1
EXHIBIT 99.1
Conoco Inc.'s Audited 2000 Consolidated Financial Statements
INDEX
PAGE
Report of Management......................................................................... 1
Audited Consolidated Financial Statements
Report of Independent Accountants......................................................... 2
Consolidated Statement of Income - Years Ended December 31, 2000, 1999 and 1998........... 3
Consolidated Balance Sheet - at December 31, 2000 and 1999................................ 4
Consolidated Statement of Stockholders' Equity/Owner's Net Investment and Accumulated
Other Comprehensive Loss - Years Ended December 31, 2000, 1999 and 1998................. 5
Consolidated Statement of Cash Flows - Years Ended December 31, 2000, 1999 and 1998....... 6
Notes to Consolidated Financial Statements................................................ 7
Unaudited Financial Information
Supplemental Petroleum Data - 2000, 1999 and 1998......................................... 39
Consolidated Quarterly Financial Data - 2000 and 1999..................................... 45
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REPORT OF MANAGEMENT
Management of Conoco Inc. is responsible for preparing the accompanying
consolidated financial statements and other information. The consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles considered by management to present fairly Conoco's
financial position, results of operations and cash flows. The consolidated
financial statements include some amounts that are based on management's best
estimates and judgments.
Conoco's system of internal controls is designed to provide reasonable
assurance as to the protection of assets against loss from unauthorized use or
disposition, and the reliability of financial records for preparing financial
statements and maintaining accountability for assets. Conoco's business ethics
policy is the cornerstone of our internal control system. This policy sets forth
management's commitment to conduct business worldwide with the highest ethical
standards and in conformity with applicable laws. The business ethics policy
also requires that all documents supporting transactions clearly describe their
true nature and that all transactions be properly reported and classified in the
financial records. An extensive internal audit program monitors Conoco's system
of internal controls. Management believes Conoco's system of internal controls
meets the objective noted above.
Conoco's independent accountants, PricewaterhouseCoopers LLP, have audited
the consolidated financial statements. The purpose of their audit is to
independently affirm the fairness of management's reporting of financial
position, results of operations and cash flows. Management has made available to
PricewaterhouseCoopers LLP all of Conoco's financial records and related data,
as well as the minutes of the stockholders' and directors' meetings. To express
the opinion set forth in their report, PricewaterhouseCoopers LLP studies and
evaluates the internal controls to the extent they deem necessary. The adequacy
of Conoco's internal control systems and the accounting principles employed in
financial reporting are under the general oversight of the Audit and Compliance
Committee of the Board of Directors. This committee also has responsibility for
employing the independent accountants, subject to stockholder ratification. All
members of this committee are independent of Conoco, in compliance with the
rules of the New York Stock Exchange. The independent accountants and the
internal auditors have direct access to the Audit and Compliance Committee, and
they meet with the Audit and Compliance Committee from time to time, with and
without management present, to discuss accounting, auditing and financial
reporting matters.
/s/ ARCHIE W. DUNHAM /s/ ROBERT W. GOLDMAN /s/ W. DAVID WELCH
- ----------------------------------- -------------------------------- --------------------------------
Archie W. Dunham Robert W. Goldman W. David Welch
Chairman, President and Senior Vice President, Finance Controller and
Chief Executive Officer and Chief Financial Officer Principal Accounting Officer
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and the Board of Directors of Conoco Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of stockholders' equity/owner's net
investment and accumulated other comprehensive loss, and of cash flows present
fairly, in all material respects, the financial position of Conoco Inc. and its
subsidiaries at December 31, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2000, in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, 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 our opinion.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
February 19, 2001
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CONOCO INC.
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31
---------------------------------------
2000 1999 1998
----------- ----------- -----------
(IN MILLIONS, EXCEPT PER SHARE)
Revenues
Sales and other operating revenues* .................. $ 38,737 $ 27,039 $ 22,796
Equity in earnings of affiliates (note 12) ........... 277 150 22
Other income (note 4) ................................ 273 120 350
----------- ----------- -----------
Total revenues ................................. 39,287 27,309 23,168
----------- ----------- -----------
Costs and expenses
Cost of goods sold ................................... 23,921 14,781 11,751
Operating expenses ................................... 2,215 2,060 2,089
Selling, general and administrative expenses ......... 794 809 736
Stock option provision (note 22) ..................... -- -- 236
Exploration expenses ................................. 279 270 380
Depreciation, depletion and amortization ............. 1,301 1,193 1,113
Taxes other than on income* (note 5) ................. 6,981 6,668 5,970
Interest and debt expense (note 6) ................... 338 311 199
----------- ----------- -----------
Total costs and expenses ...................... 35,829 26,092 22,474
----------- ----------- -----------
Income before income taxes .............................. 3,458 1,217 694
Provision for income taxes (note 7) ..................... 1,556 473 244
----------- ----------- -----------
Net income .............................................. $ 1,902 $ 744 $ 450
=========== =========== ===========
Earnings per share (note 8)**
Basic ................................................ $ 3.05 $ 1.19 $ .95
Diluted .............................................. $ 3.00 $ 1.17 $ .95
Weighted-average number of shares outstanding (note 8)
Basic ................................................ 624 627 474
Diluted .............................................. 633 636 475
- ----------
* Includes petroleum excise taxes .................... $ 6,774 $ 6,492 $ 5,801
** Earnings per share for 1998, prior to Conoco's initial public offering, was calculated by using
only Class B common stock, as required by SFAS No. 128 (see note 8).
See accompanying notes to consolidated financial statements.
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CONOCO INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31
------------------------
2000 1999
---------- ----------
(IN MILLIONS)
ASSETS
Current assets
Cash and cash equivalents ...................................................... $ 342 $ 317
Accounts and notes receivable (note 9) ......................................... 1,837 1,735
Inventories (note 10) .......................................................... 791 703
Prepaid expenses and other current assets ...................................... 441 313
---------- ----------
Total current assets ..................................................... 3,411 3,068
Property, plant and equipment (note 11) ........................................... 23,890 22,476
Less: accumulated depreciation, depletion and amortization ........................ (11,683) (11,241)
---------- ----------
Net property, plant and equipment ................................................. 12,207 11,235
Investment in affiliates (note 12) ................................................ 1,831 1,604
Other assets (note 13) ............................................................ 678 468
---------- ----------
Total assets ...................................................................... $ 18,127 $ 16,375
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable (note 14) ..................................................... $ 1,723 $ 1,489
Short-term borrowings and capital lease obligations (note 15) .................. 256 663
Income taxes (note 7) .......................................................... 665 303
Other accrued liabilities (note 16) ............................................ 1,543 1,303
---------- ----------
Total current liabilities ................................................ 4,187 3,758
Long-term borrowings and capital lease obligations (note 17) ...................... 4,138 4,080
Deferred income taxes (note 7) .................................................... 1,911 1,689
Other liabilities and deferred credits (note 18) .................................. 1,926 1,958
---------- ----------
Total liabilities ........................................................ 12,162 11,485
---------- ----------
Commitments and contingent liabilities (note 26)
Minority interests (note 19) ...................................................... 337 335
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 with 186,646,358
shares outstanding at December 31, 2000 and 189,039,861 shares
outstanding at December 31, 1999 ........................................... 2 2
Class B common stock, $.01 par value
1,599,776,271 shares authorized, 436,786,482 shares issued and
outstanding at December 31, 2000; 1,600,000,000 shares authorized,
436,543,573 shares issued and outstanding at December 31, 1999 ............. 4 4
Additional paid-in capital ..................................................... 4,932 4,941
Retained earnings .............................................................. 1,460 44
Accumulated other comprehensive loss (note 21) ................................. (653) (372)
Treasury stock, at cost
4,851,463 and 2,457,960 Class A shares at December 31, 2000 and
December 31, 1999, respectively ............................................ (117) (64)
---------- ----------
Total stockholders' equity ............................................... 5,628 4,555
---------- ----------
Total liabilities and stockholders' equity ........................................ $ 18,127 $ 16,375
========== ==========
See accompanying notes to consolidated financial statements.
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CONOCO INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY/OWNER'S NET INVESTMENT AND
ACCUMULATED OTHER COMPREHENSIVE LOSS
(NOTES 20 AND 21)
RETAINED ACCUMULATED
ADDITIONAL EARNINGS OTHER
OWNER'S NET COMMON PAID-IN (ACCUMULATED COMPREHENSIVE COMPREHENSIVE TREASURY
INVESTMENT STOCK CAPITAL DEFICIT) INCOME LOSS STOCK
----------- --------- --------- ------------ ------------- --------- ---------
(IN MILLIONS)
Balance January 1, 1998 ............. $ 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
=========
Cash distribution to owner .......... (512)
Dividends to owner .................. (8,200)
Other transfers from owner .......... 433
Capitalization from owner at initial
public offering ................... (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)
Comprehensive income
Net income ........................ 744 $ 744
Other comprehensive income (loss)
Foreign currency translation
adjustment ................... (162)
Minimum pension liability
adjustment ................... 64
---------
Other comprehensive loss ..... (98) (98)
---------
Comprehensive income ................ $ 646
=========
Adjustment to capitalization from
owner at initial public
offering (note 20) ................ (26)
Dividends ........................... (445)
Compensation plans .................. 12
Treasury stock - purchases .......... (87)
- issuances .......... (11) 28
--------- --------- --------- --------- --------- ---------
Balance December 31, 1999 ........... -- 6 4,941 44 (372) (64)
Comprehensive income
Net income ........................ 1,902 $ 1,902
Other comprehensive income (loss)..
Foreign currency translation
adjustment ................... (272)
Minimum pension liability
adjustment ................... (9)
---------
Other comprehensive loss ..... (281) (281)
---------
Comprehensive income ................ $ 1,621
=========
Dividends ........................... (474)
Compensation plans .................. 5
Redemption of minority interests .... (9)
Treasury stock - purchases .......... (90)
- issuances .......... (17) 37
--------- --------- --------- --------- --------- ---------
Balance December 31, 2000 ........... $ -- $ 6 $ 4,932 $ 1,460 $ (653) $ (117)
========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
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CONOCO INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31
--------------------------------------
2000 1999 1998
---------- ---------- ----------
(IN MILLIONS)
Cash provided by operations
Net income .......................................................... $ 1,902 $ 744 $ 450
Adjustments to reconcile net income to cash provided by operations
Depreciation, depletion and amortization ......................... 1,301 1,193 1,113
Dry hole costs and impairment of unproved properties ............. 88 131 163
Stock option provision (note 22) ................................. -- -- 236
Inventory write-down to market (note 10) ......................... -- -- 97
Deferred income taxes (note 7) ................................... 236 (111) (32)
Income applicable to minority interests .......................... 24 25 21
Gain on asset dispositions ....................................... (72) (20) (206)
Undistributed equity earnings .................................... (145) (73) 83
Other non-cash charges and credits - net ......................... (87) (18) (14)
Decrease (increase) in operating assets
Accounts and notes receivable .................................. (153) (573) 125
Inventories .................................................... (119) 80 (62)
Other operating assets ......................................... (313) 107 (172)
Increase (decrease) in operating liabilities
Accounts and other operating payables .......................... 567 639 (69)
Income and other taxes payable (notes 5 and 7) ................. 209 92 (360)
---------- ---------- ----------
Cash provided by operations ................................. 3,438 2,216 1,373
---------- ---------- ----------
Investing activities (note 24)
Purchases of property, plant and equipment ......................... (1,921) (1,675) (1,965)
Purchases of businesses - net of cash acquired ..................... (661) -- --
Investments in affiliates - additions .............................. (173) (272) (391)
- repayment of loans and advances ........ 64 45 6
Proceeds from sales of assets and subsidiaries ..................... 222 162 721
Net (increase) decrease in short-term financial instruments ........ (3) 34 31
---------- ---------- ----------
Cash used in investing activities ........................... (2,472) (1,706) (1,598)
---------- ---------- ----------
Financing activities
Short-term borrowings (note 15) - receipts ......................... 28,091 12,778 --
- payments ......................... (28,498) (12,156) (26)
Long-term borrowings - receipts .................................... 65 3,970 --
- payments .................................... -- (20) (4)
Related party borrowings - receipts ................................ -- 865 927
- payments ................................ -- (5,461) (5,434)
Related party notes receivable - receipts .......................... -- -- 444
- payments .......................... -- -- (152)
Treasury stock - purchases ......................................... (90) (87) (5)
- proceeds from issuances ........................... 12 13 --
Cash dividends ..................................................... (474) (445) --
Proceeds from initial public offering .............................. -- -- 4,228
Cash distribution to owner ......................................... -- (11) (512)
Minority interests (note 19) - receipts ............................ -- 326 --
- payments ............................ (26) (324) (21)
---------- ---------- ----------
Cash used in financing activities ........................... (920) (552) (555)
---------- ---------- ----------
Effect of exchange rate changes on cash ................................ (21) (35) 27
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents ....................... 25 (77) (753)
Cash and cash equivalents at beginning of year ......................... 317 394 1,147
---------- ---------- ----------
Cash and cash equivalents at end of year ............................... $ 342 $ 317 $ 394
========== ========== ==========
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES
Transactions with DuPont
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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
1. BASIS OF PRESENTATION
Conoco is an integrated, global energy company that has three operating
segments--upstream, downstream and emerging businesses. Activities of the
upstream operating segment include exploring for, developing, producing and
selling crude oil, natural gas and natural gas liquids. Downstream operating
segment 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. Emerging businesses
operating segment activities include the development of new businesses beyond
our traditional operations with the potential to contribute substantially to
long-term growth. Conoco has five reporting segments. Four of these reporting
segments reflect geographic division between U.S. and international
operations in upstream and downstream businesses, and one segment is for
emerging businesses. Corporate includes general corporate expenses, financing
costs and other non-operating items and captive insurance operations.
The initial public offering of the Class A common stock of Conoco commenced
on October 21, 1998. The initial public offering consisted of approximately 191
million 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. After the initial public offering, DuPont owned
100 percent of Conoco's Class B common stock (approximately 437 million shares),
representing approximately 70 percent of Conoco's outstanding common stock and
approximately 92 percent of the combined voting power of all classes of voting
stock of Conoco. On August 6, 1999, DuPont concluded an exchange offer to its
stockholders, which resulted in all 437 million shares of Class B common stock
being distributed to DuPont stockholders. The exchange offer was the final step
in DuPont's planned divestiture of Conoco.
Prior to the date of the initial public offering, operations were conducted
by Conoco and, in some cases, subsidiaries of DuPont. The accompanying
consolidated financial statements for 1998 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, cash distribution to owner prior to the initial public offering
included funds transferred between Conoco and DuPont for operating needs, cash
dividends paid and other equity transactions.
Effective at the time of the initial public offering, 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
initial public offering, financial information is presented on a consolidated
basis.
The consolidated statement of income includes all revenues and costs
directly attributable to Conoco. These costs include 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 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 are deemed 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
considered 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.
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 initial
public offering.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
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. All intercompany balances have been
eliminated. The equity method is used to account for investments in corporate
entities, partnerships and limited liability companies in which Conoco exerts
significant influence, generally having a 20 percent to 50 percent ownership
interest. Conoco's 50.1 percent noncontrolling interest in Petrozuata C.A.,
located in Venezuela, is accounted for using the equity method. The equity
method is used because the minority shareholder, a subsidiary of PDVSA, the
national oil company of the Bolivarian Republic of Venezuela, has substantive
participating rights. Undivided interests in oil and gas properties under joint
operating agreements and in transportation assets are combined on a
proportionate gross 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.
Revenue Recognition
Revenues are recorded when title passes to the customer. Revenues from the
production of oil and gas properties in which Conoco has interests with other
companies are recorded on the basis of sales to customers. Differences between
these sales and our share of production are not significant. Revenues from
construction service contracts are recorded on a percentage-of-completion
method.
Cash Equivalents
Cash equivalents represent investments with maturities of three months or
less from the 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, including interest capitalized on construction
projects. 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.
Minor maintenance and repairs are charged to expense; replacements and
improvements are capitalized.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Major Maintenance
Conoco accrues in advance for planned major maintenance. Costs accrued,
which are classified as liabilities on the balance sheet, are primarily related
to work to be done as part of refinery turnarounds and drydock maintenance for
tankers, barges and boats.
Oil and Gas Properties
Conoco follows the successful efforts method of accounting. Under
successful efforts, the costs of property acquisitions, successful exploratory
wells, development wells and related support equipment and facilities 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. The impairment of individually insignificant properties
is recorded by amortizing the costs based on past experience and the estimated
holding period. Exploratory well costs are expensed in the period a 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.
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 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
Conoco applies the intrinsic value method of accounting for stock options
as prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. 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 basis of Conoco'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 some or all of the deferred tax asset will
not be realized.
Prior to the date of the initial public offering, 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 expected amount to be
paid or received from the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
consolidated group. Benefits of losses and credit carry forwards are recorded
when members of the consolidated group expect to realize such benefits. The pro
forma effect on the consolidated statement of income, reflecting the provision
for income taxes on a separate return basis prior to the initial public
offering, is not material. For periods ending after the initial public offering,
Conoco has filed separate tax returns. Accordingly, for periods subsequent to
the initial public offering, 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
The local currency is the functional currency for Conoco's integrated
western European and some eastern European petroleum operations. The euro has
been adopted as the local currency by the 12 countries participating in the
European Economic and Monetary Union. For those participating countries in which
Conoco operates, the euro concurrently became Conoco's functional currency. For
subsidiaries whose functional currency is the local currency, assets and
liabilities denominated in local currency are translated into U.S. dollars at
end-of-period exchange rates. The resultant translation adjustment is a
component of accumulated other comprehensive loss (see note 21). Monetary assets
and liabilities denominated in currencies other than the local currency are
remeasured into the local currency prior to translation into U.S. dollars. The
resultant exchange gains or losses, together with their related tax effects, are
included in income in the period in which they occur. Revenue and expenses are
translated into U.S. dollars at the average exchange rates in effect during the
period.
For subsidiaries where the U.S. dollar is the functional currency, all
foreign currency asset and liability amounts are remeasured into U.S. dollars at
end-of-period exchange rates. Inventories, prepaid expenses and PP&E are
exceptions to this policy and are remeasured at historical rates. Foreign
currency revenue and expenses are remeasured at average exchange rates in effect
during the year. Exceptions to this policy include all expenses related to
balance sheet amounts that are remeasured at historical exchange rates. Exchange
gains and losses arising from remeasured foreign-currency-denominated monetary
assets and liabilities are included in current period income.
Commodity Hedging and Trading Activities
Conoco enters into energy-related futures, forwards, swaps and options in
various markets:
o to balance its physical systems;
o to meet customer needs; and
o to manage its price exposure on anticipated crude oil, natural gas,
refined product and electric power transactions.
Gains and losses on non-trading contracts that are designated as hedges are
deferred and included in the measurement of the related transaction. Changes in
market values of all other derivative 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
maturity of the hedged transaction, gains or losses 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, then the gains or
losses associated with the derivative, through the maturity date of the
transaction, are included in the measurement of the hedged transaction. The
derivative also is reclassified as for trading purposes. Derivatives designated
as a hedge of an anticipated transaction are reclassified as for trading
purposes if the anticipated transaction is no longer expected to occur.
In the consolidated statement of cash flows, Conoco reports the cash flows
resulting from its hedging activities in the same category as the related item
that is being hedged.
10
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Reclassifications
Certain data in the prior years' financial statements have been
reclassified to conform to the 2000 presentation.
Recent Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Certain Hedging Activities." In June 2000, the FASB
issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Hedging
Activities," which made certain amendments to SFAS No. 133. These Standards,
which were required to be adopted by Conoco on January 1, 2001, modify the
criteria for identifying derivative instruments and require that derivatives,
whether in stand-alone contracts or, in certain cases, those embedded into other
contracts, be recorded at their fair value as assets or liabilities in the
balance sheet. In addition, the Standards prescribe the accounting for the gain
or loss resulting from changes in the fair value of derivatives designated as
hedging instruments as follows:
o the gain or loss on a fair value hedge (a hedge of the exposure to changes
in the fair value of a recognized asset or liability or an unrecognized
firm commitment) is recognized in earnings in the period of change together
with the offsetting gain or loss on the hedged item;
o the gain or loss on a cash flow hedge (a hedge of the exposure to variable
cash flow of a forecasted transaction) is initially reported as a component
of other comprehensive income and subsequently reclassified into earnings
when the forecasted transaction affects earnings;
o the gain or loss on a foreign currency hedge (a hedge of an exposure to
risk of changes in foreign currency exchange rates) is initially reported
as a component of other comprehensive income and subsequently reclassified
into earnings when the foreign currency transaction affects earnings; and
o the ineffective portion of the gain or loss on derivatives designated as
hedging instruments is recognized in earnings in the period of change.
Conoco adopted SFAS No. 133 and SFAS No. 138 on January 1, 2001. As part of
the preparation for adoption of these Standards, Conoco completed an evaluation
of its Risk Management Policy and a review of its underlying business activities
in order to identify contractual arrangements that qualify as derivative
instruments pursuant to the requirements of the Standards. Consistent with its
Risk Management Policy, which was not changed as a result of this evaluation,
Conoco intends to use stand-alone derivative instruments to manage its commodity
price, foreign currency rate and interest rate risks. In addition, Conoco
intends to continue to conduct limited amounts of trading for profit unrelated
to its underlying physical business using stand-alone commodity derivative
instruments. Pursuant to these Standards, such trading for profit contracts will
continue to be reported on the balance sheet at fair value consistent with the
current treatment afforded such contracts under existing generally accepted
accounting principles.
Upon initial adoption of the Standards on January 1, 2001, Conoco recorded
a cumulative transition gain of $37 after tax into net income, which was mainly
the result of certain derivative instruments that did not meet the conditions
for hedge accounting pursuant to the Standards, and $1 into other comprehensive
income to reflect the fair value of derivatives intended as cash flow hedges. In
addition, $297 was recorded as assets and $259 was recorded as liabilities.
SFAS No. 133 and SFAS No. 138 are complex and subject to a potentially wide
range of interpretations in their application. As such, in 1998 the FASB
established the Derivative Implementation Group (DIG) task force specifically to
consider and to publish official interpretations of issues arising from the
implementation of these Standards. The DIG currently is considering several
issues, and the potential exists for additional issues to be brought under its
review. Therefore, if subsequent DIG interpretations of these Standards are
different than Conoco's initial application, it is possible that the impact of
Conoco's implementation, as stated above, will be modified.
Conoco's Risk Management Policy is further explained in note 25 to these
financial statements.
11
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
3. TRANSACTIONS WITH DUPONT
As disclosed in note 1, DuPont ceased to be a related party effective
August 6, 1999. However, the 1999 and 1998 consolidated financial statements
included related party transactions with DuPont involving services such as cash
management, other financial services, purchasing, legal, computer, corporate
aviation and general corporate expenses that were provided between Conoco and
DuPont organizations. For periods prior to the initial public offering, the
costs of services were directly charged or allocated between Conoco and DuPont
using methods management believes were 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.
Amounts charged to Conoco for these services were $21 for 1999 and $121 for
1998. These amounts were 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.
Charges for these services amounted to $15 for 1999 and $61 for 1998. These
charges to DuPont were treated as reductions, as appropriate, of cost of goods
sold, operating expenses or selling, general and administrative expenses.
Interest expense charged by DuPont was $91 for 1999 and $264 for 1998.
Interest charged by DuPont reflected market-based interest rates. A portion of
historical related party interest cost and other interest expense was
capitalized as cost associated with major construction projects. Interest income
from DuPont was $43 for 1998, and also reflected market-based interest rates.
Sales and other operating revenues included sales of products from Conoco
to DuPont, principally natural gas and gas liquids supplied to several DuPont
plant sites. These sales totaled $211 for 1999 and $427 for 1998. Also included
for 1998 was $20 in revenues from insurance premiums charged to DuPont for
property and casualty coverage outside the U.S. Purchases of products from
DuPont during these periods were not material. Subsequent to the initial public
offering, these intercompany arrangements between DuPont and Conoco, excluding
insurance coverage provided to DuPont, were provided under transition service
agreements or other long-term agreements.
In April 1999, Conoco issued and sold in a public offering $4,000 in senior
fixed-rate debt securities with a weighted-average interest rate of 6.49
percent. The $3,970 net proceeds of this offering were used to repay a portion
of Conoco's separation-related indebtedness to DuPont that was incurred in 1998.
The remaining debt owed to DuPont was repaid in May 1999 with proceeds from a
commercial paper program (see note 15).
4. OTHER INCOME
2000 1999 1998
--------- --------- ---------
Interest income
DuPont (see note 3) ........................ $ -- $ -- $ 43
Other ...................................... 39 25 46
--------- --------- ---------
Total ...................................... 39 25 89
Gain on sales of assets and subsidiaries (1) .. 72 26 207
Write-off of Colombia power venture ........... (26) -- --
Syrian service contract ....................... 110 3 --
Exchange gain (loss) and other ................ 78 66 54
--------- --------- ---------
Other income .................................. $ 273 $ 120 $ 350
========= ========= =========
- ----------
(1) 2000 includes a gain of $42 from the sale of Oklahoma gas properties. 1998
includes a gain of $89 from the sale of certain upstream properties in the
North Sea and the U.S.
12
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
5. TAXES OTHER THAN ON INCOME
2000 1999 1998
--------- --------- ---------
Petroleum excise taxes
U.S. .................................................................... $ 1,572 $ 1,495 $ 1,286
Non-U.S. ................................................................ 5,202 4,997 4,515
--------- --------- ---------
Total ................................................................ 6,774 6,492 5,801
Payroll taxes .............................................................. 45 44 42
Property taxes ............................................................. 65 64 64
Production and other taxes ................................................. 97 68 63
--------- --------- ---------
Taxes other than on income.................................................. $ 6,981 $ 6,668 $ 5,970
========= ========= =========
6. INTEREST AND DEBT EXPENSE
2000 1999 1998
--------- --------- ---------
Interest and debt cost incurred
DuPont (see note 3) ..................................................... $ -- $ 91 $ 264
Other debt and capital leases ........................................... 354 226 7
--------- --------- ---------
Total ................................................................ 354 317 271
Less: Interest and debt cost capitalized ................................... 16 6 72
--------- --------- ---------
Interest and debt expense (1) .............................................. $ 338 $ 311 $ 199
========= ========= =========
- ----------
(1) Interest paid, net of amounts capitalized, was $331 in 2000, $297 in 1999
and $145 in 1998.
7. PROVISION FOR INCOME TAXES
2000 1999 1998
--------- --------- ---------
Current tax expense
U.S. federal ........................................................... $ 126 $ 26 $ (57)
U.S. state and local ................................................... 11 4 10
Non-U.S. ............................................................... 1,183 554 323
--------- --------- ---------
Current tax expense .................................................. 1,320 584 276
--------- --------- ---------
Deferred tax expense
U.S. federal ........................................................... 125 (84) (51)
U.S. state and local ................................................... 3 (5) (5)
Non-U.S. ............................................................... 108 (22) 24
--------- --------- ---------
Deferred tax expense ................................................. 236 (111) (32)
--------- --------- ---------
Provision for income taxes ................................................. 1,556 473 244
Foreign currency translation (see note 21) ............................. (83) (29) (22)
Minimum pension liability (see note 21) ................................ (5) 29 (26)
--------- --------- ---------
Total provision ............................................................ $ 1,468 $ 473 $ 196
========= ========= =========
Total income taxes paid worldwide were $1,030 in 2000, $493 in 1999 and
$714 in 1998.
13
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
At December 31, 2000 and 1999, deferred taxes were classified in the
consolidated balance sheet as follows:
2000 1999
---------- ----------
Prepaid expenses and other current assets .... $ (43) $ (15)
Other assets (see note 13) ................... (39) (61)
Income taxes ................................. 66 27
Deferred income taxes ........................ 1,911 1,689
---------- ----------
Net deferred tax liabilities ................. $ 1,895 $ 1,640
========== ==========
The significant components of deferred tax liabilities/(assets) at December
31, 2000 and 1999 were as follows:
2000 1999
---------- ----------
Deferred tax liabilities
PP&E ....................................... $ 2,452 $ 2,349
Inventories ................................ 15 46
Other ...................................... 181 85
---------- ----------
Deferred tax liabilities ............... 2,648 2,480
Deferred tax assets
PP&E ....................................... (35) (244)
Employee benefits .......................... (252) (241)
Other accrued expenses ..................... (275) (236)
Tax loss/tax credit carry forwards ......... (442) (512)
Other ...................................... (158) (59)
---------- ----------
Deferred tax assets .................... (1,162) (1,292)
Valuation allowance .......................... 409 452
---------- ----------
Net deferred tax assets ................ (753) (840)
---------- ----------
Net deferred tax liabilities ................. $ 1,895 $ 1,640
========== ==========
Valuation allowances, which reduce deferred tax assets to an amount that
will more likely than not be realized, decreased $43 in 2000. This reflects a
$123 decrease related to tax assets representing operating losses, which Conoco
determined will more likely than not be realized in future years and tax loss
carry forwards that have been relinquished or expired. This decrease is
partially offset by an $80 increase used to offset tax assets representing
operating and tax losses incurred in exploration, production and start-up
operations. Valuation allowances increased $29 in 1999 primarily reflecting an
$80 increase in the valuation allowance used to offset operating losses incurred
in exploration, production and start-up operations, partially offset by a $51
decrease related to tax assets representing operating losses.
Under the tax laws of various jurisdictions in which Conoco operates,
deductions or credits that cannot be fully utilized for tax purposes during the
current year may be carried forward. These loss carry forwards, subject to
statutory limitations, can reduce taxable income or taxes payable in a future
year. At December 31, 2000, the tax effect of such loss carry forwards
approximated $442. Of this amount, $166 has no expiration date, $76 expires in
2001, $6 expires in 2002, $39 expires in 2003, $71 expires in 2004 and $84
expires in 2005 and later years.
In connection with the separation from DuPont and the initial public
offering, Conoco and DuPont entered into a tax sharing agreement. Several
matters under the tax sharing agreement remain in dispute between Conoco and
DuPont and are currently being arbitrated. Conoco currently expects that
DuPont's obligations to Conoco could total up to approximately $250, plus
interest. DuPont also has made claims related to the dispute, to which Conoco
has taken exception. The amount of such claims is not material. The effect of
the dispute currently is not reflected in Conoco's financial statements and,
regardless of the outcome of this dispute, Conoco believes the result will not
be material to its financial position or results of operations.
14
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
An analysis of Conoco's effective income tax rate follows:
2000 1999 1998
--------- --------- ---------
Statutory U.S. federal income tax rate .................. 35.0% 35.0% 35.0%
Higher tax rate on international operations ............. 11.3 10.0 7.8
Alternative fuels credit ................................ (1.2) (4.0) (8.2)
Reduced tax benefit from stock option provision ......... -- -- 4.9
Realization of unbenefited loss from sale of subsidiary . -- -- (4.6)
Other - net ............................................. (0.1) (2.1) 0.3
--------- --------- ---------
Effective income tax rate ............................... 45.0% 38.9% 35.2%
========= ========= =========
Income before income taxes was based on the location of the corporate unit
to which such earnings are attributable. However, since such earnings were 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 as set forth in
the following table.
2000 1999 1998
--------- --------- ---------
U.S. .................................................... $ 735 $ 93 $ (173)
Non-U.S. ................................................ 2,723 1,124 867
--------- --------- ---------
Income before income taxes .............................. $ 3,458 $ 1,217 $ 694
========= ========= =========
Unremitted earnings of international subsidiaries totaling $1,661 at
December 31, 2000, and $1,488 at December 31, 1999, were deemed to be
permanently invested. No deferred tax liability was recognized for 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 U.S.
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 certain Conoco employee and director awards and fee deferrals that
are invested in Conoco stock units (the denominator). Diluted EPS is similarly
computed, except that the denominator is increased to include the dilutive
effect of outstanding stock options awarded under Conoco's compensation plans
(see note 22).
As described in note 1, Conoco's capital structure was established at the
time of the initial public offering. In accordance with SEC Staff Accounting
Bulletin No. 98, the capitalization of Class B common stock has been
retroactively reflected for the purpose of presenting earnings per share for
periods prior to the initial public offering. For the periods subsequent to the
initial public offering, basic EPS reflects the weighted-average number of
shares of Class A and Class B common stock and deferred award units outstanding.
Corresponding diluted EPS includes the dilutive effect of an additional
8,405,998 shares for 2000, an additional 9,241,896 shares for 1999 and an
additional 1,659,816 shares for 1998. These additional shares for 1998 represent
the weighted-average dilutive effect of outstanding stock options that resulted
from the concurrent cancellation of DuPont stock options at the date of the
initial public offering and the issuance of options with respect to Class A
common stock.
The denominator is based on the following weighted-average number of common
shares outstanding:
2000 1999 1998
------------------ ----------------- -----------------
Basic.................................................. 624,354,441 627,233,229 473,826,632
Diluted................................................ 632,760,439 636,475,125 475,486,448
Variable stock options for 3,124,146 shares of Class A and Class B common
stock were outstanding at December 31, 2000 and 1999. At December 31, 1998,
variable stock options for 1,724,146 shares of Class A and
15
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Class B common stock were outstanding. These options were not included in the
computation of diluted EPS because the threshold price 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.
Fixed stock options for 89,530; 30,972; and 28,796 shares of Class A common
stock were not included in the diluted earnings per share calculation for 2000,
1999 and 1998, respectively, because the exercise price was greater than the
average market price.
9. ACCOUNTS AND NOTES RECEIVABLE
DECEMBER 31
-----------------------
2000 1999
---------- ----------
Trade .................................................... $ 1,506 $ 1,394
Notes and other .......................................... 331 341
---------- ----------
Accounts and notes receivable ............................ $ 1,837 $ 1,735
========== ==========
Included in the preceding table are accounts and notes receivable from
affiliated companies (see note 12) of $548 at December 31, 2000, and $115 at
December 31, 1999.
The carrying value of accounts and notes receivable approximates fair value
because of their short maturity.
See note 27 for a description of operating segment markets and associated
concentrations of credit risk.
10. INVENTORIES
DECEMBER 31
---------------------
2000 1999
--------- ---------
Crude oil and petroleum products ............................. $ 643 $ 554
Other merchandise ............................................ 27 33
Materials and supplies ....................................... 121 116
--------- ---------
Inventories .................................................. $ 791 $ 703
========= =========
The excess of market over book value of inventories valued under the LIFO
method was $643 and $430 at December 31, 2000 and 1999, respectively. In the
fourth quarter of 1998, a write-down to market of $97 was made in accordance
with Conoco's inventory valuation policy (see note 2). Inventories valued at
LIFO represented 81 percent and 78 percent of consolidated inventories at
December 31, 2000 and 1999, respectively.
During 2000, certain inventory quantities were reduced, resulting in a
partial liquidation of the LIFO basis. The 2000 liquidation of inventories,
carried at lower costs prevailing in prior years, as compared with the
replacement costs of these inventories, had no material effect on net income.
The effect of a liquidation of the LIFO basis during 1999 decreased cost of
goods sold by approximately $67 and increased net income by approximately $42,
or $.07 per diluted share. There was no material effect on net income in 1998
for LIFO reductions.
16
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
11. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31
---------------------------------------------
COST NET
--------------------- ---------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Oil and gas properties
Unproved ................. $ 1,106 $ 1,201 $ 920 $ 985
Proved ................... 14,730 13,661 6,719 5,990
Other ....................... 1,449 1,222 1,009 792
--------- --------- --------- ---------
Total upstream ....... 17,285 16,084 8,648 7,767
Refining .................... 4,264 4,082 2,161 2,072
Marketing and distribution .. 2,202 2,214 1,292 1,309
--------- --------- --------- ---------
Total downstream ..... 6,466 6,296 3,453 3,381
Emerging businesses ......... 58 60 58 60
Corporate ................... 81 36 48 27
--------- --------- --------- ---------
PP&E ........................ $ 23,890 $ 22,476 $ 12,207 $ 11,235
========= ========= ========= =========
PP&E includes downstream assets acquired under capital leases of $36 at
December 31, 2000, and December 31, 1999. Related amounts included in
accumulated DD&A were $16 at December 31, 2000, and $15 at December 31, 1999.
12. SUMMARIZED FINANCIAL INFORMATION FOR AFFILIATED COMPANIES
Summarized consolidated financial information for Petrozuata C.A. (50.1
percent noncontrolling interest) and other affiliated companies for which
Conoco uses the equity method of accounting (see note 2, "Basis of
Consolidation") is shown below. "Other Affiliates" includes the financial
information of, among others, the following: Ceska Rafinerska, a.s. (16.33
percent), CFJ Properties (50 percent), Excel Paralubes (50 percent), Malaysian
Refining Company Sdn. Bhd. (40 percent), Pocahontas Gas Partnership (50 percent)
and Polar Lights Company (50 percent).
100%
-------------------------------------------------
OTHER CONOCO'S
PETROZUATA AFFILIATES TOTAL SHARE
-------------- --------------- --------------- -------------
2000
RESULTS OF OPERATIONS
Sales.............................................. $ 512 $ 10,836 $ 11,348 $ 4,368
Cost of goods sold................................. $ 17 $ 8,031 $ 8,048 $ 3,287
Operating expenses................................. $ 125 $ 1,349 $ 1,474 $ 493
DD&A............................................... $ 26 $ 380 $ 406 $ 133
Interest........................................... $ 40 $ 165 $ 205 $ 86
Earnings before income taxes....................... $ 307 $ 744 $ 1,051 $ 387
Net income (1)..................................... $ 294 $ 545 $ 839 $ 277
FINANCIAL POSITION
Current assets..................................... $ 324 $ 2,238 $ 2,562 $ 874
Non-current assets................................. 2,799 7,423 10,222 3,638
-------------- --------------- --------------- -------------
Total assets....................................... $ 3,123 $ 9,661 $ 12,784 $ 4,512
============== =============== =============== =============
Short-term borrowings (2).......................... $ -- $ 564 $ 564 $ 163
Other current liabilities.......................... 218 1,604 1,822 603
Long-term borrowings (2)........................... 1,373 3,938 5,311 1,787
Other long-term liabilities........................ 1,174 721 1,895 793
-------------- --------------- --------------- -------------
Total liabilities.................................. $ 2,765 $ 6,827 $ 9,592 $ 3,346
============== =============== =============== =============
Conoco's net investment in affiliates (includes
advances)........................................ $ 693 $ 1,138 $ 1,831
============== =============== =============
17
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
100%
-------------------------------------------------
OTHER CONOCO'S
PETROZUATA AFFILIATES TOTAL SHARE
-------------- --------------- --------------- -------------
1999
RESULTS OF OPERATIONS
Sales.............................................. $ 228 $ 8,304 $ 8,532 $ 3,208
Cost of goods sold................................. $ -- $ 5,665 $ 5,665 $ 2,361
Operating expenses................................. $ 84 $ 1,340 $ 1,424 $ 452
DD&A............................................... $ 26 $ 314 $ 340 $ 127
Interest........................................... $ 24 $ 208 $ 232 $ 80
Earnings before income taxes....................... $ 92 $ 665 $ 757 $ 163
Net income......................................... $ 109 $ 490 $ 599 $ 150
FINANCIAL POSITION
Current assets..................................... $ 190 $ 2,662 $ 2,852 $ 776
Non-current assets................................. 2,202 6,702 8,904 3,223
-------------- --------------- --------------- -------------
Total assets....................................... $ 2,392 $ 9,364 $ 11,756 $ 3,999
============== =============== =============== =============
Short-term borrowings (2).......................... $ -- $ 581 $ 581 $ 182
Other current liabilities.......................... 149 1,525 1,674 588
Long-term borrowings (2)........................... 1,282 3,719 5,001 1,677
Other long-term borrowings......................... 896 422 1,318 522
-------------- --------------- --------------- -------------
Total liabilities.................................. $ 2,327 $ 6,247 $ 8,574 $ 2,969
============== =============== =============== =============
Conoco's net investment in affiliates (includes
advances)........................................ $ 445 $ 1,159 $ 1,604
============== =============== =============
1998
RESULTS OF OPERATIONS
Sales.............................................. $ 9 $ 6,735 $ 6,744 $ 2,386
Cost of goods sold................................. $ -- $ 4,195 $ 4,195 $ 1,679
Operating expenses................................. $ 46 $ 1,438 $ 1,484 $ 488
DD&A............................................... $ 7 $ 276 $ 283 $ 97
Interest........................................... $ 21 $ 323 $ 344 $ 55
Earnings before income taxes....................... $ (54) $ 412 $ 358 $ 43
Net income......................................... $ (16) $ 268 $ 252 $ 22
- ----------
(1) For 2000, Conoco's equity in Petrozuata's earnings totaled $147.
(2) Equity affiliate borrowings of $979 in 2000 and $1,005 in 1999 were
guaranteed by Conoco or DuPont, on behalf of and indemnified by Conoco.
These amounts are included in the guarantees disclosed in note 26. In
addition, Conoco owns 2.0 billion shares of Turcas Petrol A.S., of which
909 million shares at December 31, 2000, and 1.3 billion shares at December
31, 1999, were pledged to a group of Turkish banks that issued letters of
credit in support of a $70 long-term debt instrument.
Equity affiliate sales to Conoco amounted to $804 in 2000, $720 in 1999 and
$412 in 1998. Equity affiliate purchases from Conoco totaled $2,200 in 2000,
$1,519 in 1999 and $1,219 in 1998.
Dividends received from equity affiliates were $132 in 2000, $77 in 1999
and $105 in 1998. Conoco's equity in undistributed earnings of its affiliated
companies was $446 at December 31, 2000, and $366 at December 31, 1999.
18
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
13. OTHER ASSETS
DECEMBER 31
---------------------------
2000 1999
----------- ------------
Prepaid pension cost (see note 23)..................................................... $ 5 $ 13
Long-term receivables (1).............................................................. 280 69
Other securities and investments....................................................... 105 87
Leveraged lease on Deepwater Pathfinder................................................ 61 55
Deferred tax assets (see note 7)....................................................... 39 61
Deferred pension transition obligation (see note 23)................................... 33 54
Other (2).............................................................................. 155 129
---------- -----------
Other assets........................................................................... $ 678 $ 468
========== ===========
- ----------
(1) Includes $223 at December 31, 2000, and $10 at December 31, 1999,
attributable to a long-term service contract to develop gas and condensate
infrastructure in Syria. Once the infrastructure is in place, this amount
is recoverable from the gas and condensate revenue stream generated over a
period up to five years commencing in late 2001.
(2) Includes intangible assets of $10 at December 31, 2000, and $14 at December
31, 1999.
14. ACCOUNTS PAYABLE
DECEMBER 31
---------------------------
2000 1999
----------- ------------
Trade.................................................................................. $ 1,287 $ 959
Payables to banks...................................................................... 130 81
Product exchanges...................................................................... 217 210
Other.................................................................................. 89 239
---------- -----------
Accounts payable....................................................................... $ 1,723 $ 1,489
========== ===========
Included in the preceding table are accounts payable to affiliated
companies (see note 12) of $573 at December 31, 2000, and $100 at December 31,
1999.
Payables to banks represent checks issued on certain disbursement accounts
but not presented to the banks for payment. The amounts above are carried at
historical cost, which approximate fair value because of their short maturity.
15. SHORT-TERM BORROWINGS AND CAPITAL LEASE OBLIGATIONS
DECEMBER 31
---------------------------
2000 1999
----------- ------------
Commercial paper....................................................................... $ 187 $ 628
Industrial development bonds........................................................... 59 24
Long-term borrowings payable within one year........................................... 8 9
Capital lease obligations.............................................................. 2 2
---------- -----------
Short-term borrowings and capital lease obligations.................................... $ 256 $ 663
========== ===========
These amounts are carried at historical cost, which approximate fair value
because of their short maturity.
At December 31, 2000 and December 31, 1999, Conoco had an unsecured $2,000
revolving credit facility with a syndicate of U.S. and international banks. The
terms consist of a 364-day committed facility in the amount of $1,350 and a
five-year committed facility in the amount of $650. At December 31, 2000 and at
December 31, 1999, Conoco had no outstanding borrowings under the credit
facility. The five-year committed facility has over three years remaining at
December 31, 2000.
19
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Conoco maintains a $2,000 U.S. commercial paper program that is fully
supported by the credit facility. The program gives Conoco the ability to issue
commercial paper at any time with various maturities not to exceed 270 days.
During 2000, Conoco initiated a euro 500 million European commercial paper
program, which gives Conoco the ability to issue commercial paper in the
European market at any time with maturities not to exceed 183 days. The program
is an alternative to the use of U.S. commercial paper and is not expected to
increase Conoco's current debt level. This program will complement the $2,000
U.S. commercial paper program and is fully supported by our existing revolving
credit facility.
At December 31, 2000, there was $187 of commercial paper outstanding, with
a weighted-average interest rate of 6.8 percent, of which $85 was denominated in
foreign currencies. At December 31, 1999, U.S. commercial paper of $628, with a
weighted-average interest rate of 6.6 percent, was outstanding.
The weighted-average interest rate on short-term borrowings and capital
lease obligations outstanding was 6.3 percent at December 31, 2000, and 6.4
percent at December 31, 1999.
16. OTHER ACCRUED LIABILITIES
DECEMBER 31
---------------------------
2000 1999
----------- ------------
Taxes other than on income............................................................. $ 384 $ 371
Operating expenses..................................................................... 469 347
Payroll and other employee-related costs............................................... 206 153
Royalties.............................................................................. 134 99
Restructuring costs (1)................................................................ -- 11
Accrued post-retirement benefits cost (see note 23).................................... 18 18
Other.................................................................................. 332 304
---------- -----------
Other accrued liabilities.............................................................. $ 1,543 $ 1,303
========== ===========
- ----------
(1) In December 1998, Conoco announced that as a result of a comprehensive
review of its assets and long-term strategy, Conoco would make
organizational realignments consistent with furthering the efficiency of
operations and taking advantage of synergies created by upgrading its asset
portfolio. Associated with the announcement, Conoco recorded an $82 pretax
($52 after-tax) charge to operating expense in the fourth quarter of 1998.
Nearly all of this charge represented termination payments and related
employee benefits to be made to the estimated 975 persons in both upstream
and downstream businesses affected by the restructuring. Payments were made
under existing company severance policies, generally based on years of
service up to a maximum amount that varied by country.
During 1999, 704 employees left Conoco as part of the implementation of the
realignment plans, with related charges against the restructuring reserve
of $68. In the fourth quarter 1999, estimates of the number of severances
were revised due to changes in operational requirements. The original
number of estimated severances was reduced by 137 positions, primarily in
our upstream business, to 838 positions. The reduction of positions
eliminated resulted in a reduction in the restructuring reserve of $3 that
was recorded in the fourth quarter 1999. Total charges and adjustments to
the reserve during 1999 were $71, resulting in a December 31, 1999 reserve
balance of $11.
During the first half of 2000, 79 employees left Conoco as part of the
realignment plans. Related charges against the reserve totaled $6. The
remaining reserve balance of $5 was reversed into earnings in the second
quarter of 2000.
20
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
17. LONG-TERM BORROWINGS AND CAPITAL LEASE OBLIGATIONS
DECEMBER 31
---------------------------
2000 1999
----------- ------------
5.90% senior unsecured notes due 2004.................................................. $ 1,348 $ 1,348
6.50% senior unsecured notes due 2008.................................................. 7 7
6.35% senior unsecured notes due 2009.................................................. 750 750
7.68% senior unsecured notes due 2012.................................................. 65 --
5.75% senior unsecured notes due 2026.................................................. 16 16
6.95% senior unsecured notes due 2029.................................................. 1,900 1,900
Other loans (various currencies) due 2002-2008 (1)..................................... 20 24
Capitalization obligation to affiliate due 2008........................................ 9 8
Capital lease obligations.............................................................. 23 27
---------- -----------
Long-term borrowings and capital lease obligations..................................... $ 4,138 $ 4,080
========== ===========
- ----------
(1) Weighted-average interest rate was 7.5 percent at December 31, 2000, and
7.4 percent at December 31, 1999.
Maturities of long-term borrowings, together with sinking fund requirements
for years ending after December 31, 2001, are $3 for 2002, $3 for 2003, $1,353
for 2004, $3 for 2005 and $4 for 2006. Long-term borrowings and capital lease
obligations outstanding at December 31, 2000 approximate fair value. At December
31, 1999, these outstanding obligations had an estimated fair value of $3,839.
These estimates were based on quoted market prices for the same or similar
issues.
18. OTHER LIABILITIES AND DEFERRED CREDITS
DECEMBER 31
---------------------------
2000 1999
----------- ------------
Deferred gas revenue................................................................... $ 280 $ 361
Accrued post-retirement benefits cost (see note 23).................................... 335 335
Accrued pension liability (see note 23)................................................ 184 200
Abandonment costs...................................................................... 397 289
Environmental remediation costs (see note 26).......................................... 107 97
Other.................................................................................. 623 676
---------- -----------
Other liabilities and deferred credits................................................. $ 1,926 $ 1,958
========== ===========
19. MINORITY INTERESTS
In 1996, various upstream subsidiaries contributed assets to Conoco Oil &
Gas Associates L.P. for a general partnership interest of 67 percent. Vanguard
Energy Investors L.P. then purchased the remaining 33 percent as a limited
partner. In December 1999, Conoco elected to retire Vanguard's $302 minority
interest and terminate the Conoco Oil & Gas Associates partnership.
In November 1999, Conoco and Armadillo Investors L.L.C. formed Conoco Gas
Holdings L.L.C. Conoco contributed certain domestic upstream assets for a 75
percent common member interest and cash, and Armadillo contributed cash for a 25
percent preferred member interest. Armadillo is entitled to a cumulative annual
preferred dividend on its investment of 7.16 percent. Armadillo's share of
Conoco Gas Holdings' 2000 earnings was $15, while its share of 1999 earnings was
$2. The net minority interest in Conoco Gas Holdings held by Armadillo was $185
at December 31, 2000 and December 31, 1999.
In December 1999, Conoco formed Conoco Corporate Holdings L.P. by
contributing certain corporate assets. The limited partner interest was sold to
Highlander Investors L.L.C. for $141, or an initial net 47 percent interest.
Highlander is entitled to a cumulative annual priority return on its investment
of 7.86 percent. Highlander's share of
21
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Conoco Corporate Holdings' 2000 earnings was $11, while its share of 1999
earnings was $1. The net minority interest in Conoco Corporate Holdings held by
Highlander was $141 at December 31, 2000 and December 31, 1999.
The net effect of these 1999 transactions resulted in a minority interest
balance of $335 at December 31, 1999. Minority interest at December 31, 2000 was
$337.
20. STOCKHOLDERS' EQUITY
As described in note 1, Conoco's capital structure was established at the
time of the initial public offering in October 1998. A summary of the activity
in common shares outstanding for 1998, 1999 and 2000 is presented as follows:
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 (1)......................... (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
Purchase of shares for treasury (1)......................... (3,494,616) -- (3,494,616)
Issued on exercise of stock options and compensation
awards from treasury (see note 22)........................ 1,286,519 -- 1,286,519
----------- ----------- -----------
Common shares outstanding - December 31, 1999............... 189,039,861 436,543,573 625,583,434
----------- ----------- -----------
Purchase of shares for treasury (1)......................... (3,634,400) -- (3,634,400)
Additional shares issued.................................... -- 466,638 466,638
Shares purchased and retired (1) (2)........................ -- (223,729) (223,729)
Issued on exercise of stock options and compensation awards
from treasury (see note 22)............................... 1,240,897 -- 1,240,897
----------- ----------- -----------
Common shares outstanding - December 31, 2000............... 186,646,358 436,786,482 623,432,840
=========== =========== ===========
- ----------
(1) To offset dilution from issuances under compensation plans.
(2) Purchased Class B shares must be retired in accordance with Conoco's
certificate of incorporation.
At December 31, 2000 and 1999, 250,000,000 shares of preferred stock were
authorized. Of this amount, 1,000,000 shares were designated as Series A Junior
Participating Preferred Stock and reserved for issuance on the exercise of
preferred stock purchase rights under Conoco'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 currently are not exercisable.
During 1999, Conoco recorded a $26 reduction of additional paid-in capital
to reflect an adjustment to capitalization from owner at the initial public
offering. This reduction was primarily related to tax adjustments of $52,
partially offset by a $31 adjustment in book value for various subsidiaries
transferred from DuPont to Conoco as part of the separation.
22
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Dividends declared and paid on Class A and Class B common stock for 2000
and 1999 are shown as follows:
2000 1999
--------- ----------
First quarter (1)......................................................................... $.19 $.14
Second quarter............................................................................ .19 .19
Third quarter............................................................................. .19 .19
Fourth quarter............................................................................ .19 .19
---- ----
Dividends per share....................................................................... $.76 $.71
==== ====
- ----------
(1) The first quarter 1999 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.
Conoco declared a first quarter cash dividend on January 22, 2001, of $.19
per share on each outstanding share of Class A and Class B common stock. This
quarterly dividend will be paid on March 10, 2001, to all shareholders of record
as of February 10, 2001.
21. ACCUMULATED OTHER COMPREHENSIVE LOSS
Balances of related after-tax components comprising accumulated other
comprehensive loss are summarized in the following table:
DECEMBER 31
--------------------------
2000 1999
---------- ---------
Foreign currency translation adjustment................................................ $ (619) $ (347)
Minimum pension liability adjustment (see note 23)..................................... (34) (25)
---------- ---------
Accumulated other comprehensive loss................................................... $ (653) $ (372)
========== =========
The following table summarizes the changes in the related components of
other comprehensive loss, which are reported net of associated income tax
effects:
YEAR ENDED DECEMBER 31
-------------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------- ------------------------------- -------------------------------
PRETAX INCOME TAX AFTER-TAX PRETAX INCOME TAX AFTER-TAX PRETAX INCOME TAX AFTER-TAX
------ ---------- --------- ------ ---------- --------- ------ ---------- ---------
Foreign currency translation
adjustment ................... $ (355) $ (83) $ (272) $ (191) $ (29) $ (162) $ (47) $ (22) $ (25)
Minimum pension liability
adjustment ................. (14) (5) (9) 93 29 64 (84) (26) (58)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Other comprehensive loss ..... $ (369) $ (88) $ (281) $ (98) $ -- $ (98) $ (131) $ (48) $ (83)
======== ======== ======== ======== ======== ======== ======== ======== ========
22. COMPENSATION PLANS
TRANSITION FROM DUPONT PLANS TO CONOCO PLANS
Until the date of the initial public offering, 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 initial
public offering, 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.
At the time of the initial public offering, Conoco 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. Upon such cancellation, Conoco issued comparable options to
acquire Conoco Class A common stock or SARs with respect to Conoco Class A
common stock. The substitute stock options and other awards had the same vesting
provisions, option periods and other terms and conditions as the DuPont options
and awards they replaced. Further, these 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
23
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
options. A total of 8,921,508 DuPont stock options and 745,358 DuPont SARs were
cancelled. Conoco then issued 24,275,690 stock options for Conoco Class A common
stock and 2,279,834 SARs with respect to Conoco Class A common stock. The Conoco
stock options and SARs had comparable terms and conditions to the previous
DuPont options and SARs. The new program was deemed a change in the terms of
certain awards granted to Conoco employees. As a result, Conoco 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
retained DuPont stock options are exercised.
AWARDS UNDER DUPONT PLANS
Stock option awards under the DuPont Stock Performance Plan were granted to
key employees of Conoco prior to the initial public offering and were "fixed"
and/or "variable" as defined by APB Opinion No. 25. The purchase price of shares
subject to option is the market price of DuPont stock at the date of grant.
During 1997, variable stock option grants were made to certain senior
management and are subject to forfeiture. The forfeiture would occur 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 initial public
offering, the $75 price was reached and options with that hurdle price became
fixed and exercisable. All of the outstanding variable DuPont options with a $90
per share hurdle price at the time of the initial public offering were cancelled
and substituted with options for Conoco Class A common stock with a hurdle price
of $32.88 per share.
AWARDS UNDER CONOCO PLANS
The 1998 Stock and Performance Incentive Plan provides incentives to
certain corporate officers and non-employee directors who can contribute
materially to the success and profitability of Conoco and its subsidiaries, and
provides for substitution of certain existing DuPont awards in connection with
the initial public offering. Awards may be in the form of cash, stock, stock
options or SARs with respect to Class A and Class B common stock (further
reference to common stock in this note refers to Conoco Class A and B common
stock). This plan also provides for the Conoco Global Variable Compensation
Plan. The Conoco Global Variable Compensation Plan 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):
o are awarded at market price on the date of grant;
o have a 10-year life;
o generally vest one year from date of grant; and
o may be subject to exercise restrictions, such as the attainment of
specific stock price targets or the passage of time.
For certain senior management, certain shares can be deferred as stock
units for a designated future delivery. These shares include both:
o shares 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; and
o incremental new Conoco stock options granted from the date of the
initial public offering.
In 1999, a variable option grant to acquire 1,400,000 shares of Class B
common stock was made to Conoco's Chairman, President and Chief Executive
Officer. Of this grant, 50 percent is subject to forfeiture if, within three
years from the date of grant, the market price of Conoco Class B common stock
does not achieve a price of $35 per share for five consecutive days. The
remaining 50 percent of the grant is subject to forfeiture if, within five
years
24
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
from the date of grant, the market price of Conoco Class B common stock does not
achieve a price of $42 per share for five consecutive days. The exercise price
is $26.50, which was the market price on the grant date.
The maximum number of shares of common stock and stock options granted
under the plan is limited to the highest of 20,000,000 or 3.3 percent of
outstanding shares of common stock. Awards made in substitution for DuPont
awards do not count against the number of shares available under the plan. At
December 31, 2000, and December 31, 1999, respectively, 12,028,155 shares and
15,078,195 shares of common stock were available for issuance under the plan.
Conoco adopted the 1998 Key Employee Stock Performance Plan to attract and
retain employees. The plan will accomplish this by enhancing the proprietary and
personal interests of employees in Conoco's success and profitability. Awards to
employees may be made in the form of Conoco stock options or SARs, both with
respect to common stock. Such awards granted under this plan (except to
substitute for DuPont awards) are awarded under the same terms and conditions of
the 1998 Stock and Performance Incentive Plan as described above. The maximum
number of shares of common stock and stock options granted under the plan is
limited to the higher of 18,000,000 or 3 percent of outstanding shares of common
stock. Awards made in substitution for DuPont awards do not count against the
number of shares available under the plan. At December 31, 2000 and 1999,
respectively, 10,556,261 and 14,615,564 shares of common stock were available
for issuance under the plan.
Under both the 1998 Stock and Performance Incentive Plan and the 1998 Key
Employee Stock Performance Plan, reload options are available upon the exercise
of stock options. These reload options include a condition that shares received
from the exercise of the original option may not be sold for at least two years.
Under a reload option, the number of new options granted is equal to the number
of shares required to satisfy the total exercise price of the original option.
Reload options are granted at the market price of the stock on the reload grant
date.
The 1998 Global Performance Sharing Plan is a broad-based plan under which,
on the date of the initial public offering, grants of stock options and SARs
with respect to Class A common stock were made to certain non-officer employees.
This was done 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:
o at the price of the initial public offering ($23 per share);
o have a 10-year life; and
o become exercisable in one-third increments on the first, second and
third anniversaries of the grant date.
Currently, there are no additional shares available for issuance under this
plan.
Most stock options granted under Conoco plans are fixed and have no
intrinsic value at grant date. The 1,724,146 options granted to substitute for
cancelled DuPont options granted in 1997 and the 1,400,000 variable options
granted on August 17, 1999, are the exceptions to this fixed status. 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.
25
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
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, 1998........................... 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 (at initial public
offering).............................. 10,335,117 39.50 629,800 52.50
Cancelled for Conoco options........... (8,291,708) -- (629,800) --
--------------- --------------
Options retained by DuPont ............ 2,043,409 -- -- --
CONOCO OPTIONS
Granted at initial public offering 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
Granted................................ 30,689 27.46 1,400,000 26.50
Exercised.............................. (1,225,424) 12.37 -- --
Forfeited.............................. (133,929) 22.28 -- --
--------------- --------------
December 31, 1999......................... 30,849,259 17.31 3,124,146 22.46
Granted................................ 6,419,256 21.31 -- --
Exercised.............................. (1,406,597) 10.47 -- --
Forfeited.............................. (170,785) 20.54 -- --
--------------- --------------
December 31, 2000......................... 35,691,133 18.29 3,124,146 22.46
The following table summarizes information concerning outstanding and
exercisable fixed Conoco options at December 31, 2000. For total variable
options outstanding at December 31, 2000, the weighted-average remaining
contractual life was 7.1 years.
EXERCISE PRICE
---------------------------------------------------------------------------
$6.57 - $10.13 - $19.17 - $28.00 -
$9.59 $14.47 $27.20 $29.72
--------------- ---------------- ---------------- ---------------
Options outstanding..................... 3,987,574 6,676,845 24,988,871 37,843
Weighted-average remaining
contractual life (years)............ 2.0 4.5 7.6 8.6
Weighted-average price.................. $ 8.79 $ 11.92 $ 21.49 $ 28.03
Options exercisable..................... 3,987,574 6,676,845 14,764,448 14,963
Weighted-average price.................. $ 8.79 $ 11.92 $ 21.24 $ 28.09
26
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Fixed options exercisable at the end of the last three years and the
weighted-average fair value of fixed options granted are as follows:
2000 1999 1998
----------------- ---------------- ----------------
OPTIONS EXERCISABLE AT YEAR-END
Number of shares.......................................... 25,443,830 22,481,408 19,425,900
Weighted-average price.................................... $ 16.85 $ 15.31 $ 13.49
Weighted-average fair value of options granted during the year
New options............................................... $ 6.14 $ 6.85 $ 4.15
Options substituted for DuPont options.................... $ -- $ -- $ 9.22
The incremental 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:
DUPONT
CONOCO OPTIONS (1) OPTIONS
---------------------------------------------- -----------
2000 1999 1998 1998
------------ ---------- ---------------------- -----------
NEW NEW NEW SUBSTITUTES FIXED
------------ ---------- ---------- ----------- -----------
Dividend yield......................................... 3.3% 3.3% 3.3% 3.3% 2.1%
Volatility............................................. 30.0% 25.0% 20.0% 20.0% 19.9%
Risk-free interest rate................................ 5.1% 5.8% 4.6% 4.4% 5.5%
Expected life (years).................................. 6.0 6.0 5.8 3.9 5.8
- ----------
(1) For 2000, Conoco's historical volatility is used. However, due to
insufficient history, the volatility of Conoco stock was estimated by
referencing oil industry experience trends in 1999 and DuPont experience
trends in 1998. The expected life for exercise of Conoco stock options was
estimated by using DuPont experience trends.
The following table sets forth pro forma information as if Conoco had
adopted the optional recognition provisions of SFAS No. 123 (see note 1):
2000 1999 1998
------------ ----------- ------------
Increase (decrease) in
Net income............................................................ $ (28) $ (18) $ 157
Earnings per share
Basic............................................................. $ (.04) $ (.03) $ .33
Diluted........................................................... $ (.04) $ (.03) $ .33
The incremental fair value for cancellation and substitution of stock
options originally granted before adoption of SFAS No. 123 was zero because
intrinsic value exceeds fair value.
Compensation expense recognized in income for stock-based employee
compensation awards was $4 for 2000, $24 for 1999 and $229 for 1998. The year
1998 includes a one-time charge of $236 for the cancellation of DuPont stock
options described above.
Prior to the initial public offering, 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 the ability to assume significant
responsibility and leadership. At the time of the initial public offering,
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 Conoco's 1998 Key Employee Stock Performance Plan. Effective with the
initial public offering, no new grants were made or are planned out of the
Conoco Unit Option Plan. At December 31, 2000,
27
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
outstanding unit options based on Conoco Class A common stock were 1,330,485,
and at December 31, 1999, outstanding unit options based on Conoco Class A
common stock were 1,469,287. For these same time periods, outstanding unit
options based on DuPont common stock were 403,115 and 466,436, respectively. The
related liability provisions totaled $21 at December 31, 2000, and $23 at
December 31, 1999.
Through the date of the initial public offering, 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. Actual cash and stock awards made in 1999 for
the 1998 plan year totaled $24. These awards were made out of the Conoco 1998
Stock and Performance Incentive Plan based on performance standards set
previously in the DuPont Variable Compensation Plan. Both the DuPont Variable
Compensation Plan and the Conoco 1998 Stock and Performance Incentive Plan allow
future delivery of stock awards.
Beginning with the 1999 plan year, grants of stock and cash are made from
the Conoco 1998 Stock and Performance Incentive Plan according to the financial
performance of Conoco and its business units. Awards are subject to maximum
limits as defined by the plan. Amounts charged against earnings during 2000 in
anticipation of awards to be made in 2001 were $62, while amounts charged
against earnings during 1999 in anticipation of awards to be made in 2000 were
$52. Awards actually distributed in 2001 for the 2000 plan year amounted to $65.
Awards actually distributed in 2000 for the 1999 plan year amounted to $49.
Under the Conoco 1998 Stock and Performance Incentive Plan, employees were
offered the opportunity to cancel DuPont shares, which were granted under
previous awards, and receive substitute shares of Conoco Class A common stock
for designated future delivery. At December 31, 2000, 60,072 shares of DuPont
stock and 282,576 shares of Conoco Class A common stock were awaiting delivery.
Conoco recognized a liability of $3 for the 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 Conoco's earnings and cash provided by
operations. Beginning with the 1999 plan year, awards also are adjusted up or
down based on a measure of Conoco's shareholder return as compared to a group of
selected benchmark competitors. All payout amounts are subject to maximum limits
as defined by the plan. Amounts charged against earnings for the current year
and to adjust for over/under accruals in prior years totaled $63 for 2000, $40
in 1999, and $22 in 1998. Awards made for plan years were $56 for 2000, $40 for
1999, and $19 for 1998.
23. PENSIONS AND OTHER POST-RETIREMENT BENEFITS
Prior to the split-off, Conoco participated in the DuPont U.S. tax
qualified defined benefit pension plan. In 1999, Conoco established a U.S. tax
qualified defined benefit pension plan (Conoco plan) which was spun off from the
DuPont U.S. tax qualified defined benefit pension plan. The Conoco plan covers
substantially all U.S. non-retail employees, as well as about half of all U.S.
retail employees, and provides essentially the same benefits to Conoco employees
as the DuPont plan provided to these employees. In addition, Conoco has separate
U.S. non-tax qualified defined benefit pension plans covering certain U.S. and
international employees. The benefits for the plans mentioned in this paragraph
are based primarily on years of service and the average of the employees'
highest 36 consecutive months' pay. Conoco's funding policy for the U.S. tax
qualified plan is consistent with the funding requirements of federal laws and
regulations. The nonqualified plans are not funded. In 1999, however, Conoco set
up a "Rabbi Trust," which may be funded in the future. A Rabbi Trust sets aside
assets to pay for benefits under a nonqualified pension plan, but those assets
remain subject to claims of Conoco's general creditors in preference to the
claims of plan participants and beneficiaries.
With respect to the DuPont U.S. tax qualified defined benefit pension plan,
Conoco and DuPont agreed upon an amount of approximately $820 at the date of the
initial public offering to be transferred to a separate trust for Conoco's
pension plan. The transfer value was adjusted for benefit payments and
investment returns from the date of the initial public offering to the transfer
date. The adjusted value transferred in July and September 2000 totaled $858. At
December 31, 1999, prior to the transfer, the estimated value of the amount to
be transferred was $884.
28
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
DuPont allocated the pension obligations based on Conoco's individual employees
covered by the plan. The unrecognized prior service cost and unrecognized net
gain were allocated in proportion to Conoco's projected benefit obligation to
the total projected benefit obligation of the DuPont plan. The net periodic
pension cost components included in the following table also are based on the
foregoing allocation factors.
Pension coverage is provided to the extent appropriate for employees of
Conoco's international subsidiaries 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 U.S. retirees and survivors. The associated plans, principally
health, are not funded, and approved claims are paid from Conoco's funds. Under
the terms of these plans, Conoco 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. Therefore, Conoco does not expect an increase to the
accumulated post-retirement benefit obligation or the other post-retirement
benefit cost.
OTHER
POST-RETIREMENT
PENSION BENEFITS BENEFITS
---------------------------------------------------- ------------------------------
2000 1999 1998 2000 1999 1998
------------------- ------------------- -------- -------- -------- --------
U.S. INT'L. U.S. INT'L.
-------- -------- -------- --------
Service cost ........................... $ 35 $ 27 $ 44 $ 42 $ 65 $ 7 $ 9 $ 7
Interest cost .......................... 62 37 58 41 94 25 22 21
Expected return on plan assets ......... (76) (33) (79) (36) (105) -- -- --
Amortization of prior service
cost (credit) ........................ (6) 5 (7) 5 9 (4) (4) (4)
Recognized actuarial loss (gain) ....... 4 -- 4 5 (4) (1) 2 --
-------- -------- -------- -------- -------- -------- -------- --------
Net periodic benefit cost .............. $ 19 $ 36 $ 20 $ 57 $ 59 $ 27 $ 29 $ 24
======== ======== ======== ======== ======== ======== ======== ========
29
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
The following table reflects information concerning benefit obligations,
plan assets, funded status and recorded values. Pension benefits for 1999
include amounts associated with Conoco's portion of what was previously the
DuPont U.S. tax qualified defined benefit pension plan.
OTHER
POST-RETIREMENT
PENSION BENEFITS BENEFITS
-------------------------------------------- --------------------
2000 1999 2000 1999
-------------------- -------------------- -------- --------
U.S. INT'L. U.S. INT'L.
-------- -------- -------- --------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year ................. $ 834 $ 679 $ 113 $ 753 $ 323 $ 350
Adjustment to include U.S. qualified plan balance ....... -- -- 871 -- -- --
-------- -------- -------- -------- -------- --------
Adjusted benefit obligation at beginning of year......... 834 679 984 753 323 350
Service cost ............................................ 35 27 44 42 7 9
Interest cost ........................................... 62 37 58 41 25 22
Exchange gain ........................................... -- (58) -- (24) -- --
Participant contributions ............................... -- -- -- -- 4 4
Actuarial (gain) loss ................................... (2) 17 (151) (104) 46 (32)
Divestitures and other .................................. -- 18 13 -- -- (5)
Benefits paid ........................................... (74) (22) (114) (29) (31) (25)
-------- -------- -------- -------- -------- --------
Benefit obligation at end of year ....................... $ 855 $ 698 $ 834 $ 679 $ 374 $ 323
======== ======== ======== ======== ======== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year .......... $ 884 $ 494 $ -- $ 438 $ -- $ --
Adjustment for fair value of U.S. qualified plan assets.. -- -- 878 -- -- --
-------- -------- -------- -------- -------- --------
Adjusted fair value of plan assets at beginning of
year ................................................. 884 494 878 438 -- --
Actual return on plan assets ............................ (29) 49 130 59 -- --
Employer contribution ................................... 17 29 6 32 26 21
Participant contributions ............................... -- -- -- -- 5 4
Exchange gain ........................................... -- (40) -- (14) -- --
Divestitures and other .................................. -- 10 (16) -- -- --
Benefits paid ........................................... (74) (18) (114) (21) (31) (25)
-------- -------- -------- -------- -------- --------
Fair value of plan assets at end of year ................ $ 798 $ 524 $ 884 $ 494 $ -- $ --
======== ======== ======== ======== ======== ========
Funded status of plans at end of year ................... $ (57) $ (174) $ 50 $ (185) $ (374) $ (323)
Transition asset ........................................ (15) (6) (23) (14) -- --
Unrecognized actuarial (gain) loss ...................... 55 12 (41) 12 62 15
Unrecognized prior service cost (credit) ................ 11 81 13 94 (41) (45)
-------- -------- -------- -------- -------- --------
Net amount recognized at end of year .................... $ (6) $ (87) $ (1) $ (93) $ (353) $ (353)
======== ======== ======== ======== ======== ========
AMOUNTS RECOGNIZED IN CONSOLIDATED BALANCE SHEET
AT END OF YEAR
Prepaid benefit (see note 13) ........................... $ 5 $ -- $ 13 $ -- $ -- $ --
Accrued benefit liability
Short-term (see note 16) .............................. -- -- -- -- (18) (18)
Long-term (see note 18) ............................... (69) (115) (58) (142) (335) (335)
Deferred pension transition obligation (see note ........
13) .................................................. 5 28 5 49 -- --
Accumulated other comprehensive loss (1) ................ 53 -- 39 -- -- --
-------- -------- -------- -------- -------- --------
Net amount recognized ................................... $ (6) $ (87) $ (1) $ (93) $ (353) $ (353)
======== ======== ======== ======== ======== ========
- ----------
(1) Before reduction for associated deferred tax savings of $19 at December 31,
2000, and $14 at December 31, 1999 (see note 21).
30
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
OTHER
POST-RETIREMENT
PENSION BENEFITS BENEFITS
----------------------------------------------- --------------------
2000 1999 2000 1999
----------------------- ------------------ --------- ---------
U.S. INT'L. U.S. INT'L.
------ ------- ------ -------
WEIGHTED-AVERAGE ASSUMPTIONS AT END OF YEAR
Discount rate..................................... 7.50% 6.00% 7.75% 6.00% 7.50% 8.00%
Rate of compensation increase..................... 4.60% 4.50% 5.20% 4.50% 4.60% 5.15%
Expected return on plan assets.................... 9.00% 7.00% 9.00% 7.00% -- --
Health care escalation rate....................... -- -- -- -- 4.50% 4.50%
At December 31, 2000, U.S. defined benefit plan assets consisted primarily
of common stocks. No Conoco common stock was included in the holdings. At
December 31, 1999, the U.S. defined benefit plan assets consisted principally of
common stocks, including 34,809 shares of Conoco common stock.
24. INVESTING ACTIVITIES
Purchases of businesses in 2000 included $545 for Saga U.K. Ltd. There were
no significant purchases in 1999. Purchases in 1998 included $929 for upstream
natural gas properties in South Texas.
Non-cash additions to PP&E were $41 for 2000, zero for 1999 and $162 for
1998.
For 2000, total proceeds from sales of assets of $222 included the sale of
Oklahoma gas plants and the sale of retail assets in the Dallas-Fort Worth area
and the Gulf Coast region. There were no significant proceeds from any one asset
sale in 1999. Proceeds in 1998 included $245 from the sale of certain U.S. and
North Sea upstream properties, $156 from various U.S. downstream asset sales and
$54 from the sale of a downstream office building in Europe.
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. These
fluctuations can affect revenues and the cost of operating, investing and
financing. Conoco's management has used and intends to continue 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 Risk Management Policy that provides guidelines
for entering into contractual arrangements (derivatives) to manage its commodity
price, foreign currency rate and interest rate risks. The Conoco Risk Management
Committee has:
o an ongoing responsibility for the content of this policy;
o principal oversight responsibility to ensure that Conoco is in
compliance with the policy; and
o responsibility to ensure 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, to assess the adequacy of internal
controls, Conoco's internal audit group reviews these risk management
activities. The audit results are then reviewed by both the Conoco Risk
Management Committee and by management.
31
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
The counterparties to these contractual arrangements are limited to major
financial institutions and other established companies in the petroleum
industry. Although Conoco, in the event of nonperformance by these
counterparties, is exposed to credit loss, 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.
COMMODITY PRICE RISK
Conoco enters into energy-related futures, forwards, swaps and options in
various markets:
o to balance its physical systems;
o to meet customer needs; and
o 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. The
commodity futures market has greater 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 generally to 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 its refinery margins.
Specifically, we have taken action to mitigate our exposure to volatile crude
oil prices through the purchase of crude oil put options, which reduce our
downside risk while maintaining our upside potential.
Conoco does limited amounts of trading for profit unrelated to its
underlying physical business. After-tax gain or loss from trading for profit
activities has not been material.
FOREIGN CURRENCY RISK
Conoco has foreign currency exchange rate risk resulting from operations in
over 40 countries around the world. Conoco 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 dividends, and cash
returns from net investments in foreign affiliates to be remitted within the
coming year.
In conjunction with our European commercial paper program, initiated in
2000, Conoco enters into foreign currency swaps for all non-U.S. dollar notes
issued in order to receive the U.S. dollar equivalent proceeds upon note
issuance and to lock in the forward foreign currency rate on note maturity. At
December 31, 2000, the U.S. dollar equivalent of all non-U.S. dollar notes
outstanding was $85, all of which were swapped to the U.S. dollar. The notional
amount of the forward portion of these swaps was $81, and the estimated fair
value was $86.
At December 31, 2000, Conoco had open foreign currency exchange derivative
instruments of $45, related to anticipated foreign currency capital investments,
with an estimated fair value of $42. Conoco had no open foreign currency
exchange derivative instruments at December 31, 1999.
INTEREST RATE RISK
Conoco manages any material risk arising from exposure to interest rates by
using a combination of financial derivative instruments. This program was
developed to manage the fixed and floating interest rate mix of Conoco's total
debt portfolio and related overall cost of borrowing.
32
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
At December 31, 2000 and at December 31, 1999, Conoco had no significant
open interest rate financial derivative instruments.
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 borrowings and capital lease obligations outstanding at December
31, 2000, of $4,138 approximate fair value. Obligations outstanding at December
31, 1999, of $4,080 had an estimated fair value of $3,839. These estimates were
based on quoted market prices for the same or similar issues, or the current
rates offered to Conoco for issues with the same remaining maturities.
SUMMARY OF OUTSTANDING COMMODITY DERIVATIVE FINANCIAL INSTRUMENTS
The following table provides a summary of the fair values, carrying amounts
and notional values of outstanding commodity financial instruments at December
31, 2000 and 1999.
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. These estimated values 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) position
recorded in the consolidated balance sheet.
FAIR CARRYING NOTIONAL
VALUE AMOUNT VALUE
-------- -------- --------
COMMODITY DERIVATIVES (1)
December 31, 2000
Trading..................................... $ 6 $ 6 $ 811
Non-trading (2)............................. $ 185 $ 125 $ 1,606
December 31, 1999
Trading..................................... $ 10 $ 10 $ 529
Non-trading................................. $ 6 $ 5 $ 464
- ----------
(1) Includes derivative instruments that can only be settled in cash.
(2) Includes purchased crude oil put options with a strike price of $22.00
(West Texas Intermediate equivalent) per barrel on 63 million barrels
during the period of April through December 2001.
26. COMMITMENTS AND CONTINGENT LIABILITIES
Conoco uses various leased facilities and equipment in its operations.
Future minimum lease payments under noncancelable operating leases are $231 for
2001, $276 for 2002, $251 for 2003, $124 for 2004, $112 for 2005 and $585 for
subsequent years. Future minimum lease payments are not reduced by $46 of
noncancelable minimum sublease rentals, where Conoco continues to be the primary
obligator under the original leases. Rental expense under operating leases was
$274 in 2000, $301 in 1999 and $214 in 1998. Rental revenue under operating
subleases was $11 in 2000, $15 in 1999 and $16 in 1998.
Conoco has various purchase commitments for materials, supplies, services
and items of permanent investment incident to the ordinary conduct of business.
Such commitments are not at prices in excess of current market. Additionally,
Conoco has obligations under international contracts to purchase natural gas
over periods up to 19 years. Due to the significant strengthening of market
prices, these long-term purchase obligations are at prices lower than December
31, 2000 quoted market prices. However, at December 31, 1999, these obligations
were at prices in
33
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
excess of year-end 1999 quoted market prices. No material annual gain or 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, actions related to gas measurement and
valuation methods, actions related to joint interest billings to operating
agreement partners, and claims for damages resulting from leaking underground
storage tanks. As a result of the separation agreement with DuPont, Conoco also
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 ultimate
liabilities resulting from such lawsuits and claims may be material to results
of operations in the period in which they are recognized.
On May 2, 2000, a jury in federal court in Virginia found that Conoco
infringed patents of General Technology Applications (GTA) involving part of a
process for manufacturing a flow improver product. The amount awarded as damages
was $55. We have appealed the verdict. Conoco remains convinced that the
evidence clearly demonstrates that Conoco's process does not infringe the GTA
patents, and that the trial court decision will be reversed.
Conoco also is 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. Conoco 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. The
accrual amounted to $119 at December 31, 2000, and $109 at December 31, 1999. In
management's opinion, this accrual 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. However, management does not
anticipate they will have a material adverse effect on the consolidated
financial position of Conoco.
Conoco or DuPont, on behalf of and indemnified by Conoco, has directly
guaranteed obligations of certain affiliated companies and others. These
guarantees totaled $1,090 at December 31, 2000, and $1,138 at December 31, 1999.
The balance at December 31, 2000, included $706 and $167 associated with
Petrozuata and Polar Lights, respectively. Conoco had no indirect guarantees as
of December 31, 2000. At December 31, 1999, Conoco had 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 $7. No material loss is anticipated
by reason of such agreements and guarantees.
Conoco's operations, particularly oil and gas exploration and production,
can be affected by changing economic, regulatory and political environments in
the various countries in which Conoco operates, including the U.S. In certain
locations, host governments have imposed restrictions, controls and taxes. In
others, political conditions have existed that may threaten the safety of
employees and Conoco's continued presence in those countries. Internal unrest or
strained relations between a host government and Conoco or other governments may
affect Conoco's operations. Those developments have, at times, significantly
affected Conoco's operations and related results and are carefully considered by
management when evaluating the level of current and future activity in such
countries. Conoco does take various steps to minimize its financial exposure to
loss including, in certain cases, obtaining risk insurance coverage. Areas in
which Conoco has a significant active presence include Canada, the Czech
Republic, Germany, Indonesia, Malaysia, Nigeria, Norway, Russia, Syria, the
United Arab Emirates, the U.K., the U.S., Venezuela and Vietnam.
27. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION
Conoco has three operating segments that comprise the structure used by
senior management to make key operating decisions and assess performance. These
are the upstream, downstream and emerging businesses segments. Upstream
operating segment activities include exploring for, 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,
34
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
distributing and marketing petroleum products. Activities of the emerging
businesses operating segment include the development of new businesses beyond
our traditional operations. Conoco has five reporting segments. Four reporting
segments reflect the geographic division between the U.S. and international
operations of its upstream and downstream businesses. One reporting segment is
for emerging businesses. Corporate includes general corporate expenses,
financing costs and other non-operating items and captive insurance operations.
There were several factors driving Conoco's revised segment reporting and
the subsequent creation of the emerging businesses operating segment in the
fourth quarter of 2000. The most important of these factors was the desire to
differentiate new businesses from our traditional operations. These businesses
have the potential to contribute substantially to our long-term growth and are
built on our core businesses. This segment includes Conoco's emerging power,
carbon fibers and natural gas refining businesses.
Conoco sells its products worldwide. In 2000, about 59 percent of sales
were made in the U.S. and 36 percent of sales were made in Europe. In 1999,
about 54 percent of sales were made in the U.S. and 41 percent of sales were
made in Europe. 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 any single customer or small
group of customers. Transfers between segments are on the basis of estimated
market values.
UPSTREAM DOWNSTREAM
-------------------- --------------------
EMERGING ELIMINA- CONSOLI-
SEGMENT INFORMATION U.S. INT'L. U.S. INT'L. BUSINESSES CORPORATE TIONS DATED
-------- -------- -------- -------- ---------- --------- ----------- --------
2000
Sales and other operating
revenues (2)
Refined products ............... $ -- $ -- $ 12,343 $ 11,284 $ -- $ -- $ -- $ 23,627
Crude oil ...................... 16 1,627 4,754 497 -- -- -- 6,894
Natural gas .................... 4,099 1,686 -- -- -- -- -- 5,785
Other .......................... 1,416 353 282 376 4 -- -- 2,431
-------- -------- -------- -------- -------- -------- ----------- --------
Total ..................... 5,531 3,666 17,379 12,157 4 -- -- 38,737
Transfers between segments ........ 740 831 177 644 -- -- (2,392) --
-------- -------- -------- -------- -------- -------- ----------- --------
Total operating revenues .......... $ 6,271 $ 4,497 $ 17,556 $ 12,801 $ 4 $ -- $ (2,392) $ 38,737
======== ======== ======== ======== ======== ======== =========== ========
Operating profit .................. $ 1,051 $ 2,103 $ 208 $ 344 $ (89) $ (159) $ -- $ 3,458
Equity in earnings of affiliates .. 20 230 53 (26) -- -- -- 277
Corporate non-operating items
Interest and debt expense ...... -- -- -- -- -- (338) -- (338)
Interest income (net of misc.
interest expense) ............. -- -- -- -- -- 39 -- 39
Other .......................... -- -- -- -- -- 22 -- 22
-------- -------- -------- -------- -------- -------- ----------- --------
Income before income taxes ........ 1,071 2,333 261 318 (89) (436) -- 3,458
Provision for income taxes ........ (352) (1,185) (79) (88) 20 128 -- (1,556)
-------- -------- -------- -------- -------- -------- ----------- --------
Net income (loss) (1) ............. $ 719 $ 1,148 $ 182 $ 230 $ (69) $ (308) $ -- $ 1,902
======== ======== ======== ======== ======== ======== =========== ========
Capital employed at December 31 (3)
Excluding investment in
affiliates .................... $ 2,501 $ 3,278 $ 1,265 $ 918 $ 27 $ 202 $ -- $ 8,191
Investment in affiliates (4) ... 162 865 285 490 29 -- -- 1,831
-------- -------- -------- -------- -------- -------- ----------- --------
Total capital employed ............ $ 2,663 $ 4,143 $ 1,550 $ 1,408 $ 56 $ 202 $ -- $ 10,022
======== ======== ======== ======== ======== ======== =========== ========
Return on capital employed
(ROCE) (5) ...................... 25.9% 30.2% 12.9% 18.0% N/A N/A -- 23.1%
Significant non-cash items
DD&A ............................ $ 412 $ 611 $ 136 $ 138 $ -- $ 4 $ -- $ 1,301
Dry hole costs and impairment of
unproved properties ........... $ 44 $ 44 $ -- $ -- $ -- $ -- $ -- $ 88
Inventory write-down to market .. $ -- $ -- $ -- $ 24 $ -- $ -- $ -- $ 24
Capital expenditures and
investments (6) ................. $ 667 $ 1,486 $ 344 $ 201 $ 72 $ 26 $ -- $ 2,796
Total assets ...................... $ 3,733 $ 7,195 $ 3,461 $ 2,925 $ 88 $ 725 $ -- $ 18,127
35
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
UPSTREAM DOWNSTREAM
-------------------- --------------------
SEGMENT INFORMATION EMERGING ELIMINA- CONSOLI-
U.S. INT'L. U.S. INT'L. BUSINESSES CORPORATE TIONS DATED
-------- -------- -------- -------- ---------- --------- ---------- --------
1999
Sales and other operating
revenues (2)
Refined products ............... $ -- $ -- $ 7,771 $ 9,253 $ -- $ -- $ -- $ 17,024
Crude oil ...................... 10 1,101 3,165 621 -- -- -- 4,897
Natural gas .................... 2,436 1,033 -- -- -- -- -- 3,469
Other .......................... 863 113 255 390 28 -- -- 1,649
-------- -------- -------- -------- -------- -------- ---------- --------
Total ..................... 3,309 2,247 11,191 10,264 28 -- -- 27,039
Transfers between segments ........ 435 476 106 325 -- -- (1,342) --
-------- -------- -------- -------- -------- -------- ---------- --------
Total operating revenues .......... $ 3,744 $ 2,723 $ 11,297 $ 10,589 $ 28 $ -- $ (1,342) $ 27,039
======== ======== ======== ======== ======== ======== ========== ========
Operating profit .................. $ 381 $ 891 $ 110 $ 192 $ (54) $ (154) $ -- $ 1,366
Equity in earnings of affiliates .. 8 94 55 (7) -- -- -- 150
Corporate non-operating items
Interest and debt expense ...... -- -- -- -- -- (311) -- (311)
Interest income (net of misc.
interest expense) ............. -- -- -- -- -- 25 -- 25
Other .......................... -- -- -- -- -- (13) -- (13)
-------- -------- -------- -------- -------- -------- ---------- --------
Income before income taxes ........ 389 985 165 185 (54) (453) -- 1,217
Provision for income taxes ........ (67) (451) (46) (56) 19 128 -- (473)
-------- -------- -------- -------- -------- -------- ---------- --------
Net income (loss) (1) ............. $ 322 $ 534 $ 119 $ 129 $ (35) $ (325) $ -- $ 744
======== ======== ======== ======== ======== ======== ========== ========
Capital employed at December 31 (3)
Excluding investment in
affiliates .................... $ 2,509 $ 2,840 $ 1,311 $ 890 $ 50 $ 94 $ -- $ 7,694
Investment in affiliates (4) ... 166 620 260 526 32 -- -- 1,604
-------- -------- -------- -------- -------- -------- ---------- --------
Total capital employed ............ $ 2,675 $ 3,460 $ 1,571 $ 1,416 $ 82 $ 94 $ -- $ 9,298
======== ======== ======== ======== ======== ======== ========== ========
Return on capital employed
(ROCE) (5) ...................... 12.3% 16.0% 8.9% 8.8% N/A N/A -- 11.1%
Significant non-cash items
DD&A ........................... $ 374 $ 547 $ 126 $ 142 $ -- $ 4 $ -- $ 1,193
Dry hole costs and impairment of
unproved properties ........... $ 16 $ 115 $ -- $ -- $ -- $ -- $ -- $ 131
Capital expenditures and
investments(6) .................. $ 413 $ 839 $ 214 $ 248 $ 69 $ 4 $ -- $ 1,787
Total assets ...................... $ 3,502 $ 5,949 $ 3,287 $ 2,835 $ 91 $ 711 $ -- $ 16,375
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 .......................... 770 104 217 351 729 20 -- 2,191
-------- -------- -------- -------- -------- -------- ---------- --------
Total ..................... 3,200 1,601 8,949 8,297 729 20 -- 22,796
Transfers between segments ........ 308 378 89 181 -- -- (956) --
-------- -------- -------- -------- -------- -------- ---------- --------
Total operating revenues .......... $ 3,508 $ 1,979 $ 9,038 $ 8,478 $ 729 $ 20 $ (956) $ 22,796
======== ======== ======== ======== ======== ======== ========== ========
Operating profit .................. $ 229 $ 482 $ 157 $ 256 $ (47) $ (346) $ -- $ 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
-------- -------- -------- -------- -------- -------- ---------- --------
Income before income taxes ........ 230 468 213 236 (48) (405) -- 694
Provision for income taxes ........ (7) (185) (72) (80) 17 83 -- (244)
-------- -------- -------- -------- -------- -------- ---------- --------
Net income (loss) (1) ............. $ 223 $ 283 $ 141 $ 156 $ (31) $ (322) $ -- $ 450
======== ======== ======== ======== ======== ======== ========== ========
Capital employed at December 31 (3)
Excluding investment in
affiliates .................... $ 2,349 $ 2,849 $ 1,245 $ 989 $ 2 $ 382 $ -- $ 7,816
Investment in affiliates (4) ... 191 371 248 531 22 -- -- 1,363
-------- -------- -------- -------- -------- -------- ---------- --------
Total capital employed ............ $ 2,540 $ 3,220 $ 1,493 $ 1,520 $ 24 $ 382 $ -- $ 9,179
======== ======== ======== ======== ======== ======== ========== ========
Return on capital employed
(ROCE) (5) ...................... 9.3% 8.9% 13.6% 10.9% N/A N/A -- 10.3%
36
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
UPSTREAM DOWNSTREAM
------------------- ------------------- EMERGING ELIMINA- CONSOLI-
SEGMENT INFORMATION U.S. INT'L. U.S. INT'L. BUSINESSES CORPORATE TIONS DATED
-------- ------- -------- ------- ---------- --------- -------- --------
1998 (CONTINUED)
Significant non-cash items
DD&A ...................... $ 383 $ 457 $ 139 $ 133 $ -- $ 1 $ -- $ 1,113
Dry hole costs and
impairment of unproved
properties .............. $ 59 $ 104 $ -- $ -- $ -- $ -- $ -- $ 163
Stock option provision .... $ -- $ -- $ -- $ -- $ -- $ 236 $ -- $ 236
Inventory write-down to
market .................. $ 6 $ -- $ 63 $ 28 $ -- $ -- $ -- $ 97
Capital expenditures and
investments (6)............. $ 788 $ 1,177 $ 201 $ 332 $ 1 $ 17 $ -- $ 2,516
Total assets ................. $ 3,653 $ 5,693 $ 2,805 $ 2,815 $ 14 $ 1,095 $ -- $ 16,075
- ----------
(1) Includes after-tax benefits (charges) from special items:
2000
Asset sales ................. $ 27 $ -- $ -- $ -- $ -- $ -- $ -- $ 27
Discontinued businesses ..... -- -- -- -- -- (4) -- (4)
Property impairments ........ -- -- (3) -- (26) -- -- (29)
Inventory write-downs ....... -- -- -- (24) -- -- -- (24)
Litigation .................. -- -- (16) -- -- -- -- (16)
-------- ------- -------- ------- -------- -------- -------- --------
Total special items ......... $ 27 $ -- $ (19) $ (24) $ (26) $ (4) $ -- $ (46)
======== ======= ======== ======= ======== ======== ======== ========
1999
Discontinued businesses ..... $ -- $ -- $ -- $ -- $ -- $ (20) $ -- $ (20)
Litigation .................. -- -- (18) -- -- -- -- (18)
-------- ------- -------- ------- -------- -------- -------- --------
Total special items ......... $ -- $ -- $ (18) $ -- $ -- $ (20) $ -- $ (38)
======== ======= ======== ======= ======== ======== ======== ========
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)
Litigation .................. -- -- (28) -- -- (14) -- (42)
Stock option provision ...... -- -- -- -- -- (183) -- (183)
-------- ------- -------- ------- -------- -------- -------- --------
Total special items ......... $ (14) $ 25 $ (73) $ (12) $ -- $ (197) $ -- $ (271)
======== ======= ======== ======= ======== ======== ======== ========
(2) Includes sales of purchased products substantially at cost:
2000 1999 1998
---------- ---------- ----------
Buy/sell supply transactions settled in cash
Crude oil.................................. $ 4,786 $ 3,282 $ 2,728
Refined products........................... $ 1,703 $ 747 $ 438
Natural gas resales............................ $ 2,551 $ 1,242 $ 1,109
Electric power resales......................... $ 4 $ 28 $ 729
Sales to equity affiliates totaled $2,200 for 2000, $1,519 for 1999 and
$1,219 for 1998. The majority of these sales was in downstream and
represented refined products.
(3) Capital employed is equivalent to the sum of stockholders' equity/owner's
net investment and borrowings (both short-term and long-term). Borrowings
include amounts due to 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, including cash
and cash equivalents, financing-oriented items and aviation investment.
(4) Investment in affiliates (including advances) for Petrozuata was $693 and
$445 for 2000 and 1999, respectively.
37
39
(5) ROCE is a measure of annual net income before special items, excluding
after-tax debt cost incurred, generated as a percentage of the two-year
average capital employed.
(6) Includes investments in affiliates.
OTHER
GEOGRAPHIC INFORMATION U.S. U.K. GERMANY NORWAY COUNTRIES CONSOLIDATED
------- -------- ------- ------- --------- ------------
2000
Sales and other operating revenues (1)......... $22,914 $7,851 $3,606 $ 474 $3,892 $38,737
Long-lived assets at December 31 (2)........... $ 5,492 $3,662 $ 143 $1,473 $1,437 $12,207
1999
Sales and other operating revenues (1)......... $14,528 $5,950 $3,150 $ 330 $3,081 $27,039
Long-lived assets at December 31 (2)........... $ 5,192 $3,265 $ 154 $1,574 $1,050 $11,235
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
- ----------
(1) Revenues are attributed to countries based on location of the selling
entity.
(2) Represents net PP&E.
28. OTHER FINANCIAL INFORMATION
Research and development expenses were $58 for 2000, $54 for 1999 and
$51 for 1998.
38
40
SUPPLEMENTAL PETROLEUM DATA
(UNAUDITED)
(DOLLARS IN MILLIONS)
OIL AND GAS PRODUCING ACTIVITIES
Supplemental Petroleum Data disclosures are presented in accordance
with the provisions of 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
----------------------- ------------------------ ---------------------- ---------------------------
2000 1999 1998 2000 1999 1998 2000 1999 1998 2000 1999 1998
------ ------ ------ ------ ------ ------ ------ ------ ------ ------- ------- -------
CONSOLIDATED COMPANIES
Revenues
Sales ............ $3,494 $2,389 $1,938 $1,022 $ 646 $ 643 $1,573 $1,192 $ 831 $ 899 $ 551 $ 464
Transfers ........ 1,420 862 646 688 384 272 731 478 374 1 -- --
Exploration (1) ...... (279) (270) (380) (121) (64) (128) (59) (62) (108) (99) (144) (144)
Production ........... (872) (851) (806) (324) (287) (303) (369) (433) (382) (179) (131) (121)
DD&A ................. (973) (887) (799) (366) (338) (345) (526) (491) (372) (81) (58) (82)
Other (2) ............ 63 18 148 (27) 13 104 73 6 48 17 (1) (4)
Income taxes ......... (1,390) (501) (201) (293) (87) (36) (698) (272) (100) (399) (142) (65)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------- ------- -------
Results of
Operations ..... 1,463 760 546 579 267 207 725 418 291 159 75 48
------ ------ ------ ------ ------ ------ ------ ------ ------ ------- ------- -------
EQUITY AFFILIATES (3)
Revenues ............ 399 212 78 25 14 14 118 84 60 256 114 4
Production .......... (118) (81) (67) (12) (9) (6) (35) (30) (38) (71) (42) (23)
DD&A ................ (31) (33) (23) (6) (4) (4) (12) (16) (16) (13) (13) (3)
Other (2) ........... 5 -- -- 3 -- -- (2) -- -- 4 -- --
Income taxes ........ (38) 8 18 -- -- -- (13) (1) (1) (25) 9 19
------ ------ ------ ------ ------ ------ ------ ------ ------ ------- ------- -------
Results of
Operations ..... 217 106 6 10 1 4 56 37 5 151 68 (3)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------- ------- -------
Total Results of
Operations ........ $1,680 $ 866 $ 552 $ 589 $ 268 $ 211 $ 781 $ 455 $ 296 $ 310 $ 143 $ 45
====== ====== ====== ====== ====== ====== ====== ====== ====== ======= ======= =======
- ---------
(1) Includes exploration operating expenses, dry hole costs and impairment of
unproved properties.
(2) Includes gain/(loss) on disposal of fixed assets and other miscellaneous
revenues and expenses.
(3) Includes Conoco's net share of equity affiliate information.
39
41
SUPPLEMENTAL PETROLEUM DATA
(UNAUDITED)
(DOLLARS IN MILLIONS)
COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION,
EXPLORATION AND DEVELOPMENT ACTIVITIES (1)
TOTAL WORLDWIDE UNITED STATES EUROPE OTHER REGIONS
---------------------- ---------------------- ---------------------- ----------------------
2000 1999 1998 2000 1999 1998 2000 1999 1998 2000 1999 1998
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
CONSOLIDATED
COMPANIES
Property acquisitions
Proved (2) (3) (4) .. $ 621 $ 138 $ 199 $ 24 $ 6 $ 24 $ 572 $ -- $ 175 $ 25 $ 132 $ --
Unproved ............ 92 19 93 6 1 55 11 12 25 75 6 13
Exploration ............. 299 276 436 125 97 119 61 72 114 113 107 203
Development ............. 908 737 1,019 398 304 542 335 342 403 175 91 74
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total .............. 1,920 1,170 1,747 553 408 740 979 426 717 388 336 290
EQUITY AFFILIATES (5)
Development ............. 320 337 564 18 15 30 8 1 2 294 321 532
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total ................... $2,240 $1,507 $2,311 $ 571 $ 423 $ 770 $ 987 $ 427 $ 719 $ 682 $ 657 $ 822
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
- ----------
(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) Acquisition costs of properties are shown before a gross up for SFAS No.
109 "Accounting For Income Taxes" of $204 in 2000, $48 in 1999 and $55
in 1998.
(4) Includes acquisition costs associated with petroleum reserves acquired in
the North Sea in 2000 and 1998.
(5) Includes Conoco's net share of equity affiliate information.
CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING ACTIVITIES
TOTAL WORLDWIDE UNITED STATES EUROPE OTHER REGIONS
------------------------- ---------------------- ---------------------- ----------------------
2000 1999 1998 2000 1999 1998 2000 1999 1998 2000 1999 1998
------- ------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------
CONSOLIDATED
COMPANIES
Gross costs
Proved properties (1) .. $14,730 $13,661 $13,488 $5,266 $4,968 $5,013 $7,461 $6,939 $6,942 $2,003 $1,754 $1,533
Unproved properties .... 1,106 1,201 1,159 497 651 634 322 331 262 287 219 263
Less
Accumulated DD&A ....... 8,197 7,887 7,469 3,099 3,024 2,983 3,668 3,507 3,182 1,430 1,356 1,304
------- ------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total net costs ...... 7,639 6,975 7,178 2,664 2,595 2,664 4,115 3,763 4,022 860 617 492
EQUITY AFFILIATES (2)
Gross costs
Proved properties ...... 1,728 1,411 1,075 119 102 87 213 207 207 1,396 1,102 781
Less
Accumulated DD&A ....... 164 134 99 29 25 21 101 90 75 34 19 3
------- ------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total net costs ...... 1,564 1,277 976 90 77 66 112 117 132 1,362 1,083 778
------- ------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total ..................... $ 9,203 $ 8,252 $ 8,154 $2,754 $2,672 $2,730 $4,227 $3,880 $4,154 $2,222 $1,700 $1,270
======= ======= ======= ====== ====== ====== ====== ====== ====== ====== ====== ======
- ----------
(1) Includes acquisition costs associated with petroleum reserves acquired in
the North Sea in 2000 and 1998.
(2) Includes Conoco's net share of equity affiliate information.
40
42
SUPPLEMENTAL PETROLEUM DATA
(UNAUDITED)
(IN MILLIONS OF BARRELS)
ESTIMATED PROVED RESERVES OF OIL (1)
TOTAL WORLDWIDE UNITED STATES EUROPE OTHER REGIONS
---------------------- ---------------------- ---------------------- ----------------------
2000 1999 1998 2000 1999 1998 2000 1999 1998 2000 1999 1998
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
PROVED RESERVES OF
CONSOLIDATED COMPANIES
Beginning of year ............... 788 863 893 238 261 277 383 410 421 167 192 195
Revisions and other changes ..... 46 (6) 42 23 4 14 16 (5) 20 7 (5) 8
Extensions and discoveries ...... 56 54 41 19 7 15 18 37 6 19 10 20
Improved recovery ............... -- -- 14 -- -- -- -- -- 11 -- -- 3
Purchase of reserves (2) (3) .... 55 1 8 -- 1 -- 45 -- 8 10 -- --
Sale of reserves (4) ............ (2) (8) (16) (2) (8) (16) -- -- -- -- -- --
Production ...................... (115) (116) (119) (29) (27) (29) (57) (59) (56) (29) (30) (34)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
End of year ..................... 828 788 863 249 238 261 405 383 410 174 167 192
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
PROVED RESERVES OF EQUITY
AFFILIATES (5)
Beginning of year ............... 742 728 731 -- -- -- 60 50 51 682 678 680
Revisions and other changes ..... 2 8 5 -- -- -- 3 8 5 (1) -- --
Extensions and discoveries ...... 87 21 -- -- -- -- 4 9 -- 83 12 --
Production ...................... (21) (15) (8) -- -- -- (7) (7) (6) (14) (8) (2)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
End of year ..................... 810 742 728 -- -- -- 60 60 50 750 682 678
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total ........................... 1,638 1,530 1,591 249 238 261 465 443 460 924 849 870
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
PROVED DEVELOPED RESERVES OF
CONSOLIDATED COMPANIES
Beginning of year ............... 565 622 600 202 222 242 217 228 174 146 172 184
End of year ..................... 607 565 622 215 202 222 256 217 228 136 146 172
PROVED DEVELOPED RESERVES OF
EQUITY AFFILIATES (5)
Beginning of year ............... 129 92 43 -- -- -- 43 42 43 86 50 --
End of year ..................... 193 129 92 -- -- -- 39 43 42 154 86 50
- ---------
(1) Oil reserves comprise crude oil and condensate, and natural gas liquids
expected to be removed for Conoco's account from its natural gas
deliveries.
(2) Includes reserves acquired through property trades.
(3) Includes reserves acquired in the North Sea in 2000 and 1998.
(4) Includes reserves disposed of through property trades.
(5) Includes Conoco's net share of equity affiliate information.
41
43
SUPPLEMENTAL PETROLEUM DATA
(UNAUDITED)
(IN BILLION CUBIC FEET)
ESTIMATED PROVED RESERVES OF GAS
TOTAL WORLDWIDE UNITED STATES EUROPE OTHER REGIONS
---------------------- ---------------------- ---------------------- ----------------------
2000 1999 1998 2000 1999 1998 2000 1999 1998 2000 1999 1998
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
PROVED RESERVES OF
CONSOLIDATED COMPANIES
Beginning of year .............. 5,799 5,802 5,491 2,166 2,319 2,235 2,884 3,053 3,060 749 430 196
Revisions and other changes
(1) (2) .................... (176) 7 25 (110) (34) 18 42 31 (20) (108) 10 27
Extensions and discoveries ..... 515 446 961 284 219 624 1 65 111 230 162 226
Purchase of reserves (3) (4) ... 222 174 116 19 8 4 203 -- 112 -- 166 --
Sale of reserves (5) ........... (7) (30) (281) (7) (30) (243) -- -- (38) -- -- --
Production ..................... (617) (600) (510) (291) (316) (319) (293) (265) (172) (33) (19) (19)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
End of year .................... 5,736 5,799 5,802 2,061 2,166 2,319 2,837 2,884 3,053 838 749 430
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
PROVED RESERVES OF EQUITY
AFFILIATES (6)
Beginning of year .............. 343 381 370 343 381 370 -- -- -- -- -- --
Revisions and other changes .... (19) (35) (12) (19) (35) (12) -- -- -- -- -- --
Extensions and discoveries ..... -- -- 1 -- -- 1 -- -- -- -- -- --
Purchase of reserves ........... -- 3 27 -- 3 27 -- -- -- -- -- --
Production ..................... (7) (6) (5) (7) (6) (5) -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
End of year .................... 317 343 381 317 343 381 -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total .......................... 6,053 6,142 6,183 2,378 2,509 2,700 2,837 2,884 3,053 838 749 430
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
PROVED DEVELOPED RESERVES OF
CONSOLIDATED COMPANIES
Beginning of year .............. 4,164 3,991 3,061 1,792 1,828 1,801 2,017 1,954 1,091 355 209 169
End of year .................... 4,375 4,164 3,991 1,788 1,792 1,828 2,295 2,017 1,954 292 355 209
PROVED DEVELOPED RESERVES OF
EQUITY AFFILIATES (6)
Beginning of year .............. 72 66 40 72 66 40 -- -- -- -- -- --
End of year .................... 74 72 66 74 72 66 -- -- -- -- -- --
- ---------
(1) Includes revisions due to wet gas and NGL accounting realignment in the
U.S. This resulted in net additional reserves of 11 MMBOE in 2000.
(2) Includes other regions' price-driven revisions to gas reserve entitlements
under production sharing contracts and similar arrangements.
(3) Includes reserves acquired through property trades.
(4) Includes reserves acquired in the North Sea in 2000 and 1998.
(5) Includes reserves disposed of through property trades.
(6) Includes Conoco's net share of equity affiliate information.
42
44
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 prices, costs and statutory income tax rates
and a 10 percent annual discount rate. Specifically, the per-barrel oil prices
used to calculate the December 31, 2000 data averaged $25.29 for the U.S.,
$21.75 for Europe and $21.23 for other regions. The gas prices per thousand
cubic feet averaged $9.79 for the U.S., $3.15 for Europe and $5.43 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 Conoco. 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 also may vary. Conoco'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 include probable as well as
proved reserves, and on different price and cost assumptions from those
reflected in this information.
43
45
SUPPLEMENTAL PETROLEUM DATA
(UNAUDITED)
(DOLLARS IN MILLIONS)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS RESERVES
TOTAL WORLDWIDE UNITED STATES EUROPE OTHER REGIONS
--------------------------- ------------------------- ------------------------- -------------------------
2000 1999 1998 2000 1999 1998 2000 1999 1998 2000 1999 1998
-------- -------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
CONSOLIDATED COMPANIES
Future cash flows
Revenues............ $ 52,174 $ 31,682 $20,340 $25,990 $ 9,824 $ 6,148 $17,664 $15,724 $11,376 $ 8,520 $ 6,134 $ 2,816
Production costs.... (9,698) (8,295) (8,271) (3,342) (2,604) (2,665) (4,794) (4,460) (4,742) (1,562) (1,231) (864)
Development costs... (1,904) (1,573) (1,548) (304) (347) (370) (627) (665) (823) (973) (561) (355)
Income tax expense.. (16,892) (10,212) (3,904) (7,505) (1,805) (546) (6,515) (5,581) (2,239) (2,872) (2,826) (1,119)
-------- -------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Future net cash
flows............... 23,680 11,602 6,617 14,839 5,068 2,567 5,728 5,018 3,572 3,113 1,516 478
Discounted to present
value at a 10%
annual rate.......... (9,341) (4,373) (2,414) (6,350) (2,157) (1,055) (1,699) (1,468) (1,151) (1,292) (748) (208)
-------- -------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total (1)....... 14,339 7,229 4,203 8,489 2,911 1,512 4,029 3,550 2,421 1,821 768 270
-------- -------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
EQUITY AFFILIATES (2)
Future cash flows
Revenues............ 15,366 13,524 5,327 3,158 839 1,001 1,015 976 427 11,193 11,709 3,899
Production costs.... (1,578) (2,489) (2,228) (514) (334) (346) (417) (492) (266) (647) (1,663) (1,616)
Development costs... (1,239) (1,168) (1,086) (288) (181) (191) (39) (38) (28) (912) (949) (867)
Income tax expense.. (3,341) (2,522) (425) (867) (115) (166) (161) (78) (63) (2,313) (2,329) (196)
-------- -------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Future net cash
flows............... 9,208 7,345 1,588 1,489 209 298 398 368 70 7,321 6,768 1,220
Discounted to present
value at a 10%
annual rate.......... (5,771) (5,039) (1,327) (833) (155) (220) (139) (106) (9) (4,799) (4,778) (1,098)
-------- -------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total........... 3,437 2,306 261 656 54 78 259 262 61 2,522 1,990 122
-------- -------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total................. $ 17,776 $ 9,535 $ 4,464 $ 9,145 $ 2,965 $ 1,590 $ 4,288 $ 3,812 $ 2,482 $ 4,343 $ 2,758 $ 392
======== ======== ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
- ---------
(1) Includes $263 at year-end 1998 attributable to Conoco Oil & Gas Associates
L.P., in which there was a minority interest with an approximate 20 percent
average revenue share.
(2) Includes Conoco's net share of equity affiliate information.
SUMMARY OF CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
RELATING TO PROVED OIL AND GAS RESERVES
CONSOLIDATED COMPANIES EQUITY AFFILIATES(1)
---------------------------- ---------------------------
2000 1999 1998 2000 1999 1998
-------- ------- ------- ------- ------- -------
Balance at January 1 ................................................. $ 7,229 $ 4,203 $ 5,623 $ 2,306 $ 261 $ 604
Sales and transfers of oil and gas produced, net of production
costs .............................................................. (4,041) (2,400) (1,778) (281) (124) (2)
Development costs incurred during the period ......................... 908 737 1,019 320 337 555
Net changes in prices and in development and production costs ........ 9,150 6,650 (3,948) 541 2,112 (1,155)
Extensions, discoveries and improved recovery, less related costs .... 2,241 1,023 838 423 80 1
Revisions of previous quantity estimates ............................. 77 (24) 189 (39) 25 2
Purchases (sales) of reserves in place - net ......................... 869 99 (92) -- 2 18
Accretion of discount ................................................ 1,321 620 916 294 36 84
Net change in income taxes ........................................... (3,450) (3,978) 1,541 (444) (530) 128
Other ................................................................ 35 299 (105) 317 107 26
-------- ------- ------- ------- ------- -------
Balance at December 31 ............................................... $ 14,339 $ 7,229 $ 4,203 $ 3,437 $ 2,306 $ 261
======== ======= ======= ======= ======= =======
- ---------
(1) Includes Conoco's net share of equity affiliate information.
44
46
CONSOLIDATED QUARTERLY FINANCIAL DATA
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
QUARTER ENDED
---------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------- ---------- -------------- --------------
2000
Sales and other operating revenues (1) ...... $ 8,524 $ 9,357 $ 10,587 $ 10,269
Cost of goods sold and other expenses (2) ... $ 7,896 $ 8,643 $ 9,654 $ 9,298
Interest and debt expense ................... $ 83 $ 89 $ 78 $ 88
Net income before special items ............. $ 391 $ 460 $ 523 $ 574
Net income .................................. $ 399(3) $ 456(4) $ 497(5) $ 550(6)
Earnings per share
Basic (7) ................................ $ .64 $ .73 $ .80 $ .88
Diluted (7) .............................. $ .63 $ .72 $ .79 $ .87
Dividends per common share .................. $ .19 $ .19 $ .19 $ .19
Market price of Class A common stock (8)
High ..................................... $ 27.88 $ 27.06 $ 27.63 $ 29.56
Low ...................................... $ 18.81 $ 22.00 $ 21.38 $ 24.00
Market price of Class B common stock (8)
High ..................................... $ 28.75 $ 29.00 $ 28.75 $ 29.69
Low ...................................... $ 19.00 $ 23.25 $ 22.31 $ 24.69
1999
Sales and other operating revenues (1) ...... $ 5,311 $ 6,252 $ 7,409 $ 8,067
Cost of goods sold and other expenses (2) ... $ 5,130 $ 6,090 $ 7,020 $ 7,541
Interest and debt expense ................... $ 71 $ 79 $ 80 $ 81
Net income before special items ............. $ 83 $ 114 $ 261 $ 324
Net income .................................. $ 83 $ 114 $ 223(9) $ 324
Earnings per share
Basic (7) ................................ $ .13 $ .18 $ .36 $ .52
Diluted (7) .............................. $ .13 $ .18 $ .35 $ .51
Dividends per common share .................. $ .14 $ .19 $ .19 $ .19
Market price of Class A common stock (8)
High ..................................... $ 25.44 $ 31.25 $ 29.25 $ 29.06
Low ...................................... $ 19.38 $ 22.94 $ 25.31 $ 20.94
Market price of Class B common stock (8)
High ..................................... $ -- $ -- $ 29.38 $ 28.94
Low ...................................... $ -- $ -- $ 24.50 $ 20.75
- ---------
(1) Excludes other income and equity in earnings of affiliates of $167, $149,
$110 and $124 in each of the quarters in 2000 and $24, $77, $76 and $93 in
each of the quarters in 1999.
(2) Excludes provision for income taxes.
(3) Includes $8 ($.01 per share - diluted) reflecting a $27 gain from the sale
of natural gas processing assets in the U.S. partially offset by a $16 loss
for litigation provisions and $3 for the write-off of related refinery
assets.
(4) Includes $4 ($.01 per share - diluted) for settlement costs associated with
the separation agreement from DuPont related to a discontinued business.
(5) Includes $26 ($.04 per share - diluted) for the write-off of our share of a
Colombian power venture.
(6) Includes $24 ($.04 per share - diluted) related to the write-down of an
international refinery venture's inventories to market value.
(7) Earnings per share for the year may not equal the sum of the quarterly
earnings per share due to changes in average shares outstanding (see note 8
to the consolidated financial statements).
(8) Conoco's Class A common stock and Class B common stock are listed on the
New York Stock Exchange (trading symbols: COC.A and COC.B). Class A common
stock commenced trading on October 22, 1998, subsequent to Conoco's initial
public offering. Class B common stock commenced trading on August 16, 1999,
subsequent to the conclusion of DuPont's exchange offer, which resulted in
100 percent of Class B common stock being distributed to DuPont
shareholders. Prices are reported by the New York Stock Exchange.
(9) Includes $38 ($.06 per share - diluted) related to U.S. downstream
litigation and corporate settlement charges.
45