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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-14521
CONOCO INC.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0370352
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
600 NORTH DAIRY ASHFORD ROAD
HOUSTON, TEXAS 77079
(Address of principal executive offices and zip code)
(281) 293-1000
(Registrant's telephone number, including area code)
----------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
187,357,139 shares of Class A common stock, $.01 par value, and 437,361,305
shares of Class B common stock, $.01 par value, were outstanding as of May 4,
2001.
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CONOCO INC.
TABLE OF CONTENTS
PAGE(S)
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Part I - Financial Information
Item 1. Financial Statements
Consolidated Statement of Income..................................................................... 1
Consolidated Balance Sheet........................................................................... 2
Consolidated Statement of Cash Flows................................................................. 3
Notes to Consolidated Financial Statements........................................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations
(a) Financial Condition............................................................................ 10
(b) Results of Operations.......................................................................... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................... 18
Part II - Other Information
Item 1. Legal Proceedings.............................................................................. 20
Item 5. Other Information
Disclosure Regarding Forward-Looking Information............................................... 20
Item 6. Exhibits and Reports on Form 8-K............................................................... 21
Signature................................................................................................. 22
Exhibit Index............................................................................................. 23
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONOCO INC.
CONSOLIDATED STATEMENT OF INCOME (NOTE 1)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
--------------------
2001 2000
-------- --------
(IN MILLIONS,
EXCEPT PER SHARE)
Revenues
Sales and other operating revenues* ........................................ $ 10,535 $ 8,524
Equity in earnings of affiliates (note 3) .................................. 21 80
Other income (note 2) ...................................................... 31 87
-------- --------
Total revenues ....................................................... 10,587 8,691
-------- --------
Cost and expenses
Cost of goods sold ......................................................... 6,529 5,124
Operating expenses ......................................................... 614 506
Selling, general and administrative expenses ............................... 196 188
Exploration expenses ....................................................... 37 37
Depreciation, depletion and amortization ................................... 353 339
Taxes other than on income* ................................................ 1,638 1,702
Interest and debt expense .................................................. 75 83
-------- --------
Total costs and expenses ............................................. 9,442 7,979
-------- --------
Income before income taxes and accounting change ............................... 1,145 712
Provision for income taxes (note 2) ............................................ 529 313
-------- --------
Income before accounting change ................................................ 616 399
Cumulative effect of accounting change, net of income taxes of $22 (note 2) .... 37 --
-------- --------
Net income (note 10) ........................................................... $ 653 $ 399
======== ========
Earnings per share (note 4)
Basic
Before accounting change ................................................... $ .99 $ .64
Cumulative effect of accounting change ..................................... .05 --
-------- --------
$ 1.04 $ .64
======== ========
Diluted
Before accounting change ................................................... $ .97 $ .63
Cumulative effect of accounting change ..................................... .06 --
-------- --------
$ 1.03 $ .63
======== ========
Weighted-average shares outstanding (note 4)
Basic ...................................................................... 625 626
Diluted .................................................................... 635 633
Dividends per share of common stock (note 5) ................................... $ .19 $ .19
- ----------
* Includes petroleum excise taxes .............................................. $ 1,564 $ 1,657
See accompanying notes to consolidated financial statements.
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CONOCO INC.
CONSOLIDATED BALANCE SHEET (NOTE 1)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2001 2000
------------ ------------
(IN MILLIONS)
ASSETS
Current assets
Cash and cash equivalents ...................................................... $ 561 $ 342
Accounts and notes receivable .................................................. 1,878 1,837
Inventories (note 6) ........................................................... 970 791
Prepaid expenses and other current assets ...................................... 512 441
------------ ------------
Total current assets ..................................................... 3,921 3,411
Property, plant and equipment ..................................................... 23,825 23,890
Less: accumulated depreciation, depletion and amortization ........................ (11,827) (11,683)
------------ ------------
Net property, plant and equipment ................................................. 11,998 12,207
Investment in affiliates .......................................................... 1,870 1,831
Other assets ...................................................................... 680 678
------------ ------------
Total assets ...................................................................... $ 18,469 $ 18,127
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ............................................................... $ 1,807 $ 1,723
Short-term borrowings and capital lease obligations ............................ 235 256
Income taxes ................................................................... 818 665
Other accrued liabilities ...................................................... 1,486 1,543
------------ ------------
Total current liabilities ................................................ 4,346 4,187
Long-term borrowings and capital lease obligations ................................ 4,139 4,138
Deferred income taxes ............................................................. 1,954 1,911
Other liabilities and deferred credits ............................................ 1,832 1,926
------------ ------------
Total liabilities ........................................................ 12,271 12,162
------------ ------------
Commitments and contingent liabilities (note 7)
Minority interests (note 8) ....................................................... 153 337
Stockholders' equity
Preferred stock, $.01 par value
250,000,000 shares authorized; none issued ................................... -- --
Class A common stock, $.01 par value
3,000,000,000 shares authorized; 191,497,821 shares issued with
187,213,024 shares outstanding at March 31, 2001 and 186,646,358 shares
outstanding at December 31, 2000 ........................................... 2 2
Class B common stock, $.01 par value
1,599,768,771 shares authorized, 437,336,455 shares issued and
outstanding at March 31, 2001; 1,599,776,271 shares authorized,
436,786,482 shares issued and outstanding at December 31, 2000 ............. 4 4
Additional paid-in capital ..................................................... 4,944 4,932
Retained earnings .............................................................. 1,973 1,460
Accumulated other comprehensive loss (note 9) .................................. (772) (653)
Treasury stock, at cost
4,284,797 and 4,851,463 Class A shares at March 31, 2001 and
December 31, 2000, respectively ............................................ (106) (117)
------------ ------------
Total stockholders' equity ............................................... 6,045 5,628
------------ ------------
Total liabilities and stockholders' equity ........................................ $ 18,469 $ 18,127
============ ============
See accompanying notes to consolidated financial statements.
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CONOCO INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (NOTE 1)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
--------------------
2001 2000
-------- --------
(IN MILLIONS)
Cash provided by operations
Net income ............................................................ $ 653 $ 399
Adjustments to reconcile net income to cash provided by operations
Depreciation, depletion and amortization ............................ 353 339
Dry hole costs and impairment of unproved properties ................ 7 13
Deferred income taxes ............................................... 128 1
Income applicable to minority interests ............................. 7 4
Gain on asset dispositions .......................................... (13) (42)
Undistributed equity earnings ....................................... 9 (58)
Other non-cash charges and credits - net ............................ (27) (34)
Decrease (increase) in operating assets
Accounts and notes receivable ..................................... (68) 24
Inventories ....................................................... (193) (233)
Other operating assets ............................................ (101) (155)
Increase in operating liabilities
Accounts and other operating payables ............................. 48 105
Income and other taxes payable .................................... 125 106
-------- --------
Cash provided by operations .................................... 928 469
-------- --------
Investing activities
Purchases of property, plant and equipment ............................ (336) (434)
Investments in affiliates - net ....................................... (65) (54)
Proceeds from sales of assets and subsidiaries ........................ 51 92
-------- --------
Cash used in investing activities .............................. (350) (396)
-------- --------
Financing activities
Short-term borrowings - net ........................................... (183) 41
Treasury stock - purchases ............................................ (29) (34)
- proceeds from issuances .............................. 17 1
Cash dividends ........................................................ (118) (119)
Decrease in minority interests ........................................ (20) (7)
-------- --------
Cash used in financing activities .............................. (333) (118)
-------- --------
Effect of exchange rate changes on cash ................................... (26) (13)
-------- --------
Increase in cash and cash equivalents ..................................... 219 (58)
Cash and cash equivalents at beginning of year ............................ 342 317
-------- --------
Cash and cash equivalents at March 31 ..................................... $ 561 $ 259
======== ========
See accompanying notes to consolidated financial statements.
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CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
1. BASIS OF PRESENTATION AND ACCOUNTING POLICY
These consolidated interim financial statements are unaudited, but reflect
all adjustments that, in the opinion of management, are necessary to provide a
fair presentation of the financial position, results of operations and cash
flows for the dates and periods covered. All such adjustments are of a normal
recurring nature. Interim period results are not necessarily indicative of
results of operations or cash flows for a full-year period. These interim
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in Conoco's 2000 Annual Report
on Form 10-K.
2. ACCOUNTING CHANGE
In June 2000, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities," which made
amendments to SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (the Standards). The Standards, 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 on 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 set forth in note 2 to the
consolidated financial statements presented in Conoco's 2000 Annual Report on
Form 10-K.
Consistent with its Risk Management Policy, 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. Additional
details of Conoco's risk management activities are disclosed in note 25 to the
consolidated financial statements presented in Conoco's 2000 Annual Report on
Form 10-K.
Pursuant to the Standards, such derivative instruments will be reported on
the balance sheet at fair value. Hedge accounting will be adopted for reporting
gains and losses from changes in the fair value of these instruments when the
impact is material and the hedging instruments meet the criteria for hedge
accounting, as defined in the Standards. Such gains or losses are reported in
the same income statement caption as the hedged item. Gains or losses from
derivative instruments for which hedge accounting is not applied are reported in
other income. When a derivative instrument is designated for hedge accounting,
prior to executing the hedge, formal documentation is developed that defines:
o the company's risk-management objectives and strategies for
undertaking the hedging transaction;
o the instruments that will be used for hedging; and
o the methods that will be used for measuring the effectiveness of these
hedging instruments.
Conoco formally assesses, both at inception of the hedge and on an ongoing
basis, the effectiveness of the hedging instrument. If it is determined that a
hedging instrument has not been highly effective in offsetting gains or losses
on the hedged transaction, hedge accounting will be discontinued on a
prospective basis. Hedge accounting was not discontinued during the period for
any hedging instruments.
In accordance with the transition provisions of the Standards, Conoco
recorded the following after-tax cumulative adjustments into earnings on January
1, 2001.
Previously designated fair value hedging relationships:(1)
Fair value of hedging instruments .................................................... $ 27
Offsetting changes in fair value of hedged items ..................................... (25)
Hedging instruments not designated for hedge accounting under the Standards(2) .......... 36
Contracts previously not designated as derivative instruments prior to the Standards .... (1)
----
Total cumulative effect of adoption on earnings, after-tax .............................. $ 37
====
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
The total amount is shown on the Consolidated Statement of Income as
"Cumulative effect of accounting change."
----------
(1) These fair value hedging relationships reflect conversions of certain
commodity contracts from fixed prices to market prices, in accordance
with Conoco's Risk Management Policy. During the first quarter of
2001, the ineffective portions of these hedges were immaterial.
(2) Primarily reflects a pretax gain of $64 ($40 after-tax) related to
changes in the fair value of certain crude oil put options from their
purchase date to the January 1, 2001 adoption date of the Standards.
Included in income before accounting change on the Consolidated
Statement of Income is a $69 pretax expense ($43 after-tax) related to
changes in the fair value of these same crude oil put options from
January 1, 2001 to March 31, 2001.
During the first quarter of 2001, Conoco recorded an after-tax loss of $2
($3 pretax) into other comprehensive income. This loss included an after-tax
gain of $1, recorded at the date of adoption of the Standards, related to a
derivative instrument designated as a cash flow hedge of a variable interest
rate obligation, an after-tax charge of $3 due to changes in the fair value of
this derivative instrument, and an immaterial amount that was reclassified into
net income as a result of the settlement of a small portion of the obligation. A
small portion of the after-tax loss of $2 reported in other comprehensive income
is expected to be reclassified into income during the next twelve-month period.
The Standards 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
the 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 the Standards are different than
Conoco's initial application, it is possible that the impact of Conoco's
implementation of the Standards, as described above, will be modified.
3. SUMMARIZED FINANCIAL INFORMATION FOR PETROZUATA
Summarized below is the consolidated financial information for Petrozuata
C.A. on a 100 percent basis. We use the equity method to account for our
noncontrolling 50.1 percent equity interest in Petrozuata.
THREE MONTHS ENDED
MARCH 31
------------------
2001 2000
------ ------
RESULTS OF OPERATIONS
Sales .................................................... $ 108 $ 162
Earnings before income taxes ............................. (32) 118
Net income ............................................... (18) 112
Conoco's equity in Petrozuata's earnings was a loss of $9 for the three
months ended March 31, 2001. Conoco's equity in Petrozuata's earnings was $56
for the three months ended March 31, 2000.
4. EARNINGS PER SHARE
Basic earnings per share (EPS) is computed by dividing net income (the
numerator) by the weighted-average number of common shares outstanding plus the
effects of 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.
For the three months ended March 31, 2001 and March 31, 2000, basic EPS
reflected the weighted-average number of shares of Class A and Class B common
stock and deferred award units outstanding. Diluted EPS included the dilutive
effect of an additional 10,306,345 shares for the first quarter of 2001 and an
additional 7,697,659 shares for the first quarter of 2000.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
The denominator is based on the following weighted-average number of common
shares outstanding:
THREE MONTHS ENDED
MARCH 31
------------------------------
2001 2000
------------ ------------
Basic ....................................... 624,701,151 625,616,017
Diluted ..................................... 635,007,496 633,313,676
Variable stock options for 3,124,146 shares of Class A and Class B common
stock were outstanding at March 31, 2001 and 2000. 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.
Fixed stock options for 7,681,467 and 9,532,761 shares of Class A and Class
B common stock were not included in the diluted earnings per share calculation
for March 31, 2001 and March 31, 2000, respectively, because the exercise price
was greater than the average market price.
Common shares held as treasury stock are deducted in determining the number
of shares outstanding.
5. DIVIDENDS
Conoco paid a $.19 dividend per share in the first quarter of 2001 and a
$.19 dividend per share in the first quarter of 2000.
On April 23, 2001, Conoco declared a second quarter cash dividend of $.19
per share on each outstanding share of Class A and Class B common stock, payable
on June 10, 2001 to shareholders of record on May 10, 2001.
6. INVENTORIES
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
Crude oil and petroleum products ................... $ 822 $ 643
Other merchandise .................................. 25 27
Materials and supplies ............................. 123 121
--------- ------------
Inventories ........................................ $ 970 $ 791
========= ============
7. COMMITMENTS AND CONTINGENT LIABILITIES
Conoco has various purchase commitments for materials, supplies, services
and items of permanent investment incident to the ordinary conduct of business.
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. These long-term purchase obligations are at prices
on par with March 31, 2001 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 has
also assumed responsibility for current and future claims related to certain
discontinued chemicals and agricultural chemicals businesses operated by Conoco
in the past. In general, the effect on future financial results is not subject
to reasonable estimation because considerable uncertainty exists. 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.
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9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
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 to the consolidated financial statements presented in Conoco's 2000
Annual Report on Form 10-K. 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. At March 31, 2001, the environmental accrual was $117. 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.
At March 31, 2001, Conoco or DuPont, on behalf of and indemnified by
Conoco, had directly guaranteed $1,181 of the obligations of certain affiliated
companies and others. No material loss is anticipated as a result of such
agreements and guarantees. Conoco had no indirect guarantees as of March 31,
2001.
8. MINORITY INTERESTS
In March 2001, Conoco acquired the minority interest in Conoco Gas Holdings
L.L.C. from Armadillo L.L.C. The acquisition resulted in a reduction of minority
interest of $185, an increase in debt of $171 and a reduction in cash of $14.
Conoco assumed the $171 debt from Armadillo L.L.C.
9. COMPREHENSIVE INCOME
The following sets forth Conoco's comprehensive income for the periods
shown:
THREE MONTHS ENDED
MARCH 31
------------------
2001 2000
------ ------
Net income ............................................... $ 653 $ 399
Other comprehensive loss
Foreign currency translation adjustment ................ (117) (45)
Hedging activities ..................................... (2) --
------ ------
Comprehensive income ..................................... $ 534 $ 354
====== ======
10. 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. 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. 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 United States 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.
Conoco sells its products worldwide. Major products include crude oil,
natural gas and refined products that are sold primarily in the energy and
transportation markets. Conoco's sales are not materially dependent on a single
customer or small group of customers. Transfers between segments are on the
basis of estimated market values.
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10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
(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
------- ------- ------- ------- ---------- --------- -------- --------
THREE MONTHS ENDED MARCH 31, 2001
Sales and other operating revenues ........ $ 2,686 $ 1,240 $ 3,803 $ 2,801 $ 5 $ -- $ -- $ 10,535
Transfers between segments ................ 253 250 53 130 24 -- (710) --
------- ------- ------- ------- ------- ------- ------- --------
Total operating revenues .................. $ 2,939 $ 1,490 $ 3,856 $ 2,931 $ 29 $ -- $ (710) $ 10,535
======= ======= ======= ======= ======= ======= ======= ========
Operating profit .......................... $ 484 $ 568 $ 105 $ 86 $ (22) $ (37) $ -- $ 1,184
Equity in earnings of affiliates .......... 16 10 5 (6) (4) -- -- 21
Corporate non-operating items
Interest and debt expense .............. -- -- -- -- -- (75) -- (75)
Interest income (net of misc.
interest expense) ..................... -- -- -- -- -- 10 -- 10
Other .................................. -- -- -- -- -- 5 -- 5
------- ------- ------- ------- ------- ------- ------- --------
Income before income taxes and accounting
change ................................ 500 578 110 80 (26) (97) -- 1,145
Provision for income taxes ................ (176) (322) (39) (27) 9 26 -- (529)
------- ------- ------- ------- ------- ------- ------- --------
Income before accounting change ........... 324 256 71 53 (17) (71) -- 616
Cumulative effect of accounting change, net
of income taxes ....................... 8 32 (3) -- -- -- -- 37
------- ------- ------- ------- ------- ------- ------- --------
Net income (loss)(1) ...................... $ 332 $ 288 $ 68 $ 53 $ (17) $ (71) $ -- $ 653
======= ======= ======= ======= ======= ======= ======= ========
THREE MONTHS ENDED MARCH 31, 2000
Sales and other operating revenues ........ $ 1,007 $ 895 $ 3,717 $ 2,904 $ 1 $ -- $ -- $ 8,524
Transfers between segments ................ 177 168 37 135 -- -- (517) --
------- ------- ------- ------- ------- ------- ------- --------
Total operating revenues .................. $ 1,184 $ 1,063 $ 3,754 $ 3,039 $ 1 $ -- $ (517) $ 8,524
======= ======= ======= ======= ======= ======= ======= ========
Operating profit .......................... $ 210 $ 503 $ (35) $ 65 $ (10) $ (32) $ -- $ 701
Equity in earnings of affiliates .......... 5 72 7 (4) -- -- -- 80
Corporate non-operating items
Interest and debt expense .............. -- -- -- -- -- (83) -- (83)
Interest income (net of misc.
interest expense) ..................... -- -- -- -- -- 11 -- 11
Other .................................. -- -- -- -- -- 3 -- 3
------- ------- ------- ------- ------- ------- ------- --------
Income before income taxes ................ 215 575 (28) 61 (10) (101) -- 712
Provision for income taxes ................ (72) (278) 17 (12) 3 29 -- (313)
------- ------- ------- ------- ------- ------- ------- --------
Net income (loss)(1) ...................... $ 143 $ 297 $ (11) $ 49 $ (7) $ (72) $ -- $ 399
======= ======= ======= ======= ======= ======= ======= ========
TOTAL ASSETS
At March 31, 2001 ...................... $ 3,807 $ 7,212 $ 3,676 $ 2,952 $ 110 $ 712 $ -- $ 18,469
At December 31, 2000 ................... $ 3,733 $ 7,195 $ 3,461 $ 2,925 $ 88 $ 725 $ -- $ 18,127
- ----------
(1) Includes after-tax benefits (charges) from special items:
THREE MONTHS ENDED MARCH 31, 2001
Cumulative effect of accounting change .... $ 8 $ 32 $ (3) $ -- $ -- $ -- $ -- $ 37
------- ------- ------- ------- ------- ------- ------- --------
Total special items ....................... $ 8 $ 32 $ (3) $ -- $ -- $ -- $ -- $ 37
======= ======= ======= ======= ======= ======= ======= ========
THREE MONTHS ENDED MARCH 31, 2000
Asset sales ............................... $ 27 $ -- $ -- $ -- $ -- $ -- $ -- $ 27
Litigation ................................ -- -- (16) -- -- -- -- (16)
Property impairments ...................... -- -- (3) -- -- -- -- (3)
------- ------- ------- ------- ------- ------- ------- --------
Total special items ....................... $ 27 $ -- $ (19) $ -- $ -- $ -- $ -- $ 8
======= ======= ======= ======= ======= ======= ======= ========
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Special items for the first three months of 2001 included a cumulative
transition gain of $37 recorded on January 1, 2001 upon initial adoption of SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities." This cumulative transition gain included a $40 gain in upstream
related to changes in the fair value of certain crude oil put options from their
purchase date to the January 1, 2001 adoption of the Standards and a $3 charge
in U.S. downstream associated with various derivatives.
The $40 upstream gain consisted of $8 that was U.S. related and $32 that
was related to international operations. Also included in net income for
upstream was a $43 expense related to changes in the fair value of these same
crude oil put options from January 1, 2001 to March 31, 2001, which essentially
offsets the $40 transition gain. This expense consisted of $9 for U.S.
operations and $34 for international operations.
For the first three months of 2000, special items included a $27 gain from
the sale of natural gas processing assets in the U.S., a $16 loss for litigation
provisions and $3 for the write-off of related refinery assets.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(a) FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
CASH PROVIDED BY OPERATIONS
Cash provided by operations in the first three months of 2001 increased
$459 million to $928 million from $469 million in the first three months of
2000. Cash provided by operations before changes in operating assets and
liabilities increased $495 million compared to the first three months of 2000,
primarily due to higher natural gas prices, stronger refining margins and
increased crude oil sales volumes. Negative changes to net operating assets and
liabilities of $36 million were due to increased receivables and lower payables,
partially offset by decreased inventories and higher taxes payable.
INVESTING ACTIVITIES
CAPITAL EXPENDITURES AND INVESTMENTS
THREE MONTHS ENDED
MARCH 31
------------------
2001 2000
------ ------
(IN MILLIONS)
Upstream
United States ........................................ $ 122 $ 83
International ........................................ 177 257
------ ------
Total upstream ................................... 299 340
Downstream
United States ........................................ 26 58
International ........................................ 41 64
------ ------
Total downstream ................................. 67 122
Emerging businesses ...................................... 34 26
Corporate ................................................ 6 1
------ ------
Total capital expenditures and investments ............... $ 406 $ 489
====== ======
United States ............................................ $ 187 $ 168
International ............................................ 219 321
------ ------
Total capital expenditures and investments ............... $ 406 $ 489
====== ======
Total capital expenditures and investments were $406 million for the first
three months of 2001, a decrease of $83 million, or 17 percent, versus capital
expenditures and investments of $489 million for the first three months of 2000.
The decrease was primarily due to lower spending on international upstream
acquisitions. A more detailed description and analysis of capital expenditures
and investments by operating segment within the U.S. and international follows
below. Capital expenditures and investments include capitalized exploratory
wells but do not include expensed exploration costs.
Upstream
Upstream capital expenditures and investments totaled $299 million for the
first three months of 2001 compared to $340 million for the first three months
of 2000. The decrease of $41 million, or approximately 12 percent, was primarily
the result of lower spending on international acquisitions. Expenditures in 2000
included the acquisition of Canadian natural gas processing and gathering
assets.
United States
During the first three months of 2001, Conoco spent $122 million on U.S.
capital projects, an increase of $39 million, or 47 percent, from $83 million in
the first three months of 2000. The increase in expenditures in 2001 versus 2000
was primarily due to higher development drilling costs resulting from contract
services related to higher commodity prices.
10
13
International
International upstream capital expenditures and investments totaled $177
million in the first three months of 2001, a decrease of $80 million, or 31
percent, from $257 million in the first three months of 2000. The decrease was
primarily the result of lower spending on acquisitions. Expenditures in 2000
included the acquisition of Canadian natural gas processing and gathering
assets.
Downstream
Downstream capital expenditures and investments totaled $67 million in the
first three months of 2001, a decrease of $55 million, or 45 percent, versus
$122 million in the first three months of 2000, primarily reflecting decreased
expenditures on refining operations worldwide.
United States
During the first three months of 2001, Conoco spent $26 million on
downstream U.S. capital projects, down $32 million, or 55 percent, from $58
million in the first three months of 2000. Expenditures in the first three
months of 2001 were principally related to several small investments in our
pipeline and refining operations. Capital expenditures and investments in the
first three months of 2000 were primarily related to the new units being
installed at our Lake Charles, Louisiana refinery to process synthetic crude
from Petrozuata, our Venezuelan joint venture, as well as our ongoing refining
and marketing operations.
International
Conoco spent $41 million on downstream international capital projects
during the first three months of 2001, down $23 million, or 36 percent, from $64
million in the first three months of 2000. The majority of the funds in 2001
were spent on our ongoing refining and marketing operations. In the first three
months of 2000, a major portion of capital expenditures and investments went to
support refining operations, including upgrades to meet future clean fuels
specifications in Europe.
Emerging Businesses
First quarter emerging businesses capital expenditures and investments
totaled $34 million in 2001, an increase of $8 million, compared to $26 million
in the first three months of 2000. The increased expenditures during the first
three months of 2001 were primarily related to the continued construction of our
carbon fibers manufacturing plant in Ponca City, Oklahoma and project costs
associated with our power business.
Corporate
Corporate capital expenditures and investments totaled $6 million in the
first three months of 2001, an increase of $5 million, compared to $1 million in
the first three months of 2000. The increased expenditures during the first
three months of 2001 were largely the result of expenditures incurred for
computer infrastructure.
PROCEEDS FROM SALES OF ASSETS AND SUBSIDIARIES
Proceeds from asset sales amounted to $51 million for the first three
months of 2001, a decrease of $41 million, from $92 million in the first three
months of 2000. Proceeds in the first quarter 2001 were primarily the result of
the sale of our interest in Arkhangelskgeoldobycha, a Russian oil company, while
proceeds in the first quarter of 2000 were primarily the result of the sale of
non-strategic natural gas processing assets in the U.S.
FINANCING ACTIVITIES
Conoco's ability to maintain and grow its operating income and cash flow is
dependent upon continued capital spending to replace depleting assets. Conoco
believes its future cash flow from operations and its borrowing capacity should
be sufficient to fund its payments of dividends, if any, capital expenditures
and working capital requirements and to service debt.
11
14
At March 31, 2001, Conoco had an unsecured $2,000 million 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 million and a five-year
committed facility in the amount of $650 million. The five-year committed
facility had over three years remaining at March 31, 2001. Conoco had no
outstanding borrowings under the credit facility at March 31, 2001.
Conoco maintains a $2,000 million U.S. commercial paper program and a euro
500 million European commercial paper program that are fully supported by the
credit facility. Conoco has the ability to issue commercial paper at any time
with maturities not to exceed 270 days. At March 31, 2001, there was no
commercial paper outstanding.
In March 2001, Conoco acquired the minority interest in Conoco Gas Holdings
L.L.C. from Armadillo L.L.C. The acquisition resulted in a reduction of minority
interest of $185 million, an increase in debt of $171 million and a reduction in
cash of $14 million. Conoco assumed the $171 million debt from Armadillo L.L.C.
Total Conoco debt was $4,374 million at March 31, 2001, down $20 million
versus $4,394 million at December 31, 2000. The total debt-to-capitalization
ratio was 42.0 percent at March 31, 2001 and 43.8 percent at December 31, 2000.
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(b) RESULTS OF OPERATIONS
CONSOLIDATED RESULTS
THREE MONTHS ENDED
MARCH 31
----------------------
2001 2000
-------- --------
(IN MILLIONS)
SALES AND OTHER OPERATING REVENUES
Upstream
United States ....................................... $ 2,686 $ 1,007
International ....................................... 1,240 895
-------- --------
Total upstream ................................ 3,926 1,902
Downstream
United States ....................................... 3,803 3,717
International ....................................... 2,801 2,904
-------- --------
Total downstream .............................. 6,604 6,621
Emerging businesses ................................... 5 1
Corporate ............................................. -- --
-------- --------
Sales and other operating revenues ....................... $ 10,535 $ 8,524
======== ========
AFTER-TAX OPERATING INCOME
Upstream
United States ....................................... $ 332 $ 143
International ....................................... 288 297
-------- --------
Total upstream ................................ 620 440
Downstream
United States ....................................... 68 (11)
International ....................................... 53 49
-------- --------
Total downstream .............................. 121 38
Emerging businesses ................................... (17) (7)
Corporate ............................................. (24) (22)
-------- --------
Total after-tax operating income .............. 700 449
Interest and other non-operating expenses net of tax ..... (47) (50)
-------- --------
Net income ............................................... $ 653 $ 399
======== ========
SPECIAL ITEMS
Net income includes the following non-recurring items (special items) on an
after-tax basis:
THREE MONTHS ENDED
MARCH 31
----------------------
2001 2000
-------- --------
(IN MILLIONS)
UPSTREAM
Cumulative effect of accounting change ................ $ 40 $ --
Asset sales ........................................... -- 27
-------- --------
Total upstream special items ..................... 40 27
DOWNSTREAM
Cumulative effect of accounting change ................ (3) --
Property impairments .................................. -- (3)
Litigation ............................................ -- (16)
-------- --------
Total downstream special items ................... (3) (19)
-------- --------
Total special items ...................................... $ 37 $ 8
======== ========
Special items for the first three months of 2001 included a cumulative
transition gain of $37 million recorded on January 1, 2001 upon initial adoption
of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities." This cumulative transition gain included a $40 million gain
in upstream related to changes in the fair value of certain
13
16
crude oil put options from their purchase date to the January 1, 2001 adoption
of the Standards and a $3 million charge in U.S. downstream associated with
various derivatives.
The $40 million upstream gain consisted of $8 million that was U.S. related
and $32 million that was related to international operations. Also included in
net income for upstream was a $43 million expense related to changes in the fair
value of these same crude oil put options from January 1, 2001 to March 31,
2001, which essentially offsets the $40 million transition gain. This expense
consisted of $9 million for U.S. operations and $34 million for international
operations.
For the first three months of 2000, special items included a $27 million
gain from the sale of natural gas processing assets in the U.S., a $16 million
loss for litigation provisions and $3 million for the write-off of related
refinery assets.
FIRST QUARTER 2001 VERSUS FIRST QUARTER 2000
Net income was $653 million in the first quarter of 2001, up 64 percent
from $399 million in the first quarter of 2000. Net income before special items
was $616 million in the first quarter of 2001, up 58 percent from $391 million
in the first quarter of 2000. These increases predominantly reflected higher
global natural gas prices, stronger refining margins and increased crude oil
sales volumes. Partly offsetting these increases were lower equity earnings from
affiliates, higher overhead and operating expenses, and lower marketing margins
in the U.S.
Sales and other operating revenues for the first quarter of 2001 were
$10,535 million, up 24 percent from $8,524 million in the first quarter of 2000,
primarily due to higher natural gas and refined product prices and increased
crude oil sales volumes. Crude oil and refined product buy/sell and natural gas
resale activities in the first quarter of 2001 totaled $2,832 million, up 52
percent compared to $1,860 million in the first quarter of 2000, primarily due
to higher natural gas prices.
Income from equity affiliates for the first quarter of 2001 was $21
million, down $59 million, or 74 percent, compared to $80 million in the first
quarter of 2000. Increased costs during the start-up phase at Petrozuata and
lower prices for heavy crude reduced our first quarter earnings from Petrozuata
by $65 million. This was partially offset by an increase in our earnings from
the Pocahontas Gas partnership due to strong U.S. natural gas prices.
Other income for the first quarter of 2001 was $31 million, down 64 percent
from $87 million in the first quarter of 2000. Other income includes losses of
$69 million related to the change during the quarter in the market value of
crude oil put options as a result of the implementation of SFAS No. 133 and SFAS
No. 138.
Cost of goods sold for the first quarter of 2001 totaled $6,529 million, an
increase of $1,405 million, or 27 percent, compared to $5,124 million in the
first quarter of 2000, primarily due to the increase in natural gas prices and
higher refinery feedstock costs.
Operating expenses for the first quarter of 2001 were $614 million, up 21
percent, compared to $506 million for the first quarter of 2000. This increase
was primarily due to the higher energy costs experienced by our downstream
operations and the higher transportation and tariff charges experienced by our
upstream operations.
Exploration expenses for the first quarter of 2001 totaled $37 million,
unchanged from the first quarter of 2000, reflecting higher exploration expenses
offset by lower dry hole costs.
Depreciation, depletion and amortization (DD&A) for the first quarter of
2001 totaled $353 million, an increase of $14 million, or 4 percent, compared to
$339 million in the first quarter of 2000. The increase was principally due to
changes in rates and field mix.
Provision for income taxes for the first quarter of 2001 totaled $529
million, up 69 percent compared to $313 million for the first quarter of 2000,
as a result of significantly higher pretax income. The effective tax rate,
approximately 46 percent in the first quarter of 2001 compared to 44 percent in
the first quarter of 2000, was higher primarily due to the reduced impact of
U.S. alternative fuels tax credits on higher pretax income in 2001.
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UPSTREAM SEGMENT RESULTS
THREE MONTHS ENDED
MARCH 31
------------------
2001 2000
------ ------
(IN MILLIONS)
After-tax operating income
United States ........................................................ $ 332 $ 143
International ........................................................ 288 297
------ ------
After-tax operating income ......................................... 620 440
Special items
United States ........................................................ (8) (27)
International ........................................................ (32) --
------ ------
Special items ...................................................... (40) (27)
Earnings before special items
United States ........................................................ 324 116
International ........................................................ 256 297
------ ------
Earnings before special items ........................................... $ 580 $ 413
====== ======
The following tables set forth for Conoco (including equity affiliates),
Conoco (excluding equity affiliates) and its equity affiliates, average sales
prices per barrel of crude oil and condensate sold and average sales prices per
thousand cubic feet (mcf) of natural gas sold.
TOTAL UNITED
WORLDWIDE STATES INT'L.
--------- ------- -------
(UNITED STATES DOLLARS)
TOTAL CONOCO
For the quarter ended March 31, 2001
Average sales prices of produced petroleum
Per barrel of crude oil and condensate sold ......... $ 23.22 $ 25.29 $ 22.86
Per mcf of natural gas sold ......................... 5.31 6.78 4.09
For the quarter ended March 31, 2000
Average sales prices of produced petroleum
Per barrel of crude oil and condensate sold ......... 25.34 26.60 25.13
Per mcf of natural gas sold ......................... 2.33 2.12 2.49
CONSOLIDATED COMPANIES
For the quarter ended March 31, 2001
Average sales prices of produced petroleum
Per barrel of crude oil and condensate sold ......... $ 24.75 $ 25.29 $ 24.63
Per mcf of natural gas sold ......................... 5.28 6.76 4.09
For the quarter ended March 31, 2000
Average sales prices of produced petroleum
Per barrel of crude oil and condensate sold ......... 26.29 26.60 26.22
Per mcf of natural gas sold ......................... 2.32 2.11 2.49
EQUITY AFFILIATES
For the quarter ended March 31, 2001
Average sales prices of produced petroleum
Per barrel of crude oil and condensate sold ......... $ 12.50 $ -- $ 12.50
Per mcf of natural gas sold ......................... 7.57 7.57 --
For the quarter ended March 31, 2000
Average sales prices of produced petroleum
Per barrel of crude oil and condensate sold ......... 20.73 -- 20.73
Per mcf of natural gas sold ......................... 2.57 2.57 --
FIRST QUARTER 2001 VERSUS FIRST QUARTER 2000
Upstream earnings before special items were $580 million in the first
quarter of 2001, up 40 percent from $413 million in the first quarter of 2000,
driven by stronger natural gas prices and increased crude oil sales volumes.
U.S.
15
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upstream earnings before special items totaled $324 million in the first quarter
of 2001, up 179 percent from $116 million in the comparable period of 2000,
reflecting higher natural gas prices, partly offset by increased transportation
and tariff charges. International upstream earnings before special items were
$256 million, a decrease of 14 percent from $297 million in the comparable
period in 2000. The decline was primarily attributable to lower equity earnings
from Petrozuata, higher transportation and tariff charges, and a charge to
reflect the change in value during the quarter of certain crude oil put options.
These decreases were partly offset by higher natural gas prices and higher crude
oil sales volumes.
Conoco's worldwide net realized crude oil price, including equity
affiliates, was $23.22 per barrel for the quarter, down $2.12 per barrel, or 8
percent, from $25.34 per barrel in the first quarter of 2000. Worldwide net
realized natural gas prices, including equity affiliates, averaged $5.31 per mcf
for the quarter, compared with $2.33 per mcf in the same period in 2000, an
increase of 128 percent.
Worldwide petroleum liquids production, including our share of equity
affiliates, in the first quarter of 2001 was 381,000 barrels per day versus
375,000 barrels per day in the first quarter of 2000, a 2 percent increase. U.S.
petroleum liquids production was down 1 percent as a result of natural gas
liquids production decreases, offset by additional crude volumes from the Ursa
field in the Gulf of Mexico. International petroleum liquids production
increased 2 percent to 308,000 barrels per day due to increases in Vietnam,
Indonesia and the U.K. resulting from our Saga U.K. Ltd. acquisition. This was
partially offset by natural field decline in other U.K. fields.
Worldwide natural gas production, including our share of equity affiliates,
in the first quarter of 2001 was down 1 percent to 1,822 million cubic feet
(mmcf) per day from 1,842 mmcf per day in the first quarter of 2000. U.S.
natural gas production was up 2 percent while international natural gas
production was 3 percent lower. The international decrease was mainly due to
natural field decline in several U.K. fields.
DOWNSTREAM SEGMENT RESULTS
THREE MONTHS ENDED
MARCH 31
------------------
2001 2000
------ ------
(IN MILLIONS)
After-tax operating income
United States ......................................... $ 68 $ (11)
International ......................................... 53 49
------ ------
After-tax operating income .......................... 121 38
Special items
United States ......................................... 3 19
International ......................................... -- --
------ ------
Special items ....................................... 3 19
Earnings before special items
United States ......................................... 71 8
International ......................................... 53 49
------ ------
Earnings before special items ............................ $ 124 $ 57
====== ======
FIRST QUARTER 2001 VERSUS FIRST QUARTER 2000
Downstream earnings before special items were $124 million for the first
quarter of 2001, an increase of 118 percent from $57 million in the comparable
period in 2000. U.S. downstream earnings before special items were $71 million
for the first quarter of 2001, up $63 million from the first quarter of 2000.
The increase was primarily attributable to the impact of stronger refining
margins, partly offset by depressed marketing margins and higher overhead and
operating expenses, primarily energy costs. International downstream earnings
before special items were $53 million for the first quarter of 2001, up 8
percent from $49 million in the comparable period in 2000, primarily reflecting
an increase in refinery throughputs. Worldwide refined product sales in the
first quarter of 2001 were 1,477,000 barrels per day, up 8 percent from the
first quarter of 2000, primarily due to increased sales volumes in all regions.
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EMERGING BUSINESSES SEGMENT RESULTS
THREE MONTHS ENDED
MARCH 31
------------------
2001 2000
------ ------
(IN MILLIONS)
After-tax operating loss ................................. $ (17) $ (7)
Special items ............................................ -- --
------ ------
Losses before special items .............................. $ (17) $ (7)
====== ======
FIRST QUARTER 2001 VERSUS FIRST QUARTER 2000
Emerging businesses operating losses were $17 million for the first quarter
of 2001, an increase of $10 million compared to the first quarter of 2000,
principally resulting from higher research and development costs for natural gas
refining and the continuing development of our carbon fibers ventures.
CORPORATE SEGMENT RESULTS
THREE MONTHS ENDED
MARCH 31
------------------
2001 2000
------ ------
(IN MILLIONS)
After-tax operating loss ................................. $ (24) $ (22)
Special items ............................................ -- --
------ ------
Losses before special items .............................. $ (24) $ (22)
====== ======
FIRST QUARTER 2001 VERSUS FIRST QUARTER 2000
Corporate operating losses were $24 million for the first quarter of 2001,
an increase of $2 million compared to the first quarter of 2000, mainly due to
higher technology, advertising and compensation costs.
INTEREST AND OTHER NON-OPERATING EXPENSES NET OF TAX
THREE MONTHS ENDED
MARCH 31
------------------
2001 2000
------ ------
(IN MILLIONS)
Interest expense on debt ................................. $ (67) $ (66)
Interest income .......................................... 11 8
Exchange gains ........................................... 9 8
------ ------
Interest and other non-operating expense net of tax ...... $ (47) $ (50)
====== ======
FIRST QUARTER 2001 VERSUS FIRST QUARTER 2000
Interest and other non-operating expenses for the first quarter of 2001
amounted to $47 million, a decrease of $3 million, or 6 percent, compared to $50
million in the comparable period in 2000. This improvement is attributable to
higher interest income.
TAX MATTERS
During the period ended March 31, 2001, Conoco recorded a reduction in
deferred tax assets of $39 million due to the utilization of prior year U.S.
alternative minimum tax credit carry forwards. Conoco continues to believe it is
more likely than not that the deferred tax asset based on remaining U.S.
alternative minimum tax credit carry forwards will be realized in future years.
SUBSEQUENT EVENTS
Conoco's wholly owned Humber refinery in North Lincolnshire, U.K.
experienced an explosion and fire on April 16, 2001. Almost all of the main
processing units remained operational, however the refinery was shut down
17
20
for repairs to the units damaged by the fire. The accident resulted in no
serious personal injuries or loss of hydrocarbons to the environment and its
impact was centered on a saturate gas processing unit. The earnings impact of
the accident is expected to be in the $30 million to $50 million range,
depending on second quarter margins. We began an already scheduled major
turnaround on April 28, 2001 and we anticipate commissioning the plant by late
June 2001.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISKS
Information about interest rate risk for the period ended March 31, 2001
did not differ materially from that discussed under "Quantitative and
Qualitative Disclosures About Market Risk" in Item 7A of Conoco's 2000 Annual
Report on Form 10-K.
Changes in commodity price risk and foreign currency risk for the period
ended March 31, 2001, are summarized below.
COMMODITY PRICE RISK
The fair value gain or loss of outstanding derivative commodity instruments
and the change in fair value that would be expected from a 10 percent adverse
price change are shown in the table as follows:
CHANGE IN FAIR VALUE
FROM 10% ADVERSE
FAIR VALUE PRICE CHANGE
---------- --------------------
COMMODITY DERIVATIVES(1)
AT MARCH 31, 2001
Crude Oil and Refined Products
Trading ............................................... $ 12 $ 5
Non-trading(2) ........................................ 21 (15)
------ ------
Combined ................................................. $ 33 $ (10)
====== ======
Natural Gas
Trading ............................................... $ 5 $ 1
Non-trading ........................................... 13 (19)
------ ------
Combined ................................................. $ 18 $ (18)
====== ======
AT DECEMBER 31, 2000
Crude Oil and Refined Products
Trading ............................................... $ 1 $ 1
Non-trading(2) ........................................ 92 (29)
------ ------
Combined ................................................. $ 93 $ (28)
====== ======
Natural Gas
Trading ............................................... $ 3 $ 2
Non-trading ........................................... 103 (33)
------ ------
Combined ................................................. $ 106 $ (31)
====== ======
- ----------
(1) Includes derivative instruments that can be settled in cash or by physical
delivery of the commodity.
(2) Includes purchased crude oil put options with a strike price of $22.00
(West Texas Intermediate equivalent) per barrel on approximately 63 million
barrels during the period of April through December 2001.
The fair values of the futures contracts are based on quoted market prices
obtained from the New York Mercantile Exchange or the International Petroleum
Exchange of London. The fair values of swaps and other over-the-counter
instruments are estimated based on quoted market prices of comparable contracts
and approximate the gain or loss that would have been realized if the contracts
had been closed out at the end of the period.
18
21
Price-risk sensitivities were calculated by assuming an across-the-board 10
percent adverse change in prices regardless of term or historical relationships
between the contractual price of the instrument and the underlying commodity
price. In the event of an actual 10 percent change in prompt month crude or
natural gas prices, the fair value of Conoco's derivative portfolio would
typically change less than that shown in the table due to lower volatility in
out-month prices.
FOREIGN CURRENCY RISK
At March 31, 2001, Conoco had no foreign currency swaps associated with our
European commercial paper program.
At March 31, 2001, Conoco had open foreign currency exchange derivative
instruments related to anticipated foreign currency capital investments and
foreign currency cash tax payments, with a fair value liability of $2 million. A
10 percent adverse change in foreign currency exchange rates would change the
fair value of the derivative instruments by $12 million.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments with respect to the legal
proceedings previously reported in the 2000 Annual Report on Form 10-K.
On January 26, 2001, the Louisiana Department of Environmental Quality
issued a Compliance Order/Notice of Potential Penalty to Conoco for the Excel
Paralubes facility in Lake Charles, Louisiana. The Compliance Order/Notice of
Potential Penalty alleges excessive boiler air emissions and fuel usage, and
failure to make timely equipment repairs. Governmental monetary sanctions
resulting from this matter could be in excess of $100,000.
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 has
also assumed responsibility for current and future claims related to certain
discontinued chemicals and agricultural chemicals businesses operated by Conoco
in the past. In general, the effect on future financial results is not subject
to reasonable estimation because considerable uncertainty exists. The ultimate
liabilities resulting from such lawsuits and claims may be material to results
of operations in the period in which they are recognized.
ITEM 5. OTHER INFORMATION
DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION
This quarterly report on Form 10-Q includes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. You can identify our forward-looking
statements by the words "expects," "intends," "plans," "projects," "believes,"
"estimates" and similar expressions.
We have based the forward-looking statements related to our operations on
our current expectations, estimates and projections about Conoco and the
petroleum industry in general. We caution you that these statements are not
guarantees of future performance and involve risks, uncertainties and
assumptions that we cannot predict. In addition, we have based many of these
forward-looking statements on assumptions about future events that may prove to
be inaccurate. Accordingly, our actual outcomes and results may differ
materially from what we have expressed or forecasted in the forward-looking
statements. Any differences could result from a variety of factors including the
following:
o fluctuations in crude oil and natural gas prices and refining and
marketing margins;
o potential failure or delays in achieving expected reserve or
production levels from existing and future oil and gas development
projects due to operating hazards, drilling risks and the inherent
uncertainties in predicting oil and gas reserves and oil and gas
reservoir performance;
o unsuccessful exploratory drilling activities;
o failure of new products and services to achieve market acceptance;
o unexpected cost increases or technical difficulties in constructing or
modifying company manufacturing and refining facilities;
o unexpected difficulties in manufacturing, transporting or refining
synthetic crude oil;
o ability to meet government regulations;
o potential disruption or interruption of our production facilities due
to accidents or political events;
o international monetary conditions and exchange controls;
o liability for remedial actions under environmental regulations;
o liability resulting from litigation;
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o general domestic and international economic and political conditions;
or
o changes in tax and other laws applicable to our business.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The exhibit index filed with this Form 10-Q is on page 23.
(b) REPORTS ON FORM 8-K
1. A current report on Form 8-K dated February 21, 2001 was filed by
Conoco on February 23, 2001. In this report, we announced our approval
of a stock buyback program.
2. A current report on Form 8-K dated February 22, 2001 was filed by
Conoco on February 22, 2001. In this report, we filed our 2000 audited
financial statements.
3. A current report on Form 8-K dated March 29, 2001 was filed by Conoco
on March 29, 2001. In this report, we filed an outlook for first
quarter earnings.
4. An amended current report on Form 8-K/A dated March 29, 2001 was filed
by Conoco on March 29, 2001. In this report, we corrected a
typographical error to the last sentence of Exhibit 99.1 to the Form
8-K filed by Conoco Inc. on March 29, 2001.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CONOCO INC.
(Registrant)
By: /s/ W. DAVID WELCH
-------------------------------------
(As Duly Authorized Officer and
Principal Accounting Officer)
Date: May 10, 2001
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
12 Computation of Ratio of Earnings to Fixed Charges*
* File herein.
23