1
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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 JUNE 30, 1999
[ ] 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)
(281) 293-1000
(Registrant's telephone number, including area code)
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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
190,582,195 shares of Class A common stock, $0.01 par value, and
436,543,573 shares of Class B common stock, $0.01 par value, were outstanding as
of August 6, 1999.
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CONOCO INC.
TABLE OF CONTENTS
Page(s)
-------
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.............................................................................. 12
(b) Results of Operations............................................................................ 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................... 22
Part II - Other Information
Item 1. Legal Proceedings................................................................................ 25
Item 5. Other Information
(a) Disclosure Regarding Forward-Looking Information................................................. 25
(b) Split-Off of Conoco from DuPont.................................................................. 26
(c) Amendment to Rights Agreement.................................................................... 26
Item 6. Exhibits and Reports on Form 8-K................................................................. 26
Signature ................................................................................................. 27
Exhibit Index ............................................................................................ 28
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONOCO INC.
CONSOLIDATED STATEMENT OF INCOME (NOTES 1 AND 3)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(IN MILLIONS, EXCEPT PER SHARE)
Revenues
Sales and Other Operating Revenues* ................ $ 6,252 $ 5,612 $ 11,563 $ 11,348
Other Income ....................................... 77 40 101 138
---------- ---------- ---------- ----------
Total Revenues ........................... 6,329 5,652 11,664 11,486
---------- ---------- ---------- ----------
Costs and Expenses
Cost of Goods Sold and Other Operating Expenses .... 3,882 3,361 6,887 6,754
Selling, General and Administrative Expenses ....... 197 187 383 370
Exploration Expenses ............................... 74 109 120 176
Depreciation, Depletion and Amortization ........... 282 238 584 505
Taxes Other Than on Income* ........................ 1,655 1,479 3,246 2,896
Interest and Debt Expense .......................... 79 -- 150 1
---------- ---------- ---------- ----------
Total Costs and Expenses ................. 6,169 5,374 11,370 10,702
---------- ---------- ---------- ----------
Income Before Income Taxes ............................. 160 278 294 784
Provision for Income Taxes ............................. 46 64 97 254
---------- ---------- ---------- ----------
Net Income (Note 10) ................................... $ 114 $ 214 $ 197 $ 530
========== ========== ========== ==========
Earnings Per Share (Note 4)
Basic .............................................. $ .18 $ .49 $ .31 $ 1.21
Diluted ............................................ $ .18 $ .49 $ .31 $ 1.21
Weighted Average Shares Outstanding (Note 4)
Class A** .......................................... 190 -- 191 --
Class B ............................................ 437 437 437 437
---------- ---------- ---------- ----------
Total Basic .............................. 627 437 628 437
Stock Options** .................................... 11 -- 8 --
---------- ---------- ---------- ----------
Total Diluted ............................ 638 437 636 437
Dividends Per Share of Common Stock (Note 5) ........... $ .19 $ -- $ .33 $ --
* Includes petroleum excise taxes .................... $ 1,610 $ 1,433 $ 3,156 $ 2,806
** Earnings per share for the period prior to the Offerings was calculated using only Class B common stock
as required by SFAS No. 128 (see Note 4).
See Notes to Consolidated Financial Statements
1
4
CONOCO INC.
CONSOLIDATED BALANCE SHEET (NOTES 1 AND 3)
(UNAUDITED)
ASSETS
JUNE 30, DECEMBER 31,
1999 1998
---------- ----------
(IN MILLIONS)
Current Assets
Cash and Cash Equivalents ........................................................ $ 252 $ 394
Accounts and Notes Receivable .................................................... 1,210 1,191
Inventories (Note 6) ............................................................. 858 807
Prepaid Expenses ................................................................. 282 378
---------- ----------
Total Current Assets ......................................................... 2,602 2,770
Property, Plant and Equipment ....................................................... 22,240 22,094
Less: Accumulated Depreciation, Depletion and Amortization .......................... (11,043) (10,681)
---------- ----------
Net Property, Plant and Equipment ................................................... 11,197 11,413
---------- ----------
Investment in Affiliates ............................................................ 1,529 1,363
Other Assets ........................................................................ 563 529
---------- ----------
Total ........................................................................ $ 15,891 $ 16,075
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable ................................................................. $ 1,163 $ 1,312
Other Short-Term Borrowings and Capital Lease Obligations ........................ 1,019 52
Income Taxes ..................................................................... 107 199
Other Accrued Liabilities (Note 7) ............................................... 1,071 1,162
---------- ----------
Total Current Liabilities .................................................... 3,360 2,725
Long-Term Borrowings-- Related Parties .............................................. -- 4,596
Other Long-Term Borrowings and Capital Lease Obligations ............................ 4,086 93
Deferred Income Taxes ............................................................... 1,667 1,714
Other Liabilities and Deferred Credits .............................................. 2,138 2,200
---------- ----------
Total Liabilities ............................................................ 11,251 11,328
---------- ----------
Commitments and Contingent Liabilities (Note 8)
Minority Interests .................................................................. 309 309
Stockholders' Equity
Preferred Stock, $.01 par value:
250,000,000 shares authorized; none issued ....................................... -- --
Class A Common Stock, $.01 par value:
3,000,000,000 shares authorized; 191,497,821 shares issued ....................... 2 2
Class B Common Stock, $.01 par value:
1,600,000,000 shares authorized; 436,543,573 shares issued and outstanding ....... 4 4
Additional Paid-In Capital ....................................................... 4,986 4,955
Accumulated Deficit .............................................................. (260) (244)
Accumulated Other Comprehensive Loss (Note 9) .................................... (379) (274)
Treasury Stock, at cost (916,800 and 249,863 Class A shares at June 30, 1999
and December 31, 1998, respectively) ......................................... (22) (5)
---------- ----------
Total Stockholders' Equity ................................................... 4,331 4,438
---------- ----------
Total ........................................................................ $ 15,891 $ 16,075
========== ==========
See Notes to Consolidated Financial Statements
2
5
CONOCO INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (NOTES 1 AND 3)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30
------------------------
1999 1998
---------- ----------
(IN MILLIONS)
Cash Provided by Operations
Net Income ............................................................ $ 197 $ 530
Adjustments to Reconcile Net Income to Cash Provided by Operations:
Depreciation, Depletion and Amortization .......................... 584 505
Dry Hole Costs and Impairment of Unproved Properties .............. 55 68
Deferred Income Taxes ............................................. 60 107
Income Applicable to Minority Interests ........................... 11 11
Other Noncash Charges and Credits--Net ............................ (23) (55)
Decrease (Increase) in Operating Assets:
Accounts and Notes Receivable ................................. (38) 85
Inventories ................................................... (70) (153)
Other Operating Assets ........................................ 41 (90)
Increase (Decrease) in Operating Liabilities:
Accounts Payable and Other Operating Liabilities ............... 53 (191)
Accrued Interest and Income Taxes .............................. (200) (269)
---------- ----------
Cash Provided by Operations ................................ 670 548
---------- ----------
Investment Activities
Purchases of Property, Plant and Equipment ............................ (762) (941)
Investments in Affiliates ............................................. (175) (109)
Proceeds from Sales of Assets and Subsidiaries ........................ 38 348
Net Decrease (Increase) in Short-Term Financial Instruments ........... 4 (16)
---------- ----------
Cash Used for Investment Activities ........................ (895) (718)
---------- ----------
Financing Activities
Cash Dividends (Note 5) ............................................... (207) --
Treasury Stock Purchases .............................................. (24) --
Short-Term Borrowings--Net ............................................ 984 (19)
Long-Term Borrowings--Receipts ........................................ 3,970 --
--Payments ........................................ (20) (2)
Related Party Borrowings--Receipts .................................... 865 260
--Payments .................................... (5,461) (62)
Related Party Notes Receivable--Receipts .............................. -- 25
--Payments .............................. -- (162)
Net Cash Contribution From (To) Owner ................................. 2 (177)
Decrease in Minority Interests ........................................ (11) (12)
---------- ----------
Cash Provided by (Used for) Financing Activities ........... 98 (149)
---------- ----------
Effect of Exchange Rate Changes on Cash ................................... (15) 1
---------- ----------
Decrease in Cash and Cash Equivalents ..................................... (142) (318)
Cash and Cash Equivalents at Beginning of Year ............................ 394 1,147
---------- ----------
Cash and Cash Equivalents at June 30 ...................................... $ 252 $ 829
========== ==========
See Notes to Consolidated Financial Statements
3
6
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
1. BASIS OF PRESENTATION
Conoco Inc., including its consolidated subsidiaries ("Conoco"), is an
integrated, global energy company that is involved in the Upstream and
Downstream operating segments of the petroleum industry. Activities of the
Upstream operating segment include exploring for, and developing, producing and
selling crude oil, natural gas and natural gas liquids. Activities of the
Downstream operating segment include refining crude oil and other feedstocks
into petroleum products, buying and selling crude oil and refined products and
transporting, distributing and marketing petroleum products. Conoco has four
reporting segments for its Upstream and Downstream businesses, reflecting
geographic division between the United States and International. Corporate and
other includes general corporate expenses, financing costs and other
non-operating items, and results for electric power and related-party insurance
operations.
The initial public offerings (the "Offerings") of the Class A common
stock of Conoco commenced on October 21, 1998, and the Class A common stock
began trading on the New York Stock Exchange on October 22, 1998. The Offerings
consisted of 191,456,427 shares of Class A common stock issued at a price of $23
per share, and represented E.I. du Pont de Nemours and Company's ("DuPont")
first step in the planned divestiture of Conoco. Through its ownership of 100
percent of Conoco's Class B common stock (436,543,573 shares), DuPont owned
approximately 70 percent of Conoco's common stock representing approximately 92
percent of the combined voting power of all classes of voting stock of Conoco at
June 30, 1999. The holders of Class A common stock and Class B common stock
generally have identical rights, except that holders of Class A common stock are
entitled to one vote per share while holders of Class B common stock are
entitled to five votes per share on matters to be voted on by stockholders.
Prior to the date of the Offerings, operations were conducted by Conoco
Inc., subsidiaries of Conoco Inc. and, in some cases, subsidiaries of DuPont.
The accompanying consolidated financial statements for the periods ended June
30, 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
Offerings. In this context, no direct ownership relationship existed among all
the various units comprising Conoco. Accordingly, net cash contributions from/to
owner prior to the Offerings included funds transferred between Conoco and
DuPont for operating needs, cash dividends paid and other equity transactions.
Effective at the time of the Offerings, Conoco's capital structure was
established and the transfer to Conoco of certain subsidiaries previously owned
by DuPont was substantially complete, resulting in direct ownership of those
subsidiaries. Accordingly, for periods subsequent to the Offerings, financial
information is presented on a consolidated basis.
On July 12, 1999, DuPont commenced an exchange offer in which it
offered its stockholders the opportunity to receive 2.95 shares of Conoco Class
B common stock in exchange for each share of DuPont common stock validly
tendered and accepted in the exchange offer, up to a maximum of 147,980,872
DuPont shares. The exchange offer expired on August 6, 1999, and DuPont
announced the final results of the exchange offer on August 12, 1999. As a
result of the exchange offer, all of the 436,543,573 shares of Class B common
stock owned by DuPont were distributed to DuPont stockholders. The exchange
offer was the final step in DuPont's planned divestiture of Conoco.
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 1998 Annual Report
on Form 10-K as amended.
4
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
2. RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
Effective January 1, 1999, Conoco adopted Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities," issued by the American
Institute of Certified Public Accountants. This Statement requires that costs
related to start-up activities, including organization costs, be expensed as
incurred. Conoco's policy has been one of expensing organization and other
similar costs of start-up operations. Accordingly, there was no effect on
earnings due to the adoption of this pronouncement.
In June 1998, the Financial Accounting Standard Board ("FASB") issued
Statement on Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which requires that companies
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. SFAS No. 133 provides, if certain
conditions are met, that a derivative may be specifically designated as (1) a
hedge of the exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment (fair value hedge), (2) a hedge of
the exposure to variable cash flows of a forecasted transaction (cash flow
hedge), or (3) a hedge of the foreign currency exposure of a net investment in a
foreign operation, an unrecognized firm commitment, an available-for-sale
security or a foreign-currency-denominated forecasted transaction (foreign
currency hedge). Under SFAS No. 133, the accounting for changes in fair value of
a derivative depends on its intended use and designation. For a fair value
hedge, the gain or loss is recognized in earnings in the period of change
together with the offsetting loss or gain on the hedged item. For a cash flow
hedge, the effective portion of the derivative's gain or loss is initially
reported as a component of other comprehensive income and subsequently
reclassified into earnings when the forecasted transaction affects earnings. For
a foreign currency hedge, the gain or loss is reported in other comprehensive
income as part of the cumulative translation adjustment. For all other items not
designated as hedging instruments, the gain or loss is recognized in earnings in
the period of change. In June 1999, the FASB approved the issuance of SFAS No.
137 deferring the effective date of SFAS No. 133 for one year. Consequently,
Conoco is required to adopt SFAS No. 133 by the first quarter of 2001 and is
currently assessing its effect on the consolidated financial statements.
3. RELATED PARTY TRANSACTIONS
The consolidated financial statements include significant transactions
with DuPont involving services (such as cash management, other financial
services, purchasing, legal, computer and corporate aviation) and general
corporate expenses that were provided between Conoco and DuPont organizations.
For periods prior to the Offerings, the costs of services were directly charged
or allocated between Conoco and DuPont using methods management believes are
reasonable. These methods include 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 and allocated to Conoco for these services were $8 and
$38 for the second quarter of 1999 and 1998, respectively, and $15 and $72 for
the first six months of 1999 and 1998, respectively, and are principally
included in selling, general and administrative expenses. Conoco provided DuPont
services such as computer, legal and purchasing, as well as certain technical
and plant operating services, which amounted to $6 and $11 for the second
quarter of 1999 and 1998, respectively, and $13 and $25 for the first six months
of 1999 and 1998, respectively. These charges to DuPont were treated as
reductions, as appropriate, of cost of goods sold and other operating expenses
and selling, general and administrative expenses.
Interest expense charged by DuPont was $19 and $28 for the second
quarter of 1999 and 1998, respectively, and $91 and $55 for the first six months
of 1999 and 1998, respectively, and reflects market-based interest rates. A
portion of historical related party interest cost and other interest expense of
$1 and $29 for the second quarter of 1999 and 1998, respectively, and $3 and $57
for the first six months of 1999 and 1998, respectively, was
5
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
capitalized as costs associated with major construction projects. Interest
income from DuPont was $17 for the second quarter of 1998, and $33 for the first
six months of 1998, and also reflects market-based interest rates.
Sales and other operating revenues include sales of products from
Conoco to DuPont, principally natural gas and gas liquids to supply several
DuPont plant sites. These sales totaled $88 and $99 for the second quarter of
1999 and 1998, respectively, and $179 and $209 for the first six months of
1999 and 1998, respectively. Also included, for the second quarter of 1998 and
the first six months of 1998, are revenues of $5 and $10 from insurance premiums
charged to DuPont for property and casualty coverage outside the United States.
Purchases of products from DuPont during these periods were not material.
Subsequent to the Offerings, these intercompany arrangements between DuPont and
Conoco, excluding insurance coverage provided to DuPont, are provided under
transition service agreements or other long-term agreements. It is not
anticipated that a change, if any, in these costs and revenues would have a
material effect on Conoco's results of operations or consolidated financial
position.
Accounts and notes receivable include amounts due from DuPont of $64
and $80 at June 30, 1999, and December 31, 1998, respectively, representing
current month balances of transactions between Conoco and DuPont, mainly product
sales and certain charges billed annually. Accounts payable include amounts due
DuPont of $10 and $52 at June 30, 1999, and December 31, 1998, respectively.
Other liabilities include accrued interest of $51 due DuPont at December 31,
1998.
In connection with the separation from DuPont, Conoco incurred
indebtedness to DuPont, consisting of a $7,500 dividend promissory note, other
intercompany notes and borrowings under a revolving credit agreement with
DuPont. Amounts representing borrowings from DuPont, including its subsidiary
organizations, are identified as related parties and presented separately in the
consolidated balance sheet. At December 31, 1998, Conoco had long-term
borrowings from related parties of $4,596, representing the balance under two
promissory notes due on or before January 2, 2000. At June 30, 1999, Conoco had
no aggregate related parties borrowings.
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 net proceeds of this offering of $3,970 were used to repay a
portion of Conoco's separation-related indebtedness to DuPont. The remaining
debt owed to DuPont was repaid in May 1999 with proceeds from a commercial paper
program. The commercial paper program provides Conoco with up to $2,000 of
borrowing capacity and gives Conoco the ability to issue commercial paper at any
time with various maturities not to exceed 270 days. As of June 30, 1999, Conoco
had $988 of commercial paper outstanding, bearing a weighted average interest
rate of 5.26 percent.
Upon repayment of the indebtedness to DuPont, Conoco and DuPont
terminated the revolving credit agreement.
4. EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing net income
(the numerator) by the weighted average number of common shares outstanding plus
the effects of award and fee deferrals that are invested in Conoco stock units
by certain employees and directors of Conoco (the denominator). Diluted EPS is
similarly computed, except that the denominator is increased to include the
dilutive effects of outstanding stock options awarded under Conoco's
compensation plans.
As described in Note 1, Conoco's capital structure was established at
the time of the Offerings. In accordance with SEC Staff Accounting Bulletin No.
98, the capitalization of Class B common stock has been retroactively reflected
for the purposes of presenting earnings per share for the second quarter and
first six months of 1998. For the second quarter and first six months of 1999,
basic EPS reflects the Class B common stock plus the weighted average number of
shares of Class A common stock and deferred award units outstanding at June 30,
1999. Corresponding diluted EPS for the second quarter and first six months of
1999 includes an additional 10,502,805
6
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
and 8,772,737 shares, respectively, representing the weighted average dilutive
effect of outstanding stock options that resulted from the concurrent
cancellation of DuPont stock options at the date of the Offerings and 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:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------------- ---------------------------
1999 1998 1999 1998
------------ ----------- ----------- -----------
Basic ................ 627,474,181 436,543,573 627,553,205 436,543,573
Diluted .............. 637,976,986 436,543,573 636,325,942 436,543,573
Variable stock options for 1,724,146 shares of common stock were
outstanding at June 30, 1999, but were not included in the computation of
diluted EPS since the threshold price of $32.88 required for these options to be
vested had not been reached.
Common shares held as treasury stock are deducted in determining the
number of shares outstanding.
For the three months and six months ended June 30, 1999, stock options
for 3,793 and 49,419 shares, respectively, of Class A common stock were
antidilutive and therefore were not included in the diluted earnings per share
calculation because the exercise price was greater than the average market
price.
PRO FORMA EPS
Pro forma EPS for the second quarter and the first six months of 1998
includes the shares of Conoco Class A and Class B common stock and deferred
award units outstanding immediately after the Offerings as if the Offerings had
been completed in the beginning of the period presented. Pro forma basic EPS is
based on pro forma net income for the second quarter and the first six months of
1998 divided by the total Class A and Class B common stock plus deferred award
units outstanding immediately after the Offerings (basic shares). For pro forma
diluted EPS, basic shares have been adjusted to reflect the effect of
outstanding stock options immediately after the Offerings as though outstanding
for the periods presented. Pro forma net income reflects historical income for
the periods adjusted to give effect to the transactions substantially completed
in October 1998 directly associated with the Offerings and separation from
DuPont.
7
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
The reconciliation of historical net income to pro forma net income
with pro forma adjustments separately identified is as follows:
THREE MONTHS ENDED
JUNE 30
-------------------------------------------------
1999 1998 1998
ACTUAL PRO FORMA ACTUAL
-------------- -------------- --------------
Historical net income ...................... $ 114 $ 214 $ 214
Lower interest income(1) .............. -- (21) --
Incremental interest expense(2) ....... -- (45) --
Related tax effects(3) ................ -- 11 --
-------------- -------------- --------------
Net income ................................. $ 114 $ 159 $ 214
============== ============== ==============
Earnings per share:
Basic ................................. $ .18 $ .25 $ .49
Diluted ............................... $ .18 $ .25 $ .49
Weighted average shares outstanding:
Basic ................................. 627,474,181 628,195,100 436,543,573
Diluted ............................... 637,976,986 636,746,186 436,543,573
-------------------
SIX MONTHS ENDED
JUNE 30
-------------------------------------------------
1999 1998 1998
ACTUAL PRO FORMA ACTUAL
-------------- -------------- --------------
Historical net income ...................... $ 197 $ 530 $ 530
Lower interest income(1) .............. -- (53) --
Incremental interest expense(2) ....... -- (91) --
Related tax effects(3) ................ -- 36 --
-------------- -------------- --------------
Net income ................................. $ 197 $ 422 $ 530
============== ============== ==============
Earnings per share:
Basic ................................. $ .31 $ .67 $ 1.21
Diluted ............................... $ .31 $ .66 $ 1.21
Weighted average shares outstanding:
Basic ................................. 627,553,205 628,195,100 436,543,573
Diluted ............................... 636,325,942 636,746,186 436,543,573
-------------------
(1) Lower interest income due to settlement of related party notes
receivables and the impact of currency exchange rates on certain
intercompany loans purchased by Conoco from DuPont.
(2) Incremental interest expense resulting from Conoco's new debt
structure.
(3) Tax effects associated with adjustments in (1) and (2) and the impact
of the calculation of income taxes on a separate return basis.
5. DIVIDENDS
DIVIDENDS
1999 Dividends Paid PER SHARE
------------------- ---------
First Quarter ................................ $ 0.14
Second Quarter ............................... $ 0.19
---------
Dividends Paid Through June 30, 1999 ......... $ 0.33
=========
8
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
On July 29, 1999, Conoco declared a quarterly cash dividend of $.19 per
share on each outstanding share of Class A and Class B common stock, payable on
September 11, 1999, to stockholders of record on August 13, 1999.
6. INVENTORIES
JUNE 30, DECEMBER 31,
1999 1998
---------- ----------
Crude oil and petroleum products ....... $ 718 $ 661
Other merchandise ...................... 23 22
Materials and supplies ................. 117 124
---------- ----------
$ 858 $ 807
========== ==========
7. RESTRUCTURING
In December 1998, Conoco announced, that as a result of a comprehensive
review of its assets and long-term strategy, Conoco was making organizational
realignments consistent with furthering the efficiency of operations and taking
advantage of synergies created by the upgrading of its asset portfolio. The
announced plans are being implemented in 1999 and will result in a reduction of
approximately 775 Upstream positions and 200 Downstream positions worldwide.
About three quarters of the Upstream positions and about half of the Downstream
positions affected will be in the United States. These reductions largely
reflect the elimination of redundancies at all levels resulting from past and
ongoing consolidation of assets into operations requiring less employee support
as well as better sharing of common services and functions across regions.
Associated with these announcements, Conoco recorded a charge in the fourth
quarter of 1998 of $82 pretax ($52 after-tax), nearly all of which represents
termination payments and related employee benefits to be made to persons
affected. During the first six months of 1999 approximately 465 persons left
Conoco under implementation of these realignment plans. The following table
shows the status of, and changes to, the restructuring reserve for the first six
months of 1999.
AMOUNTS
--------
Reserve at December 31, 1998 ..................... $ 82
Expenditures ................................. (23)
New accruals ................................. --
--------
Reserve at June 30, 1999 ......................... $ 59
========
We expect the restructuring efforts provided for in December 1998 will
be substantially completed by year-end 1999.
8. COMMITMENTS AND CONTINGENT LIABILITIES
Conoco has various purchase commitments for materials, supplies,
services and items of permanent investment incident to the ordinary conduct of
business. In the aggregate, such commitments are not at prices in excess of
current market. In addition, at June 30, 1999, Conoco had obligations under
international contracts to purchase, over periods up to 20 years, natural gas at
prices that were in excess of current market prices at June 30, 1999. No
material annual loss is expected from these long-term commitments.
Conoco is subject to various lawsuits and claims involving a variety of
matters including, along with other oil companies, actions challenging oil and
gas royalty and severance tax payments based on posted prices, and claims for
damages resulting from leaking underground storage tanks. As a result of the
separation agreement with DuPont, Conoco has also assumed responsibility for
current and future claims related to certain discontinued chemicals and
agricultural chemicals businesses operated by Conoco in the past. In general,
the effect on future
9
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
financial results is not subject to reasonable estimation because considerable
uncertainty exists. Conoco believes the ultimate liabilities resulting from such
lawsuits and claims may be material to results of operations in the period in
which they are recognized but will not materially affect the consolidated
financial position of Conoco.
Conoco is also subject to contingencies pursuant to environmental laws
and regulations that in the future may require further action to correct the
effects on the environment of prior disposal practices or releases of petroleum
substances by Conoco or other parties. Conoco has accrued for certain
environmental remediation activities consistent with the policy set forth in
Note 2 to the consolidated financial statements presented in Conoco's 1998 Form
10-K as amended. Conoco has assumed environmental remediation liabilities from
DuPont related to certain discontinued chemicals and agricultural chemicals
businesses operated by Conoco in the past, which are included in the
environmental accrual. At June 30, 1999, such accrual amounted to $125 and, in
management's opinion, was appropriate based on existing facts and circumstances.
Under adverse changes in circumstances, potential liability may exceed amounts
accrued. Although future remediation expenditures in excess of current reserves
are possible, the effect of any such excess on future financial results is not
subject to reasonable estimation because of the considerable uncertainty
regarding the cost and timing of expenditures. In the event future monitoring
and remediation expenditures are in excess of amounts accrued, they may be
significant to results of operations in the period recognized but management
does not anticipate they will have a material adverse effect on the consolidated
financial position of Conoco.
Conoco has indirectly guaranteed various debt obligations under
agreements with certain affiliated and other companies to provide specified
minimum revenues from shipments or purchases of products. At June 30, 1999,
these indirect guarantees totaled $9 and Conoco or DuPont, on behalf of and
indemnified by Conoco, had directly guaranteed $1,231 of the obligations of
certain affiliated companies and others. Conoco has a multiparty banking
agreement that provides for the indirect guarantee of bank account overdrafts
for itself and its subsidiaries. No material loss is anticipated by reason of
such agreements and guarantees.
9. COMPREHENSIVE INCOME
The following sets forth Conoco's comprehensive income for the periods
shown:
THREE MONTHS ENDED SIX MONTHS END
JUNE 30 JUNE 30
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
Net Income .................................. $ 114 $ 214 $ 197 $ 530
Other Comprehensive Loss:
Foreign Currency Translation Adjustment ..... (12) (9) (105) (27)
-------- -------- -------- --------
Comprehensive Income ........................ $ 102 $ 205 $ 92 $ 503
======== ======== ======== ========
10. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION
Conoco is involved in both the Upstream and Downstream operating
segments of the petroleum industry. Activities of the Upstream operating segment
include exploring for, and developing, producing and selling, crude oil, natural
gas and natural gas liquids. Activities of the Downstream operating segment
include refining crude oil and other feedstocks into petroleum products, buying
and selling crude oil and refined products and transporting, distributing and
marketing petroleum products. Conoco has four reporting segments for its
Upstream and Downstream businesses, reflecting geographic division between the
United States and International. Corporate and other includes general corporate
expenses, financing costs and other non-operating items, and results for
electric power and related-party insurance operations. Conoco sells its products
worldwide. Major products include crude oil, natural gas and refined products
that are sold primarily in the energy and transportation markets. Conoco's sales
are not materially dependent on a single customer or small group of customers.
Transfers between segments are on the basis of estimated market values.
10
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
UPSTREAM DOWNSTREAM
----------------------- -----------------------
UNITED UNITED CORPORATE
SEGMENT INFORMATION STATES INTERNATIONAL STATES INTERNATIONAL AND OTHER CONSOLIDATED
-------- ------------- -------- ------------- --------- ------------
THREE MONTHS ENDED JUNE 30, 1999
Sales and Other Operating Revenues ... $ 701 $ 443 $ 2,703 $ 2,402 $ 3 $ 6,252
Transfers Between Segments ........... 88 105 27 62 -- --
-------- -------- -------- -------- -------- --------
Total Operating Revenues ......... $ 789 $ 548 $ 2,730 $ 2,464 $ 3 $ 6,252
======== ======== ======== ======== ======== ========
Net Income (Loss) .................... $ 52 $ 86 $ 28 $ 19 $ (71) $ 114
THREE MONTHS ENDED JUNE 30, 1998
Sales and Other Operating Revenues ... $ 804 $ 352 $ 2,280 $ 2,041 $ 135 $ 5,612
Transfers Between Segments ........... 76 112 25 39 -- --
-------- -------- -------- -------- -------- --------
Total Operating Revenues ......... $ 880 $ 464 $ 2,305 $ 2,080 $ 135 $ 5,612
======== ======== ======== ======== ======== ========
Net Income (Loss) (1) ................ $ 56 $ 72 $ 52 $ 38 $ (4) $ 214
SIX MONTHS ENDED JUNE 30, 1999
Sales and Other Operating Revenues ... $ 1,407 $ 922 $ 4,665 $ 4,545 $ 24 $ 11,563
Transfers Between Segments ........... 162 184 45 105 -- --
-------- -------- -------- -------- -------- --------
Total Operating Revenues ......... $ 1,569 $ 1,106 $ 4,710 $ 4,650 $ 24 $ 11,563
======== ======== ======== ======== ======== ========
Net Income (Loss) .................... $ 92 $ 154 $ 45 $ 42 $ (136) $ 197
SIX MONTHS ENDED JUNE 30, 1998
Sales and Other Operating Revenues ... $ 1,667 $ 808 $ 4,465 $ 4,069 $ 339 $ 11,348
Transfers Between Segments ........... 165 219 46 86 -- --
-------- -------- -------- -------- -------- --------
Total Operating Revenues ......... $ 1,832 $ 1,027 $ 4,511 $ 4,155 $ 339 $ 11,348
======== ======== ======== ======== ======== ========
Net Income (Loss) (1) ................ $ 144 $ 215 $ 86 $ 95 $ (10) $ 530
- --------------------
(1) Includes after-tax benefits (charges) from special items:
THREE MONTHS ENDED JUNE 30, 1998
Asset Sales $ -- $ 31 $ -- $ -- $ -- $ 31
Litigation Charges -- -- (28) -- -- (28)
-------- -------- -------- -------- -------- --------
Total $ -- $ 31 $ (28) $ -- $ -- $ 3
======== ======== ======== ======== ======== ========
SIX MONTHS ENDED JUNE 30, 1998
Asset Sales $ -- $ 54 $ -- $ -- $ -- $ 54
Litigation Charges -- -- (28) -- -- (28)
-------- -------- -------- -------- -------- --------
Total $ -- $ 54 $ (28) $ -- $ -- $ 26
======== ======== ======== ======== ======== ========
11
14
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 six months of 1999 increased
$122 million to $670 million versus $548 million in the first six months of
1998. Cash provided by operations before changes in operating assets and
liabilities decreased $282 million compared to the first six months of 1998,
primarily due to lower net realized natural gas prices, weaker refined product
margins and increased interest expense, partly offset by higher volumes.
Positive changes to net operating assets and liabilities of $404 million were
due to timing of payments on other operating liabilities, lower 1999 tax
payments and higher 1999 accrued interest expense. Partly offsetting these
improvements was an increase in accounts receivable due to the rise in crude oil
prices during the first half of 1999 as compared to the decrease in crude oil
prices during the first half of 1998.
INVESTMENT ACTIVITIES
CAPITAL EXPENDITURES AND INVESTMENTS
SIX MONTHS ENDED
JUNE 30
------------------------
1999 1998
---------- ---------
(IN MILLIONS)
Upstream:
United States ...................................... $ 207 $ 384
International ...................................... 376 420
---------- ---------
Total Upstream ................................ 583 804
Downstream:
United States ...................................... 79 80
International ...................................... 119 161
---------- ---------
Total Downstream .............................. 198 241
Corporate and Other .................................... 13 5
---------- ---------
Total Capital Expenditures and Investments .... $ 794 $ 1,050
========== =========
United States ...................................... $ 299 $ 469
International ...................................... 495 581
---------- ---------
Total ......................................... $ 794 $ 1,050
========== =========
Total capital expenditures and investments (excluding amounts paid in
the first quarter of 1999 for the completion of 1998 acquisitions) were $794
million, a decrease of $256 million, or 24 percent, versus capital expenditures
and investments of $1,050 for the first six months of 1998. The decrease is
primarily due to lower spending on Upstream capital projects in the United
States. Described below is a more detailed analysis of capital expenditures and
investments by operating segments within the United States and International.
Capital expenditures and investments do not include expensed exploration costs.
Upstream
Upstream capital expenditures and investments (excluding amounts paid
in the first quarter of 1999 for the completion of 1998 acquisitions) totaled
$583 million in the first six months of 1999. The decrease was $221 million, or
approximately 27 percent, compared to $804 million for the first six months of
1998, primarily a result of an overall reduction in the capital expenditure
program, including exploration, partly offset by increased 1999 investments in
Petrozuata, a joint venture in Venezuela.
12
15
United States
During the first six months of 1999, Conoco spent $207 million on
Upstream capital projects in the United States, a decrease of $177 million, or
46 percent, from $384 million in the first six months of 1998. Expenditures in
the first six months of 1999 focused on the continued development of the Lobo
field in South Texas and the completion of the Ursa field, as well as the
drilling of the Magnolia discovery in the deepwater Gulf of Mexico.
International
International Upstream capital expenditures and investments totaled
$376 million in the first six months of 1999, a decrease of $44 million, or ten
percent, from $420 million in the first six months of 1998. The 1999
expenditures include investments in Petrozuata, as well as continued development
of various fields in the U.K. and the Norwegian sector of the North Sea.
Downstream
Downstream capital expenditures and investments totaled $198 million in
the first six months of 1999, a decrease of $43 million, or 18 percent, versus
$241 million in the first six months of 1998, primarily reflecting reduced
expenditures associated with the Melaka refinery in the Asia Pacific region that
was completed in the second half of 1998.
United States
During the first six months of 1999, Conoco spent $79 million on
Downstream capital projects in the United States, down $1 million, or one
percent, from $80 million in the first six months of 1998. The majority of the
funds spent were used to support continuing refining operations.
International
During the first six months of 1999, Conoco spent $119 million on
Downstream international capital expenditures and investments, down $42 million,
or 26 percent, from $161 million in the first six months of 1998. Expenditures
in the first six months of 1999 focused on strengthening Conoco's retail
marketing position, as well as on investment in the Melaka Refinery in Malaysia
and the Humber Refinery in the U.K.
Corporate and Other
Corporate and other capital expenditures totaled $13 million in the
first six months of 1999. Expenditures were primarily related to project costs
associated with the construction of power generation facilities.
PROCEEDS FROM SALES OF ASSETS AND SUBSIDIARIES
Conoco's investment activities also included proceeds of $38 million
from the sale of assets during the first six months of 1999, a decrease of $310
million, or 89 percent, from $348 million in the first six months of 1998, which
included $54 million from the sale of North Sea producing and non-producing
properties and $156 million from the sale of various Downstream assets in the
U.S. These sales resulted from Conoco's ongoing strategic portfolio realignment.
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 dividends, if any, capital expenditures and
working capital requirements and to service debt.
13
16
In connection with the separation from DuPont, Conoco incurred
indebtedness to DuPont, consisting of a $7,500 million dividend promissory note,
other intercompany notes and borrowings under a revolving credit agreement with
DuPont.
In April 1999, Conoco issued and sold in a public offering $4,000
million in senior fixed-rate debt securities with a weighted average interest
rate of 6.49 percent. The net proceeds of this offering of $3,970 million were
used to repay a portion of Conoco's separation-related indebtedness to DuPont.
The remaining debt owed to DuPont was repaid in May 1999 with proceeds from a
commercial paper program. The commercial paper program provides Conoco with up
to $2,000 million of borrowing capacity and gives Conoco the ability to issue
commercial paper at any time with various maturities not to exceed 270 days. As
of June 30, 1999, Conoco had $988 million of commercial paper outstanding,
bearing a weighted average interest rate of 5.26 percent.
Upon repayment of the indebtedness to DuPont, Conoco and DuPont
terminated the revolving credit agreement.
Total debt of Conoco was $5,105 million at June 30, 1999, up $364
million, versus $4,741 million at year-end 1998. The debt-to-capitalization
ratio at June 30, 1999 was 54 percent compared to 52 percent at year-end 1998.
14
17
(b) RESULTS OF OPERATIONS
CONSOLIDATED RESULTS
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30 JUNE 30
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
(IN MILLIONS)
SALES AND OTHER OPERATING REVENUES
Upstream
United States ........................................... $ 701 $ 804 $ 1,407 $ 1,667
International ........................................... 443 352 922 808
-------- -------- -------- --------
Total Upstream ....................................... 1,144 1,156 2,329 2,475
Downstream
United States ........................................... 2,703 2,280 4,665 4,465
International ........................................... 2,402 2,041 4,545 4,069
-------- -------- -------- --------
Total Downstream ..................................... 5,105 4,321 9,210 8,534
Corporate and Other ...................................... 3 135 24 339
-------- -------- -------- --------
Total Sales and Other Operating Revenues ............. $ 6,252 $ 5,612 $ 11,563 $ 11,348
======== ======== ======== ========
AFTER-TAX OPERATING INCOME
Upstream
United States ........................................... $ 52 $ 56 $ 92 $ 144
International ........................................... 86 72 154 215
-------- -------- -------- --------
Total Upstream ....................................... 138 128 246 359
Downstream
United States ........................................... 28 52 45 86
International ........................................... 19 38 42 95
-------- -------- -------- --------
Total Downstream ..................................... 47 90 87 181
Corporate and Other Operating ............................ (19) (19) (34) (39)
-------- -------- -------- --------
Total After-Tax Operating Income ..................... 166 199 299 501
Interest and Other Non-Operating Income (Expenses) Net
of Tax ................................................. (52) 15 (102) 29
-------- -------- -------- --------
CONSOLIDATED NET INCOME ..................................... $ 114 $ 214 $ 197 $ 530
======== ======== ======== ========
SPECIAL ITEMS
Consolidated net income includes the following non-recurring items on
an after-tax basis:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
(IN MILLIONS)
UPSTREAM
Asset sales .............................................. $ -- $ 31 $ -- $ 54
-------- -------- -------- --------
Total Upstream Special Items ......................... $ -- $ 31 $ -- $ 54
======== ======== ======== ========
DOWNSTREAM
Litigation charges ....................................... $ -- $ (28) $ -- $ (28)
-------- -------- -------- --------
Total Downstream Special Items ....................... $ -- $ (28) $ -- $ (28)
======== ======== ======== ========
TOTAL SPECIAL ITEMS ........................................ $ -- $ 3 $ -- $ 26
======== ======== ======== ========
There were no special items for the first six months of 1999. Special
items for the first six months of 1998 reflected a $23 million gain from the
sale of certain properties in the North Sea, and a $31 million gain from the
sale of an international subsidiary, partly offset by a $28 million charge for
litigation.
15
18
Second Quarter 1999 versus Second Quarter 1998
Conoco had second quarter consolidated net income of $114 million in
1999, down 47 percent from $214 million in the second quarter of 1998, and down
46 percent from second quarter of 1998 earnings before special items of $211
million. Lower earnings primarily reflected significantly weaker refining
margins, higher interest expense and lower net realized natural gas prices,
partly offset by increased natural gas volumes, higher crude oil prices,
improved equity earnings, reduced exploration expenses and higher refining and
marketing volumes.
Sales and other operating revenues for the second quarter of 1999 were
$6,252 million, up 11 percent from $5,612 million in the second quarter of 1998.
The rise was primarily due to higher refined product prices and sales volumes,
as well as higher crude oil prices and increased natural gas volumes, which were
partly offset by reduced power trading revenues and lower natural gas prices.
Conoco's worldwide net realized crude oil price was $15.15 per barrel for the
quarter, up $2.70 per barrel, or 22 percent, from $12.45 per barrel in the
second quarter of 1998. Worldwide net realized natural gas prices averaged $1.83
per thousand cubic feet (mcf) for the quarter, compared with $2.15 per mcf in
the same period in 1998, a reduction of 15 percent.
Worldwide crude oil and condensate production in the second quarter of
1999 was 312,000 barrels per day versus 314,000 barrels per day in the second
quarter of 1998, a one percent decrease. U.S. crude oil and condensate
production was down 12 percent, or 6,000 barrels per day, primarily due to
disposition of various small, non-strategic properties in 1998 and natural
decline; however international production was up two percent due to the new
production of condensate from the Britannia field, crude oil from the Banff
field and crude oil from Petrozuata.
Worldwide natural gas production in the second quarter of 1999 was up
20 percent to 1,579 million cubic feet per day from 1,318 million cubic feet per
day in the second quarter of 1998. U.S. natural gas deliveries were up four
percent from the second quarter of 1998, primarily from increased production
from prior development drilling in the Lobo field in South Texas, partly offset
by dispositions of some non-strategic assets and natural production declines.
International natural gas deliveries were up 51 percent from the second quarter
of 1998 due to the new production from the Britannia and Viking Phoenix gas
fields in the U.K.
Worldwide refined product sales were 1,163,000 barrels per day, up ten
percent versus 1998. Crude oil and refined product buy/sell and natural gas and
electric power resale activities in the second quarter of 1999 totaled $556
million, down 54 percent compared to $1,200 million in the second quarter of
1998, primarily due to reduced crude oil and power trading activities.
Cost of goods sold and other operating expenses for the second quarter
of 1999 totaled $3,882 million, an increase of $521 million, or 16 percent,
compared to $3,361 million in the second quarter of 1998, primarily due to
higher refinery feedstock costs, partly offset by a reduction in power trading
activities.
Exploration expenses for the second quarter of 1999 totaled $74
million, a decline of $35 million, or 32 percent, compared to $109 million in
the second quarter of 1998, primarily driven by cost reduction efforts, a more
focused exploration program and lower dry hole costs.
Depreciation, depletion and amortization ("DD&A") for the second
quarter of 1999 totaled $282 million, an increase of $44 million, or 18 percent,
compared to $238 million in the second quarter of 1998, primarily due to
increased Upstream production volumes, field mix and DD&A rate changes.
Provision for income taxes for the second quarter of 1999 totaled $46
million, down 28 percent compared to $64 million for the second quarter of 1998.
This reflected lower pretax earnings partially offset by an effective tax rate
of approximately 29 percent in the second quarter of 1999 compared to 23 percent
in the second quarter of 1998.
First Six Months 1999 versus First Six Months 1998
Conoco had first six months consolidated net income of $197 million in
1999, down 63 percent from $530 million in the first six months of 1998 and down
61 percent from the first six months 1998 earnings before special items of $504
million. Lower earnings primarily reflected significantly weaker refined product
margins, higher interest expense, lower net realized natural gas prices and
fewer gains from asset dispositions than in 1998, partly offset by increased
natural gas volumes and refining and marketing volumes, reduced exploration
expenses and improved equity earnings.
16
19
Sales and other operating revenues for the first six months of 1999
were $11,563 million, up two percent from $11,348 million in the first six
months of 1998, primarily due to higher refined product prices and increased
natural gas production partly offset by reduced power trading revenues and lower
natural gas prices. Conoco's worldwide net realized crude oil price was $13.02
per barrel for the first six months of 1999, down $0.06 per barrel, or flat
versus the $13.08 per barrel in the first six months of 1998. Worldwide net
realized natural gas prices averaged $1.96 per thousand cubic feet (mcf) for the
first six months of 1999, compared with $2.39 per mcf in the same period in
1998, a reduction of 18 percent.
Worldwide crude oil and condensate production in the first six months
of 1999 was 319,000 barrels per day versus 317,000 barrels per day in the first
six months of 1998, a one percent increase. Worldwide natural gas production in
the first six months of 1999 was up 30 percent to 1,697 million cubic feet per
day from 1,308 million cubic feet per day of 1998. U.S. natural gas production
was up 11 percent, primarily as a result of increased production from prior
development drilling in the Lobo field in South Texas. International natural gas
production was up 61 percent due to the new production from the Britannia and
Viking Phoenix gas fields in the U.K.
Worldwide refined product sales were 1,136,000 barrels per day, up ten
percent versus 1998. Crude oil and refined product buy/sell and natural gas and
electric power resale activities in the first six months of 1999 totaled $1,513
million, down 37 percent compared to $2,400 million in the first six months of
1998, primarily due to reduced crude oil and power trading activities.
Cost of goods sold and other operating expenses for the first six
months of 1999 totaled $6,887 million, an increase of $133 million, or two
percent, compared to $6,754 million in the first six months of 1998, primarily
due to higher refinery feedstock costs, partly offset by the reduction in power
trading activities.
Exploration expenses for the first six months of 1999 totaled $120
million, a decline of $56 million, or 32 percent, compared to $176 million in
the first six months of 1998, primarily driven by cost reduction efforts, a more
focused exploration program and lower dry hole costs.
Depreciation, depletion and amortization for the first six months of
1999 totaled $584 million, an increase of $79 million, or 16 percent, compared
to $505 million in the first six months of 1998, primarily due to increased
Upstream production volumes, field mix and DD&A rate changes.
Provision for income taxes for the first six months of 1999 totaled $97
million, down 62 percent compared to $254 million for the first six months of
1998 primarily driven by lower pretax income with the effective tax rate
essentially flat versus the prior year.
UPSTREAM SEGMENT RESULTS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
(IN MILLIONS)
After-Tax Operating Income
United States ........................ $ 52 $ 56 $ 92 $ 144
International ........................ 86 72 154 215
-------- -------- -------- --------
After-Tax Operating Income ........ $ 138 $ 128 $ 246 $ 359
Special Items
United States ........................ $ -- $ -- $ -- $ --
International ........................ -- (31) -- (54)
-------- -------- -------- --------
Special Items ..................... $ -- $ (31) $ -- $ (54)
Earnings Before Special Items
United States ........................ $ 52 $ 56 $ 92 $ 144
International ........................ 86 41 154 161
-------- -------- -------- --------
Earnings Before Special Items ..... $ 138 $ 97 $ 246 $ 305
======== ======== ======== ========
17
20
Second Quarter 1999 versus Second Quarter 1998
Upstream earnings before special items were $138 million in the second
quarter of 1999, up 42 percent from $97 million in the second quarter of 1998.
U.S. Upstream earnings before special items totaled $52 million in the second
quarter of 1999, down seven percent from $56 million in the comparable period of
1998. Lower U.S. Upstream earnings were due to lower natural gas prices,
decreased crude oil volumes resulting from natural declines and the sale of
various small, non-strategic properties in 1998, higher depreciation, depletion
and amortization charges and fewer gains from asset dispositions. These factors
more than offset increased natural gas production, higher crude oil prices and
lower exploration expenses. Natural gas volumes in the United States were up
four percent, as production from the Lobo field in South Texas increased more
than production declined elsewhere. International Upstream earnings before
special items were $86 million, up 110 percent, from $41 million in the
comparable period in 1998, primarily attributable to higher oil prices,
increased natural gas production, improved equity earnings and lower exploration
expenses, partly offset by lower natural gas prices and fewer gains from
non-strategic asset dispositions.
First Six Months 1999 versus First Six Months 1998
Upstream earnings before special items were $246 million in the first
six months of 1999, down 19 percent from $305 million in the first six months of
1998. U.S. Upstream earnings before special items totaled $92 million in the
first six months of 1999, down 36 percent from $144 million in the comparable
period of 1998. Lower U.S. Upstream earnings were due to lower natural gas
prices, decreased crude oil volumes resulting from natural declines and the sale
of various small, non-strategic properties in 1998, higher depreciation,
depletion and amortization charges and fewer gains from asset dispositions.
These factors more than offset increased natural gas production and lower
exploration expenses. Natural gas volumes in the United States were up 11
percent, as production from the Lobo field in South Texas increased more than
production declined elsewhere. International Upstream earnings before special
items were $154 million, down four percent, from $161 million in the comparable
period in 1998, primarily attributable to lower natural gas prices, higher
depreciation, depletion and amortization charges and fewer gains from
non-strategic asset dispositions, partly offset by increased natural gas and
condensate production from the Britannia field, higher equity earnings and lower
exploration expenses.
DOWNSTREAM SEGMENT RESULTS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
(IN MILLIONS)
After-Tax Operating Income
United States ..................... $ 28 $ 52 $ 45 $ 86
International ..................... 19 38 42 95
-------- -------- -------- --------
After-Tax Operating Income ...... $ 47 $ 90 $ 87 $ 181
Special Items
United States ..................... $ -- $ 28 $ -- $ 28
International ..................... -- -- -- --
-------- -------- -------- --------
Special Items ................... $ -- $ 28 $ -- $ 28
Earnings Before Special Items
United States ..................... $ 28 $ 80 $ 45 $ 114
International ..................... 19 38 42 95
-------- -------- -------- --------
Earnings Before Special Items ... $ 47 $ 118 $ 87 $ 209
======== ======== ======== ========
Second Quarter 1999 versus Second Quarter 1998
Downstream earnings before special items were $47 million for the
second quarter of 1999, down 60 percent from $118 million in the comparable
period in 1998. U.S. Downstream earnings before special items were $28 million
for the second quarter of 1999, down 65 percent from $80 million for the second
quarter of 1998, due to
18
21
significantly weaker refining margins, partly offset by higher refined product
sales volumes, benefits from a tax settlement and gains from the sale of
non-strategic assets. International Downstream earnings before special items
were $19 million for the second quarter of 1999, down 50 percent from $38
million in the comparable period in 1998, reflecting significantly lower
refining margins that were only partly offset by higher refined product sales
volumes.
First Six Months 1999 versus First Six Months 1998
Downstream earnings before special items were $87 million for the first
six months of 1999, down 58 percent from $209 million in the comparable period
in 1998. U.S. Downstream earnings before special items were $45 million for the
first six months of 1999, down 61 percent from $114 million for the first six
months of 1998, due to very weak refining margins, partly offset by higher
refined product sales volumes. International Downstream earnings before special
items were $42 million for the first six months of 1999, down 56 percent from
$95 million in the comparable period in 1998, reflecting significantly lower
refining margins that were only partly offset by higher refined product sales
volumes and marketing margins.
CORPORATE AND OTHER SEGMENT RESULTS
CORPORATE AND OTHER OPERATING
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
(IN MILLIONS)
After-Tax Operating Income (Loss) .......... $ (19) $ (19) $ (34) $ (39)
Special Items .............................. -- -- -- --
-------- -------- -------- --------
Earnings (Losses) Before Special Items ..... $ (19) $ (19) $ (34) $ (39)
======== ======== ======== ========
Second Quarter 1999 versus Second Quarter 1998
Corporate and other operating losses were $19 million for the second
quarter of 1999, equal to the comparable period in 1998.
First Six Months 1999 versus First Six Months 1998
Corporate and other operating losses were $34 million for the first six
months of 1999, an improvement of 13 percent from a loss of $39 million for the
comparable period in 1998, resulting from lower administrative costs.
INTEREST AND OTHER NON-OPERATING INCOME (EXPENSES) NET OF TAX
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
(IN MILLIONS)
Interest Expense on Debt .............. $ (49) $ -- $ (96) $ --
Interest Income ....................... 3 20 8 39
Exchange Gains (Losses) ............... 4 (2) 6 5
Other Corporate Expenses (1) .......... (10) (3) (20) (15)
-------- -------- -------- --------
Total ............................. $ (52) $ 15 $ (102) $ 29
======== ======== ======== ========
- -------------------------
(1) Includes other non-operating items.
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Second Quarter 1999 versus Second Quarter 1998
Interest and other non-operating expenses for the second quarter of
1999 were a loss of $52 million compared to income of $15 million in the
comparable period in 1998, primarily reflecting an increase in interest expense
from separation-related debt and lower interest income.
First Six Months 1999 versus First Six Months 1998
Interest and other non-operating expenses for the first six months of
1999 were a loss of $102 million compared to income of $29 million in the
comparable period in 1998, primarily reflecting an increase in interest expense
from separation-related debt and lower interest income.
TAX MATTERS
As a result of the separation and the Offerings, Conoco is no longer
able to combine the results of its operations with those of DuPont in reporting
income for U.S. federal income tax purposes and for state and non-U.S. income
tax purposes in certain states and countries. Conoco believes this will not have
a material adverse effect on its earnings.
In connection with the separation from DuPont, Conoco and DuPont
entered into a tax sharing agreement. Several matters under the tax sharing
agreement are currently in dispute between Conoco and DuPont. DuPont's
obligations to Conoco arising out of the most significant of these matters could
range from zero to up to approximately $160 million, depending on the outcome of
the dispute. The effect of the dispute is not currently 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.
During the period ended June 30, 1999, Conoco's net deferred tax assets
increased, primarily as a result of the recognition of $90 million of
carryforwards related to foreign tax credits, alternative fuels tax credits and
the U.S. alternative minimum tax. Conoco believes it is more likely than not
that the additional deferred tax assets related to these foreign tax credits and
alternative fuels tax credits will be realized in the current year. Further,
Conoco believes it is more likely than not the alternative minimum tax credits
will be realized in future years.
YEAR 2000
Historically, many computerized systems have used two digits rather
than four digits to define the applicable year, which could result in
recognizing a date using "00" as the year 1900 rather than the year 2000. This
could result in major failures or miscalculations.
Conoco recognizes that the impact of the Year 2000 issue extends beyond
traditional computer hardware and software to automated plant systems and
instrumentation, as well as to third parties. The Year 2000 issue is being
addressed within Conoco by its individual business units, and progress is
reported periodically to management and the board of directors.
Conoco has committed resources to conduct risk assessments and to take
corrective action, where required, within each of the following areas:
information technology, plant systems and external parties. Information
technology includes telecommunications as well as traditional computer software
and hardware in the mainframe, midrange and desktop environments. Plant systems
include all automation and embedded chips used in production, plant,
transportation and marketing facilities. External parties include any third
party with which Conoco interacts. Most of the resources committed to this work
are internal.
Managing Year 2000 risk is being handled in three tiers - through Year
2000 Compliance Plans, Mitigation Plans and Emergency Recovery Plans. The Year
2000 Compliance Plans include inventorying and assessing risk, and outlining
action to be taken for each of these items. Year 2000 Compliance Plans have been
developed and are being implemented for all business units. Mitigation Plans
outline a list of actions that will be taken at specified times to further
minimize risk. These plans are currently being developed for areas in which the
Year 2000 Compliance Plans may not adequately address all of the relevant risk
issues. For example, Conoco cannot be guaranteed that external partners will be
ready for the year 2000. Therefore, operations that rely heavily on external
partners will develop Mitigation Plans. Mitigation Plans will be developed, as
needed, for all business units by the end of the third quarter of 1999.
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Emergency Recovery Plans already exist in many of Conoco's operations
to address other issues such as oil tanker spills and plant explosions.
Typically, the Emergency Recovery Plans address the results of single events.
These plans are designed to facilitate the resumption of normal operations
following a disruption. In contrast to a "normal" disruption, the scope of Year
2000 issues may cause multiple concurrent events. Accordingly, it is expected
that the Emergency Recovery Plans will be reviewed and supplemented to address
Year 2000 risks by the end of the third quarter of 1999.
Currently contingency plans call for close monitoring of information
technology, field operations and external supply during and around critical
dates. Additional staff including senior management will be available to monitor
operations and deal with disruptions that might occur. Some critical inventories
and products will be increased.
The progress reported below covers only the replacement or upgrade of
existing non-compliant systems. Replacement projects planned and managed outside
of the Year 2000 Program have been excluded. Approximately 87 percent of the
work required to fix Year 2000 issues identified by the Year 2000 Program has
been completed.
In the information technology area, inventory and assessment audits
have been completed. Corrective action in the mainframe, midrange and desktop
environments will be completed by the end of the third quarter of 1999 and
telecommunications and business application software by the end of the fourth
quarter of 1999.
In the plant systems area, inventory and assessment audits have been
completed. Conoco is relying on vendor testing of hardware, software and
embedded chips, with certification and validation through limited internal
testing and/or industry test results. Downtime for normally scheduled plant
maintenance will be used to conduct testing, with completion of corrective
action expected by the end of the third quarter of 1999.
With respect to external parties, the inventory of critical external
parties and initial risk assessment is complete. Various methods are being used
to assess and monitor external party readiness including letters, phone calls,
meetings and SEC disclosure statements. Monitoring of risk in this area will
continue throughout 1999.
The total cost of Year 2000 activities is not expected to be material
to Conoco's operations, liquidity or capital resources. Costs are being managed
within each business unit. The total estimated cost for Conoco's Year 2000 work
is $46 million. 1997 costs were $5 million, 1998 costs were $25 million and
through the second quarter 1999 costs were $8 million. This includes costs for
the replacement or upgrade of existing non-compliant systems. Replacement
projects planned and managed outside of the Year 2000 program have been
excluded. In order to control costs, Conoco is taking advantage of savings
presented by its memberships in industry organizations.
Conoco cannot guarantee that all third parties of business importance
to Conoco will be prepared for the Year 2000. Therefore, the most likely worst
case scenario may occur if Conoco's contingency plans do not adequately address
the nature or extent of disruptions caused by external third parties, or by
abnormal supply and demand patterns in late 1999 and early 2000. These
disruptions could materially affect Conoco's operations, liquidity or capital
resources. Given the diverse and global nature of Conoco operations, varying
degrees of readiness and risk exist at each location. The company cannot
quantify the impact or probability of these failures. Therefore, the company
cannot further anticipate the potential impact of a worst case scenario. Conoco
is developing contingency plans to address issues within Conoco's control. This
program minimizes, but does not eliminate, risks related to external parties.
This disclosure is provided pursuant to Securities Exchange Act Release
No. 39-40277. As such, it is protected as a forward-looking statement under
Section 21E of the Securities Exchange Act of 1934. See Part II, Item 5(a)
"Disclosure Regarding Forward-Looking Information." This disclosure is also
subject to protection under the Year 2000 Information and Readiness Disclosure
Act of 1998, 15 USC Section 1 (1999), as a "Year 2000 Statement" and "Year 2000
Readiness Disclosure" as defined therein.
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RESTRUCTURING
In December 1998, Conoco announced, that as a result of a comprehensive
review of its assets and long-term strategy, Conoco was making organizational
realignments consistent with furthering the efficiency of operations and taking
advantage of synergies created by the upgrading of its asset portfolio. The
announced plans are being implemented in 1999 and will result in a reduction of
approximately 775 Upstream positions and 200 Downstream positions worldwide.
About three quarters of the Upstream positions and about half of the Downstream
positions affected will be in the United States. These reductions largely
reflect the elimination of redundancies at all levels resulting from past and
ongoing consolidation of assets into operations requiring less employee support
as well as better sharing of common services and functions across regions.
Associated with these announcements, Conoco recorded a charge in the fourth
quarter of 1998 of $82 million pretax ($52 million after-tax), nearly all of
which represents termination payments and related employee benefits to be made
to persons affected. During the first six months of 1999 approximately 465
persons left Conoco under implementation of these realignment plans.
Restructuring costs of $23 million were charged against the reserve for the
first six months of 1999.
We expect the restructuring efforts provided for in December 1998 will
be substantially completed by year-end 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISKS
Conoco operates in the worldwide crude oil, refined product, natural
gas, natural gas liquids and electric power markets and is exposed to
fluctuations in hydrocarbon prices, electric power prices, foreign currency
rates, and interest rates that can affect the revenues and cost of operating,
investing and financing. Conoco's management has used and intends to use
financial and commodity-based derivative contracts to reduce the risk in overall
earnings and cash flow when the benefits provided are anticipated to more than
offset the risk management costs involved.
Conoco has established a Financial Risk Management Policy Framework
that provides guidelines for entering into contractual arrangements
(derivatives) to manage Conoco's commodity price, foreign currency rate and
interest rate risks. The Conoco Risk Management Committee has ongoing
responsibility for the content of this policy and has principal oversight
responsibility to ensure Conoco is in compliance with the policy and that
procedures and controls are in place for the use of commodity, foreign currency
and interest rate instruments. These procedures clearly establish derivative
control and valuation processes, routine monitoring and reporting requirements
and counterparty credit approval procedures. Additionally, Conoco's internal
audit group conducts routine reviews of these risk management activities to
assess the adequacy of internal controls. The audit results are reviewed by the
Conoco Risk Management Committee and by management.
The counterparties to these contractual arrangements are limited to
major financial institutions and other established companies in the petroleum
industry. Although Conoco is exposed to credit loss in the event of
nonperformance by these counterparties, this exposure is managed through credit
approvals, limits and monitoring procedures, and limits to the period over which
unpaid balances are allowed to accumulate. Conoco has not experienced
nonperformance by counterparties to these contracts, and no material loss would
be expected from any such nonperformance.
Commodity Price Risk
Conoco enters into energy-related futures, forwards, swaps and options
in various markets to balance its physical systems, to meet customer needs and
to manage its price exposure on anticipated crude oil, natural gas, refined
product and electric power transactions. These instruments provide a natural
extension of the underlying cash market and are used to physically acquire a
portion of supply requirements as well as to manage pricing of near term
physical requirements. The commodity futures market has underlying principles of
increased liquidity and longer trading periods than the cash market and is one
method of managing price risk in the energy business.
Conoco policy is to generally be exposed to market pricing for
commodity purchases and sales. From time to time, management may use derivatives
to establish longer-term positions to hedge the price risk for Conoco's equity
crude oil and natural gas production as well as refinery margins.
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Under Conoco's policy, hedging includes only those transactions that
offset physical positions and reduce overall company exposure to price risk.
Trading is defined as any transaction that does not meet the definition of
hedging. Much of the portfolio is reported in the trading category and, thereby,
receives mark-to-market accounting. As a consequence, current revenues and costs
reflect the full effect of price movement on most of Conoco's trading activity.
Those activities that qualify as hedges use deferral accounting.
The fair value gain (loss) of outstanding derivative commodity
instruments and the change in fair value that would be expected from a ten
percent adverse price change are shown in the table below:
CHANGE IN FAIR VALUE
FROM 10% ADVERSE
FAIR VALUE PRICE CHANGE
---------- ----------
(IN MILLIONS)
AT JUNE 30, 1999
Crude Oil and Refined Products
Hedging .................................... $ (1) $ (2)
Trading .................................... 19 (4)
---------- ----------
Combined ................................... $ 18 $ (6)
Natural Gas
Hedging .................................... $ 13 $ (15)
Trading .................................... (1) --
---------- ----------
Combined ................................... $ 12 $ (15)
AT DECEMBER 31, 1998
Crude Oil and Refined Products
Hedging .................................... $ (1) $ (5)
Trading .................................... 3 3
---------- ----------
Combined ................................... $ 2 $ (2)
Natural Gas
Hedging .................................... $ (25) $ (20)
Trading .................................... (2) (1)
---------- ----------
Combined ................................... $ (27) $ (21)
The fair values of the futures contracts are based on quoted market
prices obtained from the New York Mercantile Exchange or the International
Petroleum Exchange of London. The fair values of swaps and other
over-the-counter instruments are estimated based on quoted market prices of
comparable contracts and approximate the gain or loss that would have been
realized if the contracts had been closed out at the end of the reporting
period.
All hedge positions offset physical positions exposed to the cash
market; none of these offsetting physical positions is included in the above
table.
Price-risk sensitivities were calculated by assuming an
across-the-board ten percent adverse change in prices regardless of term or
historical relationships between the contractual price of the instrument and the
underlying commodity price. In the event of an actual ten percent change in
prompt month crude or natural gas prices, the fair value of Conoco's derivative
portfolio would typically change less than that shown in the table due to lower
volatility in out-month prices.
Foreign Currency Risk
Conoco has foreign currency exchange rate risk resulting from
operations in approximately 40 countries around the world. Conoco does not
comprehensively hedge its exposure to currency rate changes, although it may
choose to selectively hedge exposure to foreign currency exchange rate risk.
Examples include firm commitments for capital projects, certain local currency
tax payments, and cash returns from net investments in foreign affiliates to be
remitted within the coming year. There were no open forward exchange contracts
at the end of the reporting period.
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Interest Rate Risk
Prior to the Offerings, Conoco had no significant interest rate risk to
manage. In March 1999, Conoco hedged interest rate exposure on a portion of
public debt that was issued in April 1999 (see Note 3). The hedge was
accomplished by purchasing put options on U.S. Treasury securities with a
maturity date matching the expected pricing date of the debt offering and having
a total notional amount of $2.5 billion spread over five-year, ten-year and
30-year maturities proportional to the expected tranches of company debt to be
issued. In April 1999, subsequent to purchasing the put options, U.S. Treasury
interest rates decreased and the put options expired out of the money. Before
the public debt issuance, Conoco entered into interest rate lock agreements
proportional to the expected tranches of debt to be issued. Overall, the two
hedging transactions resulted in an immaterial net gain that will be amortized
against interest expense over the life of the various debt maturities.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 6, 1996, the Department of Justice filed a complaint in the
United States District Court for the District of Montana against Yellowstone
Pipeline Company ("YPL") and the Conoco Pipe Line Company as a 40 percent owner
and operator of YPL. The Complaint alleges discharges of oil from a YPL pipeline
in January 1993 and seeks civil penalties of up to $25,000 per day for each
violation or up to $1,000 for each barrel of oil discharged. The parties have
reached an agreement to settle the case that requires the parties to pay a
penalty of $165,000 and construct a fish passageway in the Jocko River to
enhance the Bull Trout population. The court entered final settlement documents,
and Conoco is in the process of implementing the terms of the settlement
agreement.
On August 31, 1998, the Louisiana Department of Environmental Quality
("LDEQ") issued a notice of violation against Conoco for failure to maintain
control equipment to control emissions from the sulfur pits at the Lake Charles
Refinery. On November 11, 1998, the LDEQ notified Conoco that it is seeking a
fine of $300,000. Conoco is contesting these allegations and the proposed
penalty and is seeking a hearing in this manner.
On February 18, 1999, the Oklahoma Department of Environmental Quality
issued a notice of violation to Conoco's Ponca City refinery alleging certain
violations of the Oklahoma Air Pollution Control Rules. Conoco believes this
notice of violation will result in the Department seeking monetary sanctions of
less than $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 based on posted prices, and claims for
damages resulting from leaking underground storage tanks. As a result of its
separation from DuPont, Conoco has also assumed responsibility for current and
future claims related to 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. We believe the ultimate liabilities resulting
from such lawsuits and claims may be material to results of operations in the
period in which they are recognized but will not materially affect the
consolidated financial position of Conoco.
ITEM 5. OTHER INFORMATION
(a) 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 relating to our operations
on our current expectations, estimates and projections about us 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 failure or delays in achieving expected production from oil
and gas development projects;
o uncertainties inherent in predicting oil and gas reserves and
oil and gas reservoir performance;
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o lack of exploration success;
o 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 disruption to our operations due to untimely or incomplete
resolution of Year 2000 issues by us or other entities;
o liability resulting from litigation;
o world economic and political conditions; and
o changes in tax and other laws applicable to our business
(b) SPLIT-OFF OF CONOCO FROM DUPONT
On July 12, 1999, DuPont commenced an exchange offer in which it
offered its stockholders the opportunity to receive 2.95 shares of Conoco Class
B common stock in exchange for each share of DuPont common stock validly
tendered and accepted in the exchange offer, up to a maximum of 147,980,872
DuPont shares. The exchange offer expired on August 6, 1999, and DuPont
announced the final results of the exchange offer on August 12, 1999. As a
result of the exchange offer, all of the 436,543,573 shares of Class B common
stock owned by DuPont were distributed to DuPont stockholders. The exchange
offer was the final step in DuPont's planned divestiture of Conoco. A copy of
the press release of DuPont is attached as Exhibit 99.1 hereto.
In connection with the completion of the exchange offer, Mr. Edgar S.
Woolard and Mr. Gary M. Pfeiffer resigned from Conoco's board of directors as of
the close of business on August 11, 1999. Mr. Archie W. Dunham was elected
chairman of the board upon Mr. Woolard's resignation. The moves create two
additional vacancies on Conoco's board that are expected to be filled in the
near future. A copy of the Conoco press release is attached as Exhibit 99.2
hereto.
(c) AMENDMENT TO RIGHTS AGREEMENT
On July 29, 1999, Conoco amended its rights agreement to provide for
uncertificated shares of Class A and Class B common stock owned by registered
holders in book-entry accounts at Conoco's transfer agents. The amendment to the
rights agreement is attached as Exhibit 4.1 hereto and is incorporated by
reference herein in its entirety.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The exhibit index filed with this Form 10-Q is on page 28.
(b) REPORTS ON FORM 8-K
On April 16, 1999, Conoco filed a Current Report on Form 8-K for the
following:
Item. 5 Other Events and Item 7. Financial Statements and Exhibits
regarding a Terms Agreement dated April 15, 1999, between Conoco and
Credit Suisse First Boston Corporation and Salomon Smith Barney Inc.,
as representatives of several underwriters, relating to the $4,000
million offering of senior debt securities (Notes) by Conoco under its
Registration Form S-3 (Registration No. 333-72291). The Form 8-K
included as exhibits (i) the Terms Agreement, (ii) the form of the
Underwriting Agreement, (iii) the terms of the Notes, including the
form of Note, (iv) an opinion of Baker & Botts, L.L.P., counsel to the
Company, as to certain tax matters relating to the Notes and (v) the
Statement of Eligibility and Qualification under the Trust Indenture
Act of 1939 of the Trustee on Form T-1.
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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: August 13, 1999
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
4.1 Second Amendment to Rights Agreement dated as of July 29, 1999
between Conoco Inc. and First Chicago Trust Company of New
York, as Rights Agent*
4.2 Consent Action dated June 2, 1999 amending the Thrift Plan for
Employees of Conoco Inc. (incorporated by reference to Exhibit
4.9 of the registration statement of Conoco on Form S-8,
Registration No. 333-80957)
4.3 Consent Action dated June 2, 1999 amending the Thrift Plan for
Retail Employees of Conoco Inc. (incorporated by reference to
Exhibit 4.8 of the registration statement of Conoco on Form
S-8, Registration No. 333-80959)
12 Computation of Ratio of Earnings to Fixed Charges*
27 Financial Data Schedule*
99.1 Press release of DuPont dated August 12, 1999*
99.2 Press release of Conoco dated August 12, 1999*
- -----------------
* Filed herein.
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