.
Rights Plan
Conoco's board of directors has adopted a DuPont has not adopted a rights plan.
rights plan providing for the issuance of
Rights, which would cause substantial dilution
to a person or group that attempts to acquire
Conoco on terms not approved in advance by
Conoco's board of directors. For more details,
see "Description of Conoco Capital Stock --
Anti-Takeover Effects of Certificate and
By-Law Provisions -- Rights Plan."
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CONOCO DUPONT
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- ------------------------------------------------------
LISTING
The Conoco Class B common stock has been DuPont common stock is currently listed and
approved for listing on the NYSE under the traded on the NYSE under the symbol "DD" and on
symbol "COC.B." the Boston, Chicago, Cincinnati, Pacific,
The Class A common stock is listed on the NYSE Philadelphia, London, Brussels, Paris,
under the symbol "COC." At the closing of the Dusseldorf, Frankfurt and Amsterdam exchanges,
exchange offer, the symbol for the Class A as well as the Swiss Electronic Exchange.
common stock will be changed to "COC.A."
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ARRANGEMENTS BETWEEN CONOCO AND DUPONT
In 1998 and prior years, there were significant transactions between Conoco
and DuPont involving services such as natural gas and gas liquids supply, cash
management, other financial services, purchasing, legal, computer and corporate
activities. See note 3 to the notes to consolidated financial statements of
Conoco.
To govern Conoco's and DuPont's on-going relationship and to facilitate
separating the two companies, Conoco and DuPont, or their respective
subsidiaries, entered into various agreements, including those described below.
These agreements were negotiated in the context of a parent-subsidiary
relationship and therefore are not the result of arm's-length negotiations
between independent parties. Therefore, these agreements may not contain terms
as favorable to Conoco as Conoco could have obtained from unaffiliated third
parties.
Conoco filed the agreements summarized below as exhibits to the
registration statement filed with its initial public offering. Reading the
following summaries is not a substitute for reading the documents in their
entirety. To find out where you can get copies of these documents, see "Where
You Can Find More Information" on page 153.
RESTRUCTURING, TRANSFER AND SEPARATION AGREEMENT
In connection with the Conoco initial public offering, DuPont and Conoco
entered into a Restructuring, Transfer and Separation Agreement, which provided
for the principal transactions required to separate the two companies and the
Conoco initial public offering. These transactions included transferring oil and
gas assets to Conoco, dividing liabilities between DuPont and Conoco, and
entering into other agreements governing the on-going relationship between
DuPont and Conoco.
To effect the separation, DuPont and its subsidiaries transferred assets
related to the oil and gas business to Conoco or one of its subsidiaries, and
Conoco transferred and its subsidiaries transferred assets unrelated to the oil
and gas business to DuPont or one of its subsidiaries. As a result, Conoco and
DuPont assumed the liabilities of the businesses they received in the transfer.
DuPont and Conoco and their subsidiaries made all of the transfers on an "as is,
where is" basis, and without any representations or warranties. As a result,
Conoco and DuPont, each bear the economic and legal risks that these transfers
did not convey good and marketable title to such assets. The parties also agreed
that following the Conoco initial public offering, DuPont and its subsidiaries,
on the one hand, and Conoco and its subsidiaries, on the other hand, would
transfer to the other, in some instances without additional consideration, all
assets which, subsequent to October 27, 1998, the effective date of the
separation of Conoco from DuPont, the parties determined more properly belong in
the other's business.
The separation agreement generally provided that DuPont and Conoco assumed
all of the liabilities, actual or contingent, associated with the following:
Conoco
- - Conoco's historical and current operations, including the oil and gas
business;
- - Conoco's former chemical business, except those sold to Cain Chemical;
- - Conoco's interest in the Pocahantas Gas partnership; and
- - all other assets transferred to Conoco in connection with the separation of
Conoco from DuPont.
DuPont
- - all other business of DuPont and its subsidiaries;
- - Conoco's former coal business; and
- - Conoco's former chemical business sold to Cain Chemical.
Each party also agreed to assume liabilities associated with activities and
operations of the other party to the extent such activities and operations were
performed for or on behalf of its current or historical business. The parties
also agreed to bear responsibility in proportion to the relative amounts of
waste deposited by each
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party on any contaminated off-site location. The separation agreement contained
indemnification and contribution provisions in connection with:
- the assumption or retention of liabilities by Conoco and DuPont;
- the conduct of the parties' respective businesses after the separation of
Conoco from DuPont;
- misstatements or omissions in the Conoco initial public offering
registration statement relating to information provided by the other
party; and
- the use of the other's trade marks, tradenames, logos or other
identifiers.
The separation agreement contains provisions regarding Conoco's corporate
governance, most of which depend on the level of DuPont's ownership interest in
Conoco. Upon completion of the transaction, Conoco will no longer be subject to
these provisions. The separation agreement provides for the following corporate
governance requirements in the event DuPont owns the following percentages of
the voting power of all of Conoco's capital stock:
Percentage Provision
At least 10% Each committee of the Conoco board of directors must
include a director chosen by DuPont.
At least 20% Conoco must deliver to DuPont specified financial
information.
At least 30% Conoco cannot recommend or take any action without
DuPont's consent that would limit DuPont's rights or
deny any benefit to DuPont or its subsidiaries in a
manner not applicable to Conoco's other stockholders
At least 50% - DuPont can nominate a majority of Conoco's board of
directors.
- Directors chosen by DuPont must constitute a
majority of the Conoco board's Audit and
Compensation Committee.
- Conoco may not change specified accounting
practices without DuPont's consent.
Between 10% and 50% DuPont may designate for nomination a number of
Conoco directors proportionate to its voting power.
The separation agreement provides that Conoco will, subject to specified
exceptions, use the proceeds from incurring debt or issuing stock to repay debt
owed to DuPont, including the $7.5 billion note described below under the
caption "-- Intercompany Notes." Net proceeds from the Conoco initial public
offering of $4.2 billion were used to repay a portion of debt owed to DuPont in
October 1998. The separation agreement provides in general that DuPont is
responsible for all nonrecurring costs, including fees and taxes, directly
relating to the Conoco initial public offering, the separation of Conoco from
DuPont and subsequent transactions resulting in a reduction of DuPont's
ownership of outstanding voting stock, including the transaction, and will
reimburse Conoco for all such costs that it incurs. Conoco and DuPont agreed in
the separation agreement that Conoco will take all actions reasonably requested
by DuPont to facilitate the exchange offer and that DuPont will reimburse Conoco
for its expenses associated with the exchange offer. In addition, Conoco and
DuPont have agreed to indemnify and provide contribution to each other and take
other relevant action, in a manner similar to that set forth in the registration
rights agreement.
The separation agreement requires that Conoco use its best efforts to
terminate, or have Conoco or a subsidiary of Conoco substituted for DuPont
under, all existing guarantees by DuPont of obligations relating to Conoco's
business. Beginning on the earlier of October 27, 2000 or the first trigger
date, which will occur upon completion of the exchange offer, Conoco will pay
DuPont a fee of 0.20 percent per year on the total amount of any outstanding
guarantees and letters of credit. For the purpose of the fee calculation, Conoco
and DuPont agreed that the amount of such guarantees was $1,610 million as of
the effective date of the separation of Conoco from DuPont. The amount of
guarantees for purposes of the fee calculation may be increased or
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decreased in good faith judgment of the chief financial officer or treasurer of
DuPont to reflect changes in the financial exposure of DuPont but may only be
adjusted at such time as the amount of any such adjustment exceeds $50 million.
INTERCOMPANY NOTES
On July 20, 1998, Conoco issued a promissory note to DuPont in the
aggregate principal amount of $7.5 billion. The net proceeds from Conoco's
initial public offering were approximately $4,228 million. Conoco used the net
proceeds of the initial public offering to repay a portion of the amounts
outstanding under the note and other intercompany notes with DuPont. At March
31, 1999, the aggregate principal amount owed by Conoco to DuPont pursuant to
these notes was $4,596 million. On October 27, 1998, Conoco and DuPont entered
into a revolving credit agreement under which DuPont provided Conoco with a
revolving credit facility in the principal amount of up to $500 million. The
outstanding balance under this credit facility as of March 31, 1999 was $300
million.
On April 20, 1999, Conoco repaid $3,970 million of principal and accrued
interest on the notes with the proceeds from its $4 billion senior debt
offering, and in May 1999, repaid the remaining principal and accrued interest
on the notes and the revolving credit facility with the proceeds from its
commercial paper program.
For a description of the senior debt offering and commercial paper program
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations of Conoco -- Liquidity and Capital Resources -- Financing
Activities."
TAX SHARING AGREEMENT
Conoco and a number of its subsidiaries have historically been included in
DuPont's consolidated group (the "consolidated group") for United States federal
income tax purposes as well as in consolidated, combined or unitary groups which
include DuPont and/or a number of its subsidiaries (a "combined group") for
state, local and foreign income tax purposes. Conoco and DuPont entered into a
tax sharing agreement in connection with the Conoco initial public offering.
Under the tax sharing agreement, Conoco and DuPont generally will make payments
between them such that, with respect to tax returns for any taxable period in
which Conoco or any of its subsidiaries is included in the consolidated group or
any combined group, the amount of taxes to be paid by Conoco will be determined,
subject to adjustments, as if Conoco and each of its subsidiaries included in
the consolidated group or combined group filed their own consolidated, combined
or unitary tax return. Conoco and DuPont will jointly prepare pro forma tax
returns with respect to any tax return filed with respect to the consolidated
group or any combined group in order to determine the amount of tax sharing
payments under the tax sharing agreement. Conoco generally will be responsible
for any taxes related to tax returns that include only Conoco and its
subsidiaries.
The tax sharing agreement allocates responsibility between DuPont and
Conoco for preparing and filing tax returns and controlling and contesting
audits and tax proceedings. DuPont will be primarily responsible for preparing
and filing any tax return with respect to the consolidated group or any combined
group. Conoco will be responsible for preparing the portion of any such tax
return that relates exclusively to Conoco or any of its subsidiaries; however,
Conoco will be required to submit any such portions to DuPont for DuPont's
review and approval, which may not be unreasonably withheld. Conoco generally
will be responsible for preparing and filing any tax returns that include only
Conoco and its subsidiaries. DuPont will be primarily responsible for
controlling and contesting any audit or other tax proceeding relating to the
consolidated group or any combined group and, Conoco will have the right to
control and contest any audit or tax proceeding that relates directly to any tax
item included on the portion of any tax return which Conoco is responsible for
preparing. Conoco may not, however, enter into any settlement or agreement or
any decision in connection with any audit or tax proceeding without DuPont's
approval, which may not be unreasonably withheld. Disputes arising between the
parties relating to matters covered by the tax sharing agreement are subject to
resolution through specific dispute resolution provisions.
Several matters under the tax sharing agreement are currently in dispute
between Conoco and DuPont. DuPont's obligations to Conoco arising out of the
most significant of these matters could range from zero to up
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to approximately $160 million, depending on the outcome of the dispute. The
effect of the dispute is not currently reflected in DuPont's or Conoco's
financial statements and, regardless of the outcome of this dispute, neither
DuPont nor Conoco believes the result will be material to its financial
position.
Conoco was included in the consolidated group for periods in which DuPont
beneficially owned at least 80 percent of the total voting power and value of
the outstanding stock of Conoco. Conoco ceased to be included in the
consolidated group following the Conoco initial public offering. Each member of
a consolidated group for United States federal income tax purposes is jointly
and severally liable for the United States federal income tax liability of each
other member of the consolidated group. Accordingly, although the tax sharing
agreement allocates tax liabilities between Conoco and DuPont, for any period in
which Conoco was included in the consolidated group, Conoco could be liable in
the event that any United States federal income tax liability was incurred, but
not discharged, by any other member of the consolidated group.
Each of Conoco and DuPont have agreed not to take, or fail to take, any
action inconsistent with any information, covenant or representation provided to
the IRS in connection with obtaining the ruling and further agreed to be liable
for any taxes arising from a breach of such agreement. In addition, Conoco has
agreed that, during the three year period following the exchange offer and any
subsequent spin-off, it will not engage in transactions that could adversely
affect the tax treatment of the exchange offer and any subsequent spin-off,
unless a supplemental ruling from the IRS or a tax opinion acceptable to DuPont
of nationally recognized tax counsel is obtained to the effect that the proposed
transaction would not adversely affect the tax treatment of the exchange offer
and any subsequent spin-off. Moreover, Conoco will be liable to DuPont for any
corporate level taxes incurred by DuPont as a result of the exchange offer and
any subsequent spin-off to the extent such taxes are attributable to specified
actions or failures to act by Conoco, or to specified transactions involving
Conoco following the exchange offer and any subsequent spin-off, including the
acquisition of Conoco stock by any person or persons.
EMPLOYEE MATTERS AGREEMENT
In connection with the Conoco initial public offering, DuPont and Conoco
entered into an employee matters agreement. This agreement covers claims arising
out of or relating to any employee benefit or compensation plan, agreement,
arrangement or program, as well as collective bargaining agreements, accrued
wages and workers' compensation, holiday, vacation and disability benefits.
Under this agreement, subject to specified exceptions, Conoco assumed sole
responsibility for all liabilities arising relating to current and former
employees of businesses transferred to Conoco under the separation agreement. We
refer to these employees in this section as "transferred business employees."
DuPont agreed to assume sole responsibility for liabilities relating to all of
its other current and former employees. Individuals employed by both a business
transferred to Conoco as well as another business retained by DuPont are
considered transferred business employees if their primary employment is with a
transferred business.
Transferred business employees who participated in the DuPont pension plan
continue to participate in the DuPont pension plan. Within 90 days of, and
effective on, the date DuPont owns less than 80 percent of the voting power and
80 percent of the economic value of all outstanding shares of Conoco common
stock, Conoco will establish its own retirement plan. This will occur upon
completion of the transaction. Within six months of Conoco's establishing its
own plan, so long as specified conditions are met, the trustee of the DuPont
Pension Plan will transfer to the trustee of Conoco's retirement plan an amount
equal to approximately 90 percent of $820 million, plus or minus any investment
gains and losses and benefits payments made between the date of the separation
and the date of the transfer; within 90 days of this date, the trustee of the
DuPont Pension Plan will transfer the remaining 10 percent, plus interest.
Most Conoco employees had the option, subject to specific country tax and
legal requirements, effective as of the closing of the Conoco initial public
offering, to cancel all or part of their DuPont options or DuPont stock
appreciation rights and receive Conoco stock options and Conoco stock
appreciation rights. Retired employees of Conoco did not participate in this
program. All DuPont options and DuPont stock appreciation rights held by retired
employees, together with all such options and stock appreciation rights held by
employees who did not elect to participate in this program, will continue to be
obligations solely of DuPont.
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Conoco assumed or retained pension plans and associated assets and
liabilities maintained or sponsored by DuPont for the benefit of foreign
employees in which only transferred business employees participate.
In consideration of the liabilities assumed by DuPont under the employee
transfer guidelines as a result of transfers of employees between Conoco and
DuPont, Conoco incurred an approximate $10 million liability to DuPont. This
amount was reduced by a $3 million obligation of DuPont to Conoco resulting from
an agreed calculation to allocate liabilities associated with the option program
based on actual levels of participation. As a result, at the effective date,
Conoco owed DuPont approximately $7 million, evidenced by a promissory note.
Conoco repaid this note in full in May 1999 with proceeds from its commercial
paper program. Transfers of 100 or more employees between Conoco and DuPont
occurring prior to the transaction will result in a supplemental cash payment to
Conoco or DuPont as applicable.
TRANSITIONAL SERVICES AGREEMENTS
In connection with the Conoco initial public offering, DuPont and Conoco
entered into several transitional services agreements where they agreed to
continue providing various services to each other. These services include
material procurement, financial and administrative services, consulting and
research services, and employee benefits administration. The parties agreed to
provide each service covered for a specified time period, ranging from three to
24 months. However, either party may terminate any or all services that they
receive under the transitional services agreements at any time upon 45 days
prior written notice. The parties receiving services are obligated to take all
steps necessary to enable them to perform the relevant services on a stand alone
basis. The parties are obligated to pay fees established in the transitional
services agreements based upon the type and amount of services rendered.
INFORMATION SYSTEMS AND TELECOMMUNICATION CARRIER TRANSITIONAL SERVICES
AGREEMENTS AND FACILITIES LEASE AGREEMENTS
DuPont and Conoco entered into a series of United States and foreign
service agreements under which DuPont and Conoco provide information system
services to each other, and DuPont provides telecommunication carrier services
to Conoco. DuPont and Conoco also entered into a facilities lease agreement
whereby DuPont leases data center and office facilities at Conoco's Houston,
Texas and Ponca City, Oklahoma sites. The terms of these agreements range from
two to nine years. Under the agreements, DuPont and third party contractors
provide services to Conoco at DuPont's cost, or, in the case of third party
services, at the prices and in accordance with the terms and conditions provided
for in the third party agreements, and subject to an administrative fee.
NATURAL GAS SUPPLY AGREEMENT
DuPont consumes approximately 350 million cubic feet per day of natural gas
at its various facilities in the United States. Prior to the Conoco initial
public offering, DuPont and Conoco entered into an agreement providing for
Conoco to supply natural gas to DuPont for at least one year at cost plus a
management fee reflecting market costs for similar supply services.
FEEDSTOCK FOR DUPONT'S SABINE RIVER WORKS PLANT
Conoco owns and operates the Mont Belvieu Storage Facility, which currently
supplies the Ethylene Business Unit at DuPont's Sabine River Works Plant with
its full ethane feedstock requirements. Conoco also provides storage and
throughput services for both ethane and ethylene and operates DuPont-owned
pipelines for these products. Conoco has agreed to provide ethane and ethylene
storage and throughput services for the next 30 years, and to operate
DuPont-owned pipelines for the next 20 years. Conoco will supply DuPont with its
partial requirements of ethane for at least two years, generally at market
prices.
MOTOR CARRIER AGREEMENT
Conoco and Sentinel Transportation Company, a wholly owned subsidiary of
DuPont, have entered into a motor carrier agreement governing transportation of
commodities within the United States and Canada. The
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motor carrier agreement expires in 1999. However, either party may terminate
this arrangement at any time upon 90 days' prior written notice.
REGISTRATION RIGHTS AGREEMENT
In connection with the Conoco initial public offering, DuPont and Conoco
entered into a registration rights agreement, under which Conoco agreed to
register on a shelf registration statement the sale of Conoco common stock owned
by DuPont. Conoco agreed to keep the shelf registration effective for a period
of two years following the date that the shelf registration becomes effective.
In addition, Conoco provided DuPont with three demand registration rights and
specified "piggy-back" registration rights. Such sales may be made under one or
more underwritten offerings or otherwise. The parties agreed to indemnify each
other and any underwriters on standard terms, including for liability under
federal securities laws. Upon completion of the transaction, DuPont will no
longer own any securities of Conoco which would be subject to this agreement.
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UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material United States federal income tax
consequences relating to the exchange offer and any subsequent spin-off. The
summary is based on the Code, the Treasury regulations promulgated thereunder,
and interpretations of the Code and Treasury regulations by the courts and the
IRS, all as they exist as of the date of this document. This summary does not
discuss all tax considerations that may be relevant to DuPont stockholders in
light of their particular circumstances, nor does it address the consequences to
DuPont stockholders subject to special treatment under the United States federal
income tax laws, such as tax-exempt entities, non-resident alien individuals,
foreign entities, foreign trusts and estates and beneficiaries thereof, persons
who acquire such DuPont stock pursuant to the exercise of employee stock options
or otherwise as compensation, insurance companies, and dealers in securities. In
addition, this summary does not address the United States federal income tax
consequences to DuPont stockholders who do not hold their DuPont common stock as
a capital asset. This summary does not address any state, local or foreign tax
consequences. DuPont stockholders are urged to consult their tax advisors as to
the particular tax consequences to them of the exchange offer and any subsequent
spin-off.
Tax Opinion, IRS Ruling and Federal Income Tax Consequences. DuPont has
received a tax opinion from Skadden, Arps, Slate, Meagher & Flom LLP and a
ruling from the IRS to the effect that, for United States federal income tax
purposes, the exchange offer and any subsequent spin-off will qualify under
Section 355 of the Code as a distribution that is generally tax-free to DuPont
stockholders and to DuPont. DuPont will not be able to rely on the tax opinion
or the ruling if any factual representations made to counsel or the IRS are
incorrect or untrue in any material respect or any undertakings made to counsel
or the IRS are not complied with. Neither DuPont nor Conoco is aware of any
facts or circumstances that would cause any such representations to be incorrect
or untrue in any material respect. An opinion of counsel is not binding on the
IRS or the courts.
Nevertheless, if DuPont completes the exchange offer and any subsequent
spin-off and, notwithstanding the ruling, the exchange offer and any subsequent
spin-off is held to be taxable for United States federal income tax purposes,
both DuPont and its stockholders that receive Conoco Class B common stock could
be subject to a material amount of taxes as a result of the exchange offer and
any subsequent spin-off. Conoco will be liable to DuPont for any such corporate
level taxes incurred by DuPont to the extent such taxes are attributable to
specified actions or failures to act by Conoco, or to specified transactions
involving Conoco following the exchange offer and any subsequent spin-off. For a
description of DuPont's and Conoco's obligations in connection with obtaining
the ruling and potential tax liabilities if the exchange offer and any
subsequent spin-off is held to be taxable, see "Arrangements Between Conoco and
DuPont -- Tax Sharing Agreement", at page 148.
The tax opinion and the ruling provide that for United States federal
income tax purposes:
- no gain or loss will be recognized by, and no amount will be included in
the income of, the DuPont stockholders upon their receipt of shares of
Conoco Class B common stock in the exchange offer and any subsequent
spin-off;
- for those DuPont stockholders that surrender all of their DuPont common
stock in the exchange offer, the aggregate tax basis of the shares of
Conoco Class B common stock held by the DuPont stockholders after the
exchange offer, including any fractional share interests, will be the
same as the aggregate tax basis of the shares of DuPont common stock
exchanged in the exchange offer;
- for those DuPont stockholders that do not surrender all of their DuPont
common stock in the exchange offer, each such stockholder's aggregate tax
basis in the DuPont common stock held before the completion of the
exchange offer will be allocated between the DuPont common stock and
Conoco Class B common stock, including any fractional share interests,
held by such stockholder after the exchange offer and any subsequent
spin-off in proportion to their relative fair market values; and
- the holding period of the shares of Conoco Class B common stock received
by the DuPont stockholders in the exchange offer and any subsequent
spin-off, including any fractional share interests, will include
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the holding period of the shares of DuPont common stock with respect to
which the shares of Conoco Class B common stock were received.
The ruling does not specifically address tax basis issues with respect to
holders of DuPont common stock who have blocks of DuPont common stock with
different per share tax bases. Such holders are urged to consult their tax
advisors regarding the possible tax basis consequences to them of the exchange
offer and any subsequent spin-off.
For DuPont stockholders that do not surrender all of their DuPont common
stock in the exchange offer, the aggregate tax basis in the DuPont common stock
and Conoco Class B common stock held after the exchange offer will equal such
stockholder's aggregate tax basis in its DuPont common stock held before the
exchange offer. The portion of the stockholder's aggregate tax basis allocated
to Conoco Class B common stock received in the exchange offer will equal the
aggregate tax basis in the DuPont common stock held before the exchange offer
multiplied by a fraction equal to:
- the fair market value of Conoco Class B common stock received in the
exchange offer, divided by
- the fair market value of Conoco Class B common stock received in the
exchange offer plus the fair market value of the DuPont common stock held
immediately after the exchange offer.
For DuPont stockholders that receive additional Conoco Class B common stock in
any subsequent spin-off, the calculation described above must be repeated using
the tax basis in the DuPont common stock, as determined following the exchange
offer, as the starting point in the calculation.
United States Treasury regulations require each DuPont stockholder that
receives shares of Conoco Class B common stock in the exchange offer and any
subsequent spin-off to attach to the holder's United States federal income tax
return for the year in which such stock is received a detailed statement setting
forth such data as may be appropriate in order to show the applicability of
Section 355 of the Code to the exchange offer and any subsequent spin-off.
Within a reasonable time after the exchange offer and any subsequent spin-off,
DuPont will provide DuPont stockholders who participate in the exchange offer
and DuPont stockholders who receive Conoco Class B common stock in any
subsequent spin-off with the information necessary to comply with such
requirement, and will provide information regarding the allocation of tax basis
described above.
DuPont stockholders are urged to consult their tax advisors as to the
particular tax consequences to them of the exchange offer and any subsequent
spin-off, including the application of state, local and foreign tax laws and any
changes in federal tax laws that occur after the date of this document.
LEGAL MATTERS
Rick A. Harrington, Senior Vice President, Legal and General Counsel of
Conoco, will pass upon the validity of Conoco Class B common stock being offered
hereby. Certain legal matters with respect to the transaction will be passed
upon for DuPont by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York
and for Conoco by Baker & Botts, L.L.P., Houston, Texas. Cravath, Swaine &
Moore, New York, New York will represent the dealer manager. Skadden, Arps,
Slate, Meagher & Flom LLP has in the past represented Conoco, DuPont and the
dealer manager and continues to represent DuPont and the dealer manager in
connection with various matters. Cravath, Swaine & Moore has in the past and
continues to represent DuPont and Conoco in various matters not related to the
transaction.
EXPERTS
The consolidated financial statements of Conoco as of December 31, 1998 and
1997, and for each of the three years in the period ended December 31, 1998
included in this document, and the consolidated financial statements of DuPont
as of December 31, 1998 and 1997 and for each of the three years in the period
ended December 31, 1998 incorporated by reference in DuPont's Annual Report on
Form 10-K have been so included in reliance on the reports of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
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WHERE YOU CAN FIND MORE INFORMATION
DuPont and Conoco both file annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements or other information filed by either company at the SEC's
public reference rooms in Washington, D.C., New York, New York and Chicago,
Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. The companies' SEC filings are also available to the
public from commercial document retrieval services and at the web site
maintained by the SEC at "http://www.sec.gov." You can also obtain information
about DuPont and Conoco at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005.
Conoco filed a registration statement on Form S-4 to register with the SEC
Conoco Class B common stock to be issued to DuPont stockholders who tender their
shares in the exchange offer and whose shares of DuPont common stock are
accepted for exchange. DuPont will file a Schedule 13E-4 Issuer Tender Offer
Statement with the SEC with respect to the exchange offer. This document is a
part of that registration statement and constitutes an offering circular of
DuPont, in addition to being a prospectus of Conoco. As allowed by SEC rules,
this document does not contain all the information you can find in the
registration statement, the Schedule 13E-4 or the exhibits to the registration
statement and the Schedule 13E-4.
The SEC allows DuPont to "incorporate by reference" information into this
document, which means important information may be disclosed to you by referring
you to another document filed separately with the SEC. The information
incorporated by reference is deemed to be part of this document, except for any
information superseded by information in, or incorporated by reference in, this
document. This document incorporates by reference the documents of DuPont set
forth below that have been previously filed with the SEC. These documents
contain important information about DuPont and its finances.
DUPONT SEC FILINGS (FILE NO. 1-815) PERIOD
- ----------------------------------- ------
Annual Report on Form 10-K............ Year ended December 31, 1998, filed
March 19, 1999
Proxy Statement....................... Filed March 19, 1999
Form 8-K.............................. Filed April 16, 1999
Quarterly Report on Form 10-Q......... First Quarter ended March 31, 1999,
filed May 6, 1999
Form 8-K.............................. Filed April 27, 1999.
Form 8-K.............................. Filed June 14, 1999.
Form 8-K.............................. Filed July 2, 1999.
DuPont is also incorporating by reference additional documents that the
company may file with the SEC between the date of this document and the
expiration date.
Conoco has agreed to indemnify DuPont against specified liabilities such as
civil liabilities under the federal securities act, and to contribute to
payments which DuPont may be required to make in respect thereof, but solely
with respect to information relating to Conoco in this document. DuPont has
agreed to indemnify Conoco against specified liabilities such as civil
liabilities under the federal securities, and to contribute to payments which
Conoco may be required to make in respect thereof, but solely with respect to
information relating to DuPont in or incorporated by reference into this
document.
DuPont may have already sent you some of the documents incorporated by
reference, but you can obtain any of them through the SEC or through DuPont,
Morgan Stanley or D.F. King, without charge, excluding all exhibits unless we
have specifically incorporated by reference an exhibit in this document.
Stockholders may obtain documents incorporated by reference in this document by
requesting them in writing or by telephone from D.F. King or Morgan Stanley at
their addresses and telephone numbers provided on the back cover of this
document.
If you would like to request documents from either company, please do so
five business days before the expiration date to receive them in time.
You should rely only on the information contained in this document. We have
not authorized anyone to provide you with information that is different. This
document is dated , 1999. You should assume that the information
appearing in this document is accurate as of the date on the front cover of this
document only. The business, financial condition, results of operations and
prospects of DuPont and Conoco may have changed since that date.
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CONOCO INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Audited Consolidated Financial Statements
Report of Independent Accountants......................... F-2
Consolidated Statement of Income -- Years Ended December
31, 1998, 1997 and 1996................................ F-3
Consolidated Balance Sheet -- at December 31, 1998 and
1997................................................... F-4
Consolidated Statement of Stockholders' Equity/Owner's Net
Investment and Accumulated Other Comprehensive
Loss -- Years Ended December 31, 1998, 1997 and 1996... F-5
Consolidated Statement of Cash Flows -- Years Ended
December 31, 1998, 1997 and 1996....................... F-6
Notes to Consolidated Financial Statements................ F-7
Unaudited Financial Information
Supplemental Petroleum Data............................... F-38
Consolidated Quarterly Financial Data -- 1998 and 1997.... F-44
Interim Consolidated Financial Statements (Unaudited)
Consolidated Statement of Income -- Three Months Ended
March 31, 1999 and 1998................................ F-46
Consolidated Balance Sheet -- at March 31, 1999........... F-47
Consolidated Statement of Cash Flows -- Three Months Ended
March 31, 1999 and 1998................................ F-48
Notes to Interim Consolidated Financial Statements........ F-49
Certain supplementary financial statement schedules have been omitted
because the information required to be set forth therein is either not
applicable or is shown in the financial statements or notes thereto.
F-1
157
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and the Board of Directors of Conoco Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Conoco Inc. and its subsidiaries at December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We conducted our audits
of these statements in accordance with generally accepted auditing standards,
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.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
February 15, 1999
F-2
158
CONOCO INC.
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
(IN MILLIONS, EXCEPT PER SHARE)
Revenues
Sales and Other Operating Revenues*................... $ 22,796 $ 25,796 $ 24,230
Other Income (Note 4)................................. 372 467 186
----------- ----------- -----------
Total Revenues................................ 23,168 26,263 24,416
----------- ----------- -----------
Costs and Expenses
Costs of Goods Sold and Other Operating Expenses...... 13,840 16,226 14,560
Selling, General and Administrative Expenses.......... 736 726 755
Stock Option Provision (Note 22)...................... 236 -- --
Exploration Expenses.................................. 380 457 404
Depreciation, Depletion and Amortization.............. 1,113 1,179 1,085
Taxes Other Than on Income* (Note 5).................. 5,970 5,532 5,637
Interest and Debt Expense (Note 6).................... 199 36 74
----------- ----------- -----------
Total Costs and Expenses...................... 22,474 24,156 22,515
----------- ----------- -----------
Income Before Income Taxes.............................. 694 2,107 1,901
Provision for Income Taxes (Note 7)..................... 244 1,010 1,038
----------- ----------- -----------
Net Income.............................................. $ 450 $ 1,097 $ 863
=========== =========== ===========
Earnings Per Share (Note 8)
Basic................................................. $ .95 $ 2.51 $ 1.98
Diluted............................................... $ .95 $ 2.51 $ 1.98
Weighted Average Shares Outstanding:
Class A**............................................. 37 -- --
Class B............................................... 437 437 437
----------- ----------- -----------
Total Basic................................... 474 437 437
Stock Options**....................................... 1 -- --
----------- ----------- -----------
Total Diluted................................. 475 437 437
=========== =========== ===========
- ---------------
* Includes petroleum excise taxes...................... $ 5,801 $ 5,349 $ 5,461
** Earnings per share for the periods prior to the
Offerings was calculated using only Class B Common
Stock as required by SFAS 128 (see Note 8).
See accompanying Notes to Consolidated Financial Statements
F-3
159
CONOCO INC.
CONSOLIDATED BALANCE SHEET
ASSETS
DECEMBER 31
------------------
1998 1997
------- -------
(IN MILLIONS)
Current Assets
Cash and Cash Equivalents................................. $ 394 $ 1,147
Marketable Securities..................................... -- 7
Accounts and Notes Receivable (Note 9).................... 1,191 1,497
Notes Receivable -- Related Parties (Note 3).............. -- 490
Inventories (Note 10)..................................... 807 830
Prepaid Expenses.......................................... 378 236
------- -------
Total Current Assets.............................. 2,770 4,207
Property, Plant and Equipment (Note 11)..................... 22,094 21,229
Less: Accumulated Depreciation, Depletion and
Amortization.............................................. (10,681) (10,401)
------- -------
Net Property, Plant and Equipment........................... 11,413 10,828
------- -------
Investment in Affiliates (Note 12).......................... 1,363 1,085
Long-Term Notes Receivable -- Related Parties (Note 3)...... -- 450
Other Assets (Note 13)...................................... 529 492
------- -------
Total............................................. $16,075 $17,062
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY/OWNER'S NET INVESTMENT
Current Liabilities
Accounts Payable (Note 14)................................ $ 1,312 $ 1,090
Short-Term Borrowings -- Related Parties (Note 3)......... -- 644
Other Short-Term Borrowings and Capital Lease Obligations
(Note 15).............................................. 52 72
Income Taxes (Note 7)..................................... 199 545
Other Accrued Liabilities (Note 16)....................... 1,162 1,289
------- -------
Total Current Liabilities......................... 2,725 3,640
Long-Term Borrowings -- Related Parties (Note 3)............ 4,596 1,450
Other Long-Term Borrowings and Capital Lease Obligations
(Note 17)................................................. 93 106
Deferred Income Taxes (Note 7).............................. 1,714 1,739
Other Liabilities and Deferred Credits (Note 18)............ 2,200 1,922
------- -------
Total Liabilities................................. 11,328 8,857
------- -------
Commitments and Contingent Liabilities (Note 26)
Minority Interests (Note 19)................................ 309 309
Owner's Net Investment...................................... -- 8,087
Stockholders' Equity (Note 20)
Preferred Stock, $.01 par value:
250,000,000 shares authorized; none issued................ -- --
Class A Common Stock, $.01 par value:
3,000,000,000 shares authorized; 191,497,821 shares
issued................................................. 2 --
Class B Common Stock; $.01 par value:
1,600,000,000 shares authorized; 436,543,573 shares issued
and outstanding........................................ 4 --
Additional Paid-In Capital................................ 4,955 --
Accumulated Deficit....................................... (244) --
Accumulated Other Comprehensive Loss (Note 21)............ (274) (191)
Treasury Stock, at cost (249,863 Class A shares).......... (5) --
------- -------
Total Stockholders' Equity........................ 4,438 (191)
------- -------
Total Stockholders' Equity/Owner's Net
Investment....................................... 4,438 7,896
------- -------
Total............................................. $16,075 $17,062
======= =======
See accompanying Notes to Consolidated Financial Statements
F-4
160
CONOCO INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY/OWNER'S NET
INVESTMENT AND ACCUMULATED OTHER COMPREHENSIVE LOSS
(NOTES 20 AND 21)
ACCUMULATED
ADDITIONAL OTHER
OWNER'S NET COMMON PAID-IN ACCUMULATED COMPREHENSIVE COMPREHENSIVE TREASURY
INVESTMENT STOCK CAPITAL DEFICIT INCOME LOSS STOCK
----------- ------ ---------- ----------- ------------- ------------- --------
(IN MILLIONS)
Balance January 1, 1996.............. $ 6,762 $ (8)
Comprehensive Income
Net Income......................... 863 $ 863
Other Comprehensive Income (Loss):
Foreign Currency Translation
Adjustment..................... (39)
Minimum Pension Liability
Adjustment..................... (10)
------
Other Comprehensive Loss....... (49) (49)
------
Comprehensive Income......... $ 814
======
Net Cash Contribution to Owner....... (993)
Other Transfer from Owner............ 4
------- -----
Balance December 31, 1996............ 6,636 (57)
Comprehensive Income
Net Income (Loss).................. 1,097 $1,097
Other Comprehensive Income (Loss):
Foreign Currency Translation
Adjustment..................... (121)
Minimum Pension Liability
Adjustment..................... (13)
------
Other Comprehensive Loss....... (134) (134)
------
Comprehensive Income......... $ 963
======
Net Cash Contribution from Owner..... 360
Other Transfers to Owner............. (6)
------- -----
Balance December 31, 1997............ 8,087 (191)
Comprehensive Income
Net Income (Loss).................. 694 $(244) $ 450
Other Comprehensive Income (Loss):
Foreign Currency Translation
Adjustment..................... (25)
Minimum Pension Liability
Adjustment..................... (58)
------
Other Comprehensive Loss....... (83) (83)
------
Comprehensive Income......... $ 367
======
Net Cash Contribution to Owner....... (512)
Dividends to Owner (Note 3).......... (8,200)
Other Transfers from Owner........... 433
Capitalization from Owner at
Offerings.......................... (502) $4 $ 498
Initial Public Offering.............. 2 4,226
Compensation Plans................... (5)
Treasury Stock Purchases............. $(5)
Stock Option Provision (Note 22)..... 236
------- -- ------ ----- ----- ---
Balance December 31, 1998............ $ -- $6 $4,955 $(244) $(274) $(5)
======= == ====== ===== ===== ===
See accompanying Notes to Consolidated Financial Statements
F-5
161
CONOCO INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31
---------------------------
1998 1997 1996
------- ------- -------
(IN MILLIONS)
Cash Provided by Operations
Net Income................................................ $ 450 $ 1,097 $ 863
Adjustments to Reconcile Net Income to Cash Provided by
Operations:
Depreciation, Depletion and Amortization............... 1,113 1,179 1,085
Dry Hole Costs and Impairment of Unproved Properties... 163 169 137
Stock Option Provision (Note 22)....................... 236 -- --
Inventory Write-down to Market (Note 10)............... 97 -- --
Deferred Income Taxes (Note 7)......................... (32) 16 10
Income Applicable to Minority Interests................ 21 24 19
Other Non-Cash Charges and Credits -- Net.............. (137) (271) 66
Decrease (Increase) in Operating Assets:
Accounts and Notes Receivable........................ 125 127 (280)
Inventories.......................................... (62) (79) 22
Other Operating Assets............................... (172) (96) 10
Increase (Decrease) in Operating Liabilities:
Accounts Payable and Other Operating Liabilities..... (85) 622 362
Accrued Interest and Income Taxes (Notes 6 and 7).... (344) 88 102
------- ------- -------
Cash Provided by Operations....................... 1,373 2,876 2,396
------- ------- -------
Investing Activities (Note 24)
Purchases of Property, Plant and Equipment................ (1,965) (2,644) (1,616)
Investments in Affiliates................................. (385) (339) (326)
Proceeds from Sales of Assets and Subsidiaries............ 721 565 328
Net Decrease (Increase) in Short-Term Financial
Instruments............................................ 31 381 (33)
------- ------- -------
Cash Used for Investing Activities................ (1,598) (2,037) (1,647)
------- ------- -------
Financing Activities
Short-Term Borrowings -- Receipts......................... -- 24 --
-- Payments..................... (26) (2) (90)
Other Long-Term Borrowings -- Receipts.................... -- 33 38
-- Payments............... (4) (3) (1)
Proceeds from Initial Public Offering (Notes 3 and 20).... 4,228 -- --
Treasury Stock Purchases.................................. (5) -- --
Transactions with Related Parties:
Notes Receivable -- Receipts........................... 444 9 402
-- Payments......................... (152) (617) (9)
Borrowings -- Receipts................................. 927 413 706
-- Payments................................ (5,434) (695) (520)
Net Cash Contribution From (To) Owner.................. (512) 360 (993)
Increase (Decrease) in Minority Interests (Note 19)....... (21) (21) 280
------- ------- -------
Cash Used for Financing Activities................ (555) (499) (187)
------- ------- -------
Effect of Exchange Rate Changes on Cash..................... 27 (39) (2)
------- ------- -------
Increase (Decrease) in Cash and Cash Equivalents............ (753) 301 560
Cash and Cash Equivalents at Beginning of Year.............. 1,147 846 286
------- ------- -------
Cash and Cash Equivalents at End of Year.................... $ 394 $ 1,147 $ 846
======= ======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Transactions with Related Parties (Note 3):
Dividends to Owner..................................... $(8,200)
Promissory Note Issued................................. 7,500
Notes Receivable Reduced............................... 700
Borrowings Contributed to Capital...................... (544)
-------
Total Non-Cash Financing Activities............... $ (544)
=======
See accompanying Notes to Consolidated Financial Statements
F-6
162
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
1. BASIS OF PRESENTATION
Conoco Inc., including its consolidated subsidiaries, ("Conoco" or the
"Company") is an integrated, global energy company that is involved in the
Upstream and Downstream segments of the petroleum business. Activities of the
Upstream operating segment include exploring for, and developing, producing and
selling crude oil, natural gas and natural gas liquids. Activities of the
Downstream operating segment include refining crude oil and other feedstocks
into petroleum products, buying and selling crude oil and refined products and
transporting, distributing and marketing petroleum products. The Company has
four reporting segments for its Upstream and Downstream operating segments,
reflecting geographic division between the United States and International.
Corporate and Other includes general corporate expenses, financing costs and
other non-operating items, and results for electric power and related-party
insurance operations.
The initial public offering (the "Offerings") of the Class A Common Stock
of Conoco, a subsidiary of E.I. du Pont de Nemours and Company ("DuPont"),
commenced on October 21, 1998, and the Class A Common Stock began trading on the
New York Stock Exchange on October 22, 1998. The Offerings consisted of
191,456,427 shares of Class A Common Stock issued at a price of $23 per share,
and represented DuPont's first step in the planned divestiture of its entire
petroleum business. Through its ownership of 100% of the Company's Class B
Common Stock (436,543,573 shares), DuPont owned approximately 70% of the
Company's common stock representing approximately 92% of the combined voting
power of all classes of voting stock of the Company at December 31, 1998. The
holders of Class A Common Stock and Class B Common Stock generally have
identical rights, except that holders of Class A Common Stock are entitled to
one vote per share while holders of Class B Common Stock are entitled to five
votes per share on matters to be voted on by stockholders.
Effective at the time of the Offerings, Conoco's capital structure was
established and the transfer to Conoco of certain subsidiaries previously owned
by DuPont was substantially complete, resulting in direct ownership of those
subsidiaries. Accordingly, for periods subsequent to the Offerings, financial
information is presented on a consolidated basis.
Prior to the date of the Offerings, operations were conducted by Conoco
Inc., subsidiaries of Conoco Inc. and, in some cases, subsidiaries of DuPont.
The accompanying Consolidated Financial Statements for these periods are
presented on a carve-out basis prepared from DuPont's historical accounting
records, and include the historical operations of both entities owned by Conoco
and operations transferred to Conoco by DuPont at the time of the Offerings. In
this context, no direct ownership relationship existed among all the various
units comprising Conoco. Accordingly, DuPont and its subsidiaries' net
investment in Conoco ("Owner's Net Investment") is shown in lieu of
Stockholders' Equity in the Consolidated Financial Statements. Net Cash
Contributions from/to Owner prior to the Offerings include funds transferred
between Conoco and DuPont for operating needs, cash dividends paid and other
equity transactions.
The Consolidated Statement of Income includes all revenues and costs
directly attributable to Conoco, including costs for facilities, functions and
services used by Conoco at shared sites and costs for certain functions and
services performed by centralized DuPont organizations and directly charged to
Conoco based on usage. In addition, services performed by Conoco on DuPont's
behalf are directly charged to DuPont. The results of operations also include
allocations of DuPont's general corporate expenses through the date of the
Offerings.
Prior to the date of the Offerings, all charges and allocations of cost for
facilities, functions and services performed by DuPont organizations for Conoco
have been deemed to have been paid by Conoco to DuPont, in cash, in the period
in which the cost was recorded in the Consolidated Financial Statements.
Allocations of current income taxes receivable or payable are similarly deemed
to have been remitted, in cash, by or to DuPont in the period the related income
taxes were recorded. Subsequent to the Offerings,
F-7
163
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
such costs are billed directly under transitional service agreements, and income
taxes are paid directly to the taxing authorities, or to DuPont, as appropriate.
All of the allocations and estimates in the Consolidated Financial
Statements are based on assumptions that management believes are reasonable
under the circumstances. However, these allocations and estimates are not
necessarily indicative of the costs and expenses that would have resulted if
Conoco had been operated as a separate entity for periods prior to the
Offerings.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The accounts of wholly owned and majority-owned subsidiaries are included
in the Consolidated Financial Statements. The equity method is used to account
for investments in corporate entities, partnerships and limited liability
companies in which the Company exerts significant influence, generally having a
20-50% ownership interest. The Company's 50.1 percent non-controlling interest
in Petrozuata C.A. in Venezuela is accounted for using the equity method because
the minority shareholder, a subsidiary of the national oil company of the
Republic of Venezuela, has substantive participating rights. Undivided interests
in oil and gas joint ventures and transportation assets are combined on a pro
rata basis. Other investments, excluding marketable securities, are carried at
cost.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses, and the disclosure of contingent assets and liabilities. Actual
results may differ from those estimates and assumptions.
Cash Equivalents
Cash equivalents represent investments with maturities of three months or
less from time of purchase. They are carried at cost plus accrued interest,
which approximates fair value.
Inventories
Inventories are carried at the lower of cost or market. Cost is determined
under the last-in, first-out ("LIFO") method for inventories of crude oil and
petroleum products. Cost for remaining inventories, principally materials and
supplies, is generally determined by the average cost method. Market is
determined on a regional basis and any lower of cost or market write-down is
recorded as a permanent adjustment to the cost of inventory.
Property, Plant and Equipment ("PP&E")
PP&E is carried at cost. Depreciation of PP&E, other than oil and gas
properties, is generally computed on a straight-line basis over the estimated
economic lives of the facilities, which for major assets range from 14 to 25
years. When assets that are part of a composite group are retired, sold,
abandoned or otherwise disposed of, the cost, net of sales proceeds or salvage
value, is charged against the accumulated reserve for depreciation, depletion
and amortization ("DD&A"). Where depreciation is accumulated for specific
assets, gains or losses on disposal are included in period income.
Maintenance and repairs are charged to expense; replacements and
improvements are capitalized.
Oil and Gas Properties
The Company follows the successful efforts method of accounting, under
which the costs of property acquisitions, successful exploratory wells,
development wells and related support equipment and facilities
F-8
164
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
are capitalized. The costs of producing properties are amortized at the field
level on a unit-of-production method.
Unproved properties which are individually significant are periodically
assessed for impairment, whereas the impairment of individually insignificant
properties is provided by amortizing the costs based on past experience and the
estimated holding period. Exploratory well costs are expensed in the period the
well is determined to be unsuccessful. All other exploration costs, including
geological and geophysical costs, production costs and overhead costs, are
expensed in the period incurred.
The estimated costs of dismantlement and removal of oil and gas related
facilities are accrued over the properties' productive lives using the
unit-of-production method and recognized as a liability as the amortization
expense is recorded.
Impairment of Long-Lived Assets
Long-lived assets with recorded values that are not expected to be
recovered through future cash flows are written down to current fair value
through additional amortization or depreciation provisions. Fair value is
generally determined from estimated discounted future net cash flows. Upstream
properties are evaluated at the field level including both proved and
risk-adjusted unproved reserves.
Environmental Costs
Environmental expenditures are expensed or capitalized, as appropriate,
depending on their future economic benefit. Expenditures that relate to an
existing condition caused by past operations, and that do not have future
economic benefit, are expensed. Liabilities related to these future costs are
recorded on an undiscounted basis when environmental assessments and/or
remediation activities are probable and the costs can be reasonably estimated.
Stock Compensation
The Company applies Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations in
accounting for stock options. Pro forma information regarding changes in net
income and earnings per share data if the accounting prescribed by Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation", had been applied is presented in Note 22.
Income Taxes
The provision for income taxes has been determined using the asset and
liability approach of accounting for income taxes. Under this approach, deferred
taxes represent the future tax consequences expected to occur when the reported
amounts of assets and liabilities are recovered or paid. The provision for
income taxes represents income taxes paid or payable for the current year plus
the change in deferred taxes during the year. Deferred taxes result from
differences between the financial and tax bases of the Company's assets and
liabilities and are adjusted for changes in tax rates and tax laws when changes
are enacted. Valuation allowances are recorded to reduce deferred tax assets
when it is more likely than not that a tax benefit will not be realized.
Prior to the date of the Offerings, Conoco was included in the DuPont
consolidated tax return and the provision for income taxes was determined using
the loss benefit method. Under the loss benefit method, the current tax
provision or benefit is allocated based on the amount expected to be paid or
received from the consolidated group and benefits of losses and credit carry
forwards are recorded when such benefits are expected to be realized by members
of the consolidated group. The pro forma effect on the Consolidated
F-9
165
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Statement of Income reflecting the provision for income taxes on a separate
return basis prior to the Offerings is not material. For periods ending after
the Offerings, Conoco will file a separate tax return. Accordingly, for periods
subsequent to the Offerings, the provision for income taxes has been determined
on a separate tax return basis.
Provision has been made for income taxes on unremitted earnings of
subsidiaries and affiliates, except in cases in which earnings are deemed to be
permanently invested.
Foreign Currency Translation
Local currency is the functional currency for the Company's integrated
Western European petroleum operations. For subsidiaries whose functional
currency is the local currency, assets and liabilities denominated in local
currency are translated into United States dollars at end-of-period exchange
rates. The resultant translation adjustment is a component of Accumulated Other
Comprehensive Loss (see Note 21). Assets and liabilities denominated in other
than the local currency are remeasured into the local currency prior to
translation into United States dollars, and the resultant exchange gains or
losses, together with their related tax effects, are included in income in the
period in which they occur. Income and expenses are translated into United
States dollars at average exchange rates in effect during the period.
For subsidiaries where the United States dollar is the functional currency,
all foreign currency asset and liability amounts are remeasured into United
States dollars at end-of-period exchange rates, except for inventories, prepaid
expenses and property, plant and equipment, which are remeasured at historical
rates. Foreign currency income and expenses are remeasured at average exchange
rates in effect during the year, except for expenses related to balance sheet
amounts, which are remeasured at historical exchange rates. Exchange gains and
losses arising from remeasurement of foreign currency-denominated monetary
assets and liabilities are included in current period income.
Effective January 1, 1999, the Euro was adopted as the local currency by 11
countries participating in the European Economic and Monetary Union. For those
countries in which the Company operates, the Euro concurrently became the
functional currency.
Commodity Hedging and Trading Activities
The Company enters into energy-related futures, forwards, swaps, and
options in various markets to balance its physical systems, to meet customer
needs, and to manage its exposure to price fluctuations on anticipated crude
oil, natural gas, refined product and electric power transactions.
Under the Company's policy, hedging includes only those transactions that
offset physical positions and reduce overall Company exposure to price risk.
Trading is defined as any transaction that does not meet the definition of
hedging.
Gains and losses on hedging contracts are deferred and included in the
measurement of the related transaction. Changes in market values of trading
contracts are reflected in income in the period the change occurs.
In the event a derivative designated as a hedge is terminated prior to the
maturation of the hedged transaction, gains or losses realized at termination
are deferred and included in the measurement of the hedged transaction. If a
hedged transaction matures, is sold, extinguished or terminated prior to the
maturity of a derivative designated as a hedge of such transaction, gains or
losses associated with the derivative through the date the transaction matured
are included in the measurement of the hedged transaction and the derivative is
reclassified as for trading purposes. Derivatives designated as a hedge of
F-10
166
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
an anticipated transaction are reclassified as for trading purposes if the
anticipated transaction is no longer likely to occur.
In the Consolidated Statement of Cash Flows, the Company reports the cash
flows resulting from its hedging activities in the same category as the related
item that is being hedged.
Recent Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
which the Company has adopted for the year ended December 31, 1998. This
standard requires disclosing segment information on the same basis used
internally for evaluating segment performance and deciding how to allocate
resources to segments. It also requires disclosure of revenue and long-lived
assets attributed to operations in individual countries outside the United
States for which such information is material. No substantive changes in segment
reporting resulted from this standard. The Company has four reporting segments
for its Upstream and Downstream operating segments, reflecting geographic
division between the United States and International. In addition, geographic
reporting changed with revenues and long-lived assets attributed to operations
in the United Kingdom, Germany and Norway disclosed separately.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure
About Pensions and Other Postretirement Benefits," that revised disclosure
requirements for pension and other postretirement benefits. This statement did
not affect measurement of the expense of the Company's pension and other
postretirement benefits. The Company has adopted the disclosure requirements of
this Statement for the year ended December 31, 1998.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires that companies recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. SFAS No. 133 provides, if certain conditions
are met, that a derivative may be specifically designated as:
- a hedge of the exposure to changes in the fair value of a recognized asset
or liability or an unrecognized firm commitment (fair value hedge),
- a hedge of the exposure to variable cash flows of a forecasted transaction
(cash flow hedge), or
- a hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security
or a foreign-currency-denominated forecasted transaction (foreign currency
hedge).
Under SFAS No. 133, the accounting for changes in fair value of a
derivative depends on its intended use and designation. For a fair value hedge,
the gain or loss is recognized in earnings in the period of change together with
the offsetting loss or gain on the hedged item. For a cash flow hedge, the
effective portion of the derivative's gain or loss is initially reported as a
component of other comprehensive income and subsequently reclassified into
earnings when the forecasted transaction affects earnings. For a foreign
currency hedge, the gain or loss is reported in other comprehensive income as
part of the cumulative translation adjustment. For all other items not
designated as hedging instruments, the gain or loss is recognized in earnings in
the period of change. The Company is required to adopt this Statement by the
first quarter of 2000 and is currently assessing its effect on the Consolidated
Financial Statements.
3. RELATED PARTY TRANSACTIONS
The Consolidated Financial Statements include significant transactions with
DuPont involving services (such as cash management, other financial services,
purchasing, legal, computer and corporate aviation)
F-11
167
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
and general corporate expenses that were provided between Conoco and centralized
DuPont organizations. For periods prior to the Offerings, the costs of services
have been directly charged or allocated between Conoco and DuPont using methods
management believes are reasonable. These methods include negotiated usage
rates, dedicated asset assignment and proportionate corporate formulas involving
assets, revenues and employees. Such charges and allocations are not necessarily
indicative of what would have been incurred if Conoco had been a separate
entity.
Amounts charged and allocated to Conoco for these services were $121, $125
and $101 for the years 1998, 1997 and 1996, respectively, and are principally
included in Selling, General and Administrative Expenses. Conoco provided DuPont
services, such as computer, legal and purchasing, as well as certain technical
and plant operating services, which amounted to $61, $62 and $66 in 1998, 1997
and 1996, respectively. These charges to DuPont were treated as reductions, as
appropriate, of Cost of Goods Sold and Other Operating Expenses or Selling,
General and Administrative Expenses.
Interest expense charged by DuPont was $264, $124 and $143 for the years
1998, 1997 and 1996, respectively, and reflects market-based interest rates. A
portion of this and other interest and debt expense was capitalized as cost
associated with major construction projects. Interest income from DuPont was
$43, $11 and $57 for the same years and also reflects market-based interest
rates.
Sales and Other Operating Revenues include sales of products from Conoco to
DuPont, principally natural gas and gas liquids to supply several DuPont plant
sites. These sales totaled $427, $420 and $413 for the years 1998, 1997 and
1996, respectively. Also included are revenues from insurance premiums charged
to DuPont for property and casualty coverage outside the United States. These
revenues totaled $20, $22 and $21 for the years 1998, 1997 and 1996,
respectively. Purchases of products from DuPont during these periods were not
material.
Subsequent to the Offerings, these intercompany arrangements between DuPont
and Conoco, excluding insurance coverage provided to DuPont, are being provided
under transition service agreements or other long-term agreements. It is not
anticipated that a change, if any, in these costs and revenues would have a
material effect on the Company's results of operations or consolidated financial
position.
Accounts and Notes Receivable include amounts due from DuPont of $80 and
$79 at December 31, 1998 and 1997, respectively, representing current month
balances of transactions between Conoco and DuPont, mainly product sales and
certain charges billed annually. Accounts Payable include amounts due DuPont of
$52 and $4 at December 31, 1998 and 1997, respectively. Other Liabilities
include accrued interest of $51 due DuPont at December 31, 1998.
Amounts representing notes receivable or borrowings from DuPont, including
its subsidiary organizations, are identified as related parties and presented
separately in the Consolidated Balance Sheet. The current portion of Notes
Receivable represents the accumulation of a variety of cash transfers and
operating transactions with DuPont. These balances are generally interest
bearing and represent net amounts of cash transferred for funding and cash
management purposes and amounts charged between the companies for certain
product and service purchases. At December 31, 1997, the long-term portion of
Notes Receivable and amounts shown for Short-Term and Long-Term Borrowings
represent borrowings between Conoco and DuPont with established due dates at
market-based interest rates, except for certain short-term non-interest bearing
borrowings due DuPont of $492. At December 31, 1998, related balances only
reflected long-term borrowings due DuPont as further described.
In July 1998, a dividend was declared and paid by the Company in the form
of a promissory note (the "Note") to DuPont in the aggregate principal amount of
$7,500 bearing interest at a rate of 6.0125 percent per annum and due on January
2, 2000. The Note may be voluntarily prepaid without penalty or premium. The
Note also provides for mandatory prepayments in the event cash proceeds are
realized by
F-12
168
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
the Company from the incurrence of indebtedness or the issuance of equity
securities by the Company or its subsidiaries. The Note includes certain
covenants and customary events of default, including failure to pay interest
when due, certain events of bankruptcy of the Company and change of control. The
consent of DuPont is also required prior to the Company entering into certain
transactions.
In September 1998, the Company declared a dividend of $700 paid through a
reduction of notes receivable from DuPont and further certain intercompany notes
were created.
The net proceeds from the Offerings referred to in Note 1 were $4,228,
after deducting the underwriting discounts and commissions payable by the
Company. The Company used these net proceeds to repay indebtedness owed to
DuPont or purchase a portion of the indebtedness owed by certain subsidiaries of
the Company to DuPont as follows:
(a) to pay accrued interest ($124) on the $7,500 Note and then to
repay principal ($2,654) on such Note to the extent necessary to reduce the
principal amount to $4,846;
(b) to purchase certain intercompany notes denominated in Norwegian
Kroner with an aggregate principal amount of approximately $461 after
conversion to U.S. dollars, together with accrued interest ($9);
(c) to pay accrued interest ($8) and a portion of the principal ($820)
on a certain other intercompany note to the extent necessary to reduce the
principal amount to $7;
(d) to pay a portion of the principal ($152) on an intercompany demand
note which reduced the outstanding balance to $52.
During 1998, DuPont made capital contributions of $544 to the Company
reflecting the retirement of certain non-interest bearing borrowings of $492 and
the remaining balance of $52 on the foregoing demand note.
Subsequent to the Offerings, the Company made an additional principal
payment of $257 on the Note reducing the outstanding balance to $4,589 at
December 31, 1998. Aggregate borrowings from related parties at December 31,
1998, totaled $4,596 and reflected a weighted average interest rate of 6.0
percent with maturity on January 2, 2000.
On October 27, 1998, the Company and DuPont entered into a revolving credit
agreement under which DuPont will provide the Company with a revolving credit
facility in principal amount of up to $500. Loans under the revolving credit
agreement will be subject to mandatory repayment to the extent the Company's
cash and cash equivalents exceed $325 or such higher amount as the Company and
DuPont may agree. Loans under this facility bear interest at a rate equal to
30-day LIBOR plus 0.20 percent per annum and may be voluntarily prepaid without
penalty or premium. There was no outstanding debt under this facility on
December 31, 1998.
The Company is obligated to repay all outstanding debt owed to DuPont at
such time as DuPont's direct or indirect voting power in the Company falls below
50 percent of the outstanding voting power of the Company. The Company intends
to refinance outstanding related party debt owed to DuPont with a combination of
commercial paper and public debt in 1999.
F-13
169
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
4. OTHER INCOME
1998 1997 1996
---- ---- ----
Interest income
Related parties (see Note 3).............................. $ 43 $ 11 $ 57
Other, net of miscellaneous interest expense.............. 46 66 67
---- ---- ----
89 77 124
Equity in earnings of affiliates (see Note 12).............. 22(1) 40 (25)
Gain on sales of assets(2).................................. 206 314 84
Exchange gain (loss)........................................ 51 27 (5)
Other -- net................................................ 4 9 8
---- ---- ----
$372 $467 $186
==== ==== ====
- ---------------
(1) Includes a $5 charge for write-down of inventories to market in accordance
with the Company's inventory valuation policy (see Note 2).
(2) 1998 includes a gain of $89 from sale of certain Upstream properties in the
North Sea and the United States. 1997 includes a gain of $239 from sale of
certain Upstream properties in the North Sea.
5. TAXES OTHER THAN ON INCOME
1998 1997 1996
------ ------ ------
Petroleum excise taxes
U.S....................................................... $1,286 $1,201 $1,145
Non-U.S................................................... 4,515 4,148 4,316
------ ------ ------
5,801 5,349 5,461
Payroll taxes............................................... 42 43 48
Property taxes.............................................. 64 63 55
Production and other taxes.................................. 63 77 73
------ ------ ------
$5,970 $5,532 $5,637
====== ====== ======
6. INTEREST AND DEBT EXPENSE
1998 1997 1996
---- ---- ----
Interest and debt cost incurred
Related parties (see Note 3).............................. $264 $124 $143
Other..................................................... 7 6 6
---- ---- ----
271 130 149
Less: Interest and debt cost capitalized.................... 72 94 75
---- ---- ----
Interest and debt expense................................... $199 $ 36 $ 74
==== ==== ====
Interest paid (net of amounts capitalized) was $145 in 1998, $33 in 1997
and $77 in 1996.
F-14
170
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
7. PROVISION FOR INCOME TAXES
1998 1997 1996
---- ------ ------
Current tax expense
U.S. federal.............................................. $(57) $ 64 $ 155
U.S. state and local...................................... 10 5 8
Non-U.S. ................................................. 323 925 865
---- ------ ------
Total............................................. 276 994 1,028
---- ------ ------
Deferred tax expense
U.S. federal.............................................. (51) 80 (78)
U.S. state and local...................................... (5) 8 --
Non-U.S. ................................................. 24 (72) 88
---- ------ ------
Total............................................. (32) 16 10
---- ------ ------
Provision for Income Taxes.................................. 244 1,010 1,038
Foreign Currency Translation(1)............................. (22) -- --
Minimum Pension Liability(1)................................ (26) (7) (5)
---- ------ ------
Total Provision................................... $196 $1,003 $1,033
==== ====== ======
- ---------------
(1) Represents respective deferred tax provisions for adjustments included in
other comprehensive loss (see Note 21).
Total income taxes paid worldwide were $714 in 1998, $935 in 1997 and $901
in 1996.
The significant components of deferred tax assets and liabilities at
December 31, 1998 and 1997 are as follows:
1998 1997
-------------------- --------------------
ASSET LIABILITY ASSET LIABILITY
------ --------- ------ ---------
Property, plant and equipment............................ $ 233 $2,296 $ 182 $2,219
Employee benefits........................................ 247 -- 166 --
Other accrued expenses................................... 237 -- 273 --
Inventories.............................................. -- 90 -- 102
Tax loss/tax credit carry forwards....................... 496 -- 417 --
Other.................................................... 25 188 27 169
------ ------ ------ ------
Total.......................................... $1,238 $2,574 $1,065 $2,490
====== ======
Valuation allowances..................................... (423) (392)
------ ------
Net............................................ $ 815 $ 673
====== ======
Valuation allowances, which reduce deferred tax assets to an amount that
will more likely than not be realized, increased $31 in 1998, primarily
reflecting increases in tax assets representing operating losses incurred in
exploration and start-up operations. Valuation allowances decreased by $22 in
1997, principally reflecting a $37 decrease related to tax assets representing
operating losses which the Company determined will more likely than not be
realized in future years. This decrease was partially offset by an increase of
$15 reflecting offsets to operating losses. Valuation allowances in 1996
increased by $52 to offset increases in deferred tax assets resulting primarily
from operating losses incurred in exploration and start-up operations.
F-15
171
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Under the tax laws of various jurisdictions in which the Company operates,
deductions or credits that cannot be fully utilized for tax purposes during the
current year may be carried forward, subject to statutory limitations, to reduce
taxable income or taxes payable in a future year. At December 31, 1998, the tax
effect of such carry forwards approximated $496. Of this amount, $312 has no
expiration date, $3 expires in 1999, $5 expires in 2000, $75 expires in 2001,
$46 expires in 2002, and $55 expires in 2003 and later years.
Current deferred tax liabilities (included in the Consolidated Balance
Sheet caption "Income Taxes") were $76 and $122 at December 31, 1998 and 1997,
respectively.
Current deferred tax assets included in Prepaid Expenses were $7 at
December 31, 1997. In addition, Other Assets includes deferred tax assets of $31
and $37 at December 31, 1998 and 1997, respectively.
An analysis of the Company's effective income tax rate follows:
1998 1997 1996
---- ---- ----
Statutory U.S. federal income tax rate...................... 35.0% 35.0% 35.0%
Higher effective tax rate on non-U.S. operations............ 7.8 13.9 21.6
Alternative fuels credit.................................... (8.2) (3.0) (3.4)
Reduced tax benefit from Stock Option Provision............. 4.9 -- --
Realization of unbenefited loss from sale of subsidiary..... (4.6) -- --
Other -- net................................................ 0.3 2.0 1.4
---- ---- ----
Effective income tax rate................................... 35.2% 47.9% 54.6%
==== ==== ====
Earnings before income taxes shown below are based on the location of the
corporate unit to which such earnings are attributable. However, since such
earnings are often subject to taxation in more than one country, the income tax
provision shown above as U.S. or non-U.S. does not correspond to the earnings
set forth below.
1998 1997 1996
----- ------ ------
U.S......................................................... $(173) $ 740 $ 563
Non-U.S..................................................... 867 1,367 1,338
----- ------ ------
$ 694 $2,107 $1,901
===== ====== ======
At December 31, 1998 and 1997, respectively, unremitted earnings of
non-U.S. subsidiaries totaling $1,536 and $1,645 were deemed to be permanently
invested. No deferred tax liability has been recognized with regard to the
remittance of such earnings. It is not practicable to estimate the income tax
liability that might be incurred if such earnings were remitted to the United
States.
8. EARNINGS PER SHARE
Basic earnings per share (EPS) is computed by dividing net income (the
numerator) by the weighted average number of common shares outstanding plus the
effects of award and fee deferrals that are invested in Conoco stock units by
certain employees and directors of the Company (the denominator). Diluted EPS is
similarly computed, except that the denominator is increased to include the
dilutive effects of outstanding stock options awarded under Conoco's
compensation plans (see Note 22).
As described in Note 1, the Company's capital structure was established at
the time of the Offerings. In accordance with SEC Staff Accounting Bulletin No.
98, the capitalization of Class B Common Stock has been retroactively reflected
for the purposes of presenting earnings per share for periods prior to the
F-16
172
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Offerings. For the period subsequent to the Offerings, basic EPS reflects the
Class B Common Stock plus the weighted average from the date of the Offerings of
Class A Common Stock and deferred award units outstanding at the date of the
Offerings. Corresponding diluted EPS for 1998 includes an additional 1,659,816
shares representing the weight average dilutive effect of outstanding stock
options that resulted from the concurrent cancellation of DuPont stock options
at the date of the Offerings and issuance of options with respect to Class A
Common Stock.
The denominator is based on the following weighted average number of common
shares outstanding:
1998 1997 1996
----------- ----------- -----------
Basic............................................. 473,826,632 436,543,573 436,543,573
Diluted........................................... 475,486,448 436,543,573 436,543,573
Variable stock options for 1,724,146 shares of common stock were
outstanding at December 31, 1998, but were not included in the computation of
diluted EPS since the threshold price of $32.88 required for these options to be
vested had not been reached.
Common shares held as Treasury Stock are deducted in determining the number
of shares outstanding.
9. ACCOUNTS AND NOTES RECEIVABLE
DECEMBER 31
---------------
1998 1997
------ ------
Trade....................................................... $ 805 $ 916
Related parties (see Note 3)................................ 80 79
Other....................................................... 306 502
------ ------
$1,191 $1,497
====== ======
See Note 27 for a description of operating segment markets and associated
concentrations of credit risk.
10. INVENTORIES
DECEMBER 31
-----------------
1998 1997
------- -------
Crude oil and petroleum products............................ $ 661 $ 675
Other merchandise........................................... 22 25
Materials and supplies...................................... 124 130
------- -------
$ 807 $ 830
======= =======
As a result of reduced crude oil and petroleum product price levels, a
write-down to market of $97 was made in the fourth quarter of 1998, in
accordance with the Company's inventory valuation policy (see Note 2). At
December 31, 1997, the excess of market over book value of inventories valued
under the LIFO method was $152. Inventories valued at LIFO represented 82
percent and 81 percent of consolidated inventories at December 31, 1998 and
1997, respectively.
During 1998, 1997 and 1996, certain LIFO inventory quantities were reduced
resulting in partial liquidation of the LIFO bases, with no material effect on
net income.
F-17
173
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
11. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31
-------------------------------------
GROSS NET
----------------- -----------------
1998 1997 1998 1997
------- ------- ------- -------
Oil and Gas Properties
Unproved................................................. $ 1,159 $ 1,491 $ 942 $ 1,230
Proved................................................... 13,488 12,420 6,236 5,480
Other...................................................... 1,280 1,316 845 871
------- ------- ------- -------
Total Upstream................................... 15,927 15,227 8,023 7,581
Refining................................................... 3,834 3,803 1,958 1,952
Marketing and Distribution................................. 2,255 2,199 1,375 1,295
------- ------- ------- -------
Total Downstream................................. 6,089 6,002 3,333 3,247
Corporate(1)............................................... 78 -- 57 --
------- ------- ------- -------
$22,094 $21,229 $11,413 $10,828
======= ======= ======= =======
- ---------------
(1) Includes aviation investment transferred from DuPont in 1998 and corporate
software.
Property, Plant and Equipment includes Downstream gross assets acquired
under capital leases of $41 at December 31, 1998 and 1997; related amounts
included in Accumulated Depreciation, Depletion and Amortization were $12 and
$10 at December 31, 1998 and 1997, respectively.
12. SUMMARIZED FINANCIAL INFORMATION FOR AFFILIATED COMPANIES
Summarized consolidated financial information for affiliated companies for
which Conoco uses the equity method of accounting (see Note 2, "Basis of
Consolidation") is shown below on a 100 percent basis. The most significant of
these affiliates are Malaysia Refining Company Sdn. Bhd. (40%), Petrozuata C.A.
(50.1% -- see Note 2), CFJ Properties (50%), Pocahontas Gas Partnership (50%),
Excel Paralubes (50%), Polar Lights Company (50%), and Ceska Rafinerska a.s.
(16.33%).
Dividends received from equity affiliates were $105 in 1998, $58 in 1997
and $85 in 1996.
YEAR ENDED DECEMBER 31
------------------------
1998 1997 1996
------ ------ ------
RESULTS OF OPERATIONS
Sales(1).................................................... $6,744 $7,521 $6,622
Earnings before income taxes................................ 358 556 305
Net income.................................................. 252 345 140
Conoco's equity in earnings of affiliates (see Note 4)...... 22 40 (25)
- ---------------
(1) Includes sales to Conoco of $574 in 1998, $568 in 1997 and $359 in 1996.
F-18
174
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
DECEMBER 31
----------------
1998 1997
------- ------
FINANCIAL POSITION
Current assets.............................................. $ 2,771 $2,543
Non-current assets.......................................... 8,682 6,826
------- ------
Total assets...................................... $11,453 $9,369
------- ------
Short-term borrowings(1).................................... $ 897 $ 550
Other current liabilities................................... 1,650 1,308
Long-term borrowings(1)..................................... 4,743 4,364
Other long-term liabilities................................. 1,119 645
------- ------
Total liabilities................................. $ 8,409 $6,867
------- ------
Conoco's investment in affiliates (includes advances)....... $ 1,363 $1,085
======= ======
- ---------------
(1) Conoco's pro rata interest in total borrowings was $1,828 in 1998 and $1,586
in 1997, of which $967 in 1998 and $826 in 1997 were guaranteed by the
Company or DuPont, on behalf of, and indemnified by, the Company. These
amounts are included in the guarantees disclosed in Note 26.
At December 31, 1998, Conoco's equity in undistributed earnings of its
affiliated companies was $114.
13. OTHER ASSETS
DECEMBER 31
----------------
1998 1997
------- ------
Prepaid pension cost (see Note 23).......................... $ 50 $ 71
Long-term receivables....................................... 71 74
Other securities and investments(1)......................... 116 100
Deferred pension transition obligation (see Note 23)........ 109 116
Other(2).................................................... 183 131
------- ------
$ 529 $ 492
======= ======
- ---------------
(1) Includes $74 and $97 at December 31, 1998 and 1997, respectively,
representing marketable securities classified as available for sale and
reported at fair value. The remainder represents investments which are
reported at cost.
(2) Includes intangible assets of $14 and $15 at December 31, 1998 and 1997,
respectively.
14. ACCOUNTS PAYABLE
DECEMBER 31
----------------
1998 1997
------ ------
Trade....................................................... $ 906 $ 969
Payables to banks........................................... 124 85
Related parties (see Note 3)................................ 52 4
Other....................................................... 230(1) 32
------ ------
$1,312 $1,090
====== ======
- ---------------
(1) Includes $158 for property acquisitions.
F-19
175
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Payables to banks represent checks issued on certain disbursement accounts
but not presented to the banks for payment.
15. OTHER SHORT-TERM BORROWINGS AND CAPITAL LEASE OBLIGATIONS
DECEMBER 31
---------------
1998 1997
------ ------
Industrial development bonds................................ $ 24 $ 24
Bank borrowings (foreign currency).......................... -- 21
Long-term borrowings payable within one year................ 26 25
Capital lease obligations................................... 2 2
------ ------
$ 52 $ 72
====== ======
The Company has uncommitted short-term bank credit lines of approximately
$122 and $42 at December 31, 1998 and 1997, respectively. These lines are
denominated in United States dollars or various foreign currencies to support
general international operating needs. No significant advances were outstanding
under these lines at these respective dates.
The weighted average interest rate on other short-term borrowings
outstanding at December 31, 1998 and 1997, was 3.8 percent and 3.7 percent,
respectively.
16. OTHER ACCRUED LIABILITIES
DECEMBER 31
---------------
1998 1997
------ ------
Taxes other than on income.................................. $ 354 $ 376
Operating expenses.......................................... 293 343
Payroll and other employee-related costs.................... 102 135
Restructuring costs(1)...................................... 82 --
Accrued postretirement benefits cost (see Note 23).......... 18 24
Other....................................................... 313 411
------ ------
$1,162 $1,289
====== ======
- ---------------
(1) In December 1998, Conoco announced that as a result of a comprehensive
review of its assets and long-term strategy, Conoco was making
organizational realignments consistent with furthering the efficiency of
operations and taking advantage of synergies created by the upgrading of its
asset portfolio. The announced plans are being implemented in 1999 and will
result in a reduction of approximately 775 Upstream positions and 200
Downstream positions worldwide. About 75 percent of the Upstream positions
and about 50 percent of the Downstream positions affected will be in the
United States. These reductions largely reflect the elimination of
redundancies at all levels resulting from past and ongoing consolidation of
assets into operations requiring less employee support, as well as better
sharing of common services and functions across regions. Associated with
these announcements, Conoco recorded a charge of $82 pre-tax, or $52
after-tax, nearly all of which represents termination payments and related
employee benefits to be made to persons affected. The restructuring charge,
on a pre-tax basis, consisted of $31 for Upstream U.S., $36 for Upstream
International, $8 for Downstream U.S. and $7 for International Downstream.
At December 31, 1998, no persons left Conoco under implementation of these
realignment plans, and no payments had been made. Conoco expects the
restructuring efforts will be completed by year-end 1999.
F-20
176
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
17. OTHER LONG-TERM BORROWINGS AND CAPITAL LEASE OBLIGATIONS
DECEMBER 31
---------------
1998 1997
------ ------
5.75% notes due 2026........................................ $ 16 $ 16
6.50% notes due 2008........................................ 7 7
Other loans (various currencies) due 1999-2007(1)........... 29 30
Capitalization obligation to affiliate due 2008............. 11 --
Capitalization obligation to affiliate due 1999............. -- 20
Capital lease obligations................................... 30 33
------ ------
$ 93 $ 106
====== ======
- ---------------
(1) Weighted average interest rates were 7.3 percent at December 31, 1998 and
1997, respectively.
Maturities of long-term borrowings, together with sinking fund requirements
for years ending after December 31, 1999, are $4 for each of the years 2000,
2001, 2002 and 2003.
18. OTHER LIABILITIES AND DEFERRED CREDITS
DECEMBER 31
---------------
1998 1997
------ ------
Deferred gas revenue........................................ $ 371 $ 379(1)
Accrued postretirement benefits cost (see Note 23).......... 331 318
Accrued pension liability (see Note 23)..................... 320 230
Abandonment costs........................................... 297 310
Environmental remediation costs (see Note 26)............... 117 132
Related parties (see Note 3)................................ 51 --
Other....................................................... 713 553
------ ------
$2,200 $1,922
====== ======
- ---------------
(1) 1997 includes $303 received from a contract for future sales of natural gas
to Centrica, a United Kingdom gas marketing company.
19. MINORITY INTERESTS
In 1996, certain upstream subsidiaries contributed assets with an aggregate
fair value of $613 to Conoco Oil & Gas Associates L.P. (COGA) for a general
partnership interest of 67 percent. The remaining 33 percent was purchased by
Vanguard Energy Investors L.P. (Vanguard) as a limited partner. The net result
of this transaction was to increase minority interests by $297.
Vanguard is entitled to a cumulative annual priority return on its
investment and participation in residual earnings at rates established in the
partnership agreement. The priority return rate, currently 6.52 percent, is
scheduled to be renegotiated in the second half of 1999. In the event the
parties are unable to agree on a new return rate, Vanguard has the option to
call for liquidation of the partnership, which could take place before December
31, 1999. Cash outflows arising from such liquidation should not be materially
different from the recorded amount of minority interest.
Vanguard's share of COGA's earnings was $22 or 25 percent in 1998 and $22
or 18 percent in 1997; the net minority interest in COGA held by Vanguard was
$302 and $301 on December 31, 1998 and 1997, respectively.
F-21
177
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
20. STOCKHOLDERS' EQUITY
As described in Note 1, the Company's capital structure was established at
the time of the Offerings in October 1998.
At December 31, 1998, 4,600,000,000 shares of Class A and Class B Common
Stock were authorized and 628,041,394 shares were issued, including 249,863
Class A shares held in the treasury. A summary of activity in common shares
outstanding for the year 1998 is presented below:
CLASS A CLASS B TOTAL
----------- ----------- -----------
Issued in connection with the initial public offering
of Class A shares and recapitalization of DuPont
ownership (Class B shares)......................... 191,456,427 436,543,573 628,000,000
Purchase of shares for treasury (to offset dilution
from issuances under compensation plans)........... (250,000) -- (250,000)
Issued on exercise of stock options (including 137
from treasury)..................................... 41,531 -- 41,531
----------- ----------- -----------
Common Shares Outstanding -- December 31, 1998....... 191,247,958 436,543,573 627,791,531
=========== =========== ===========
At December 31, 1998, 250,000,000 shares of Preferred Stock were
authorized, of which 1,000,000 shares were designated Series A Junior
Participating Preferred Stock and reserved for issuance on exercise of preferred
stock purchase rights under the Company's Share Purchase Rights Plan. Each
issued share of Class A and Class B Common Stock has one preferred stock
purchase Right attached to it. No preferred shares have been issued and the
Rights are not currently exercisable.
Net proceeds received from the Offerings totaled $4,228, after deduction
for underwriting discounts and commissions payable by the Company, and were used
to reduce indebtedness owed to DuPont (see Note 3). In addition, Additional
Paid-In Capital was increased by $236 during 1998 as a result of a corresponding
non-cash charge to compensation expense associated with changes in certain
outstanding compensation awards made at the time of the Offerings (see Note 22).
The Company declared a first quarter cash dividend on January 27, 1999, of
$.14 per share on each outstanding share of Class A Common Stock and Class B
Common Stock, payable March 12, 1999 to stockholders of record as of February
12, 1999. This initial dividend was determined on a pro rata basis covering the
period from October 27, 1998 to December 31, 1998, and is equivalent to $.19 per
share for a full quarter.
21. ACCUMULATED OTHER COMPREHENSIVE LOSS
Balances of related after-tax components comprising Accumulated Other
Comprehensive Loss are summarized below:
DECEMBER 31
-------------
1998 1997
----- -----
Foreign Currency Translation Adjustment..................... $(185) $(160)
Minimum Pension Liability Adjustment (see Note 23).......... (89) (31)
----- -----
$(274) $(191)
===== =====
F-22
178
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Changes in related components of other comprehensive income (loss) are
reported net of associated income tax effects as summarized below:
YEAR ENDED DECEMBER 31
------------------------------------------------------------------------------
1998 1997 1996
------------------------ ------------------------ ------------------------
INCOME AFTER- INCOME AFTER- INCOME AFTER-
PRETAX TAX TAX PRETAX TAX TAX PRETAX TAX TAX
------ ------ ------ ------ ------ ------ ------ ------ ------
Foreign Currency Translation Adjustment........ $ (47) $(22) $(25) $(121) $-- $(121) $(39) $-- $(39)
Minimum Pension Liability Adjustment........... (84) (26) (58) (20) (7) (13) (15) (5) (10)
----- ---- ---- ----- --- ----- ---- --- ----
Other Comprehensive Income (Loss).............. $(131) $(48) $(83) $(141) $(7) $(134) $(54) $(5) $(49)
===== ==== ==== ===== === ===== ==== === ====
22. COMPENSATION PLANS
Until the date of the Offerings, employees of Conoco participated in
stock-based compensation plans administered through DuPont and involving options
to acquire DuPont common stock. At the time of the Offerings, Conoco employees
held a total of 10,964,917 stock options for DuPont common stock and 1,333,135
stock appreciation rights (SARs) with respect to DuPont common stock, and the
Company gave those persons the option, subject to specific country tax and legal
requirements, to participate in a program involving the cancellation of all or
part of their DuPont stock options or SARs and the issuance by the Company, upon
such cancellation, of comparable options to acquire Class A Common Stock or SARs
with respect to Class A Common Stock. The substitute stock options and other
awards have the same vesting provisions, option periods and other terms and
conditions as the DuPont options and awards they replaced. The substitute stock
options had the same ratio of the exercise price per share to the market value
per share, and the same aggregated difference between market value and exercise
price, as the DuPont stock options. A total of 8,921,508 DuPont stock options
and 745,358 DuPont SARs were cancelled with Conoco issuing 24,275,690 stock
options for Class A Common Stock and 2,279,834 SARs with respect to Class A
Common Stock with comparable terms and conditions. The program was deemed a
change in the terms of certain awards granted to Conoco employees. As a result,
the Company incurred a non-cash charge to compensation expense of $236 in the
fourth quarter of 1998, with a corresponding increase in Additional Paid-In
Capital. DuPont retained responsibility for delivery of DuPont common stock to
Conoco employees when DuPont stock options not cancelled are exercised.
AWARDS UNDER DUPONT PLANS
Stock option awards under the DuPont Stock Performance Plan were granted to
key employees of the Company prior to the Offerings and were "fixed" and/or
"variable". The purchase price of shares subject to option is the market price
of DuPont stock at the date of grant. In January 1997, a reload feature was
added to the Stock Performance Plan to accelerate stock ownership. Generally,
fixed options granted under the DuPont Stock Performance Plan are fully
exercisable one year after date of grant and expire ten years from date of
grant. However, awards in 1998 vest over a three-year period and, except for the
last six months of the ten-year option term, are exercisable when the market
price of DuPont common stock exceeds the option grant price by 20 percent.
During 1997, variable stock option grants were made to certain senior
management and subject to forfeiture if, within five years from the date of
grant, the market price of DuPont common stock did not achieve a price of $75
per share for 50 percent of the options and $90 per share for the remaining 50
percent. During 1998, before the Offerings, the $75 price was reached and
options with that hurdle became "fixed" and exercisable. All of the outstanding
variable DuPont options with a $90 per share hurdle price at the time of the
Offerings were cancelled and substituted with options for Conoco Class A Common
Stock with a hurdle price of $32.88 per share.
F-23
179
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
From time to time, the DuPont Board of Directors has approved the adoption
of a worldwide Corporate Sharing Program. Under these programs, a majority of
the Company's employees received a one-time grant to acquire shares of DuPont
common stock at the fair market value at the date of grant. Option terms are
"fixed" and generally are exercisable one year after date of grant and expire
ten years from date of grant.
AWARDS UNDER CONOCO PLANS
The 1998 Stock and Performance Incentive Plan provides incentives to
certain corporate officers, non-employee directors and independent contractors
who can contribute materially to the success and profitability of the Company
and its subsidiaries and provides for substitution of certain existing DuPont
awards in connection with the Offerings. Awards may be in the form of cash,
stock, stock options or SARs with respect to Class A Common Stock. This plan
also provides for the Conoco Global Variable Compensation Plan, which is an
annual management incentive program for officers and certain non-officer
employees with awards made in cash and stock. Stock options and SARs granted
under the 1998 Stock and Performance Incentive Plan (except those granted to
substitute for DuPont awards) are awarded at market price on the date of grant,
have a ten year life, and generally vest one year from date of grant with
one-third becoming exercisable each of the first three years. For certain senior
management, shares otherwise receivable from the exercise of nonqualified
options with respect to Class A Common Stock granted under the 1998 Stock and
Performance Incentive Plan of Conoco to substitute for cancelled 1998 DuPont
stock options, as well as incremental new Conoco stock options granted at the
date of the Offerings, can be deferred as stock units for a designated future
delivery. The maximum number of shares of common stock and stock options granted
under the plan is limited to the higher of 20 million or 3.3 percent of
outstanding shares of Class A and Class B Common Stock. Awards made in
substitution for DuPont awards do not count against the number of shares
available under the plan. At December 31, 1998, 16,850,266 shares of Class A
Common Stock were available for issuance under the plan.
The Company adopted the 1998 Key Employee Stock Performance Plan to attract
and retain employees by enhancing the proprietary and personal interests of
employees in the success and profitability of the Company and to grant some
awards in substitution for certain existing DuPont awards in connection with the
Offerings. Awards to employees may be in the form of Company stock options or
SARs, both with respect to Class A Common Stock. Such awards granted under this
plan (except to substitute for DuPont awards) are awarded at market price on the
date of grant, have a ten year life, and generally vest one year from date of
grant with one-third becoming exercisable each of the first three years. The
maximum number of shares of common stock and stock options granted under the
plan is limited to the higher of 18 million or three percent of outstanding
Class A and Class B Common Stock. Awards made in substitution for DuPont awards
do not count against the number of shares available under the plan. At December
31, 1998, 14,484,936 shares of Class A Common Stock were available for issuance
under the plan.
Persons electing to substitute Conoco stock options with respect to Class A
Common Stock for DuPont stock options and persons receiving incremental new
Conoco stock options with respect to Class A Common Stock at the date of the
Offerings under the 1998 Stock and Performance Incentive Plan and the 1998 Key
Employee Stock Performance Plan are eligible for reload options upon the
exercise of stock options, with the condition that shares received from the
exercise of the original option may not be sold for at least two years. Reloads
are granted at the market price on the reload grant date and have a term equal
to the remaining term of the original option. The number of new options granted
under a reload option is equal to the number of shares required to satisfy the
total exercise price of the original option.
F-24
180
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
The 1998 Global Performance Sharing Plan is a broad-based plan under which
grants of stock options and SARs with respect to Class A Common Stock were made
to certain non-officer employees on the date of the Offerings to encourage a
sense of proprietorship and an active interest in the financial success of
Conoco and its subsidiaries. The stock options and SARs were awarded at the
price of the Offerings ($23 per share), have a ten year life, and become
exercisable in one-third increments on the first, second and third anniversaries
of the grant date. There are no additional shares available for issuance under
this plan.
All stock options granted under Conoco plans are "fixed" and have no
intrinsic value at grant date except for those granted to substitute for
cancelled DuPont options. Accordingly, except for the fourth quarter 1998 charge
related to the one-time offer to cancel DuPont options and substitute Conoco
options, no compensation expense has been recognized for fixed options.
The following table summarizes activity for fixed and variable options for
the last three years:
FIXED VARIABLE
---------------------- ---------------------
NUMBER WEIGHTED- NUMBER WEIGHTED-
OF AVERAGE OF AVERAGE
SHARES PRICE SHARES PRICE
---------- --------- --------- ---------
DUPONT OPTIONS
January 1, 1996....................................... 7,811,547 $24.27 -- --
Granted............................................. 1,140,780 39.20 -- --
Exercised........................................... (1,781,277) 23.33 -- --
Forfeited........................................... (95,330) 26.38 -- --
---------- ------ --------- ------
December 31, 1996..................................... 7,075,720 $26.88 -- --
Granted............................................. 2,761,416 52.90 1,259,600 $52.50
Exercised........................................... (730,383) 23.97 -- --
Forfeited........................................... (116,325) 50.44 -- --
---------- ------ --------- ------
December 31, 1997..................................... 8,990,428 $35.14 1,259,600 $52.50
Granted............................................. 1,241,055 59.53 -- --
Reclassified........................................ 629,800 52.50 (629,800) 52.50
Exercised........................................... (460,314) 24.64 -- --
Forfeited........................................... (65,852) 50.68 -- --
---------- ------ --------- ------
October 21, 1998 (Offerings date)..................... 10,335,117 $39.50 629,800 $52.50
Cancelled for Conoco options........................ (8,291,708) (629,800)
---------- ---------
Retained by DuPont.................................. 2,043,409 --
CONOCO OPTIONS
Granted at Offerings date:
For cancelled DuPont options........................ 22,551,544 $14.62 1,724,146 $19.18
New awards.......................................... 9,721,750 23.00 -- --
Exercised............................................. (41,531) 14.18 -- --
Forfeited............................................. (53,840) 23.00 -- --
---------- ------ --------- ------
December 31, 1998..................................... 32,177,923 $17.14 1,724,146 $19.18
F-25
181
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
The following table summarizes information concerning outstanding and
exercisable fixed Conoco options at December 31, 1998. For total variable
options outstanding at December 31, 1998, the weighted-average remaining
contractual life was 3.1 years.
EXERCISE PRICE
--------------------------------------------------
$5.89- $8.90- $14.47- $21.73-
$8.41 $12.80 $21.64 $29.58
---------- ---------- ---------- -----------
Options outstanding............................. 2,766,632 7,335,094 9,281,970 12,794,227
Weighted-average remaining contractual life
(years)....................................... 2.9 5.5 7.8 9.6
Weighted-average price.......................... $ 7.60 $ 10.02 $ 17.94 $ 22.70
Options exercisable............................. 2,766,632 7,335,094 9,281,970 42,204
Weighted-average price.......................... $ 7.60 $ 10.02 $ 17.94 $ 24.22
Fixed options exercisable at the end of the last three years and the
weighted-average fair value of fixed options granted are as follows:
CONOCO DUPONT OPTIONS
OPTIONS ------------------------------------
1998 1998* 1997 1996
----------- ---------- ---------- ----------
Options exercisable at year-end:
Number of shares.............................. 19,425,900 9,113,046 6,229,012 5,934,940
Weighted-average price........................ $ 13.49 $ 36.81 $ 27.26 $ 24.51
Weighted-average fair value of options granted
during the year:
New options................................... $ 4.15 $ 13.85 $ 12.84 $ 9.01
Options substituted for DuPont options........ $ 9.22
- ---------------
* As of the date of the Offerings rather than year-end.
The fair value of Conoco variable options with a hurdle price of $32.88 per
share granted as substitutes for DuPont variable options was assumed to be zero.
The fair value of options is calculated using the Black-Scholes option
pricing model. Assumptions used were as follows:
CONOCO OPTIONS DUPONT OPTIONS
------------------ --------------------------------
1998 1997
FIXED 1998 ---------------- 1996
NEW SUBSTITUTES FIXED FIXED VARIABLE FIXED
---- ----------- ----- ----- -------- -----
Dividend yield..................................... 3.3% 3.3% 2.1% 2.2% 2.2% 2.6%
Volatility......................................... 20.0%* 20.0%* 19.9% 18.6% 18.6% 21.0%
Risk-free interest rate............................ 4.6% 4.4% 5.5% 6.4% 6.4% 5.4%
Expected life (years).............................. 5.8* 3.9* 5.8 5.6 5.7 6.0
- ---------------
* Due to insufficient history, DuPont experience trends have been used to
estimate the volatility of Conoco stock and the expected life for exercise of
Conoco stock options.
F-26
182
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
The following table sets forth pro forma information as if the Company had
adopted the optional recognition provisions of SFAS No. 123:
1998 1997 1996
---- ----- -----
Increase (Decrease) in:
Net income.................................................. $157 $ (28) $ (6)
Earnings per share
Basic..................................................... $.33 $(.06) $(.01)
Diluted................................................... $.33 $(.06) $(.01)
Total fair value underpinning the pro forma disclosure for 1998 presented
above includes the fair value of new DuPont grants and a pro rata portion of new
Conoco grants made at the Offerings date, plus incremental fair value of the
Conoco stock options that were substituted for DuPont stock options granted
after the adoption of SFAS No. 123. The incremental fair value for cancellation
and substitution of stock options originally granted before adoption of SFAS No.
123 is zero because intrinsic value exceeds fair value.
Compensation expense recognized in income for stock-based employee
compensation awards was $229, $26 and $13 for 1998, 1997 and 1996, respectively,
with 1998 including a one-time charge of $236 for the cancellation of DuPont
stock options described above.
Prior to the Offerings, the Conoco Unit Option Plan awarded SARs with
respect to DuPont common stock to key salaried employees in certain grade levels
who showed early evidence of ability to assume significant responsibility and
leadership. At the time of the Offerings, 1,131,494 unit options were
outstanding of which 593,722 were cancelled and substituted with comparable SARs
with respect to Conoco Class A Common Stock under the 1998 Key Employee Stock
Performance Plan of Conoco. Effective with the Offerings, no new grants were
made or are planned out of the Conoco Unit Option Plan. At December 31, 1998,
outstanding unit options based on Conoco Class A Common Stock were 1,605,614. At
December 31, 1998 and 1997, outstanding unit options based on DuPont common
stock were 545,724 and 908,532, respectively. At these same dates, related
liability provisions totaled $22 and $27, respectively.
Through the date of the Offerings, certain Conoco employees who
participated in the DuPont Variable Compensation Plan received grants of stock
and cash. Overall amounts were dependent on financial performance of DuPont and
Conoco and other factors, and were subject to maximum limits as defined by the
plan. Amounts charged against earnings in anticipation of awards to be made
later were $39 in 1998, $38 in 1997 and $38 in 1996. Awards made for plan years
1998, 1997 and 1996 were $24, $45 and $38, respectively, with awards distributed
in 1999 for the 1998 plan year made out of the 1998 Stock and Performance
Incentive Plan of Conoco based on performance standards set previously in the
DuPont Variable Compensation Plan. Both the DuPont Variable Compensation Plan
and the 1998 Stock and Performance Incentive Plan of Conoco allow future
delivery of stock awards. Employees were offered the opportunity to cancel
DuPont shares granted under previous awards and receive substitute shares of
Conoco Class A Common Stock for designated future delivery under the 1998 Stock
and Performance Incentive Plan of Conoco. At December 31, 1998, 72,345 shares of
DuPont stock and 199,268 shares of Conoco Class A Common Stock are awaiting
delivery. A liability of $4 has been recognized for delivery of DuPont shares.
Awards under the separate Conoco Challenge Program may be granted in cash
to employees not covered by the Variable Compensation Plan. This plan provides
awards based on meeting financial goals and upholding Conoco's core values.
Overall amounts are dependent on Company earnings and cash
F-27
183
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
provided by operations and are subject to maximum limits as defined by the plan.
Amounts charged against earnings in anticipation of awards to be made later were
$22 in 1998, $49 in 1997 and $47 in 1996. Awards made for plan years 1998, 1997
and 1996 were $19, $47 and $47, respectively.
23. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
The Company participates in the DuPont U.S. defined benefit pension plan,
which covers substantially all U.S. employees and has separate defined benefit
pension plans covering certain U.S. and non-U.S. employees. The benefits for
these plans are based primarily on years of service and employees' pay near
retirement. The Company's funding policy is consistent with the funding
requirements of federal laws and regulations.
With respect to the DuPont U.S. defined benefit pension plan, the Company
and DuPont agreed upon an amount of approximately $820 at the date of the
Offerings that will eventually be transferred to a separate trust for the
Company's pension plan. Ninety percent of this amount, adjusted for benefit
payments and investment return from the date of the Offerings, will be
transferred to the Company within six months following the date on which DuPont
owns neither 80 percent of the voting power nor 80 percent of the economic value
of the Common Stock, assuming certain conditions are satisfied. The remainder
will be transferred within a further 90-day period. The adjusted value subject
to transfer was approximately $878 at December 31, 1998. DuPont allocated the
pension obligations based on the Company's individual employees covered and
allocated the unrecognized prior service cost and unrecognized net gain in
proportion to the Company's projected benefit obligation to the total projected
benefit obligation of the DuPont plan. The projected benefit obligation
approximates $871 and $723 at December 31, 1998 and 1997, respectively, and the
prepaid pension asset recognized in the Consolidated Balance Sheet (see Note 13)
is $50 and $71 at December 31, 1998 and 1997, respectively. The net periodic
pension cost components included in the table below are also based on the
foregoing allocation factors.
Pension coverage for employees of the Company's non-U.S. subsidiaries is
provided, to the extent deemed appropriate, through separate plans. Obligations
under such plans are systematically provided for by depositing funds with
trustees, under insurance policies or by book reserves.
Conoco and certain subsidiaries also provide medical and life insurance
benefits to retirees and survivors. The associated plans, principally health,
are unfunded, and approved claims are paid from Company funds. Under the terms
of these plans, the Company reserves the right to change, modify or discontinue
the plans. Conoco has communicated to plan participants that any increase in the
annual health care escalation rate above 4.5 percent will be borne by the
participants and, therefore, result in no increase to the accumulated
postretirement benefit obligation or the other postretirement benefits cost.
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------- ------------------------
1998 1997 1996 1998 1997 1996
----- ---- ---- ------ ------ ------
NET PERIODIC BENEFIT COST
Service cost............................................. $ 65 $ 60 $ 55 $ 7 $ 6 $ 7
Interest cost............................................ 94 88 76 21 18 16
Expected return on plan assets........................... (105) (98) (91) -- -- --
Amortization of prior service cost (credit).............. 9 2 2 (4) (4) (4)
Recognized actuarial loss (gain)......................... (4) 1 (5) -- (1) (1)
----- ---- ---- --- --- ---
Net periodic benefit cost................................ $ 59 $ 53 $ 37 $24 $19 $18
===== ==== ==== === === ===
F-28
184
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Information concerning benefit obligations, plan assets, funded status and
recorded values for these plans (excluding the DuPont U.S. defined benefit plan)
follows:
OTHER
POSTRETIREMENT
PENSION BENEFITS BENEFITS
----------------- ---------------
1998 1997 1998 1997
------- ------- ------ ------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year..................... $ 682 $ 533 $ 301 $ 242
Service cost................................................ 33 28 7 6
Interest cost............................................... 44 39 21 18
Amendments.................................................. (4) -- -- --
Participant contributions................................... -- -- 3 3
Actuarial (gain) loss....................................... 160 113 43 58
Divestitures and other...................................... (17) (2) -- --
Benefits paid............................................... (32) (29) (25) (26)
----- ----- ----- -----
Benefit obligation at end of year........................... $ 866 $ 682 $ 350 $ 301
===== ===== ===== =====
CHANGE IN PLAN ASSETS
Fair Value of plan assets at beginning of year.............. $ 386 $ 323 $ -- $ --
Actual return on plan assets................................ 61 48 -- --
Employer contribution....................................... 26 28 22 23
Participant contributions................................... -- -- 3 3
Divestitures and other...................................... (14) -- -- --
Benefits paid............................................... (21) (13) (25) (26)
----- ----- ----- -----
Fair Value of plan assets at end of year.................... $ 438 $ 386 $ -- $ --
===== ===== ===== =====
Funded status of plans at end of year....................... $(428) $(296) $(350) $(301)
Unrecognized actuarial loss................................. 240 109 53 14
Unrecognized prior service cost (credit).................... 109 121 (52) (55)
----- ----- ----- -----
Net amount recognized at end of year........................ $ (79) $ (66) $(349) $(342)
===== ===== ===== =====
AMOUNTS RECOGNIZED IN CONSOLIDATED BALANCE SHEET AT END OF
YEAR
Accrued benefit liability:
Short-term (see Note 16).................................. $ -- $ -- $ (18) $ (24)
Long-term (see Note 18)................................... (320) (230) (331) (318)
Deferred pension cost (see Note 13)......................... 109 116 -- --
Accumulated other comprehensive loss(1)..................... 132 48 -- --
----- ----- ----- -----
Net amount recognized..................................... $ (79) $ (66) $(349) $(342)
===== ===== ===== =====
- ---------------
(1) Before reduction for associated deferred tax savings of $43 and $17 at
December 31, 1998 and 1997, respectively (see Note 21).
F-29
185
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
WEIGHTED-AVERAGE ASSUMPTIONS AT END OF YEAR
Discount rate(1)............................................ 6.50% 7.00% 6.50% 7.00%
Rate of compensation increase(1)............................ 5.15% 5.15% 5.15% 5.15%
Expected return on plan assets(1)........................... 9.00% 9.00% -- --
Health care escalation rate................................. -- -- 4.50% 4.50%
- ---------------
(1) Represents rates for U.S. plans; similar economic assumptions were used for
non-U.S. plans, with the exception of the United Kingdom where discount
rates of 6 percent and 7.25 percent were used at year end 1998 and 1997,
respectively.
At December 31, 1998, U.S. defined benefit plan assets consisted
principally of common stocks, including 471,667 shares of DuPont.
24. INVESTING ACTIVITIES
Purchases of property, plant and equipment in 1997 include $929 for
Upstream natural gas properties in South Texas (see Supplementary Petroleum
Data).
Non-cash additions to property, plant and equipment totaled $162 and $127
for the years 1998 and 1997, respectively.
Proceeds from sales of assets in 1998 include $245 from the sale of certain
Upstream properties in the U.S. and North Sea, $156 for various U.S. Downstream
assets, and $54 from sale of a Downstream office building in Europe. Proceeds in
1997 include $272 from the sale of certain Upstream North Sea properties.
25. FINANCIAL INSTRUMENTS AND OTHER RISK MANAGEMENT ACTIVITIES
Conoco operates in the worldwide crude oil, refined product, natural gas,
natural gas liquids and electric power markets and is exposed to fluctuations in
hydrocarbon prices, foreign currency rates and interest rates that can affect
the revenues and cost of operating, investing and financing. Conoco's management
has used and intends to use financial and commodity-based derivative contracts
to reduce the risk in overall earnings and cash flow when the benefits provided
are anticipated to more than offset the risk management costs involved.
The Company has established a Financial Risk Management Policy Framework
that provides guidelines for entering into contractual arrangements
(derivatives) to manage the Company's commodity price, foreign currency rate and
interest rate risks. The Conoco Risk Management Committee has ongoing
responsibility for the content of this policy and has principal oversight
responsibility to ensure the Company is in compliance with the policy and that
procedures and controls are in place for the use of commodity, foreign currency
and interest rate instruments. These procedures clearly establish derivative
control and valuation processes, routine monitoring and reporting requirements,
and counterparty credit approval procedures. Additionally, the Company's
internal audit group conducts reviews of these risk management activities to
assess the adequacy of internal controls. The audit results are reviewed by the
Conoco Risk Management Committee and by management.
The counterparties to these contractual arrangements are limited to major
financial institutions and other established companies in the petroleum
industry. Although the Company is exposed to credit loss in the event of
nonperformance by these counterparties, this exposure is managed through credit
approvals, limits and monitoring procedures and limits to the period over which
unpaid balances are allowed to
F-30
186
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
accumulate. The Company has not experienced nonperformance by counterparties to
these contracts, and no material loss would be expected from any such
nonperformance.
COMMODITY PRICE RISK
The Company enters into energy-related futures, forwards, swaps and options
in various markets to balance its physical systems, to meet customer needs and
to manage its price exposure on anticipated crude oil, natural gas, refined
product and electric power transactions.
These instruments provide a natural extension of the underlying cash market
and are used to physically acquire a portion of supply requirements as well as
to manage pricing of near-term physical requirements. The commodity futures
market has underlying principles of increased liquidity and longer trading
periods than the cash market and is one method of managing price risk in the
energy business.
Conoco's policy is to generally be exposed to market pricing for commodity
purchases and sales. From time to time, management may use derivatives to
establish longer-term positions to hedge the price risk for the Company's equity
crude oil and natural gas production as well as refinery margins.
Under the Company's policy, hedging includes only those transactions that
offset physical positions and reduce overall Company exposure to price risk.
Trading is defined as any transaction that does not meet the definition of
hedging. After-tax gain/loss from risk trading has not been material.
FOREIGN CURRENCY RISK
Conoco has foreign currency exchange rate risk resulting from operations in
over 40 countries around the world. The Company does not comprehensively hedge
its exposure to currency rate changes, although it may choose to selectively
hedge exposures to foreign currency rate risk. Examples include firm commitments
for capital projects, certain local currency tax payments, and cash returns from
net investments in foreign affiliates to be remitted within the coming year.
At December 31, 1998, the Company had no open forward exchange contracts.
At December 31, 1997, the Company had open forward exchange contracts designated
as a hedge of firm foreign currency commitments. The notional amount of these
contracts was $50 and the estimated fair value was $38.
INTEREST RATE RISK
Prior to the Offerings, the Company had no significant interest rate risk
to manage. Subsequent to the Offerings, however, the Company intends to manage
any material risk arising from exposure to interest rates by using a combination
of financial derivative instruments as part of a program to manage the fixed and
floating interest rate mix of the total debt portfolio and related overall cost
of borrowing.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying values of most financial instruments are based on historical
costs. The carrying values of marketable securities, receivables, payables and
short-term obligations approximate their fair value because of their short
maturity. Long-term receivables from and long-term borrowings due to related
parties approximate fair value because associated interest rates are market
based. At December 31, 1998, however, long-term borrowings due related parties
included $4,589 at a fixed rate with fair value estimated at $4,624. Excluding
amounts due related parties, the estimated fair value of other long-term
borrowings outstanding at December 31, 1998 and 1997 of $93 and $106,
respectively, was $96 and $108, respectively. These estimates were based on
quoted market prices for the same or similar issues, or the current rates
offered to the Company for issues with the same remaining maturities.
F-31
187
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
SUMMARY OF OUTSTANDING DERIVATIVE FINANCIAL INSTRUMENTS
Set forth below is a summary of the fair values, carrying amounts and
notional values of outstanding commodity financial instruments at December 31,
1998 and 1997.
Notional amounts represent the face amount of the contractual arrangements
and are not a measure of market or credit exposure. The fair value of swaps and
other over-the-counter instruments are estimated based on quoted market prices
of comparable contracts and approximate the gain or (loss) that would have been
realized if the contracts had been closed out at the balance sheet date.
Carrying amounts represent the receivable (payable) recorded in the Consolidated
Balance Sheet.
FAIR CARRYING NOTIONAL
COMMODITY DERIVATIVES VALUE AMOUNT VALUE
--------------------- ----- -------- --------
December 31, 1998:
Hedging................................................... $(10) $(6) $ 422
Trading................................................... 2 -- 330
December 31, 1997:
Hedging................................................... $ 10 $12 $1,037
Trading................................................... (2) (1) 1,089
Estimated fair values for hedging instruments only represent the value of
the hedge component of the transactions and, thus, are not indicative of the
fair value of the Company's overall hedged position.
26. COMMITMENTS AND CONTINGENT LIABILITIES
The Company uses various leased facilities and equipment in its operations.
Future minimum lease payments under noncancelable operating leases are $246,
$226, $216, $199 and $194 for the years 1999, 2000, 2001, 2002 and 2003,
respectively, and $580 for subsequent years, and are not reduced by
noncancelable minimum sublease rentals due in the future in the amount of $69.
Rental expense under operating leases was $198 in 1998, $132 in 1997 and $118 in
1996.
The Company has various purchase commitments for materials, supplies,
services and items of permanent investment incident to the ordinary conduct of
business. In the aggregate, such commitments are not at prices in excess of
current market. In addition, at December 31, 1998, the Company has obligations
under international contracts to purchase, over periods up to 20 years, natural
gas at prices that were in excess of year-end 1998 market prices. No material
annual loss is expected from these long-term commitments.
The Company is subject to various lawsuits and claims involving a variety
of matters including, along with other oil companies, actions challenging oil
and gas royalty payments, severance tax payments and other payments, including
claims based on posted prices, and claims for damages resulting from leaking
underground storage tanks. As a result of the Separation Agreement with DuPont,
the Company has assumed responsibility for current and future claims related to
certain discontinued chemicals and agricultural chemicals businesses operated by
Conoco in the past. In general, the effect on future financial results is not
subject to reasonable estimation because considerable uncertainty exists. The
Company believes the ultimate liabilities resulting from such lawsuits and
claims may be material to results of operations in the period in which they are
recognized but will not materially affect the consolidated financial position of
the Company.
The Company is also subject to contingencies under environmental laws and
regulations that in the future may require the Company to take further action to
correct the effects on the environment of prior
F-32
188
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
disposal practices or releases of petroleum substances by the Company or other
parties. The Company has accrued for certain environmental remediation
activities consistent with the policy set forth in Note 2. The Company has
assumed environmental remediation liabilities from DuPont related to certain
discontinued chemicals and agricultural chemicals businesses operated by Conoco
in the past that are included in the environmental accrual. At December 31, 1998
and 1997, such accrual amounted to $129 and $144, respectively, and, in
management's opinion, was appropriate based on existing facts and circumstances.
Under adverse changes in circumstances, potential liability may exceed amounts
accrued. Although future remediation expenditures in excess of current reserves
are possible, the effect of any such excess on future financial results is not
subject to reasonable estimation because of the considerable uncertainty
regarding the cost and timing of expenditures. In the event future monitoring
and remediation expenditures are in excess of amounts accrued, they may be
significant to results of operations in the period recognized but management
does not anticipate they will have a material adverse effect on the consolidated
financial position of the Company.
The Company has indirectly guaranteed various debt obligations under
agreements with certain affiliated and other companies to provide specified
minimum revenues from shipments or purchases of products. These indirect
guarantees totaled $18 and $19 at December 31, 1998 and 1997, respectively. The
Company, as of August 1, 1998, terminated a multiparty account banking agreement
that provided for the indirect guarantee of bank account overdrafts of certain
European DuPont subsidiaries. The Company now has a new multiparty banking
agreement that provides for the indirect guarantee of bank account overdrafts
for itself and its subsidiaries. Management believes the exposure under this
agreement is not material. In addition, the Company or DuPont, on behalf of and
indemnified by, the Company, had directly guaranteed obligations of certain
affiliated companies and others. These guarantees totaled $1,353 and $1,131 at
December 31, 1998 and 1997, respectively. The increase in 1998 is primarily
related to additional financing associated with the construction of drillships
and cogeneration facilities in South Texas. The balance at December 31, 1998,
includes a drillship construction guarantee of $260 that was eliminated through
successful completion in early 1999. No material loss is anticipated by reason
of such agreements and guarantees.
The Company's operations, particularly oil and gas exploration and
production, can be affected by changing economic, regulatory and political
environments in the various countries, including the United States, in which it
operates. In certain locations, host governments have imposed restrictions,
controls and taxes, and in others, political conditions have existed that may
threaten the safety of employees and the Company's continued presence in those
countries. Internal unrest or strained relations between a host government and
the Company or other governments may affect the Company's operations. Those
developments have, at times, significantly affected the Company's operations and
related results and are carefully considered by management when evaluating the
level of current and future activity in such countries.
Areas in which the Company has significant operations include the United
States, the United Kingdom, Norway, Germany, Venezuela, the United Arab
Emirates, Indonesia, Russia, Canada, the Czech Republic, Malaysia and Nigeria.
F-33
189
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
27. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION
Conoco is involved in both the Upstream and Downstream operating segments
of the petroleum business that comprise the structure used by senior management
to make key operating decisions and assess performance. Activities of the
Upstream operating segment include exploring for, and developing, producing and
selling, crude oil, natural gas and natural gas liquids. Activities of the
Downstream operating segment include refining crude oil and other feedstocks
into petroleum products, buying and selling crude oil and refined products and
transporting, distributing and marketing petroleum products. The Company has
four reporting segments for its Upstream and Downstream operating segments,
reflecting geographic division between the United States and International.
Corporate and Other includes general corporate expenses, financing costs and
other non-operating items, and results for electric power and related-party
insurance operations. The Company sells its products worldwide; however, in
1998, about 57 percent and 39 percent of sales were made in the United States
and Europe, respectively. Major products include crude oil, natural gas and
refined products that are sold primarily in the energy and transportation
markets. The Company's sales are not materially dependent on a single customer
or small group of customers. Transfers between segments are on the basis of
estimated market values.
UPSTREAM DOWNSTREAM
----------------------- ----------------------- CORPORATE
UNITED UNITED AND
SEGMENT INFORMATION STATES INTERNATIONAL STATES INTERNATIONAL OTHER CONSOLIDATED
- ------------------- ------ ------------- ------- ------------- --------- ------------
1998
Sales and Other Operating Revenues(2)
Refined Products................................ $ -- $ -- $ 6,082 $7,647 $ -- $13,729
Crude Oil....................................... 14 774 2,650 299 -- 3,737
Natural Gas..................................... 2,416 723 -- -- -- 3,139
Other........................................... 770 104 217 351 749 2,191
------ ------ ------- ------ ------ -------
Total..................................... 3,200 1,601 8,949 8,297 749 22,796
Transfers Between Segments........................ 308 378 89 181 -- --
------ ------ ------- ------ ------ -------
Total Operating Revenues.................. $3,508 $1,979 $ 9,038 $8,478 $ 749 $22,796
====== ====== ======= ====== ====== =======
Operating Profit.................................. $ 223 $ 482 $ 149 $ 256 $ (379) $ 731
Equity in Earnings of Affiliates.................. 1 (14) 56 (20) (1) 22
Corporate Non-Operating Items:
Interest and Debt Expense....................... (199) (199)
Interest Income (net of misc. interest
expense)...................................... 89 89
Other........................................... 51 51
Provision for Income Taxes........................ (5) (185) (70) (80) 96 (244)
------ ------ ------- ------ ------ -------
Net Income (Loss)(1).............................. $ 219 $ 283 $ 135 $ 156 $ (343) $ 450
====== ====== ======= ====== ====== =======
Capital Employed at December 31:
Excluding Investment in Affiliates.............. $2,349 $2,849 $ 1,245 $ 989 $ 384 $ 7,816
Investment in Affiliates........................ 191 371 248 531 22 1,363
------ ------ ------- ------ ------ -------
Total(3).................................. $2,540 $3,220 $ 1,493 $1,520 $ 406 $ 9,179
====== ====== ======= ====== ====== =======
Depreciation, Depletion and Amortization.......... $ 383 $ 457 $ 139 $ 133 $ 1 $ 1,113
Dry Hole Costs and Impairment of Unproved
Properties...................................... $ 59 $ 104 $ 163
Other Significant Non-Cash Items:
Stock Option Provision.......................... $ 236 $ 236
Inventory Write-down to Market.................. $ 6 $ 63 $ 28 $ 97
Capital Expenditures and Investments(4)........... $ 788 $1,177 $ 201 $ 332 $ 18 $ 2,516
F-34
190
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
UPSTREAM DOWNSTREAM
----------------------- ----------------------- CORPORATE
UNITED UNITED AND
SEGMENT INFORMATION STATES INTERNATIONAL STATES INTERNATIONAL OTHER CONSOLIDATED
- ------------------- ------ ------------- ------- ------------- --------- ------------
1997
Sales and Other Operating Revenues(2)
Refined Products................................ $ -- $ -- $ 7,664 $8,165 $ -- $15,829
Crude Oil....................................... 24 1,191 3,483 181 -- 4,879
Natural Gas..................................... 2,415 556 -- -- -- 2,971
Other........................................... 909 159 247 293 509 2,117
------ ------ ------- ------ ------ -------
Total..................................... 3,348 1,906 11,394 8,639 509 25,796
Transfers Between Segments........................ 599 622 115 191 -- --
------ ------ ------- ------ ------ -------
Total Operating Revenues.................. $3,947 $2,528 $11,509 $8,830 $ 509 $25,796
====== ====== ======= ====== ====== =======
Operating Profit.................................. $ 489 $1,174 $ 287 $ 185 $ (132) $ 2,003
Equity in Earnings of Affiliates.................. 18 (7) 30 (1) 40
Corporate Non-Operating Items:
Interest and Debt Expense....................... (36) (36)
Interest Income (net of misc. interest
expense)...................................... 77 77
Other........................................... 23 23
Provision for Income Taxes........................ (62) (728) (101) (93) (26) (1,010)
------ ------ ------- ------ ------ -------
Net Income (Loss)(1).............................. $ 445 $ 439 $ 216 $ 91 $ (94) $ 1,097
====== ====== ======= ====== ====== =======
Capital Employed at December 31:
Excluding Investment in Affiliates.............. $2,390 $2,299 $ 1,421 $1,130 $ 903 $ 8,143
Investment in Affiliates........................ 155 256 226 425 23 1,085
------ ------ ------- ------ ------ -------
Total(3).................................. $2,545 $2,555 $ 1,647 $1,555 $ 926 $ 9,228
====== ====== ======= ====== ====== =======
Depreciation, Depletion and Amortization.......... $ 268 $ 578 $ 145 $ 188 $ 1,179
Dry Hole Costs and Impairment of Unproved
Properties...................................... $ 63 $ 106 $ 169
Capital Expenditures and Investments(4)........... $1,534 $ 999 $ 227 $ 331 $ 23 $3,114 \
F-35
191
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
UPSTREAM DOWNSTREAM
----------------------- ----------------------- CORPORATE
UNITED UNITED AND
SEGMENT INFORMATION STATES INTERNATIONAL STATES INTERNATIONAL OTHER CONSOLIDATED
- ------------------- ------ ------------- ------- ------------- --------- ------------
1996
Sales and Other Operating Revenues(2)
Refined Products................................ $ -- $ -- $ 7,355 $8,598 $ -- $15,953
Crude Oil....................................... 29 1,359 2,897 1 -- 4,286
Natural Gas..................................... 1,907 471 -- -- -- 2,378
Other........................................... 847 113 293 281 79 1,613
------ ------ ------- ------ ------ -------
Total..................................... 2,783 1,943 10,545 8,880 79 24,230
Transfers Between Segments........................ 587 572 125 151 -- --
------ ------ ------- ------ ------ -------
Total Operating Revenues.................. $3,370 $2,515 $10,670 $9,031 $ 79 $24,230
====== ====== ======= ====== ====== =======
Operating Profit.................................. $ 328 $1,231 $ 244 $ 202 $ (118) $ 1,887
Equity in Earnings of Affiliates.................. 11 (41) 8 (3) (25)
Corporate Non-Operating Items:
Interest and Debt Expense....................... (74) (74)
Interest Income (net of misc. interest
expense)...................................... 124 124
Other........................................... (11) (11)
Provision for Income Taxes........................ (25) (823) (80) (82) (28) (1,038)
------ ------ ------- ------ ------ -------
Net Income (Loss)(1).............................. $ 314 $ 367 $ 172 $ 117 $ (107) $ 863
====== ====== ======= ====== ====== =======
Capital Employed at December 31:
Excluding Investment in Affiliates.............. $1,371 $3,042 $ 1,538 $1,195 $ 995 $ 8,141
Investment in Affiliates........................ 105 129 154 315 -- 703
------ ------ ------- ------ ------ -------
Total(3).................................. $1,476 $3,171 $ 1,692 $1,510 $ 995 $ 8,844
====== ====== ======= ====== ====== =======
Depreciation, Depletion and Amortization.......... $ 307 $ 485 $ 156 $ 137 $ 1,085
Dry Hole Costs and Impairment of Unproved
Properties...................................... $ 65 $ 72 $ 137
Capital Expenditures and Investments(4)........... $ 400 $ 864 $ 218 $ 462 $ 1,944
- ------------
(1) Includes After-Tax Benefits (Charges) from
Special Items:
1998
Asset Sales................................. $ 41 $ 54 $ -- $ 12 $ -- $ 107
Property Impairments........................ (32) (6) -- -- -- (38)
Inventory Write-downs....................... (4) -- (40) (19) -- (63)
Employee Separation Costs................... (19) (23) (5) (5) -- (52)
Environmental Litigation Charges............ -- -- (28) -- (14) (42)
Stock Option Provision...................... -- -- -- -- (183) (183)
------ ------ ------- ------ ------ -------
Total................................. $ (14) $ 25 $ (73) $ (12) $ (197) $ (271)
====== ====== ======= ====== ====== =======
1997
Asset Sales................................. $ 49 $ 191 $ -- $ -- $ -- $ 240
Property Impairments........................ -- (112) -- (55) -- (167)
Environmental Litigation Charges............ -- -- (23) -- -- (23)
Tax Rate Changes............................ -- 19 -- 11 -- 30
Total................................. $ 49 $ 98 $ (23) $ (44) $ -- $ 80
====== ====== ======= ====== ====== =======
F-36
192
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
UPSTREAM DOWNSTREAM
----------------------- ----------------------- CORPORATE
UNITED UNITED AND
SEGMENT INFORMATION STATES INTERNATIONAL STATES INTERNATIONAL OTHER CONSOLIDATED
- ------------------- ------ ------------- ------- ------------- --------- ------------
1996
Asset Sales................................. $ 16 $ -- $ -- $ 19 $ -- $ 35
Property Impairments........................ -- (63) -- -- -- (63)
Employee Separation Costs................... (7) (4) (8) (3) -- (22)
Environmental Litigation Insurance
Recoveries................................ -- -- 44 -- -- 44
------ ------ ------- ------ ------ -------
Total................................. $ 9 $ (67) $ 36 $ 16 $ -- $ (6)
====== ====== ======= ====== ====== =======
(2) Includes sales of purchased products substantially at cost:
1998 1997 1996
------ ------ ------
Buy/sell supply transactions settled in cash:
Crude oil................................................. $2,728 $3,566 $2,820
Refined products.......................................... 438 683 729
Natural gas resales......................................... 1,109 773 560
Electric power resales...................................... 729 487 58
(3) Capital Employed is equivalent to the sum of Stockholders' Equity/Owner's
Net Investment and Borrowings (both short-term and long-term portions).
Borrowings include amounts due related parties, net of associated Notes
Receivable. Amounts identified for operating segments comprise those assets
and liabilities not deemed to be of a general corporate nature, such as cash
and cash equivalents, financing-oriented items and aviation investment.
(4) Includes investments in affiliates.
UNITED UNITED OTHER
GEOGRAPHIC INFORMATION STATES KINGDOM GERMANY NORWAY COUNTRIES CONSOLIDATED
- ---------------------- ------- ------- ------- ------ --------- ------------
1998
Sales and Other Operating Revenues(1)........ $12,878 $4,305 $2,881 $ 289 $2,443 $22,796
Long-Lived Assets at December 31(2).......... $ 5,122 $3,577 $ 195 $1,547 $ 972 $11,413
1997
Sales and Other Operating Revenues(1)........ $15,229 $4,480 $3,007 $ 406 $2,674 $25,796
Long-Lived Assets at December 31(2).......... $ 4,956 $3,284 $ 168 $1,559 $ 861 $10,828
1996
Sales and Other Operating Revenues(1)........ $13,386 $4,241 $3,260 $ 508 $2,835 $24,230
Long-Lived Assets at December 31(2).......... $ 4,086 $3,201 $ 203 $1,757 $ 835 $10,082
- ---------------
(1) Revenues are attributed to countries based on location of the selling
entity.
(2) Represents Net Property, Plant and Equipment.
28. OTHER FINANCIAL INFORMATION
Research and development expenses were $42, $44 and $41 for the years 1998,
1997 and 1996, respectively.
F-37
193
CONOCO INC.
SUPPLEMENTAL PETROLEUM DATA
(DOLLARS IN MILLIONS)
(UNAUDITED)
OIL AND GAS PRODUCING ACTIVITIES
Supplemental Petroleum Data disclosures are presented in accordance with
the provisions of Statement of Financial Accounting Standards (SFAS) No. 69,
"Disclosures About Oil and Gas Producing Activities."
Accordingly, volumes of reserves and production exclude royalty interests
of others, and royalty payments are reflected as reductions in revenues.
RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES
TOTAL WORLDWIDE UNITED STATES EUROPE OTHER REGIONS
------------------------ --------------------- ----------------------- ---------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996 1998 1997 1996
------ ------ ------ ----- ----- ----- ----- ------ ------ ----- ----- -----
CONSOLIDATED COMPANIES
Revenues:
Sales................ $1,938 $2,603 $2,479 $ 643 $ 787 $ 621 $ 831 $1,181 $1,204 $ 464 $ 635 $ 654
Transfers............ 646 849 927 272 272 363 374 577 566 -- -- (2)
Exploration(1)......... (380) (457) (404) (128) (134) (151) (108) (131) (159) (144) (192) (94)
Production............. (806) (854) (755) (303) (320) (297) (382) (409) (372) (121) (125) (86)
DD&A................... (799) (827) (770) (345) (246) (282) (372) (419) (440) (82) (162)(2) (48)
Other(3)............... 148 321 69 104 106 48 48 215 (1) (4) -- 22
Income taxes........... (201) (847) (912) (36) (109) (47) (100) (393) (436) (65) (345) (429)
------ ------ ------ ----- ----- ----- ----- ------ ------ ----- ----- -----
Results of
operations......... 546 788 634 207 356 255 291 621 362 48 (189) 17
EQUITY AFFILIATES
Results of
operations........... (4) 30 32 4 7 7 5 29 25 (13) (6) --
------ ------ ------ ----- ----- ----- ----- ------ ------ ----- ----- -----
Total.......... $ 542 $ 818 $ 666 $ 211 $ 363 $ 262 $ 296 $ 650 $ 387 $ 35 $(195) $ 17
====== ====== ====== ===== ===== ===== ===== ====== ====== ===== ===== =====
- ---------------
(1) Includes exploration operating expenses, dry hole costs, impairment of
unproved properties and depreciation.
(2) Includes charges of $112 for impairment of non-revenue producing properties.
(3) Includes gain/(loss) on disposal of fixed assets and other miscellaneous
revenues and expenses.
F-38
194
CONOCO INC.
SUPPLEMENTAL PETROLEUM DATA
(DOLLARS IN MILLIONS)
(UNAUDITED)
COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION, EXPLORATION AND DEVELOPMENT
ACTIVITIES(1)
TOTAL WORLDWIDE UNITED STATES EUROPE OTHER REGIONS
------------------------ --------------------- ------------------- --------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996 1998 1997 1996
------ ------ ------ ---- ------ ---- ---- ---- ---- ---- ---- ----
CONSOLIDATED COMPANIES
Property acquisitions
Proved(2)........................ $ 254 $ 152 $ 21 $ 24 $ 148 $ 14 $230(3) $ -- $ -- $ -- $ 4 $ 7
Unproved......................... 93 831 42 55 723(4) 41 25 95 -- 13 13 1
Exploration....................... 436 450 445 119 107 144 114 135 169 203 208 132
Development....................... 1,019 921 828 542 289 203 403 568 543 74 64 82
------ ------ ------ ---- ------ ---- ---- ---- ---- ---- ---- ----
Total...................... 1,802 2,354 1,336 740 1,267 402 772 798 712 290 289 222
EQUITY AFFILIATES
Total Equity Affiliates........... 564 263 19 30 12 5 2 2 14 532(5) 249(5) --
------ ------ ------ ---- ------ ---- ---- ---- ---- ---- ---- ----
Total...................... $2,366 $2,617 $1,355 $770 $1,279 $407 $774 $800 $726 $822 $538 $222
====== ====== ====== ==== ====== ==== ==== ==== ==== ==== ==== ====
- ---------------
(1) These data comprise all costs incurred in the activities shown, whether
capitalized or charged to expense at the time they were incurred.
(2) Does not include properties acquired through property trades.
(3) Includes acquisition costs associated with petroleum reserves acquired in
the North Sea.
(4) Includes acquisition costs associated with gas reserves acquired in the
South Texas Lobo trend.
(5) Represents Conoco's equity share of the Petrozuata heavy oil venture in
Venezuela.
CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING ACTIVITIES
TOTAL WORLDWIDE UNITED STATES EUROPE
--------------------------- ------------------------- -------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
------- ------- ------- ------ ------ ------ ------ ------ ------
CONSOLIDATED COMPANIES
Gross costs:
Proved properties............ $13,488 $12,420 $11,914 $5,013 $4,676 $4,255 $6,942(1) $6,276 $6,268
Unproved properties.......... 1,159 1,491 913 634 774(2) 262 262 432 444
Less: Accumulated DD&A........ 7,469 7,201 6,886 2,983 2,907 2,816 3,182 3,008 2,954
------- ------- ------- ------ ------ ------ ------ ------ ------
Total net costs........ 7,178 6,710 5,941 2,664 2,543 1,701 4,022 3,700 3,758
EQUITY AFFILIATES
Net costs of equity
affiliates................... 976 441 199 66 45 37 132 147 162
------- ------- ------- ------ ------ ------ ------ ------ ------
Total.................. $ 8,154 $ 7,151 $ 6,140 $2,730 $2,588 $1,738 $4,154 $3,847 $3,920
======= ======= ======= ====== ====== ====== ====== ====== ======
OTHER REGIONS
--------------------------
1998 1997 1996
------ ------ ------
CONSOLIDATED COMPANIES
Gross costs:
Proved properties............ $1,533 $1,468 $1,391
Unproved properties.......... 263 285 207
Less: Accumulated DD&A........ 1,304 1,286 1,116
------ ------ ------
Total net costs........ 492 467 482
EQUITY AFFILIATES
Net costs of equity
affiliates................... 778(3) 249(3) --
------ ------ ------
Total.................. $1,270 $ 716 $ 482
====== ====== ======
- ---------------
(1) Includes acquisition costs associated with petroleum reserves acquired in
the North Sea.
(2) Includes acquisition costs associated with gas reserves acquired in the
South Texas Lobo trend.
(3) Represents Conoco's equity share of the Petrozuata heavy oil venture in
Venezuela.
F-39
195
CONOCO INC.
SUPPLEMENTAL PETROLEUM DATA
(IN MILLIONS OF BARRELS)
(UNAUDITED)
ESTIMATED PROVED RESERVES OF OIL(1)
TOTAL WORLDWIDE UNITED STATES EUROPE OTHER REGIONS
-------------------- ------------------ ------------------ ------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996 1998 1997 1996
----- ----- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
PROVED RESERVES OF CONSOLIDATED
COMPANIES
Beginning of year................... 893 926 933 277 299 294 421 413 408 195 214 231
Revisions and other changes......... 42 54 55 14 3 11 20 43 36 8 8 8
Extensions and discoveries.......... 41 62 75 15 12 31 6 44 35 20 6 9
Improved recovery................... 14 3 4 -- 3 4 11 -- -- 3 -- --
Purchase of reserves(2)............. 8 5 (1) -- 4 (1) 8 1 -- -- -- --
Sale of reserves(3)................. (16) (27) (12) (16) (11) (10) -- (16) -- -- -- (2)
Production.......................... (119) (130) (128) (29) (33) (30) (56) (64) (66) (34) (33) (32)
----- ----- ---- --- --- --- --- --- --- --- --- ---
End of year(4)...................... 863 893 926 261 277 299 410 421 413 192 195 214
----- ----- ---- --- --- --- --- --- --- --- --- ---
PROVED RESERVES OF EQUITY AFFILIATES
Beginning of year................... 731 47 44 -- -- -- 51 47 44 680 -- --
Revisions and other changes......... 5 10 8 -- -- -- 5 10 8 -- -- --
Extensions and discoveries.......... -- 680 -- -- -- -- -- -- -- -- 680(5) --
Production.......................... (8) (6) (5) -- -- -- (6) (6) (5) (2) -- --
----- ----- ---- --- --- --- --- --- --- --- --- ---
End of year......................... 728 731 47 -- -- -- 50 51 47 678 680 --
----- ----- ---- --- --- --- --- --- --- --- --- ---
Total....................... 1,591 1,624 973 261 277 299 460 472 460 870 875 214
===== ===== ==== === === === === === === === === ===
PROVED DEVELOPED RESERVES OF
CONSOLIDATED COMPANIES
Beginning of year................... 600 630 684 242 258 265 174 185 217 184 187 202
End of year......................... 622 600 630 222 242 258 228 174 185 172 184 187
PROVED DEVELOPED RESERVES OF EQUITY
AFFILIATES
Beginning of year................... 43 39 32 -- -- -- 43 39 32 -- -- --
End of year......................... 92 43 39 -- -- -- 42 43 39 50 -- --
- ---------------
(1) Oil reserves comprise crude oil and condensate and natural gas liquids
expected to be removed for the Company's account from its natural gas
deliveries.
(2) Includes reserves acquired through property trades.
(3) Includes reserves disposed of through property trades.
(4) Includes reserves of 123, 87 and 89 at year-end 1998, 1997 and 1996,
respectively, attributable to Conoco Oil & Gas Associates L.P. in which
there is a minority interest with an approximate 20 percent average revenue
share (see Note 19).
(5) Represents Conoco's equity share of the Petrozuata heavy oil venture in
Venezuela.
F-40
196
CONOCO INC.
SUPPLEMENTAL PETROLEUM DATA
(IN BILLION CUBIC FEET)
(UNAUDITED)
ESTIMATED PROVED RESERVES OF GAS
TOTAL WORLDWIDE UNITED STATES EUROPE OTHER REGIONS
--------------------- ---------------------- --------------------- ---------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
PROVED RESERVES OF CONSOLIDATED
COMPANIES
Beginning of year................ 5,491 5,063 4,709 2,235 1,822 1,891 3,060 3,068 2,649 196 173 169
Revisions and other changes...... 25 134 41 18 -- 79 (20) 97 (39) 27 37 1
Extensions and discoveries....... 961 518 780 624 453 176 111 59 574 226 6 30
Improved recovery................ -- 1 -- -- 1 -- -- -- -- -- -- --
Purchase of reserves(1).......... 116 270 41 4 264(2) 3 112 -- 36 -- 6 2
Sale of reserves(3).............. (281) (62) (71) (243) (46) (57) (38) (7) -- -- (9) (14)
Production....................... (510) (433) (437) (319) (259) (270) (172) (157) (152) (19) (17) (15)
----- ----- ----- ----- ----- ----- ----- ----- ----- --- --- ---
End of year(4)................... 5,802 5,491 5,063 2,319 2,235 1,822 3,053 3,060 3,068 430 196 173
----- ----- ----- ----- ----- ----- ----- ----- ----- --- --- ---
PROVED RESERVES OF EQUITY
AFFILIATES
Beginning of year................ 370 333 339 370 333 339 -- -- -- -- -- --
Revisions and other changes...... (12) (6) -- (12) (6) -- -- -- -- -- -- --
Extensions and discoveries....... 1 49 -- 1 49 -- -- -- -- -- -- --
Purchase of reserves............. 27 -- -- 27 -- -- -- -- -- -- -- --
Production....................... (5) (6) (6) (5) (6) (6) -- -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- ----- ----- --- --- ---
End of Year...................... 381 370 333 381 370 333 -- -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- ----- ----- --- --- ---
Total.................... 6,183 5,861 5,396 2,700 2,605 2,155 3,053 3,060 3,068 430 196 173
===== ===== ===== ===== ===== ===== ===== ===== ===== === === ===
PROVED DEVELOPED RESERVES OF
CONSOLIDATED COMPANIES
Beginning of year................ 3,061 2,843 2,933 1,801 1,672 1,733 1,091 1,041 1,071 169 130 129
End of year...................... 3,991 3,061 2,843 1,828 1,801 1,672 1,954 1,091 1,041 209 169 130
PROVED DEVELOPED RESERVES OF
EQUITY AFFILIATES
Beginning of year................ 40 36 40 40 36 40 -- -- -- -- -- --
End of year...................... 66 40 36 66 40 36 -- -- -- -- -- --
- ---------------
(1) Includes reserves acquired through property trades.
(2) Includes reserves acquired in the South Texas Lobo trend.
(3) Includes reserves disposed of through property trades.
(4) Includes reserves of 121, 115 and 104 at year-end 1998, 1997 and 1996,
respectively, attributable to Conoco Oil & Gas Associates L.P. in which
there is a minority interest with an approximate 20 percent average revenue
share (see Note 19).
F-41
197
CONOCO INC.
SUPPLEMENTAL PETROLEUM DATA
(UNAUDITED)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS RESERVES
The information on the following page has been prepared in accordance with
SFAS No. 69, which requires the standardized measure of discounted future net
cash flows to be based on year-end sales prices, costs and statutory income tax
rates and a 10 percent annual discount rate. Specifically, the per-barrel oil
sales prices used to calculate the December 31, 1998, data averaged $9.40 for
the United States, $10.69 for Europe and $10.67 for Other Regions, and the gas
prices per thousand cubic feet averaged approximately $1.70 for the United
States, $2.29 for Europe and $1.90 for Other Regions. Because prices used in the
calculation are as of December 31, the standardized measure could vary
significantly from year to year based on market conditions at that specific
date.
The projections should not be viewed as realistic estimates of future cash
flows nor should the "standardized measure" be interpreted as representing
current value to the Company. Material revisions to estimates of proved reserves
may occur in the future, development and production of the reserves may not
occur in the periods assumed, actual prices realized are expected to vary
significantly from those used and actual costs may also vary. The Company's
investment and operating decisions are not based on the information presented on
the following page, but on a wide range of reserve estimates that includes
probable as well as proved reserves, and on different price and cost assumptions
from those reflected in this information.
F-42
198
CONOCO INC.
SUPPLEMENTAL PETROLEUM DATA
(DOLLARS IN MILLIONS)
(UNAUDITED)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS RESERVES
TOTAL WORLDWIDE UNITED STATES EUROPE
---------------------------- --------------------------- ---------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
------- ------- -------- ------- ------- ------- ------- ------- -------
CONSOLIDATED COMPANIES
Future cash flows:
Revenues............. $20,340 $26,666 $ 34,366 $ 6,148 $ 8,355 $10,044 $11,376 $15,119 $19,364
Production costs..... (8,271) (9,251) (10,406) (2,665) (2,997) (3,085) (4,742) (5,387) (6,378)
Development costs.... (1,548) (1,586) (1,669) (370) (446) (283) (823) (1,094) (1,294)
Income tax expense... (3,904) (6,822) (10,364) (546) (1,175) (2,041) (2,239) (3,921) (5,179)
------- ------- -------- ------- ------- ------- ------- ------- -------
Future net cash
flows................ 6,617 9,007 11,927 2,567 3,737 4,635 3,572 4,717 6,513
Discounted to present
value at a 10% annual
rate................. (2,414) (3,384) (4,638) (1,055) (1,552) (2,088) (1,151) (1,679) (2,317)
------- ------- -------- ------- ------- ------- ------- ------- -------
Total(1)....... 4,203 5,623 7,289 1,512 2,185 2,547 2,421 3,038 4,196
------- ------- -------- ------- ------- ------- ------- ------- -------
EQUITY AFFILIATES
Future cash flows:
Revenues............. 5,327 8,520 1,971 1,001 893 968 427 651 1,003
Production costs..... (2,228) (2,640) (597) (346) (267) (242) (266) (315) (355)
Development costs.... (1,086) (1,300) (180) (191) (174) (157) (28) (30) (23)
Income tax expense... (425) (1,090) (496) (166) (161) (193) (63) (170) (303)
------- ------- -------- ------- ------- ------- ------- ------- -------
Future net cash
flows................ 1,588 3,490 698 298 291 376 70 136 322
Discounted to present
value at a 10% annual
rate................. (1,327) (2,886) (398) (220) (226) (277) (9) (44) (121)
------- ------- -------- ------- ------- ------- ------- ------- -------
Total.......... 261 604 300 78 65 99 61 92 201
------- ------- -------- ------- ------- ------- ------- ------- -------
Total.......... $ 4,464 $ 6,227 $ 7,589 $ 1,590 $ 2,250 $ 2,646 $ 2,482 $ 3,130 $ 4,397
======= ======= ======== ======= ======= ======= ======= ======= =======
OTHER REGIONS
---------------------------
1998 1997 1996
------- ------- -------
CONSOLIDATED COMPANIES
Future cash flows:
Revenues............. $ 2,816 $ 3,192 $ 4,958
Production costs..... (864) (867) (943)
Development costs.... (355) (46) (92)
Income tax expense... (1,119) (1,726) (3,144)
------- ------- -------
Future net cash
flows................ 478 553 779
Discounted to present
value at a 10% annual
rate................. (208) (153) (233)
------- ------- -------
Total(1)....... 270 400 546
------- ------- -------
EQUITY AFFILIATES
Future cash flows:
Revenues............. 3,899 6,976 --
Production costs..... (1,616) (2,058) --
Development costs.... (867) (1,096) --
Income tax expense... (196) (759) --
------- ------- -------
Future net cash
flows................ 1,220 3,063 --
Discounted to present
value at a 10% annual
rate................. (1,098) (2,616) --
------- ------- -------
Total.......... 122 447 --
------- ------- -------
Total.......... $ 392 $ 847 $ 546
======= ======= =======
- ---------------
(1) Includes $263, $372 and $686 at year-end 1998, 1997 and 1996, respectively,
attributable to Conoco Oil & Gas Associates L.P. in which there is a
minority interest with an approximate 20 percent average revenue share (see
Note 19).
SUMMARY OF CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
RELATING TO PROVED OIL AND GAS RESERVES
CONSOLIDATED COMPANIES EQUITY AFFILIATES
----------------------------- ---------------------------
1998 1997 1996 1998 1997 1996
------- ------- ------- ------- ------- -----
Balance at January 1........................................ $ 5,623 $ 7,289 $ 5,158 $ 604 $ 300 $ 151
Sales and transfers of oil and gas produced, net of
production costs.......................................... (1,778) (2,583) (2,647) (2) (56) (73)
Development costs incurred during the period................ 1,019 921 828 555 218 20
Net changes in prices and in development and production
costs..................................................... (3,948) (4,974) 2,525 (1,155) (1,242) 119
Extensions, discoveries and improved recovery, less related
costs..................................................... 838 818 1,630 1 1,181 4
Revisions of previous quantity estimates.................... 189 439 553 2 37 83
Purchases (sales) of reserves in place -- net............... (92) 36 (54) 18 -- --
Accretion of discount....................................... 916 1,312 931 84 55 25
Net change in income taxes.................................. 1,541 2,285 (1,676) 128 16 (152)
Other....................................................... (105) 80 41 26 95 123
------- ------- ------- ------- ------- -----
Balance at December 31...................................... $ 4,203 $ 5,623 $ 7,289 $ 261 $ 604 $ 300
======= ======= ======= ======= ======= =====
F-43
199
CONOCO INC.
CONSOLIDATED QUARTERLY FINANCIAL DATA
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
(UNAUDITED)
QUARTER ENDED
-------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
1998
Sales and Other Operating Revenues(1)................ $5,736 $5,612 $5,916 $5,532
Cost of Goods Sold and Other Expenses(2)............. 5,327 5,374 5,620 5,954
Interest and Debt Expense............................ 1 -- 107 91
Net Income (Loss).................................... 316(5) 214(6) 183 (263)(7)
Earnings Per Share
Basic(3)........................................... $ .72 $ .49 $ .42 $ (.45)
Diluted(3)......................................... $ .72 $ .49 $ .42 $ (.45)
Market Price of Common Stock(4)
High............................................... $25 3/4
Low................................................ $19 3/8
1997
Sales and Other Operating Revenues(1)................ $6,560 $5,915 $6,671 $6,650
Cost of Goods Sold and Other Expenses(2)............. 5,898 5,501 6,269 6,452
Interest and Debt Expense............................ 15 9 7 5
Net Income........................................... 341 246(8) 289(9) 221(10)
Earnings Per Share
Basic(3)........................................... $ .78 $ .56 $ .66 $ .51
Diluted(3)......................................... $ .78 $ .56 $ .66 $ .51
- ---------------
(1) Excludes other income of $98, $40, $113 and $121 in each of the quarters in
1998 and $55, $70, $28 and $314 in each of the quarters in 1997.
(2) Excludes provision for income taxes.
(3) Earnings per share for the year may not equal the sum of the quarterly
earnings per share due to changes in average shares outstanding. Earnings
per share for the periods prior to the Offerings was calculated using only
Class B Common Stock, as required by SFAS 128 (see Note 8 to the
consolidated financial statements).
(4) The Company's Class A Common Stock is listed on the New York Stock Exchange
(trading symbol: COC) and commenced trading on October 22, 1998. Prices are
as reported in the New York Stock Exchange, Inc. Composite Transactions
Tape.
(5) Includes gain of $23 ($.04 per share-diluted) from sale of certain Upstream
properties.
(6) Includes net benefit of $3 ($.01 per share-diluted) reflecting: tax benefit
of $31 from sale of an international Upstream subsidiary and a $28 charge
for U.S. Downstream environmental litigation.
(7) Includes net charge of $297 ($.47 per share-diluted) reflecting: charges of
$183 for non-cash stock option compensation expense related to the
Offerings, $63 for write-down of inventories to market, $52 principally for
employee separation costs, $38 for impairment of long-lived Upstream
properties located in Texas and in the Gulf of Mexico, as well as a
write-down of a nonoperating gas plant in Texas and an exploration license
in Norway, and $14 for environmental litigation charges and gains of $41
from the sale of U.S. producing properties and $12 from sale of an office
building.
(8) Includes gain of $24 ($.04 per share-diluted) from sale of U.S. producing
properties.
F-44
200
(9) Includes net benefit of $37 ($.05 per share-diluted) reflecting: gain of
$30 from sale of North Sea properties, benefit of $30 from foreign tax rate
changes, and charge of $23 for environmental litigation charges.
(10) Includes a net benefit of $19 ($.03 per share-diluted) reflecting: a gain
of $186 from the sale of North Sea and U.S. Upstream properties, a charge
of $112 for impairment of non-revenue producing properties, and a charge of
$55 for write-down of an office building held for sale.
F-45
201
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
CONOCO INC.
CONSOLIDATED STATEMENT OF INCOME (NOTES 1 AND 3)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
------------------
1999 1998
------ ------
(IN MILLIONS,
EXCEPT PER SHARE)
Revenues
Sales and Other Operating Revenues*....................... $5,311 $5,736
Other Income.............................................. 24 98
------ ------
Total Revenues.................................... 5,335 5,834
------ ------
Cost and Expenses
Cost of Goods Sold and Other Operating Expenses........... 3,005 3,393
Selling, General and Administrative Expenses.............. 186 183
Exploration Expenses...................................... 46 67
Depreciation, Depletion and Amortization.................. 302 267
Taxes Other Than on Income*............................... 1,591 1,417
Interest and Debt Expense................................. 71 1
------ ------
Total Cost and Expenses........................... 5,201 5,328
------ ------
Income Before Income Taxes.................................. 134 506
Provision for Income Taxes.................................. 51 190
------ ------
Net Income (Note 10)........................................ $ 83 $ 316
====== ======
Earnings Per Share (Note 4)
Basic..................................................... $ .13 $ .72
Diluted................................................... $ .13 $ .72
Weighted Average Shares Outstanding (Note 4)
Class A**................................................. 191 --
Class B................................................... 437 437
------ ------
Total Basic....................................... 628 437
Stock Options**........................................... 7 --
------ ------
Total Diluted..................................... 635 437
Dividends Per Share of Common Stock (Note 5)................ $ .14 $ --
- ---------------
* Includes petroleum excise taxes.......................... $1,546 $1,373
** Earnings Per Share for the period prior to the Offerings was calculated using
only Class B Common Stock as required by SFAS 128 (See Note 4).
See Notes to Unaudited Interim Consolidated Financial Statements
F-46
202
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
CONOCO INC.
CONSOLIDATED BALANCE SHEET (NOTES 1 AND 3)
(UNAUDITED)
ASSETS
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
(IN MILLIONS)
Current Assets
Cash and Cash Equivalents................................. $ 425 $ 394
Accounts and Notes Receivable............................. 1,228 1,191
Inventories (Note 6)...................................... 899 807
Prepaid Expenses.......................................... 305 378
-------- --------
Total Current Assets.............................. 2,857 2,770
Property, Plant and Equipment............................... 22,031 22,094
Less: Accumulated Depreciation, Depletion and
Amortization.............................................. (10,801) (10,681)
-------- --------
Net Property, Plant and Equipment........................... 11,230 11,413
-------- --------
Investment in Affiliates.................................... 1,445 1,363
Other Assets................................................ 548 529
-------- --------
Total............................................. $ 16,080 $ 16,075
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable.......................................... $ 1,355 $ 1,312
Short-Term Borrowings -- Related Parties.................. 926 --
Other Short-Term Borrowings and Capital Lease
Obligations............................................ 29 52
Income Taxes.............................................. 171 199
Other Accrued Liabilities (Note 7)........................ 1,082 1,162
-------- --------
Total Current Liabilities......................... 3,563 2,725
Long-Term Borrowings -- Related Parties..................... 3,970 4,596
Other Long-Term Borrowings and Capital Lease Obligations.... 93 93
Deferred Income Taxes....................................... 1,658 1,714
Other Liabilities and Deferred Credits...................... 2,144 2,200
-------- --------
Total Liabilities................................. 11,428 11,328
-------- --------
Commitments and Contingent Liabilities (Note 8)
Minority Interests.......................................... 310 309
Stockholders' Equity
Preferred Stock, $.01 par value:
250,000,000 shares authorized; none issued................ -- --
Class A Common Stock, $.01 par value:
3,000,000,000 shares authorized; 191,497,821 shares
issued................................................. 2 2
Class B Common Stock, $.01 par value:
1,600,000,000 shares authorized; 436,543,573 shares issued
and outstanding........................................ 4 4
Additional Paid-In Capital................................ 4,975 4,955
Accumulated Deficit....................................... (250) (244)
Accumulated Other Comprehensive Loss (Note 9)............. (367) (274)
Treasury Stock, at cost (1,032,607 and 249,863 Class A
shares at March 31, 1999 and December 31, 1998,
respectively).......................................... (22) (5)
-------- --------
Total Stockholders' Equity........................ 4,342 4,438
-------- --------
Total............................................. $ 16,080 $ 16,075
======== ========
See Notes to Unaudited Interim Consolidated Financial Statements
F-47
203
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
CONOCO INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (NOTES 1 AND 3)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
-------------------
1999 1998
------ -------
(IN MILLIONS)
Cash Provided by Operations
Net Income................................................ $ 83 $ 316
Adjustments to Reconcile Net Income to Cash Provided by
Operations:
Depreciation, Depletion and Amortization............... 302 267
Dry Hole Costs and Impairment of Unproved Properties... 17 22
Deferred Income Taxes.................................. (42) 48
Income Applicable to Minority Interest................. 5 5
Other Noncash Charges and Credits -- Net............... 8 (51)
Decrease (Increase) in Operating Assets:
Accounts and Notes Receivable........................ (52) 178
Inventories.......................................... (107) (192)
Other Operating Assets............................... 25 (98)
Increase (Decrease) in Operating Liabilities:
Accounts Payable and Other Operating Liabilities..... 113 (379)
Accrued Interest and Income Taxes.................... 41 (104)
----- ------
Cash Provided by Operations....................... 393 12
----- ------
Investment Activities
Purchases of Property, Plant and Equipment................ (457) (389)
Investments in Affiliates................................. (100) (42)
Proceeds from Sales of Assets and Subsidiaries............ 18 275
Net Decrease (Increase) in Short-Term Financial
Instruments............................................ (8) (9)
----- ------
Cash Used for Investment Activities............... (547) (165)
----- ------
Financing Activities
Cash Dividends (Note 5)................................... (88) --
Short-Term Borrowings -- Receipts......................... -- 2
-- Payments..................... (1) (21)
Other Long-Term Borrowings -- Payments.................... (19) (3)
Treasury Stock Purchases.................................. (18) --
Transactions with Related Parties:
Notes Receivable -- Receipts......................... -- 48
-- Payments....................... -- (162)
Borrowings -- Receipts............................... 710 137
-- Payments.............................. (410) --
Net Cash Contribution From (To) Owner................ 19 (258)
Increase (Decrease) in Minority Interests................. (5) (5)
----- ------
Cash Provided by (Used for) Financing
Activities....................................... 188 (262)
----- ------
Effect of Exchange Rate Changes on Cash..................... (3) (3)
----- ------
Increase (Decrease) in Cash and Cash Equivalents............ 31 (418)
Cash and Cash Equivalents at Beginning of Year.............. 394 1,147
----- ------
Cash and Cash Equivalents at March 31....................... $ 425 $ 729
===== ======
See Notes to Unaudited Interim Consolidated Financial Statements
F-48
204
CONOCO INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
(UNAUDITED)
1. BASIS OF PRESENTATION
Conoco Inc., including its consolidated subsidiaries ("Conoco"), is an
integrated, global energy company that is involved in the Upstream and
Downstream operating segments of the petroleum industry. Activities of the
Upstream operating segment include exploring for, and developing, producing and
selling crude oil, natural gas and natural gas liquids. Activities of the
Downstream operating segment include refining crude oil and other feedstocks
into petroleum products, buying and selling crude oil and refined products, and
transporting, distributing and marketing petroleum products. Conoco has four
reporting segments for its Upstream and Downstream businesses, reflecting
geographic division between the United States and International. Corporate and
other includes general corporate expenses, financing costs and other
non-operating items, and results for electric power and related-party insurance
operations.
The initial public offerings (the "Offerings") of the Class A Common Stock
of Conoco commenced on October 21, 1998, and the Class A Common Stock began
trading on the New York Stock Exchange on October 22, 1998. The Offerings
consisted of 191,456,427 shares of Class A Common Stock issued at a price of $23
per share, and represented E.I. du Pont de Nemours and Company's ("DuPont")
first step in the planned divestiture of Conoco. Through its ownership of 100
percent of Conoco's Class B Common Stock (436,543,573 shares), DuPont owned
approximately 70 percent of Conoco's common stock representing approximately 92
percent of the combined voting power of all classes of voting stock of Conoco at
March 31, 1999. The holders of Class A Common Stock and Class B Common Stock
generally have identical rights, except that holders of Class A Common Stock are
entitled to one vote per share while holders of Class B Common Stock are
entitled to five votes per share on matters to be voted on by stockholders.
Prior to the date of the Offerings, operations were conducted by Conoco
Inc., subsidiaries of Conoco Inc. and, in some cases, subsidiaries of DuPont.
The accompanying consolidated financial statements for this period are presented
on a carve-out basis prepared from DuPont's historical accounting records, and
include the historical operations of both entities owned by Conoco and
operations transferred to Conoco by DuPont at the time of the Offerings. In this
context, no direct ownership relationship existed among all the various units
comprising Conoco. Accordingly, net cash contributions from/to owner prior to
the Offerings included funds transferred between Conoco and DuPont for operating
needs, cash dividends paid and other equity transactions.
Effective at the time of the Offerings, Conoco's capital structure was
established and the transfer to Conoco of certain subsidiaries previously owned
by DuPont was substantially complete, resulting in direct ownership of those
subsidiaries. Accordingly, for periods subsequent to the Offerings, financial
information is presented on a consolidated basis.
On March 22, 1999, Conoco filed a registration statement with the
Securities and Exchange Commission ("SEC") outlining a "split-off" plan to
establish Conoco as a fully independent company. This filing is the next step in
DuPont's planned divestiture of Conoco. The tax-free split-off will be achieved
through an exchange offer in which DuPont stockholders will be given an
opportunity to exchange DuPont common stock for shares of Conoco Class B Common
Stock currently held by DuPont. DuPont announced on April 28, 1999 that its
board of directors had approved the split-off plan. Following a review by the
SEC, and depending on market conditions, the split-off is expected to be
completed in the third quarter of 1999.
These consolidated interim financial statements are unaudited, but reflect
all adjustments that, in the opinion of management, are necessary to provide a
fair presentation of the financial position, results of operations and cash
flows for the dates and periods covered. All such adjustments are of a normal
F-49
205
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
(UNAUDITED)
recurring nature. Interim period results are not necessarily indicative of
results of operations or cash flows for a full-year period. These interim
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in Conoco's 1998 Annual Report
on Form 10-K as amended.
2. RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
Effective January 1, 1999, Conoco adopted Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities," issued by the American
Institute of Certified Public Accountants. This Statement requires that costs
related to start-up activities, including organization costs, be expensed as
incurred. Conoco's policy has been one of expensing organization and other
similar costs of start-up operations. Accordingly, we have no cumulative charge
to earnings from a write-off of deferred start-up costs as a result of adoption
of this accounting standard.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement on Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which requires that companies
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value.
SFAS No. 133 provides, if certain conditions are met, that a derivative may
be specifically designated as:
- a hedge of the exposure to changes in the fair value of a recognized asset
or liability or an unrecognized firm commitment (fair value hedge),
- a hedge of the exposure to variable cash flows of a forecasted transaction
(cash flow hedge), or
- a hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security
or a foreign-currency-denominated forecasted transaction (foreign currency
hedge).
Under SFAS No. 133, the accounting for changes in fair value of a
derivative depends on its intended use and designation. For a fair value hedge,
the gain or loss is recognized in earnings in the period of change together with
the offsetting loss or gain on the hedged item. For a cash flow hedge, the
effective portion of the derivative's gain or loss is initially reported as a
component of other comprehensive income and subsequently reclassified into
earnings when the forecasted transaction affects earnings. For a foreign
currency hedge, the gain or loss is reported in other comprehensive income as
part of the cumulative translation adjustment. For all other items not
designated as hedging instruments, the gain or loss is recognized in earnings in
the period of change. Conoco is required to adopt this Statement by the first
quarter of 2000 and is currently assessing its effect on the consolidated
financial statements.
3. RELATED PARTY TRANSACTIONS
The consolidated financial statements include significant transactions with
DuPont involving services (such as cash management, other financial services,
purchasing, legal, computer and corporate aviation) and general corporate
expenses that were provided between Conoco and DuPont organizations. For periods
prior to the Offerings, the costs of services were directly charged or allocated
between Conoco and DuPont using methods management believes are reasonable.
These methods included negotiated usage rates, dedicated asset assignment and
proportionate corporate formulas involving assets, revenues and employees. Such
charges and allocations were not necessarily indicative of what would have been
incurred if Conoco had been a separate entity.
F-50
206
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
(UNAUDITED)
Amounts charged and allocated to Conoco for these services were $7 and $34
for the first quarter of 1999 and 1998, respectively, and are principally
included in selling, general and administrative expenses. Conoco provided DuPont
services such as computer, legal and purchasing, as well as certain technical
and plant operating services, which amounted to $7 and $14 for the first quarter
of 1999 and 1998, respectively. These charges to DuPont were treated as
reductions, as appropriate, of cost of goods sold and other operating expenses
and selling, general and administrative expenses.
Interest expense charged by DuPont was $72 and $27 for the first quarter of
1999 and 1998, respectively, and reflects market-based interest rates. A portion
of historical related party interest cost and other interest expense of $2 and
$28 for the first quarter of 1999 and 1998, respectively, was capitalized as
costs associated with major construction projects. Interest income from DuPont
was $16 for the first quarter of 1998 and also reflects market-based interest
rates.
Sales and other operating revenues include sales of products from Conoco to
DuPont, principally natural gas and gas liquids to supply several DuPont plant
sites. These sales totaled $91 and $110 in the first quarter of 1999 and 1998,
respectively. Also included, for the first quarter of 1998, are revenues of $5
from insurance premiums charged to DuPont for property and casualty coverage
outside the United States. Purchases of products from DuPont during these
periods were not material. Subsequent to the Offerings, these intercompany
arrangements between DuPont and Conoco, excluding insurance coverage provided to
DuPont, are provided under transition service agreements or other long-term
agreements. It is not anticipated that a change, if any, in these costs and
revenues would have a material effect on Conoco's results of operations or
consolidated financial position.
Accounts and notes receivable include amounts due from DuPont of $48 and
$80 at March 31, 1999, and December 31, 1998, respectively, representing current
month balances of transactions between Conoco and DuPont, mainly product sales
and certain charges billed annually. Accounts payable include amounts due DuPont
of $35 and $52 at March 31, 1999, and December 31, 1998, respectively. Other
liabilities include accrued interest of $122 and $51 due DuPont at March 31,
1999 and December 31, 1998, respectively.
Amounts representing notes receivable or borrowings from DuPont, including
its subsidiary organizations, are identified as related parties and presented
separately in the consolidated balance sheet. At December 31, 1998, Conoco had
long-term borrowings from related parties of $4,596, representing the balance
under two promissory notes due on or before January 2, 2000. At March 31, 1999,
Conoco had aggregate related parties borrowings of $4,896 consisting of
short-term borrowings of $926 and long-term borrowings of $3,970. The short-term
borrowings consisted of $300 under a revolving credit agreement and $626 under
two promissory notes due on or before January 2, 2000. Subsequent to March 31,
1999, the long-term borrowings were refinanced with proceeds from placement of
public debt as described below. Consequently, the senior borrowings have been
classified as long-term pursuant to SFAS 6.
On April 20, 1999, Conoco completed the public offering and sale of $4,000
of senior debt securities. The senior debt securities consisted of three
tranches as follows:
- $1,350 in five-year notes due 2004 with a coupon of 5.90 percent, offered
to the public at 99.856 percent.
- $750 in ten-year notes due 2009 with a coupon of 6.35 percent, offered to
the public at par.
- $1,900 in 30-year notes due 2029 with a coupon of 6.95 percent, offered
to the public at par.
Conoco achieved a weighted average interest rate of 6.49 percent in this
financing. After deducting the note discount and underwriting discounts the net
proceeds of $3,970 received from the senior debt offerings were used to repay a
portion of the outstanding principal and accrued interest owed to DuPont
F-51
207
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
(UNAUDITED)
under one of the promissory notes. In May 1999, Conoco instituted a commercial
paper program with a borrowing capacity up to $2,000. Through May 1999, Conoco
had issued $1,022 under this program, the proceeds of which were used to repay
remaining debt and accrued interest to DuPont.
4. EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing net income (the
numerator) by the weighted average number of common shares outstanding plus the
effects of award and fee deferrals that are invested in Conoco stock units by
certain employees and directors of Conoco (the denominator). Diluted EPS is
similarly computed, except that the denominator is increased to include the
dilutive effects of outstanding stock options awarded under Conoco's
compensation plans.
As described in Note 1, Conoco's capital structure was established at the
time of the Offerings. In accordance with SEC Staff Accounting Bulletin No. 98,
the capitalization of Class B Common Stock has been retroactively reflected for
the purposes of presenting earnings per share for the first quarter of 1998. For
the first quarter of 1999, basic EPS reflects the Class B Common Stock plus the
weighted average number of shares of Class A Common Stock and deferred award
units outstanding at March 31, 1999. Corresponding diluted EPS for the first
quarter of 1999 includes an additional 7,347,178 shares representing the
weighted average dilutive effect of outstanding stock options that resulted from
the concurrent cancellation of DuPont stock options at the date of the Offerings
and issuance of options with respect to Class A Common Stock.
The denominator is based on the following weighted average number of common
shares outstanding:
THREE MONTHS ENDED
MARCH 31
-------------------------
1999 1998
----------- -----------
Basic...................................................... 627,633,168 436,543,573
Diluted.................................................... 634,980,346 436,543,573
Variable stock options for 1,724,146 shares of common stock were
outstanding at March 31, 1999, but were not included in the computation of
diluted EPS since the threshold price of $32.88 required for these options to be
vested had not been reached.
Common shares held as treasury stock are deducted in determining the number
of shares outstanding.
For the three months ended March 31, 1999, stock options for 12,736,261
shares of Class A Common Stock are antidilutive and therefore are not included
in the diluted earnings per share calculation because the exercise price is
greater than the average market price.
PRO FORMA EPS
Pro forma EPS for the first quarter of 1998 include the shares of Conoco
Class A and Class B Common Stock and deferred award units outstanding
immediately after the Offerings as if the Offerings had been completed at the
beginning of the period presented. Pro forma basic EPS is based on pro forma net
income for the first quarter of 1998 divided by the total Class A and Class B
Common Stock plus deferred award units outstanding immediately after the
Offerings (basic shares). For pro forma diluted EPS, basic shares have been
adjusted to reflect the effect of outstanding stock options immediately after
the Offerings as though outstanding for the period presented. Pro forma net
income reflects historical income for the period adjusted to give effect to the
transactions substantially completed in October 1998 directly associated with
the Offerings and separation from DuPont.
F-52
208
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
(UNAUDITED)
The reconciliation of historical net income to pro forma net income with
pro forma adjustments separately identified is as follows:
THREE MONTHS ENDED
MARCH 31
-----------------------------------------
1999 1998 1998
ACTUAL PRO FORMA ACTUAL
----------- ----------- -----------
Historical net income............................... $ 83 $ 316 $ 316
Lower interest income(1).......................... -- (32) --
Incremental interest expense(2)................... -- (46) --
Related tax effects(3)............................ -- 25 --
----------- ----------- -----------
Net income.......................................... $ 83 $ 263 $ 316
=========== =========== ===========
Earnings per share:
Basic............................................. $ .13 $ .42 $ .72
Diluted........................................... $ .13 $ .41 $ .72
Weighted average shares outstanding:
Basic............................................. 627,633,168 628,195,100 436,543,573
Diluted........................................... 634,980,346 636,746,186 436,543,573
- ---------------
(1) Lower interest income due to settlement of related party notes receivable
and the impact of currency exchange rates on certain intercompany loans
purchased by Conoco from DuPont.
(2) Incremental interest expense resulting from Conoco's new debt structure.
(3) Tax effects associated with adjustments in (1) and (2), and the impact of
the calculation of income taxes on a separate return basis.
5. DIVIDENDS
Conoco declared a first quarter cash dividend on January 27, 1999, of $.14
per share on each outstanding share of Class A common stock and Class B common
stock, payable March 12, 1999, to shareholders of record as of February 12,
1999. This initial dividend was determined on a pro rata basis covering the
period from October 27, 1998 to December 31, 1998, and is equivalent to $.19 per
share for a full quarter.
On April 28, 1999, Conoco declared a quarterly cash dividend of $.19 per
share on each outstanding share of Class A and Class B common stock, payable on
June 12, 1999, to stockholders of record on May 14, 1999.
6. INVENTORIES
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
Crude oil and petroleum products............................ $757 $661
Other merchandise........................................... 22 22
Materials and supplies...................................... 120 124
---- ----
$899 $807
==== ====
F-53
209
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
(UNAUDITED)
7. RESTRUCTURING
In December 1998, Conoco announced, that as a result of a comprehensive
review of its assets and long-term strategy, Conoco was making organizational
realignments consistent with furthering the efficiency of operations and taking
advantage of synergies created by the upgrading of its asset portfolio. The
announced plans are being implemented in 1999 and will result in a reduction of
approximately 775 Upstream positions and 200 Downstream positions worldwide.
About three quarters of the Upstream positions and about half of the Downstream
positions affected will be in the United States. These reductions largely
reflect the elimination of redundancies at all levels resulting from past and
ongoing consolidation of assets into operations requiring less employee support
as well as better sharing of common services and functions across regions.
Associated with these announcements, Conoco recorded a charge in the fourth
quarter 1998 of $82 pretax ($52 after-tax), nearly all of which represents
termination payments and related employee benefits to be made to persons
affected. During the first quarter, approximately 134 persons in Upstream and 28
persons in Downstream left Conoco under implementation of these realignment
plans. The following table shows the status of, and changes to, the
restructuring reserve for the first quarter of 1999.
UPSTREAM DOWNSTREAM
-------------------- --------------------
U.S. INTERNATIONAL U.S. INTERNATIONAL TOTAL
---- ------------- ---- ------------- -----
Reserve at December 31, 1998...................... $31 $36 $8 $7 $82
Expenditures.................................... (3) (1) -- -- (4)
New accruals.................................... -- -- -- -- --
--- --- -- -- ---
Reserve at March 31, 1999......................... $28 $35 $8 $7 $78
=== === == == ===
We expect the restructuring efforts provided for in December 1998 will be
completed by year-end 1999.
8. COMMITMENTS AND CONTINGENT LIABILITIES
Conoco has various purchase commitments for materials, supplies, services
and items of permanent investment incident to the ordinary conduct of business.
In the aggregate, such commitments are not at prices in excess of current
market. In addition, at March 31, 1999, Conoco had obligations under
international contracts to purchase, over periods up to 20 years, natural gas at
prices that were in excess of market prices at March 31, 1999. No material
annual loss is expected from these long-term commitments.
Conoco is subject to various lawsuits and claims involving a variety of
matters including, along with other oil companies, actions challenging oil and
gas royalty and severance tax payments based on posted prices, and claims for
damages resulting from leaking underground storage tanks. As a result of the
separation agreement with DuPont, Conoco has also assumed responsibility for
current and future claims related to certain discontinued chemicals and
agricultural chemicals businesses operated by Conoco in the past. In general,
the effect on future financial results is not subject to reasonable estimation
because considerable uncertainty exists. Conoco believes the ultimate
liabilities resulting from such lawsuits and claims may be material to results
of operations in the period in which they are recognized but will not materially
affect the consolidated financial position of Conoco.
Conoco is also subject to contingencies pursuant to environmental laws and
regulations that in the future may require further action to correct the effects
on the environment of prior disposal practices or releases of petroleum
substances by Conoco or other parties. Conoco has accrued for certain
environmental remediation activities consistent with the policy set forth in
Note 2 to the consolidated financial statements presented in Conoco's 1998 Form
10-K as amended. Conoco has assumed environmental remediation
F-54
210
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
(UNAUDITED)
liabilities from DuPont related to certain discontinued chemicals and
agricultural chemicals businesses operated by Conoco in the past, which are
included in the environmental accrual. At March 31, 1999, such accrual amounted
to $130 and, in management's opinion, was appropriate based on existing facts
and circumstances. Under adverse changes in circumstances, potential liability
may exceed amounts accrued. In the event future monitoring and remediation
expenditures are in excess of amounts accrued, they may be significant to
results of operations in the period recognized but management does not
anticipate they will have a material adverse effect on the consolidated
financial position of Conoco.
Conoco has indirectly guaranteed various debt obligations under agreements
with certain affiliated and other companies to provide specified minimum
revenues from shipments or purchases of products. At March 31, 1999, these
indirect guarantees totaled $18 and Conoco or DuPont, on behalf of and
indemnified by Conoco, had directly guaranteed $1,120 of the obligations of
certain affiliated companies and others. Conoco has a multiparty banking
agreement that provides for the indirect guarantee of bank account overdrafts
for itself and its subsidiaries. No material loss is anticipated by reason of
such agreements and guarantees.
9. COMPREHENSIVE (LOSS) INCOME
The following sets forth Conoco's comprehensive income (loss) for the
periods shown:
THREE MONTHS ENDED
MARCH 31
------------------
1999 1998
------ ------
Net Income.................................................. $ 83 $316
Other Comprehensive Loss:
Foreign Currency Translation Adjustment................... (93) (18)
---- ----
Comprehensive (Loss) Income................................. $(10) $298
==== ====
F-55
211
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
(UNAUDITED)
10. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION
Conoco is involved in both the Upstream and Downstream operating segments
of the petroleum industry. Activities of the Upstream operating segment include
exploring for, and developing, producing and selling, crude oil, natural gas and
natural gas liquids. Activities of the Downstream operating segment include
refining crude oil and other feedstocks into petroleum products, buying and
selling crude oil and refined products, and transporting, distributing and
marketing petroleum products. Conoco has four reporting segments for its
Upstream and Downstream businesses, reflecting geographic division between the
United States and International. Corporate and other includes general corporate
expenses, financing costs and other non-operating items, and results for
electric power and related-party insurance operations. Conoco sells its products
worldwide. Major products include crude oil, natural gas and refined products
that are sold primarily in the energy and transportation markets. Conoco's sales
are not materially dependent on a single customer or small group of customers.
Transfers between segments are on the basis of estimated market values.
UPSTREAM DOWNSTREAM
---------------------- ----------------------
UNITED UNITED CORPORATE
SEGMENT INFORMATION STATES INTERNATIONAL STATES INTERNATIONAL AND OTHER CONSOLIDATED
------------------- ------ ------------- ------ ------------- --------- ------------
THREE MONTHS ENDED MARCH 31, 1999
Sales and Other Operating
Revenues.......................... $706 $479 $1,962 $2,143 $ 21 $5,311
Transfers Between Segments.......... 74 79 18 43 -- --
---- ---- ------ ------ ---- ------
Total Operating
Revenues................ $780 $558 $1,980 $2,186 $ 21 $5,311
==== ==== ====== ====== ==== ======
Net Income (Loss)................... $ 40 $ 68 $ 17 $ 23 $(65) $ 83
THREE MONTHS ENDED MARCH 31, 1998
Sales and Other Operating
Revenues.......................... $863 $456 $2,185 $2,028 $204 $5,736
Transfers Between Segments.......... 89 107 21 47 -- --
---- ---- ------ ------ ---- ------
Total Operating
Revenues................ $952 $563 $2,206 $2,075 $204 $5,736
==== ==== ====== ====== ==== ======
Net Income (Loss)(1)................ $ 88 $143 $ 34 $ 57 $ (6) $ 316
- ---------------
(1) Includes After-Tax Benefits from Special Items:
THREE MONTHS ENDED MARCH 31, 1999... $ -- $ -- $ -- $ -- $ -- $ --
THREE MONTHS ENDED MARCH 31, 1998
Asset Sales....................... $ -- $ 23 $ -- $ -- $ -- $ 23
F-56
212
SCHEDULE A
TRANSACTIONS CONCERNING
COMMON STOCK OF DUPONT
Neither DuPont, nor any of DuPont's executive officers or directors or
associates has engaged in any transaction involving shares of DuPont common
stock during the period of forty business days prior to the date of this
Offering Circular-Prospectus except for the following transactions by certain
executive officers of DuPont:
PERSON
EFFECTING DATE OF NUMBER OF DESCRIPTION OF PRICE PER
TRANSACTION TRANSACTION SHARES TRANSACTION SHARE
- ----------- ----------- --------- -------------- ---------
Curtis J. Crawford........... May 3, 1999 700 Annual grant to directors N/A
Director
June 14, 1999 7 Dividends applied to deferred $67.33
directors fees
Louisa C. Duemling........... May 3, 1999 700 Annual grant to directors N/A
Director
May 7, 1999 1,024 Gave gift N/A
May 7, 1999 15,000 Open market sale $72.88
Edward B. du Pont............ May 3, 1999 700 Annual grant to directors N/A
Director
June 17, 1999 200 Gave gift N/A
Richard R. Goodmanson........ May 1, 1999 150,000 Stock option grant (NQOs) $71.75
Executive Vice President
and Chief Operating Officer
May 1, 1999 10,000 Restricted stock grant N/A
June 14, 1999 51 Dividends applied to $67.75
restricted stock account
Charles O. Holliday, Jr...... May 4, 1999 20,672 Shares surrendered in payment $70.41
Chairman and Chief of cost and tax obligation on
Executive Officer stock option exercises
(21,400 exercised @$23 and
16,000 exercised @$24.375)
May 5, 1999 2,537 Open market sale of shares to $70.19
pay additional taxes on
exercise
May 4, 1999 12,529 Reload options acquired as a $70.41
result of option exercises on
May 4, 1999
May 6, 1999 114 Shares surrendered in payment $70.50
of cost and tax obligation on
stock option exercises (200
exercised @ $19.125)
June 14, 1999 106 Dividends applied to $67.75
restricted stock account
June 15, 1999 63 Dividends applied to deferred $67.75
variable compensation account
Lois D. Juliber.............. May 3, 1999 700 Annual grant to directors N/A
Director
May 3, 1999 69 Monthly deferred directors $70.69
fees
June 1, 1999 54 Monthly deferred directors $64.44
fees
June 14, 1999 30 Dividends applied to deferred $67.31
directors fees
Kurt M. Landgraf............. June 14, 199 15 Dividends applied to $67.75
Executive Vice President restricted stock account
and Chief Operating Officer
June 15, 199 30 Dividends applied to deferred $67.75
variable compensation account
A-1
213
PERSON
EFFECTING DATE OF NUMBER OF DESCRIPTION OF PRICE PER
TRANSACTION TRANSACTION SHARES TRANSACTION SHARE
- ----------- ----------- --------- -------------- ---------
Stacey J. Moblay............. May 5, 1999 3,565 Open market sale of portion $70.63
Senior Vice President of shares acquired as a
result of April, 1999 option
exercise
June 15, 1999 9 Dividends applied to deferred $67.75
variable compensation account
Gary M. Pfeiffer............. June 14, 1999 7 Dividends applied to $67.75
Senior Vice President restricted stock account
June 15, 1999 16 Dividends applied to deferred $67.75
variable compensation account
Dennis H. Reilley............ May 1, 199 85,000 Stock option grant $71.75
Executive Vice President
and Chief Operating Officer
May 4, 1999 3,426 Shares surrendered in payment $70.46
of cost and tax obligation on
stock option exercise (3,654
exercised @ $18 and 5,600
exercised @ $27.75)
May 4, 1999 2,207 Reload options acquired as a $70.41
result of option exercises on
May 4, 1999
May 4, 1999 3,392 Net shares acquired during N/A
option exercise and deferred
until retirement
May 5, 1999 114 Share surrendered in payment $70.19
of cost and tax obligation on
stock option exercises (200
exercised @ $19.125)
June 14, 1999 17 Dividends applied to deferred $67.31
unit account
June 14, 1999 19 Dividends applied to $67.75
restricted stock account
June 15, 1999 23 Dividends applied to deferred $67.75
variable compensation account
William K. Reilly............ May 3, 1999 700 Annual grant to directors N/A
Director
May 3, 1999 66 Monthly deferred directors $70.69
fees
June 1, 1999 51 Monthly deferred directors $64.44
fees
June 14, 1999 49 Dividends applied to deferred $67.31
directors fees
Howard J. Rudge.............. June 14, 1999 107 Dividends applied to deferred $67.75
Senior Vice President and unit account
General Counsel
June 15, 1999 24 Dividends applied to deferred $67.75
variable compensation account
H. Rodney Sharp, III......... May 3, 1999 700 Annual grant to directors N/A
Director
Charles M. Vest.............. May 3, 1999 700 Annual grant to directors N/A
Director
May 3, 1999 29 Monthly deferred directors $70.69
fees
June 1, 1999 31 Monthly deferred directors $64.44
fees
June 14, 1999 29 Dividends applied to deferred $67.31
directors fees
Sanford I. Weill............. May 3, 1999 700 Annual grant to directors N/A
Director
June 14, 1999 7 Dividends applied to deferred $67.31
directors fees
A-2
214
As of June 30, 1999, directors and executive officers of DuPont owned or
held rights to acquire approximately 7.2 million shares of DuPont common stock.
Certain of these persons have indicated to DuPont that they intend to tender an
aggregate of approximately 80,000 shares of DuPont common stock under the
exchange offer as follows:
APPROXIMATE
NAME NUMBER OF SHARES
- ---- ----------------
Louisa C. Duemling........................... 7,000
Director
Archie W. Dunham............................. 60,000
Director
Howard J. Rudge.............................. 5,000
Senior Vice President and General Counsel
H. Rodney Sharp, III......................... 8,000
Director
A-3
215
Manually signed facsimile copies of the letter of transmittal will be
accepted. The letter of transmittal, certificates for shares of DuPont Common
Stock and any other required documents should be sent or delivered by each
holder of DuPont Common Stock or his or her broker, dealer, commercial bank,
trust company or other nominee to the exchange agent at one of the following
addresses:
If by mail: If by overnight courier: If by hand:
First Chicago Trust Company First Chicago Trust Company First Chicago Trust Company
of New York of New York of New York
Attn: Corporate Actions Dept. Attn: Corporate Actions Dept. c/o Securities Transfer and
P.O. Box 2569 8th Floor, Suite 4680 Reporting Service Inc.
Suite 4660 14 Wall Street 100 William Street, Galleria
Jersey City, NJ 07303-2569 New York, NY 10005 New York, NY 10038
If by facsimile transmission:
(For eligible institutions only)
(201) 222-4740
or
(201) 222-4721
Facsimile confirmation number:
(201) 222-4707
You may direct any questions and requests for assistance to the information
agent or the dealer manager at their respective addresses and telephone numbers
and locations listed below. Additional copies of this Offering
Circular-Prospectus, the letter of transmittal and other exchange offer material
may be obtained from the information agent or the dealer manager listed below.
You may also contact your broker, dealer, commercial bank or trust company for
assistance concerning the exchange offer.
The information agent for the exchange offer is:
D.F. KING & CO., INC.
77 Water Street
New York, New York 10005
(800) 755-3105 (Toll-Free) for calls in the United
States
(212) 269-5550 (Collect) for calls outside the United States
The dealer manager for the exchange offer is:
MORGAN STANLEY DEAN WITTER
Morgan Stanley & Co. Incorporated
1251 Avenue of the Americas
New York, New York 10020
(212) 761-6531
216
INFORMATION NOT REQUIRED IN PROSPECTUS
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify directors and officers as well as other employees and
individuals against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement in connection with specified actions, suits or
proceedings, whether civil, criminal, administrative or investigative (other
than an action by or in the right of the corporation -- a "derivative action"),
if they acted in good faith and in a manner they reasonably believed to be in or
not opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe their conduct
was unlawful. A similar standard is applicable in the case of derivative
actions, except that indemnification only extends to expenses (including
attorneys' fees) incurred in connection with the defense or settlement of such
action, and the statute required court approval before there can be any
indemnification where the person seeking indemnification has been found liable
to the corporation. The statute provides that it is not exclusive of other
indemnification that may be granted by a corporation's charter, by-laws,
disinterested director vote, stockholder vote, agreement or otherwise.
Section 102(b)(7) of the Delaware General Corporation Law permits a
corporation to provide in its certificate of incorporation that a director of
the corporation shall not be personably liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (1) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (2) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (3) for
payments of unlawful dividends or unlawful stock repurchases or redemptions, or
(4) for any transaction from which the director derived an improper personal
benefit.
Article 5E(2) of the certificate of incorporation of Conoco (the
"Registrant") provides that no director shall be personally liable to Conoco or
any of its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (1) for any breach of the director's duty of
loyalty to Conoco or its stockholders, (2) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law, (3)
under section 174 of the Delaware General Corporation Law or (4) for any
transaction from which the director derived an improper personal benefit. Any
repeal or modification of such Article 5E(2) shall not adversely affect any
right or protection of a director of the Registrant for or with respect to any
acts or omissions of such director occurring prior to such amendment or repeal.
Conoco's by-laws provide for indemnification of directors and officers to the
maximum extent permitted by Delaware law.
Conoco has entered into indemnification agreements with each of its
directors and persons named in the Offering Circular-Prospectus constituting a
part of this Registration Statement (collectively, "Indemnitees"). Such
agreements provide that, to the fullest extent permitted by applicable law,
Conoco shall indemnify and hold each Indemnitee harmless from and against any
and all losses and expenses whatsoever (1) arising out of any event or
occurrence related to the fact that such Indemnitee is or was a director or
officer of Conoco, is or was serving in another capacity with Conoco, or by
reason of anything done or not done by such Indemnitee in such capacity and (2)
incurred in connection with any threatened, pending or completed legal
proceeding.
The Registrant may provide liability insurance for each director and
officer for certain losses arising from claims or changes made against them
while acting in their capabilities as directors or officers of Registrant,
whether or not Registrant would have the power to indemnify such person against
such liability, as permitted by law.
I
217
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
EXHIBIT
NO. DESCRIPTION
- ------- -----------
3.1 -- Second Amended and Restated Certificate of Incorporation of
Conoco Inc.(1)
3.2 -- By-laws of Conoco Inc. as amended May 12, 1999(2)
4.1 -- Specimen Certificate for shares of Class A Common Stock of
the Registrant(3)
4.2 -- Specimen Certificate for shares of Class B Common Stock of
the Registrant(3)
4.3 -- Preferred Share Purchase Rights Agreement(3)
4.4 -- Promissory Note and Guaranty to DuPont Energy Company(3)
4.5 -- Promissory Note to DuPont Chemical and Energy Operations
Inc. (Norway)(3)
4.6 -- Promissory Note to DuPont Chemical and Energy Operations
Inc. (United Kingdom and Poland)(3)
4.7 -- Promissory Note and Guaranty to DuPont Energy Company(3)
4.8 -- Revolving Credit Agreement and Guaranty(3)
4.9 -- Indenture between Conoco and the Trustee relating to the
debt securities(4)
5.1 -- Opinion of R.A. Harrington, Senior Vice President, Legal and
General Counsel of Conoco Inc. regarding the legality of the
shares being registered(10)
8.1 -- Opinion of Skadden, Arps, Slate, Meagher & Flom LLP
regarding tax matters(5)
8.2 -- Internal Revenue Service Private Letter Ruling(5)
10.1 -- Restructuring, Transfer and Separation Agreement between
DuPont and Conoco(3)
10.2 -- Tax Sharing Agreement between DuPont and Conoco(3)
10.3 -- Employee Matters Agreement between DuPont and Conoco(3)
10.4 -- Information Systems and Telecommunications Carrier
Transitional Services and Facilities Lease Agreement between
DuPont and Conoco(3)
10.5 -- Transitional Services Agreement between DuPont and Conoco(3)
10.6 -- Registration Rights Agreement between DuPont and Conoco(3)
10.7 -- Natural Gas Supply Agreement between DuPont and Conoco(3)
10.8 -- Severance Agreement, dated May 10, 1998, between Conoco and
Archie W. Dunham(3)
10.9 -- 1998 Stock and Performance Incentive Plan as amended May 12,
1999(6)
10.10 -- 1998 Key Employee Stock Performance Plan as amended May 12,
1999(7)
10.11 -- Humber DME Agreement(3)
10.12 -- Deferred Compensation Plan for Nonemployee Directors as
amended May 12, 1999(8)
10.13 -- Conoco Inc. Key Employee Severance Plan(3)
10.14 -- Conoco Inc. Key Employee Temporary Severance Plan(3)
10.15 -- Conoco Salary Deferral & Savings Restoration Plan(3)
10.16 -- Directors' Charitable Gift Plan(3)
10.17 -- Motor Carrier Contract between Sentinel and Conoco(3)
10.18 -- Mount Belvieu Agreements(3)
10.19 -- Form Indemnity Agreement with Directors(3)
21.1 -- List of Principal Subsidiaries of the Registrant(9)
23.1 -- Consent of PricewaterhouseCoopers LLP(5)
24 -- Power of Attorney(10)
99.1 -- Form of letter of transmittal(5)
99.2 -- Form of notice of guaranteed delivery(5)
99.3 -- Form of letter from the dealer manager to Brokers, Dealers,
Commercial Banks, Trust Companies and Other Nominees(5)
99.4 -- Form of letter to Clients for use by Brokers, Dealers,
Commercial Banks, Trust Companies and other Nominees(5)
II
218
EXHIBIT
NO. DESCRIPTION
- ------- -----------
99.5 -- Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9(5)
99.6 -- Form of letters from Trustees or Administrators of DuPont or
DuPont affiliated company savings plans(5)
99.7 -- Form of notice to participants in a Blueprint brokerage
account at Merrill Lynch of DuPont(5)
99.8 -- Letter from DuPont to stockholders(5)
- ---------------
(1) Incorporated by reference to exhibit 3.1 filed as part of Conoco's Form
10-Q for the quarter ended September 30, 1998.
(2) Incorporated by reference to exhibit 3.2 to Conoco's Form 10-Q for the
quarter ended March 31, 1999.
(3) Incorporated by reference to the exhibit of the same number filed as part
of Conoco's Registration Statement on Form S-1, File No. 333-60119.
(4) Incorporated by reference to exhibit 4.1 to Conoco's Registration Statement
on Form S-3, File No. 333-72291.
(5) Filed herein.
(6) Incorporated by reference to exhibit 10.2 to Conoco's Form 10-Q for the
quarter ended March 31, 1999.
(7) Incorporated by reference to exhibit 10.3 to Conoco's Form 10-Q for the
quarter ended March 31, 1999.
(8) Incorporated by reference to exhibit 10.1 to Conoco's Form 10-Q for the
quarter ended March 31, 1999.
(9) Incorporated by reference to exhibit 21.1 filed as part of Conoco's Form
10-K for the year ended December 31, 1998.
(10) Previously filed.
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report under section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report under section 15(d) of the Securities
Exchange Act of 1934) that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant under the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Offering
Circular-Prospectus under Items 4, 10(b), 11 or 13 of this Form, within one
business day of receipt of such request, and to send the incorporated documents
by first
III
219
class mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the registration statement
through the date of responding to the request. The undersigned registrant hereby
undertakes to supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the registration statement when it
becomes effective.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(a) To include any Offering Circular-Prospectus required by Section
10(a)(3) of the Securities Act:
(b) To reflect in the Offering Circular-Prospectus any facts or
events arising after the effective date of the Registration Statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
Offering Circular-Prospectus filed with the Commission under Rule 424(b)
if, in the aggregate, the changes in volume and price represent no more
than 20 percent change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
registration statement;
(c) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
IV
220
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Houston, State of Texas, on July 2, 1999.
CONOCO INC.
By: /s/ ROBERT W. GOLDMAN
------------------------------------
Name: Robert W. Goldman
Title: Senior Vice President,
Finance,
and Chief Financial
Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed below by the following persons in
the capacities indicated on July 2, 1999.
SIGNATURE TITLE
--------- -----
* President, Chief Executive Officer and Director
- ---------------------------------------------------
Archie W. Dunham
/s/ ROBERT W. GOLDMAN Senior Vice President, Finance, and Chief Financial Officer
- --------------------------------------------------- (Principal Financial Officer)
Robert W. Goldman
* Controller (Principal Accounting Officer)
- ---------------------------------------------------
W. David Welch
* Chairman of the Board
- ---------------------------------------------------
Edgar S. Woolard, Jr.
* Director
- ---------------------------------------------------
Ruth R. Harkin
* Director
- ---------------------------------------------------
Frank A. McPherson
* Director
- ---------------------------------------------------
Gary M. Pfeiffer
* Director
- ---------------------------------------------------
William K. Reilly
* Director
- ---------------------------------------------------
William R. Rhodes
V
221
SIGNATURE TITLE
--------- -----
* Director
- ---------------------------------------------------
Franklin A. Thomas
/s/ ROBERT W. GOLDMAN
- ---------------------------------------------------
* Robert W. Goldman
Attorney-in-fact
VI
222
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -----------
3.1 -- Second Amended and Restated Certificate of Incorporation of
Conoco Inc.(1)
3.2 -- By-laws of Conoco Inc. as amended May 12, 1999(2)
4.1 -- Specimen Certificate for shares of Class A Common Stock of
the Registrant(3)
4.2 -- Specimen Certificate for shares of Class B Common Stock of
the Registrant(3)
4.3 -- Preferred Share Purchase Rights Agreement(3)
4.4 -- Promissory Note and Guaranty to DuPont Energy Company(3)
4.5 -- Promissory Note to DuPont Chemical and Energy Operations
Inc. (Norway)(3)
4.6 -- Promissory Note to DuPont Chemical and Energy Operations
Inc. (United Kingdom and Poland)(3)
4.7 -- Promissory Note and Guaranty to DuPont Energy Company(3)
4.8 -- Revolving Credit Agreement and Guaranty(3)
4.9 -- Indenture between Conoco and the Trustee relating to the
debt securities(4)
5.1 -- Opinion of R.A. Harrington, Senior Vice President, Legal and
General Counsel of Conoco Inc. regarding the legality of the
shares being registered(10)
8.1 -- Opinion of Skadden, Arps, Slate, Meagher & Flom LLP
regarding tax matters(5)
8.2 -- Internal Revenue Service Private Letter Ruling(5)
10.1 -- Restructuring, Transfer and Separation Agreement between
DuPont and Conoco(3)
10.2 -- Tax Sharing Agreement between DuPont and Conoco(3)
10.3 -- Employee Matters Agreement between DuPont and Conoco(3)
10.4 -- Information Systems and Telecommunications Carrier
Transitional Services and Facilities Lease Agreement between
DuPont and Conoco(3)
10.5 -- Transitional Services Agreement between DuPont and Conoco(3)
10.6 -- Registration Rights Agreement between DuPont and Conoco(3)
10.7 -- Natural Gas Supply Agreement between DuPont and Conoco(3)
10.8 -- Severance Agreement, dated May 10, 1998, between Conoco and
Archie W. Dunham(3)
10.9 -- 1998 Stock and Performance Incentive Plan as amended May 12,
1999(6)
10.10 -- 1998 Key Employee Stock Performance Plan as amended May 12,
1999(7)
10.11 -- Humber DME Agreement(3)
10.12 -- Deferred Compensation Plan for Nonemployee Directors as
amended May 12, 1999(8)
10.13 -- Conoco Inc. Key Employee Severance Plan(3)
10.14 -- Conoco Inc. Key Employee Temporary Severance Plan(3)
10.15 -- Conoco Salary Deferral & Savings Restoration Plan(3)
10.16 -- Directors' Charitable Gift Plan(3)
10.17 -- Motor Carrier Contract between Sentinel and Conoco(3)
10.18 -- Mount Belvieu Agreements(3)
10.19 -- Form Indemnity Agreement with Directors(3)
21.1 -- List of Principal Subsidiaries of the Registrant(9)
23.1 -- Consent of PricewaterhouseCoopers LLP(5)
24 -- Power of Attorney(10)
99.1 -- Form of letter of transmittal(5)
99.2 -- Form of notice of guaranteed delivery(5)
99.3 -- Form of letter from the dealer manager to Brokers, Dealers,
Commercial Banks, Trust Companies and Other Nominees(5)
99.4 -- Form of letter to Clients for use by Brokers, Dealers,
Commercial Banks, Trust Companies and other Nominees(5)
99.5 -- Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9(5)
223
EXHIBIT
NO. DESCRIPTION
- ------- -----------
99.6 -- Form of letters from Trustees or Administrators of DuPont or
DuPont affiliated company savings plans(5)
99.7 -- Form of notice to Participants in a Blueprint brokerage
account at Merrill Lynch of DuPont(5)
99.8 -- Letter from DuPont to Stockholders(5)
- ---------------
(1) Incorporated by reference to exhibit 3.1 filed as part of Conoco's Form
10-Q for the quarter ended September 30, 1998.
(2) Incorporated by reference to exhibit 3.2 to Conoco's Form 10-Q for the
quarter ended March 31, 1999.
(3) Incorporated by reference to the exhibit of the same number filed as part
of Conoco's Registration Statement on Form S-1, File No. 333-60119.
(4) Incorporated by reference to exhibit 4.1 to Conoco's Registration Statement
on Form S-3, File No. 333-72291.
(5) Filed herein.
(6) Incorporated by reference to exhibit 10.2 to Conoco's Form 10-Q for the
quarter ended March 31, 1999.
(7) Incorporated by reference to exhibit 10.3 to Conoco's Form 10-Q for the
quarter ended March 31, 1999.
(8) Incorporated by reference to exhibit 10.1 to Conoco's Form 10-Q for the
quarter ended March 31, 1999.
(9) Incorporated by reference to exhibit 21.1 filed as part of Conoco's Form
10-K for the year ended December 31, 1998.
(10) Previously filed.