UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER 1-14521
CONOCO INC.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0370352
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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600 NORTH DAIRY ASHFORD ROAD
HOUSTON, TEXAS 77079
(Address of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Class A Common Stock ($.01 par value) New York Stock Exchange, Inc.
Class B Common Stock ($.01 par value) New York Stock Exchange, Inc.
Preferred Share Purchase Rights New York Stock Exchange, Inc.
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Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Aggregate market value of voting Class A and Class B common stock held by nonaffiliates of the registrant (excludes outstanding shares beneficially owned by directors and officers) as of March 1, 2000, was approximately $3,750 million and $9,000 million based on the closing price on that date of $19 15/16 and $20 9/16, by the New York Stock Exchange, Inc. As of such date, 188,537,206 shares of Class A common stock, $.01 par value, and 436,786,482 shares of Class B common stock, $.01 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(TO THE EXTENT INDICATED HEREIN)
INCORPORATED BY
(REFERENCE IN PART NO.)
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Conoco Inc. Annual Report to Stockholders for the year
1999...................................................... II
Portions of the Registrant's Proxy Statement for the Annual
Meeting of Stockholders to be held on May 16, 2000........ III
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CONOCO INC.
Unless the context otherwise indicates, references in this Form 10-K to "Conoco," "we," or "us" are references to Conoco Inc., its wholly owned and majority owned subsidiaries, and its ownership interest in equity affiliates (corporate entities, partnerships, limited liability companies and other ventures, in which Conoco exerts significant influence by virtue of its ownership interest, typically between 20 and 50 percent).
TABLE OF CONTENTS
PAGE
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PART I
Items 1. and 2. Business and Properties..................................... 1
Item 3. Legal Proceedings........................................... 31
Item 4. Submission of Matters to a Vote of Security Holders......... 32
Executive Officers of the Registrant........................ 32
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 34
Item 6. Selected Financial Data..................................... 35
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 36
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 36
Item 8. Financial Statements and Supplementary Data................. 36
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 36
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 37
Item 11. Executive Compensation...................................... 37
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 37
Item 13. Certain Relationships and Related Transactions.............. 37
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 37
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PART I
ITEMS 1. AND 2. BUSINESS AND PROPERTIES
DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION
This annual report on Form 10-K 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 Conoco and the petroleum industry in general. We caution you that these statements are not guarantees of future performance and involve risks, uncertainties and assumptions that we cannot predict. In addition, we have based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. Accordingly, our actual outcomes and results may differ materially from what we have expressed or forecasted in the forward-looking statements. Any differences could result from a variety of factors including the following:
- fluctuations in crude oil and natural gas prices and refining and marketing margins;
- failures or delays in achieving expected production from existing and future oil and gas development projects;
- uncertainties inherent in predicting oil and gas reserves and oil and gas reservoir performance;
- lack of exploration success;
- disruption or interruption of our production facilities due to accidents or political events;
- international monetary conditions and exchange controls;
- liability for remedial actions under environmental regulations;
- liability resulting from litigation;
- world economic and political conditions; and
- changes in tax and other laws applicable to our business.
GENERAL
Conoco, a major, integrated, global energy company, is involved in both the upstream and downstream segments of the petroleum business. Upstream activities include exploring for, and developing, producing and selling crude oil, natural gas and natural gas liquids. Downstream activities include refining crude oil and other feedstocks into petroleum products, buying and selling crude oil and refined products and transporting, distributing and marketing petroleum products. In addition to upstream and downstream operations, Conoco also is engaged in developing and operating power facilities. Conoco operates in over 40 countries worldwide.
As of December 31, 1999, Conoco had proved worldwide reserves of 2,554 million barrels-of-oil-equivalent (BOE), 40 percent of which were natural gas. In this document, natural gas volumes have been converted to BOE using a ratio of six thousand cubic feet of gas to one barrel of oil. Based on 1999 annual production of 232 million BOE, excluding natural gas liquids from gas plant ownership, Conoco had a reserve life of 11 years as of December 31, 1999. Over the last five years, Conoco has replaced an average of 174 percent of the oil and gas it has produced each year. Conoco owns or has equity interests in nine refineries worldwide, with a total crude and condensate processing capacity of approximately 829,000 barrels per day. Conoco has a marketing network of approximately 8,000 outlets in the United States, Europe and Asia Pacific. For the year ended December 31, 1999, Conoco reported net income of $744 million, which included a net charge for special items of $38 million, on total revenues of $27,309 million.
BUSINESS STRATEGY
Conoco intends to pursue a growth-oriented business strategy by exploiting opportunities where Conoco has existing major areas of operation, creating at least two new major business areas, potentially in northern South America and Asia Pacific, and perhaps in West Africa, the Caspian Sea region, the Middle East and, longer term, in Russia, and continuing to improve the profitability, efficiency and effectiveness of its existing operations. Specifically, Conoco intends to:
- manage its portfolio to increase the proportion of upstream assets relative to downstream assets and the proportion of large-scale, long-lived, early-life cycle assets relative to mature assets, that could include forming joint ventures or alliances to optimize the efficiency of operations or monetize a portion of the value of such assets;
- achieve near-term production growth through large scale projects such as Petrozuata and Ursa;
- seek opportunities created by worldwide privatizations and the opening of new markets previously closed to private investment;
- apply its strengths in carbon upgrading, project management, deepwater technology, natural gas processing, seismic processing and interpretation, and the ability to present integrated upstream/downstream/power solutions to host governments and other institutions in new and emerging markets;
- pursue exploration activities that have significant value creation potential by concentrating on areas that are under-explored;
- capitalize on its ability to convert low cost, heavy, high sulfur and acidic crude oils into high value light oil products; and
- continuously rationalize its asset base, contain costs, optimize its investment portfolio, and improve operating reliability.
In all of our activities, we will strive to act in accordance with our core values of operating safely, protecting the environment, acting ethically and valuing all people.
FINANCIAL INFORMATION -- OPERATING SEGMENT AND GEOGRAPHIC INFORMATION
See note 27 to the audited Consolidated Financial Statements incorporated by reference into this document from our 1999 Annual Report to Stockholders, for operating segment and geographic information.
UPSTREAM
Summary
Conoco is currently exploring for, developing or producing crude oil, natural gas and/or natural gas liquids in 19 countries around the world. In 1999, production averaged 636,000 BOE per day, consisting of 359,000 barrels per day of petroleum liquids, excluding natural gas liquids from gas plant ownership, and 1,660 million cubic feet of natural gas per day. The majority of this production came from fields located in the United States, the United Kingdom and Norway, with the remaining production coming from operations in Canada, the United Arab Emirates, Indonesia, Nigeria, Russia and Venezuela.
In 1999, Conoco replaced 71 percent of the oil and natural gas it produced, adding 164 million BOE to its worldwide reserves while producing 232 million BOE, excluding natural gas liquids from gas plant ownership, for a net reduction of 68 million BOE. We replaced 93 percent of the natural gas and 53 percent of the oil we produced. On December 31, 1999, we had proved reserves of 2,554 million BOE, consisting of 1,530 million barrels of petroleum liquids and 6,142 billion cubic feet of natural gas, representing an increase of 45 percent on a BOE basis since December 31, 1994.
Conoco's capital investment in upstream activities in 1999 was $1,252 million, including the continued development of the South Texas Lobo trend, several North Sea fields and Petrozuata, as well as the acquisition of additional producing properties and acreage in Canada. These projects will contribute to Conoco's 2000 production and increase Conoco's production rates over current levels in future years.
The majority of Conoco's exploration and production assets are located in North America and Western Europe. The producing properties in these areas generate cash to fund growth opportunities around the world. Outside of North America and Western Europe, Conoco's investment activities are focused on areas that have the potential to become major business areas in the future, such as northern South America, Asia Pacific, West Africa, the Caspian Sea region, the Middle East and Russia.
Conoco is exploring for oil and/or natural gas in 15 countries. Since 1996, Conoco has acquired significant acreage positions in the following regions:
- the deepwater Gulf of Mexico;
- the Atlantic Margin of Northwest Europe;
- northern South America and the Caribbean; and
- selected basins in the Asia Pacific region.
In 1999, Conoco improved on its exceptional 1998 exploration performance. Approximately 50 percent of the exploratory wells we drilled, excluding appraisal wells, were potentially commercial. Significant gas and oil finds were made in the deepwater Gulf of Mexico, Indonesia and the United Kingdom.
Conoco intends to manage its asset portfolio to increase the proportion of upstream assets relative to downstream assets and the proportion of large-scale, long-lived, early-life cycle assets relative to mature assets. In the course of implementing this strategy, we have in the past, and may from time to time in the future, purchase or sell producing upstream assets. We may also consider forming alliances or joint ventures to hold and operate selected upstream assets, either to optimize the efficiency of such operations through achieving economies of scale or, in certain circumstances, to monetize a portion of the value of such assets.
United States
Production operations in the United States are principally located in the following areas:
- the Lobo trend in South Texas;
- the Gulf of Mexico;
- the San Juan Basin in New Mexico;
- the Permian Basin in West Texas; and
- the Central Appalachian Basin in Virginia.
In 1999, United States operations contributed approximately 21 percent of Conoco's worldwide petroleum liquids production and 53 percent of its worldwide natural gas production. United States proved reserves as of December 31, 1999, were 656 million BOE, consisting of 238 million barrels of petroleum liquids and 2,509 billion cubic feet of natural gas.
In recent years, Conoco has consolidated its exploration and production operations in the United States in order to increase profitability. We sold hundreds of smaller, less efficient properties, while acquiring an increased interest in our largest producing areas, such as the San Juan Basin and the Lobo trend. As a result, we have reduced the number of fields in our portfolio from approximately 700 in 1990 to 92 as of December 31, 1999, while maintaining production essentially constant on a BOE basis. We have also focused our exploration activities in the United States by concentrating our efforts in the deepwater Gulf of Mexico.
Conoco's objectives are to increase production from the deepwater Gulf of Mexico, while maintaining production from other United States assets and optimizing our natural gas processing capabilities.
LOBO TREND IN SOUTH TEXAS
Conoco is the largest natural gas producer in the Lobo trend, and a leading producer, marketer and transporter of natural gas in South Texas. Conoco has over 20 years of operating and drilling experience in the Lobo trend and currently holds approximately 450,000 acres in the area under oil and gas leases. In December 1999, our gross natural gas production was approximately 610 million cubic feet per day. Conoco's 1999 development program included the acquisition of new 3D seismic data and the drilling of 151 wells. We anticipate spending $600 million between 2000 and 2002 to further develop our leases in the Lobo trend.
Conoco's average working interest in its leases in the Lobo trend is 93 percent. Certain producing wells are subject to volumetric production payments, the last of which terminate in 2002. These volumetric production payments averaged approximately 66 million cubic feet per day in 1999.
Lobo Pipeline Company, a wholly owned subsidiary of Conoco, owns a 1,268 mile intrastate natural gas pipeline system in South Texas, which is designed to provide transportation for our gas production and that of third party producers.
GULF OF MEXICO
Conoco's current portfolio of producing properties in the Gulf of Mexico includes seven fields operated by Conoco and 14 operated by other companies. The properties are in various stages of development, ranging from properties that are fully developed to ones with considerable additional development potential. We also hold interests in various offshore platforms, pipelines and other infrastructure.
Conoco currently has 13 leases in production or under development in the deepwater Gulf of Mexico. Our most important recent development project in the Gulf of Mexico is the Ursa field development. Ursa, operated by Shell, is one of the largest discoveries to date in the deepwater Gulf of Mexico. We hold a 16 percent interest in the field, and the other owners are Shell, BP Amoco and Exxon Mobil. The Ursa tension-leg platform was installed in late 1998 in approximately 3,900 feet of water, with first production occurring in March 1999. The Ursa field achieved gross production of 49,000 barrels of petroleum liquids per day and 80 million cubic feet of gas per day in 1999. Ursa has platform capacity of 150,000 barrels per day of petroleum liquids and 400 million cubic feet of gas per day and is expected to reach peak production in 2001. The Shell-operated Europa field is Conoco's most recent and second deepwater development with first production occurring in February 2000.
Conoco's most important exploration program in the United States is in the deepwater Gulf of Mexico. We are the sixth largest deepwater leaseholder in the Gulf on an acreage basis, with interests in 306 leases. We have a 100 percent interest in 105 of these leases, and jointly own 76 of the remaining leases on a 50-50 basis with Shell and 58 of the remaining leases on a 50-50 basis with Exxon Mobil. Since 1996, we have acquired 3D seismic data over large portions of the deepwater Gulf of Mexico to identify acreage to lease and to select prospects for drilling. In 1999, Conoco announced discoveries on its Magnolia prospect in Garden Banks Block 783 and K2 prospect in Green Canyon Block 562. Further delineation to determine the commercial significance of each discovery will be required.
Conoco is carrying out its deepwater Gulf of Mexico drilling program in large part with the Deepwater Pathfinder, a drillship, which is owned by a joint venture between R&B Falcon Corporation and us. This vessel went into service in January 1999, commencing a five-year and $400 million drilling program in the Gulf of Mexico. This highly sophisticated drillship is capable of drilling in water depths of up to 10,000 feet and provides us with the ability to explore in areas that were previously inaccessible.
While drilling its third well in the Gulf of Mexico, a mechanical failure caused damage to the Deepwater Pathfinder's drilling equipment. Repairs to the drillship are scheduled for completion in early 2000 and the vessel will resume operations shortly thereafter, with minimal financial and operational impact.
OTHER U.S. PRODUCING PROPERTIES
Outside of South Texas and the Gulf of Mexico, Conoco's largest producing properties in the United States are located in the San Juan Basin in New Mexico, the Permian Basin in West Texas and the Central Appalachian Basin in Virginia. We also have producing properties in the Williston Basin and the Hugoton complex in the Oklahoma/Texas Panhandle.
Conoco has a significant acreage position in the San Juan Basin. Our average daily net production from the San Juan Basin in 1999 was approximately 11,700 barrels of petroleum liquids and 225 million cubic feet of natural gas per day. We believe significant additional hydrocarbons lie below the basin's traditional producing formations and we are actively exploring for new reserves. We have identified several high-potential prospects, one of which commenced drilling in late 1999. We will also continue to consider potential acquisitions in this basin to take advantage of synergies resulting from our large asset base and gas plant in the area.
Conoco has an interest in 29 fields in the Permian Basin, which is one of the largest producing areas in the United States. In the Permian Basin, our average daily net production in 1999 was approximately 21,600 barrels of petroleum liquids and 44 million cubic feet of gas. We are using 3D seismic technology, horizontal wells and other innovative extraction technologies in an effort to extend the productive life of many of the mature fields in the Permian Basin.
Pocahontas Gas Partnership is a 50/50 partnership between Conoco and Consol Energy Inc. Pocahontas produces and gathers coal bed methane prior to and during coal mining operations in Virginia. Pocahontas produced and gathered approximately 35 million gross cubic feet per day of coal bed methane from the existing active mining and expansion areas in 1999. Pocahontas drilled more than 80 wells in 1999, with the majority of the wells drilled in the expansion area. Pocahontas will continue to focus on expansion drilling in 2000.
NATURAL GAS AND GAS PRODUCTS
As of December 31, 1999, Conoco owned interests in 20 natural gas processing plants located in Louisiana, New Mexico, Oklahoma and Texas, as well as approximately 9,000 miles of gathering lines. We operate 15 of the plants.
Conoco gathers natural gas, extracts natural gas liquids and sells the remaining residual gas. Most of our raw gas liquids are supplied to our fractionation operations, which further separate them into natural gas liquids products that are used as feedstocks for gasoline and chemicals production. Conoco provides service to approximately 830 natural gas producers and sells more than 470 million cubic feet per day of residue gas to approximately 180 customers.
Conoco's share of total natural gas liquids from natural gas processed averaged 61,300 barrels per day in 1999, of which approximately 10,800 barrels per day of natural gas liquids were from Conoco owned reserves that were reported, net of royalties, as United States natural gas liquids production. In 1999, approximately 18,500 barrels per day of additional natural gas liquids were attributable to processing of Conoco's natural gas liquids in third party-operated plants. Furthermore, our 50 percent-owned equity affiliate, C&L Processors Partnership, has four natural gas processing plants in Oklahoma. Conoco's pro rata share of C&L's natural gas liquids production was approximately 7,000 barrels per day in 1999.
Conoco's other natural gas and gas products facilities in the United States include:
- an 800-mile intrastate natural gas pipeline system in Louisiana operated by Conoco's wholly owned subsidiary, Louisiana Gas System, Inc.;
- natural gas and natural gas liquids pipelines in several states;
- two underground natural gas liquids storage facilities;
- a natural gas liquids fractionating plant in Gallup, New Mexico with a capacity of 25,000 barrels per day; and
- a 22.5 percent equity interest in Gulf Coast Fractionators, which owns a natural gas liquids fractionating plant in Mt. Belvieu, Texas with a capacity of 104,000 barrels per day.
In January 2000, Conoco announced an agreement with Duke Energy Field Services to sell its Oklahoma natural gas gathering and processing assets, consisting of 2,300 miles of natural gas gathering pipelines and five natural gas processing plants. The sale is part of Conoco's ongoing upstream portfolio management program to reduce non-strategic assets and costs, and make strategic acquisitions in core areas of North America that will increase our natural gas production, reserves and processing capacity. The sale is expected to close in the first quarter of 2000. In a separate transaction, Conoco also sold its interest in the Jameson natural gas processing plant in north Texas in 1999.
In 1999, Conoco marketed approximately 3.1 billion cubic feet per day of natural gas, which included 865 million cubic feet per day of its U.S. natural gas production.
Western Europe
Conoco has a significant portfolio of producing properties in the United Kingdom and Norway. Proved reserves in Western Europe as of December 31, 1999, were 864 million BOE, consisting of 383 million barrels of petroleum liquids and 2,884 billion cubic feet of natural gas. In 1999, operations in Western Europe contributed 45 percent of our worldwide petroleum liquids production and 44 percent of our natural gas production.
BRITANNIA FIELD
Conoco has a 42.4 percent interest in the Britannia field, which is one of the largest natural gas/condensate fields in the United Kingdom sector of the North Sea. Britannia is a centerpiece of Conoco's strategy to increase production and reserves through large, long-lived projects. First production from Britannia occurred in August 1998, and we estimate that the field will have a production life of approximately 30 years. Our proved reserves in Britannia include one trillion cubic feet of natural gas and 50 million barrels of petroleum liquids at December 31, 1999. Britannia is currently producing approximately 740 million gross cubic feet of gas per day and 44,000 gross barrels of petroleum liquids per day, although this is expected to fluctuate due to seasonal demand. Conoco and Chevron, the two largest interest holders in the field, jointly operate Britannia.
SOUTHERN NORTH SEA PRODUCING PROPERTIES
Conoco has various ownership interests in 14 producing gas fields in the Southern North Sea, a major gas producing area on the United Kingdom continental shelf. These fields mostly feed into the Conoco-operated Theddlethorpe gas processing facility through three Conoco-operated pipeline systems: Viking, LOGGS and CMS. In 1999, Conoco's net production from the Southern North Sea was 328 million cubic feet of natural gas per day.
During 1999, production commenced from the Vampire field, the Northwest Bell field and the Jupiter Sinope reservoir. In addition, we increased pipeline system throughput with new third party business from the Ketch field and the Saltfleetby onshore gas field. We believe there are additional development opportunities within the Southern North Sea. One example of this is the 1999 Vixen discovery, where development is ongoing and first gas is anticipated in late 2000.
OTHER UNITED KINGDOM PROPERTIES AND DISCOVERIES
Conoco also has interests in the following fields and discoveries:
- Miller (30 percent);
- Alba (12 percent);
- Statfjord (4.8 percent in the United Kingdom sector);
- MacCulloch (40 percent);
- Banff (32 percent); and
- Clair (24 percent).
Conoco operates the MacCulloch and Banff fields, both of which employ floating production, storage and offtake technology. BP Amoco operates the Miller field and the Clair discovery, which is one of the largest undeveloped oil discoveries in Western Europe. We acquired an additional 3 percent interest in Clair in 1999, when Elf Aquitaine disposed of its interest in the discovery.
INTERCONNECTOR PIPELINE AND GAS SALES
The Interconnector pipeline, which connects the United Kingdom and Belgium, facilitates marketing throughout Europe of the natural gas Conoco produces in the United Kingdom. This pipeline commenced operation in October 1998. Conoco's 10 percent equity share of the Interconnector pipeline allows us to ship approximately 200 million cubic feet of gas per day to the markets in continental Europe. We have six-to-nine-year contracts to supply natural gas to Gasunie in the Netherlands and Wingas in Germany, which fully utilize this capacity. Because the Interconnector pipeline provides flexibility to flow in either direction, we are able to take advantage of the long-term and short-term market conditions in both the United Kingdom and continental Europe.
NORWEGIAN PROPERTIES
Conoco has an ownership interest in three of the largest producing fields in Norway: Heidrun, Statfjord and Troll. We also have an ownership interest in two fields that began producing in 1999: Visund (9.1 percent) and Jotun (3.75 percent). In addition, we have an interest in the Oseberg South (7.7 percent) and Huldra (23.3 percent) discoveries, which are in development, as well as the PL 203 (20 percent) discovery.
Production from the Heidrun field, in which we own an 18.125 percent interest, began in 1995 and is currently averaging approximately 216,000 gross barrels of petroleum liquids per day. We were the operator for the construction and installation of Heidrun's tension-leg platform. Upon first production, Statoil assumed operatorship in accordance with a pre-agreed arrangement. Associated gas from the Heidrun field currently serves as feedstock for a methanol plant that became operational in Norway in 1997. Statoil operates the plant, in which we also hold an 18.125 percent equity interest.
Conoco holds a 10.3 percent interest in the Norwegian sector of the Statfjord field. We are supporting work by Statoil, the operator of Statfjord, to determine ways to slow the natural decline of the field and increase reserves. We also own a 1.62 percent interest in the Troll gas field, operated by Statoil.
EXPLORATION -- THE ATLANTIC MARGIN
Outside of our activity around existing assets, exploration in Western
Europe is focused on the deepwater Atlantic Margin fairway, which runs from the
Voring Basin off the coast of Norway to the Porcupine Basin off the west coast
of Ireland. Along the Atlantic Margin, Conoco has significant acreage positions
in the Voring Basin, the West of Shetlands and North Rockhall Trough areas in
the United Kingdom and the Porcupine Basin. In 1998, Conoco drilled a discovery
in the West of Shetlands area on Block 204/14, adjacent to BP Amoco's Suilven
discovery. A 1999 well on Block 204/15 was unsuccessful. Development options are
now being considered. Drilling results in 2000 and 2001 will determine the level
of future investment in this region.
Northern South America and the Caribbean
PETROZUATA
Petrozuata is a key component of Conoco's strategy to increase production and reserves through implementation of long-lived, large development projects and to utilize our proprietary coking technology in other areas of our business. Petrozuata is a joint venture between Conoco, which holds a 50.1 percent non- controlling equity interest, and PDVSA Petroleo y Gas S.A., a subsidiary of PDVSA, the national oil company of the Bolivarian Republic of Venezuela, which holds the remaining interest.
Petrozuata, the first venture of its kind in Venezuela, is developing an integrated operation to produce extra heavy crude oil from known reserves in the Zuata region of the Orinoco Belt, transport it to the Jose industrial complex on the north coast of Venezuela and upgrade it into synthetic crude, with associated by-products of liquefied petroleum gas, sulfur, petroleum coke and heavy gas oil, a product slightly lighter than residual oil. Petrozuata's synthetic crude is a lighter, partially processed refining feedstock similar to crude oil. Our recorded proved reserves related to our interest in Petrozuata as of December 31, 1999, were 682 million barrels of oil. Drilling began in 1997 and at December 31, 1999, approximately 110 horizontal wells were completed with another 108 wells planned to be drilled by year-end 2000. The joint venture agreement has a 35-year term, commencing upon the completion of the upgrading facility at the end of 2000, and requires approval of both Conoco and PDVSA Petroleo y Gas S.A. for major Petrozuata decisions.
The upgrading facility, which will employ Conoco's proprietary delayed coking technology, will be located at Jose and is approximately 85 percent complete. Construction of the upgrader is currently on schedule to be completed with first commercial sales in early 2001. Diluted extra heavy crude oil will be transported via a 36-inch pipeline from the field to the Jose industrial complex. An adjacent 20-inch pipeline will return naphtha from the upgrading facility to the field for use as a diluent. The construction of the field processing and support facilities and marine facilities for shipping synthetic crude and by-products are essentially complete. Petrozuata has experienced approximately $430 million in gross cost overruns in the project due to overvaluation of the Bolivar and higher labor costs. The cost overruns have been partially offset by higher than expected early production revenues. Therefore, the expected rate of return on Petrozuata has not been significantly impacted.
Petrozuata began early production of extra heavy crude oil in August 1998, and as of December 1999, was producing approximately 90,000 gross barrels per day. We expect Petrozuata's production will rise to 120,000 gross barrels per day by year-end 2000. Prior to completion of the upgrading facility, the extra heavy crude is being blended with lighter oils and sold on world markets. Following completion of the upgrading facility, the synthetic crude produced by Petrozuata will either be used as a feedstock for Conoco's Lake Charles refinery and a refinery operated by PDVSA, or will be sold to third parties.
In 1999, Petrozuata approved an accelerated drilling program to increase average well productivity. The drilling program was also modified from single completion wells to multilateral wells. Preliminary results from the multilateral wells have been positive.
Conoco has entered into an agreement to purchase up to 104,000 barrels per day of the Petrozuata synthetic crude for a formula price over the term of the joint venture in the event that Petrozuata is unable to sell the production for higher prices. All synthetic crude sales will be denominated in United States dollars. By-products produced by the upgrading facility, principally coke and sulfur, will be sold to a variety of domestic and foreign purchasers. The loading facilities at Jose will transfer synthetic crude and some of the by-products to ocean tankers for export. Synthetic crude sales are expected to comprise more than 90 percent of the project's revenues.
THE LA LUNA TREND
Exploration activity in northern South America and the Caribbean is focused on a geologic trend known as La Luna. In Venezuela, we conducted seismic surveys in 1997 on the shallow water Gulf of Paria West block and on the Guanare block in the Merida Andes foothills. In 1999, we drilled two wells in the Gulf of Paria West, the first of which was a discovery that flowed hydrocarbons from multiple zones in drill stem tests.
Conoco and its partners are currently undertaking an assessment of the commerciality of the discovery prior to proposing an appraisal program. The second well in a different structure resulted in a dry hole. We also drilled a well in the Guanare block in 1998, which was a dry hole. We currently hold a 50 percent working interest in both the Gulf of Paria West block, which we operate, and the Guanare block, which Elf Aquitaine operates. Our interest in each case is subject to dilution to 32.5 percent at the option of a PDVSA affiliate.
In northwestern Colombia, seismic surveys have been completed in partnership with Texaco on three tracts that Conoco acquired through a 50 percent farm-in. In 1998, Texaco drilled two unsuccessful wells on the acreage and Conoco and Texaco also acquired a fourth tract in a joint bid. During 1999, the partnership drilled one well resulting in a dry hole, and subsequently relinquished three of the four blocks. We plan to drill one well on the remaining block during 2000.
In 1997, Conoco signed a production sharing contract for Blocks 4a and 4b, two large prospective blocks off Trinidad's east coast, and acquired a 3D seismic survey over the acreage. We are operator of both blocks and have a 50 percent working interest; Texaco holds the remaining working interest in both blocks. During 1999, we drilled one unsuccessful well on Block 4b and relinquished Block 4a without any drilling.
In May 1996, Conoco acquired an exclusive deepwater exploration license offshore Barbados. Following hydrocarbon seep-detection surveys using both sea bottom sampling and satellite imaging, we acquired 2D seismic on the block in 1999. We are currently interpreting the seismic data along with planning prospects for drilling in 2001 or early 2002. Elf Aquitaine farmed in to the license for a 35 percent working interest in 1999.
PHOENIX PARK
Conoco holds a 39 percent equity interest in Phoenix Park Gas Processors Limited, a joint venture with the National Gas Company of Trinidad and Tobago Limited, that processes gas in Trinidad and markets natural gas liquids throughout the Caribbean and into the U.S. Gulf Coast. Phoenix Park's facilities include:
- a gas processing plant;
- a fractionator producing propane, mixed butane and natural gasoline;
- storage tanks; and
- two marine loading docks.
In April 1999, Phoenix Park completed an expansion that more than doubled the capacity of its facilities, four months ahead of schedule. The facilities can now process up to 1,400 million cubic feet of gas per day and fractionate up to 33,500 barrels per day. Currently, these facilities produce over 20,000 gross barrels per day of natural gas liquids.
Asia Pacific
Conoco has a 32-year operating history in Indonesia. The focus of Conoco's effort in the Asia Pacific region is in the Indonesian sector of the Natuna Sea. In this area, we are the operator of the Block B, Tobong and Northwest Natuna Sea Block II production sharing contracts and have an interest in the South Sokang production sharing contract. We also have interests in exploration blocks in Cambodia, Vietnam and New Zealand. The Deepwater Frontier, our second deepwater drillship, owned by a joint venture between Conoco and R&B Falcon, completed drilling its first exploratory well in New Zealand in 1999. The well did not encounter commercial hydrocarbons. The drillship is now on a two-year contract with Petrobras in Brazil.
WEST NATUNA GAS PROJECT
In 1996, Conoco, as operator of the South Natuna Sea Block B production
sharing contract, along with the other participants in Block B and the interest
holders in the Block A and Kakap production sharing contracts, formed the "West
Natuna Group," with the aim of jointly marketing gas from the West Natuna Area
to Singapore. In January 1999, the West Natuna Group, Pertamina (the Indonesian
state-owned oil and
gas company) and SembGas (a Singapore gas marketing company owned by SembCorp Industries, Temasek and Tracetebel), signed agreements to provide for the sale, transportation and purchase of natural gas from specified fields in the production sharing contracts operated by the West Natuna Group.
The agreements provide for gas deliveries to begin by mid-2001 that will rise to a sales rate averaging 325 million cubic feet per day, with our share averaging 56 million cubic feet per day. SembGas will sell the gas to a series of end users, including Tuas Power, SembCorp Cogen and Esso Chemicals, which will use the gas for industrial purposes, primarily power generation. The West Natuna Group has entered into a gas supply agreement with Pertamina to develop a series of fields and to supply the gas produced to Pertamina for the sale to SembGas. The agreements provide for supply of approximately one trillion cubic feet of natural gas from fields in Block B to SembGas. Block B's share of production is expected to reach 140 million cubic feet of gas daily. Block B constitutes 43.1 percent of the West Natuna Group. We own a 40 percent interest in Block B and have net proved reserves of 364 billion cubic feet of natural gas. In addition, each of the production sharing contracts has been extended to allow the West Natuna Group to support Pertamina for the expected 22-year life of the contract with SembGas.
A 300-mile 28-inch sub-marine pipeline and smaller gathering pipelines are being built by the West Natuna Group to transport the gas from the West Natuna Sea fields to Singapore. We will be the operator of the pipeline system, including the receiving terminal in Singapore. Contractual arrangements between the West Natuna Group, Pertamina and SembGas to govern the construction and operation of the pipeline system are in place, as are related engineering, procurement, construction and installation contracts to build the pipeline. Pipe laying operations began at the Singapore end of the pipeline in late January 2000.
In anticipation of growing gas demand in Asia, Conoco increased exploratory drilling in offshore Indonesia in 1999, resulting in five new gas and associated oil discoveries or field extensions in the Block B production sharing contract area of Indonesia's South Natuna Sea. Based on a report from a third party engineering firm, we believe these discoveries will yield significant additional reserves that we hope to classify as proved in the foreseeable future.
BELIDA AND SEMBILANG FIELDS, INDONESIA
Conoco holds a 40 percent interest in and serves as operator of the Belida and Sembilang oil fields in the Block B production sharing contract. An active development program in the Belida Field resulted in gross production averaging 65,000 barrels per day in 1999.
VIETNAM
In September 1998, Conoco was awarded a 23.25 percent interest in Block 15-1 in the Cuu Long Basin. We acquired 3D seismic in 1999 and are planning our first exploration well for 2000. In addition, we have recently acquired a 30 percent interest in Block 15-2 in the Cuu Long Basin through a farm-in from the Japanese Vietnam Petroleum Company. Block 15-2 currently produces approximately 35,000 gross barrels of oil per day from the Rang Dong field. Conoco has also signed an agreement with Petrovietnam and the Korean National Oil Company on exploration Block 16-2, paving the way for us to become the operator with a 40 percent interest in the block. Negotiations to develop a petroleum contract and joint operating company are ongoing. Conoco also has an interest in deepwater Blocks 133 and 134.
Canada
In the foothills east of the Canadian Rockies, we have an interest in 233,000 net acres, much of which has yet to be developed. We brought two discoveries in the foothills on-stream during 1999. In addition to the discoveries in the foothills trend, we have a significant interest in the Peco gas field, located just east of the foothills. We also own 100 percent of the Peco gas processing plant that processes gas from the Peco field and two of the foothills discoveries.
Conoco doubled its Canadian natural gas operations with the acquisition of producing assets and acreage from Renaissance Energy Ltd., effective October 1, 1999. Gross production from the field averaged
approximately 87 million cubic feet of natural gas per day in January 2000. The acquisition also included two million acres of land, of which only 500,000 acres have been explored and developed.
Conoco acquired substantially all of Petro-Canada's natural gas liquids business in Canada. The purchase, which includes the fifth largest natural gas processing plant in North America, closed in the first quarter of 2000. Closing on the purchase of other Petro-Canada assets included in a definitive agreement is scheduled to be completed in the second quarter of 2000.
Russia
Conoco holds a 50 percent direct and a 4.7 percent indirect ownership interest in Polar Lights Company, a Russian limited liability company established in January 1992 to develop the Ardalin field. Polar Lights started producing oil in August 1994, and gross production has increased from an average 21,000 barrels per day in 1994, to an average 37,750 barrels per day in 1999. Oil is transported through the existing Russian pipeline system and is then exported or sold on the domestic market.
In March 1998, Conoco signed a memorandum of understanding with OAO Lukoil, Russia's largest oil company, to jointly study the development of petroleum reserves in the 1.2 million acre block, known as the Northern Territories, in the Timan-Pechora region in northern Russia, which includes the large undeveloped Yuzhno Khilchuyu oil field. In November 1998, Conoco and OAO Lukoil signed a second memorandum of understanding to work together to draw up and submit all documents required by the Russian government to develop the Northern Territories under production sharing agreement terms. Based upon this work, in November 1999, the Russian Federation approved the law allowing a production sharing agreement for the project to be negotiated. Conoco and OAO Lukoil are continuing to negotiate the outstanding issues and to secure funding for the project.
West Africa
Conoco, in partnership with Express Petroleum and Gas Company Ltd. of Nigeria, produces oil from the shallow water Ukpokiti field, located offshore in the western Niger delta. We currently have a 90 percent revenue interest in the field. Total production from the field is currently about 20,000 barrels per day of oil, and Conoco's net proved reserves as of December 31, 1999, were 12 million barrels of oil. Express operates Ukpokiti, and we provide technical and operational assistance in the field's development, which includes three remote caisson-type structures, five wells, and the conversion of the Conoco tanker Independence into a floating production and storage offtake vessel. With a 1.7 million barrel storage capacity, the vessel also serves as an export terminal.
In addition to our interest in the Ukpokiti field, we operate and have a 47.5 percent working interest in the deepwater OPL 220 license off the coast of Nigeria, which encompasses 600,000 acres. Conoco has acquired a 3D seismic survey and drilled two wells on this license. The first well, which we drilled in 1997, found only gas and was not commercial. We drilled the second well in 1998, and encountered both oil and gas-filled sands. Conoco and its partner, Exxon Mobil, are currently evaluating results from this second well and plan to drill an appraisal well in late 2000.
Caspian Sea Region and Middle East
In Dubai, United Arab Emirates, Conoco has operated four fields since their discovery between 1966 and 1973. Currently, we are using horizontal drilling techniques and advanced reservoir drainage technology to enhance the efficiency of the offshore production operations and improve recovery rates.
Conoco has entered into a joint venture service agreement with Syria to develop its natural gas resources and to build natural gas infrastructure. We are the lead operator and have a 50 percent interest in the service agreement for the project. Our joint venture partner is Elf Aquitaine, who also holds a 50 percent interest. Under the contract, the joint venture is constructing pipeline and plant facilities to gather and process 450 million cubic feet per day of natural gas. In addition, about 150 million cubic feet per day of residue gas
from the combined facilities will be transported through a new, 155-mile pipeline that will connect to the existing delivery system, which serves western Syria including the Damascus area.
Conoco also received permission from the U.S. government to travel to Libya in 1999 to evaluate oil fields and production facilities that we left in 1986, when the U.S. government imposed sanctions against Libya. We found the assets operating and in good repair.
One of Conoco's newest initiatives is the 20 percent interest we were awarded in the Zafar Mashal exploration prospect in the Caspian Sea, pending final ratification by the Azerbaijan Parliament. The Zafar Mashal prospect offers promising acreage, located in the high potential Volga Delta play in the South Caspian basin, an area that includes previously proved mega discoveries. From a strategic perspective, exploration in the Caspian Sea region fits well with our long-term goal to build Conoco's portfolio for the future.
Oil and Natural Gas Reserves
Conoco's estimated proved reserves at December 31, 1999 were 2,554 million BOE, consisting of 1,530 million barrels of oil and 6,142 billion cubic feet of natural gas.
Oil and gas proved reserves cannot be measured precisely. The reserve data set forth in this report is only an estimate. Reservoir engineering is a subjective and inexact process of estimating underground accumulations of oil and natural gas. Reserve estimates are based on many factors related to reservoir performance, which require evaluation by engineers interpreting the available data, as well as price and other economic factors. The reliability of these estimates at any point in time depends on both the quality and quantity of the technical and economic data, the production performance of the reservoirs, as well as extensive engineering judgment. Consequently, reserve estimates are subject to revision, as additional data become available during the producing life of a reservoir. When a commercial reservoir is discovered, proved reserves are initially determined based on limited data from the first well or wells. Subsequent data may better define the extent of the reservoir and additional production performance. Well tests and engineering studies will likely improve the reliability of the reserve estimate.
At lower prices for crude oil and natural gas, it may no longer be economic to produce certain reserves. Actual production revenues and expenditures with respect to Conoco's reserves will likely vary from estimates, and such variances may be material.
The following table sets forth by region Conoco's proved oil reserves at year-end for the past five years. Proved oil reserves comprise crude oil, condensate and natural gas liquids expected to be removed for our account from our natural gas production.
DECEMBER 31
-----------------------------------
1999 1998 1997 1996 1995
----- ----- ----- ---- ----
(MILLIONS OF BARRELS)
PROVED OIL RESERVES
CONSOLIDATED COMPANIES
United States..................................... 238 261 277 299 294
Europe............................................ 383 410 421 413 408
Other Regions..................................... 167 192 195 214 231
----- ----- ----- --- ---
Worldwide....................................... 788 863 893 926 933
SHARE OF EQUITY AFFILIATES
Europe............................................ 60 50 51 47 44
Other Regions(1).................................. 682 678 680 -- --
----- ----- ----- --- ---
Total Proved Reserves -- Equity Affiliates...... 742 728 731 47 44
----- ----- ----- --- ---
Total Proved Oil Reserves............... 1,530 1,591 1,624 973 977
===== ===== ===== === ===
|
(1) Represents Conoco's equity share of the Petrozuata venture in Venezuela.
The following table sets forth by region Conoco's proved natural gas reserves at year-end for the past five years:
DECEMBER 31
-------------------------------------
1999 1998 1997 1996 1995
----- ----- ----- ----- -----
(BILLIONS OF CUBIC FEET)
PROVED NATURAL GAS RESERVES
CONSOLIDATED COMPANIES
United States.................................. 2,166 2,319 2,235 1,822 1,891
Europe......................................... 2,884 3,053 3,060 3,068 2,649
Other Regions.................................. 749 430 196 173 169
----- ----- ----- ----- -----
Worldwide.................................... 5,799 5,802 5,491 5,063 4,709
SHARE OF EQUITY AFFILIATES
United States.................................. 343 381 370 333 339
----- ----- ----- ----- -----
Total Proved Natural Gas Reserves.... 6,142 6,183 5,861 5,396 5,048
===== ===== ===== ===== =====
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Production Data
Conoco's oil and natural gas production, excluding natural gas liquids from gas plant ownership, averaged 636,000 BOE per day in 1999, compared with 585,000 BOE per day in 1998. As a percentage of total production, natural gas production was 44 percent and 40 percent in 1999 and 1998, respectively.
The table below shows Conoco's interests in average daily oil production and natural gas production for the past three years. Oil production comprises crude oil and condensate produced for our account, plus our share of natural gas liquids removed from natural gas production from our owned leases. Natural gas production represents our share of production from leases, in which we have an ownership interest. Natural gas liquids processed represents our share of natural gas liquids acquired through gas plant ownership.
1999 1998 1997
---- ---- ----
(THOUSANDS OF
BARRELS PER DAY)
NET AVERAGE DAILY OIL PRODUCTION
CONSOLIDATED COMPANIES
United States.......................................... 74 79 90
Europe................................................. 161 152 176
Other Regions.......................................... 84 95 92
--- --- ---
Total Net Production -- Consolidated Companies.... 319 326 358
SHARE OF EQUITY AFFILIATES
Europe................................................. 18 17 16
Other Regions.......................................... 22 5 --
--- --- ---
Total Net Production -- Equity Affiliates......... 40 22 16
--- --- ---
Total Net Oil Production Per Day.................. 359 348 374
=== === ===
|
1999 1998 1997
------ ------ ------
(MILLIONS OF CUBIC FEET
PER DAY)
NET AVERAGE DAILY NATURAL GAS PRODUCTION
CONSOLIDATED COMPANIES
United States.......................................... 865 873 709
Europe................................................. 728 470 432
Other Regions.......................................... 52 53 46
----- ----- -----
Total Net Production -- Consolidated Companies.... 1,645 1,396 1,187
SHARE OF EQUITY AFFILIATES
United States.......................................... 15 15 16
----- ----- -----
Total Net Natural Gas Production Per Day.......... 1,660 1,411 1,203
===== ===== =====
|
1999 1998 1997
----- ----- -----
(THOUSANDS OF BARRELS
PER DAY)
NET AVERAGE DAILY NATURAL GAS LIQUIDS PROCESSED
CONSOLIDATED COMPANIES
United States.......................................... 51 55 55
SHARE OF EQUITY AFFILIATES
United States.......................................... 7 8 8
Other Regions.......................................... 6 4 5
-- -- --
Total Net Processed -- Equity Affiliates.......... 13 12 13
-- -- --
Total Net Natural Gas Liquids Processed Per Day... 64 67 68
== == ==
|
See the Supplemental Petroleum Data incorporated by reference into this document from our 1999 Annual Report to Stockholders for the annual production volumes of oil (crude oil, condensate and natural gas liquids) and natural gas from proved reserves. Proved oil production volumes exclude natural gas liquids from plant ownership.
The following table sets forth Conoco's average production costs per BOE produced, average sales prices per barrel of crude oil and condensate sold, and average sales prices per mcf of natural gas sold for the three-year period ended December 31, 1999. Average sales prices exclude proceeds from sales of interests in oil and gas properties.
TOTAL UNITED OTHER
WORLDWIDE STATES EUROPE REGIONS
--------- ------ ------ -------
(UNITED STATES DOLLARS)
CONSOLIDATED COMPANIES
For the year ended December 31, 1999
Average production costs per barrel of oil
equivalent of petroleum produced(1)....... $ 3.93 $ 3.60 $ 4.20 $ 3.91
Average sales prices of produced petroleum
Per barrel of crude oil and condensate
sold................................... 17.51 17.33 17.80 17.07
Per mcf of natural gas sold............... 2.12 1.98 2.30 1.92
For the year ended December 31, 1998
Average production costs per barrel of oil
equivalent of petroleum produced(1)....... 3.95 3.69 4.54 3.21
Average sales prices of produced petroleum
Per barrel of crude oil and condensate
sold................................... 12.37 12.17 12.61 12.12
Per mcf of natural gas sold............... 2.24 1.96 2.86 1.42
For the year ended December 31, 1997
Average production costs per barrel of oil
equivalent of petroleum produced(1)....... 4.21 4.23 4.51 3.40
Average sales prices of produced petroleum
Per barrel of crude oil and condensate
sold................................... 18.58 17.93 18.93 18.35
Per mcf of natural gas sold(2)............ 2.44 2.18 3.25 1.41
EQUITY AFFILIATES
For the year ended December 31, 1999
Average production costs per barrel of oil
equivalent of petroleum produced(1)....... $ 5.53 $10.02 $ 4.51 $ 5.84
Average sales prices of produced petroleum
Per barrel of crude oil and condensate
sold................................... 13.86 -- 13.03 14.55
Per mcf of natural gas sold............... 2.35 2.35 -- --
For the year ended December 31, 1998
Average production costs per barrel of oil
equivalent of petroleum produced(1)....... 9.10 10.11 6.16 18.64
Average sales prices of produced petroleum
Per barrel of crude oil and condensate
sold................................... 8.90 -- 9.85 3.76
Per mcf of natural gas sold............... 2.39 2.39 -- --
For the year ended December 31, 1997
Average production costs per barrel of oil
equivalent of petroleum produced(1)....... 8.16 8.32 7.15 --
Average sales prices of produced petroleum
Per barrel of crude oil and condensate
sold................................... 15.88 -- 15.88 --
Per mcf of natural gas sold............... 2.89 2.89 -- --
|
(1) Average production costs per barrel of equivalent liquids, with natural gas converted to liquids at a ratio of 6,000 cubic feet of gas to one barrel of liquid.
(2) 1997 restated from wet gas price to dry gas price.
Drilling and Productive Wells
The following table sets forth Conoco's drilling wells and productive wells by region as of December 31, 1999. The table excludes our share of equity affiliates.
TOTAL UNITED OTHER
WORLDWIDE STATES EUROPE REGIONS
--------- ------ ------ -------
(NUMBER OF WELLS)
Number of wells drilling(1)
Gross........................................... 54 26 17 11
Net............................................. 23 15 2 6
Number of productive wells(2)
Oil wells -- gross.............................. 7,403 6,768 299 336
-- net................................ 2,588 2,450 26 112
Gas wells -- gross.............................. 8,709 8,078 209 422
-- net............................... 4,411 3,975 50 386
|
(1) Includes wells being completed.
(2) Approximately 63 gross (21 net) oil wells and 727 gross (258 net) gas wells have multiple completions.
Drilling Activity
The following table sets forth Conoco's net exploratory and development wells drilled by region for the three-year period ended December 31, 1999. The table excludes our share of equity affiliates.
TOTAL UNITED OTHER
WORLDWIDE STATES EUROPE REGIONS
--------- ------ ------ -------
(NUMBER OF NET WELLS COMPLETED)
For the year ended December 31, 1999
Exploratory -- productive....................... 6.8 1.7 1.3 3.8
-- dry............................. 3.3 0.0 0.8 2.5
Development -- productive....................... 179.1 165.2 8.7 5.2
-- dry............................ 19.1 18.3 0.0 0.8
For the year ended December 31, 1998
Exploratory -- productive....................... 7.3 2.2 1.1 4.0
-- dry............................. 14.0 5.4 1.9 6.7
Development -- productive....................... 234.8 215.9 2.8 16.1
-- dry............................ 13.0 13.0 0.0 0.0
For the year ended December 31, 1997
Exploratory -- productive....................... 7.1 3.7 1.6 1.8
-- dry............................. 18.4 11.7 4.9 1.8
Development -- productive....................... 142.6 126.9 5.4 10.3
-- dry............................ 10.2 7.2 0.0 3.0
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Developed and Undeveloped Petroleum Acreage
The following table sets forth Conoco's developed and undeveloped petroleum acreage by region as of December 31, 1999. The table excludes our share of equity affiliates.
TOTAL UNITED OTHER
WORLDWIDE STATES EUROPE REGIONS
--------- ------ ------ -------
(THOUSANDS OF ACRES)
Developed acreage
Gross........................................... 8,086 3,064 1,153 3,869
Net............................................. 3,558 1,543 285 1,730
Undeveloped acreage
Gross........................................... 79,354 3,461 4,107 71,786
Net............................................. 43,857 2,252 1,350 40,255
|
Conoco is not required to file, and has not filed on a recurring basis, estimates of its total proved net oil and gas reserves with any U.S. or non-U.S. governmental regulatory authority or agency other than the Department of Energy and the Securities and Exchange Commission. The estimates furnished to the DOE have been consistent with those furnished to the SEC. They are not necessarily directly comparable, however, due to special DOE reporting requirements, such as requirements to report in some instances on a gross, net or total operator basis, and requirements to report in terms of smaller units. In no instance have the estimates for the DOE differed by more than 5 percent from the corresponding estimates reflected in total reserves reported to the SEC.
DOWNSTREAM
Summary
Downstream operations encompass refining crude oil and other feedstocks into petroleum products, buying and selling crude oil and refined products and transporting, distributing and marketing petroleum products. Downstream operations are organized regionally with operations in the United States, Europe and the Asia Pacific region.
Downstream's objective is to continue to provide an appropriate return on investment by improving the competitiveness of the core business, while providing free cash flow to fund growth in upstream, as well as in new high potential downstream businesses. Consistent with this objective, Conoco has in the past, and may from time to time in the future, purchase or sell downstream assets. We may also consider forming alliances or joint ventures to hold and operate all or a selected part of our downstream assets either to optimize the efficiency of such operations through achieving economies of scale or, in certain circumstances, to monetize a portion of the value of such assets.
Conoco has made capital investments in downstream activities averaging approximately $500 million per year for the last three years. Capital investments for 1999 in downstream activities were approximately $462 million.
Conoco's downstream strengths are in the following areas:
- processing heavy, high sulfur and acidic crudes;
- upgrading bottom-of-the barrel feedstocks via coking technology;
- maintaining low cost, high volume retail marketing operations; and
- developing specialty products.
Approximately 50 percent of Conoco's worldwide refining capacity is designed to process heavy, high sulfur crude. In addition, the Humber refinery in the United Kingdom can process about 44 percent acidic crudes in its crude slate. Conoco has applied its coking technology to nearly all of its refining operations throughout the world. This has enabled us to become a world leader in producing petroleum coke products,
such as high value graphite and anode coke, which are used in the production of electrodes and anodes for the steel and aluminum industries, respectively. We have also licensed our fuel coking technology around the world, which has in turn created other business development opportunities.
Conoco produces and markets a full range of refined petroleum products, including gasolines, diesel fuels, heating oils, aviation fuels, heavy fuel oils, asphalts, lubricants, petroleum coke and specialty products and petrochemical feedstocks. We own and operate, or are a partner in the operation of, nine refineries worldwide with a total crude and condensate capacity of 829,000 barrels per day. Refining capacity is distributed 63 percent in the United States, 32 percent in Europe and 5 percent in the Asia Pacific region.
Capacity has risen by 208,000 barrels per day, or 33 percent, since year-end 1995, primarily as a result of:
- the expansion of the Lake Charles refinery;
- the upgrade of the Humber refinery;
- the acquisition of an interest in two refineries in the Czech Republic;
- the completion of the new Melaka refinery in Malaysia; and
- low cost incremental expansion of existing refining units.
In the United States, Conoco primarily markets through low cost wholesale operations. We have a growing marketing presence in Europe and Asia Pacific, where we are a leader in operating low cost, high volume retail stations. In 1999, refined product sales averaged 1,172,000 barrels per day, distributed 64 percent, 35 percent and 1 percent in the United States, Europe and the Asia Pacific region, respectively.
United States
Conoco's four U.S. refineries are high conversion facilities with capacity designed to process over 50 percent high sulfur crude oils, much of which is also heavy crude. A principal factor affecting the profitability of our U.S. operations is the price of refined products in relation to the cost of crude oils and other feedstocks processed. Because we are able to process a relatively large portion of heavy, high sulfur crude oil, the cost advantage of these crude oils, such as those from Mexico, Venezuela and Canada, over lighter, low sulfur crude oils, such as West Texas Intermediate, is particularly significant. Over half of our U.S. refining capacity is located in inland markets and therefore benefits from the price differential for products produced and sold inland versus those produced and sold on the Gulf Coast.
Integration of refining, transportation and marketing and continuous improvement initiatives have provided increased profitability through improvements in refinery reliability, utilization, product yield and energy usage. Since the end of 1995, Conoco has increased refining input at its four U.S. refineries by approximately 18 percent, while lowering average operating expenses by approximately $.65 per barrel of refinery input. We have also improved market share through geographic concentration of markets.
Conoco intends to limit future capital investments in downstream United States, excluding large, non-discretionary, regulatory-driven projects and selected growth projects, to a level that is less than half of downstream United States' operating cash flow. Capital expenditures were approximately $214 million in 1999, relatively flat compared to $201 million in 1998. We are positioned to make the necessary clean fuels investments at our refineries over the next five years in support of changing motor fuel specifications. We also plan to make further investments at the Lake Charles refinery to facilitate processing of Petrozuata synthetic crude.
REFINING
Conoco operates four wholly owned refineries in the United States. The following tables outline the rated crude and condensate distillation capacity as of December 31 for each of the past five years, and the average daily crude, condensate and other inputs for each of the past five years.
DECEMBER 31
--------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(THOUSANDS OF BARRELS PER DAY)
REFINERY CRUDE AND CONDENSATE CAPACITY
Lake Charles, Louisiana............................... 240 226 226 226 191
Ponca City, Oklahoma.................................. 174 168 155 155 150
Denver, Colorado...................................... 58 58 58 58 58
Billings, Montana..................................... 52 52 52 52 49
--- --- --- --- ---
Total....................................... 524 504 491 491 448
=== === === === ===
REFINERY INPUTS(1)
Lake Charles, Louisiana
Crude and condensate(2)............................. 234 216 211 177 179
Other feedstocks.................................... 20 24 23 21 23
Ponca City, Oklahoma
Crude and condensate(2)............................. 173 167 161 150 151
Other feedstocks.................................... 3 4 2 2 5
Denver, Colorado
Crude and condensate(2)............................. 56 50 53 49 49
Other feedstocks.................................... 0 0 0 0 0
Billings, Montana
Crude and condensate(2)............................. 49 52 51 51 45
Other feedstocks.................................... 3 3 3 3 3
Total crude and condensate.................. 512 485 476 426 424
Total other feedstocks...................... 26 31 27 26 31
|
(1) Includes feedstocks in addition to crude and condensate, on which rated capacity is based.
(2) Includes actual crude and condensate runs, which may exceed rated capacity.
Conoco's U.S. consolidated refined product yields by volume in 1999 were 48 percent motor gasoline, 43 percent middle distillates, including jet and diesel fuel, and 9 percent residual fuel oil and asphalt and other products, including petroleum coke, lubricants and liquefied petroleum gases.
LAKE CHARLES REFINERY AND RELATED FACILITIES
Conoco's Lake Charles refinery, located in Westlake, Louisiana, is a fully integrated, high conversion facility, which has a crude and condensate capacity of 240,000 barrels per day, an increase of 6 percent, or 14,000 barrels per day, from 1998, resulting from increased operational efficiencies. The refinery processes both heavy, high sulfur crude oil and low sulfur crude oil. The refinery's Gulf Coast location provides access to numerous cost effective domestic and international crude oil sources. The crude design capacity is approximately 182,000 barrels per day of heavy, high sulfur crudes with the remaining 58,000 barrels per day of domestic sourced low sulfur crudes. While the types and origins of these lower priced, heavy, high sulfur crudes can vary, the majority consists of Venezuelan and Mexican crudes delivered via tanker. Lake Charles refinery products can be delivered by truck, rail or major common carrier product pipelines, partially owned by Conoco, which serve the eastern and mid-continent United States. In addition, refinery products can be sold into export markets through the refinery's marine terminal.
The ability to refine both low sulfur and heavy, high sulfur crudes at the Lake Charles refinery provides a competitive advantage to us by enabling the refinery to produce from relatively low-cost feedstocks a full range
of products including gasolines, jet fuel, diesel fuel, petroleum coke, lube oils, LPG and other specialty products. The refinery facilities include fluid catalytic cracking, delayed coking and hydrodesulfurization units, which enable it to maximize its upgrade of heavier crude oil. We are making investments in the Lake Charles refinery so that it will be able to process Petrozuata synthetic crude when Petrozuata's upgrader is complete.
Integration of fuels and specialty products plays an important role in maximizing product value at the refinery. Intermediates produced from low sulfur crude processing allow the refinery to supply the heaviest, highest boiling range material in the crude to the Cit-Con lube plant, owned 35 percent by Conoco, for base oils, finished lubes and wax production. Other intermediates are exchanged with a neighboring chemical plant complex for further processing.
The refinery supplies high sulfur gas oil to Excel Paralubes, a 50/50 joint venture between Conoco and Pennzoil-Quaker State, which owns a hydrocracked lubricating base oil facility. Excel Paralubes' state-of-the-art lube oil facility produces approximately 18,000 barrels per day of high quality clear hydrocracked base oils, representing approximately 9 percent of U.S. lubricating base oil production. Hydrocracked base oils are second in quality only to synthetic base oils, but are produced at a much lower cost. The refinery produces other specialty intermediates for making solvents to supply Penreco, also a joint venture with Pennzoil-Quaker State. Penreco manufactures and markets highly refined specialty petroleum products for global markets.
The Lake Charles facilities also include a specialty coker and calciner that manufacture the more highly valued graphite and anode petroleum cokes for the steel and aluminum industries, and provide a substantial increase in light oils production by converting the heaviest part of the crude barrel into diesel fuel and gasoline. In addition, green petroleum coke is supplied to a nearby coke calcining venture.
PONCA CITY REFINERY
Conoco's refinery located in Ponca City, Oklahoma has a crude and condensate capacity of 174,000 barrels per day of light, high sulfur and light, low sulfur crudes. Both foreign and domestic crudes are delivered by pipeline from offshore, Oklahoma, Kansas and North and West Texas fields. Finished products are shipped by truck, rail and company-owned and common carrier pipelines to markets throughout the mid-continent region.
The Ponca City refinery is a high conversion facility, which produces a full range of products, including gasoline, jet fuel, diesel, LPG and anode and fuel grade petroleum cokes. The refinery's facilities include fluid catalytic cracking, delayed coking and hydrodesulfurization units, which enable it to produce high ratios of gasoline and diesel fuel from crude oil.
DENVER REFINERY
Conoco's Denver refinery, located in Commerce City, Colorado, has a crude and condensate capacity of 58,000 barrels per day, processing a mixture of Canadian heavy, high sulfur crudes, and domestic heavy, high sulfur crude oils and low sulfur crude oils. Almost all crude oil processed at the refinery is transported via pipeline. Products are delivered predominantly through a local truck loading terminal to the east side of the Rockies, but also by rail and pipelines to other Colorado markets. The refined gasoline products from the Denver refinery help supply our marketing operations in the Rocky Mountain states.
The Denver refinery is a high conversion refinery that produces a full range of products including gasolines, jet fuels, diesel and asphalt. The refinery's upgrading units enable it to process a crude slate containing nearly 50 percent heavy, high sulfur crude. We have a processing agreement with a refinery located in Cheyenne, Wyoming, that has coking capabilities, from which the refinery receives intermediate feedstocks for processing into finished products. The Denver refinery also supplies KC Asphalt, a 50/50 joint venture between Koch Industries and us, which markets high quality asphalt products. Both of these ventures enable us to turn relatively low value intermediates into higher margin products.
BILLINGS REFINERY
Conoco's Billings, Montana refinery has a crude and condensate capacity of 52,000 barrels per day, processing a mixture of about 70 percent Canadian heavy, high sulfur crude plus domestic high sulfur and low
sulfur crude oils, all delivered by pipeline. Products from the refinery are delivered via company-owned pipelines, rail, and trucks, thereby supplying Conoco's extensive branded marketing operations in eastern Washington and the northern Rocky Mountain states. The refinery's proximity to its primary source of crude and its ability to refine both low sulfur and heavy, high sulfur crudes provides us with significant competitive advantages.
The Billings refinery is a high conversion refinery that produces a full range of products including gasolines, jet fuels, diesel and fuel grade petroleum coke. The Billings refinery has a very high conversion rate and the capability to process less expensive, very heavy, high sulfur crudes. A delayed coker converts heavy, high sulfur residue into higher value light oils. A gas oil hydrotreating unit and hydrogen plant improve the light oil production yields and remove the additional sulfur contained in these heavy, high sulfur crudes.
MARKETING
In the United States, Conoco markets gasoline, utilizing the Conoco brand, in 37 states, 23 of which represent primary markets, in the southeast, mid-continent and Rocky Mountain regions. Market growth continues to be targeted to those areas where we can obtain a strong market share and areas that leverage supply from our U.S. refineries and those distribution systems in which we have an ownership position. Increasing operating market share has resulted in particularly strong brand recognition in the Rocky Mountain and mid-continent markets.
Conoco gasoline is sold through approximately 4,900 branded stations in the United States, 86 percent of the gasoline through retail outlets owned by independent wholesale marketers and 14 percent through 219 company-owned stores at year-end 1999. We market gasoline primarily through the wholesale channel in the United States because it requires a lower capital investment than company-owned retail stations, but still provides a secure, branded outlet for Conoco's products. Conoco operates retail stations to establish brand standards and image, as well as to better understand the independent distributors in order to provide programs and services to them and the consumer.
In 1999, we continued to expand "breakplace(R)," Conoco's upscale convenience store design. This format is designed to increase the frequency and transaction size of customer visits by catering to the needs of our targeted customer, the "convenience connoisseur." There were 45 "breakplace(R)" locations as of December 31, 1999. Many more stores in the network have adopted comprehensive offerings patterned after the format, thereby elevating Conoco's brand perception to the consumer. Complementing the "breakplace(R)" image, we continued the upgrade of company and marketer owned retail outlets to the enhanced "Conoco Red" image, which employs brighter exterior lighting and improved signage to attract customers.
At year-end 1999, CFJ Properties, a 50/50 joint venture between Conoco and Flying J, owned and operated 92 truck travel plazas that carry the Conoco and/or Flying J brands and provide a secure outlet for our diesel production. In addition, bulk sales of all refined petroleum products are made to commercial, industrial and spot market customers.
TRANSPORTATION
Conoco has approximately 7,300 miles of crude and product mainline pipelines in the United States, including those partially owned and/or operated by affiliates. We also own and operate 39 finished product terminals, four liquefied petroleum gas terminals, two crude terminals and one coke-exporting facility. Our crude pipeline interests and terminals provide integral logistical links between crude sources and refineries to lower crude costs. The product pipelines serve as secure links between refineries and key products markets. Our U.S. pipeline system transported an average of 946,000 barrels per day in 1999. Our equity share of shipments on affiliate pipelines was an additional 406,000 barrels per day.
Conoco currently operates a fleet of seven seagoing double-hulled crude oil tankers. Six of the ships typically travel to Mexico, Central America and South America to load crude oil and discharge at a Gulf Coast location. The vessels are used to provide secure transportation to the Lake Charles refinery, but when not in service for Conoco, are available for charter to third parties. The seventh double-hulled tanker, the
Rangrid, is on lease to a third party for use as a shuttle tanker for the Heidrun field in the North Sea, in which Conoco has an interest. The Independence, operated by Conoco Energy Nigeria Ltd., is a VLCC class ship that has been converted for use as a floating production storage and off-take vessel off the coast of Nigeria.
Conoco also operates a domestic fleet of seven boats and 14 double-hulled barges, providing the Gulf Coast Regional Business Unit with inland waterway transportation services. The fleet operates along the Gulf Coast from Corpus Christi, Texas to Mobile, Alabama transporting crude oil and refined products.
Europe
Conoco's European refining and marketing activities are conducted in 17 countries. In 1999, we reorganized our European operations into two regional clusters to centralize and leverage the benefits of certain support activities, which frees individual country organizations to focus on serving customers and developing our business within and across European borders.
The Northern cluster is based in the United Kingdom and includes marketing operations in Sweden, Norway, Finland and Denmark, in addition to refining and marketing activities in the U.K. The Continental cluster is based in Germany and includes marketing operations in Austria, Switzerland, Belgium, Luxembourg, Hungary, Slovakia, France, Poland and the Czech Republic. Additionally, the Continental cluster includes refining joint ventures in Germany and the Czech Republic and a marketing joint venture in Spain.
Our refining and marketing operations in the United Kingdom and Germany together accounted for 77 percent of our European downstream after-tax earnings in 1999.
Conoco's European downstream strategy has been to operate low cost, high volume retail outlets in selected key markets where we have a competitive advantage, pursue opportunities in growth regions, and maintain our Humber refinery and the Mineraloel Raffinerie Oberrhein GmbH (MiRO) joint venture refinery, in the United Kingdom and Germany, respectively, as top performers in Europe. We plan to redirect cash generated by our mature European businesses to other parts of upstream and downstream operations and to the identified European growth markets.
Conoco invested approximately $174 million in its downstream European operations in 1999, and $180 million in 1998. We continue to implement relatively low-cost projects in our refining operations designed to increase production and improve yields, while reducing feedstock costs and operating expenses. Conoco plans to continue to direct capital expenditures for marketing operations, which are expected to be approximately 33 percent of total European downstream capital expenditures, toward construction of new stations in growth markets. These markets are primarily in Central and Eastern Europe, and also in its areas of competitive strength in Germany, Austria and the Nordic countries.
Conoco's European downstream profitability is affected by several factors. As with all refining operations, the difference between the market price of refined products and the cost of crude oil is the major factor. Our European refineries are able to process lower cost crudes or upgrade other feedstocks into high value finished products. In addition, since the United Kingdom refinery also processes fuel oil as a feedstock, the price difference between low sulfur fuel oil and finished products is important to earnings. European operations also include significant retail marketing volumes, and therefore earnings are driven by retail margins, fuel and convenience product sales and operating expenses in the various countries where we operate.
REFINING
Conoco's principal European refining operations are located in the United Kingdom, Germany and the Czech Republic. Since early 1996, the expansion of Conoco's Humber refinery in the United Kingdom, the formation of the MiRO joint venture through consolidation with a neighboring German refinery and the purchase of a share in the Czech Refining Company (CRC) joint venture owning two Czech Republic refineries have increased our European crude refining capacity by approximately 53 percent, or 92,000 barrels per day. We have continuously upgraded our refineries in Europe since the early 1990's and the configuration and output of the refineries are two of Conoco's primary sources of competitive advantage. In 1998, the United
Kingdom and Germany refineries ranked in the first quartile of Western European refineries by Solomon Associates, an independent benchmarking company for financial and operating performance, as measured by net margin and return on investment categories. In addition, Wood Mackenzie, a recognized petroleum industry consultant, rated Conoco's European refining operations best in Europe in a 1999 study, as measured by net cash margin per barrel.
Conoco has undertaken a major capital investment program, totaling approximately $429 million from 1994 through 1999, to process lower cost feedstocks and increase conversion capacity, product quality and energy efficiency at the Humber refinery. We plan to spend about $150 million at the Humber refinery, in order to continue to improve reliability and efficiency, and to make investments to meet clean fuel specifications. By making clean fuel investments in advance of rigorous new European Union fuels specifications, Conoco will realize attractive duty savings for the next few years tied to the production of low sulfur road use diesel and be positioned to realize possible future incentives for gasoline. We are also participating in upgrading projects at joint venture owned refineries in Germany and the Czech Republic.
The following tables outline the rated crude and condensate distillation capacity as of December 31 for each of the past five years and the annual average daily crude and condensate and other inputs for each of the past five years.
DECEMBER 31
--------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(THOUSANDS OF BARRELS PER DAY)
REFINERY CRUDE AND CONDENSATE CAPACITY
Humber, United Kingdom................................ 180 180 180 180 130
MiRO, Germany(1)...................................... 56 54 54 43 43
CRC, Czech Republic(2)................................ 29 29 29 29 --
--- --- --- --- ---
Total(3).................................... 265 263 263 252 173
=== === === === ===
REFINERY INPUTS(4)
Humber, United Kingdom(5)
Crude and condensate(6)............................. 178 165 137 121 133
Other feedstocks.................................... 48 57 56 76 74
MiRO, Germany(1)
Crude and condensate(6)............................. 56 54 51 47 46
Other feedstocks.................................... 4 3 11 13 13
CRC, Czech Republic(2)
Crude and condensate(6)............................. 17 20 21 22 --
Other feedstocks.................................... 1 1 1 1 --
Total crude and condensate(3)............... 251 239 209 190 179
Total other feedstocks...................... 53 61 68 90 87
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(1) The 1999, 1998, and 1997 figures represent Conoco's 18.75 percent interest in the MiRO refinery complex at Karlsruhe, Germany. For 1996 and 1995, Conoco's interest was 25 percent in the OMW refinery.
(2) Represents Conoco's 16.33 percent interest in two refineries in the Czech Republic.
(3) Does not include Conoco's 1.4 percent interest in a 95,000 barrel per day refinery in Mersin, Turkey.
(4) Includes feedstocks in addition to crude and condensate, on which rated capacity is based.
(5) The tie-in of a major expansion project and a major refinery maintenance turnaround significantly affected the Humber refinery's utilization in 1997 and 1996, respectively.
(6) Includes actual crude and condensate runs, which may exceed rated capacity.
The yield of Conoco's European refineries by product and country for the year ended December 31, 1999, was as follows:
UNITED
KINGDOM GERMANY CZECH REPUBLIC
------- ------- --------------
PERCENT OF TOTAL YIELD (1)
Motor gasoline....................................... 32 41 19
Middle distillate.................................... 49 43 31
Residual fuel oil and asphalt........................ 5 8 23
Other(2)............................................. 14 8 27
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(1) Percentages are volume based, not weight based.
(2) Other products primarily include petroleum coke, lubricants and liquefied petroleum gases.
UNITED KINGDOM REFINERY
Conoco's wholly owned Humber refinery is located in North Lincolnshire, United Kingdom, and has a crude and condensate capacity of 180,000 barrels per day. Crude processed at the refinery is exclusively low or medium sulfur, supplied primarily from the North Sea and includes lower cost, acidic crudes. The refinery also processes up to 60,000 barrels per day of other intermediate feedstocks, mostly vacuum gas oils and residual fuel oil, which many other European refineries are not able to process. The refinery's location on the east coast of England provides for cost-effective North Sea crude imports and product exports to European and world markets.
The Humber refinery, one of the most sophisticated refineries in Europe, is a fully integrated, high conversion refinery that produces a full slate of light products and minimal fuel oil. In 1996, Conoco increased crude capacity at the refinery and added a vacuum unit that allows the refinery to process up to 80,000 barrels per day of less expensive, acidic North Sea crudes. The refinery also has two coking units with associated calcining plants, which upgrade the heavy "bottoms" and imported feedstocks into light oil products and high value graphite and anode petroleum cokes. Approximately 48 percent of the light oils produced in the refinery are marketed in the United Kingdom, while the other products are exported to the rest of Europe and the United States. This gives the refinery the flexibility to take full advantage of inland and global export market opportunities.
GERMANY REFINERY
The MiRO refinery in Karlsruhe, Germany, is a joint venture refinery with a crude and condensate capacity of 299,000 barrels per day. The MiRO joint venture arose from the combination in 1996 of the existing OMW refinery, in which Conoco had a 25 percent share, with an adjacent Esso refinery. Conoco has an 18.75 percent interest in MiRO and Conoco's capacity share is 56,000 barrels per day. The other owners of MiRO are DEA Mineraloel AG, Esso AG and Ruhr Oel GmbH, a 50/50 joint venture between Veba and PDVSA. Approximately 55 percent of the refinery's crude feedstock is low cost, high sulfur crude. The MiRO refinery complex is a fully integrated, high conversion refinery producing gasoline, middle distillates, residual fuel oil and other products. The refinery has a high capacity to convert lower cost feedstocks into high value products, primarily with a fluid catalytic cracker and delayed coker. The coker produces both fuel grade and specialty calcined cokes.
The creation of the MiRO joint venture has improved the refinery's competitiveness and was driven by the synergy that existed between the two facilities. Integrated operations have yielded improved product slates, which better match local demand, and increased processing efficiency, while retaining operational flexibility for the partners. The refinery processes crude and feedstock supplied by each of the partners in proportion to their respective ownership interests. Streamlining the two operations has allowed Conoco to eliminate less efficient processing units in both refineries, resulting in lower operating costs.
CZECH REPUBLIC REFINERIES
In late 1995, Conoco, through participation in the newly formed CRC, acquired an interest in two refineries in the Czech Republic. The other owners of CRC are Unipetrol A.S., Agip Petroli, and Shell Overseas Investment B.V. The refinery at Litvinov has a crude and condensate capacity of 109,800 barrels per day, and the Kralupy refinery has a crude and condensate capacity of 67,500 barrels per day. Conoco's 16.33 percent ownership share of the combined capacity is 29,000 barrels per day. Both refineries process mostly high sulfur crude, with a large portion being Russian export blend delivered by pipeline at an advantageous cost. The refineries have an alternative crude supply via a pipeline from the Mediterranean.
Conoco expects that completion of a visbreaker project at the Litvinov refinery, scheduled for the year 2000, will increase conversion rates and significantly reduce fuel oil production. The Kralupy refinery is currently a hydroskimming facility, but CRC has approved an investment in major conversion facilities to reduce fuel oil production and increase light oil yields. The two Czech refineries are operated as a single entity, with intermediate streams moving between the two facilities. CRC markets finished products both inland and abroad. We intend to use our share of the light oil production to support an expanding retail marketing network in Central and Eastern Europe.
MARKETING
Conoco has marketing operations in 17 European countries. Our European marketing strategy is to sell primarily through owned, leased or joint venture retail sites using a low cost, high volume, low price strategy. Conoco has a strong reputation in the European marketing area, as evidenced by Wood Mackenzie's 1999 study that ranked our retail marketing operations first in marketing efficiency (measured as average sales per station relative to industry average sales per station in countries where Conoco operates). We intend to expand into identified growing markets, while concurrently strengthening our market share in core markets such as Germany, Austria and the Nordic countries. Conoco is standardizing its European retail operations in order to capture cost savings and prepare for a more integrated Europe. We are continuing to reduce our cost structure for marketing activities while also optimizing activities to grow income in the non-fuels sector. We also market aviation fuels, liquid petroleum gases, heating oils, transportation fuels and marine bunkers to commercial accounts and into the bulk or spot market.
Conoco uses the "Jet" brand name to market its retail products in its wholly owned operations in Austria, Czech Republic, Denmark, Finland, Germany, Hungary, Norway, Poland, Slovakia, Sweden and the United Kingdom. In Belgium and Luxembourg, we market under the "SECA" brand. Stations throughout Europe also display the "Conoco" brand. In addition, various joint ventures, in which Conoco has an equity interest, market products in Spain, Switzerland and Turkey under the "Jet," "OK Co-op" and "Tabas" or "Turkpetrol" brand names, respectively.
As of December 31, 1999, Conoco had 1,987 marketing outlets in its wholly owned European operations, of which 1,307 were company-owned. Through our joint venture operations in Turkey, Spain and Switzerland, we also have an interest in another 958 retail sites. Our largest branded site networks are in Germany and the United Kingdom, which account for 64 percent of the total branded units. In Germany and Austria, 69 outlets were added during 1999, largely as a result of an acquisition of retail units at supermarket locations. In the Nordic countries, we have expanded from our base of unmanned sites in Sweden and Denmark into Norway and Finland, with two new stations in the region. In response to weak fuel margins in the United Kingdom over the past several years, we have restructured our operations, reducing the number of stations and focusing on locations where we have a competitive advantage, which has reduced our unit breakeven cost structure.
Conoco has been expanding in targeted growth markets in Central and Eastern Europe in the Czech Republic, Poland, Hungary and Slovakia, and has added two stations in the last year for a total of 128 stations at December 31, 1999. We expect to continue this expansion in order to capture the demand growth and rising margins expected in these inland markets. This marketing expansion allows us to obtain further integration with products produced at the Czech refineries. Similarly, Conoco has invested in the growing markets of Spain and Turkey, where at the end of 1999, we had an interest through our joint ventures in 118 and 750 sites,
respectively. The joint venture marketing operation in Turkey also provides us with a strategic position and opportunity for upstream ventures in this region.
In the third quarter of 1999, our Turkish affiliate, Tabas, merged with an affiliated Turkish company, Turcas. Conoco's ownership interest in the larger combined company amounts to 27.6 percent versus 28.9 percent of the pre-merger company. The resulting entity structure provides significant financial advantages to our Turkish operations.
Asia Pacific
Conoco is looking to the Asia Pacific region for much of its long-term downstream growth. Despite the recent economic downturn, we expect the Asian market, in the long-term, to grow faster than comparable markets. Conoco intends to eventually establish at least 100,000 barrels per day of equity refining capacity in the region. Further, we plan to expand our marketing operations to integrate with the refining supply, and capitalize on market deregulation and long-term regional demand growth.
The refinery in Melaka, Malaysia was built by a joint venture, which is 40 percent owned by Conoco with partners Petronas, the Malaysian state oil company, and Statoil. The refinery has a rated crude capacity of 100,000 barrels per day, of which Conoco's share is 40,000 barrels per day. Start-up of the Melaka refinery was initiated in August 1998, with the commissioning of the crude unit. Conoco's share of refinery inputs, sourced from Dubai, as well as third parties, was about 12 million barrels for 1999. This volume accounts for approximately 32,000 barrels per day of Conoco's total refinery inputs for 1999. The joint venture has a five-year tax holiday commencing with initial operation. The feedstocks for Conoco's capacity in the refinery will consist of between 70 and 90 percent high sulfur crude and the remainder local heavy sweet crude, depending on processing economics.
This refinery capitalizes on Conoco's proprietary coking technology to upgrade low-cost feedstocks to higher-margin products. Initial refinery units, in addition to the fuels delayed coker, include:
- a crude and vacuum distillation unit;
- a vacuum gas oil hydrocracker;
- naphtha and diesel hydrotreater;
- catalytic reformer; and
- an isomerization unit.
The refinery is a high conversion facility that will produce a full range of refined petroleum products.
Conoco intends to utilize some of its share of refined products from the refinery to continue growing its retail marketing operations in the Asia Pacific region. The balance of Conoco's share of production will be sold primarily in the spot market. Our regional crude and product supply and disposition operations are centrally located in Singapore.
We began marketing motor fuels in Thailand in 1993. Conoco has since established a significant presence in the Thai retail market. At the end of 1999, Conoco had 105 stores in operation. We plan to build about 50 additional retail outlets.
Conoco has launched a retail marketing joint venture in Malaysia with Sime Darby Bhd., a company that has a major presence in the Malaysian business sector. Capitalizing on the cost benefits of direct supply, the benefits of being the first licensees since 1969 to establish retail marketing in Malaysia, and the currently depressed prices of premium Malaysian real estate, we will initially target major markets within 125 miles of the Melaka refinery. The fourth quarter of 1999 witnessed the opening of the first ProJET station and "destina(R)" store in Malaysia. Current plans are to open up to 10 new stores in 2000.
Specialty Products
Conoco sells a variety of high value lubricants and specialty products including lubes, such as automotive and industrial lubricants and waxes, petroleum coke, solvents and pipeline flow improvers, to commercial, industrial and wholesale accounts worldwide. Our experience has been that specialty products are attractive because their premium prices generate higher margins and their markets are generally less cyclical than commodity markets.
Conoco began marketing the HYDROCLEAR(R) brand of lubricants with the start-up of Excel Paralubes in 1997. The HYDROCLEAR(R) lubricants, which are non-toxic, were designed to compete with synthetics for a range of applications with difficult operating conditions. We also are partners with Pennzoil-Quaker State in Penreco, a fully integrated specialties company providing high quality products for use in the global cosmetic, pharmaceutical, industrial and home markets.
Conoco's technical expertise in carbon upgrading positions it as a leader in manufacturing and marketing specialty coke and coke products. We manufacture high quality graphite coke, at our Lake Charles and Humber refineries, for use in the global steel industry. We also globally market anode and fuel coke produced at our Lake Charles, Ponca City, Billings, Humber and joint venture MiRO refineries, as well as fuel coke produced at our joint venture Melaka refinery. In addition, we participate in the Asia Pacific coke market by providing technical and marketing expertise to our PetroCokes joint venture with Sumitomo and Japan Energy. In 1999, we granted two licenses for this technology to other companies. Today our technology is used by more than two dozen coking facilities -- a third of the world's delayed coking capacity.
Conoco, utilizing its carbon upgrading expertise, has developed a new petroleum-based carbon fiber with unique applications in the electronics, composite materials, plastics, automotive, construction, transportation and other niche markets. The product is vastly different from existing carbon-based fibers, with unique properties that can enhance existing products and open the door to new markets. The manufacturing process uses low-valued refinery product streams, instead of the high-cost chemical feedstocks utilized in making traditional carbon fibers, with a resulting significant reduction in plant construction and manufacturing costs. Construction of a 4.4 million pound per year manufacturing plant, adjacent to our Ponca City refinery, with the capability of expanding to an eight million pound per year facility, will begin in the second quarter of 2000. Commercial production is expected to commence in the second half of 2001.
Conoco is a leader in the worldwide market for pipeline flow improvers. Our "LiquidPower(TM) Flow Improver" product is used for increasing petroleum pipeline capacity by reducing frictional pressure drop or used for energy savings. We also use "LiquidPower(TM) Flow Improver" in our own pipeline systems. We recently introduced "RefinedPower(R) Flow Improver," an innovative new generation product designed for petroleum product pipelines.
POWER
Conoco Global Power was founded in 1995, to leverage the economic advantages of Conoco's energy production activities and offer integrated energy solutions to customers, by capitalizing on our strengths in managing major projects, risk and industrial operations.
Conoco Global Power owns 37.5 percent of a Colombian joint venture, located in Barrancabermeja, Colombia along with Western Resources (37.5 percent) and five Colombian companies (5 percent each). The joint venture built a natural gas-fired generation plant capable of producing 160 megawatts of power, which became operational in August 1998. The joint venture sells primarily to the local power grid.
Conoco Global Power owns a 50 percent interest in a natural gas-fired
cogeneration plant near Corpus Christi, Texas. The plant, which commenced
commercial operation in November 1999, is located adjacent to chemical complexes
owned by DuPont and OxyChem. OxyChem, Occidental Petroleum Corporation's
chemicals division, is our partner in this joint venture. OxyChem operates the
plant under a long-term contract and purchases electricity and steam production
from the plant. The plant is designed to produce 440 megawatts of power and 1.1
million pounds per hour of process steam. The plant is a qualifying facility
under the Public Utility Regulatory Policies Act and expects to sell excess
electricity in the Texas power markets.
Conoco Global Power commenced construction of a natural gas-fired cogeneration facility near Orange, Texas in October 1999. The facility, which is located at DuPont's chemical complex, is in the process of securing project financing. It is anticipated that Conoco Global Power will reduce its ownership to 50 percent during the first half of 2000. The facility will provide electricity and process steam to the chemical complex, with 250 megawatts of power sold to Pacific G&E Energy Trading Power, L.P., under a long term tolling agreement. The remaining electric output is expected to be sold on a merchant basis into the Southeast electric market. Conoco Global Power will manage the facility, while DuPont will be the contract operator under a long-term operating agreement. The plant is designed to produce 421 megawatts of power and 810,000 pounds per hour of process steam. Commercial operation is scheduled for mid-2001.
Conoco Global Power and DuPont have signed letters of intent to develop natural gas-fired cogeneration facilities at DuPont chemical facilities in Germany and Spain. The two plants, with a total capacity of 235 megawatts, will provide needed electricity and steam for DuPont's operations. Conoco also will sell surplus electric power to other customers, including the local utilities. The plants are expected to be in operation by 2003. Conoco Global Power has also signed a letter of intent with Total Oil Marine to investigate the possibility of Conoco Global Power constructing and operating a gas-fired 475-700 megawatt combined heat and power station servicing Conoco's and Totalfina's refineries in North Lincolnshire, United Kingdom. The facility would provide steam and electricity to the refineries and market power into the U.K. market. Some of the required capacity on the U.K.'s national grid has been secured and permitting is in process. If the U.K. government and Conoco approve this project, the facility is expected to commence operation in the fourth quarter of 2002.
CORE VALUES
Conoco is committed to four core values: operating safely, protecting the environment, behaving ethically and valuing all people. During 1999, 1998 and 1997, Conoco achieved and maintained its lowest level of recordable injury rates in Conoco's history for both employees and contractors. In 1999, the American Petroleum Institute ranked Conoco's U.S. employees as the safest in the petroleum industry with the lowest 1998 injury rate, an achievement that has been matched for 14 out of the last 20 years. In 1999, the European oil industry organization, CONCAWE, recognized Conoco as having the best safety statistics in the European downstream industry for two of the past three years.
Conoco is also an innovator both at recycling materials and at operating in environmentally sensitive areas. In the United Kingdom, for example, Conoco recycled over 99 percent of four Viking gas platforms, which it decommissioned in the North Sea. We have also operated for 60 years in the Aransas National Wildlife Refuge, a natural habitat for the endangered whooping crane in South Texas. In 1990, Conoco took a major step toward oil spill prevention as the first petroleum company to voluntarily commit to build only double-hulled tankers -- a decision made before U.S. law mandated such technology. During 1998, Conoco began operating a fleet of 100 percent double-hulled crude oil tankers and tank barges in U.S. waters, more than a year ahead of its target date of 2000. In 1999, Conoco marked the 31st anniversary of implementing one of the industry's first environmental policies, which predates both the World Environmental Day and Earth Day in the United States.
In order to maintain the highest ethical standards, Conoco established clear guidelines on business ethics, which every employee agrees to follow. We have historically granted annual President's Awards to recognize exceptional examples of performance in safety, environmental protection and valuing all people. A President's Award for ethical behavior was added in 1999.
The valuing all people core value is based on our commitment to maximize the contribution and motivation of our approximately 16,700 person workforce, to being a great company to work for and to achieve business success.
We believe these core values result in a motivated workforce with values and goals firmly aligned with the strategic aims of the business. This belief was reinforced through our 1999 Employee Opinion Survey results, which reached a six-year high, indicating employees were quite pleased with Conoco and their jobs. Core values provide guidance to employees in working to meet the expectations of customers, partners and host
governments and in respecting the communities in which we do business. In addition, we believe our commitment to core values helps to reduce liabilities, manage risks and improve business performance. The financial success of Conoco -- which is influenced by performance in our core values -- is shared with substantially all employees through the "Conoco Challenge" and "Global Variable Compensation" programs.
ENVIRONMENTAL REGULATION
As with other companies and industries, Conoco's operations are subject to numerous federal, state, local, European Union and other foreign environmental laws and regulations, including legislation that implements international conventions or protocols, concerning its oil and gas operations, products and other activities, including:
- The federal Clean Air Act, as amended (CAA), which subjects Conoco operations to regulations controlling emissions of air pollutants;
- The Comprehensive Environmental Response, Compensation, and Liability Act, as amended (CERCLA) and comparable state statutes, which impose strict, joint and several liability on owners and operators of sites and on persons who disposed of or arranged for the disposal of "hazardous substances" found at such sites. Although CERCLA currently excludes petroleum operations from cleanup liability, many state laws affecting Conoco's operations impose clean-up liability regarding petroleum-related products;
- The Resource Conservation and Recovery Act, as amended (RCRA) and comparable state statutes that govern the management and disposal of wastes;
- The federal Oil Pollution Act of 1990, as amended, under which (i) owners and operators of onshore facilities and pipelines, (ii) lessees or permittees of an area in which an offshore facility is located and (iii) owners and operators of tank vessels, are strictly liable on a joint and several basis for removal costs and damages that result from a discharge of oil into navigable waters of the United States; and
- Regulations of the United States Department of the Interior related to offshore oil and gas operations in U.S. waters, which currently impose strict liability upon the lessee under a federal lease for the cost of clean-up of pollution resulting from the lessee's operations, and possible liability for pollution damages.
Governmental approvals and permits are currently, and may in the future be, required in connection with Conoco's operations. The duration and success of obtaining such approvals are contingent upon numerous variables, many of which are not within our control. To the extent such approvals are required and not obtained, operations may be delayed or curtailed, or Conoco may be prohibited from proceeding with planned exploration or operation of facilities.
Environmental laws and regulations are expected to have an increasing impact on Conoco's operations in most of the countries in which it operates, although it is impossible to predict accurately the effect of future developments in such laws and regulations on Conoco's future earnings and operations. Some risk of environmental costs and liabilities is inherent in particular operations and products of Conoco, as it is with other companies engaged in similar businesses, and there can be no assurance that material costs and liabilities will not be incurred. However, Conoco does not currently expect any material adverse effect upon its results of operations or financial position as a result of compliance with such laws and regulations.
Under the CAA, the U.S. Environmental Protection Agency (EPA) has
promulgated a number of regulatory standards that mandate a variety of
specifications for motor fuels designed to reduce emissions of certain air
pollutants from vehicles burning such fuels. These regulated fuels include
gasoline and diesel fuels produced and marketed by Conoco. In addition, many
other countries in which Conoco produces or markets motor fuels regulate the
composition of such products. Conoco has already incurred the costs of complying
with such requirements that are currently in effect. The European Parliament
enacted legislation in October 1998 that, among other things, required phased
reductions of sulfur and aromatics content in gasoline and diesel fuel and of
benzene in gasoline. The estimated cost to modify and/or replace existing
equipment to
comply with the new sulfur standards is about $150 million, with completion scheduled for no later than 2001. Aromatics and benzene requirements for 2005 have not yet been finalized, and therefore it is too early to be able to estimate the costs to comply with those standards.
In late 1999, the EPA published final rules, referred to as Tier 2, for controlling future vehicle emissions and the sulfur content of gasoline. Over the next four to five years, Conoco will be positioning itself to be able to supply the low sulfur gasoline as required by the new Tier 2 regulations. It is too early to fully assess the compliance costs that will be incurred, but these costs are expected to be in line with the estimate of two to three cents per gallon included in the Tier 2 regulations.
In 1997, an international conference on global warming concluded an agreement, known as the Kyoto Protocol, which called for reductions of certain emissions that contribute to increases in atmospheric greenhouse gas concentrations. The United States has not ratified the treaty codifying the Kyoto Protocol, but it may in the future. In addition, other countries where Conoco has interests, or may have interests in the future, have made commitments to the Kyoto Protocol and are in various stages of formulating applicable regulations. Although it is not yet possible to estimate accurately the total actual expenditures that may be incurred by Conoco as a result of the Kyoto Protocol, such expenditures could be substantial.
For a discussion of our operating expenses and capital expenditures with respect to environmental protection, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Environmental Matters," incorporated by reference into this document from our 1999 Annual Report to Stockholders. Although future environmental obligations are not expected to have a material adverse effect on the results of operations or financial condition of Conoco, there can be no assurance that future developments, such as increasingly stringent environment laws or enforcement thereof, will not cause us to incur substantial environmental liabilities or costs.
SOURCES OF SUPPLY
During 1999, Conoco supplemented its own crude oil production to meet its refining requirements by the purchase of crude oil from both domestic and international sources. Approximately 47 percent of the crude oil processed in our U.S. refineries in 1999 came from U.S. sources. The remainder of crude processed came principally from Venezuela, Mexico and Canada. During 1999, Conoco's Humber refinery processed principally North Sea crude oils. In the joint venture MiRO refinery, Conoco processed primarily Mediterranean crude oils in 1999. Conoco's joint venture CRC refineries processed primarily Russian crudes.
To assure availability, Conoco maintains multiple sources for most raw materials, supplies, services and equipment, with no one company supplying a substantial portion of our needs. We also routinely lease or charter equipment, such as drilling rigs, offshore supply boats, seismic boats, pipeline laying equipment, derrick barges and cranes. Availability of supply and/or cost of such equipment has been a factor in the past, and could have a detrimental impact on us in the future.
RESEARCH AND DEVELOPMENT
The objectives of Conoco's research and development programs are to discover new products, processes and business opportunities in relevant fields, and to improve existing products and processes. Research and development also focuses on optimizing existing assets and improving efficiency, safety and environmental protection. Worldwide expenditures for research and development amounted to approximately $35 million in 1999, $42 million in 1998 and $44 million in 1997.
PATENTS AND TRADEMARKS
Conoco owns and is licensed under various patents, which expire from time to time, covering many products, processes and product uses. No individual patent is of material importance to Conoco's business as a whole. During 1999, we were granted seven U.S. and 25 non-U.S. patents. We also have individual trademarks and brands for our products and services, which are registered, in various countries throughout the world. None of these trademarks and brands is considered material other than the "Conoco" and "Jet" brands.
OPERATING HAZARDS AND INSURANCE
Conoco's operations are subject to certain operating hazards, such as well blowouts, collapsed wells, explosions, uncontrolled flows of oil, natural gas or well fluids, fires, formations with abnormal pressures, pipeline ruptures or spills, refinery explosions, surface or marine transportation incidents, pollution, releases of toxic gas and other environmental hazards and risks. In accordance with customary industry practices, Conoco maintains insurance against some, but not all, of such risks and losses. Given our risk profile, and in accordance with the practices of a number of major, integrated, international energy companies, Conoco does not carry business interruption insurance on all operations. Conoco's decision to carry business interruption insurance only on selected operations is based on several factors, including its spread of risks, a favorable loss history and loss prevention and safety programs. Conoco has elected to retain the risk where management believes the cost of insurance, although available, is excessive relative to the risks presented. In addition, pollution and environmental risks are generally not fully insurable.
PROPERTIES
Conoco's corporate headquarters, consisting of 16 three-story buildings on a 62-acre site, is located in Houston, Texas. We own and lease petroleum properties and operate production processing, refining, marketing, power-generating and research and development facilities worldwide. In addition, we operate sales offices, regional purchasing offices, distribution centers and various other specialized service locations throughout the world.
EMPLOYEES
Conoco had about 16,700 employees as of December 31, 1999, approximately the same as last year. In 1999, Conoco reduced staff by 704 positions to improve operational efficiencies by combining some functions in the United States and by more broadly sharing services and more effectively deploying employees. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Restructuring," incorporated by reference into this document from our 1999 Annual Report to Stockholders. These reductions were offset by an increase in staff positions, due to expansion of our Thailand retail operations and the growth of our Central and Eastern European retail operations in the Czech Republic and Poland.
Approximately 1,400 employees at our four U.S. refineries are primarily represented by the Paper, Allied-Industrial, Chemical and Energy Workers International Union, under separate bargaining agreements for each refinery. These agreements cover wages, certain benefits matters, grievance procedures and various employment conditions, and we believe they are typical of the refining industry in the U.S.
ITEM 3. 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 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 would be seeking a civil penalty of $300,000. Since that time, Conoco and the LDEQ have negotiated a settlement of this matter. Under the settlement agreement terms, Conoco will execute a supplemental environmental project (SEP) and pay a civil penalty of $75,000. The SEP involves the relocation of marine dock area pipes. The draft agreement is currently being circulated within LDEQ for approvals.
On November 17, 1999, Conoco received Notice of Violation (NOV) 402 from the New Mexico Environment Department (NMED). NMED alleged that Conoco did not complete two initial compliance tests at the Kemnitz NG&GP Compressor Station by the permitted deadline, and that it did not submit the test reports to the state within the regulatory timeframe after the tests were completed. The NOV contained a draft penalty calculation of $160,656. Conoco disputes that it had the duty to conduct one of the compliance tests. Settlement negotiations are ongoing.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 1999 to a vote of security holders through the solicitation of proxies or otherwise.
EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE(1) POSITION WITH THE COMPANY
---- ------ -------------------------
Archie W. Dunham..................... 61 Chairman, President and Chief
Executive Officer
Gary W. Edwards...................... 58 Senior Executive Vice President,
Corporate Strategy and Development
Robert E. McKee III.................. 53 Executive Vice President, Exploration
Production
Jim W. Nokes......................... 53 Executive Vice President, Refining,
Marketing, Supply and
Transportation
Robert W. Goldman.................... 57 Senior Vice President, Finance, and
Chief Financial Officer
Rick A. Harrington................... 55 Senior Vice President, Legal, and
General Counsel
|
(1) As of March 13, 2000.
Set forth below is information concerning the current executive officers.
Archie W. Dunham has been Chairman of the Board of Conoco since August 1999 and a director since July 1998. He has been President and Chief Executive Officer of Conoco since 1996. He joined Conoco in 1966 and subsequently held a number of commercial and managerial positions within Conoco and DuPont. He served on DuPont's board of directors until August 1999. Mr. Dunham is also a member of the boards of directors of Louisiana-Pacific Corporation and Phelps Dodge Corporation. Mr. Dunham is a former Executive Vice President, Exploration Production and Executive Vice President, Refining, Marketing, Supply and Transportation for Conoco. He was also a Senior Vice President, Polymers and Senior Vice President, Chemicals and Pigments for DuPont. He is a director of the American Petroleum Institute, the U.S.-Russia Business Council and the Greater Houston Partnership. He is Chairman of the United States Energy Association, Chairman of the National Petroleum Council and a member of The Business Council. Mr. Dunham is also a member of the Board of Visitors and the Energy Center board of directors at the
University of Oklahoma. He also serves on the board of trustees of the Memorial Hermann Healthcare System in Houston, the Houston Grand Opera, the Houston Symphony, the George Bush Presidential Library and the Smithsonian Institution.
Gary W. Edwards was appointed Senior Executive Vice President, Corporate Strategy and Development of Conoco in November 1999. Prior to his appointment, he had been Executive Vice President of Conoco since 1991, with responsibility for worldwide refining, marketing, supply and transportation and was a Senior Vice President of DuPont until October 27, 1998. He joined Conoco in 1963, working at various locations throughout the United States and in the United Kingdom, and was formerly Conoco's Vice President, Refining Marketing Europe; Vice President Refining, Marketing and Transportation; and Vice President North American Marketing. Mr. Edwards has held a number of managerial positions in Conoco Pipe Line, Transportation, Natural Gas and Gas Products, Logistics and Marketing. He is a Director of the American Petroleum Institute and National Association of Manufacturers and a previous director and Vice President of the European Petroleum Industry Association in Brussels, Belgium. Mr. Edwards is a member of the Kansas State University Engineering advisory council and serves on the boards of the Yellowstone Park Foundation, Theatre Under the Stars, Junior Achievement, Inc. (National), as well as Junior Achievement of Southeast Texas, Target Hunger, Private Sector Initiative, and the Houston Music Hall Foundation.
Robert E. McKee III has been an Executive Vice President for Conoco since 1992, with responsibility for worldwide exploration and production and was a Senior Vice President of DuPont until October 27, 1998. He was formerly Conoco's Executive Vice President for Corporate Strategy and Development, Senior Vice President for Administration, Vice President of North American Refining and Marketing and Vice President, Chairman and Managing Director of Conoco (UK) Limited. Since he joined Conoco in 1967, Mr. McKee has worked at various locations and held numerous managerial, operating, administrative and technology positions both in the United States and overseas. He currently serves on the board of directors of the American Petroleum Institute and is a former director of Consol Energy Inc. and Consol Inc. In addition, he is Chairman of the Southern Regional Advisory Board of the Institute of International Education and a member of the advisory committee of the University of Texas Engineering Department. Mr. McKee also serves as Chairman of the President's Council of the Colorado School of Mines.
Jim W. Nokes has been Executive Vice President for Conoco since November 1999, with responsibility for worldwide refining, marketing, supply and transportation, and was President of North American Refining and Marketing from 1998 until 1999. Mr. Nokes was Vice President of North American Refining and Marketing from 1994 until 1998. Since he joined Conoco in 1970, Mr. Nokes has held various administrative, planning and operating management positions with Conoco's gas and natural gas processing departments and pipe line subsidiary. In 1989, he transferred to London to serve as Director and General Manager of Business Development for Conoco's exploration and production affiliate, returning to the United States in 1991 to become Vice President and General Manager for North American Marketing.
Robert W. Goldman has been Senior Vice President, Finance, and Chief Financial Officer of Conoco since 1998 and was its Vice President, Finance from 1991 to 1998. Mr. Goldman began his career with DuPont in 1965 and subsequently held many technical and managerial positions within the finance, tax and treasury functions. He is the former Vice President-Finance of DuPont (Mexico), Vice President, Remington Arms Company and served as Director and Comptroller of several operating departments of DuPont in Wilmington, Delaware. Mr. Goldman transferred to Conoco in 1988 as Vice President and Controller. He is co-chairman of Conoco's Risk Management Committee and is a member of the American Petroleum Institute, a former chairman of its Accounting Committee and currently serves on its Executive Committee of the General Committee on Finance. He is also a member of the Financial Executives Institute and the Executive Committee of the Board of Directors of the Alley Theatre in Houston, Texas.
Rick A. Harrington has been Senior Vice President, Legal, and General Counsel of Conoco since 1998 and was Vice President and General Counsel of Conoco and Vice President and Assistant General Counsel of DuPont from 1994 until October 27, 1998. He joined DuPont in 1979 as a Senior Attorney, and subsequently held the positions of Managing Counsel, Special Litigation, and Vice President and General Counsel of Consolidation Coal Company. Prior to joining DuPont, he was a partner in the firm of Arent, Fox, Kintner,
Plotkin and Kahn in Washington, D.C. where he specialized in antitrust litigation. Mr. Harrington is a member of the bar of the District of Columbia, the District of Columbia Court of Appeals and the Fifth Circuit Court of Appeals. He is co-chairman of Conoco's Risk Management Committee. He is on the boards of directors of the American Corporate Counsel Association and the Minority Corporate Counsel Association and Chairman of the American Petroleum Institute General Committee on Law. He is also a member of the Association of General Counsel.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET, STOCK AND DIVIDEND INFORMATION
Conoco's Class A common stock (symbol: COC.A) and Class B common stock (symbol: COC.B) are listed on the New York Stock Exchange, Inc. The number of record holders of Class A common stock was 2,122, and Class B common stock was 6,068 at March 1, 2000.
QUARTERLY COMMON STOCK PRICES AND DIVIDENDS
COMMON STOCK PRICE RANGE
-----------------------------------------------------------
HIGH LOW HIGH LOW
----------- ----------- ----------- -----------
1999 1998
--------------------------- ---------------------------
CLASS A COMMON STOCK
First Quarter................................. $25 7/16 $19 3/8 $ -- $ --
Second Quarter................................ 31 1/4 22 15/16 -- --
Third Quarter................................. 29 1/4 25 5/16 -- --
Fourth Quarter................................ 29 1/16 20 15/16 25 3/4 19 3/8
CLASS B COMMON STOCK
Third Quarter................................. $29 3/8 $24 1/2 $ -- $ --
Fourth Quarter................................ 28 15/16 20 3/4 -- --
|
1999 1998
----------- -----------
DIVIDENDS PER SHARE
First Quarter................................. $ .14 $ --
Second Quarter................................ .19 --
Third Quarter................................. .19 --
Fourth Quarter................................ .19 --
------ -----
Total............................... $ .71 $ --
|
Conoco's Class A common stock began trading on the New York Stock Exchange on October 22, 1998. There are no stock prices for Class A common stock for any quarters prior to the fourth quarter of 1998. Conoco's Class B common stock began trading on the New York Stock Exchange on August 16, 1999. There are no stock prices for Class B common stock for any quarters prior to the third quarter of 1999. Quarterly market prices are as reported by the New York Stock Exchange, Inc.
No dividends were declared in 1998 relating to the Class A common stock. Dividends were declared on a quarterly basis throughout 1999. The first quarter dividend of 1999 of $.14 per share was determined on a pro rata basis covering the period from October 27, 1998 to December 31, 1998, and is equivalent to $.19 per share for a full quarter. Conoco declared a first quarter cash dividend on January 26, 2000, of $.19 per share on each outstanding share of Class A common stock and Class B common stock, payable March 10, 2000, to shareholders of record as of February 10, 2000.
Conoco's Board of Directors will determine the amount of future cash dividends to be declared and paid based upon Conoco's financial condition, results of operations, cash flow, the level of its capital and exploration expenditures, its future business prospects and such other matters that the Board of Directors deems relevant.
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31
-----------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(IN MILLIONS, EXCEPT PER SHARE)
STATEMENT OF INCOME DATA
Total Revenues(1)............................ $27,309 $23,168 $26,263 $24,416 $20,518
Cost of Goods Sold........................... 14,781 11,751 14,333 12,847 9,465
Operating Expenses........................... 2,060 2,089 1,893 1,713 1,681
Selling, General and Administrative
Expenses(2)............................. 809 972 726 755 728
Exploration Expenses(3)...................... 270 380 457 404 331
Depreciation, Depletion and Amortization
(DD&A).................................. 1,193 1,113 1,179 1,085 1,067
Taxes Other Than on Income(1)................ 6,668 5,970 5,532 5,637 5,823
Interest and Debt Expense.................... 311 199 36 74 74
------- ------- ------- ------- -------
Income Before Income Taxes................... 1,217 694 2,107 1,901 1,349
Provision for Income Taxes................... 473 244 1,010 1,038 774
------- ------- ------- ------- -------
Net Income(4)...................... $ 744 $ 450 $ 1,097 $ 863 $ 575
======= ======= ======= ======= =======
SEGMENT NET INCOME
Upstream
United States.............................. $ 311 $ 219 $ 445 $ 314 $ 258
International.............................. 534 283 439 367 234
Downstream
United States.............................. 108 135 216 172 112
International.............................. 129 156 91 117 121
Corporate and Other(4)....................... (338) (343) (94) (107) (150)
------- ------- ------- ------- -------
Net Income(4)...................... $ 744 $ 450 $ 1,097 $ 863 $ 575
======= ======= ======= ======= =======
Earnings Per Share (5)
Basic...................................... $ 1.19 $ .95 $ 2.51 $ 1.98 $ 1.32
Diluted.................................... $ 1.17 $ .95 $ 2.51 $ 1.98 $ 1.32
Weighted-Average Shares Outstanding (5)
Basic...................................... 627 474 437 437 437
Diluted.................................... 636 475 437 437 437
Dividends per Common Share................... $ .71 $ -- $ -- $ -- $ --
OTHER DATA
Cash Provided by Operations.................. $ 2,216 $ 1,373 $ 2,876 $ 2,396 $ 1,924
Capital Expenditures and Investments......... 1,787 2,516 3,114 1,944 1,837
Cash Exploration Expense..................... 139 217 286 262 204
|
(1) Includes petroleum excise taxes of $6,492, $5,801, $5,349, $5,461 and $5,655 for 1999, 1998, 1997, 1996 and 1995, respectively.
(2) Includes a non-cash stock option provision for 1998 of $236.
(3) Includes cash exploration overhead and operating expense, DD&A, dry hole costs and impairments of unproved properties.
(4) Includes after-tax exchange gains (losses) of $6, $32, $21, $(7), and $(40) for 1999, 1998, 1997, 1996 and 1995, respectively.
(5) Conoco's capital structure was established at the time of the initial public offering. Earnings per share for the periods prior to the initial public offering was calculated using only Class B common stock, as required by SFAS No. 128. See note 8 to the Consolidated Financial Statements incorporated into this document from our 1999 Annual Report to Stockholders.
DECEMBER 31
-----------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(IN MILLIONS)
BALANCE SHEET DATA
Cash and Cash Equivalents........................ $ 317 $ 394 $ 1,147 $ 846 $ 286
Working Capital.................................. (690) 45 567 862 999
Net Property, Plant and Equipment................ 11,235 11,413 10,828 10,082 9,758
Total Assets..................................... 16,375 16,075 17,062 15,226 14,229
Long-term Borrowings-Related Parties............. -- 4,596 1,450 2,287 2,141
Long-term Borrowings and Capital Lease
Obligations.................................... 4,080 93 106 101 65
Total Stockholders' Equity/Owner's Net
Investment..................................... 4,555 4,438 7,896 6,579 6,754
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference to pages 28 through 41 of Conoco Inc.'s 1999 Annual Report to Stockholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and Qualitative Disclosures About Market Risk is incorporated herein by reference to pages 41 through 42 of Conoco Inc.'s 1999 Annual Report to Stockholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements and Supplementary Data is incorporated herein by reference to pages 43 through 77 of Conoco Inc.'s 1999 Annual Report to Stockholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Except as indicated below, information with respect to the following items is incorporated by reference to Conoco's 2000 Annual Meeting Proxy Statement filed in connection with the Annual Meeting of Stockholders to be held on May 16, 2000.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be set forth under the captions "Proposal I -- Election of Directors" and "Stock Ownership of Directors and Executive Officers -- Section 16 (a) Beneficial Ownership Reporting Compliance" in Conoco's definitive proxy statement (the "2000 Proxy Statement") for its annual meeting of stockholders to be held on May 16, 2000, which sections are incorporated herein by reference.
Pursuant to General Instruction G to Form 10-K, the information required by Item 401 of Regulation S-K with respect to executive officers of Conoco is set forth in Part I of this report (page 32).
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be set forth in the sections entitled "Proposal I -- Election of Directors--Board Compensation" and "Compensation of Executive Officers" in the 2000 Proxy Statement, which sections are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth in the sections entitled "Principal Stockholders" and "Stock Ownership of Directors and Executive Officers" in the 2000 Proxy Statement, which sections are incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth in the section entitled "Compensation of Executive Officers -- Certain Relationships and Related Transactions" in the 2000 Proxy Statement, which section is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements, Financial Statement Schedules and Exhibits
1. Financial Statements (See Part II, Item 8 of this report regarding financial statements).
2. Financial Statement Schedules -- none required.
The following should be read in conjunction with the previously referenced Financial Statements:
Financial Statement Schedules listed under SEC rules but not included in this report are omitted because they are not applicable or the required information is shown in the financial statements or notes.
Condensed financial information of the parent company is omitted because restricted net assets of consolidated subsidiaries do not exceed 25 percent of consolidated net assets. Footnote disclosure of restrictions on the ability of subsidiaries and affiliates to transfer funds is omitted because the restricted net assets of subsidiaries combined with Conoco's equity in the undistributed earnings of affiliated companies does not exceed 25 percent of consolidated net assets at December 31, 1999.
Separate financial statements of affiliated companies accounted for by the equity method are omitted because no such affiliate individually constitutes a 20 percent significant subsidiary.
3. Exhibits
The following list of exhibits includes both exhibits submitted with this Form 10-K as filed with the SEC and those incorporated by reference to other filings:
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 -- Second Amended and Restated Certificate of Incorporation
of Conoco Inc.(1)
3.2 -- By-Laws of Conoco Inc., as amended October 28, 1999(2)
4.1 -- Specimen Certificate for shares of Class A Common Stock
of the Registrant(3)
4.2 -- Specimen Certificate for shares of Class B Common Stock
of the Registrant(3)
4.3 -- Preferred Share Purchase Rights Agreement(3)
4.4 -- Amendment to Preferred Share Purchase Rights Agreement(4)
4.5 -- Second Amendment to Preferred Share Purchase Rights
Agreement(5)
4.6 -- Indenture between Conoco and the Trustee relating to the
Debt Securities(6)
10.1# -- Employment Agreement, dated September 23, 1999, between
Conoco and Archie W. Dunham(7)
10.2# -- Conoco Inc. Key Employee Severance Plan, as amended(7)
10.3# -- Conoco Inc. Key Employee Temporary Severance Plan, as
amended(7)
10.4# -- Conoco Inc. Salary Deferral and Savings Restoration Plan,
as amended(7)
10.5# -- Directors' Charitable Gift Plan, as amended(7)
10.6# -- Deferred Compensation Plan for Nonemployee Directors, as
amended May 12, 1999(8)
10.7# -- Form Indemnity Agreement with Directors(9)
10.8# -- 1998 Stock and Performance Incentive Plan, as amended
October 28, 1999(10)
10.9# -- 1998 Key Employee Stock Performance Plan, as amended
October 28, 1999(11)
10.11# -- Rabbi Trust Agreement dated December 17, 1999(12)
11 -- Statement re Computation of Per Share Earnings(12)
12 -- Computation of Ratio of Earnings to Fixed Charges(12)
13 -- Copy of those portions of Conoco's Annual Report to
Stockholders that are incorporated herein by reference
into this Annual Report on Form 10-K(12)
21.1 -- List of Principal Subsidiaries of the Registrant(12)
23.1 -- Consent of PricewaterhouseCoopers LLP(12)
24 -- Power of Attorney(12)
27 -- Financial Data Schedule(12)
99.1 -- Consent of Solomon Associates(12)
|
(1) Incorporated by reference to exhibit 3.1 of Conoco's Form 10-Q for the quarter ended September 30, 1998.
(2) Incorporated by reference to exhibit 3.2 of Conoco's registration statement on Form S-3/A, Registration No. 333-88573.
(3) Incorporated by reference to the exhibit of the same number filed as part of Conoco's registration statement on Form S-1, Registration No. 333-60119.
(4) Incorporated by reference to exhibit 4.6 of Conoco's registration statement on Form S-8, Registration No. 333-65977.
(5) Incorporated by reference to exhibit 4.1 of Conoco's Form 10-Q for the quarter ended June 30, 1999.
(6) Incorporated by reference to exhibit 4.1 of Conoco's registration statement on Form S-3, Registration No. 333-72291.
(7) Incorporated by reference to exhibit of the same number of Conoco's registration statement on Form S-1, Registration No. 333-88573.
(8) Incorporated by reference to exhibit 10.1 of Conoco's Form 10-Q for the quarter ended March 31, 1999.
(9) Incorporated by reference to exhibit 10.19 of Conoco's registration statement on Form S-1, Registration No. 333-60119.
(10) Incorporated by reference to exhibit 10.6 of Conoco's Form 10-Q for the quarter ended September 30, 1999.
(11) Incorporated by reference to exhibit 10.7 of Conoco's Form 10-Q for the quarter ended September 30, 1999.
(12) Filed herein.
# Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 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 and in the capacities indicated, as of the 13th day of March 2000.
CONOCO INC.
(Registrant)
By: /s/ ROBERT W. GOLDMAN
----------------------------------
Robert W. Goldman
Senior Vice President, Finance,
and
Chief Financial Officer
By: /s/ W. DAVID WELCH
----------------------------------
W. David Welch
Controller and
Principal Accounting Officer
|
Pursuant to the requirements of the Securities exchange Act of 1934, this report has been signed, as of the 13th day of March, 2000, by the following persons on behalf of the registrant in the capacities indicated:
SIGNATURE TITLE
--------- -----
/s/ ARCHIE W. DUNHAM Chairman, President and Chief Executive
----------------------------------------------------- Officer
Archie W. Dunham
/s/ ROBERT W. GOLDMAN Senior Vice President, Finance, and Chief
----------------------------------------------------- Financial Officer
Robert W. Goldman
/s/ W. DAVID WELCH Controller and Principal Accounting Officer
-----------------------------------------------------
W. David Welch
* Director
-----------------------------------------------------
Ruth R. Harkin
* Director
-----------------------------------------------------
Frank A. McPherson
* Director
-----------------------------------------------------
William K. Reilly
* Director
-----------------------------------------------------
William R. Rhodes
* Director
-----------------------------------------------------
Franklin A. Thomas
* Director
-----------------------------------------------------
A. R. "Tony" Sanchez, Jr.
*By: /s/ MICHAEL A. GIST
------------------------------------------------
Michael A. Gist
Attorney-in-Fact
|
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 -- Second Amended and Restated Certificate of Incorporation
of Conoco Inc.(1)
3.2 -- By-Laws of Conoco Inc., as amended October 28, 1999(2)
4.1 -- Specimen Certificate for shares of Class A Common Stock
of the Registrant(3)
4.2 -- Specimen Certificate for shares of Class B Common Stock
of the Registrant(3)
4.3 -- Preferred Share Purchase Rights Agreement(3)
4.4 -- Amendment to Preferred Share Purchase Rights Agreement(4)
4.5 -- Second Amendment to Preferred Share Purchase Rights
Agreement(5)
4.6 -- Indenture between Conoco and the Trustee relating to the
Debt Securities(6)
10.1# -- Employment Agreement, dated September 23, 1999, between
Conoco and Archie W. Dunham(7)
10.2# -- Conoco Inc. Key Employee Severance Plan, as amended(7)
10.3# -- Conoco Inc. Key Employee Temporary Severance Plan, as
amended(7)
10.4# -- Conoco Inc. Salary Deferral and Savings Restoration Plan,
as amended(7)
10.5# -- Directors' Charitable Gift Plan, as amended(7)
10.6# -- Deferred Compensation Plan for Nonemployee Directors, as
amended May 12, 1999(8)
10.7# -- Form Indemnity Agreement with Directors(9)
10.8# -- 1998 Stock and Performance Incentive Plan, as amended
October 28, 1999(10)
10.9# -- 1998 Key Employee Stock Performance Plan, as amended
October 28, 1999(11)
10.11# -- Rabbi Trust Agreement dated December 17, 1999(12)
11 -- Statement re Computation of Per Share Earnings(12)
12 -- Computation of Ratio of Earnings to Fixed Charges(12)
13 -- Copy of those portions of Conoco's Annual Report to
Stockholders that are incorporated herein by reference
into this Annual Report on Form 10-K(12)
21.1 -- List of Principal Subsidiaries of the Registrant(12)
23.1 -- Consent of PricewaterhouseCoopers LLP(12)
24 -- Power of Attorney(12)
27 -- Financial Data Schedule(12)
99.1 -- Consent of Solomon Associates(12)
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(1) Incorporated by reference to exhibit 3.1 of Conoco's Form 10-Q for the quarter ended September 30, 1998.
(2) Incorporated by reference to exhibit 3.2 of Conoco's registration statement on Form S-3/A, Registration No. 333-88573.
(3) Incorporated by reference to the exhibit of the same number filed as part of Conoco's registration statement on Form S-1, Registration No. 333-60119.
(4) Incorporated by reference to exhibit 4.6 of Conoco's registration statement on Form S-8, Registration No. 333-65977.
(5) Incorporated by reference to exhibit 4.1 of Conoco's Form 10-Q for the quarter ended June 30, 1999.
(6) Incorporated by reference to exhibit 4.1 of Conoco's registration statement on Form S-3, Registration No. 333-72291.
(7) Incorporated by reference to exhibit of the same number of Conoco's registration statement on Form S-1, Registration No. 333-88573.
(8) Incorporated by reference to exhibit 10.1 of Conoco's Form 10-Q for the quarter ended March 31, 1999.
(9) Incorporated by reference to exhibit 10.19 of Conoco's registration statement on Form S-1, Registration No. 333-60119.
(10) Incorporated by reference to exhibit 10.6 of Conoco's Form 10-Q for the quarter ended September 30, 1999.
(11) Incorporated by reference to exhibit 10.7 of Conoco's Form 10-Q for the quarter ended September 30, 1999.
(12) Filed herein.
# Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-K.
EXHIBIT 10.11
RABBI TRUST AGREEMENT
CONOCO INC., formerly Conoco Energy Company (the "Company"), and U.S. TRUST COMPANY, NATIONAL ASSOCIATION (the "Trustee") have as of December 17, 1999 (the "Effective Date"), entered into this grantor trust agreement ("Trust Agreement"), established under the Company's nonqualified deferred compensation plans included in the list set forth in Exhibit A attached hereto (the "Plan" or "Plans"), as herein set forth.
WHEREAS, the Company and/or one or more of the Company's affiliates have adopted certain nonqualified deferred compensation Plans; and
WHEREAS, the Company and/or one or more of the Company's affiliates have incurred or expect to incur liability under the terms of such Plans with respect to the individuals participating in such Plans ("Participants"); and
WHEREAS, the Company wishes to establish a trust (the "Trust") and to contribute to the Trust assets that shall be held therein, subject to the claims of the Company's creditors in the event of the Company's Insolvency, as herein defined, until paid to the Participants and their beneficiaries in such manner and at such times as specified in the Plans; and
WHEREAS, it is the intention of the parties that this Trust shall constitute an unfunded arrangement and shall not affect the status of each Plan as an unfunded plan maintained for the purpose of providing deferred compensation for a select group of management or highly compensated employees for purposes of Title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), an unfunded excess benefit plan, or a plan not subject to ERISA; and
WHEREAS, it is the intention of the Company to make contributions to the Trust to provide a source of funds to assist it in the meeting of Liabilities under the Plans;
NOW, THEREFORE, the parties do hereby establish the Trust and agree that the Trust shall be comprised, held and disposed of as follows:
1. ESTABLISHMENT OF TRUST:
(a) The Company hereby deposits with Trustee in trust $2 million, which shall become the principal of the Trust to be held, administered and disposed of by the Trustee as provided in this Trust Agreement.
(b) The Trust hereby established is revocable by the Company. It shall become irrevocable automatically upon the occurrence of a Change of Control. Upon the occurrence of a Change of Control or a Potential Change of Control, the Company shall promptly give written notice thereof to the Trustee.
(c) The Trust is intended to be a grantor trust, of which the Company is the grantor, within the meaning of subpart E, part I, subchapter J, chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended (the "Code"), and shall be construed accordingly.
(d) The principal of the Trust, and any earnings thereon (the "Trust Fund"), shall be held separate and apart from the Company's other funds and shall be used exclusively for the uses and purposes of Participants and the Company's general creditors as herein set forth. Participants and their beneficiaries shall have no preferred claim on, or any beneficial ownership interest in, any assets of the Trust. Any rights created under the Plan and this Trust Agreement shall be mere unsecured contractual rights of Participants and their beneficiaries against the Company. Any assets held by the Trust will be subject to the claims of the Company's general creditors under federal and state law in the event the Company is Insolvent, as defined in Section 3(a) herein.
(e) Prior to a Change of Control, the Company, in its sole discretion, may at any time, or from time to time, make additional deposits of cash or other property in trust with the Trustee to augment the principal to be held, administered and disposed of by the Trustee as provided in this Trust Agreement. Prior to a Change of Control, neither the Trustee nor any Participant or beneficiary shall have any right or duty to compel such additional deposits or determine the sufficiency thereof.
(f) Within 30 days following the end of each calendar year, the Company shall provide the Trustee with a written statement of all Liabilities as of the close of such calendar year, together with supporting calculations. Upon a Change of Control, the Company shall, as soon as practicable, but in no event later than the effective date of the Change of Control, (i) make an irrevocable contribution to the Trust in an amount equal to at least 100% of the Liabilities as determined by the Company in good faith in accordance with the methodology specified in Exhibit B as of the date on which the Change of Control occurred, plus the projected administrative expenses of the Trust for the one-year period following such funding, and (ii) provide the Trustee a written statement of such Liabilities and projected expenses, together with supporting calculations.
(g) Within 30 days following the end of each calendar year ending
after the Trust has become irrevocable pursuant to Section 1(b) hereof, the
Company shall (i) irrevocably deposit cash, or other property acceptable to
the Trustee, with the Trustee in an amount, when added to the assets then
held by the Trustee, adequate to satisfy all Liabilities as of the close of
such calendar year, as determined by the Company in good faith in
accordance with the methodology specified in Exhibit B plus the projected
administrative expenses of the Trust for the following calendar year, and
(ii) provide the Trustee a written statement of such Liabilities and
projected expenses, together with supporting calculations.
(h) The Company shall at all times ensure that the Plans and this Trust each shall have characteristics supporting a determination that they are not subject to ERISA, or are arrangements constituting unfunded plans maintained for the purpose of providing deferred compensation to a select group of management or highly compensated employees for purposes of Title I of ERISA.
2. PAYMENTS TO PARTICIPANTS AND THEIR BENEFICIARIES:
(a) Annually, prior to a Change of Control, the Company shall deliver to the Trustee a schedule (the "Payment Schedule") that indicates the amounts payable in respect of each Participant (and his or her beneficiaries), that provides a formula or other instructions acceptable to Trustee for determining the amounts so payable, that indicates the form in which amounts are to be paid (as provided for or available under the appropriate Plan), and that indicates the time of commencement for payment of such amounts. Except as otherwise provided in Section 2(e) hereof or elsewhere herein, Trustee shall make payments to the Participants and their beneficiaries in accordance with such Payment Schedule. The Company shall provide in writing to the Trustee any and all information the Trustee reasonably believes necessary for the Trustee or its agent to make any determination as to payments to Participants, tax reporting, tax withholding or otherwise not less than 30 calendar days prior to the time the payments must be made. Within 20 days after a Change of Control, the Company shall deliver to the Trustee a then current Payment Schedule of benefits due under the Plans. Thereafter, the Trustee shall pay benefits due in accordance with such Payment Schedule. After a Change of Control, the Company shall continue to make the determination of benefits due to Participants or their beneficiaries and shall provide the Trustee with an updated Payment Schedule whenever appropriate; provided, however, that Participants or their beneficiaries may make application to the Trustee for an independent decision as to the amount or form of their benefits due under the Plans. In making any determination required or permitted to be made by the Trustee under this Section 2, the Trustee shall, in each such case, reach its own independent determination, in its absolute and sole discretion, as to the Participant's or beneficiary's entitlement to a payment hereunder. In making its determination, the Trustee may consult with and make such inquiries of such persons, including the Participant or beneficiary, the Company, legal counsel, actuaries or other persons, as the Trustee may reasonably deem necessary. Any reasonable costs incurred by the Trustee in arriving at its determination shall be reimbursed by the Company and, to the extent not paid by the Company within a reasonable time, shall be charged to the Trust. The Company waives any right to contest any amount paid over by the Trustee hereunder pursuant to a good faith determination made by the Trustee, notwithstanding any claim by or on behalf of the Company (absent a manifest abuse of discretion by the Trustee) that such payments should not be made or should not have been made.
(b) The Trustee agrees that it will not itself institute any action at law or at equity, whether in the nature of an accounting, interpleading action, request
for a declaratory judgment or otherwise, requesting a court or administrative or quasi-judicial body to make the determination required to be made by the Trustee under this Section 2 in the place and stead of the Trustee. The Trustee shall institute, and vigorously pursue, an action to collect a contribution due the Trust following a Change of Control or in the event that the Trust should ever experience a shortfall in the amount of assets necessary to make payments pursuant to the terms of the Payment Schedule following a Change of Control.
(c) The Trustee shall make provision for the reporting and withholding of any federal taxes that may be required to be withheld with respect to the payment of benefits pursuant to the terms of a Plan and shall pay amounts withheld to the appropriate taxing authorities or determine that such amounts have been reported, withheld and paid by the Company. The Trustee shall make provision for the reporting and withholding of any state or local taxes that may be required with respect to the payment of benefits only as directed by the Company.
(d) The Company shall, from time to time, pay taxes of any and all kinds whatsoever that at any time are lawfully levied or assessed upon or become payable in respect of the Trust Fund, the income or any property forming a part thereof or any security transaction pertaining thereto. To the extent that any taxes lawfully levied or assessed upon the Trust Fund are not paid by the Company, the Trustee shall have the power to pay such taxes out of the Trust Fund and shall seek reimbursement from the Company. Prior to making any payment, the Trustee may require such releases or other documents from any lawful taxing authority as it shall deem necessary. The Trustee shall contest the validity of taxes in any manner deemed appropriate by the Company or its counsel, but at the Company's expense, and only if it has received an indemnity bond or other security satisfactory to it to pay any such expenses. The Trustee shall not be liable for any nonpayment of tax when it distributes an interest hereunder on directions from the Company.
(e) The Company may make payment of benefits directly to Participants or their beneficiaries as they become due under the terms of the relevant Plan. The Company shall notify the Trustee of its decision to make payment of benefits directly prior to the time amounts are payable to Participants or their beneficiaries and the Trustee's obligation to make payments under the Payment Schedule provided pursuant to Section 2(a) shall be modified accordingly. In addition, if the principal of the Trust, and any earnings thereon, are not sufficient to make payments of benefits in accordance with the terms of the Payment Schedule, the Company shall make the balance of each such payment as it falls due. The Trustee shall notify the Company in the event that principal and earnings are not sufficient (in addition to instituting and pursuing a collection action as described in Section 2(b), if applicable).
(f) Notwithstanding anything contained in this Trust Agreement to the contrary, if at any time the Trust is finally determined by the Internal Revenue
Service (the "IRS") not to be a "grantor trust" with the result that the income of the Trust Fund is not treated as income of the Company pursuant to Sections 671 through 679 of the Code, or if a tax is finally determined by the IRS to be payable by one or more Participants or beneficiaries with respect to any interest in the Plan or the Trust Fund prior to payment of such interest to such Participant or beneficiary, then the Trust shall automatically terminate 90 days following such final determination unless the Trustee has been provided written notice of the Company's, Participant's or beneficiary's intent to appeal such determination in which event the Trust shall automatically terminate 90 days following the determination of the IRS becoming final on appeal. Upon termination, the Trustee shall immediately distribute such interest in a lump sum to each Participant or beneficiary entitled thereto regardless of whether such Participant's employment has terminated and regardless of the form and time of payments specified in or pursuant to the relevant Plan as directed by the Company. Any remaining assets (less any expenses or costs due under Sections 9 and 13 of this Trust Agreement) shall then be paid by the Trustee to the Company in such amounts and in the manner instructed by the Company.
3. TRUSTEE RESPONSIBILITY REGARDING PAYMENTS WHEN THE COMPANY IS INSOLVENT:
(a) The Trustee shall cease payment of benefits to Participants and their beneficiaries if the Company is "Insolvent." The Company shall be considered "Insolvent" for purposes of this Trust Agreement if (i) the Company is unable to pay its debts as they become due or (ii) the Company is subject to a pending proceeding as a debtor under the United States Bankruptcy Code.
(b) At all times during the continuance of this Trust, as provided in
Section 1(d) hereof, the principal and income of the Trust shall be subject
to claims of general creditors of the Company under federal and state law
as set forth below.
(i) Each member of the Board of Directors acting in such capacity shall have the duty to inform the Trustee in writing of the Company's Insolvency; provided, however, such duty shall exist only if the Trustee has actual knowledge of the Company's Insolvency, or has received notice from a member of the Board of Directors or a person claiming to be a creditor alleging that the Company is Insolvent. If a person claiming to be a creditor of the Company notifies the Trustee that the Company has become Insolvent, the Trustee shall provide the Board of Directors with a copy of such writing, and absent the Company's provision of an independent expert's opinion satisfactory to the Trustee that the Company is not Insolvent, the Trustee shall discontinue payment of benefits to Participants or their beneficiaries.
(ii) Unless the Trustee has actual knowledge of the Company's Insolvency, or has received notice from a member of the Board of Directors or a person claiming to be a creditor alleging that the Company is Insolvent, the Trustee shall have no duty to inquire whether the Company is Insolvent.
(iii) If at any time the Trustee has received a written notice containing information or allegations described in Section 3(b)(i) that the Company is Insolvent, the Trustee shall discontinue payments to Participants and their beneficiaries and shall hold the assets of the Trust for the benefit of the Company's general creditors. Nothing in this Trust Agreement shall in any way diminish any rights of Participants or their beneficiaries to pursue their rights as general creditors of the Company with respect to benefits due under the Plan or otherwise.
(iv) The Trustee shall resume the payment of benefits to Participants or their beneficiaries in accordance with Section 2 of this Trust Agreement only after it has been demonstrated to the Trustee's satisfaction that the Company is not Insolvent (or is no longer Insolvent).
(c) Provided that there are sufficient assets, if the Trustee discontinues the payment of benefits from the Trust pursuant to Section 3(b) hereof and subsequently resumes such payments, the first payment following such discontinuance shall include the aggregate amount of all payments due to Participants and their beneficiaries under the terms of the Plans for the period of such discontinuance plus, in each case, interest on any delayed payment at the annual percentage rate which is three percentage points above the interest rate shown as the Prime Rate in the Money Rates column in the then most recently published edition of The Wall Street Journal (Southwest Edition), or, if such rate is not then so published on at least a weekly basis, the interest rate announced by Chase Bank Texas, N.A. (or its successor), from time to time, as its "Base Rate" (or prime lending rate), from the date those amounts were required to have been paid until those amounts are finally and fully paid; provided, however, that in no event shall the amount of interest contracted for, charged or received hereunder exceed the maximum non-usurious amount of interest allowed by applicable law, less the aggregate amount of any payments made to Participants and their beneficiaries by the Company in lieu of the payments provided for hereunder during any such period of discontinuance.
4. PAYMENTS TO THE COMPANY:
Except as provided in Sections 3, 8, 9 and 13 hereof, the Company shall have no right or power to direct the Trustee to return to the Company or to divert to others any of the
Trust assets before all payments of benefits have been made to Participants and their beneficiaries pursuant to the terms of the Plans.
5. INVESTMENT AUTHORITY:
The Trustee shall have, without exclusion, all powers conferred on the Trustee by applicable law, unless expressly provided otherwise herein, and all rights associated with assets of the Trust shall be exercised by the Trustee and shall in no event be exercisable by or rest with Participants. The Trustee shall have full power and authority to invest and reinvest the Trust Fund in any investment permitted by law, subject to any investment guidelines provided in Exhibit C hereto and any amendment to such Exhibit, exercising the judgment and care that persons of prudence, discretion and intelligence would exercise under the circumstances then prevailing considering the probable income and safety of their capital, including, without limiting the generality of the foregoing, the power:
(a) To invest and reinvest the Trust Fund, together with the income therefrom, in common stock, preferred stock, mutual funds, bonds, mortgages, notes, time certificates of deposit, commercial paper and other evidences of indebtedness (including those issued by the Trustee or any of its affiliates), other securities, policies of life insurance, annuity contracts, options to buy or sell securities or other assets, and other property of any kind (personal, real or mixed, and tangible or intangible);
(b) To deposit or invest all or any part of the assets of the Trust Fund in savings accounts or certificates of deposit or other deposits which bear a reasonable interest rate in a bank, including the commercial department of the Trustee, if such bank is supervised by the United States or any state;
(c) To hold, manage, improve and control all property, real or personal, forming part of the Trust Fund and to sell, convey, transfer, exchange, partition, lease for any term, even extending beyond the duration of this Trust, and otherwise dispose of the same from time to time in such manner for such consideration and upon such terms and conditions as the Trustee shall determine;
(d) To have, respecting securities, all the rights, powers and privileges of an owner, including the power to give proxies, pay assessments and other sums deemed by the Trustee to be necessary for the protection of the Trust Fund, to vote any corporate stock either in person or by proxy, with or without power of substitution for any purpose; to participate in voting trusts, pooling agreements, foreclosures, reorganizations, consolidations, mergers and liquidations and, in connection therewith, to deposit securities with and transfer title to any protective or other committee under such terms as the Trustee may deem advisable; to exercise or sell stock subscriptions or conversion rights; and regardless of any limitation elsewhere in this document relative to investment by the Trustee, to accept and retain as an investment any securities or other property received through the exercise of any of the foregoing powers;
(e) To hold in cash, without liability for interest, such portion of the Trust Fund which, in its discretion, shall be reasonable under the circumstances, pending investments or payments of expenses or the distribution of benefits;
(f) To take such actions as may be necessary or desirable to protect the Trust Fund from loss due to the default on mortgages held in the Trust, including the appointment of agents or trustees in such other jurisdictions as the Trustee may deem desirable, to transfer property to such agents or trustees, to grant such powers as are necessary or desirable to protect the Trust or its assets, to direct such agents or trustees, or to delegate such power to direct and to remove such agents or trustees;
(g) To employ such agents, including investment advisors, custodians, sub-custodians and counsel as may be reasonably necessary, and to pay them reasonable compensation, to settle, compromise or abandon all claims and demands in favor of or against the Trust assets;
(h) To cause title to property of the Trust to be issued, held or registered in the individual name of the Trustee or in the name of its nominee(s) or agents, or in such form that title will pass by delivery;
(i) To exercise all of the further rights, powers, options and privileges granted, provided for or vested in trustees generally under the laws of the State of California, so that powers conferred upon the Trustee herein shall not be in limitation of any authority conferred by law, but shall be in addition thereto;
(j) To borrow money from any source (including the Trustee) and to execute promissory notes, mortgages or other obligations and to pledge or mortgage any Trust assets as security;
(k) To lend certificates representing stocks, bonds or other securities to any brokerage or other firm selected by the Trustee;
(l) To institute, compromise and defend actions and proceedings, to pay or contest any claim, to settle a claim by or against the Trustee by compromise, arbitration or otherwise to release, in whole or in part, any claim belonging to the Trust to the extent that the claim is uncollectible;
(m) To use securities, depositories or custodians and to allow such securities as may be held by a depository or custodian to be registered in the name of such depository or its nominee or in the name of such custodian or its nominee;
(n) To invest the Trust Fund from time to time in one or more investment funds registered under the Investment Company Act of 1940 (including companies with respect to which the Trustee or an affiliate is the investment adviser or provides other services);
(o) To delegate its investment responsibility, in its sole discretion, to an investment manager who may be an affiliate of the Trustee. In the event the Trustee shall exercise this right, the Trustee shall remain, at all times, responsible for the acts of an investment manager;
(p) To purchase an insurance policy or an annuity to fund the benefits of the Plans; and
(q) To do all other acts necessary or desirable for the proper administration of the Trust Fund, as if the Trustee were the absolute owner thereof. However, nothing in this Section 5 shall be construed to mean the Trustee assumes any responsibility for the performance of any investment made by the Trustee in its capacity as trustee under this Trust Agreement. Notwithstanding any powers granted to the Trustee pursuant to this Trust Agreement or applicable law, the Trustee shall not have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom within the meaning of Section 301.7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Code.
In no event may the Trustee invest in securities (including stock or rights to acquire stock) or obligations issued by the Company, other than a de minimis amount held in common investment vehicles in which the Trustee invests.
6. DISPOSITION OF INCOME:
During the term of this Trust, all income received by the Trust, net of expenses and taxes, shall be accumulated and reinvested.
7. ACCOUNTING BY THE TRUSTEE:
The Trustee shall keep accurate and detailed records of all investments, receipts, disbursements and all other transactions required to be made, including such specific records as shall be agreed upon in writing between the Company and the Trustee. Within 120 days following the close of each calendar year and within 120 days after the removal or resignation of the Trustee, the Trustee shall deliver to the Company a written account of its administration of the Trust during such year or during the period from the close of the last preceding year to the date of such removal or resignation, setting forth all investments, receipts, disbursements and other transactions effected by it, including a description of all securities and investments purchased and sold with the cost or net proceeds of such purchases or sales (accrued interest paid or receivable being shown separately), and showing all cash, securities and other property held in the Trust at the end of such year or as of the date of such removal or resignation, as the case may be.
8. RESPONSIBILITY OF THE TRUSTEE:
(a) The Trustee shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like
capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims; provided, however, that the Trustee shall incur no liability to any person for any action taken pursuant to a direction, request or approval given in writing by the Board of Directors which is contemplated by, and in conformity with, the terms of the relevant Plan or this Trust Agreement. In the event of a dispute between the Company and another party, the Trustee may apply to a court of competent jurisdiction to resolve the dispute.
(b) If the Trustee undertakes or defends any administrative, adversarial or other litigation or proceeding arising in connection with this Trust, the Company agrees to indemnify the Trustee against the Trustee's costs, expenses and liabilities (including, without limitation, attorneys' fees and expenses) relating thereto and the Company shall be primarily liable for such payments. The Company will, upon notice, pay monthly, in arrears, to or on behalf of the Trustee, all reasonable attorneys' fees and expenses incurred by the Trustee. If the Company does not pay such costs, expenses and liabilities in a reasonably timely manner, the Trustee may obtain payment from the Trust without notice to any party.
(c) Prior to a Change of Control, the Trustee may consult with legal counsel (who may also, but need not, be counsel for the Company) generally with respect to any of its duties or obligations hereunder at the Company's expense which, should it remain unpaid, may be paid from the Trust without notice to any party. Following a Change of Control, the Trustee shall select independent legal counsel and may consult with counsel or other persons with respect to its duties and with respect to the rights of Participants or their beneficiaries under the Plans. The Trustee shall incur no liability to any person for acting or refraining from acting in accordance with the advice of such counsel.
(d) The Trustee may hire agents, accountants, actuaries, investment advisors, financial consultants or other professionals to assist it in performing any of its duties or obligations hereunder at the Company's expense which, should it remain unpaid, may be paid from the Trust without notice to any party. The Trustee shall incur no liability to any person for acting or refraining from acting in accordance with the advice of such agents, accountants, actuaries, investment advisors, financial consultants or other professionals.
(e) The Trustee shall have, without exclusion, all powers conferred on trustees by applicable law, unless expressly provided otherwise herein; provided, however, that if an insurance policy is held as an asset of the Trust, Trustee shall have no power to name a beneficiary of the policy other than the Trust, to assign the policy (as distinct from conversion of the policy to a different form) other than to a successor trustee, or to loan to any person the proceeds of any borrowing against such policy. The Trustee shall not be liable for the failure or inability of an insurance company to pay the proceeds of any policy when due.
(f) The Company shall indemnify and hold the Trustee harmless from and against all loss or liability (including expenses and reasonable attorneys' fees), to which it may be subject by reason of its execution of its duties under this Trust, or by reason of any acts taken in good faith in accordance with any directions, or acts omitted in good faith due to absence of directions, from the Company or a Participant unless, and only to the extent, such loss or liability is due to the Trustee's negligence or willful misconduct.
(g) The Company has represented to the Trustee that each Plan (i) is
not subject to ERISA or (ii) qualifies as either (A) an excess benefit plan
within the meaning of Section 4(b) of ERISA or (B) a "top-hat" plan
maintained primarily for the purpose of providing deferred compensation for
a select group of management or highly compensated employees, which is
exempt from the provisions of Part 4 of Title I of ERISA. The Trustee is
entering into this Trust Agreement in reliance upon the Company's
representation. Accordingly, in the event that any Plan fails to meet one
of the foregoing criteria then, notwithstanding any other provision of this
Trust Agreement to the contrary, the Company will indemnify and hold the
Trustee harmless from all liabilities, damages, costs and expenses
(including, without limitation, reasonable attorneys' fees and expenses)
that the Trustee incurs as a result of a breach of fiduciary duty under
ERISA arising from any action taken, or omitted to be taken, by the Trustee
in good faith in accordance with this Trust Agreement. In such event, the
Company will, upon notice, pay monthly, in arrears to or on behalf of the
Trustee, all reasonable attorneys' fees and expenses incurred by the
Trustee. In the event that the Trustee is determined to have incurred any
liability as a result of the Trustee's negligence or willful misconduct,
the Trustee will promptly reimburse the Company for all legal fees and
expenses paid by the Company to or on behalf of the Trustee.
(h) In the event that the Trustee is named as a defendant in a lawsuit or proceeding involving any Plan or the Trust Fund, the Trustee shall be entitled to receive payments on a current basis pursuant to the indemnity provisions provided for in this Section 8; provided however, that if the final judgment entered in the lawsuit or proceeding holds that Trustee is guilty of negligence or willful misconduct with respect to the Trust Fund, the Trustee shall be required to refund the indemnity payments that it has received.
(i) All releases and indemnities provided in this Trust Agreement shall survive the termination of this Trust Agreement. The Company shall indemnify and hold harmless the Trustee for any actions of a prior trustee.
9. COMPENSATION AND EXPENSES OF TRUSTEE:
(a) The Trustee shall be entitled to reasonable compensation for its services as agreed upon between the Trustee and the Company and as set forth from time to time in Exhibit D attached hereto and incorporated herein by this reference. If the Trustee and the Company fail to agree upon a compensation
agreement, the Trustee shall be entitled to compensation at a rate equal to the rate charged by the Trustee for similar services rendered by it during the current fiscal year for other trusts similar to this Trust. The Trustee's compensation and expenses shall be paid by the Company. The Trustee is authorized to withdraw such amounts from the Trust Fund if the Company fails to pay such amounts within 60 days of presentation of a statement of the amounts due.
(b) Upon the occurrence of an extraordinary event, such as a Change of Control, or any other matter which in the Trustee's discretion requires the Trustee to perform material services in addition to the Trustee's custodial and investment responsibilities under this Trust Agreement (an "Event"), the Trustee shall be entitled to an additional fee, as of the date of the Event, calculated as follows: (i) for administrative services related to the Event, a fee negotiated in good faith within 10 days of the Event, plus compensation at the Trustee's normal hourly rates for services not contemplated by the negotiated fee; and (ii) for investment management services, the applicable published fee schedule of the Trustee.
(c) The Trustee is authorized to incur reasonable expenses in connection with the administration of the Trust, including, but not limited to, fees and expenses incurred pursuant to Section 8(c) and Section 8(d). Such expenses shall be paid by the Company. The Trustee is authorized to pay such amounts from the Trust Fund if the Company fails to pay them within 60 days of presentation of a statement of the amounts due.
10. RESIGNATION AND REMOVAL OF TRUSTEE:
(a) The Trustee may resign at any time by written notice to the Company, which shall be effective 30 days after receipt of such notice unless the Company and the Trustee agree otherwise; provided, however, that any such resignation shall be effective only after the appointment of a successor trustee.
(b) The Trustee may be removed by the Company on 30 days' written notice or upon shorter written notice accepted by the Trustee prior to a Change of Control. Subsequent to a Change of Control, the Trustee may be removed by the Company only with the consent of a majority of the Participants.
(c) If the Trustee resigns within two years after a Change of Control, the Company, or, if the Company fails to act within a reasonable period of time following such resignation, the Trustee shall apply to a court of competent jurisdiction for the appointment of a successor trustee or for instructions.
(d) Upon resignation or removal of the Trustee and appointment of a successor trustee, all assets shall subsequently be transferred to the successor trustee. The transfer shall be completed within 60 days after receipt of notice of resignation, removal or transfer, unless the Company extends the time limit.
(e) If the Trustee resigns or is removed, a successor shall be appointed, in accordance with Section 11 hereof, by the effective date of resignation or removal under paragraph (a) or (b) of this Section. If no such appointment has been made, the Trustee may apply to a court of competent jurisdiction for appointment of a successor or for instructions. All expenses of the Trustee in connection with the proceeding shall be allowed as administrative expenses of the Trust.
11. APPOINTMENT OF SUCCESSOR:
(a) If the Trustee resigns or is removed in accordance with Section 10 hereof, the Company or the Trustee, as applicable, may appoint or apply to a court for appointment, subject to Section 10, of any independent third party national banking association with a market capitalization exceeding $100,000,000 to replace the Trustee upon resignation or removal. The appointment shall be effective when accepted in writing by the new trustee, who shall have the rights and powers of the former trustee, including ownership rights in the Trust assets, upon transfer of same to the new trustee. The former trustee shall execute any instrument necessary or reasonably requested by the Company or the successor trustee to evidence the transfer.
(b) The successor trustee need not examine the records and acts of any prior trustee and may retain or dispose of existing Trust assets, subject to Sections 7 and 8 hereof. The successor trustee shall not be responsible for, and the Company shall indemnify and defend the successor trustee from, any claim or liability resulting from any action or inaction of any prior trustee or from any other past event, or any condition existing at the time it becomes successor trustee.
12. AMENDMENT OR TERMINATION:
(a) This Trust Agreement may be amended by a written instrument
executed by the Trustee and the Company. Notwithstanding the foregoing, no
such amendment shall (i) conflict with the terms of any Plan, (ii) make the
Trust revocable after it has become irrevocable in accordance with Section
1(b) hereof, (iii) cause the Trust not to qualify as a grantor trust, or
(iv) be made to Section 13 during any Legal Defense Fund Period or to any
provision of this Trust Agreement after the Trust has become irrevocable in
accordance with Section 1(b) hereof, if, in either case, such amendment
would, in the judgment of the Trustee, be adverse to the interests of any
Participant.
(b) The Trust shall not terminate until the date on which Participants and their beneficiaries are no longer entitled to benefits pursuant to the terms of any Plan and all liabilities have been satisfied. Upon termination of the Trust, any assets remaining in the Trust shall be returned to the Company. Such remaining assets shall be paid by the Trustee to the Company in such amounts and in the manner instructed by the Company, whereupon the Trustee shall be
released and discharged from all obligations hereunder. From and after the date of termination, and until final distribution of the Trust Fund, the Trustee shall continue to have all of the powers provided herein as are necessary or expedient for the orderly liquidation and distribution of the Trust Fund.
13. LEGAL DEFENSE FUND:
(a) The Trustee shall establish within the Trust Fund a separate fund, hereinafter referred to as a "Legal Defense Fund." The Legal Defense Fund shall consist of such portions of the contributions to the Trust as the Company shall specify in writing at the time of contribution, together with all income, gains and losses and proceeds from the investment, reinvestment and sale thereof, less all payments therefrom and expenses charged thereto in accordance with the provisions of this Section 13. Subject to Section 3, the Legal Defense Fund shall be held and administered by the Trustee for the purpose of defraying the costs and expenses incurred by Participants and beneficiaries associated with the enforcement of their rights under any Plan by litigation or other legal action and the Trustee in performing its duties under this Section. Upon the initial contribution ("Legal Defense Fund Date") by the Company designated as constituting a part of the Legal Defense Fund, the portion of this Trust so designated, together with earnings allocable thereto, shall be held exclusively for use of the Legal Defense Fund for a period of not less than five years from the Legal Defense Fund Date ("Legal Defense Fund Period"). At each anniversary of the Legal Defense Fund Date, the Legal Defense Fund Period shall be extended for an additional year unless the Board has determined in good faith and the Trustee concurs in writing, that (i) no Change of Control has occurred or if such an event has occurred all Liabilities have been satisfied, (ii) at that time there is no Potential Change in Control Period, and (iii) if the Trust has become irrevocable pursuant to Section 1(b), all Liabilities have been satisfied.
(b) The Legal Defense Fund shall be maintained and administered as a separate segregated amount; provided, however, that the assets of the Legal Defense Fund may be commingled with all other assets of the Trust, and with the assets of any other trust, solely for investment purposes.
(c) If, at any time after a Change of Control or during a Potential Change of Control Period, legal proceedings are brought against the Trustee by the Company or another party seeking to invalidate any of the provisions of this Trust Agreement as they relate to the Trust, or seeking to enjoin the Trustee from paying any amounts from any trust or from taking any other action otherwise required or permitted to be taken by the Trustee under this Trust Agreement with respect to any trust, the Trustee shall take all steps that may be necessary in such proceeding to uphold the validity and enforceability of the provisions of this Trust Agreement as they relate to such trust. The Trustee shall be empowered to retain counsel and other appropriate experts, including actuaries and accountants, to assist it in making any determination under this Section 13. All costs and expenses incurred by the Trustee in connection with any such proceeding
(including, without limitation, the payment of reasonable fees, costs and disbursements of any counsel, actuaries, accountants or other experts retained by the Trustee in connection with such proceeding) shall be charged to and paid from the Legal Defense Fund. To the extent the Trustee's legal fees and expenses exceed the amount available in the Legal Defense Fund, such fees and expenses shall be paid by the Trustee from the assets of the Trust Fund.
(d) If, at any time after a Change of Control, a Participant or beneficiary notifies the Trustee in writing that the Company has refused to pay a claim asserted by such Participant or beneficiary under any Plan, the Participant or beneficiary ("Claimant") may demand payment from the Legal Defense Fund with respect to expenses incurred in connection with the initiation or defense of any litigation or other legal action by or against the Company or any director, officer, stockholder or other person affiliated with the Company with respect to such claim. Such demand shall be made in writing, by delivering to the Trustee, within 90 days of the date the Claimant incurs such expenses, (i) a certification signed by the Claimant that the Company is in default in paying its obligations under the Plan and (ii) itemizing in reasonable detail in a form acceptable to the Trustee the expenses payable by the Legal Defense Fund.
(e) In the event that, on the date a Claimant's expenses are to be paid from the Legal Defense Fund, other expenses have been claimed but not yet paid and the aggregate amount of all claims exceeds the amount available in the Legal Defense Fund, the Company shall be obligated to make an additional contribution to the Legal Defense Fund. In the event the Company fails to make such additional contribution, the Trustee shall promptly advise the Claimant and shall only pay that portion of the amount of the claim to each Claimant determined by multiplying such Claimant's expenses by a fraction, the numerator of which is the amount held in the Legal Defense Fund and the denominator of which is the aggregate expenses claimed by all Claimants.
(f) Notwithstanding any provision herein to the contrary, the Trustee shall be required to act under this Section only to the extent there are sufficient amounts available in the Legal Defense Fund to defray the costs and expenses the Trustee reasonably anticipates will be incurred in connection with such action.
(g) The Company's Legal Defense Fund shall continue to be held and administered by the Trustee for the purposes described in this Section 13 until such time as all liabilities for benefits to which all Participants are entitled under all Plans shall have been paid in full to such Participants or their beneficiaries. Any balance then remaining in the Legal Defense Fund shall be distributed to the Company.
14. MISCELLANEOUS:
(a) Any provision of this Trust Agreement prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating the remaining provisions hereof.
(b) Benefits payable to Participants and their beneficiaries under this Trust Agreement may not be anticipated, assigned (either at law or in equity), alienated, pledged, encumbered or subjected to attachment, garnishment, levy, execution or other legal or equitable process.
(c) This Trust Agreement shall be governed by and construed in accordance with the laws of the State of Texas.
(d) This Trust Agreement shall be binding on, and the powers granted to the Company and the Trustee, respectively, shall be exercisable by the respective successors and assigns of the Company and the Trustee. Any corporation that succeeds to substantially all of the business of the Trustee by merger, consolidation, purchase or otherwise shall, upon succession and without appointment or other action by the Company, be and become successor Trustee hereunder. The Board may delegate any or all of its responsibilities or authority hereunder, or that of any of its members hereunder, to any officer of the Company by providing written notice to the Trustee of such delegation.
(e) Any communication to the Trustee, including any notice, direction, designation, certification, order, instruction or objection, shall be in writing and signed by the person authorized under the Plan or the Trust Agreement that governs same. The Trustee shall be fully protected and indemnified by the Company in acting in accordance with such written communications. Any notice required or permitted to be given hereunder shall be deemed given if written and hand delivered, mailed, postage prepaid, certified mail, return receipt requested or transmitted by facsimile to the Company or the Trustee at the following address or such other address as a party may specify:
(i) if to the Company:
Conoco Inc.
600 North Dairy Ashford
Houston, Texas 77079
Facsimile No.: (281) 293-4105
Attn: Senior Vice President, Finance, and CFO
(ii) If to the Trustee:
U. S. Trust Company, N.A.
515 S. Flower Street, Suite 2800
Los Angeles, CA 90071-2291
Facsimile No. (213) 488-1366
Attention: Charles E. Wert
(f) Any obligation of the Company and/or the Trust to pay the Trustee amounts pursuant to any provision of this Trust Agreement shall survive any amendment or termination hereof or the Trustee's resignation or removal.
15. DEFINITIONS:
"AFFILIATE" shall have the meaning ascribed to such term in Rule 12b-2 of the General Rules and Regulations under the Exchange Act, as in effect on the date of this Trust Agreement.
"ASSOCIATE" shall mean, with reference to any Person, (a) any corporation, firm, partnership, association, unincorporated organization or other entity (other than the Company or a subsidiary of the Company) of which such Person is an officer or general partner (or officer or general partner of a general partner) or is, directly or indirectly, the Beneficial Owner of 10% or more of any class of equity securities, (b) any trust or other estate in which such Person has a substantial beneficial interest or as to which such Person serves as trustee or in a similar fiduciary capacity and (c) any relative or spouse of such Person, or any relative of such spouse, who has the same home as such Person.
"BENEFICIAL OWNER" shall mean, with reference to any securities, any Person if:
(a) such Person or any of such Person's Affiliates and Associates, directly or indirectly, is the "beneficial owner" of (as determined pursuant to Rule 13d-3 of the General Rules and Regulations under the Exchange Act, as in effect on the date of this Trust Agreement) such securities or otherwise has the right to vote or dispose of such securities, including pursuant to any agreement, arrangement or understanding (whether or not in writing); provided, however, that a Person shall not be deemed the "Beneficial Owner" of, or to "beneficially own," any security under this subsection (a) as a result of an agreement, arrangement or understanding to vote such security if such agreement, arrangement or understanding: (i) arises solely from a revocable proxy or consent given in response to a public (i.e., not including a solicitation exempted by Rule 14a-2(b)(2) of the General Rules and Regulations under the Exchange Act) proxy or consent solicitation made pursuant to, and in accordance with, the applicable provisions of the General Rules and Regulations under the Exchange Act and (ii) is not then reportable by such Person on Schedule 13D under the Exchange Act (or any comparable or successor report);
(b) such Person or any of such Person's Affiliates and Associates, directly or indirectly, has the right or obligation to acquire such securities (whether such right or obligation is exercisable or effective immediately or only after the passage of time or the occurrence of an event) pursuant to any agreement, arrangement or understanding (whether or not in writing) or upon the exercise of conversion rights, exchange rights, other rights, warrants or options, or otherwise; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to "beneficially own," (i) securities tendered pursuant to a tender or exchange offer made by such Person or any of such Person's Affiliates or Associates until such tendered securities are accepted for purchase or exchange or (ii) securities issuable upon exercise of Exempt Rights; or
(c) such Person or any of such Person's Affiliates or Associates (i) has any agreement, arrangement or understanding (whether or not in writing) with any other Person (or any Affiliate or Associate thereof) that beneficially owns such securities for the purpose of acquiring, holding, voting (except as set forth in the proviso to subsection (a) of this definition) or disposing of such securities or (ii) is a member of a group (as that term is used in Rule 13d-5(b) of the General Rules and Regulations under the Exchange Act) that includes any other Person that beneficially owns such securities;
provided, however, that nothing in this definition shall cause a Person engaged in business as an underwriter of securities to be the Beneficial Owner of, or to "beneficially own," any securities acquired through such Person's participation in good faith in a firm commitment underwriting until the expiration of 40 days after the date of such acquisition. For purposes hereof, "voting" a security shall include voting, granting a proxy, consenting or making a request or demand relating to corporate action (including, without limitation, a demand for a stockholder list, to call a stockholder meeting or to inspect corporate books and records) or otherwise giving an authorization (within the meaning of Section 14(a) of the Exchange Act) in respect of such security.
The terms "beneficially own" and "beneficially owning" shall have meanings that are correlative to this definition of the term "Beneficial Owner."
"BOARD" or "BOARD OF DIRECTORS" shall mean the board of directors of the Company.
"CHANGE OF CONTROL" shall mean any of the following occurring on or after the Effective Date of this Trust Agreement:
(a) any Person (other than an Exempt Person) shall become the Beneficial Owner of 20% or more of the shares of Common Stock then outstanding or 20% or more of the combined voting power of the Voting Stock of the Company then outstanding; provided, however, that no Change of Control shall be deemed to occur for purposes of this subsection (a) if such Person shall become a Beneficial Owner of 20% or more of the shares of Common Stock or 20% or more of the combined voting power of the Voting Stock of the Company
solely as a result of (i) an Exempt Transaction or (ii) an acquisition by a Person pursuant to a reorganization, merger or consolidation, if, following such reorganization, merger or consolidation, the conditions described in clauses (i), (ii) and (iii) of subsection (c) of this definition are satisfied;
(b) individuals who, as of the Effective Date of this Trust Agreement, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the Effective Date of this Trust Agreement whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board; provided, further, that there shall be excluded, for this purpose, any such individual whose initial assumption of office occurs as a result of any actual or threatened election contest that is subject to the provisions of Rule 14a-11 under the Exchange Act;
(c) the shareholders of the Company shall approve a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, (i) more than 70% of the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding Voting Stock of such corporation beneficially owned, directly or indirectly, by all or substantially all of the Persons who were the Beneficial Owners of the outstanding Common Stock immediately prior to such reorganization, merger or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger or consolidation, of the outstanding Common Stock, (ii) no Person (excluding any Exempt Person or any Person beneficially owning, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 20% or more of the Common Stock then outstanding or 20% or more of the combined voting power of the Voting Stock of the Company then outstanding) beneficially owns, directly or indirectly, 20% or more of the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation or the combined voting power of the then outstanding Voting Stock of such corporation and (iii) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement or initial action by the Board providing for such reorganization, merger or consolidation; or
(d) the shareholders of the Company shall approve (i) a complete
liquidation or dissolution of the Company unless such liquidation or
dissolution is approved as part of a plan of liquidation and dissolution
involving a sale or disposition of all or substantially all of the assets
of the Company to a corporation with respect to which, following such sale
or other disposition, all of the requirements of clauses (ii)(A), (B) and
(C) of this subsection (d) are satisfied, or (ii) the sale or other
disposition of all or substantially all of the assets of the
Company, other than to a corporation, with respect to which, following such sale or other disposition, (A) more than 70% of the then outstanding shares of common stock of such corporation and the combined voting power of the Voting Stock of such corporation is then beneficially owned, directly or indirectly, by all or substantially all of the Persons who were the Beneficial Owners of the outstanding Common Stock immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the outstanding Common Stock, (B) no Person (excluding any Exempt Person and any Person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, 20% or more of the Common Stock then outstanding or 20% or more of the combined voting power of the Voting Stock of the Company then outstanding) beneficially owns, directly or indirectly, 20% or more of the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding Voting Stock of such corporation and (C) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement or initial action of the Board providing for such sale or other disposition of assets of the Company.
"CLAIMANT" shall mean "Claimant" as defined in Section 13(d) of the Agreement.
"CODE" shall mean "Code" as defined in Section 1(c) of the Agreement.
"COMMON STOCK" shall mean the Class A common stock, par value $.01 per share, of the Company and the Class B common stock, par value $.01 per share, of the Company.
"COMPANY" shall mean "Company" as defined in the Recitals of the Agreement.
"COMPENSATION COMMITTEE" shall mean the Compensation Committee of the Board of Directors.
"EFFECTIVE DATE" shall mean "Effective Date" as defined in the Recitals of the Agreement.
"ERISA" shall mean "ERISA" as defined in the Recitals of the Agreement.
"EVENT" shall mean "Event" as defined in Section 9(b) of the Agreement.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended.
"EXEMPT PERSON" shall mean any of the Company, any subsidiary of the Company, any employee benefit plan of the Company or any subsidiary of the Company, and any Person organized, appointed or established by the Company for or pursuant to the terms of any such plan.
"EXEMPT RIGHTS" shall mean any rights to purchase shares of Common Stock or other Voting Stock of the Company if at the time of the issuance thereof such rights are not
separable from such Common Stock or other Voting Stock (i.e., are not transferable otherwise than in connection with a transfer of the underlying Common Stock or other Voting Stock), except upon the occurrence of a contingency, whether such rights exist as of the Effective Date of the Trust Agreement or are thereafter issued by the Company as a dividend on shares of Common Stock or other Voting Securities or otherwise.
"EXEMPT TRANSACTION" shall mean an increase in the percentage of the outstanding shares of Common Stock or the percentage of the combined voting power of the outstanding Voting Stock of the Company beneficially owned by any Person solely as a result of a reduction in the number of shares of Common Stock then outstanding due to the repurchase of Common Stock or Voting Stock by the Company, unless and until such time as (a) such Person or any Affiliate or Associate of such Person shall purchase or otherwise become the Beneficial Owner of additional shares of Common Stock constituting 1% or more of the then outstanding shares of Common Stock or additional Voting Stock representing 1% or more of the combined voting power of the then outstanding Voting Stock, or (b) any other Person (or Persons) who is (or collectively are) the Beneficial Owner of shares of Common Stock constituting 1% or more of the then outstanding shares of Common Stock or Voting Stock representing 1% or more of the combined voting power of the then outstanding Voting Stock shall become an Affiliate or Associate of such Person.
"INSOLVENT" shall mean "Insolvent" as defined in Section 3(a) of the Agreement.
"IRS" shall mean "IRS" as defined in Section 2(f) of the Agreement.
"LEGAL DEFENSE FUND" shall mean "Legal Defense Fund" as defined in
Section 13(a) of the Agreement.
"LEGAL DEFENSE FUND DATE" shall mean "Legal Defense Fund Date" as defined in Section 13(a) of the Agreement.
"LEGAL DEFENSE FUND PERIOD" shall mean "Legal Defense Fund Period" as defined in Section 13(a) of the Agreement.
"LIABILITIES" shall mean the aggregate benefits and other amounts paid or payable under the Plans computed in accordance with the methodologies applicable under Exhibit B.
"PARTICIPANTS" shall mean "Participants" as defined in the Recitals of the Agreement.
"PAYMENT SCHEDULE" shall mean "Payment Schedule" as defined in Section 2(a) of the Agreement.
"PERSON" shall mean any individual, firm, corporation, partnership, association, trust, unincorporated organization or other entity.
"PLAN" or "PLANS" shall mean "Plan" or "Plans" as defined in the Recitals of the Agreement.
"POTENTIAL CHANGE OF CONTROL" shall mean the occurrence of any of the following events (but no event other than the following events), except as otherwise provided below:
(a) a tender offer or exchange offer is commenced by any Person which, if consummated, would constitute a Change of Control;
(b) an agreement is entered into by the Company providing for a transaction which, if consummated, would constitute a Change of Control;
(c) any election contest is commenced that is subject to the provisions of Rule 14a-11 under the Exchange Act; or
(d) any proposal is made, or any other event or transaction occurs or is continuing, which the Board determines could result in a Change of Control.
"POTENTIAL CHANGE OF CONTROL PERIOD" shall mean a period commencing on the date of a Potential Change of Control and ending on the date that the Board of Directors determines in good faith that a Change of Control is unlikely to occur by reason of the event that constituted the Potential Change of Control; provided, that in no event shall the Potential Change of Control Period be less than one year from the date of the Potential Change of Control.
"PERSON" shall mean any individual, firm, corporation, partnership, association, trust, unincorporated organization or other entity.
"TRUST" shall mean "Trust" as defined in the Recitals of the Agreement.
"TRUST AGREEMENT" shall mean "Trust Agreement" as defined in the Recitals of the Agreement.
"TRUST FUND" shall mean "Trust Fund" as defined in Section 1(d) of the Agreement.
"TRUSTEE" shall mean "Trustee" as defined in the Recitals of the Agreement.
"VOTING STOCK" shall mean, with respect to a corporation, all securities of such corporation of any class or series that are entitled to vote generally in the election of directors of such corporation (excluding any class or series that would be entitled so to vote by reason of the occurrence of any contingency, so long as such contingency has not occurred).
16. EFFECTIVE DATE:
The effective date of this Trust Agreement shall be December 17, 1999.
IN WITNESS WHEREOF, the Company and the Trustee have signed this Trust Agreement as of the date first written above.
CONOCO INC.
By /s/ R.W. Goldman
--------------------------------------------
R. W. Goldman
Senior Vice President, Finance, and
Chief Financial Officer
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U.S. TRUST COMPANY, NATIONAL ASSOCIATION
By: /s/ Charles E. Wert
--------------------------------------------
Title: Executive Vice President
----------------------------------------
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EXHIBIT A
COVERED PLANS
Conoco Inc. Deferred Variable Compensation Plan
Conoco Inc. Salary Deferral & Savings Restoration Plan
Retirement Restoration Plan I of Conoco Inc.
Retirement Restoration Plan II of Conoco Inc.
EXHIBIT B
LIABILITY VALUATION
The aggregate benefits and other amounts paid or payable under the Plans shall be determined under the following methodology:
I. Retirement Restoration Plan I and Retirement Restoration Plan II of Conoco Inc.
(A) The Liabilities shall be the sum of:
(1) 110% of the total amount that would be immediately payable as a lump sum to participants eligible for early/normal retirement as of the date liabilities are being determined, plus
(2) the present value of the total amount that would be payable as a lump sum at the earliest age a participant not yet eligible for early retirement would become eligible for at early retirement, assuming each such employee continues employment until eligible for early retirement and pay increases by 3% per year, plus
(3) the present value of remaining installment payments to former employees.
(B) For purposes of this section I, the provisions of the Retirement Plan of Conoco Inc, the Retirement Restoration Plans I and II of Conoco Inc, and I.R.C. Section 401(a)(17) and 415, shall be applied as they exist on the date Liabilities are being determined. "Present value" shall be determined using the actuarial assumptions defined in Section 1(44) of the Retirement Plan of Conoco Inc.
II. The Thrift Restoration Plan of Conoco Inc. and the Global Variable Compensation (GVC) Deferral Plan of Conoco Inc.
The Liabilities shall be the sum of all account balances as of the date Liabilities are being determined.
EXHIBIT C
INVESTMENT GUIDELINES
Until further written notice to the Trustee, the investment authority given the Trustee pursuant to Article 5 shall be subject to the following limitations:
1. FOR INVESTMENTS MADE PURSUANT TO SECTION 5(A):
o investments with corporate issuers are limited to those with Moody's or Standard & Poor's ratings of "A1/P1, AA" or better;
o the amount that can be invested with any one issuer shall be no more than 5% of the total trust portfolio and 10% of the issuer's total issued amount;
o investment in life insurance policies and annuity contracts shall
be limited to those insurance companies rated "A" or better by
A.M. Best; and
o investments in real property shall be diversified geographically and by property type.
2. FOR INVESTMENTS MADE PURSUANT TO SECTION 5(B), INCLUDING INVESTMENTS WITH THE COMMERCIAL DEPARTMENT OF THE TRUSTEE:
o authorized banks are limited to those with the highest two ratings categories by Fitch IBCA or Thomson Bankwatch; and
o the amount that can be invested with any one bank shall be no more than 10% of the bank's stockholder's equity.
3. FOR INVESTMENTS MADE PURSUANT TO SECTION 5(P):
o authorized insurance companies are limited to those rated "A" or better by A.M. Best.
EXHIBIT D
TRUSTEE COMPENSATION
This fee schedule is applicable for U.S. Trust Company, N.A. to provide fiduciary services for the above-referenced Rabbi Trust. Assets are held in custody whereby investments are directed by the Trustee or Investment Advisor chosen by the Trustee. Account fees are calculated on an annual basis and billed in arrears on a quarterly basis in accordance with the following schedule:
INITIAL SET-UP FEE: $ 7,500.00
ANNUAL FEE (BASED ON MARKET VALUE OF ASSETS):
-APPLICABLE TO ALL ASSETS, EXCLUSIVE OF INSURANCE POLICIES
Minimum Annual Fee: $15,000.00
Or .20% on $7,500,000 to $20,000,000
and .15% on the remaining balance
TRANSACTION CHARGES:
For each receipt or delivery of a security, whether free $ 35.00
or against payment (except when opening accounts)
Benefit Payments:
Single Lump Sum $ 7.50
Periodic Disbursements $ 3.00
Earmarked or Separate Trusts (per account) $ 1,000.00
Fiduciary Income Tax Returns (minimum) $ 750.00
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TERMINATION FEE: Reasonable, but in no event to exceed 50% of the Annual Fee.
EXTRAORDINARY SERVICES: Upon the occurrence of an extraordinary event, such as a Change in Control as defined in the Trust Agreement, or any other matter which in the Trustee's discretion requires the Trustee to perform material services in addition to the Trustee's custodial and investment responsibilities under the Trust Agreement (an "Event"), the Trustee shall be entitled to an additional fee, as of the date of the Event, calculated as follows: (a) for administrative services related to the Event, a fee negotiated in good faith within ten (10) days of the Event, plus compensation at U.S. Trust's normal hourly rates for services and out of pocket expenses not contemplated by the negotiated fee; and (b) for investment management services, the applicable published U.S. Trust fee schedule.
In addition, the Trustee shall be reimbursed for the reasonable fees and expenses of its counsel or other expert required to be engaged by the Trustee. Such amounts shall be
paid by the Company to the Trustee within thirty days of billing, provided that if timely payment is not made, the Trustee may discharge any such obligation out of Trust assets, regardless of whether the Trust is then fully funded. In the event of the termination of the Trust or the removal or resignation of the Trustee, the Trustee shall be entitled to withhold out of Trust assets all amounts due under this paragraph. This paragraph shall supersede any conflicting provision of the Trust Agreement or the
Plans.
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
YEARS ENDED DECEMBER 31
--------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
Net Income ................................. $ 744 $ 450 $ 1,097 $ 863 $ 575
Weighted Average Shares Outstanding
(excluding Treasury Stock)--Basic
Class A ................................. 190,689,656 37,283,059 -- -- --
Class B ................................. 436,543,573 436,543,573 436,543,573 436,543,573 436,543,573
------------ ------------ ------------ ------------ ------------
Total Basic ......................... 627,233,229 473,826,632 436,543,573 436,543,573 436,543,573
Shares assumed to be issued due
to stock options ........................... 9,241,896 1,659,816 -- -- --
------------ ------------ ------------ ------------ ------------
Adjusted average number of Class A
and Class B common shares and share
equivalent-Diluted ......................... 636,475,125 475,486,448 436,543,573 436,543,573 436,543,573
Earnings per share:*
- Basic ................................. $ 1.19 $ .95 $ 2.51 $ 1.98 $ 1.32
- Diluted ............................... $ 1.17 $ .95 $ 2.51 $ 1.98 $ 1.32
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*Earnings per share (EPS) for the periods prior to the Offerings was calculated using only Class B common stock as required by SFAS No. 128.
EXHIBIT 12
Conoco Inc.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
Year Ended December 31
---------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
Net income ................................................ $ 744 $ 450 $ 1,097 $ 863 $ 575
Provision for Income Taxes ................................ 473 244 1,010 1,038 774
Equity in Earnings of Affiliates .......................... (150) (22) (40) 25 (22)
------- ------- ------- ------- -------
Pretax Income before Adjustment for Minority Interests
in Consolidated Subsidiaries or Income or Loss from
Equity Affiliates ...................................... 1,067 672 2,067 1,926 1,327
Fixed Charges (see below) ................................. 412 337 174 188 210
Amortization of Capitalized Interest ...................... 46 40 46 53 53
Distributed Income in Equity Affiliates ................... 77 105 58 85 42
Capitalized Interest ...................................... (6) (72) (94) (75) (95)
------- ------- ------- ------- -------
Total Adjusted Earnings Available for Payment of Fixed
Charges(a)(b) .......................................... $ 1,596 $ 1,082 $ 2,251 $ 2,177 $ 1,537
======= ======= ======= ======= =======
Ratio of Earnings to Fixed Charges ........................ 3.9 3.2 12.9 11.6 7.3
Fixed Charges
-------------
Interest and Debt Expense - Borrowings .................... $ 311 $ 199 $ 36 $ 74 $ 74
Capitalized Interest ...................................... 6 72 94 75 95
Rental Expense Representative of Interest Factor .......... 95 66 44 39 41
------- ------- ------- ------- -------
Total Fixed Charges ....................................... $ 412 $ 337 $ 174 $ 188 $ 210
======= ======= ======= ======= =======
Ratio of Earnings to Fixed Charges Excluding Special
----------------------------------------------------
Items
-----
Earnings From Above ....................................... $ 1,596 $ 1,082 $ 2,251 $ 2,177 $ 1,537
Special Items (pretax)(c) ................................. 60 454 (91) (22) 71
------- ------- ------- ------- -------
Earnings Adjusted For Special Items ....................... $ 1,656 $ 1,536 $ 2,160 $ 2,155 $ 1,608
======= ======= ======= ======= =======
Fixed Charges From Above .................................. $ 412 $ 337 $ 174 $ 188 $ 210
======= ======= ======= ======= =======
Ratio of Earnings Adjusted For Special Items to Fixed
Charges ................................................ 4.0 4.6 12.4 11.5 7.7
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a) Equity affiliate pretax losses, where incurred, include no guaranteed
payments.
b) There are no fixed charges in subsidiaries with minority interests.
c) Includes special items as reported in Conoco's form 10-K for 1999 and prior
years.
EXHIBIT 13
FINANCIAL REVIEW
PAGE
----
Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 28
Report of Management..................................................................................... 43
Audited Consolidated Financial Statements
Report of Independent Accountants..................................................................... 43
Consolidated Statement of Income - Years Ended December 31, 1999, 1998 and 1997....................... 44
Consolidated Balance Sheet - at December 31, 1999 and 1998............................................ 45
Consolidated Statement of Stockholders' Equity/Owner's Net Investment and Accumulated
Other Comprehensive Loss - Years Ended December 31, 1999, 1998 and 1997............................. 46
Consolidated Statement of Cash Flows - Years Ended December 31, 1999, 1998 and 1997................... 47
Notes to Consolidated Financial Statements............................................................ 48
Unaudited Financial Information
Supplemental Petroleum Data........................................................................... 71
Consolidated Quarterly Financial Data - 1999 and 1998................................................. 77
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
References to "Conoco," "we" or "us" are references to Conoco Inc. and its consolidated subsidiaries.
This annual report 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, and on estimates and projections about Conoco and the petroleum industry in general. We caution you that these statements are not guarantees of future performance and involve risks, uncertainties and assumptions that we cannot predict. In addition, we have based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. Accordingly, our actual outcomes and results may differ materially from what we have expressed or forecasted in the forward-looking statements. Any differences could result from a variety of factors including the following:
o fluctuations in crude oil and natural gas prices and refining and marketing margins;
o failures or delays in achieving expected production from existing and future oil and gas development projects;
o uncertainties inherent in predicting oil and gas reserves and oil and gas reservoir performance;
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 liability resulting from litigation;
o world economic and political conditions; or
o changes in tax and other laws applicable to our business.
The discussion and analysis of Conoco's financial condition and results of operations should be read in conjunction with Conoco's consolidated financial statements included in this report.
The initial public offering of the Class A common stock of Conoco commenced on October 21, 1998. The initial public offering consisted of approximately 191 million shares of Class A common stock issued at a price of $23 per share, and represented E.I. du Pont de Nemours and Company's (DuPont) first step in the planned divestiture of Conoco. After the initial public offering, DuPont owned 100 percent of Conoco's Class B common stock (approximately 437 million shares), representing approximately 70 percent of Conoco's outstanding common stock and approximately 92 percent of the combined voting power of all classes of voting stock of Conoco. On August 6, 1999, DuPont concluded an exchange offer to its stockholders which resulted in all 437 million shares of Class B common stock being distributed to DuPont stockholders. The exchange offer was the final step in DuPont's planned divestiture of Conoco.
Prior to the date of the initial public offering, operations were conducted by Conoco and, in some cases, subsidiaries of DuPont. The accompanying consolidated financial statements for these periods are presented on a carve-out basis prepared from DuPont's historical accounting records, and include the historical operations of both entities owned by Conoco and operations transferred to Conoco by DuPont at the time of the initial public offering. In this context, no direct ownership relationship existed among all the various units comprising Conoco. Accordingly, net cash contributions to/from owner prior to the initial public offering included funds transferred between Conoco and DuPont for operating needs, cash dividends paid and other equity transactions.
Effective at the time of the initial public offering, Conoco's capital structure was established and the transfer to Conoco of certain subsidiaries previously owned by DuPont was substantially complete, resulting in direct ownership of those subsidiaries. Accordingly, for periods subsequent to the initial public offering, financial information is presented on a consolidated basis.
The consolidated statement of income includes all revenues and costs directly attributable to Conoco. These costs directly attributable to Conoco include costs for facilities, functions and services used by Conoco at shared sites and costs for certain functions and services performed by centralized DuPont organizations and directly charged to Conoco based on usage. In addition, services performed by Conoco on DuPont's behalf were directly charged to DuPont. The results of operations also include allocations of DuPont's general corporate expenses through the date of the initial public offering.
Prior to the date of the initial public offering, all charges and allocations of cost for facilities, functions and services performed by DuPont organizations for Conoco are deemed paid by Conoco to DuPont, in cash, in the period in which the cost was recorded in the consolidated financial statements. Allocations of current income taxes receivable or payable are similarly considered remitted, in cash, by or to DuPont in the period the related income taxes were recorded. Subsequent to the initial public offering, such costs are billed directly under transitional service agreements, and income taxes are paid directly to the taxing authorities, or to DuPont, as appropriate.
All of the allocations and estimates in the consolidated financial statements are based on assumptions that management believes are reasonable under the circumstances. However, these allocations and estimates are not necessarily indicative of the costs and expenses that would have resulted if Conoco had been operated as a separate entity for periods prior to the initial public offering.
Conoco has four reporting segments for its upstream and downstream businesses, reflecting geographic division between the United States and international. Upstream operating segment activities include exploring for, developing, producing and selling crude oil, natural gas and natural gas liquids. Downstream operating segment activities include refining crude oil and other feedstocks into petroleum products, buying and selling crude oil and refined products, and transporting, distributing and marketing petroleum products. Corporate and other includes general corporate expenses, financing costs and other non-operating items, results for power, and related-party insurance operations.
Conoco considers portfolio optimization to be an ongoing business strategy and continuously seeks to rationalize its investment portfolio in order to maximize profitability. Over the past five years, Conoco has generated proceeds of approximately $2,020 million, averaging about $404 million a year, through the disposal of marginal and non-strategic producing properties, by upgrading and redirecting its exploration portfolio and by increasing its ownership in large-scale properties. As a result, we have increased production by 8 percent on a barrel-of-oil-equivalent (BOE) basis while undergoing this rationalization. Our policy is to report material gains and losses from individual asset sales as special items when reporting consolidated net income.
Conoco conducts its activities through wholly and majority owned subsidiaries and, increasingly, through equity affiliates. This trend of conducting business in the petroleum industry through equity affiliates is expected to increase in the future as Conoco attempts to minimize either the capital or political risks associated with new large-scale, high-impact projects and capture synergies leading to growth opportunities.
Conoco's profitability is largely determined by the difference between prices received for crude oil, natural gas, natural gas liquids and refined products produced and the costs of finding, developing, producing, refining and marketing these resources. Conoco has no control over many factors affecting prices for its products. Prices for crude oil, natural gas and refined products may fluctuate widely in response to changes in global and regional supply, political developments and the ability of the Organization of Petroleum Exporting Countries (OPEC) and other producing nations to set and maintain production levels and prices.
Crude oil prices increased substantially in 1999. West Texas Intermediate closed at $25.60 per barrel on December 31, 1999, an increase of $13.55 from $12.05 per barrel on December 31, 1998. The 12-year lows, as measured in absolute dollars, and 25-year lows, as measured in inflation-adjusted dollars, experienced during 1998 had a significant negative impact on Conoco's financial results in 1998 and continued to negatively impact 1999 financial results in the first half of the year. Low refining and marketing margins also negatively impacted earnings as high refined product inventory levels at the beginning of the year combined with crude price increases throughout the year to reduce margins.
Prices for crude oil, natural gas and refined products are also affected by changes in demand for these products. Changes may result from global events, as well as supply and demand in industrial markets, such as the steel and aluminum markets. Even small decreases in crude oil and natural gas prices and refined product margins may adversely affect Conoco. Lower crude oil and natural gas prices may reduce the amount of oil and natural gas reserves Conoco can produce economically, and existing contracts that Conoco has entered into may become uneconomic.
Local political and economic factors in international markets may have a material adverse effect on Conoco. There are many risks associated with operations in international markets, including changes in foreign governmental policies relating to crude oil, natural gas or refined product pricing and taxation; other political, economic or diplomatic developments; changing political conditions; and international monetary fluctuations. Recent turmoil in regions such as Russia, Asia Pacific and South America has subjected Conoco's operations in these regions to increased risks. These risks include:
o the risk of political and economic instability;
o the risk of war;
o the risk that Conoco's property will be seized by a foreign government with or without compensation;
o the risk of confiscatory taxation;
o the risk that foreign governments will attempt to renegotiate or revoke existing contractual arrangements;
o increased risks of fluctuating currency values, hard currency shortages and currency controls; and
o civil unrest and changes in government.
Actions of the United States government can also expose Conoco's operations to risk. The United States government can use tax and other legislation, executive orders and commercial restrictions to prevent or restrict Conoco from doing business in foreign countries. These restrictions and those of foreign governments have in the past limited Conoco's ability to operate in or gain attractive opportunities in various countries. Actions by both the United States and host governments have affected operations significantly in the past and will continue to do so in the future.
LIQUIDITY AND CAPITAL RESOURCES
CASH PROVIDED BY OPERATIONS
Cash provided by operations in 1999 increased $843 million to $2,216 million versus $1,373 million in 1998. Cash provided by operations before changes in operating assets and liabilities decreased $40 million compared to 1998, primarily due to significantly weaker refined product margins, lower net realized natural gas prices and increased interest expense, partially offset by higher crude oil prices and higher volumes. Positive changes to net operating assets and liabilities of $883 million were due to lower tax payments in 1999, a decrease in disposition trust fund balances and a decrease in inventories. In addition, the rise in crude oil prices during 1999 resulted in an increase in accounts payable, offset by an increase in accounts receivable.
During 1998, cash provided by operations decreased $1,503 million to $1,373 million versus $2,876 million in 1997. Cash provided by operations before changes in operating assets and liabilities decreased $303 million compared to 1997, primarily due to lower net realized crude oil and natural gas prices, partially offset by higher natural gas volumes and improved international downstream margins. Negative changes to net operating assets and liabilities of $1,200 million were due to higher tax payments attributable to 1997 asset sales and a decrease in accounts payable, offset by a decrease in accounts receivable due to lower crude oil prices.
INVESTING ACTIVITIES
CAPITAL EXPENDITURES AND INVESTMENTS
YEAR ENDED DECEMBER 31
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1999 1998 1997
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(IN MILLIONS)
Upstream
United States .......................................... $ 413 $ 788 $ 1,534
International .......................................... 839 1,177 999
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Total Upstream .................................... $ 1,252 $ 1,965 $ 2,533
Downstream
United States .......................................... $ 214 $ 201 $ 227
International .......................................... 248 332 331
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Total Downstream .................................. $ 462 $ 533 $ 558
Corporate and Other ........................................ 73 18 23
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Total Capital Expenditures and Investments ........... $ 1,787 $ 2,516 $ 3,114
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United States .............................................. $ 700 $ 1,007 $ 1,761
International .............................................. 1,087 1,509 1,353
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Total ................................................ $ 1,787 $ 2,516 $ 3,114
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Total capital investments in 1999, including investments in affiliates and acquisitions, were $1,787 million, a decrease of 29 percent versus 1998 capital investments of $2,516 million. The decline was primarily due to lower worldwide spending on upstream capital projects. During 1999, 70 percent of total capital investments were spent in upstream, with a majority devoted to further development of the Lobo field, completion of the Ursa field, drilling in the deepwater Gulf of Mexico, acquisition of producing acreage in Canada, additional capital investments in our Petrozuata joint venture in Venezuela, as well as continued development of various fields in the United Kingdom and the Norwegian sectors of the North Sea. Approximately $156 million was spent on exploratory drilling and leasing. The reduction in 1999 downstream capital investments primarily resulted from the late 1998 completion of the Melaka refinery, a joint venture with Petronas and Statoil, in Malaysia. The increase in corporate and other capital investments is primarily due to project costs associated with construction of Conoco's power generating facilities.
Total capital investments in 1998, including investments in affiliates and acquisitions, were $2,516 million, a decrease of 19 percent versus 1997 capital investments of $3,114 million, which included a $929 million acquisition of natural gas properties and transportation assets in the Lobo trend in South Texas. Approximately 60 percent of 1998 capital investments were outside the United States. About 78 percent of 1998 capital investments were spent in upstream, with a majority devoted to development projects in South Texas, the deepwater Gulf of Mexico, Venezuela, the U.K. and Norway. Approximately $312 million was spent on exploratory drilling and leasing. Downstream capital investments in 1998 included completion of the Melaka refinery, expansion of retail marketing operations, particularly in Europe, and upgrades and maintenance of existing facilities. Conoco also spent approximately $18 million for corporate software in 1998.
Upstream
Upstream capital investments, excluding amounts paid in the first quarter of 1999 for the completion of 1998 acquisitions, totaled $1,252 million in 1999. The decrease of $713 million, or approximately 36 percent, compared to $1,965 million in 1998, was primarily the result of an overall reduction in the capital expenditure program driven by lower prices in late 1998 and early 1999 and the completion of major projects, such as Britannia in the U.K. North Sea and Ursa in the Gulf of Mexico.
During 1998, upstream capital investments totaled $1,965 million, a decrease of $568 million, or 22 percent, compared to $2,533 million in 1997, which included the $929 million Lobo acquisition.
United States
U.S. capital investments were $413 million in 1999, a decrease of $375 million, or 48 percent, compared to 1998 U.S. capital investments of $788 million. Expenditures during 1999 focused on continued development of the South Texas Lobo field and, in the deepwater Gulf of Mexico, completion of the Ursa field and drilling of the Magnolia and K2 discoveries.
In 1998, U.S. capital investments were $788 million, a decrease of $746 million, or 49 percent, compared to 1997 U.S. capital investments of $1,534 million. Continuing operations and development expenditures were primarily the target for 1998. This included the development of the Lobo and Ursa fields, construction of two deepwater drillships, acquisition of exploratory acreage and expansion of onshore natural gas operations. The Ursa field development represented a major development project in the Gulf of Mexico. The project involved installing a new-generation tension-leg platform in approximately 3,900 feet of water, with first production in 1999.
International
International capital investments were $839 million in 1999, a decrease of $338 million, or 29 percent, compared to $1,177 million in 1998. The 1999 expenditures focused on additional capital investments in exploratory drilling and development of the Venezuelan Petrozuata joint venture, acquisition of producing acreage in Canada and continued developmental spending on the Visund field in the Norwegian North Sea and the Britannia and the Viking Phoenix gas fields in the U.K. North Sea.
In 1998, international capital investments were $1,177 million, up $178 million, or 18 percent, compared to $999 million in 1997. The 1998 increase reflects expenditures to complete the multi-year development program for Britannia, with first production in August 1998. Other significant capital investments were made for exploratory drilling and development projects, such as Petrozuata, which also began production in August 1998, and the Visund and the Viking Phoenix fields. Conoco increased its natural gas holdings in the U.K. sector of the North Sea through its acquisition of the British subsidiary of Canadian Occidental Petroleum Ltd., which held an interest in the South Valiant, Vulcan and Caister fields, as well as interests in the Murdoch and Esmond gas transportation systems.
Downstream
For 1999, downstream capital investments totaled $462 million, a decrease of $71 million, or 13 percent, versus $533 million in 1998. As in 1998, downstream continued to focus on reducing capital expenditures. The difference in the 1999 versus 1998 expenditures was primarily attributable to the late 1998 completion of the Melaka refinery.
Downstream capital investments were $533 million in 1998, a decline of $25 million, or 4 percent, versus $558 million in 1997, primarily as a result of lower investments in equity affiliates.
United States
For 1999, U.S. capital investments totaled $214 million, an increase of $13 million, or 6 percent, versus 1998 investments of $201 million. As in 1998, 1999 expenditures were primarily attributable to both ongoing continued enhancement of operations and the optimization of retail marketing operations.
Investments in 1998 totaled $201 million, a decrease of $26 million, or 11 percent, versus 1997 investments of $227 million. Investments in 1998, as in 1997, included expenditures for ongoing operations and optimization of retail marketing operations. Conoco also invested $8 million for an increased ownership interest in Penreco, a joint venture with Pennzoil-Quaker State that produces and markets specialty petroleum products. In 1997, Conoco also invested funds for an initial equity interest in Penreco.
International
Conoco made international capital investments of $248 million during 1999, down $84 million, or 25 percent, from the $332 million spent in 1998. Expenditures in 1999 continued to focus on strengthening Conoco's retail marketing position, as well as additional investment in the Melaka refinery and the Humber refinery in the U.K.
In 1998, capital investments totaled $332 million, or essentially the same as in 1997. Investments in 1998 were made to enhance Conoco's retail marketing position in core markets such as Germany and Austria, and newer retail markets such as Thailand. Further capital was used to complete the construction of the Melaka refinery, which began operation in the third quarter of 1998. Expenditures in 1997 focused on strengthening Conoco's retail marketing position in core markets such as Germany, Austria and the Nordic countries, expanding in targeted retail growth markets in Central and Eastern Europe, Spain, Turkey and the Asia Pacific region, and continuing the construction of the Melaka refinery.
Corporate and Other
During 1999, corporate and other capital investments totaled $73 million, an increase of $55 million, or 306 percent, from 1998 capital expenditures of $18 million. The increased expenditures during 1999 were primarily related to project costs associated with the construction of Conoco's power generation facilities.
Corporate and other capital investments in 1998 were $18 million, a
decrease of $5 million, or 22 percent, versus $23 million in 1997. Capital
investments in 1998 were primarily associated with corporate software, while
capital investments in 1997 primarily represented Conoco's investment in
electric power generation projects in international equity affiliates. Because
of deregulation within the power industry, Conoco expects to continue to pursue
projects that leverage the economic advantages of Conoco's energy production
activities and the demand for energy in DuPont or third-party manufacturing
operations.
PROCEEDS FROM SALES OF ASSETS AND SUBSIDIARIES
Conoco's 1999 disposition proceeds were $162 million, down $559 million, or 78 percent, from $721 million in 1998, due to fewer large asset dispositions in 1999. There were no significant proceeds from any one asset sale in 1999.
Investing activities during 1998 included proceeds of $721 million, a 28 percent increase over $565 million in 1997. The 1998 proceeds included $245 million from the sale of certain upstream U.S. and North Sea properties, $156 million from the sale of various downstream assets in the U.S., as well as $54 million from the sale of an office building in Europe. These and other proceeds were a result of Conoco's ongoing strategic portfolio upgrading and rationalization efforts.
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 borrowing capacity should be sufficient to fund dividends, capital expenditures, working capital requirements and to service debt.
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. In October 1998, Conoco raised net proceeds of $4,228 million in its initial public offering, which were used to repay a portion of the $7,500 million note and certain other intercompany notes 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 $3,970 million net proceeds of this offering 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 December 31, 1999, Conoco had $628 million of commercial paper outstanding, bearing a weighted-average interest rate of 6.6 percent.
Total Conoco debt was $4,743 million at December 31, 1999, up $2 million versus $4,741 million at year-end 1998. The total debt-to-capitalization ratio was 51 percent at December 31, 1999, and 52 percent at December 31, 1998.
In November 1999, Conoco and Armadillo Investors L.L.C. formed Conoco Gas Holdings L.L.C. Conoco contributed certain domestic upstream assets for a 75 percent common member interest and cash, and Armadillo contributed cash for a 25 percent preferred member interest. As a result of the formation, Conoco received cash proceeds of $185 million, with a corresponding increase in minority interest.
In December 1999, Conoco formed Conoco Corporate Holdings L.P. by contributing certain corporate assets. The limited partner interest was sold to Highlander Investors L.L.C. for $141 million, or an initial 47 percent interest. The net minority interest in Conoco Corporate Holdings held by Highlander was $141 million on December 31, 1999.
On December 30, 1999, we retired the limited partner interest in Conoco Oil & Gas Associates L.P. held by Vanguard Energy Investors L.P. As a result, Conoco reduced outstanding minority interests by $302 million.
RESULTS OF OPERATIONS
CONSOLIDATED RESULTS
YEAR ENDED DECEMBER 31
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1999 1998 1997
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(IN MILLIONS)
Sales and Other Operating Revenues
Upstream
United States ................................... $ 3,309 $ 3,200 $ 3,348
International ................................... 2,247 1,601 1,906
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Total Upstream ................................ $ 5,556 $ 4,801 $ 5,254
Downstream
United States ................................... $ 11,191 $ 8,949 $ 11,394
International ................................... 10,264 8,297 8,639
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Total Downstream .............................. $ 21,455 $ 17,246 $ 20,033
Corporate and Other ................................ 28 749 509
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Total Sales and Other Operating Revenues ........ $ 27,039 $ 22,796 $ 25,796
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After-tax Operating Income
Upstream
United States .................................... $ 311 $ 219 $ 445
International .................................... 534 283 439
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Total Upstream ............................... $ 845 $ 502 $ 884
Downstream
United States .................................... $ 108 $ 135 $ 216
International .................................... 129 156 91
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Total Downstream ............................. $ 237 $ 291 $ 307
Corporate and Other ................................ (111) (271) (82)
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Total After-tax Operating Income ................ $ 971 $ 522 $ 1,109
Interest and Other Non-Operating Expenses
Net of Tax ..................................... $ (227) $ (72) $ (12)
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Net Income ............................................ $ 744 $ 450 $ 1,097
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SPECIAL ITEMS
Net income includes the following non-recurring items (special items) on an after-tax basis:
YEAR ENDED DECEMBER 31
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1999 1998 1997
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(IN MILLIONS)
Upstream
Asset sales .......................................... $ -- $ 95 $ 240
Property impairments ................................. -- (38) (112)
Tax rate changes ..................................... -- -- 19
Employee separation costs ............................ -- (42) --
Inventory write-downs ................................ -- (4) --
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Total Upstream Special Items ................. $ -- $ 11 $ 147
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Downstream
Asset sales .......................................... $ -- $ 12 $ --
Property impairments ................................. -- -- (55)
Tax rate changes ..................................... -- -- 11
Employee separation costs ............................ -- (10) --
Inventory write-downs ................................ -- (59) --
Litigation and settlement charges .................... (18) (28) (23)
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Total Downstream Special Items ............... $ (18) $ (85) $ (67)
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Corporate and Other
Stock option provision ............................... $ -- $ (183) $ --
Litigation and settlement charges .................... (20) (14) --
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Total Corporate and Other Special Items ...... $ (20) $ (197) $ --
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Total Special Items .................................. $ (38) $ (271) $ 80
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Special items in 1999 included charges for $18 million related to the settlement of certain posted price litigation and $20 million for the resolution of certain liabilities associated with the separation from DuPont related to discontinued businesses operated by Conoco in the past.
Special items in 1998 include $107 million in gains from several unrelated asset sales. The gains consist of:
o $54 million from the sale of producing and non-producing international
upstream properties;
o $41 million from the sale of U.S. upstream producing properties and
assets; and
o $12 million in downstream from the sale of an office building in
Europe.
The upstream sales were a normal part of Conoco's ongoing strategic portfolio management program designed to improve profitability by disposing of marginal properties and concentrating operations on core properties. Offsetting the gains were:
o property impairments of $38 million;
o inventory write-downs of $63 million to market prices;
o restructuring and employee separation costs of $52 million; and
o other losses of $42 million for litigation settlements.
The after-tax property impairments of $38 million were made in accordance with Conoco's policy on impairment of long-lived assets, and relate to a $32 million after-tax write-down of United States upstream properties and a $6 million after-tax write-down of an international upstream property. The United States properties include various oil and gas producing properties in Texas and in the Gulf of Mexico, as well as a non-operating natural gas plant in Texas. The write-down of the oil and gas properties became necessary because of reductions to Conoco's price forecast in light of deteriorating pricing conditions. The international property is an exploration license in Norway and was written down after the decision was made to discontinue further investment in the license. The fair value of oil and gas producing properties subject to the write-down was based on the present value of estimated future net cash flows from the properties using Conoco's projections of future prices, which were higher than year-end prices, and costs.
The $63 million write-down at year-end 1998 was the result of significant declines in crude oil and petroleum product prices occurring primarily in the fourth quarter of 1998. On a quarterly basis, Conoco evaluates whether the book value of its crude oil, natural gas and petroleum products inventories exceeds the market value of such inventories. This evaluation is made on a region by region basis for each pool of inventory. For the purpose of this evaluation, the inventories are grouped into United States, Europe and Asia Pacific regions and grouped into as many as 12 different pools per region based on relative values. Conoco writes down its inventories for each region when the book value of the inventory within a region exceeds the market value of such inventory. The average book value of inventories on a price-per-barrel basis across all pools decreased from $16.68 to $13.80 in the United States region, from $20.99 to $18.54 in the European region and from $46.75 to $29.56 in the Asia Pacific region. The significantly larger difference in value in the Asia Pacific region resulted from Conoco's more recent acquisition of inventories in that region, as well as the recent dramatic economic decline in the region.
The $42 million relates to the settlement in 1998 of lawsuits and a number of group and individual claims. In each of these settlements, Conoco was and is bound to confidentiality agreements with the settling parties, most of which involved court approval.
The $183 million stock option provision is a one-time non-cash charge for stock option employee compensation expenses related to the replacement of outstanding DuPont stock options held by Conoco employees with Conoco stock options in connection with the initial public offering.
Upstream special items in 1997 included $240 million in gains from asset sales consisting of $191 million associated with producing and non-producing properties in the North Sea and $49 million in the United States. Such asset sales were a part of Conoco's rationalization program, designed to improve profitability by disposing of marginal properties and concentrating operations on core properties. A United
Kingdom tax rate change also provided a $19 million benefit in 1997. Offsetting these benefits were property impairments of $112 million related to certain international non-revenue producing properties. Downstream special items in 1997 included a United Kingdom tax rate change benefit of $11 million. Offsetting this benefit were property impairments of $55 million attributable to the write-down of a European office building held for sale. Other losses of $23 million related to litigation charges.
Net income before special items (earnings before special items) totaled $782 million in 1999, $721 million in 1998 and $1,017 million in 1997.
1999 versus 1998
Conoco's 1999 net income of $744 million was up 65 percent from $450 million in 1998. Earnings before special items of $782 million in 1999 were 8 percent higher than the $721 million in 1998. The increase in earnings before special items was primarily the result of higher crude oil prices, increased natural gas volumes, improved earnings from international upstream equity companies, higher sales volumes of lower-cost inventories and lower exploration expenses. Partly offsetting these improvements were weaker refinery margins, higher operating costs associated with higher volumes, lower net realized natural gas prices, higher corporate expenses and increased interest expense.
Sales and other operating revenues of $27,039 million in 1999 increased 19 percent compared to $22,796 million in 1998, primarily driven by higher prices and a 7 percent increase in refined product sales volumes worldwide, partly offset by reduced power trading revenues reported in the corporate and other segment and lower natural gas prices. Downstream sales and other operating revenues were $21,455 million, up 24 percent compared to $17,246 million. Crude oil and refined product buy/sell and natural gas and electric power resale activities in 1999 totaled $5,299 million, up 6 percent compared to $5,004 million in 1998. The increase was primarily due to higher crude oil prices partly offset by reduced power trading activities.
Cost of goods sold totaled $14,781 million in 1999, an increase of 26 percent compared to $11,751 million in 1998. The increase is primarily attributable to higher feedstock costs associated with higher crude oil prices and slightly higher refined product volumes partly offset by the reduction in power trading activities.
Operating expenses were $2,060 million in 1999, down 1 percent from the $2,089 million for 1998.
Selling, general and administrative expenses for 1999 amounted to $809 million, up 10 percent compared to $736 million in 1998. The $73 million increase was primarily attributable to incremental administrative costs associated with becoming an independent company.
During 1999, exploration expenses totaled $270 million, a decline of $110 million, or 29 percent, compared to $380 million in 1998. The lower expenses primarily resulted from the implementation of a more focused exploration program. This, plus higher exploration success rates, also resulted in lower dry hole costs.
Depreciation, depletion and amortization (DD&A) for 1999 totaled $1,193 million, an increase of $80 million, or 7 percent, compared to $1,113 million in 1998 due to higher production volumes, DD&A rate changes and field mix.
Provision for income taxes for 1999 was $473 million, an increase of 94 percent compared to $244 million for 1998. This increase was primarily the result of higher pretax income in 1999. The effective tax rate in 1999 was approximately 39 percent versus 35 percent in 1998. The higher effective tax rate was due to the reduced impact of the U.S. alternative fuels credit and a greater percentage of income from upstream operations in countries with higher tax rates.
1998 versus 1997
Net income for 1998 of $450 million was down 59 percent from $1,097 million in 1997. Conoco had earnings before special items of $721 million in 1998, a decline of 29 percent from $1,017 million in 1997. Lower earnings before special items primarily reflected lower net realizable crude oil and natural gas prices and refinery margins. Higher natural gas volumes, lower exploration expenses, improved international downstream marketing margins and the favorable resolution of certain tax issues combined to partially offset the lower prices.
Sales and other operating revenues of $22,796 million in 1998 decreased 12 percent compared to $25,796 million in 1997, primarily due to a decrease in worldwide crude oil and natural gas prices and lower refined product prices. Downstream sales and other operating revenues were $17,246 million, down 14 percent compared to $20,033 million in 1997. Crude oil and refined product buy/sell and natural gas and electric power resale activities in 1998 totaled $5,004 million, down 9 percent compared to $5,509 million in 1997.
Cost of goods sold in 1998 totaled $11,751 million, down 18 percent compared to $14,333 million in 1997. This reduction was primarily due to lower feedstock prices.
Operating expenses of $2,089 million in 1998 were up 10 percent compared to $1,893 million in 1997. This increase was due to an $82 million restructuring charge and higher costs associated with the 2 percent increase in 1998 production over 1997.
Selling, general and administrative expenses for 1998 totaled $736 million, an increase of $10 million, or 1 percent, compared to $726 million in 1997, primarily due to litigation charges related to a discontinued business Conoco assumed from DuPont.
Included on the 1998 income statement is a pretax charge of $236 million, labeled "Stock Option Provision." This expense is a one-time non-cash charge for employee stock option compensation relating to the replacement of outstanding DuPont stock options held by Conoco employees with Conoco stock options in connection with the initial public offering.
Exploration expenses in 1998 totaled $380 million, a decline of $77 million, or 17 percent, compared to $457 million in 1997. The decrease is primarily a result of a more focused exploration program. Also contributing to the decrease were lower amortization of non-producing leasehold properties in the United States and lower exploration overhead and operating expenses compared to 1997, which included seismic surveys conducted in the Gulf of Paria between Venezuela and Trinidad and in the Merida Andes foothills in Venezuela.
DD&A for 1998 totaled $1,113 million, a decrease of $66 million, or 6 percent, compared to $1,179 million in 1997.
Provision for income taxes for 1998 totaled $244 million, down 76 percent compared to $1,010 million for 1997. This reflected an effective tax rate of approximately 35 percent in 1998 compared to 48 percent in 1997. The lower effective tax rate in 1998 was due to the increased impact of the U.S. alternative fuels credit, realization of a tax benefit on the sale of a subsidiary and a greater percentage of earnings in countries with lower effective tax rates.
UPSTREAM SEGMENT RESULTS
YEAR ENDED DECEMBER 31
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1999 1998 1997
------------ ------------ ------------
(IN MILLIONS)
After-tax Operating Income
United States .............................................. $ 311 $ 219 $ 445
International .............................................. 534 283 439
------------ ------------ ------------
After-tax Operating Income ............................... $ 845 $ 502 $ 884
Special Items
United States .............................................. $ -- $ 14 $ (49)
International .............................................. -- (25) (98)
------------ ------------ ------------
Special Items ............................................ $ -- $ (11) $ (147)
Earnings Before Special Items
United States .............................................. $ 311 $ 233 $ 396
International .............................................. 534 258 341
------------ ------------ ------------
Earnings Before Special Items ............................ $ 845 $ 491 $ 737
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1999 versus 1998
Upstream after-tax operating income was $845 million in 1999, up 68 percent from $502 million in 1998, principally due to higher crude oil prices, increased volumes, improved equity earnings and lower exploration expenses. These improvements were partly offset by higher production costs associated with the increased volumes and lower gains from asset dispositions. Upstream earnings before special items were $845 million in 1999, an increase of 72 percent from $491 million in 1998.
Conoco's worldwide net realized crude oil price was $17.51 per barrel for 1999, an improvement of $5.14 per barrel, or 42 percent, versus $12.37 per barrel for 1998, primarily driven by the OPEC producing countries' adherence to the quota agreement implemented in early 1999. Worldwide net realized natural gas prices averaged $2.12 per thousand cubic feet (mcf) for 1999, compared to $2.24 per mcf for 1998, a reduction of 5 percent. U.S. natural gas prices increased slightly from $1.96 per mcf to $1.98 per mcf, while international natural gas prices averaged $2.27 per mcf, a 17 percent decline from $2.72 per mcf in 1998. The reduction in international gas prices was largely due to contractual terms renegotiated in 1998 and weaker demand. Worldwide petroleum liquids production in 1999, including Conoco's share of its equity affiliates, was 359,000 barrels per day versus 348,000 barrels per day in 1998, a 3 percent increase. Conoco's 1999 worldwide natural gas production, including its share of equity affiliates, was up 18 percent to 1,660 million cubic feet per day from 1998 production of 1,411 million cubic feet per day. Conoco's total net hydrocarbon production, including its share from equity affiliates, was 636,000 BOE per day, an increase of 9 percent over 1998.
U.S. upstream earnings before special items totaled $311 million in 1999, a 33 percent increase from $233 million in 1998. The increase was largely due to higher crude oil prices and lower exploration expenses. These improvements were partly offset by lower gains from non-strategic asset dispositions, higher DD&A associated with rate changes and field mix, lower petroleum liquids and natural gas production and higher incentive compensation expenses. U.S. petroleum liquids production was down 5,000 barrels per day to 74,000 barrels per day, as a result of natural decline and the disposition of non-strategic assets, partly offset by additional volumes from the Ursa field.
U.S. natural gas production was 880 million cubic feet per day, 8 million less than in 1998 due primarily to the disposition of non-strategic assets and reduced development drilling in the South Texas Lobo gas field, reflecting a more capital efficient program. U.S. production costs were $3.60 per BOE, down $.09 per BOE, compared to $3.69 per BOE in 1998, due to reduced operating expenses.
International upstream earnings before special items were $534 million, an improvement of 107 percent, from $258 million in 1998. This was due primarily to higher crude oil prices, increased natural gas and petroleum liquids production, improved earnings from equity affiliates and lower exploration costs. These improvements were partly offset by lower natural gas prices, higher production costs associated with increased volumes and fewer gains from non-strategic asset dispositions. International petroleum liquids production increased 6 percent, or 16,000 barrels per day, to 285,000 barrels per day. The increase is primarily attributable to higher production in the Britannia and Banff fields in the North Sea and Petrozuata, and was partly offset by lower cost recovery volumes in Indonesia. The 780 million cubic feet per day of international natural gas production in 1999 was 49 percent, or 257 million cubic feet per day, higher than 1998 due primarily to higher production from the Britannia and Viking Phoenix fields in the North Sea. International production costs were flat at $4.13 per BOE.
1998 versus 1997
Upstream after-tax operating income was $502 million in 1998, down 43 percent from $884 million in 1997, principally due to lower crude oil and natural gas prices. Upstream earnings before special items were $491 million in 1998, down 33 percent from $737 million in 1997.
Conoco's 1998 worldwide net realized crude oil price was $12.37 per barrel, down $6.21 per barrel, or 33 percent, from $18.58 per barrel in 1997. Excess supply caused by weak Asian demand, higher crude oil production from OPEC producing countries and warmer winter weather caused the sharp drop in crude oil prices. Worldwide natural gas prices, also affected by the warmer weather, averaged $2.24 per mcf for 1998, compared to $2.44 per mcf in 1997. The decline in worldwide natural gas prices was primarily driven by lower U.S. natural gas prices. In the U.S., natural gas prices averaged $1.96 per mcf, down 10 percent, while internationally they remained steady at $2.72 per mcf. Worldwide petroleum liquids production in 1998, including Conoco's share of equity affiliates, was 348,000 barrels per day versus 374,000 barrels per day in 1997. Worldwide natural gas production in 1998, including Conoco's share of equity affiliates, was up 17 percent to 1,411 million cubic feet per day from 1,203 million cubic feet per day in 1997.
U.S. upstream earnings before special items totaled $233 million in 1998, down 41 percent from $396 million in 1997. Lower U.S. upstream earnings before special items were due to lower crude oil and natural gas prices and lower petroleum liquids volumes resulting from asset dispositions and natural production declines. These reductions more than offset the benefits from increased natural gas production, gains on property sales and lower exploration expenses. Natural gas volumes were up 22 percent as increased production from the holdings in the South Texas Lobo trend, acquired in 1997, more than offset the decline in natural gas production elsewhere. U.S. production costs were $3.69 per BOE, down $.54 per BOE, or 13 percent, compared to $4.23 per BOE in 1997, due to lower production taxes and higher gas volumes.
Upstream earnings before special items outside the U.S. were $258 million, down 24 percent from $341 million in 1997, primarily due to lower crude oil and natural gas prices, offset by improved natural gas volumes, lower exploration expenses and the favorable resolution of certain tax issues. International liquids volumes were down 5 percent to 269,000 barrels per day due to the sale of Conoco's interest in the mature Norwegian Ula and Gyda fields and natural production declines. However, higher production in countries with relatively lower tax rates (primarily the United Kingdom and Nigeria) benefited earnings. International gas volumes were up 9 percent while international production costs were $4.13 per BOE, down $.06 per BOE, or 1 percent, compared to $4.19 per BOE in 1997. The reduction in production costs was due to reduced costs from asset dispositions and other operating costs in 1998, partly offset by lower international crude oil production.
DOWNSTREAM SEGMENT RESULTS
YEAR ENDED DECEMBER 31
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1999 1998 1997
------------ ------------ ------------
(IN MILLIONS)
After-tax Operating Income
United States ............................ $ 108 $ 135 $ 216
International ............................ 129 156 91
------------ ------------ ------------
After-tax Operating Income ............. $ 237 $ 291 $ 307
Special Items
United States ............................ $ 18 $ 73 $ 23
International ............................ -- 12 44
------------ ------------ ------------
Special Items .......................... $ 18 $ 85 $ 67
Earnings Before Special Items
United States ............................ $ 126 $ 208 $ 239
International ............................ 129 168 135
------------ ------------ ------------
Earnings Before Special Items .......... $ 255 $ 376 $ 374
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1999 versus 1998
Downstream after-tax operating income was $237 million in 1999, down 19 percent compared to $291 million in 1998. Downstream earnings before special items totaled $255 million in 1999, a decline of 32 percent from $376 million in 1998.
In 1999, United States downstream earnings before special items totaled $126 million, $82 million, or 39 percent, lower than $208 million in 1998. The decline was mainly attributable to weaker refinery margins, partly offset by higher sales volumes of lower-cost inventories.
International downstream earnings before special items were $129 million in 1999, a reduction of 23 percent from $168 million in 1998, reflecting weaker refinery margins, partly offset by higher sales volumes of lower-cost inventories.
Conoco's refineries, excluding the Melaka refinery, operated at 97 percent capacity in 1999 versus 95 percent in 1998. Including the Melaka refinery, Conoco's refineries operated at 96 percent capacity in 1999.
1998 versus 1997
In 1998, downstream after-tax operating income was $291 million, down 5 percent compared to $307 million in 1997. Downstream earnings before special items totaled $376 million in 1998, up 1 percent from $374 million in 1997.
United States downstream earnings before special items were $208 million in 1998, versus $239 million in 1997, a decrease of 13 percent. The decline was mainly attributable to weaker refinery margins, which were partly offset by record high refinery runs, lower feedstock and operating costs and higher marketing margins.
International downstream earnings before special items totaled $168 million in 1998, up 24 percent from $135 million in the comparable period in 1997, reflecting higher European marketing margins, lower costs, and 11 percent higher refinery runs.
Excluding the Melaka refinery, Conoco's refineries operated at 95 percent capacity in 1998, 4 percent higher than 1997. The improvement was primarily due to refinery upgrades in Europe in 1997, increased reliability throughout the refining system and increased rates at the Lake Charles refinery subsequent to debottlenecking work completed in February 1998.
CORPORATE AND OTHER SEGMENT RESULTS
CORPORATE AND OTHER OPERATING
YEAR ENDED DECEMBER 31
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
(IN MILLIONS)
After-tax Operating Losses ....................................... $ (111) $ (271) $ (82)
Special Items .................................................... 20 197 --
------------ ------------ ------------
Losses Before Special Items ...................................... $ (91) $ (74) $ (82)
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1999 versus 1998
Corporate and other after-tax operating losses were $111 million in 1999, an improvement of $160 million from losses of $271 million in 1998, primarily resulting from the recording in 1998 of the $183 million after-tax one-time non-cash stock option provision. Corporate and other operating losses before special items for 1999 were $91 million, an increase of $17 million from $74 million in 1998, due to increased administrative costs associated with becoming an independent company.
1998 versus 1997
Corporate and other after-tax operating losses were $271 million in 1998, up $189 million from a loss of $82 million in 1997, primarily as a result of the one-time stock option provision. Corporate and other operating losses before special items were $74 million, an improvement of $8 million from the 1997 losses of $82 million, as a result of lower compensation costs.
INTEREST AND OTHER NON-OPERATING EXPENSES NET OF TAX
YEAR ENDED DECEMBER 31
-------------------------------------------
1999 1998 1997
------------ ------------ ------------
(IN MILLIONS)
Interest Expense on Debt ..... $ (243) $ (177) $ (70)
Interest Income .............. 10 73 43
Exchange Gains ............... 6 32 21
Other ........................ -- -- (6)
------------ ------------ ------------
Total ................... $ (227) $ (72) $ (12)
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1999 versus 1998
Interest and other non-operating expenses of $227 million for 1999 were $155 million higher than the previous year, primarily reflecting an increase in interest expense, as debt was only outstanding for half of 1998. In addition, interest income was reduced in 1999 on lower bank balances and 1998 included significant exchange gains tied to DuPont intercompany loans eliminated as part of the separation. Current year results do not include comparable gains.
1998 versus 1997
Interest and other non-operating expenses were $72 million in 1998, an increase of $60 million, compared to $12 million in 1997. The increase is primarily comprised of higher interest expense from debt incurred in the second half of the year, which more than offset interest income earned in the first half of the year.
ENVIRONMENTAL EXPENDITURES
The costs to comply with complex environmental laws and regulations, as well as the cost of internal voluntary programs, are significant and will continue to be so in the foreseeable future. Conoco anticipates substantial expenditures will be necessary to comply with Maximum Achievable Control Technology (MACT) standards to be promulgated by the U.S. Environmental Protection Agency (EPA) under the Clean Air Act (CAA), and with specifications for motor fuels designed to reduce emissions of certain pollutants from vehicles using such fuels. These costs may increase in the future, but are not expected to have a material adverse effect on Conoco's financial condition, results of operations or liquidity.
Estimated pretax environmental expenses charged to current operations totaled about $127 million in 1999, compared to approximately $131 million in 1998 and $136 million in 1997. These expenses include remediation accruals, operating, maintenance and depreciation costs for solid waste, air and water pollution control facilities, and the costs of certain other environmental activities. The largest of these expenses resulted from the operation of wastewater treatment facilities, solid waste management facilities and facilities for the control and abatement of air emissions. Approximately 76 percent of 1999 total annual environmental expenses resulted from the operations of Conoco's business in the United States.
Capital expenditures for environmental control facilities totaled approximately $81 million in 1999, compared to about $53 million in 1998 and $50 million in 1997. The 1999 increase is attributable to a capital spending increase of $41 million in European downstream operations to comply with regulations requiring cleaner burning fuels, offset by lower capital requirements in other business segments. Conoco estimates that capital expenditures will increase by about $31 million in 2000 due to such regulations.
In late 1999, the EPA published final rules, referred to as Tier 2, for controlling future vehicle emissions and the sulfur content of gasoline. Over the next four to five years, Conoco will be positioning itself to be able to supply the low-sulfur gasoline as required by the new Tier 2
regulations. It is too early to fully assess the compliance costs that will be incurred, but these costs are expected to be in line with the estimate of two to three cents per gallon included in the Tier 2 regulations.
REMEDIATION EXPENDITURES
The Resource Conservation and Recovery Act, as amended (RCRA), extensively regulates the treatment, storage and disposal of hazardous waste and requires a permit to conduct such activities. RCRA requires permitted facilities to undertake an assessment of environmental conditions at the facility. If conditions warrant, Conoco may be required to remediate contamination caused by prior operations. In contrast to the Comprehensive Environmental Response, Compensation and Liability Act, as amended (CERCLA), often referred to as "Superfund," the cost of corrective action activities under the RCRA corrective action program is typically borne solely by Conoco. Over the next decade, Conoco anticipates that significant ongoing expenditures for RCRA remediation activities may be required. However, annual expenditures for the near term are not expected to vary significantly from the range of such expenditures over the past few years. Conoco's expenditures associated with RCRA and similar remediation activities conducted voluntarily or pursuant to state law were approximately $33 million in 1999, $27 million in 1998 and $31 million in 1997. In the long term, expenditures are subject to considerable uncertainty and may fluctuate significantly.
Conoco from time to time receives requests for information or notices of potential liability from EPA and state environmental agencies alleging that we are a potentially responsible party under CERCLA or an equivalent state statute. On occasion, Conoco has also been made a party to cost recovery litigation by those agencies or by private parties. These requests, notices and lawsuits assert potential liability for remediation costs at various sites that typically are not owned by Conoco but allegedly contain wastes attributable to Conoco's past operations. As of December 31, 1999, Conoco had been notified of potential liability under CERCLA or state law at about 17 sites around the United States, with active remediation under way at five of those sites. Conoco received notice of potential liability at four new sites during 1999, compared with one similar notice in 1998 and four in 1997. Expenditures associated with CERCLA and similar state remediation activities were not significant for Conoco in 1999, 1998 or 1997.
For most Superfund sites, Conoco's potential liability will be significantly less than the total site remediation costs because the percentage of waste attributable to Conoco versus that attributable to all other potentially responsible parties is relatively low. Other potentially responsible parties at sites where Conoco is a party typically have had the financial strength to meet their obligations and, where they have not, or where potentially responsible parties could not be located, Conoco's own share of liability has not materially increased. There are relatively few sites where Conoco is a major participant, and neither the cost to Conoco of remediation at those sites, nor such cost at all CERCLA sites in the aggregate, is expected to have a material adverse effect on the competitive or financial condition of Conoco.
Cash expenditures not charged against income for previously accrued remediation activities under CERCLA, RCRA and similar state and foreign laws were $26 million in 1999, $17 million in 1998 and $19 million in 1997. Although future remediation expenditures in excess of current reserves are possible, the effect of any such excess on future financial results is not subject to reasonable estimation because of the considerable uncertainty regarding the cost and timing of expenditures.
REMEDIATION ACCRUALS
Conoco accrues for remediation activities when it is probable that a liability has been incurred and reasonable estimates of the liability can be made. These accrued liabilities exclude claims against Conoco's insurers or other third parties and are not discounted. Many of these liabilities result from CERCLA, RCRA and similar state laws that require Conoco to undertake certain investigative and remedial activities at sites where we conduct, or once conducted, operations or at sites where Conoco-generated waste was disposed. The accrual also includes a number of sites identified by Conoco that may require environmental remediation, but which are not currently the subject of CERCLA, RCRA or state enforcement activities. Over the next decade, Conoco may incur significant costs under both CERCLA and RCRA. Considerable uncertainty exists with respect to these costs and, under adverse changes in circumstances, potential liability may exceed amounts accrued as of December 31, 1999.
Remediation activities vary substantially in duration and cost from site to site depending on the mix of unique site characteristics, evolving remediation technologies, diverse regulatory agencies and enforcement policies, and the presence or absence of potentially liable third parties. Therefore, it is difficult to develop reasonable estimates of future site remediation costs. At December 31, 1999, Conoco's balance sheet included an accrued liability of $109 million, as compared to $129 million at year-end 1998. Approximately 86 percent of Conoco's environmental reserve at December 31, 1999, was attributable to RCRA and similar remediation liabilities (excluding voluntary remediations) and 14 percent to CERCLA liabilities. During 1999, remediation accruals resulted in a $6 million charge, compared to a $2 million charge in 1998 and a $41 million credit attributable to 1997 insurance recoveries. No significant additional recoveries are expected.
TAX MATTERS
As a result of the separation from DuPont and the initial public offering, Conoco will no longer be 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 and the initial public offering, Conoco and DuPont entered into a tax sharing agreement. Several matters under the tax sharing agreement are currently in dispute between Conoco and DuPont. Conoco currently expects that DuPont's obligations to Conoco could total up to approximately $236 million, plus interest. Conoco expects DuPont to make one or more claims relating to the dispute, and Conoco believes that the amount thereof will not be material. 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 or results of operations.
YEAR 2000
Historically, many computerized systems used two digits rather than four digits to define the applicable year, which could have resulted in recognizing a date using "00" as the year 1900 rather than the year 2000. Conoco experienced no critical failures during the Year 2000 rollover, nor do we anticipate any critical failures during 2000.
Prior to the rollover date, Conoco addressed Year 2000 issues within its individual business units, and progress was reported periodically to management and the board of directors. Conoco completed assessment and remediation phases in the areas of information technology, plant systems and third parties prior to the rollover date by developing and implementing Year 2000 Compliance Plans, Mitigation Plans and Emergency Recovery Plans. Since the rollover date, the Year 2000 Compliance and Mitigation Plans have been stepped down, but Emergency Recovery Plans remain in place to address issues such as oil tanker spills and plant explosions.
Although Conoco believes that internal Year 2000 issues pose no material threat to its business, results of operations or financial condition, Conoco cannot predict the potential impact of any post rollover failures experienced by third parties critical to Conoco's operations. Post rollover Year 2000 failures among critical third parties could possibly cause significant business interruptions. At this time, we cannot quantify the potential impact of such failures. For this reason, Conoco remains on alert for third-party Year 2000 failures.
The total cost of Year 2000 activities was $42 million, which was not material to Conoco's operations, liquidity or capital resources. Costs were managed within each business unit. 1999 costs were $12 million, 1998 costs were $25 million and 1997 costs were $5 million. This included costs for the replacement or upgrade of existing non-compliant systems, but excluded replacement projects planned and managed outside of the Year 2000 program. Conoco also took advantage of savings presented by its memberships in industry organizations. Costs to address failures during 2000 will be handled as a part of normal operations, since Conoco does not anticipate any critical failures resulting from this issue.
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. 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.
EUROPEAN MONETARY UNION
Within Europe, the European Economic and Monetary Union (EMU) introduced a new currency, the euro, on January 1, 1999. The new currency is in response to the EMU's policy of economic convergence to harmonize trade policy, eliminate business costs associated with currency exchange and to promote the free flow of capital goods and services.
On January 1, 1999, 11 participating countries adopted the euro as their local currency, initially available for currency trading on currency exchanges and non-cash (banking) transactions. The existing local currencies, or legacy currencies, will remain legal tender through January 1, 2002. Beginning on January 1, 2002, euro-denominated notes and coins will be issued for cash transactions. For a period of up to six months from this date, both legacy currencies and the euro will be legal tender, but when legacy currencies are used, any change due will be in euro. Effective July 1, 2002, the participating countries will withdraw all legacy currency and use the euro exclusively. There is a strong possibility the period during which both legacy and euro currency can be used will be considerably shortened. This is being left up to the EMU members. For example, Germany is considering a two-month period, which would mean all legacy currency would be withdrawn by March 1, 2002.
Conoco has recognized the introduction of the euro as a significant event with potential implications for existing operations. Currently, Conoco operates in a number of countries that are participating in the EMU, including Austria, Belgium, Finland, Germany and Spain (via a joint venture). Conoco expects nonparticipating European Union countries, such as the United Kingdom, to eventually join the EMU, but there has been considerable debate about this issue and it could take years.
Conoco has committed resources to ensure it is prepared for the introduction of the euro. A review of the euro implementation has been undertaken and Conoco has concentrated on areas such as operations, finance, treasury, legal, information management, procurement and others, both in participating and nonparticipating European Union countries where Conoco currently operates. Existing legacy accounting and business systems and other business assets have been reviewed for euro compliance, including assessing any risks from third parties. Progress regarding euro implementation is reported periodically to management. Both amounts spent to date and expected to be spent in the future are not material.
Because of the staggered introduction of the euro regarding non-cash and cash transactions, Conoco has developed its plans to address its accounting and business systems first and its business assets second. Conoco undertook steps to be euro compliant, within its accounting and business systems, by the end of 1998 to meet conversion rules when performing translations between EMU currencies. The accounting systems were modified so that EMU currencies were converted to other EMU currencies via the euro rather than directly. Conoco was in a position to conduct electronic transfers in euros commencing January 1, 1999. Conoco has an implementation plan to convert its accounting and reporting systems from legacy currency to the euro by January 1, 2002, for those operations that are in EMU countries. This will generally be undertaken simultaneously with a significant upgrade to Conoco's computer systems. The plan also incorporates steps to ensure the corresponding business assets are fully compliant by that date, in preparation for being able to utilize euro notes and coins to conduct business.
Consistent with regulations and steps the industry is taking to familiarize the public with the euro, conversion at the retail outlets has already begun. The conversion program varies between countries. Examples of the conversion program include:
o displaying conversion tables between EMU legacy currencies and the euro at gasoline stations;
o placing stickers on the gasoline pumps with the equivalent euro price per liter;
o installing "euro corners" in the shop part of the station with calculators and examples so that the customers can practice converting from their EMU legacy currency to the euro; and
o printing the euro equivalent total at the bottom of receipts issued from cash registers.
The business assets conversion program will continue throughout the transition period and, in its final stages, will include new or modified pole price signs, electronic euro price displays at the pump, new or modified automatic cash machines, and receipts that give a detailed itemized breakdown in euros.
Compliance in participating and nonparticipating countries will be achieved primarily through the upgrading of systems that were previously targeted to be upgraded. Remaining systems will be modified to achieve compliance. Conoco does not currently expect to experience any significant operational disruptions or to incur any significant costs, including any currency risk, that could materially affect its liquidity or capital resources. Conoco is preparing plans to address issues within the transitional period when both legacy and euro currencies may be tendered.
Because of the competitive business environment within the petroleum industry, Conoco does not anticipate any long-term competitive implications or the need to materially change its mode of conducting business as a result of increased price transparency.
RESTRUCTURING
In December 1998, Conoco announced that, as a result of a comprehensive review of assets and long-term strategy, Conoco would make organizational realignments consistent with furthering the efficiency of operations and taking advantage of synergies created by the upgrading of its asset portfolio. These reductions largely reflected the elimination of redundancies at all levels resulting from the disposition of assets and past and ongoing consolidation of assets into operations requiring less employee support, as well as better sharing of common services and functions across the regions. Associated with the announcement, Conoco recorded an $82 million pretax ($52 million after-tax) charge to operating expense in the fourth quarter of 1998. Nearly all of this charge represented termination payments and related employee benefits to be made to the estimated 975 persons in both upstream and downstream businesses affected by the restructuring. Payments were, and will continue to be, made under existing company severance policies, generally based on years of service up to a maximum amount that varies by country.
During 1999, 704 employees left Conoco as part of the implementation of the realignment plans, with related charges against the restructuring reserve of $68 million. In the fourth quarter 1999, estimates of the number of severances were revised due to changes in operational requirements. The original number of severances, 975 positions worldwide, was reduced by 137 positions, primarily in our upstream business, to a total reduction of 838 positions. The reduction of positions to be eliminated resulted in a corresponding reduction in the restructuring reserve of $3 million that was recorded in the fourth quarter 1999. The remaining 134 identified positions to be eliminated are primarily related to various asset sales that are scheduled to close early in 2000. Total charges and adjustments to the reserve during 1999 were $71 million, resulting in a December 31, 1999 reserve balance of $11 million that is expected to be utilized in the first quarter 2000.
NEW ACCOUNTING STANDARDS
Effective January 1, 1999, Conoco adopted Statement of Position 98-5, "Reporting on the Costs of Start-up Activities," issued by the American Institute of Certified Public Accountants. This statement requires that costs related to start-up activities, including organization costs, be expensed as incurred. Conoco's policy has been one of expensing organization and other similar costs of start-up operations. Accordingly, there was no effect on earnings due to the adoption of this pronouncement.
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires that companies recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at fair value. If certain conditions are met, SFAS No. 133 provides that a derivative may be specifically designated as follows:
o fair value hedge - a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment;
o cash flow hedge - a hedge of the exposure to variable cash flows of a forecasted transaction; or
o foreign currency hedge - a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security or a foreign-currency-denominated forecasted transaction.
Under SFAS No. 133, the accounting for changes in fair value of a derivative depends on its intended use and designation. Accounting for various types of hedges are described as follows:
o 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;
o 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;
o for a foreign currency hedge of a net investment in a foreign operation, the gain or loss is reported in other comprehensive income; and
o 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 January 1, 2001, and is currently assessing its effect on the consolidated financial statements. In addition, the FASB is currently reconsidering certain key components of SFAS No. 133. However, this is not expected to affect the implementation date.
SUBSEQUENT EVENTS
In January 2000, Conoco announced an agreement with Duke Energy Field Services to sell its Oklahoma natural gas gathering and processing assets, consisting of 2,300 miles of natural gas gathering pipelines and five natural gas processing plants. The sale is part of Conoco's ongoing upstream portfolio management program to reduce non-strategic assets and costs, and make strategic acquisitions in core areas of North America that will dramatically increase our natural gas production, reserves and processing capacity. The sale is expected to close in the first quarter of 2000.
Conoco acquired substantially all of Petro-Canada's natural gas liquids business in Canada. The purchase, which includes the fifth largest natural gas processing plant in North America, closed in the first quarter of 2000.
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, 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 Risk Management Policy that provides guidelines for entering into contractual arrangements (derivatives) to manage its commodity price, foreign currency rate and interest rate risks. The Conoco Risk Management Committee has:
o an ongoing responsibility for the content of this policy;
o principal oversight responsibility to ensure Conoco is in compliance with the policy; and
o responsibility to ensure that procedures and controls are in place for the use of commodity, foreign currency and interest rate instruments.
These procedures clearly establish derivative control and valuation processes, routine monitoring and reporting requirements, and counterparty credit approval procedures. Additionally, to assess the adequacy of internal controls, Conoco's internal audit group reviews these risk management activities. The audit results are then reviewed by both the Conoco Risk Management Committee and by management.
The counterparties to these contractual arrangements are limited to the 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:
o to balance its physical systems;
o to meet customer needs; and
o to manage its price exposure on anticipated crude oil, natural gas, refined product and electric power transactions.
These instruments provide a natural extension of the underlying cash market and are used to physically acquire a portion of supply requirements. The commodity futures market has 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 generally to be exposed to market pricing for commodity purchases and sales. From time to time, management may use derivatives to establish longer-term positions to hedge the price risk for Conoco's equity crude oil and natural gas production, as well as its refinery margins.
Conoco does limited amounts of trading for profit unrelated to its underlying physical business. After-tax gain or loss from trading for profit activities has not been material.
The fair value gain or loss of outstanding derivative commodity instruments and the change in fair value that would be expected from a 10 percent adverse price change are shown in the table below:
CHANGE IN FAIR VALUE
FROM 10% ADVERSE
FAIR VALUE PRICE CHANGE
------------ ------------
(IN MILLIONS)
AT DECEMBER 31, 1999
Crude Oil and Refined Products
Trading ...................... $ 10 $ 2
Non-trading .................. 10 (4)
------------ ------------
Combined ..................... $ 20 $ (2)
Natural Gas
Trading ...................... $ -- $ --
Non-trading .................. -- (8)
------------ ------------
Combined ..................... $ -- $ (8)
AT DECEMBER 31, 1998
Crude Oil and Refined Products
Trading ...................... $ 3 $ 3
Non-trading .................. (1) (5)
------------ ------------
Combined ..................... $ 2 $ (2)
Natural Gas
Trading ...................... $ (2) $ (1)
Non-trading .................. (25) (20)
------------ ------------
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 year-end.
Price-risk sensitivities were calculated by assuming an across-the-board 10 percent adverse change in prices regardless of term or historical relationships between the contractual price of the instrument and the underlying commodity price. In the event of an actual 10 percent change in prompt month crude or natural gas prices, the fair value of Conoco's derivative portfolio would typically change less than that shown in the table due to lower volatility in out-month prices.
Additional details regarding accounting policy for these financial instruments are set forth in note 2 to the consolidated financial statements.
Foreign Currency Risk
Conoco has foreign currency exchange rate risk resulting from operations in over 40 countries around the world. Conoco does not comprehensively hedge its exposure to currency rate changes, although it may choose to selectively hedge 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. At December 31, 1999, and at December 31, 1998, Conoco had no open forward exchange contracts.
Interest Rate Risk
Conoco managed no significant interest rate risk prior to the initial public offering. Subsequent to the initial public offering, however, Conoco began managing any material risk, arising from exposure to interest rates, by using a combination of financial derivative instruments. This program was developed to manage the fixed and floating interest rate mix of Conoco's total debt portfolio and related overall cost of borrowing.
In March 1999, Conoco hedged interest rate exposure on a portion of public debt that was issued in April 1999 (see Financing Activities on page 32). 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, 10-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 instruments. At December 31, 1999, and at December 31, 1998, Conoco had no open interest rate financial derivative instruments.
REPORT OF MANAGEMENT
Management is responsible for the consolidated financial statements of Conoco Inc. and other information appearing in this annual report. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles considered by management to present fairly Conoco's financial position, results of operations and cash flows. The consolidated financial statements include some amounts that are based on management's best estimates and judgments.
Conoco's system of internal controls is designed to provide reasonable assurance as to the protection of assets against loss from unauthorized use or disposition, and the reliability of financial records for preparing financial statements and maintaining accountability for assets. Conoco's business ethics policy is the cornerstone of our internal control system. This policy sets forth management's commitment to conduct business worldwide with the highest ethical standards and in conformity with applicable laws. The business ethics policy also requires that all documents supporting transactions clearly describe their true nature and that all transactions be properly reported and classified in the financial records. An extensive internal audit program monitors Conoco's system of internal controls. Management believes Conoco's system of internal controls meets the objective noted above.
Conoco's independent accountants, PricewaterhouseCoopers LLP, have audited the consolidated financial statements. The purpose of their audit is to independently affirm the fairness of management's reporting of financial position, results of operations and cash flows. To express the opinion set forth in their report, they study and evaluate the internal controls to the extent they deem necessary. The adequacy of Conoco's internal controls and the accounting principles employed in financial reporting are under the general oversight of the Audit and Compliance Committee of the Board of Directors. This committee also has responsibility for employing the independent accountants, subject to stockholder ratification. No member of this committee may be an officer or employee of Conoco. The independent accountants and the internal auditors have direct access to the Audit and Compliance Committee, and they meet with the Audit and Compliance Committee from time to time, with and without management present, to discuss accounting, auditing and financial reporting matters.
/s/ ARCHIE W. DUNHAM /s/ ROBERT W. GOLDMAN /s/ W. DAVID WELCH
-------------------------------------- ---------------------------------------- -----------------------------
Archie W. Dunham Robert W. Goldman W. David Welch
Chairman, President and Senior Vice President, Finance, Controller and
Chief Executive Officer and Chief Financial Officer Principal Accounting Officer
|
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and the Board of Directors of Conoco Inc.
In our opinion, the consolidated financial statements appearing on pages 44 through 70 of this annual report present fairly, in all material respects, the financial position of Conoco Inc. and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
February 16, 2000
CONOCO INC.
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31
------------------------------------------
1999 1998 1997
------------ ------------ ------------
(IN MILLIONS, EXCEPT PER SHARE)
Revenues
Sales and Other Operating Revenues* .................. $ 27,039 $ 22,796 $ 25,796
Equity in Earnings of Affiliates (Note 12) ........... 150 22 40
Other Income (Note 4) ................................ 120 350 427
------------ ------------ ------------
Total Revenues ................................. 27,309 23,168 26,263
------------ ------------ ------------
Costs and Expenses
Cost of Goods Sold ................................... 14,781 11,751 14,333
Operating Expenses ................................... 2,060 2,089 1,893
Selling, General and Administrative Expenses ......... 809 736 726
Stock Option Provision (Note 22) ..................... -- 236 --
Exploration Expenses ................................. 270 380 457
Depreciation, Depletion and Amortization ............. 1,193 1,113 1,179
Taxes Other Than on Income* (Note 5) ................. 6,668 5,970 5,532
Interest and Debt Expense (Note 6) ................... 311 199 36
------------ ------------ ------------
Total Costs and Expenses ...................... 26,092 22,474 24,156
------------ ------------ ------------
Income Before Income Taxes .............................. 1,217 694 2,107
Provision for Income Taxes (Note 7) ..................... 473 244 1,010
------------ ------------ ------------
Net Income .............................................. $ 744 $ 450 $ 1,097
============ ============ ============
Earnings Per Share (Note 8)**
Basic ................................................ $ 1.19 $ .95 $ 2.51
Diluted .............................................. $ 1.17 $ .95 $ 2.51
Weighted Average of Shares Outstanding
Class A .............................................. 190 37 --
Class B .............................................. 437 437 437
------------ ------------ ------------
Total Basic ........................................ 627 474 437
Stock Options ........................................ 9 1 --
------------ ------------ ------------
Total Diluted ...................................... 636 475 437
============ ============ ============
* Includes petroleum excise taxes..................... $ 6,492 $ 5,801 $ 5,349
** Earnings per share for the periods prior to Conoco's initial public
offering was calculated using only Class B common stock, as required by
SFAS No. 128 (see note 8).
|
See accompanying notes to consolidated financial statements.
CONOCO INC.
CONSOLIDATED BALANCE SHEET
ASSETS
DECEMBER 31
----------------------------
1999 1998
------------ ------------
(IN MILLIONS)
Current Assets
Cash and Cash Equivalents ....................................................... $ 317 $ 394
Accounts and Notes Receivable (Note 9) .......................................... 1,735 1,191
Inventories (Note 10) ........................................................... 703 807
Other Current Assets ............................................................ 313 378
------------ ------------
Total Current Assets ...................................................... 3,068 2,770
Property, Plant and Equipment (Note 11) ............................................ 22,476 22,094
Less: Accumulated Depreciation, Depletion and Amortization ......................... (11,241) (10,681)
------------ ------------
Net Property, Plant and Equipment .................................................. 11,235 11,413
Investment in Affiliates (Note 12) ................................................. 1,604 1,363
Other Assets (Note 13) ............................................................. 468 529
------------ ------------
Total ..................................................................... $ 16,375 $ 16,075
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable (Note 14) ...................................................... $ 1,489 $ 1,312
Short-term Borrowings and Capital Lease Obligations (Note 15) ................... 663 52
Income Taxes (Note 7) ........................................................... 303 199
Other Accrued Liabilities (Note 16) ............................................. 1,303 1,162
------------ ------------
Total Current Liabilities ................................................. 3,758 2,725
Long-term Borrowings-- Related Parties (Note 3) .................................... -- 4,596
Long-term Borrowings and Capital Lease Obligations (Note 17) ....................... 4,080 93
Deferred Income Taxes (Note 7) ..................................................... 1,689 1,714
Other Liabilities and Deferred Credits (Note 18) ................................... 1,958 2,200
------------ ------------
Total Liabilities ......................................................... 11,485 11,328
------------ ------------
Commitments and Contingent Liabilities (Note 26)
Minority Interests (Note 19) ....................................................... 335 309
Stockholders' Equity (Note 20)
Preferred Stock, $.01 par value
250,000,000 shares authorized; none issued .................................... -- --
Class A Common Stock, $.01 par value
3,000,000,000 shares authorized; 191,497,821 shares issued .................... 2 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 ...................................................... 4,941 4,955
Retained Earnings (Accumulated Deficit) ......................................... 44 (244)
Accumulated Other Comprehensive Loss (Note 21) .................................. (372) (274)
Treasury Stock, at cost (1999 - 2,457,960 Class A shares;
1998 - 249,863 Class A shares) ................................................ (64) (5)
Total Stockholders' Equity ................................................ 4,555 4,438
------------ ------------
Total ..................................................................... $ 16,375 $ 16,075
============ ============
|
See accompanying notes to consolidated financial statements.
CONOCO INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY/OWNER'S NET INVESTMENT AND
ACCUMULATED OTHER COMPREHENSIVE LOSS
(NOTES 20 AND 21)
RETAINED ACCUMULATED
OWNER'S ADDITIONAL EARNINGS OTHER
NET COMMON PAID-IN (ACCUMULATED COMPREHENSIVE COMPREHENSIVE TREASURY
INVESTMENT STOCK CAPITAL DEFICIT) INCOME LOSS STOCK
---------- ---------- ---------- ---------- ---------- ------------- ---------
(IN MILLIONS)
Balance January 1, 1997 .................. $ 6,636 $ -- $ -- $ -- $ (57) $ --
Comprehensive Income
Net Income (Loss) ...................... 1,097 $ 1,097
Other Comprehensive Income (Loss):
Foreign Currency Translation
Adjustment ......................... (121)
Minimum Pension Liability Adjustment . (13)
----------
Other Comprehensive Loss ........... (134) (134)
----------
Comprehensive Income ............. $ 963
==========
Net Cash Contribution from Owner ......... 360
Other Transfers from Owner ............... (6)
---------- ---------- ---------- ---------- ------------ ---------
Balance December 31, 1997 ................ 8,087 -- -- -- (191) --
Comprehensive Income
Net Income (Loss) ...................... 694 (244) $ 450
Other Comprehensive Income (Loss):
Foreign Currency Translation
Adjustment ......................... (25)
Minimum Pension Liability Adjustment . (58)
----------
Other Comprehensive Loss ........... (83) (83)
----------
Comprehensive Income ............. $ 367
==========
Net Cash Contribution to Owner ........... (512)
Dividends to Owner (Note 3) .............. (8,200)
Other Transfers from Owner ............... 433
Capitalization from Owner at Initial
Public Offering ...................... (502) 4 498
Initial Public Offering .................. 2 4,226
Compensation Plans ....................... (5)
Treasury Stock Purchases ................. (5)
Stock Option Provision (Note 22) ......... 236
---------- ---------- ---------- ---------- ------------ ---------
Balance December 31, 1998 ................ -- 6 4,955 (244) (274) (5)
Comprehensive Income
Net Income (Loss) ...................... 744 $ 744
Other Comprehensive Income (Loss):
Foreign Currency Translation
Adjustment ......................... (162)
Minimum Pension Liability Adjustment . 64
----------
Other Comprehensive Loss ........... (98) (98)
----------
Comprehensive Income ............. $ 646
==========
Adjustment to Capitalization from Owner
at Initial Public Offering (Note 20) . (26)
Dividends ................................ (445)
Compensation Plans ....................... 12
Treasury Stock - Purchases ............... (87)
- Issuances ............... (11) 28
---------- ---------- ---------- ---------- ------------ ---------
Balance December 31, 1999 ................ $ -- $ 6 $ 4,941 $ 44 $ (372) $ (64)
========== ========== ========== ========== ============ =========
|
See accompanying notes to consolidated financial statements.
CONOCO INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
(IN MILLIONS)
Cash Provided by Operations
Net Income ................................................................... $ 744 $ 450 $ 1,097
Adjustments to Reconcile Net Income to Cash Provided by Operations
Depreciation, Depletion and Amortization .................................. 1,193 1,113 1,179
Dry Hole Costs and Impairment of Unproved Properties ...................... 131 163 169
Stock Option Provision (Note 22) .......................................... -- 236 --
Inventory Write-down to Market (Note 10) .................................. -- 97 --
Deferred Income Taxes (Note 7) ............................................ (111) (32) 16
Income Applicable to Minority Interests ................................... 25 21 24
Other Non-cash Charges and Credits - Net .................................. (111) (137) (271)
Decrease (Increase) in Operating Assets
Accounts and Notes Receivable ........................................... (573) 125 127
Inventories ............................................................. 80 (62) (79)
Other Operating Assets .................................................. 107 (172) (96)
Increase (Decrease) in Operating Liabilities
Accounts and Other Operating Payables ................................... 639 (69) 561
Income and Other Taxes Payable (Notes 5 and 7) .......................... 92 (360) 149
------------ ------------ ------------
Cash Provided by Operations .......................................... 2,216 1,373 2,876
------------ ------------ ------------
Investing Activities (Note 24)
Purchases of Property, Plant and Equipment .................................. (1,675) (1,965) (2,644)
Investments in Affiliates - Additions ....................................... (272) (391) (341)
- Repayment of Loans and Advances ................. 45 6 2
Proceeds from Sales of Assets and Subsidiaries .............................. 162 721 565
Net Decrease in Short-term Financial Instruments ............................ 34 31 381
------------ ------------ ------------
Cash Used in Investing Activities .................................... (1,706) (1,598) (2,037)
------------ ------------ ------------
Financing Activities
Short-term Borrowings - Net (Note 15) ....................................... 622 (26) 22
Long-term Borrowings - Receipts ............................................. 3,970 -- 33
- Payments ............................................. (20) (4) (3)
Related Party Borrowings - Receipts ......................................... 865 927 413
- Payments ......................................... (5,461) (5,434) (695)
Related Party Notes Receivable - Receipts ................................... -- 444 9
- Payments ................................... -- (152) (617)
Treasury Stock - Purchases .................................................. (87) (5) --
- Proceeds from Issuances .................................... 13 -- --
Cash Dividends .............................................................. (445) -- --
Proceeds from Initial Public Offering (Notes 3 and 20) ...................... -- 4,228 --
Net Cash Contribution from (to) Owner ....................................... (11) (512) 360
Minority Interests (Note 19) - Receipts ..................................... 326 -- --
- Payments ..................................... (324) (21) (21)
------------ ------------ ------------
Cash Used in Financing Activities .................................... (552) (555) (499)
------------ ------------ ------------
Effect of Exchange Rate Changes on Cash ......................................... (35) 27 (39)
------------ ------------ ------------
Increase (Decrease) in Cash and Cash Equivalents ................................ (77) (753) 301
Cash and Cash Equivalents at Beginning of Year .................................. 394 1,147 846
------------ ------------ ------------
Cash and Cash Equivalents at End of Year ........................................ $ 317 $ 394 $ 1,147
============ ============ ============
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES
Transactions with Related Parties (Note 3)
Dividends to Owner ..................................................... $ -- $ (8,200) $ --
Promissory Note Issued ................................................. -- 7,500 --
Notes Receivable Reduced ............................................... -- 700 --
Borrowings Contributed to Capital ...................................... -- (544) --
------------ ------------ ------------
Total Non-cash Financing Activities .................................... $ -- $ (544) $ --
============ ============ ============
|
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
1. BASIS OF PRESENTATION
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, 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, results for power, and related-party insurance operations.
The initial public offering of the Class A common stock of Conoco commenced on October 21, 1998. The initial public offering consisted of approximately 191 million shares of Class A common stock issued at a price of $23 per share, and represented E.I. du Pont de Nemours and Company's (DuPont) first step in the planned divestiture of Conoco. After the initial public offering, DuPont owned 100 percent of Conoco's Class B common stock (approximately 437 million shares), representing approximately 70 percent of Conoco's outstanding common stock and approximately 92 percent of the combined voting power of all classes of voting stock of Conoco. On August 6, 1999, DuPont concluded an exchange offer to its stockholders which resulted in all 437 million shares of Class B common stock being distributed to DuPont stockholders. The exchange offer was the final step in DuPont's planned divestiture of Conoco.
Prior to the date of the initial public offering, operations were conducted by Conoco and, in some cases, subsidiaries of DuPont. The accompanying consolidated financial statements for these periods are presented on a carve-out basis prepared from DuPont's historical accounting records, and include the historical operations of both entities owned by Conoco and operations transferred to Conoco by DuPont at the time of the initial public offering. In this context, no direct ownership relationship existed among all the various units comprising Conoco. Accordingly, net cash contributions from/to owner prior to the initial public offering included funds transferred between Conoco and DuPont for operating needs, cash dividends paid and other equity transactions.
Effective at the time of the initial public offering, Conoco's capital structure was established and the transfer to Conoco of certain subsidiaries previously owned by DuPont was substantially complete, resulting in direct ownership of those subsidiaries. Accordingly, for periods subsequent to the initial public offering, financial information is presented on a consolidated basis.
The consolidated statement of income includes all revenues and costs directly attributable to Conoco. These costs directly attributable to Conoco include costs for facilities, functions and services used by Conoco at shared sites and costs for certain functions and services performed by centralized DuPont organizations and directly charged to Conoco based on usage. In addition, services performed by Conoco on DuPont's behalf are directly charged to DuPont. The results of operations also include allocations of DuPont's general corporate expenses through the date of the initial public offering.
Prior to the date of the initial public offering, all charges and allocations of cost for facilities, functions and services performed by DuPont organizations for Conoco are deemed paid by Conoco to DuPont, in cash, in the period in which the cost was recorded in the consolidated financial statements. Allocations of current income taxes receivable or payable are similarly considered remitted, in cash, by or to DuPont in the period the related income taxes were recorded. Subsequent to the initial public offering, such costs are billed directly under transitional service agreements, and income taxes are paid directly to the taxing authorities, or to DuPont, as appropriate.
All of the allocations and estimates in the consolidated financial statements are based on assumptions that management believes are reasonable under the circumstances. However, these allocations and estimates are not necessarily indicative of the costs and expenses that would have resulted if Conoco had been operated as a separate entity for periods prior to the initial public offering.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The accounts of wholly owned and majority owned subsidiaries are included in the consolidated financial statements. The equity method is used to account for investments in corporate entities, partnerships and limited liability companies in which Conoco exerts significant influence, generally having a 20-50 percent ownership interest. Conoco's 50.1 percent non-controlling interest in Petrozuata C.A., located in Venezuela, is accounted for using the equity method. The equity method is used because the minority shareholder, a subsidiary of PDVSA, the national oil company of the Bolivarian Republic of Venezuela, has substantive participating rights. Undivided interests in oil and gas properties under joint operating agreements and transportation assets are combined on a pro rata basis. Other investments, excluding marketable securities, are carried at cost.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Actual results may differ from those estimates and assumptions.
Revenue Recognition
Revenues are recorded when title passes to the customer. Revenues from the production of oil and gas properties in which Conoco has interests with other companies are recorded on the basis of sales to customers. Differences between these sales and our share of production are not significant.
Cash Equivalents
Cash equivalents represent investments with maturities of three months or less from the time of purchase. They are carried at cost plus accrued interest, which approximates fair value.
Inventories
Inventories are carried at the lower of cost or market. Cost is determined under the last-in, first-out (LIFO) method for inventories of crude oil and petroleum products. Cost for remaining inventories, principally materials and supplies, is generally determined by the average cost method. Market is determined on a regional basis and any lower of cost or market write-down is recorded as a permanent adjustment to the cost of inventory.
Property, Plant and Equipment (PP&E)
PP&E is carried at cost. Depreciation of PP&E, other than oil and gas properties, is generally computed on a straight-line basis over the estimated economic lives of the facilities, which for major assets range from 14 to 25 years. When assets that are part of a composite group are retired, sold, abandoned or otherwise disposed of, the cost, net of sales proceeds or salvage value, is charged against the accumulated reserve for depreciation, depletion and amortization (DD&A). Where depreciation is accumulated for specific assets, gains or losses on disposal are included in period income.
Maintenance and repairs are charged to expense; replacements and improvements are capitalized.
Oil and Gas Properties
Conoco follows the successful efforts method of accounting. Under successful efforts, the costs of property acquisitions, successful exploratory wells, development wells and related support equipment and facilities are capitalized. The costs of producing properties are amortized at the field level on a unit-of-production method.
Unproved properties, which are individually significant, are periodically assessed for impairment. The impairment of individually insignificant properties is provided by amortizing the costs based on past experience and the estimated holding period. Exploratory well costs are expensed in the period the well is determined to be unsuccessful. All other exploration costs, including geological and geophysical costs, production costs and overhead costs, are expensed in the period incurred.
The estimated costs of dismantlement and removal of oil and gas related facilities are accrued over the properties' productive lives using the unit-of-production method and recognized as a liability as the amortization expense is recorded.
Impairment of Long-lived Assets
Long-lived assets with recorded values, which are not expected to be recovered through future cash flows, are written down to current fair value through additional amortization or depreciation provisions. Fair value is generally determined from estimated discounted future net cash flows. Upstream properties are evaluated at the field level.
Environmental Costs
Environmental expenditures are expensed or capitalized, as appropriate, depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations, and that do not have future economic benefit, are expensed. Liabilities related to these future costs are recorded on an undiscounted basis when environmental assessments and/or remediation activities are probable and the costs can be reasonably estimated.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Stock Compensation
Conoco applies Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for stock options. Pro forma information regarding changes in net income and earnings per share data - if the accounting prescribed by Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," had been applied - is presented in note 22.
Income Taxes
The provision for income taxes has been determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the financial and tax basis of Conoco's assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that some or all of the deferred tax asset will not be realized.
Prior to the date of the initial public offering, Conoco was included in the DuPont consolidated tax return and the provision for income taxes was determined using the loss benefit method. Under the loss benefit method, the current tax provision or benefit is allocated based on the expected amount to be paid or received from the consolidated group. Benefits of losses and credit carry forwards are recorded when members of the consolidated group expect to realize such benefits. The pro forma effect on the consolidated statement of income, reflecting the provision for income taxes on a separate return basis prior to the initial public offering, is not material. For periods ending after the initial public offering, Conoco has filed separate tax returns. Accordingly, for periods subsequent to the initial public offering, the provision for income taxes has been determined on a separate tax return basis.
Provision has been made for income taxes on unremitted earnings of subsidiaries and affiliates, except in cases in which earnings are deemed to be permanently invested.
Foreign Currency Translation
The local currency is the functional currency for Conoco's integrated Western European and some Eastern European petroleum operations. For subsidiaries whose functional currency is the local currency, assets and liabilities denominated in local currency are translated into United States dollars at end-of-period exchange rates. The resultant translation adjustment is a component of accumulated other comprehensive loss (see note 21). Assets and liabilities denominated in other than the local currency are remeasured into the local currency prior to translation into United States dollars. The resultant exchange gains or losses, together with their related tax effects, are included in income in the period in which they occur. Income and expenses are translated into United States dollars at average exchange rates in effect during the period.
For subsidiaries where the United States dollar is the functional currency, all foreign currency asset and liability amounts are remeasured into United States dollars at end-of-period exchange rates. Inventories, prepaid expenses and PP&E are exceptions to this policy and are remeasured at historical rates. Foreign currency income and expenses are remeasured at average exchange rates in effect during the year. Exceptions to this policy include all expenses related to balance sheet amounts, which are remeasured at historical exchange rates. Exchange gains and losses arising from remeasured foreign-currency-denominated monetary assets and liabilities are included in current period income.
Effective January 1, 1999, the euro was adopted as the local currency by 11 countries participating in the European Economic and Monetary Union. For those countries in which Conoco operates, the euro concurrently became the functional currency.
Commodity Hedging and Trading Activities
Conoco enters into energy-related futures, forwards, swaps and options in various markets:
o to balance its physical systems;
o to meet customer needs; and
o to manage its price exposure on anticipated crude oil, natural gas, refined product and electric power transactions.
Gains and losses on non-trading contracts that are designated as hedges are deferred and included in the measurement of the related transaction. Changes in market values of all other derivative contracts are reflected in income in the period the change occurs.
In the event a derivative designated as a hedge is terminated prior to the maturation of the hedged transaction, gains or losses realized at termination are deferred and included in the measurement of the hedged transaction. If a hedged transaction matures, is sold, extinguished or terminated prior to the maturity of a derivative designated as a hedge of such transaction, then the gains or losses associated with the derivative, through the date the transaction matured, are included in the measurement of the hedged transaction. The derivative is also reclassified as for trading purposes. Derivatives designated as a hedge of an anticipated transaction are reclassified as for trading purposes if the anticipated transaction is no longer likely to occur.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
In the consolidated statement of cash flows, Conoco reports the cash flows resulting from its hedging activities in the same category as the related item that is being hedged.
Recent 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 to expense 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 Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires that companies recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. If certain conditions are met, SFAS No. 133 provides that a derivative may be specifically designated as follows:
o fair value hedge - a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment;
o cash flow hedge - a hedge of the exposure to variable cash flows of a forecasted transaction; or
o foreign currency hedge - a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security or a foreign-currency-denominated forecasted transaction.
Under SFAS No. 133, the accounting for changes in fair value of a derivative depends on its intended use and designation. Accounting for various types of hedges are described as follows:
o 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;
o 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;
o for a foreign currency hedge of a net investment in a foreign operation, the gain or loss is reported in other comprehensive income; and
o 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 January 1, 2001, and is currently assessing its effect on the consolidated financial statements. In addition, the FASB is currently reconsidering certain key components of SFAS No. 133. However, this is not expected to change the implementation date.
3. RELATED PARTY TRANSACTIONS
The consolidated financial statements included significant related party transactions with DuPont involving services, such as cash management, other financial services, purchasing, legal, computer, corporate aviation and general corporate expenses that were provided between Conoco and DuPont organizations prior to the split-off date. For periods prior to the initial public offering, the costs of services were directly charged or allocated between Conoco and DuPont using methods management believes were reasonable. These methods included negotiated usage rates, dedicated asset assignment and proportionate corporate formulas involving assets, revenues and employees. Such charges and allocations were not necessarily indicative of what would have been incurred if Conoco had been a separate entity.
Amounts charged and allocated to Conoco for these services were $21 for 1999, $121 for 1998 and $125 for 1997. These amounts were principally included in selling, general and administrative expenses. Conoco provided DuPont services such as computer, legal and purchasing, as well as certain technical and plant operating services. Charges for these services amounted to $15 for 1999, $61 for 1998 and $62 for 1997. These charges to DuPont were treated as reductions, as appropriate, of cost of goods sold, operating expenses or selling, general and administrative expenses.
Interest expense charged by DuPont was $91 for 1999, $264 for 1998 and $124 for 1997. Interest charged by DuPont reflected market-based interest rates. A portion of historical related party interest cost and other interest expense was capitalized as cost associated with major construction projects. Interest income from DuPont was $43 for 1998 and $11 for 1997, and also reflected market-based interest rates. There was no interest income from DuPont for 1999.
Sales and other operating revenues included sales of products from Conoco to DuPont, principally natural gas and gas liquids to supply several DuPont plant sites. These sales totaled $211 for 1999, $427 for 1998 and $420 for 1997. Also included for 1998 and 1997 were revenues from insurance premiums charged to DuPont for property and casualty coverage outside the United States. These revenues totaled $20 for 1998 and $22 for 1997. Purchases of products from DuPont during these periods were not material. Subsequent to the initial public offering, these intercompany arrangements between DuPont and
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Conoco, excluding insurance coverage provided to DuPont, were 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 included amounts due from DuPont of $80 at December 31, 1998, and represented current month balances of transactions between Conoco and DuPont, mainly product sales and certain charges billed annually. Accounts payable included amounts due DuPont of $52 at December 31, 1998. Other liabilities included accrued interest of $51 due DuPont at December 31, 1998.
Amounts representing borrowings from DuPont, including its subsidiary organizations, are identified as related parties and presented separately in the consolidated balance sheet. In connection with the separation from DuPont, Conoco incurred indebtedness to DuPont consisting of a dividend promissory note, other intercompany notes and borrowings under a revolving credit agreement. The largest component of this debt was the July 1998 dividend promissory note in the aggregate principal amount of $7,500 bearing interest at a rate of 6.0125 percent per annum.
In September 1998, Conoco declared a $700 dividend, paid through a reduction of notes receivable from DuPont, and certain intercompany notes were created.
The net proceeds from the initial public offering of $4,228 were used to repay a portion of the indebtedness owed to DuPont and purchase a portion of certain subsidiaries' indebtedness owed to DuPont. At December 31, 1998, Conoco had long-term borrowings from DuPont of $4,596.
During 1998, DuPont made capital contributions of $544 to Conoco, which reflected the retirement of certain non-interest bearing borrowings of $492 and the remaining balance of $52 on the intercompany demand note.
In April 1999, Conoco issued and sold in a public offering $4,000 in senior fixed-rate debt securities with a weighted-average interest rate of 6.49 percent. The $3,970 net proceeds of this offering were used to repay a portion of Conoco's separation-related indebtedness to DuPont. The remaining debt owed to DuPont was repaid in May 1999 with proceeds from a commercial paper program (see note 15). Following the repayment of all indebtedness, Conoco and DuPont terminated their revolving credit agreement. As of December 31, 1999, Conoco had no related party borrowings.
4. OTHER INCOME
1999 1998 1997
---------- ---------- ----------
Interest income
Related parties (see note 3) .................... $ -- $ 43 $ 11
Other, net of miscellaneous interest expense .... 25 46 66
---------- ---------- ----------
Total ......................................... 25 89 77
Gain on sales of assets (1) ........................ 20 206 314
Exchange gain (loss) and other ..................... 75 55 36
---------- ---------- ----------
Other income ....................................... $ 120 $ 350 $ 427
========== ========== ==========
|
(1) 1998 includes a gain of $89 from sale of certain upstream properties in the North Sea and the United States. 1997 includes a gain of $239 from sale of certain upstream properties in the North Sea.
5. TAXES OTHER THAN ON INCOME
1999 1998 1997
---------- ---------- ----------
Petroleum excise taxes
U.S. .......................................... $ 1,495 $ 1,286 $ 1,201
Non-U.S. ...................................... 4,997 4,515 4,148
---------- ---------- ----------
Total ....................................... 6,492 5,801 5,349
Payroll taxes .................................... 44 42 43
Property taxes ................................... 64 64 63
Production and other taxes ....................... 68 63 77
---------- ---------- ----------
Taxes other than on income ....................... $ 6,668 $ 5,970 $ 5,532
========== ========== ==========
|
6. INTEREST AND DEBT EXPENSE
1999 1998 1997
---------- ---------- ----------
Interest and debt cost incurred
Related parties (see note 3) .................. $ 91 $ 264 $ 124
Other debt and capital leases ................. 226 7 6
---------- ---------- ----------
Total ....................................... 317 271 130
Less: Interest and debt cost capitalized ......... 6 72 94
---------- ---------- ----------
Interest and debt expense (1) .................... $ 311 $ 199 $ 36
========== ========== ==========
|
(1) Interest paid, net of amounts capitalized, was $297 in 1999, $145 in 1998 and $33 in 1997.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
7. PROVISION FOR INCOME TAXES
1999 1998 1997
---------- ---------- ----------
Current tax expense
U.S. federal .................................. $ 26 $ (57) $ 64
U.S. state and local .......................... 4 10 5
Non-U.S. ...................................... 554 323 925
---------- ---------- ----------
Total ....................................... 584 276 994
---------- ---------- ----------
Deferred tax expense
U.S. federal .................................. (84) (51) 80
U.S. state and local .......................... (5) (5) 8
Non-U.S. ...................................... (22) 24 (72)
---------- ---------- ----------
Total ....................................... (111) (32) 16
---------- ---------- ----------
Provision for income taxes ....................... $ 473 $ 244 $ 1,010
========== ========== ==========
Foreign currency translation (1) ................. $ (29) $ (22) $ --
Minimum pension liability (1) .................... 29 (26) (7)
---------- ---------- ----------
Total provision ............................. $ 473 $ 196 $ 1,003
========== ========== ==========
|
(1) Represents respective deferred tax provisions for adjustments included in other comprehensive loss (see note 21).
Total income taxes paid worldwide were $493 in 1999, $714 in 1998 and $935 in 1997.
The significant components of deferred tax assets and liabilities at December 31, 1999 and 1998 were as follows:
1999 1998
------------------------ -----------------------
ASSET LIABILITY ASSET LIABILITY
--------- ---------- ---------- ----------
PP&E ........................................ $ 244 $ 2,349 $ 233 $ 2,296
Employee benefits ........................... 241 -- 247 --
Other accrued expenses ...................... 236 -- 237 --
Inventories ................................. -- 46 -- 90
Tax loss/tax credit carry forwards .......... 512 -- 496 --
Other ....................................... 59 85 25 188
---------- ---------- ---------- ----------
Total .............................. $ 1,292 $ 2,480 $ 1,238 $ 2,574
========== ==========
Valuation allowances ........................ (452) (423)
---------- ----------
Net................................. $ 840 $ 815
========== ==========
|
Valuation allowances, which reduce deferred tax assets to an amount that will more likely than not be realized, increased $29 in 1999. This increase reflects an $80 increase in the valuation allowance used to offset tax assets representing operating and tax losses incurred in exploration, production and start-up operations, partially offset by a $51 decrease in the valuation allowance related to tax assets representing operating losses which Conoco determined will more likely than not be realized in future years. Valuation allowances increased $31 in 1998 primarily reflecting the offset to increases in tax assets representing operating losses incurred in exploration and start-up operations.
Under the tax laws of various jurisdictions in which Conoco operates, deductions or credits that cannot be fully utilized for tax purposes during the current year may be carried forward. These loss carry forwards, subject to statutory limitations, can reduce taxable income or taxes payable in a future year. At December 31, 1999, the tax effect of such loss carry forwards approximated $512. Of this amount, $270 has no expiration date, $2 expires in 2000, $76 expires in 2001, $50 expires in 2002, $40 expires in 2003 and $74 expires in 2004 and later years.
Current deferred tax liabilities, included in the consolidated balance sheet in income taxes, amounted to $27 at December 31, 1999, and $76 at December 31, 1998.
Current deferred tax assets included in prepaid expenses were $15 at December 31, 1999. In addition, other assets included deferred tax assets of $61 at December 31, 1999, and $31 at December 31, 1998.
In connection with the separation from DuPont and the initial public offering, Conoco and DuPont entered into a tax sharing agreement. Several matters under the tax sharing agreement are currently in dispute between Conoco and DuPont. Conoco currently expects that DuPont's obligations to Conoco could total up to approximately $236, plus interest. Conoco expects DuPont to make one or more claims relating to the dispute, and Conoco believes that the amount thereof will not be material. 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 or results of operations.
An analysis of Conoco's effective income tax rate follows:
1999 1998 1997
---------- ---------- ----------
Statutory U.S. federal income tax rate ................ 35.0% 35.0% 35.0%
Higher effective tax rate on non-U.S. operations ...... 10.0 7.8 13.9
Alternative fuels credit .............................. (4.0) (8.2) (3.0)
Reduced tax benefit from stock option provision ....... -- 4.9 --
Realization of unbenefited loss from sale of subsidiary -- (4.6) --
Other-net ............................................. (2.1) 0.3 2.0
---------- ---------- ----------
Effective income tax rate ............................. 38.9% 35.2% 47.9%
========== ========== ==========
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Income before income taxes shown below was based on the location of the corporate unit to which such earnings are attributable. However, since such earnings were often subject to taxation in more than one country, the income tax provision shown above as U.S. or non-U.S. does not correspond to the earnings set forth below.
1999 1998 1997
---------- ---------- ----------
U.S. .............................. $ 93 $ (173) $ 740
Non-U.S. .......................... 1,124 867 1,367
---------- ---------- ----------
Income before income taxes ........ $ 1,217 $ 694 $ 2,107
========== ========== ==========
|
Unremitted earnings of non-U.S. subsidiaries totaling $1,488 at December 31, 1999, and $1,536 at December 31, 1998, were deemed to be permanently invested. No deferred tax liability was recognized on the remittance of such earnings. It is not practicable to estimate the income tax liability that might be incurred if such earnings were remitted to the United States.
8. EARNINGS PER SHARE
Basic earnings per share (EPS) is computed by dividing net income (the numerator) by the weighted-average number of common shares outstanding plus the effects of certain Conoco employee and director awards and fee deferrals that are invested in Conoco stock units (the denominator). Diluted EPS is similarly computed, except that the denominator is increased to include the dilutive effect of outstanding stock options awarded under Conoco's compensation plans (see note 22).
As described in note 1, Conoco's capital structure was established at the time of the initial public offering. In accordance with SEC Staff Accounting Bulletin No. 98, the capitalization of Class B common stock has been retroactively reflected for the purpose of presenting earnings per share for periods prior to the initial public offering. For the periods subsequent to the initial public offering, basic EPS reflects the weighted-average number of shares of Class A and Class B common stock and deferred award units outstanding. Corresponding diluted EPS for 1999 includes an additional 9,241,896 shares while 1998 includes an additional 1,659,816 shares. For 1998, these additional shares represent the weighted-average dilutive effect of outstanding stock options that resulted from the concurrent cancellation of DuPont stock options at the date of the initial public offering and the issuance of options with respect to Class A common stock.
The denominator is based on the following weighted-average number of common shares outstanding:
1999 1998 1997
------------- ------------- --------------
Basic .......... 627,233,229 473,826,632 436,543,573
Diluted ........ 636,475,125 475,486,448 436,543,573
|
Variable stock options for 3,124,146 and 1,724,146 shares of Class A and Class B common stock were outstanding at December 31, 1999 and 1998, respectively. These options were not included in the computation of diluted EPS since the threshold price required for these options to be vested had not been reached.
Common shares held as treasury stock are deducted in determining the number of shares outstanding.
In 1999, fixed stock options for 30,972 shares of Class A common stock were not included in the diluted earnings per share calculation because the exercise price was greater than the average market price.
9. ACCOUNTS AND NOTES RECEIVABLE
DECEMBER 31
---------------------------
1999 1998
------------ ------------
Trade ............................................ $ 1,394 $ 805
Related parties (see note 3) ..................... -- 80
Other ............................................ 341 306
------------ ------------
Accounts and notes receivable .................... $ 1,735 $ 1,191
============ ============
|
Accounts and notes receivable are carried at historical cost, which approximates fair value because of their short maturity.
See note 27 for a description of operating segment markets and associated concentrations of credit risk.
10. INVENTORIES
DECEMBER 31
---------------------------
1999 1998
------------ ------------
Crude oil and petroleum products ................. $ 554 $ 661
Other merchandise ................................ 33 22
Materials and supplies ........................... 116 124
------------ ------------
Inventories ...................................... $ 703 $ 807
============ ============
|
At December 31, 1999, the excess of market over book value of inventories
valued under the LIFO method was $430. As a result of reduced crude oil and
petroleum product price levels during 1998, a write-down to market of $97 was
made in 1998 in accordance with Conoco's inventory valuation policy (see note
2). Inventories valued at LIFO represented 78 percent of consolidated
inventories at December 31, 1999, and 82 percent at December 31, 1998.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
During 1999, inventory quantities were reduced. This reduction resulted in a liquidation of LIFO inventories carried at lower costs prevailing in prior years, as compared with replacement costs of these inventories, the effect of which decreased cost of goods sold by approximately $67 and increased net income by approximately $42 or $.07 per diluted share. During 1998 and 1997, certain LIFO inventory quantities were reduced, resulting in partial liquidation of the LIFO bases, with no material effect on net income.
11. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31
---------------------------------------------------------
GROSS NET
--------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
Oil and gas properties
Unproved ...................... $ 1,201 $ 1,159 $ 985 $ 942
Proved ........................ 13,661 13,488 5,990 6,236
Other ............................. 1,222 1,280 792 845
------------ ------------ ------------ ------------
Total upstream ............. 16,084 15,927 7,767 8,023
Refining .......................... 4,082 3,834 2,072 1,958
Marketing and distribution ........ 2,214 2,255 1,309 1,375
------------ ------------ ------------ ------------
Total downstream ........... 6,296 6,089 3,381 3,333
Corporate and other ............... 96 78 87 57
------------ ------------ ------------ ------------
PP&E .............................. $ 22,476 $ 22,094 $ 11,235 $ 11,413
============ ============ ============ ============
|
PP&E includes downstream gross assets acquired under capital leases of $36 at December 31, 1999, and $41 at December 31, 1998. Related amounts included in accumulated DD&A were $15 at December 31, 1999, and $12 at December 31, 1998.
12. SUMMARIZED FINANCIAL INFORMATION FOR AFFILIATED COMPANIES
Summarized consolidated financial information for affiliated companies for which Conoco uses the equity method of accounting (see note 2, "Basis of Consolidation") is shown below on a 100 percent basis. The most significant of these affiliates include the following: Ceska Rafinerska, a.s. (16.33 percent), CFJ Properties (50 percent), Excel Paralubes (50 percent), Malaysian Refining Company Sdn. Bhd. (40 percent), Petrozuata C.A. (50.1 percent - see note 2), Pocahontas Gas Partnership (50 percent) and Polar Lights Company (50 percent).
YEAR ENDED DECEMBER 31
------------------------------------------
1999 1998 1997
------------ ------------ ------------
RESULTS OF OPERATIONS
Sales ....................................... $ 8,532 $ 6,744 $ 7,521
Earnings before income taxes ................ 757 358 556
Net income .................................. 599 252 345
Conoco's equity in earnings of affiliates ... 150 22 40
|
DECEMBER 31
---------------------------
1999 1998
------------ ------------
FINANCIAL POSITION
Current assets ................................................ $ 2,852 $ 2,771
Non-current assets ............................................ 8,904 8,682
------------ ------------
Total assets ............................................. $ 11,756 $ 11,453
============ ============
Short-term borrowings (1) ..................................... $ 581 $ 897
Other current liabilities ..................................... 1,674 1,650
Long-term borrowings (1) ...................................... 5,001 4,743
Other long-term liabilities ................................... 1,318 1,119
------------ ------------
Total liabilities ........................................ $ 8,574 $ 8,409
============ ============
Conoco's investment in affiliates (includes advances) ......... $ 1,604 $ 1,363
============ ============
|
(1) Conoco's pro rata interest in total borrowings was $1,858 in 1999 and $1,828 in 1998, of which $1,005 in 1999 and $1,217 in 1998 were guaranteed by Conoco or DuPont, on behalf of and indemnified by Conoco. These amounts are included in the guarantees disclosed in note 26. In addition, at December 31, 1999, 1.3 million of the 2.0 million shares that Conoco owns in its equity affiliate, Turcas Petrol A.S., were pledged to a group of Turkish banks that issued letters of credit in support of a $70 long-term debt instrument.
Equity affiliate sales to Conoco amounted to $911 in 1999, $629 in 1998 and $612 in 1997. Equity affiliate purchases from Conoco totaled $1,519 in 1999, $1,219 in 1998 and $1,138 in 1997.
Dividends received from equity affiliates were $77 in 1999, $105 in 1998 and $58 in 1997. Conoco's equity in undistributed earnings of its affiliated companies was $366 at December 31, 1999, and $310 at December 31, 1998.
13. OTHER ASSETS
DECEMBER 31
---------------------------
1999 1998
------------ ------------
Prepaid pension cost (see note 23) .................... $ 13 $ 50
Long-term receivables ................................. 69 71
Other securities and investments ...................... 87 116
Deferred pension transition obligation (see note 23) .. 54 109
Other (1) ............................................. 245 183
------------ ------------
Other assets .......................................... $ 468 $ 529
============ ============
|
(1) Includes intangible assets of $14 at December 31, 1999, and at December 31, 1998.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
14. ACCOUNTS PAYABLE
DECEMBER 31
---------------------------
1999 1998
------------ ------------
Trade ................................................. $ 959 $ 828
Payables to banks ..................................... 81 124
Related parties (see note 3) .......................... -- 52
Product exchanges ..................................... 210 78
Other ................................................. 239 230(1)
------------ ------------
Accounts payable ...................................... $ 1,489 $ 1,312
============ ============
|
(1) Includes $158 for property acquisitions.
Payables to banks represent checks issued on certain disbursement accounts but not presented to the banks for payment. The amounts above are carried at historical cost, which approximates fair value because of their short maturity.
15. SHORT-TERM BORROWINGS AND CAPITAL LEASE OBLIGATIONS
DECEMBER 31
---------------------------
1999 1998
------------ ------------
Commercial paper ...................................... $ 628 $ --
Industrial development bonds .......................... 24 24
Long-term borrowings payable within one year .......... 9 26
Capital lease obligations ............................. 2 2
------------ ------------
Short-term borrowings and capital lease obligations ... $ 663 $ 52
============ ============
|
At December 31, 1999, Conoco had an unsecured $2,000 revolving credit facility with a syndicate of U.S. and international banks. The terms consist of a 364-day committed facility in the amount of $1,350 and a five-year committed facility in the amount of $650. At December 31, 1999, Conoco had no outstanding borrowings under the credit facility. Conoco maintains a $2,000 commercial paper program that is fully supported by the credit facility. The program gives Conoco the ability to issue commercial paper at any time with various maturities not to exceed 270 days. The weighted-average interest rate on commercial paper outstanding of $628 was 6.6 percent at December 31, 1999.
Conoco had available uncommitted short-term bank credit lines of approximately $56 at December 31, 1999, and $122 at December 31, 1998. No significant advances were outstanding under these lines at these respective dates. These lines are denominated in United States dollars or various foreign currencies to support general international operating needs.
The weighted-average interest rate on short-term borrowings outstanding, which includes the commercial paper program initiated in 1999, was 6.4 percent at December 31, 1999, and 3.8 percent at December 31, 1998.
The amounts in the preceding table are carried at historical cost, which approximates fair value because of their short maturity.
16. OTHER ACCRUED LIABILITIES
DECEMBER 31
---------------------------
1999 1998
------------ ------------
Taxes other than on income ........................................... $ 371 $ 354
Operating expenses ................................................... 347 293
Payroll and other employee-related costs ............................. 153 102
Royalties ............................................................ 99 50
Restructuring costs (1) .............................................. 11 82
Accrued post-retirement benefits cost (see note 23) .................. 18 18
Other ................................................................ 304 263
------------ ------------
Other accrued liabilities ............................................ $ 1,303 $ 1,162
============ ============
|
(1) In December 1998, Conoco announced that as a result of a comprehensive review of assets and long-term strategy, Conoco would make organizational realignments consistent with furthering the efficiency of operations and taking advantage of synergies created by upgrading of its asset portfolio. These reductions largely reflected the elimination of redundancies at all levels resulting from the disposition of assets and past and ongoing consolidation of assets into operations requiring less employee support, as well as better sharing of common services and functions across the regions. Associated with the announcement, Conoco recorded an $82 pretax ($52 after-tax) charge to operating expense in the fourth quarter of 1998. Nearly all of this charge represented termination payments and related employee benefits to be made to the estimated 975 persons in both upstream and downstream businesses affected by the restructuring. Payments were, and will continue to be, made under existing company severance policies, generally based on years of service up to a maximum amount that varies by country.
During 1999, 704 employees left Conoco as part of the implementation of the realignment plans, with related charges against the restructuring reserve of $68. In the fourth quarter 1999, estimates of the number of severances were revised due to changes in operational requirements. The original number of severances, 975 positions worldwide, was reduced by 137 positions, primarily in our upstream business, to a total reduction of 838 positions. The reduction of positions to be eliminated resulted in a corresponding reduction in the restructuring reserve of $3 that was recorded in the fourth quarter 1999. The remaining 134 identified positions to be eliminated are primarily related to various asset sales that are scheduled to close early in 2000. Total charges and adjustments to the reserve during 1999 were $71, resulting in a December 31, 1999 reserve balance of $11, that is expected to be utilized in the first quarter 2000.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
17. LONG-TERM BORROWINGS AND CAPITAL LEASE OBLIGATIONS
DECEMBER 31
------------------
1999 1998
------ -----
5.90% notes due 2004............................................. $1,348 $ --
6.50% notes due 2008............................................. 7 7
6.35% notes due 2009............................................. 750 --
5.75% notes due 2026............................................. 16 16
6.95% notes due 2029............................................. 1,900 --
Other loans (various currencies) due 2000-2007 (1)............... 24 29
Capitalization obligation to affiliate due 2008.................. 8 11
Capital lease obligations........................................ 27 30
------ -----
Long-term borrowings and capital lease obligations............... $4,080 $ 93
====== =====
|
(1) Weighted-average interest rate was 7.4 percent at December 31, 1999, and 7.3 percent at December 31, 1998.
Maturities of long-term borrowings, together with sinking fund requirements for years ending after December 31, 2000, are $3 for each of the years 2001 and 2002, $4 for 2003, $1,354 for 2004, and $4 for 2005. Long-term borrowings due to related parties approximate fair value because associated interest rates are market based. Excluding amounts due related parties, long-term borrowings outstanding at December 31, 1999, of $4,080 had an estimated fair value of $3,839, while for 1998, $93 of long-term borrowings had an estimated fair value of $96. These estimates were based on quoted market prices for the same or similar issues.
18. OTHER LIABILITIES AND DEFERRED CREDITS
DECEMBER 31
---------------------------
1999 1998
------------ ------------
Deferred gas revenue .................................. $ 361 $ 371
Accrued post-retirement benefits cost (see note 23) ... 335 331
Accrued pension liability (see note 23) ............... 192 320
Abandonment costs ..................................... 289 297
Environmental remediation costs (see note 26) ......... 97 117
Related parties (see note 3) .......................... -- 51
Other ................................................. 684 713
------------ ------------
Other liabilities and deferred credits ................ $ 1,958 $ 2,200
============ ============
|
19. MINORITY INTERESTS
In 1996, certain upstream subsidiaries contributed assets with an aggregate fair market value of $613 to Conoco Oil & Gas Associates L.P. for a general partnership interest of 67 percent. The remaining 33 percent was purchased by Vanguard Energy Investors L.P. as a limited partner. The net result of this transaction was to increase minority interests by $297. Vanguard's share of Conoco Oil & Gas Associates' earnings, based upon a priority return plus residual earnings per formula, was $21, or 16 percent, in 1999, and $22, or 25 percent, in 1998. In December 1999, Conoco elected to retire Vanguard's interest and terminate the Conoco Oil & Gas Associates partnership, reducing minority interests by $302. As a result of this transaction, Vanguard received from Conoco Oil & Gas Associates $310 cash, which represented its mark-to-market adjusted capital account value plus a priority return for the period of October 1, 1999, through December 31, 1999.
In November 1999, Conoco and Armadillo Investors L.L.C. formed Conoco Gas Holdings L.L.C. Conoco contributed certain domestic upstream assets for a 75 percent common member interest and cash, and Armadillo contributed cash for a 25 percent preferred member interest. The net result of the transaction was to increase minority interests by $185. Armadillo is entitled to a cumulative annual preferred dividend on its investment of 7.16 percent. Armadillo's share of Conoco Gas Holdings' 1999 earnings was $2, or 6 percent. The net minority interest in Conoco Gas Holdings held by Armadillo was $185 on December 31, 1999.
In December 1999, Conoco formed Conoco Corporate Holdings L.P. by contributing certain corporate assets. The limited partner interest was sold to Highlander Investors L.L.C. for $141, or an initial net 47 percent interest, which represented an increase in minority interests. Highlander is entitled to a cumulative annual priority return on its investment of 7.86 percent. Highlander's share of Conoco Corporate Holdings' 1999 earnings was $1, or 80 percent. The net minority interest in Conoco Corporate Holdings held by Highlander was $141 on December 31, 1999.
The overall effect of these three transactions was to increase total minority interest from $309 at December 31, 1998, to $335 at December 31, 1999.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
20. STOCKHOLDERS' EQUITY
As described in note 1, Conoco's capital structure was established at the time of the initial public offering in October 1998.
At December 31, 1999, 4,600,000,000 shares of Class A and Class B common stock were authorized and 628,041,394 shares were issued, including 2,457,960 Class A shares held in the treasury. A summary of activity in common shares outstanding for 1998 and 1999 is presented below:
CLASS A CLASS B TOTAL
------------ ------------ ------------
Issued in connection with initial public offering of Class
A shares and recapitalization of DuPont ownership (Class
B shares) ..................................................... 191,456,427 436,543,573 628,000,000
Purchase of shares for treasury (to offset dilution from
issuances under compensation plans) ........................... (250,000) -- (250,000)
Issued on exercise of stock options (including 137 from
treasury) ..................................................... 41,531 -- 41,531
------------ ------------ ------------
Common shares outstanding - December 31, 1998 ................... 191,247,958 436,543,573 627,791,531
Purchase of shares for treasury (to offset dilution from
issuances under compensation plans) ........................... (3,494,616) -- (3,494,616)
Issued on exercise of stock options and compensation awards
from treasury (note 22) ....................................... 1,286,519 -- 1,286,519
------------ ------------ ------------
Common shares outstanding - December 31, 1999 ................... 189,039,861 436,543,573 625,583,434
============ ============ ============
|
At December 31, 1999, 250,000,000 shares of preferred stock were authorized. 1,000,000 shares of this amount were designated Series A Junior Participating Preferred Stock and reserved for issuance on exercise of preferred stock purchase rights under Conoco's Share Purchase Rights Plan. Each issued share of Class A and Class B common stock has one preferred stock purchase right attached to it. No preferred shares have been issued and the rights are not currently exercisable.
During 1999, Conoco recorded a $26 reduction of additional paid-in capital to reflect an adjustment to capitalization from owner at the initial public offering. This reduction was primarily related to tax adjustments of $52, partially offset by a $31 adjustment in book value for various subsidiaries transferred from DuPont as part of the separation.
Net proceeds received from the initial public offering during 1998 totaled $4,228, after deduction for underwriting discounts and commissions payable by Conoco. The net proceeds were used to reduce indebtedness owed to DuPont (see note 3). In addition, additional paid-in capital increased by $236 during 1998. This increase resulted from a corresponding non-cash charge to compensation expense associated with changes in certain outstanding compensation awards made at the time of the initial public offering (see note 22).
1999 dividends declared and paid on Class A and Class B common stock are shown below:
DIVIDENDS
PER SHARE
------------
First quarter (1) ..................... $ .14
Second quarter ........................ .19
Third quarter ......................... .19
Fourth quarter ........................ .19
------------
Total 1999 dividends .............. $ .71
============
|
(1) The first quarter dividend was determined on a pro rata basis covering the period from October 27, 1998 to December 31, 1998, and is equivalent to $.19 per share for a full quarter.
Conoco declared a first quarter cash dividend on January 26, 2000, of $.19 per share on each outstanding share of Class A and Class B common stock. This quarterly dividend will be paid on March 10, 2000, to all shareholders of record as of February 10, 2000.
21. ACCUMULATED OTHER COMPREHENSIVE LOSS
Balances of related after-tax components comprising accumulated other comprehensive loss are summarized below:
DECEMBER 31
----------------------------
1999 1998
------------ ------------
Foreign currency translation adjustment ............... $ (347) $ (185)
Minimum pension liability adjustment (see note 23) .... (25) (89)
------------ ------------
Accumulated other comprehensive loss .................. $ (372) $ (274)
============ ============
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Changes in related components of other comprehensive loss are reported net of associated income tax effects as summarized below:
YEAR ENDED DECEMBER 31
---------------------------------------------------------------------------------------
1999 1998 1997
--------------------------- --------------------------- ---------------------------
INCOME AFTER- INCOME AFTER- INCOME AFTER-
PRETAX TAX TAX PRETAX TAX TAX PRETAX TAX TAX
------- ------- ------- ------- ------- ------- ------- ------- -------
Foreign currency translation adjustment... $ (191) $ (29) $ (162) $ (47) $ (22) $ (25) $ (121) $ -- $ (121)
Minimum pension liability adjustment ..... 93 29 64 (84) (26) (58) (20) (7) (13)
------- ------- ------- ------- ------- ------- ------- ------- -------
Other comprehensive loss ................. $ (98) $ -- $ (98) $ (131) $ (48) $ (83) $ (141) $ (7) $ (134)
======= ======= ======= ======= ======= ======= ======= ======= =======
|
22. COMPENSATION PLANS
TRANSITION FROM DUPONT PLANS TO CONOCO PLANS
Until the date of the initial public offering, employees of Conoco participated in stock-based compensation plans administered through DuPont and involving options to acquire DuPont common stock. At the time of the initial public offering, Conoco employees held a total of 10,964,917 stock options for DuPont common stock and 1,333,135 stock appreciation rights (SARs) with respect to DuPont common stock.
At the time of the initial public offering, Conoco gave those persons the option, subject to specific country tax and legal requirements, to participate in a program involving the cancellation of all or part of their DuPont stock options or SARs. Upon such cancellation, Conoco issued comparable options to acquire Class A common stock or SARs with respect to Class A common stock. The substitute stock options and other awards had the same vesting provisions, option periods and other terms and conditions as the DuPont options and awards they replaced. Further, these substitute stock options had the same ratio of the exercise price per share to the market value per share, and the same aggregated difference between market value and exercise price as the DuPont stock options. A total of 8,921,508 DuPont stock options and 745,358 DuPont SARs were cancelled. Conoco then issued 24,275,690 stock options for Class A common stock and 2,279,834 SARs with respect to Class A common stock. The Conoco stock options and SARs had comparable terms and conditions to the previous DuPont options and SARs. The new program was deemed a change in the terms of certain awards granted to Conoco employees. As a result, Conoco incurred a non-cash charge to compensation expense of $236 in the fourth quarter of 1998 with a corresponding increase in additional paid-in capital. DuPont retained responsibility for delivery of DuPont common stock to Conoco employees when DuPont stock options not cancelled are exercised.
AWARDS UNDER DUPONT PLANS - 1998 AND 1997
Stock option awards under the DuPont Stock Performance Plan were granted to key employees of Conoco prior to the initial public offering and were "fixed" and/or "variable" as defined by APB Opinion No. 25. The purchase price of shares subject to option is the market price of DuPont stock at the date of grant. In January 1997, a reload feature was added to the DuPont Stock Performance Plan to accelerate stock ownership. Generally, fixed options granted under the DuPont Stock Performance Plan:
o are fully exercisable one year after date of grant;
o expire 10 years from date of grant;
o awards in 1998 vest over a three-year period; and
o except for the last six months of the 10-year option term, awards in 1998 are exercisable when the market price of DuPont common stock exceeds the option grant price by 20 percent.
During 1997, variable stock option grants were made to certain senior management and are subject to forfeiture. The forfeiture would occur if, within five years from the date of grant, the market price of DuPont common stock did not achieve a price of $75 per share for 50 percent of the options and $90 per share for the remaining 50 percent. During 1998, before the initial public offering, the $75 price was reached and options with that hurdle became fixed and exercisable. All of the outstanding variable DuPont options with a $90 per share hurdle price at the time of the initial public offering were cancelled and substituted with options for Conoco Class A common stock with a hurdle price of $32.88 per share.
From time to time, the DuPont board of directors has approved the adoption of a worldwide Corporate Sharing Program. Under these programs, a majority of Conoco's employees received a one-time grant to acquire shares of DuPont common stock at the fair market value at the date of grant. Option terms are fixed and generally are exercisable one year after date of grant and expire 10 years from date of grant.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
AWARDS UNDER CONOCO PLANS - 1999 AND 1998
The 1998 Stock and Performance Incentive Plan provides incentives to certain corporate officers, non-employee directors and independent contractors who can contribute materially to the success and profitability of Conoco and its subsidiaries, and provides for substitution of certain existing DuPont awards in connection with the initial public offering. Awards may be in the form of cash, stock, stock options or SARs with respect to Class A and Class B common stock (further reference to common stock in this note refers to Class A and B common stock). This plan also provides for the Conoco Global Variable Compensation Plan. The Conoco Global Variable Compensation Plan is an annual management incentive program for officers and certain non-officer employees with awards made in cash and stock. Stock options and SARs granted under the 1998 Stock and Performance Incentive Plan (except those granted to substitute for DuPont awards):
o are awarded at market price on the date of grant;
o have a 10 year life;
o generally vest one year from date of grant; and
o may be subject to exercise restrictions, such as the attainment of specific stock price targets or the passage of time.
For certain senior management, certain shares can be deferred as stock units for a designated future delivery. These shares include both:
o shares receivable from the exercise of nonqualified options, with respect to Class A common stock granted under the 1998 Stock and Performance Incentive Plan of Conoco to substitute for cancelled 1998 DuPont stock options; and
o incremental new Conoco stock options granted at the date of the initial public offering.
In 1999, a variable option grant to acquire 1,400,000 Class B shares was made to Conoco's Chairman, President and Chief Executive Officer. Of this grant, 50 percent is subject to forfeiture if, within three years from the date of grant, the market price of Conoco Class B stock does not achieve a price of $35 per share for five consecutive days. The remaining 50 percent of the grant is subject to forfeiture if, within five years from the date of grant, the market price of Conoco Class B stock does not achieve a price of $42 per share for five consecutive days. The exercise price is $26.50, which was the market price on the grant date.
The maximum number of shares of common stock and stock options granted under the plan is limited to the higher of 20,000,000 or 3.3 percent of outstanding shares of common stock. Awards made in substitution for DuPont awards do not count against the number of shares available under the plan. At December 31, 1999, 15,078,195 shares of common stock were available for issuance under the plan.
Conoco adopted the 1998 Key Employee Stock Performance Plan to attract and retain employees. The plan will accomplish this by enhancing the proprietary and personal interests of employees in Conoco's success and profitability. Awards to employees may be in the form of Conoco stock options or SARs, both with respect to common stock. Such awards granted under this plan (except to substitute for DuPont awards) are awarded under the same terms and conditions of the 1998 Stock and Performance Incentive Plan as described above. The maximum number of shares of common stock and stock options granted under the plan is limited to the higher of 18,000,000 or 3 percent of outstanding shares of common stock. Awards made in substitution for DuPont awards do not count against the number of shares available under the plan. At December 31, 1999, 14,615,564 shares of common stock were available for issuance under the plan.
Under both the 1998 Stock and Performance Incentive Plan and the 1998 Key Employee Stock Performance Plan, reload options are available upon the exercise of stock options. These reload options include a condition that shares received from the exercise of the original option may not be sold for at least two years. Under a reload option, the number of new options granted is equal to the number of shares required to satisfy the total exercise price of the original option. Reload options are granted at the market price of the stock on the reload grant date.
The 1998 Global Performance Sharing Plan is a broad-based plan under which, on the date of the initial public offering, grants of stock options and SARs with respect to Class A common stock were made to certain non-officer employees. This was done to encourage a sense of proprietorship and an active interest in the financial success of Conoco and its subsidiaries. The stock options and SARs were awarded:
o at the price of the initial public offering ($23 per share);
o have a 10 year life; and
o become exercisable in one-third increments on the first, second and third anniversaries of the grant date.
Currently, there are no additional shares available for issuance under this plan.
Most stock options granted under Conoco plans are fixed and have no intrinsic value at grant date. The 1,724,146 options granted to substitute for cancelled DuPont options granted in 1997 and the 1,400,000 options granted on August 17, 1999, are the exceptions to this fixed status. Except for the fourth quarter 1998 charge related to the one-time offer to cancel DuPont options and substitute Conoco options, no compensation expense has been recognized for fixed options.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
The following table summarizes activity for fixed and variable options for the last three years:
FIXED VARIABLE
--------------------------- ---------------------------
NUMBER WEIGHTED- NUMBER WEIGHTED-
OF AVERAGE OF AVERAGE
SHARES PRICE SHARES PRICE
------------ ------------ ------------ ------------
DUPONT OPTIONS
January 1, 1997 ............................................... 7,075,720 $ 26.88 -- $ --
Granted .................................................... 2,761,416 52.90 1,259,600 52.50
Exercised .................................................. (730,383) 23.97 -- --
Forfeited .................................................. (116,325) 50.44 -- --
------------ ------------
December 31, 1997 ............................................. 8,990,428 35.14 1,259,600 52.50
Granted .................................................... 1,241,055 59.53 -- --
Reclassified ............................................... 629,800 52.50 (629,800) 52.50
Exercised .................................................. (460,314) 24.64 -- --
Forfeited .................................................. (65,852) 50.68 -- --
------------ ------------
October 21, 1998 (initial public offering date) ............... 10,335,117 $ 39.50 629,800 $ 52.50
Cancelled for Conoco options ............................... (8,291,708) (629,800)
------------ ------------
Retained by DuPont ......................................... 2,043,409 --
CONOCO OPTIONS
Granted at initial public offering date
For cancelled DuPont options ............................... 22,551,544 $ 14.62 1,724,146 $ 19.18
New awards ................................................. 9,721,750 23.00 -- --
Exercised .................................................. (41,531) 14.18 -- --
Forfeited .................................................. (53,840) 23.00 -- --
------------ ------------
December 31, 1998 ............................................. 32,177,923 17.14 1,724,146 19.18
Granted .................................................... 30,689 27.46 1,400,000 26.50
Exercised .................................................. (1,225,424) 12.37 -- --
Forfeited .................................................. (133,929) 22.28 -- --
------------ ------------
December 31, 1999 ............................................. 30,849,259 $ 17.31 3,124,146 $ 22.46
|
The following table summarizes information concerning outstanding and exercisable fixed Conoco options at December 31, 1999. For total variable options outstanding at December 31, 1999, the weighted-average remaining contractual life was 8.2 years.
EXERCISE PRICE
--------------------------------------------------------------
$6.57 - $10.13- $19.17 - $28.37 -
$9.59 $14.47 $27.20 $29.72
-------------- -------------- -------------- --------------
Options outstanding .......... 4,928,962 6,884,597 19,031,747 3,953
Weighted-average remaining
contractual life (years) . 2.8 5.5 8.1 1.9
Weighted-average price ....... $ 8.54 $ 11.89 $ 21.55 $ 28.51
Options exercisable .......... 4,928,962 6,884,597 10,667,419 430
Weighted-average price ....... $ 8.54 $ 11.89 $ 20.64 $ 29.58
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Fixed options exercisable at the end of the last three years and the weighted-average fair value of fixed options granted are as follows:
Conoco Options DuPont Options
------------------------------ ------------------------------
1999 1998 1998(1) 1997
-------------- -------------- -------------- --------------
Options exercisable at year-end
Number of shares .................................. 22,481,408 19,425,900 -- 6,229,012
Weighted-average price ............................ $ 15.31 $ 13.49 $ -- $ 27.26
Weighted-average fair value of options granted
during the year
New options ....................................... $ 6.85 $ 4.15 $ 13.85 $ 12.84
Options substituted for DuPont options ............ $ -- $ 9.22 $ -- $ --
|
(1) As of December 31, 1998, Conoco had no further responsibility for DuPont options, as these were either converted to Conoco options or retained by DuPont.
The incremental fair value of Conoco variable options with a hurdle price of $32.88 per share granted as substitutes for DuPont variable options was assumed to be zero.
The fair value of options is calculated using the Black-Scholes option pricing model. Assumptions used were as follows:
Conoco Options (1) DuPont Options
------------------------------------ -------------------------------------
1999 1998 1998 1997
------- -------------------------- -------- --------------------------
New New Substitutes Fixed Fixed Variable
------- --------- ------------- -------- -------- ------------
Dividend yield .......... 3.3% 3.3% 3.3% 2.1% 2.2% 2.2%
Volatility .............. 25.0% 20.0% 20.0% 19.9% 18.6% 18.6%
Risk-free interest rate.. 5.8% 4.6% 4.4% 5.5% 6.4% 6.4%
Expected life (years) ... 6.0 5.8 3.9 5.8 5.6 5.7
|
(1) Due to insufficient history, the volatility of Conoco stock was estimated by referencing oil industry experience trends in 1999 and DuPont experience trends in 1998. The expected life for exercise of Conoco stock options was estimated by using DuPont experience trends.
The following table sets forth pro forma information as if Conoco had adopted the optional recognition provisions of SFAS No. 123:
1999 1998 1997
---------- ---------- ----------
Increase (decrease) in
Net income ........................ $ (18) $ 157 $ (28)
Earnings per share
Basic .......................... $ (.03) $ .33 $ (.06)
Diluted ........................ $ (.03) $ .33 $ (.06)
|
The incremental fair value for cancellation and substitution of stock options originally granted before adoption of SFAS No. 123 was zero because intrinsic value exceeds fair value.
Compensation expense recognized in income for stock-based employee compensation awards was $24 for 1999, $229 for 1998 and $26 for 1997. The year 1998 includes a one-time charge of $236 for the cancellation of DuPont stock options described above.
Prior to the initial public offering, the Conoco Unit Option Plan awarded SARs with respect to DuPont common stock to key salaried employees in certain grade levels who showed early evidence of ability to assume significant responsibility and leadership. At the time of the initial public offering, 1,131,494 unit options were outstanding, of which 593,722 were cancelled and substituted with comparable SARs with respect to Conoco Class A common stock under Conoco's 1998 Key Employee Stock Performance Plan. Effective with the initial public offering, no new grants were made or are planned out of the Conoco Unit Option Plan. At December 31, 1999, outstanding unit options based on Conoco Class A common stock were 1,469,287 and at December 31, 1998, outstanding unit options based on Conoco Class A common stock were 1,605,614. For these same time periods, outstanding unit options based on DuPont common stock were 466,436 and 545,724, respectively. The related liability provisions totaled $23 at December 31, 1999, and $22 at December 31, 1998.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Through the date of the initial public offering, certain Conoco employees who participated in the DuPont Variable Compensation Plan received grants of stock and cash. Overall amounts were dependent on financial performance of DuPont and Conoco and other factors, and were subject to maximum limits as defined by the plan. Amounts charged against earnings in anticipation of awards to be made later were $39 in 1998 and $38 in 1997. Awards made for plan years were $24 for 1998 and $45 for 1997. Awards distributed in 1999 for the 1998 plan year were made out of the Conoco 1998 Stock and Performance Incentive Plan based on performance standards set previously in the DuPont Variable Compensation Plan. Both the DuPont Variable Compensation Plan and the Conoco 1998 Stock and Performance Incentive Plan allow future delivery of stock awards.
Beginning with the 1999 plan year, grants of stock and cash are made from the Conoco 1998 Stock and Performance Incentive Plan according to the financial performance of Conoco and its business units. Awards are subject to maximum limits as defined by the plan. Amounts charged against earnings during 1999 in anticipation of awards to be made in 2000 were $52. Awards actually distributed in 2000 for the 1999 plan year amounted to $49.
Under the Conoco 1998 Stock and Performance Incentive Plan, employees were offered the opportunity to cancel DuPont shares, which were granted under previous awards, and receive substitute shares of Conoco Class A common stock for designated future delivery. At December 31, 1999, 65,309 shares of DuPont stock and 227,327 shares of Conoco Class A common stock are awaiting delivery. Conoco recognized a liability of $4 for the delivery of DuPont shares.
Awards under the separate Conoco Challenge Program may be granted in cash to employees not covered by the Variable Compensation Plan. This plan provides awards based on meeting financial goals and upholding Conoco's core values. Overall amounts are dependent on Conoco's earnings and cash provided by operations. Beginning with the 1999 plan year, awards are also adjusted up or down based on a measure of Conoco's shareholder return as compared to a group of selected benchmark competitors. All payout amounts are subject to maximum limits as defined by the plan. Amounts charged against earnings and to adjust for over/under accruals in prior years totaled $40 in 1999, $22 in 1998 and $49 in 1997. Awards made for plan years were $40 for 1999, $19 for 1998 and $47 for 1997.
23. PENSIONS AND OTHER POST-RETIREMENT BENEFITS
Prior to the split-off, Conoco participated in the DuPont U.S. tax qualified defined benefit pension plan. In 1999, Conoco established a U.S. tax qualified defined benefit pension plan (Conoco plan) which was spun off from the DuPont U.S. tax qualified defined benefit pension plan. The Conoco plan covers substantially all U.S. non-retail employees, as well as about half of all U.S. retail employees, and provides essentially the same benefits to Conoco employees as the DuPont plan provided to those employees. In addition, Conoco has separate U.S. non-tax qualified defined benefit pension plans covering certain U.S. and non-U.S. employees. The benefits for the plans mentioned in this paragraph are based primarily on years of service and employees' pay near retirement. Conoco's funding policy for the U.S. tax qualified plan is consistent with the funding requirements of federal laws and regulations. The nonqualified plans are not funded. In 1999, however, Conoco set up a "Rabbi Trust" for possible future funding. A Rabbi Trust sets aside assets to pay for benefits under a nonqualified pension plan, but those assets remain subject to claims of Conoco's general creditors in preference to the claims of plan participants and beneficiaries.
With respect to the DuPont U.S. tax qualified defined benefit pension plan, Conoco and DuPont agreed upon an amount of approximately $820 at the date of the initial public offering that will eventually be transferred to a separate trust for Conoco's pension plan. The transfer value will be adjusted for benefit payments and investment return from the date of the initial public offering. The adjusted value subject to transfer was approximately $884 at December 31, 1999. DuPont allocated the pension obligations based on Conoco's individual employees covered. The unrecognized prior service cost and unrecognized net gain were allocated in proportion to Conoco's projected benefit obligation to the total projected benefit obligation of the DuPont plan. The net periodic pension cost components included in the following table are also based on the foregoing allocation factors.
Pension coverage is provided to the extent appropriate for employees of Conoco's non-U.S. subsidiaries through separate plans. Obligations under such plans are systematically provided for by depositing funds with trustees, under insurance policies or by book reserves.
Conoco and certain subsidiaries also provide medical and life insurance benefits to retirees and survivors. The associated plans, principally health, are not funded, and approved claims are paid from Conoco's funds. Under the terms of these plans, Conoco reserves the right to change, modify or discontinue the plans. Conoco has communicated to plan participants that any increase in the annual health care escalation rate above 4.5 percent will be borne by the participants. Therefore, Conoco does not expect an increase to the accumulated post-retirement benefit obligation or the other post-retirement benefit cost.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
OTHER
POST-RETIREMENT
PENSION BENEFITS BENEFITS
------------------------------------------ ---------------------------
NET PERIODIC BENEFIT COST 1999 1998 1997 1999 1998 1997
--------------------- ------- ------- ------- ------- -------
U.S. INTERNATIONAL
------- -------------
Service cost ................................. $ 44 $ 42 $ 65 $ 60 $ 9 $ 7 $ 6
Interest cost ................................ 58 41 94 88 22 21 18
Expected return on plan assets ............... (79) (39) (105) (98) -- -- --
Amortization of prior service cost (credit) .. (7) 5 9 2 (4) (4) (4)
Recognized actuarial loss (gain) ............. 4 5 (4) 1 2 -- (1)
------- ------- ------- ------- ------- ------- -------
Net periodic benefit cost .................... $ 20 $ 54 $ 59 $ 53 $ 29 $ 24 $ 19
======= ======= ======= ======= ======= ======= =======
|
The table below reflects information concerning benefit obligations, plan assets, funded status and recorded values. Pension benefits for 1999 include amounts associated with Conoco's portion of what was previously the DuPont U.S. tax qualified defined benefit pension plan; whereas 1998 amounts exclude Conoco's portion of the DuPont plan.
OTHER
POST-RETIREMENT
PENSION BENEFITS BENEFITS
-------------------------------------- ------------------------
1999 1998(1) 1999 1998
------------------------ ---------- ---------- ----------
CHANGE IN BENEFIT OBLIGATION U.S. INTERNATIONAL
---------- -------------
Benefit obligation at beginning of year ................. $ 113 $ 753 $ 682 $ 350 $ 301
Adjustment to include U.S. qualified plan balance ....... 871 -- -- -- --
---------- ---------- ---------- ---------- ----------
Adjusted benefit obligation at beginning of year ........ 984 753 682 350 301
Service cost ............................................ 44 42 33 9 7
Interest cost ........................................... 58 41 44 22 21
Amendments .............................................. -- -- (4) -- --
Exchange gain ........................................... -- (24) -- -- --
Participant contributions ............................... -- -- -- 4 3
Actuarial (gain) loss ................................... (151) (104) 160 (32) 43
Divestitures and other .................................. 13 -- (17) (5) --
Benefits paid ........................................... (114) (29) (32) (25) (25)
---------- ---------- ---------- ---------- ----------
Benefit obligation at end of year ....................... $ 834 $ 679 $ 866 $ 323 $ 350
========== ========== ========== ========== ==========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year .......... $ -- $ 438 $ 386 $ -- $ --
Adjustment for fair value of U.S. qualified plan assets . 878 -- -- -- --
---------- ---------- ---------- ---------- ----------
Adjusted fair value of plan assets at beginning of year . 878 438 386 -- --
Actual return on plan assets ............................ 130 59 61 -- --
Employer contribution ................................... 6 32 26 21 22
Participant contributions ............................... -- -- -- 4 3
Exchange gain ........................................... -- (14) -- -- --
Divestitures and other .................................. (16) -- (14) -- --
Benefits paid ........................................... (114) (21) (21) (25) (25)
---------- ---------- ---------- ---------- ----------
Fair value of plan assets at end of year ................ $ 884 $ 494 $ 438 $ -- $ --
========== ========== ========== ========== ==========
Funded status of plans at end of year ................... $ 50 $ (185) $ (428) $ (323) $ (350)
Transition asset ........................................ (23) (14) -- -- --
Unrecognized actuarial (gain) or loss ................... (41) 20 240 15 53
Unrecognized prior service cost (credit) ................ 13 94 109 (45) (52)
---------- ---------- ---------- ---------- ----------
Net amount recognized at end of year .................... $ (1) $ (85) $ (79) $ (353) $ (349)
========== ========== ========== ========== ==========
AMOUNTS RECOGNIZED IN CONSOLIDATED BALANCE SHEET AT
END OF YEAR
Prepaid benefit (see note 13) ........................... $ 13 $ -- $ -- $ -- $ --
Accrued benefit liability
Short-term (see note 16) .............................. -- -- -- (18) (18)
Long-term (see note 18) ............................... (58) (134) (320) (335) (331)
Deferred pension transition obligation (see note 13) .... 5 49 109 -- --
Accumulated other comprehensive loss (2) ................ 39 -- 132 -- --
---------- ---------- ---------- ---------- ----------
Net amount recognized ................................... $ (1) $ (85) $ (79) $ (353) $ (349)
========== ========== ========== ========== ==========
|
(1) Conoco's portion of the DuPont qualified pension plan numbers are not included for 1998.
(2) Before reduction for associated deferred tax savings of $14 at December 31, 1999, and $43 at December 31, 1998 (see note 21).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
OTHER
POST-RETIREMENT
PENSION BENEFITS BENEFITS
------------------------------- ------------------
1999 1998 1999 1998
---------------------- ------ ------ ------
U.S. INTERNATIONAL
------- -------------
WEIGHTED-AVERAGE ASSUMPTIONS AT END OF YEAR
Discount rate .................................... 7.75% 6.00% 6.50% 8.00% 6.50%
Rate of compensation increase .................... 5.20% 4.50% 5.15% 5.15% 5.15%
Expected return on plan assets ................... 9.00% 7.00% 9.00% -- --
Health care escalation rate ...................... -- -- -- 4.50% 4.50%
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At December 31, 1999, U.S. defined benefit plan assets consisted principally of common stocks, including 34,809 shares of Conoco and 448,873 shares of DuPont.
24. INVESTING ACTIVITIES
Non-cash additions to PP&E were zero for 1999 and $162 for 1998.
There were no significant proceeds from any one asset sale in 1999. Proceeds in 1998 included $245 from the sale of certain upstream properties in the U.S. and North Sea, $156 from various U.S. downstream asset sales and $54 from the sale of a downstream office building in Europe.
25. FINANCIAL INSTRUMENTS AND OTHER RISK MANAGEMENT ACTIVITIES
Conoco operates in the worldwide crude oil, refined product, natural gas, natural gas liquids and electric power markets and is exposed to fluctuations in hydrocarbon prices, foreign currency rates and interest rates. These fluctuations can affect 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 Risk Management Policy that provides guidelines for entering into contractual arrangements (derivatives) to manage its commodity price, foreign currency rate and interest rate risks. The Conoco Risk Management Committee has:
o an ongoing responsibility for the content of this policy;
o principal oversight responsibility to ensure Conoco is in compliance with the policy; and
o responsibility to ensure that procedures and controls are in place for the use of commodity, foreign currency and interest rate instruments.
These procedures clearly establish derivative control and valuation processes, routine monitoring and reporting requirements, and counterparty credit approval procedures. Additionally, to assess the adequacy of internal controls, Conoco's internal audit group reviews these risk management activities. The audit results are then reviewed by both the Conoco Risk Management Committee and by management.
The counterparties to these contractual arrangements are limited to the 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:
o to balance its physical systems;
o to meet customer needs; and
o to manage its price exposure on anticipated crude oil, natural gas, refined product and electric power transactions.
These instruments provide a natural extension of the underlying cash market and are used to physically acquire a portion of supply requirements. The commodity futures market has increased liquidity and longer trading periods than the cash market, and is one method of managing price risk in the energy business.
Conoco's policy is generally to be exposed to market pricing for commodity purchases and sales. From time to time, management may use derivatives to establish longer-term positions to hedge the price risk for Conoco's equity crude oil and natural gas production as well as its refinery margins.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Conoco does limited amounts of trading for profit unrelated to its underlying physical business. After-tax gain or loss from trading for profit activities has not been material.
FOREIGN CURRENCY RISK
Conoco has foreign currency exchange rate risk resulting from operations in over 40 countries around the world. Conoco does not comprehensively hedge its exposure to currency rate changes, although it may choose to selectively hedge exposures to foreign currency rate risk. Examples include firm commitments for capital projects, certain local currency tax payments and cash returns from net investments in foreign affiliates to be remitted within the coming year.
At December 31, 1999, and at December 31, 1998, Conoco had no open forward exchange contracts.
INTEREST RATE RISK
Conoco managed no significant interest rate risk prior to the initial public offering. Subsequent to the initial public offering, however, Conoco began managing any material risk, arising from exposure to interest rates, by using a combination of financial derivative instruments. This program was developed to manage the fixed and floating interest rate mix of Conoco's total debt portfolio and related overall cost of borrowing.
At December 31, 1999, and at December 31, 1998, Conoco had no open interest rate financial derivative instruments.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying values of most financial instruments are based on historical costs. The carrying values of marketable securities, receivables, payables and short-term obligations approximate their fair value because of their short maturity. Long-term receivables from, and long-term borrowings due to, related parties approximate fair value because associated interest rates are market based.
At December 31, 1999, there were no long-term borrowings to related parties. Excluding amounts due related parties, long-term borrowings outstanding at December 31, 1999, of $4,080 had an estimated fair value of $3,839, while for 1998, $93 of long-term borrowings had an estimated fair value of $96. These estimates were based on quoted market prices for the same or similar issues, or the current rates offered to Conoco for issues with the same remaining maturities.
SUMMARY OF OUTSTANDING COMMODITY DERIVATIVE FINANCIAL INSTRUMENTS
Following is a summary of the fair values, carrying amounts and notional values of outstanding commodity financial instruments at December 31, 1999 and 1998.
Notional amounts represent the face amount of the contractual arrangements and are not a measure of market or credit exposure. The fair value of swaps and other over-the-counter instruments are estimated based on quoted market prices of comparable contracts. These estimated values approximate the gain or (loss) that would have been realized if the contracts had been closed out at the balance sheet date. Carrying amounts represent the receivable (payable) recorded in the consolidated balance sheet.
FAIR CARRYING NOTIONAL
COMMODITY DERIVATIVES VALUE AMOUNT VALUE
---------- ---------- -------------
December 31, 1999
Trading ........ $ 10 $ 10 $ 529
Non-trading .... $ 6 $ 5 $ 464
December 31, 1998
Trading ........ $ 2 $ 2 $ 330
Non-trading .... $ (10) $ (6) $ 422
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26. COMMITMENTS AND CONTINGENT LIABILITIES
Conoco uses various leased facilities and equipment in its operations. Future minimum lease payments under noncancelable operating leases are $197 for 2000, $200 for 2001, $250 for 2002, $236 for 2003, $121 for 2004 and $608 for subsequent years. Future minimum lease payments are not reduced by $55 of noncancelable minimum sublease rentals due in the future. Rental expense under operating leases was $286 in 1999, $198 in 1998 and $132 in 1997.
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 December 31, 1999, Conoco has obligations under international contracts to purchase, over periods up to 19 years, natural gas at prices that were in excess of year-end 1999 market prices. No material annual loss is expected from these long-term commitments.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Conoco is subject to various lawsuits and claims involving a variety of matters including, along with other oil companies, actions challenging oil and gas royalty and severance tax payments based on posted prices and claims for damages resulting from leaking underground storage tanks. As a result of the separation agreement with DuPont, Conoco has also assumed responsibility for current and future claims related to certain discontinued chemicals and agricultural chemicals businesses operated by Conoco in the past. In general, the effect on future financial results is not subject to reasonable estimation because considerable uncertainty exists. Conoco believes the ultimate liabilities resulting from such lawsuits and claims may be material to results of operations in the period in which they are recognized but will not materially affect the consolidated financial position of Conoco.
Conoco is also subject to contingencies pursuant to environmental laws and regulations that in the future may require further action to correct the effects on the environment of prior disposal practices or releases of petroleum substances by Conoco or other parties. Conoco has accrued for certain environmental remediation activities consistent with the policy set forth in note 2. Conoco assumed environmental remediation liabilities from DuPont related to certain discontinued chemicals and agricultural chemicals businesses operated by Conoco in the past that are included in the environmental accrual. The accrual amounted to $109 at December 31, 1999, and $129 at December 31, 1998. In management's opinion, this accrual was appropriate based on existing facts and circumstances. Under adverse changes in circumstances, potential liability may exceed amounts accrued. In the event future monitoring and remediation expenditures are in excess of amounts accrued, they may be significant to results of operations in the period recognized. However, management does not anticipate they will have a material adverse effect on the consolidated financial position of Conoco.
Conoco has indirectly guaranteed various debt obligations under agreements with certain affiliated and other companies to provide specified minimum revenues from shipments or purchases of products. These indirect guarantees totaled $7 at December 31, 1999, and $18 at December 31, 1998. In addition, Conoco or DuPont, on behalf of and indemnified by Conoco, had directly guaranteed obligations of certain affiliated companies and others. These guarantees totaled $1,138 at December 31, 1999, and $1,353 at December 31, 1998. The 1999 decrease from 1998 is due to the elimination of construction guarantees amounting to $335 through the successful completion of the drillships, partially offset by increases in additional financing primarily associated with Petrozuata. The majority of the balance at December 31, 1999, included $660 and $236 associated with Petrozuata and Polar Lights, respectively. No material loss is anticipated by reason of such agreements and guarantees.
Conoco's operations, particularly oil and gas exploration and production, can be affected by changing economic, regulatory and political environments in the various countries in which it operates, including the United States. In certain locations, host governments have imposed restrictions, controls and taxes. In others, political conditions have existed that may threaten the safety of employees and Conoco's continued presence in those countries. Internal unrest or strained relations between a host government and Conoco or other governments may affect Conoco's operations. Those developments have, at times, significantly affected Conoco's operations and related results and are carefully considered by management when evaluating the level of current and future activity in such countries. Conoco does take various steps to minimize its financial exposure to loss including, in certain cases, obtaining risk insurance coverage. Areas in which Conoco has significant operations include the United States, the United Kingdom, Norway, Germany, Venezuela, the United Arab Emirates, Indonesia, Russia, Canada, the Czech Republic, Malaysia and Nigeria.
27. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION
Conoco is involved in both the upstream and downstream operating segments of the petroleum industry that comprise the structure used by senior management to make key operating decisions and assess performance. Upstream operating segment activities include exploring for, developing, producing and selling crude oil, natural gas and natural gas liquids. Downstream operating segment activities include refining crude oil and other feedstocks into petroleum products, buying and selling crude oil and refined products, and transporting, distributing and marketing petroleum products. Conoco has four reporting segments for its upstream and downstream operating segments that reflect the geographic division between the United States and international. Corporate and other includes general corporate expenses, financing costs and other non-operating items, results for electric power, and related-party insurance operations.
Conoco sells its products worldwide. In 1999, about 54 percent of sales were made in the United States and 41 percent of sales were made in Europe. In 1998, about 57 percent of sales were made in the United States and 39 percent of sales were made in Europe. Major products include crude oil, natural gas and refined products that are sold primarily in the energy and transportation markets. Conoco's sales are not materially dependent on a single customer or small group of customers. Transfers between segments are on the basis of estimated market values.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
UPSTREAM DOWNSTREAM
----------------------- ----------------------- CORPORATE
UNITED UNITED AND
SEGMENT INFORMATION STATES INTERNATIONAL STATES INTERNATIONAL OTHER CONSOLIDATED
---------- ---------- ---------- ---------- ---------- ----------
1999
Sales and other operating revenues (2)
Refined products ............................. $ -- $ -- $ 7,771 $ 9,253 $ -- $ 17,024
Crude oil .................................... 10 1,101 3,165 621 -- 4,897
Natural gas .................................. 2,436 1,033 -- -- -- 3,469
Other ........................................ 863 113 255 390 28 1,649
---------- ---------- ---------- ---------- ---------- ----------
Total ................................... 3,309 2,247 11,191 10,264 28 27,039
Transfers between segments ...................... 435 476 106 325 -- --
---------- ---------- ---------- ---------- ---------- ----------
Total operating revenues ................ $ 3,744 $ 2,723 $ 11,297 $ 10,589 $ 28 $ 27,039
========== ========== ========== ========== ========== ==========
Operating profit ................................ $ 363 $ 891 $ 93 $ 192 $ (173) $ 1,366
Equity in earnings of affiliates ................ 8 94 55 (7) -- 150
Corporate non-operating items
Interest and debt expense .................... -- -- -- -- (311) (311)
Interest income (net of misc.
interest expense) .......................... -- -- -- -- 25 25
Other ........................................ -- -- -- -- (13) (13)
---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes ...................... 371 985 148 185 (472) 1,217
Provision for income taxes ...................... (60) (451) (40) (56) 134 (473)
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) (1) ........................... $ 311 $ 534 $ 108 $ 129 $ (338) $ 744
========== ========== ========== ========== ========== ==========
Capital employed at December 31
Excluding investment in affiliates ........... $ 2,509 $ 2,840 $ 1,311 $ 890 $ 144 $ 7,694
Investment in affiliates ..................... 166 620 260 526 32 1,604
---------- ---------- ---------- ---------- ---------- ----------
Total (3) ............................... $ 2,675 $ 3,460 $ 1,571 $ 1,416 $ 176 $ 9,298
========== ========== ========== ========== ========== ==========
Significant non-cash items
DD&A .......................................... $ 374 $ 547 $ 126 $ 142 $ 4 $ 1,193
Dry hole costs and impairment of
unproved properties .......................... $ 16 $ 115 $ -- $ -- $ -- $ 131
Capital expenditures and investments (4) ........ $ 413 $ 839 $ 214 $ 248 $ 73 $ 1,787
Return on capital employed (ROCE) (5) ........... 11.9% 16.0% 8.2% 8.8% N/A 11.1%
1998
Sales and other operating revenues (2)
Refined products ............................. $ -- $ -- $ 6,082 $ 7,647 $ -- $ 13,729
Crude oil .................................... 14 774 2,650 299 -- 3,737
Natural gas .................................. 2,416 723 -- -- -- 3,139
Other ........................................ 770 104 217 351 749 2,191
---------- ---------- ---------- ---------- ---------- ----------
Total ................................... 3,200 1,601 8,949 8,297 749 22,796
Transfers between segments ...................... 308 378 89 181 -- --
---------- ---------- ---------- ---------- ---------- ----------
Total operating revenues ................ $ 3,508 $ 1,979 $ 9,038 $ 8,478 $ 749 $ 22,796
========== ========== ========== ========== ========== ==========
Operating profit ................................ $ 223 $ 482 $ 149 $ 256 $ (379) $ 731
Equity in earnings of affiliates ................ 1 (14) 56 (20) (1) 22
Corporate non-operating items
Interest and debt expense .................... -- -- -- -- (199) (199)
Interest income (net of misc.
interest expense) .......................... -- -- -- -- 89 89
Other ........................................ -- -- -- -- 51 51
---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes ...................... 224 468 205 236 (439) 694
Provision for income taxes ...................... (5) (185) (70) (80) 96 (244)
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) (1) ........................... $ 219 $ 283 $ 135 $ 156 $ (343) $ 450
========== ========== ========== ========== ========== ==========
Capital employed at December 31
Excluding investment in affiliates ........... $ 2,349 $ 2,849 $ 1,245 $ 989 $ 384 $ 7,816
Investment in affiliates ..................... 191 371 248 531 22 1,363
---------- ---------- ---------- ---------- ---------- ----------
Total (3) ............................... $ 2,540 $ 3,220 $ 1,493 $ 1,520 $ 406 $ 9,179
========== ========== ========== ========== ========== ==========
Significant non-cash items
DD&A ......................................... $ 383 $ 457 $ 139 $ 133 $ 1 $ 1,113
Dry hole costs and impairment of
unproved properties ........................ $ 59 $ 104 $ -- $ -- $ -- $ 163
Stock option provision ....................... $ -- $ -- $ -- $ -- $ 236 $ 236
Inventory write-down to market ............... $ 6 $ -- $ 63 $ 28 $ -- $ 97
Capital expenditures and investments (4) ........ $ 788 $ 1,177 $ 201 $ 332 $ 18 $ 2,516
Return on capital employed (ROCE) (5) ........... 9.2% 8.9% 13.2% 10.9% N/A 10.3%
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
UPSTREAM DOWNSTREAM
-------------------------- ------------------------ CORPORATE
UNITED UNITED AND
SEGMENT INFORMATION STATES INTERNATIONAL STATES INTERNATIONAL OTHER CONSOLIDATED
---------- ------------- ---------- ------------- ---------- ------------
1997
Sales and other operating revenues (2)
Refined products ....................... $ -- $ -- $ 7,664 $ 8,165 $ -- $ 15,829
Crude oil .............................. 24 1,191 3,483 181 -- 4,879
Natural gas ............................ 2,415 556 -- -- -- 2,971
Other .................................. 909 159 247 293 509 2,117
---------- ---------- ---------- ---------- ---------- ----------
Total ............................. 3,348 1,906 11,394 8,639 509 25,796
Transfers between segments ................ 599 622 115 191 -- --
---------- ---------- ---------- ---------- ---------- ----------
Total operating revenues .......... $ 3,947 $ 2,528 $ 11,509 $ 8,830 $ 509 $ 25,796
========== ========== ========== ========== ========== ==========
Operating profit .......................... $ 489 $ 1,174 $ 287 $ 185 $ (132) $ 2,003
Equity in earnings of affiliates .......... 18 (7) 30 (1) -- 40
Corporate non-operating items
Interest and debt expense .............. -- -- -- -- (36) (36)
Interest income (net of misc.
interest expense) ................ -- -- -- -- 77 77
Other .................................. -- -- -- -- 23 23
---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes ................ 507 1,167 317 184 (68) 2,107
Provision for income taxes ................ (62) (728) (101) (93) (26) (1,010)
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) (1) ..................... $ 445 $ 439 $ 216 $ 91 $ (94) $ 1,097
========== ========== ========== ========== ========== ==========
Capital employed at December 31
Excluding investment in affiliates ..... $ 2,390 $ 2,299 $ 1,421 $ 1,130 $ 903 $ 8,143
Investment in affiliates ............... 155 256 226 425 23 1,085
---------- ---------- ---------- ---------- ---------- ----------
Total (3) ............................ $ 2,545 $ 2,555 $ 1,647 $ 1,555 $ 926 $ 9,228
========== ========== ========== ========== ========== ==========
Significant non-cash items
DD&A ................................... $ 268 $ 578 $ 145 $ 188 $ -- $ 1,179
Dry hole costs and impairment of
unproved properties .............. $ 63 $ 106 $ -- $ -- $ -- $ 169
Capital expenditures and investments (4) .. $ 1,534 $ 999 $ 227 $ 331 $ 23 $ 3,114
Return on capital employed (ROCE) (5) ..... 19.7% 11.9% 14.3% 8.8% N/A 12.7%
(1) Includes after-tax benefits (charges) from special items:
1999
Litigation and settlement charges .... $ -- $ -- $ (18) $ -- $ (20) $ (38)
---------- ---------- ---------- ---------- ---------- ----------
Total ........................... $ -- $ -- $ (18) $ -- $ (20) $ (38)
========== ========== ========== ========== ========== ==========
1998
Asset sales ........................... $ 41 $ 54 $ -- $ 12 $ -- $ 107
Property impairments .................. (32) (6) -- -- -- (38)
Inventory write-downs ................ (4) -- (40) (19) -- (63)
Employee separation costs ............ (19) (23) (5) (5) -- (52)
Litigation and settlement charges .... -- -- (28) -- (14) (42)
Stock option provision ............... -- -- -- -- (183) (183)
---------- ---------- ---------- ---------- ---------- ----------
Total ........................... $ (14) $ 25 $ (73) $ (12) $ (197) $ (271)
========== ========== ========== ========== ========== ==========
1997
Asset sales .......................... $ 49 $ 191 $ -- $ -- $ -- $ 240
Property impairments ................. -- (112) -- (55) -- (167)
Litigation and settlement charges .... -- -- (23) -- -- (23)
Tax rate changes ..................... -- 19 -- 11 -- 30
---------- ---------- ---------- ---------- ---------- ----------
Total ........................... $ 49 $ 98 $ (23) $ (44) $ -- $ 80
========== ========== ========== ========== ========== ==========
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
(2) Includes sales of purchased products substantially at cost:
1999 1998 1997
---------- ---------- ----------
Buy/sell supply transactions settled in cash
Crude oil ......................................... $ 3,282 $ 2,728 $ 3,566
Refined products .................................. 747 438 683
Natural gas resales ................................... 1,242 1,109 773
Electric power resales ................................ 28 729 487
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Sales to equity affiliates totaled $1,519 for 1999, $1,219 for 1998, and $1,138 for 1997. The majority of these sales were in downstream and represented refined products.
(3) Capital employed is equivalent to the sum of stockholders' equity/owner's net investment and borrowings (both short-term and long-term). Borrowings include amounts due related parties, net of associated notes receivable. Amounts identified for operating segments comprise those assets and liabilities not deemed to be of a general corporate nature, such as cash and cash equivalents, financing-oriented items and aviation investment.
(4) Includes investments in affiliates.
(5) Consolidated ROCE is calculated by dividing net income before special items, excluding after-tax interest and debt cost incurred, as a percent of two-year average capital employed. Operating segment ROCE is calculated similarly except it does not include dividends, debt or related interest.
UNITED UNITED OTHER
GEOGRAPHIC INFORMATION STATES KINGDOM GERMANY NORWAY COUNTRIES CONSOLIDATED
------ ------- ------- ------ --------- -------------
1999
Sales and other operating revenues (1)..... $14,528 $5,950 $3,150 $ 330 $3,081 $27,039
Long-lived assets at December 31 (2)....... $ 5,192 $3,265 $ 154 $1,574 $1,050 $11,235
1998
Sales and other operating revenues (1)..... $12,878 $4,305 $2,881 $ 289 $2,443 $22,796
Long-lived assets at December 31 (2)....... $ 5,122 $3,577 $ 195 $1,547 $ 972 $11,413
1997
Sales and other operating revenues (1)..... $15,229 $4,480 $3,007 $ 406 $2,674 $25,796
Long-lived assets at December 31 (2)....... $ 4,956 $3,284 $ 168 $1,559 $ 861 $10,828
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(1) Revenues are attributed to countries based on location of the selling entity.
(2) Represents net PP&E.
28. OTHER FINANCIAL INFORMATION
Research and development expenses were $35 for 1999, $42 for 1998 and $44 for 1997.
SUPPLEMENTAL PETROLEUM DATA
(UNAUDITED)
(DOLLARS IN MILLIONS)
OIL AND GAS PRODUCING ACTIVITIES
Supplemental Petroleum Data disclosures are presented in accordance with the provisions of SFAS No. 69, "Disclosures about Oil and Gas Producing Activities."
Accordingly, volumes of reserves and production excluded royalty interests of others, and royalty payments are reflected as reductions in revenues.
RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES
TOTAL WORLDWIDE UNITED STATES EUROPE OTHER REGIONS
------------------------- ------------------------- ------------------------- ------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998 1997
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
CONSOLIDATED COMPANIES
Revenues
Sales ............ $ 2,389 $ 1,938 $ 2,603 $ 646 $ 643 $ 787 $ 1,192 $ 831 $ 1,181 $ 551 $ 464 $ 635
Transfers ........ 862 646 849 384 272 272 478 374 577 -- -- --
Exploration (1) ...... (270) (380) (457) (64) (128) (134) (62) (108) (131) (144) (144) (192)
Production ........... (851) (806) (854) (287) (303) (320) (433) (382) (409) (131) (121) (125)
DD&A ................. (887) (799) (827) (338) (345) (246) (491) (372) (419) (58) (82) (162)(2)
Other (3) ............ 18 148 321 13 104 106 6 48 215 (1) (4) --
Income taxes ......... (501) (201) (847) (87) (36) (109) (272) (100) (393) (142) (65) (345)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Results of
Operations ..... 760 546 788 267 207 356 418 291 621 75 48 (189)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
EQUITY AFFILIATES
Revenues ............. 210 79 109 14 14 15 84 60 94 112 5 --
Production ........... (86) (78) (54) (9) (6) (5) (30) (38) (43) (47) (34) (6)
DD&A ................. (33) (23) (21) (4) (4) (3) (16) (16) (18) (13) (3) --
Income taxes ......... 8 18 (4) -- -- -- (1) (1) (4) 9 19 --
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Results of
Operations ..... 99 (4) 30 1 4 7 37 5 29 61 (13) (6)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total ......... $ 859 $ 542 $ 818 $ 268 $ 211 $ 363 $ 455 $ 296 $ 650 $ 136 $ 35 $ (195)
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
|
(1) Includes exploration operating expenses, dry hole costs, impairment of unproved properties and depreciation.
(2) Includes charges of $112 for impairment of non-revenue producing properties.
(3) Includes gain/(loss) on disposal of fixed assets and other miscellaneous revenues and expenses.
SUPPLEMENTAL PETROLEUM DATA
(UNAUDITED)
(DOLLARS IN MILLIONS)
COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION, EXPLORATION AND DEVELOPMENT ACTIVITIES (1)
TOTAL WORLDWIDE UNITED STATES EUROPE OTHER REGIONS
---------------------- --------------------- ------------------------- ----------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998 1997
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
CONSOLIDATED COMPANIES
Property acquisitions
Proved (2) ........ $ 138 $ 254 $ 152 $ 6 $ 24 $ 148 $ -- $ 230(3) $ -- $ 132 $ -- $ 4
Unproved .......... 19 93 831 1 55 723(4) 12 25 95 6 13 13
Exploration .......... 276 436 450 97 119 107 72 114 135 107 203 208
Development .......... 737 1,019 921 304 542 289 342 403 568 91 74 64
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total ........... 1,170 1,802 2,354 408 740 1,267 426 772 798 336 290 289
EQUITY AFFILIATES
Development .......... 337 564 263 15 30 12 1 2 2 321 532 249
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total ........... $1,507 $2,366 $2,617 $ 423 $ 770 $1,279 $ 427 $ 774 $ 800 $ 657 $ 822 $ 538
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
|
(1) These data comprise all costs incurred in the activities shown, whether capitalized or charged to expense at the time they were incurred.
(2) Does not include properties acquired through property trades.
(3) Includes acquisition costs associated with petroleum reserves acquired in the North Sea.
(4) Includes acquisition costs associated with gas reserves acquired in the South Texas Lobo trend.
CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING ACTIVITIES
TOTAL WORLDWIDE UNITED STATES EUROPE OTHER REGIONS
------------------------- ----------------------- -------------------------- -------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998 1997
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
CONSOLIDATED COMPANIES
Gross costs
Proved properties .. $13,661 $13,488 $12,420 $ 4,968 $ 5,013 $ 4,676 $ 6,939 $ 6,942(1)$ 6,276 $ 1,754 $ 1,533 $ 1,468
Unproved properties 1,201 1,159 1,491 651 634 774(2) 331 262 432 219 263 285
Less
Accumulated DD&A ... 7,887 7,469 7,201 3,024 2,983 2,907 3,507 3,182 3,008 1,356 1,304 1,286
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total net costs .. 6,975 7,178 6,710 2,595 2,664 2,543 3,763 4,022 3,700 617 492 467
EQUITY AFFILIATES
Gross costs
Proved properties .. $ 1,411 $ 1,075 $ 518 $ 102 $ 87 $ 62 $ 207 $ 207 $ 207 $ 1,102 $ 781 $ 249
Less
Accumulated DD&A ... 134 99 77 25 21 17 90 75 60 19 3 --
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total net costs ....... 1,277 976 441 77 66 45 117 132 147 1,083 778 249
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total ............ $ 8,252 $ 8,154 $ 7,151 $ 2,672 $ 2,730 $ 2,588 $ 3,880 $ 4,154 $ 3,847 $ 1,700 $ 1,270 $ 716
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
|
(1) Includes acquisition costs associated with petroleum reserves acquired in the North Sea.
(2) Includes acquisition costs associated with gas reserves acquired in the South Texas Lobo trend.
SUPPLEMENTAL PETROLEUM DATA
(UNAUDITED)
(IN MILLIONS OF BARRELS)
ESTIMATED PROVED RESERVES OF OIL (1)
TOTAL WORLDWIDE UNITED STATES EUROPE OTHER REGIONS
---------------------- ---------------------- ---------------------- ----------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998 1997
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
PROVED RESERVES OF
CONSOLIDATED COMPANIES
Beginning of year .......... 863 893 926 261 277 299 410 421 413 192 195 214
Revisions and other changes (6) 42 54 4 14 3 (5) 20 43 (5) 8 8
Extensions and discoveries . 54 41 62 7 15 12 37 6 44 10 20 6
Improved recovery .......... -- 14 3 -- -- 3 -- 11 -- -- 3 --
Purchase of reserves (2) ... 1 8 5 1 -- 4 -- 8 1 -- -- --
Sale of reserves (3) ....... (8) (16) (27) (8) (16) (11) -- -- (16) -- -- --
Production ................. (116) (119) (130) (27) (29) (33) (59) (56) (64) (30) (34) (33)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
End of year (4) ............ 788 863 893 238 261 277 383 410 421 167 192 195
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
PROVED RESERVES OF EQUITY
AFFILIATES
Beginning of year .......... 728 731 47 -- -- -- 50 51 47 678 680 --
Revisions and other changes 8 5 10 -- -- -- 8 5 10 -- -- --
Extensions and discoveries . 21 -- 680 -- -- -- 9 -- -- 12 -- 680
Production ................. (15) (8) (6) -- -- -- (7) (6) (6) (8) (2) --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
End of year ................ 742 728 731 -- -- -- 60 50 51 682 678 680
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total ................. 1,530 1,591 1,624 238 261 277 443 460 472 849 870 875
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
PROVED DEVELOPED RESERVES
OF CONSOLIDATED COMPANIES
Beginning of year .......... 622 600 630 222 242 258 228 174 185 172 184 187
End of year ................ 565 622 600 202 222 242 217 228 174 146 172 184
PROVED DEVELOPED RESERVES
OF EQUITY AFFILIATES
Beginning of year .......... 92 43 39 -- -- -- 42 43 39 50 -- --
End of year ................ 129 92 43 -- -- -- 43 42 43 86 50 --
|
(1) Oil reserves comprise crude oil and condensate, and natural gas liquids expected to be removed for Conoco's account from its natural gas deliveries.
(2) Includes reserves acquired through property trades.
(3) Includes reserves disposed of through property trades.
(4) Includes reserves of 123 at year-end 1998, and 87 at year-end 1997, attributable to Conoco Oil & Gas Associates L.P., in which there is a minority interest with an approximate 20 percent average revenue share (see note 19).
SUPPLEMENTAL PETROLEUM DATA
(UNAUDITED)
(IN BILLION CUBIC FEET)
ESTIMATED PROVED RESERVES OF GAS
TOTAL WORLDWIDE UNITED STATES EUROPE OTHER REGIONS
---------------------- ---------------------- ---------------------- ----------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998 1997
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
PROVED RESERVES OF
CONSOLIDATED COMPANIES
Beginning of year .......... 5,802 5,491 5,063 2,319 2,235 1,822 3,053 3,060 3,068 430 196 173
Revisions and other changes 7 25 134 (34) 18 -- 31 (20) 97 10 27 37
Extensions and discoveries . 446 961 518 219 624 453 65 111 59 162 226 6
Improved recovery .......... -- -- 1 -- -- 1 -- -- -- -- -- --
Purchase of reserves (1) ... 174 116 270 8 4 264(2) -- 112 -- 166 -- 6
Sale of reserves (3) ....... (30) (281) (62) (30) (243) (46) -- (38) (7) -- -- (9)
Production ................. (600) (510) (433) (316) (319) (259) (265) (172) (157) (19) (19) (17)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
End of year (4) ............ 5,799 5,802 5,491 2,166 2,319 2,235 2,884 3,053 3,060 749 430 196
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
PROVED RESERVES OF EQUITY
AFFILIATES
Beginning of year .......... 381 370 333 381 370 333 -- -- -- -- -- --
Revisions and other changes (35) (12) (6) (35) (12) (6) -- -- -- -- -- --
Extensions and discoveries . -- 1 49 -- 1 49 -- -- -- -- -- --
Purchase of reserves ....... 3 27 -- 3 27 -- -- -- -- -- -- --
Production ................. (6) (5) (6) (6) (5) (6) -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
End of year ................ 343 381 370 343 381 370 -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total .................. 6,142 6,183 5,861 2,509 2,700 2,605 2,884 3,053 3,060 749 430 196
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
PROVED DEVELOPED RESERVES
OF CONSOLIDATED COMPANIES
Beginning of year .......... 3,991 3,061 2,843 1,828 1,801 1,672 1,954 1,091 1,041 209 169 130
End of year ................ 4,164 3,991 3,061 1,792 1,828 1,801 2,017 1,954 1,091 355 209 169
PROVED DEVELOPED RESERVES
OF EQUITY AFFILIATES
Beginning of year .......... 66 40 36 66 40 36 -- -- -- -- -- --
End of year ................ 72 66 40 72 66 40 -- -- -- -- -- --
|
(1) Includes reserves acquired through property trades.
(2) Includes reserves acquired in the South Texas Lobo trend.
(3) Includes reserves disposed of through property trades.
(4) Includes reserves of 121 at year-end 1998, and 115 at year-end 1997, attributable to Conoco Oil & Gas Associates L.P., in which there is a minority interest with an approximate 20 percent average revenue share (see note 19).
SUPPLEMENTAL PETROLEUM DATA
(UNAUDITED)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES
The information on the following page has been prepared in accordance with SFAS No. 69, which requires the standardized measure of discounted future net cash flows to be based on year-end sales prices, costs and statutory income tax rates and a 10 percent annual discount rate. Specifically, the per-barrel oil sales prices used to calculate the December 31, 1999, data averaged $24.30 for the United States, $24.17 for Europe and $22.93 for other regions. The gas sales prices per thousand cubic feet used averaged $2.24 for the United States, $2.25 for Europe and $3.08 for other regions. Because prices used in the calculation are as of December 31, the standardized measure could vary significantly from year to year based on market conditions at that specific date.
The projections should not be viewed as realistic estimates of future cash flows nor should the "standardized measure" be interpreted as representing current value to Conoco. Material revisions to estimates of proved reserves may occur in the future; development and production of the reserves may not occur in the periods assumed; actual prices realized are expected to vary significantly from those used; and actual costs may also vary. Conoco's investment and operating decisions are not based on the information presented on the following page, but on a wide range of reserve estimates that include probable as well as proved reserves, and on different price and cost assumptions from those reflected in this information.
SUPPLEMENTAL PETROLEUM DATA
(UNAUDITED)
(DOLLARS IN MILLIONS)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES
TOTAL WORLDWIDE UNITED STATES EUROPE
---------------------------- ---------------------------- ----------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- -------- -------- -------- --------
CONSOLIDATED COMPANIES
Future cash flows
Revenues ............... $ 31,682 $ 20,340 $ 26,666 $ 9,824 $ 6,148 $ 8,355 $ 15,724 $ 11,376 $ 15,119
Production costs ....... (8,295) (8,271) (9,251) (2,604) (2,665) (2,997) (4,460) (4,742) (5,387)
Development costs ...... (1,573) (1,548) (1,586) (347) (370) (446) (665) (823) (1,094)
Income tax expense ..... (10,212) (3,904) (6,822) (1,805) (546) (1,175) (5,581) (2,239) (3,921)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Future net cash flows ..... 11,602 6,617 9,007 5,068 2,567 3,737 5,018 3,572 4,717
Discounted to present value
at a 10% annual rate ... (4,373) (2,414) (3,384) (2,157) (1,055) (1,552) (1,468) (1,151) (1,679)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total (1) ........... 7,229 4,203 5,623 2,911 1,512 2,185 3,550 2,421 3,038
-------- -------- -------- -------- -------- -------- -------- -------- --------
EQUITY AFFILIATES
Future cash flows
Revenues ............... 13,524 5,327 8,520 839 1,001 893 976 427 651
Production costs ....... (2,489) (2,228) (2,640) (334) (346) (267) (492) (266) (315)
Development costs ...... (1,168) (1,086) (1,300) (181) (191) (174) (38) (28) (30)
Income tax expense ..... (2,522) (425) (1,090) (115) (166) (161) (78) (63) (170)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Future net cash flows ..... 7,345 1,588 3,490 209 298 291 368 70 136
Discounted to present value
at a 10% annual rate .... (5,039) (1,327) (2,886) (155) (220) (226) (106) (9) (44)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total ............... 2,306 261 604 54 78 65 262 61 92
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total ............ $ 9,535 $ 4,464 $ 6,227 $ 2,965 $ 1,590 $ 2,250 $ 3,812 $ 2,482 $ 3,130
======== ======== ======== ======== ======== ======== ======== ======== ========
OTHER REGIONS
----------------------------
1999 1998 1997
-------- -------- --------
CONSOLIDATED COMPANIES
Future cash flows
Revenues ............... $ 6,134 $ 2,816 $ 3,192
Production costs ....... (1,231) (864) (867)
Development costs ...... (561) (355) (46)
Income tax expense ..... (2,826) (1,119) (1,726)
-------- -------- --------
Future net cash flows ..... 1,516 478 553
Discounted to present value
at a 10% annual rate ... (748) (208) (153)
-------- -------- --------
Total (1) ........... 768 270 400
-------- -------- --------
EQUITY AFFILIATES
Future cash flows
Revenues ............... 11,709 3,899 6,976
Production costs ....... (1,663) (1,616) (2,058)
Development costs ...... (949) (867) (1,096)
Income tax expense ..... (2,329) (196) (759)
-------- -------- --------
Future net cash flows ..... 6,768 1,220 3,063
Discounted to present value
at a 10% annual rate .... (4,778) (1,098) (2,616)
-------- -------- --------
Total ............... 1,990 122 447
-------- -------- --------
Total ............ $ 2,758 $ 392 $ 847
======== ======== ========
|
(1) Includes $263 at year-end 1998 and $372 at year-end 1997, attributable to Conoco Oil & Gas Associates L.P., in which there is a minority interest with an approximate 20 percent average revenue share (see note 19).
SUMMARY OF CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES
CONSOLIDATED COMPANIES EQUITY AFFILIATES
----------------------------------- -----------------------------------
1999 1998 1997 1999 1998 1997
--------- --------- --------- --------- --------- ---------
Balance at January 1 ................................ $ 4,203 $ 5,623 $ 7,289 $ 261 $ 604 $ 300
Sales and transfers of oil and gas produced, net of
production costs ................................ (2,400) (1,778) (2,583) (124) (2) (56)
Development costs incurred during the period ........ 737 1,019 921 337 555 218
Net changes in prices and in development and
production costs ................................ 6,650 (3,948) (4,974) 2,112 (1,155) (1,242)
Extensions, discoveries and improved recovery, less
related costs ................................... 1,023 838 818 80 1 1,181
Revisions of previous quantity estimates ............ (24) 189 439 25 2 37
Purchases (sales) of reserves in place - net ........ 99 (92) 36 2 18 --
Accretion of discount ............................... 620 916 1,312 36 84 55
Net change in income taxes .......................... (3,978) 1,541 2,285 (530) 128 16
Other ............................................... 299 (105) 80 107 26 95
--------- --------- --------- --------- --------- ---------
Balance at December 31 .............................. $ 7,229 $ 4,203 $ 5,623 $ 2,306 $ 261 $ 604
========= ========= ========= ========= ========= =========
|
CONSOLIDATED QUARTERLY FINANCIAL DATA
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
QUARTER ENDED
------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ----------- ------------ -----------
1999
Sales and Other Operating Revenues (1) .. $ 5,311 $ 6,252 $ 7,409 $ 8,067
Cost of Goods Sold and Other Expenses (2) $ 5,130 $ 6,090 $ 7,020 $ 7,541
Interest and Debt Expense ............... $ 71 $ 79 $ 80 $ 81
Net Income Before Special Items ......... $ 83 $ 114 $ 261 $ 324
Net Income .............................. $ 83 $ 114 $ 223(5) $ 324
Earnings Per Share
Basic (3) ............................ $ .13 $ .18 $ .36 $ .52
Diluted (3) .......................... $ .13 $ .18 $ .35 $ .51
Dividends per Common Share .............. $ .14 $ .19 $ .19 $ .19
Market Price of Class A Common Stock (4)
High ................................. $ 25 7/16 $ 31 1/4 $ 29 1/4 $ 29 1/16
Low .................................. $ 19 3/8 $ 22 15/16 $ 25 5/16 $ 20 15/16
Market Price of Class B Common Stock (4)
High ................................. $ -- $ -- $ 29 3/8 $ 28 15/16
Low .................................. $ -- $ -- $ 24 1/2 $ 20 3/4
1998
Sales and Other Operating Revenues (1) .. $ 5,736 $ 5,612 $ 5,916 $ 5,532
Cost of Goods Sold and Other Expenses (2) $ 5,327 $ 5,374 $ 5,620 $ 5,954
Interest and Debt Expense ............... $ 1 $ -- $ 107 $ 91
Net Income Before Special Items ......... $ 293 $ 211 $ 183 $ 34
Net Income (Loss) ....................... $ 316(6) $ 214(7) $ 183 $ (263)(8)
Earnings Per Share
Basic (3) ............................ $ .72 $ .49 $ .42 $ (.45)
Diluted (3) .......................... $ .72 $ .49 $ .42 $ (.45)
Market Price of Class A Common Stock (4)
High ................................. $ -- $ -- $ -- $ 25 3/4
Low .................................. $ -- $ -- $ -- $ 19 3/8
|
(1) Excludes other income and equity in earnings of affiliates of $24, $77, $76 and $93 in each of the quarters in 1999 and $98, $40, $113 and $121 in each of the quarters in 1998.
(2) Excludes provision for income taxes.
(3) Earnings per share for the year may not equal the sum of the quarterly earnings per share due to changes in average shares outstanding. Earnings per share for the periods prior to the initial public offering was calculated using only Class B common stock, as required by SFAS No. 128 (see note 8 to the consolidated financial statements).
(4) Conoco's Class A common stock and Class B common stock are listed on the New York Stock Exchange (trading symbols: COC.A and COC.B). Class A common stock commenced trading October 22, 1998, subsequent to Conoco's initial public offering. Class B common stock commenced trading on August 16, 1999, subsequent to the conclusion of DuPont's exchange offer, which resulted in 100 percent of Class B common stock being distributed to DuPont shareholders. Prices are reported by the New York Stock Exchange.
(5) Includes $38 ($.06 per share - diluted) related to U.S. downstream litigation and corporate settlement charges.
(6) Includes gain of $23 ($.04 per share-diluted) from sale of certain upstream properties.
(7) Includes net benefit of $3 ($.01 per share-diluted) reflecting both the tax benefit of $31 from the sale of an international upstream subsidiary and a $28 charge for U.S. downstream litigation.
(8) Includes net after-tax charge of $297 ($.47 per share-diluted). This charge was comprised of charges of $183 for non-cash stock option compensation expense related to the initial public offering, $63 for write-down of inventories to market value, $52 principally for employee separation costs, $38 for impairment of long-lived upstream properties, and $14 for litigation charges. These charges are partially offset by gains of $41 from the sale of U.S. producing properties and $12 from sale of an office building.
EXHIBIT 21.1
CONOCO INC.
SUBSIDIARIES & EQUITY AFFILIATES
-----------------------------------------------------------------------------------------------------------------------------------
INCORPORATION OWNERSHIP
COMPANY NAME LOCATION PERCENTAGE DIRECT PARENT/EQUITY OWNER
-----------------------------------------------------------------------------------------------------------------------------------
362084 Alberta Inc. Alberta 100% Conoco Canada Limited
-----------------------------------------------------------------------------------------------------------------------------------
Administrador Petrolera Guanare S.A. Venezuela 32.5% Conoco Venezuela B.V.
-----------------------------------------------------------------------------------------------------------------------------------
Agroforestal Anzoategui, C.A. Venezuela 100% Petrozuata C.A.
-----------------------------------------------------------------------------------------------------------------------------------
Alliance Energy Services Partnership Kentucky 50% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
AO Arkhangelskgeoldobycha Soviet Union 15.667% Conoco International Petroleum Company
-----------------------------------------------------------------------------------------------------------------------------------
Applied Sustainability LLC Texas 18.75% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Associated Petroleum Terminals (Immingham)
Limited England 33.33% Conoco Limited
-----------------------------------------------------------------------------------------------------------------------------------
Atlantic Energy Inc. Virginia 50% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Brandywine Industrial Gas, Inc. Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Britannia Operator Limited England 50% Conoco (U.K.) Limited
-----------------------------------------------------------------------------------------------------------------------------------
C&L Processors Partnership Texas 50% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Calcasieu Shipping Corporation Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Cardinal States Gathering Company Virginia 100% Pocahontas Gas Partnership
-----------------------------------------------------------------------------------------------------------------------------------
Ceska Rafinerska, a.s. Czech Republic 16.33% Conoco Continental Holding GmbH
-----------------------------------------------------------------------------------------------------------------------------------
CFJ I Management Inc. Delaware 50% Kayo Oil Company
-----------------------------------------------------------------------------------------------------------------------------------
CFJ II Management Inc. Delaware 50% Kayo Oil Company
-----------------------------------------------------------------------------------------------------------------------------------
CFJ III Management Inc. Delaware 50% Kayo Oil Company
-----------------------------------------------------------------------------------------------------------------------------------
CFJ Plaza Company I LLC Delaware 1% CFJ I Management Inc.
49.5% Kayo Oil Company
-----------------------------------------------------------------------------------------------------------------------------------
CFJ Plaza Company II LLC Delaware 1% CFJ II Management Inc.
49.5% Kayo Oil Company
-----------------------------------------------------------------------------------------------------------------------------------
CFJ Plaza Company III LLC Delaware 1% CFJ III Management Inc.
49.5% Kayo Oil Company
-----------------------------------------------------------------------------------------------------------------------------------
CFJ Properties Delaware 15% Kayo Oil Company
35% Douglas Oil Company of California
-----------------------------------------------------------------------------------------------------------------------------------
CGP Servicios Energeticos de Altamira,
S. de R.L. de C.V. Mexico 100% Conoco Global Power de Mexico, S. de R.L.
de C.V.
-----------------------------------------------------------------------------------------------------------------------------------
Cit-Con Oil Corporation Delaware 35% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Clearwater Ltd. Bermuda 100% Danube Insurance Limited
-----------------------------------------------------------------------------------------------------------------------------------
Cliffe Storage Limited England 100% Conoco (U.K.) Limited
-----------------------------------------------------------------------------------------------------------------------------------
Colonial Pipeline Company Delaware 7.55% Conoco Pipe Line Company
-----------------------------------------------------------------------------------------------------------------------------------
Colonial Ventures, L.L.C. Delaware 7.547% Conoco Pipe Line Company
-----------------------------------------------------------------------------------------------------------------------------------
Comap, Inc. Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Compania Agua Plan S.A. Venezuela 65% Conoco Venezuela B.V.
-----------------------------------------------------------------------------------------------------------------------------------
Conch International Methane Limited Bahama Islands 40% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
|
-----------------------------------------------------------------------------------------------------------------------------------
INCORPORATION OWNERSHIP
COMPANY NAME LOCATION PERCENTAGE DIRECT PARENT/EQUITY OWNER
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Adjgaz Limited Georgia (Russia) 100% Conoco Petroleum Operations Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco (Glen) Limited England 100% Conoco (U.K.) Limited
-----------------------------------------------------------------------------------------------------------------------------------
Conoco (Thailand) Company, Limited Thailand 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco (U.K.) Alpha Limited England 100% Conoco (U.K.) Limited
-----------------------------------------------------------------------------------------------------------------------------------
Conoco (U.K.) Beta Limited England 100% Conoco (U.K.) Alpha Limited
-----------------------------------------------------------------------------------------------------------------------------------
Conoco (U.K.) Delta Limited England 100% Conoco (U.K.) Limited
-----------------------------------------------------------------------------------------------------------------------------------
Conoco (U.K.) Epsilom Limited England 100% Conoco (U.K.) Limited
-----------------------------------------------------------------------------------------------------------------------------------
Conoco (U.K.) Gama Limited England 100% Conoco (U.K.) Limited
-----------------------------------------------------------------------------------------------------------------------------------
Conoco (U.K.) Limited England 100% CUKL Holdings Limited
-----------------------------------------------------------------------------------------------------------------------------------
Conoco A.G. Switzerland 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Arabia Inc. Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Arctic Inc. Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Asia Ltd. Bermuda 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Asia Pacific Ltd. Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Asia Pacific Sdn. Bhd. Malaysia 100% Conoco Petroleum Operations Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Baltic Inc. Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Barbados Ltd. Bermuda 100% Danube Insurance Limited
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Bardawil Inc. Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Canada Limited New Brunswick 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Capital Inc. Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Carbon and Minerals, Inc. Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Center Inc. Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Central and Eastern Europe Holdings BV Netherlands 100% Conoco Central Europe Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Central Europe Inc. Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Chile Inc. Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Colombia Ltd. Bermuda 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Communications, Inc. Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Continental Holding GmbH Germany 100% Conoco Central Europe Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Coral Inc. Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Corporate Holdings L.P. Delaware 75.6% Conoco Finance Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Czech Republic s.r.o. Czech Republic 100% Conoco Continental Holding GmbH
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Denmark Inc. Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Development II Inc. Delaware 100% Conoco Petroleum Operations Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Development Limited England 100% Conoco (U.K.) Limited
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Development Company Delaware 100% Conoco Petroleum Operations Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Development Services Inc. Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco do Brasil Ltda. Brazil 99.9% Conoco Petroleum Operations Inc.
0.1% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Drilling Inc. Delaware 100% Conoco Petroleum Operations Inc.
-----------------------------------------------------------------------------------------------------------------------------------
|
-----------------------------------------------------------------------------------------------------------------------------------
INCORPORATION OWNERSHIP
COMPANY NAME LOCATION PERCENTAGE DIRECT PARENT/EQUITY OWNER
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Egypt Inc. Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Energy Holdings Ltd. Bermuda 100% Conoco Energy Holdings Nigeria Ltd.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Energy Holdings Nigeria Ltd. Bermuda 100% Clearwater Ltd.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Energy Nigeria Limited Nigeria 100% Conoco Energy Holdings Ltd.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Enterprises Inc. Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Equity Investments Inc. Delaware 100% Conoco Petroleum Operations Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Este Pipeline Company Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco EurAsia Inc. Delaware 100% Conoco Petroleum Operations Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Europe Gas Company Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Europe Gas Limited England 100% Conoco (U.K.) Limited
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Exploration & Production B.V. Netherlands 100% Conoco Resources Holding B.V.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Exploration and Production Nigeria Limited Nigeria 100% Conoco Holdings Ltd.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Exploration Production Europe Limited England 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Finance Inc. Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Finance Services Inc. Delaware 100% Conoco Inc. (formerly Continental Oil Company).
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Foreign Sales Corporation Barbados 100% Conoco Petroleum Operations Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Frontier Ltd. Bermuda 100% Clearwater Ltd.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Gas Holdings L.L.C. Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Geisum Inc. Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Global Energy Company Delaware 100% Conoco Petroleum Operations Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Global Power (U.K.) Limited England 100% Conoco (U.K.) Limited
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Global Power Assets Inc. Delaware 100% Conoco Petroleum Operations Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Global Power Assets Sabine, Inc. Delaware 100% Conoco Petroleum Operations Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Global Power de Mexico, S. de R. L. de C. V. Mexico 100% Conoco Global Energy Company
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Global Power Developments Deutschland GmgH Germany 100% Conoco Global Power Europe Limited
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Global Power Developments Inc. Delaware 100% Conoco Petroleum Operations Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Global Power Developments Espana SRL Spain 100% Conoco Global Power Europe Limited
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Global Power Developments-Sabine Inc. Delaware 100% Conoco Petroleum Operations Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Global Power Developments UK Limited England 100% Conoco Global Power Europe Limited
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Global Power Europe Limited England 100% CUKL Holdings Limited
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Global Power Inc. Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Guanare Ltd. Bermuda 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Holdings Ltd. (formerly Conoco Iraq Ltd.) Bermuda 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Hungary Kft. Hungary 100% Conoco Continental Holding GmbH
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Inc. (formerly Continental Oil Company) Delaware 100% Conoco Inc. (formerly Conoco Energy Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Indonesia Inc. Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco International Gas Corporation Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco International Petroleum Company Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco International, Inc. Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
|
-----------------------------------------------------------------------------------------------------------------------------------
INCORPORATION OWNERSHIP
COMPANY NAME LOCATION PERCENTAGE DIRECT PARENT/EQUITY OWNER
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Investments Limited (formerly DuPont
Investments Limited) England 100% Conoco (U.K.) Limited
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Investments Norge A/S Norway 100% Conoco Norway Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Iran N.V. Antilles 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Jet (Malaysia) Sdn. Bhd. Malaysia 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Jet Danmark A/S Denmark 100% Conoco Denmark Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Jet Finland Oy Finland 100% Conoco Petroleum Operations Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Jet Nordic AB Sweden 88.39% Conoco A.G.
11.61% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Jet Norge A/S Norway 100% Conoco Norway Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Jet Retail Development spol. s.r.o. Slovak Republic 100% Conoco Slovakia s.r.o.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Khazar Ltd. Bermuda 99% Danube Insurance Ltd.
1% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Kuwait Services Inc. Delaware 100% Conoco Petroleum Operations Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Lagia Offshore, Inc. Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Leasing Limited England 100% Conoco Limited
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Limited England 100% Conoco (U.K.) Limited
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Mexico Ltd. Bermuda 25% Danube Insurance Limited
75% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Mexico Servicios, S.A. de C.V. Mexico 99% Conoco Mexico, S.A. de C.V.
1% Conoco Specialty Products Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Mexico, S.A. de C.V. Mexico 99% Conoco Petroleum Operations Inc.
1% Conoco Specialty Products Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Mid-Continent Properties Inc. Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Middle East Gas Co. N.V. Antilles 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Middle East Ltd. Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Mineraloel GmbH Germany 99.75% Conoco Continental Holding GmbH
0.25% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Mont Belvieu Holdings Inc. Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Northland Ltd. Bermuda 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Norway Inc. Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Norway Properties Inc. Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco NW Natuna Exploration and Production Ltd. Bermuda 100% Clearwater Ltd.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Offshore Inc. Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Offshore Pipe Line Company Delaware 100% Conoco Pipe Line Company
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Offshore Properties Inc. Delaware 82.4% Conoco Inc. (formerly Continental Oil Company)
17.6% Conoco Offshore Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Oil & Gas Associates L.P. Delaware 18.397% Conoco Mid-Continent Properties Inc.
27.243% Conoco Offshore Properties Inc.
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|
-----------------------------------------------------------------------------------------------------------------------------------
INCORPORATION OWNERSHIP
COMPANY NAME LOCATION PERCENTAGE DIRECT PARENT/EQUITY OWNER
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Oil & Gas Associates L.P. (continued) 40.794% Conoco Permian Basin Properties Inc.
9.983% Conoco Norway Properties Inc.
3.583% Conoco U.K. Properties Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Operations (QLD.) Pty Ltd. Australia 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Orinoco Inc. Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Overseas Oil Company Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Pakistan Exploration & Production B.V. Netherlands 100% Conoco Resources Holding B.V.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Pension Plans Trustees Limited England 100% Conoco (U.K.) Limited
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Permian Basin Properties Inc. Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Peru Ltd. Bermuda 25% Danube Insurance Limited
75% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Petcoke Far East Ltd. Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Petroleum Limited England 100% Conoco (U.K.) Limited
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Petroleum Nigeria Limited Nigeria .01% Conoco Inc. (formerly Continental Oil Company)
99.99% Conoco Petroleum Operations Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Petroleum Norge AS Norway 100% Conoco Norway Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Petroleum Operations Inc. Delaware 100% Conoco Inc. (formerly Conoco Energy Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Pipe Line Company Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Poland Sp. z o.o. Poland 100% Conoco Continental Holding GmbH
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Power Marketing Inc. Delaware 100% Conoco Petroleum Operations Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Resources Holding B.V. Netherlands 100% Clearwater Ltd.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Seagaz Ticaret Limited Sirketi Turkey 1% Conoco Inc. (formerly Conoco Energy Company)
99% Conoco Petroleum Operations Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Services Company (formerly DuPont Conoco
Services Co.) Delaware 100% Conoco Petroleum Operations Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Services Ltd. Bermuda 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Services Sdn. Bhd. Malaysia 100% Conoco Petroleum Operations Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Shale Oil Inc. Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Shipping Company Liberia 100% World Wide Transport, Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Shipping & Marine Development LLC Marshall Islands 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Shipping Norge A/S Norway 80% Norske Conoco A/S
20% Conoco Norway Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Shipping Norge Nr. 2 AS Norway 100% Norske Conoco A/S
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Shipping Norge Nr. 3 AS Norway 100% Norske Conoco A/S
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Slovakia s.r.o. Slovak Republic 100% Conoco Continental Holding GmbH
-----------------------------------------------------------------------------------------------------------------------------------
Conoco South Sokang Ltd. Bermuda 100% Clearwater Ltd.
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|
-----------------------------------------------------------------------------------------------------------------------------------
INCORPORATION OWNERSHIP
COMPANY NAME LOCATION PERCENTAGE DIRECT PARENT/EQUITY OWNER
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Specialty Products Inc. Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Specialty Products Limited England 100% Conoco Petroleum Operations Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Syria Dez Gas Ltd. Bermuda 100% Conoco Syria Ltd.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Syria Ltd. Bermuda 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Taiwan Exploration & Production B.V. Netherlands 100% Conoco Resources Holding B.V.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Timan-Pechora Ltd. Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Tobong Ltd. Bermuda 100% Clearwater Ltd.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Tobong Natuna B.V. Netherlands 100% Conoco Resources Holding B.V.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Trading Company Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Treasury Ltd. England 100% Conoco (U.K.) Limited
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Trinidad (4a) B.V. Netherlands 100% Conoco Resources Holding B.V.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Trinidad (4b) B.V. Netherlands 100% Conoco Resources Holding B.V.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Trinidad Inc. Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco U.K. Properties Inc. Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Venezuela B.V. Netherlands 100% Conoco Resources Holding B.V.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Venezuela C.A. Venezuela 100% Conoco Petroleum Operations Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Venezuela E&P Ltd. Bermuda 100% Clearwater Ltd.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Venezuela Ltd. Bermuda 25% Danube Insurance Limited
75% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Venezuela Services B.V. Netherlands 100% Conoco Resources Holding B.V.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Vietnam Exploration & Production B.V. Netherlands 100% Conoco Resources Holding B.V.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Warim B.V. Netherlands 100% Conoco Resources Holding B.V.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco Warim Ltd. Bermuda 100% Clearwater Ltd.
-----------------------------------------------------------------------------------------------------------------------------------
Conoco West Firan Inc. Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Conoco-Austria Mineraloel GmbH Austria 100% Conoco Mineraloel GmbH
-----------------------------------------------------------------------------------------------------------------------------------
Cono-Services Inc. Colorado 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Continental Europe Energy Company Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Continental Mid Delta Petroleum Company Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Continental Netherlands Oil Company B.V. Netherlands 100% Conoco Resources Holding B.V.
-----------------------------------------------------------------------------------------------------------------------------------
Continental Oil Company Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Continental Oil Company (Nederland) B.V. Netherlands 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Continental Oil Company Inc. Canada 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Continental Oil Company Limited England 100% Conoco (U.K.) Limited
-----------------------------------------------------------------------------------------------------------------------------------
Continental Oil Company of Iran Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Continental Oil Company of Italy Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Continental Oil Company of Libya Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Continental Oil Company of Niger Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Continental Oil Company of Nigeria Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
|
-----------------------------------------------------------------------------------------------------------------------------------
INCORPORATION OWNERSHIP
COMPANY NAME LOCATION PERCENTAGE DIRECT PARENT/EQUITY OWNER
-----------------------------------------------------------------------------------------------------------------------------------
Continental Oil S.A. Spain 50% Societe Europeenne Des Carburants (SECA)
-----------------------------------------------------------------------------------------------------------------------------------
Continental Pipe Line Company Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Crude Oil Terminals (Humber) Limited England 33.33% Conoco Limited
-----------------------------------------------------------------------------------------------------------------------------------
CUKL Holdings Limited England 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Danube Insurance Limited Bermuda 73.22% Conoco A.G.
26.78% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Deepwater Drilling II L.L.C. Delaware 40% Conoco Development II Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Deepwater Drilling L.L.C. Delaware 50% Conoco Development Company
-----------------------------------------------------------------------------------------------------------------------------------
Dixie Pipeline Company Delaware 8.3833% Conoco Pipe Line Company
-----------------------------------------------------------------------------------------------------------------------------------
Douglas Oil Company of California California 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Douglas Stations, Inc. Delaware 100% Douglas Oil Company of California
-----------------------------------------------------------------------------------------------------------------------------------
Du Pont E&P No. 1 B.V. Netherlands 100% Conoco Resources Holding B.V.
-----------------------------------------------------------------------------------------------------------------------------------
Du Pont E&P No. 12 B.V. Netherlands 100% Conoco Resources Holding B.V.
-----------------------------------------------------------------------------------------------------------------------------------
Du Pont E&P No. 13 B.V. Netherlands 100% Conoco Resources Holding B.V.
-----------------------------------------------------------------------------------------------------------------------------------
Dubai Marketing Company Ltd. Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Dubai Petroleum Company Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
DuPont Conoco Energy Services Company Delaware 100% Conoco Petroleum Operations Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Enertech S.A. Belgium 100% Societe Europeenne Des Carburants (SECA)
-----------------------------------------------------------------------------------------------------------------------------------
Excel Paralubes Delaware 50% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Excel Paralubes Funding Corporation Delaware 100% Excel Paralubes
-----------------------------------------------------------------------------------------------------------------------------------
Explorer Pipeline Company Delaware 7.71% Conoco Pipe Line Company
-----------------------------------------------------------------------------------------------------------------------------------
F.P.S.O. Development Ltd. Bermuda 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Fas-Gas Retail Services Co. of Texas Texas 49% Kayo Oil Company
-----------------------------------------------------------------------------------------------------------------------------------
Frontier Deepwater Drilling Inc. Delaware 100% Conoco Inc. (formerly Conoco Energy Company)
-----------------------------------------------------------------------------------------------------------------------------------
GKG Mineraloelhandel GmbH & Co. KG Germany 50% Conoco Mineraloel GmbH
-----------------------------------------------------------------------------------------------------------------------------------
GKG Mineraloelhandel Handel
-----------------------------------------------------------------------------------------------------------------------------------
Verwaltungsgesellschaft mbH Germany 50% Conoco Mineraloel GmbH
-----------------------------------------------------------------------------------------------------------------------------------
Glen Petroleum Inc. Delaware 100% Conoco (U.K.) Limited
-----------------------------------------------------------------------------------------------------------------------------------
Glen Petroleum Limited England 100% Glen Petroleum Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Gulf Coast Fractionators Texas 22.5% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Heartland Pipeline Company Delaware 50% Conoco Pipe Line Company
-----------------------------------------------------------------------------------------------------------------------------------
Horizon Energy Marketing, LLC Louisiana 50% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Humber LPG Terminal Limited England 40% Conoco Limited
-----------------------------------------------------------------------------------------------------------------------------------
Humber Oil Terminals Trustee Limited England 33.33% Conoco Limited
-----------------------------------------------------------------------------------------------------------------------------------
Hydroserve Westlake, L.L.C. Delaware 50% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Ingleside Cogeneration Limited Partnership Delaware 49% Conoco Global Power Assets, Inc.
1% Conoco Global Power Developments Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Interconnector (UK) Ltd. England 10% Conoco (U.K.) Limited
-----------------------------------------------------------------------------------------------------------------------------------
Interkraft Handel GmbH Germany 100% Conoco Mineraloel GmbH
-----------------------------------------------------------------------------------------------------------------------------------
|
-----------------------------------------------------------------------------------------------------------------------------------
INCORPORATION OWNERSHIP
COMPANY NAME LOCATION PERCENTAGE DIRECT PARENT/EQUITY OWNER
-----------------------------------------------------------------------------------------------------------------------------------
Isidan Limited England 100% Conoco (U.K.) Limited
-----------------------------------------------------------------------------------------------------------------------------------
Jet Petroleum Limited England 100% Conoco Limited
-----------------------------------------------------------------------------------------------------------------------------------
Jet Tankstellen-Betriebs GmbH Germany 100% Conoco Mineraloel GmbH
-----------------------------------------------------------------------------------------------------------------------------------
Jet/Jiffy Shops Limited Thailand 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Jiffy Limited England 100% Conoco (U.K.) Limited
-----------------------------------------------------------------------------------------------------------------------------------
Jolliet Pipe Line Company Delaware 38% Conoco Pipe Line Company
-----------------------------------------------------------------------------------------------------------------------------------
Jupiter Chemicals, Inc. (dissolved 2nd Qtr. 1999) Delaware 100% Jupiter Holdings, Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Jupiter Holdings, Inc. (dissolved 4th Qtr. 1999) Delaware 50% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Jupiter Sulphur LLC Delaware 50% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
K.C. Asphalt, L.L.C. Colorado 50% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Kayo Oil Company Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Lake Charles Pipe Line Company Delaware 50% Conoco Pipe Line Company
-----------------------------------------------------------------------------------------------------------------------------------
Lobo Pipeline Company Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Longhorn Pipeline Company Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Louisiana Gas System Inc. Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Malaysian Refining Company Sdn. Bhd. Malaysia 40% Conoco Asia Ltd.
-----------------------------------------------------------------------------------------------------------------------------------
Maple Leaf AS Norway 75% Clearwater Ltd.
-----------------------------------------------------------------------------------------------------------------------------------
Merilectrica I S.A. Colombia 35.625% Conoco Global Energy Company
-----------------------------------------------------------------------------------------------------------------------------------
Merilectrica I S.A. & Cia. S.C.A. E.S.P. Colombia 35.269% Conoco Global Energy Company
1% Merilectrica I S.A.
-----------------------------------------------------------------------------------------------------------------------------------
Mineraloelraffinerrie Oberrhein GmbH Germany 18.75% Oberrheinische Mineraloelwerke GmbH
-----------------------------------------------------------------------------------------------------------------------------------
Mineraloelraffinerrie Oberrhein Verwaltungs GmbH Germany 18.75% Conoco Continental Holding GmbH
-----------------------------------------------------------------------------------------------------------------------------------
Nelson Industrial Steam Company Texas 36.1% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Norrkoeping Depaa AB Sweden 50% Conoco Jet Nordic AB
-----------------------------------------------------------------------------------------------------------------------------------
Norske Conoco A/S Norway 100% Conoco Norway Inc. (Norway Branch)
-----------------------------------------------------------------------------------------------------------------------------------
Oberrheinische Mineraloelwerke GmbH Germany 25% Conoco Continental Holding GmbH
-----------------------------------------------------------------------------------------------------------------------------------
OK Coop AG Switzerland 49% Conoco A.G.
-----------------------------------------------------------------------------------------------------------------------------------
Penreco Texas 46% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Pentland Aviation Fuelling Services Limited England 50% Conoco Limited
-----------------------------------------------------------------------------------------------------------------------------------
Petco Enterprises, Ltd. Japan 51% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Petrex S.A. Belgium 100% Societe Europeenne Des Carburants (SECA)
-----------------------------------------------------------------------------------------------------------------------------------
Petrocokes, Ltd. Japan 20% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Petroleum Storage Ltd. England 50% Conoco Limited
-----------------------------------------------------------------------------------------------------------------------------------
Petrozuata C.A. Venezuela 50.1% Conoco Orinoco Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Phoenix Park Gas Processors, Ltd. Trinidad 39% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Pioneer Investments Corp. Delaware 55% Conoco Pipe Line Company
-----------------------------------------------------------------------------------------------------------------------------------
Pioneer Pipe Line Company Delaware 100% Pioneer Investments Corp.
-----------------------------------------------------------------------------------------------------------------------------------
Pocahontas Gas Partnership Virginia 50% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Polar Lights Company Russia 50% Conoco Timan-Pechora Ltd.
-----------------------------------------------------------------------------------------------------------------------------------
Projet Malaysia Sdn. Bhd. Malaysia 98% Conoco Jet (Malaysia) Sdn. Bhd.
2% Sime Conoco Energy Sdn. Bhd.
-----------------------------------------------------------------------------------------------------------------------------------
|
-----------------------------------------------------------------------------------------------------------------------------------
INCORPORATION OWNERSHIP
COMPANY NAME LOCATION PERCENTAGE DIRECT PARENT/EQUITY OWNER
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
Razorback Pipeline Company Delaware 40% Conoco Pipe Line Company
-----------------------------------------------------------------------------------------------------------------------------------
Ronany Limited Northern Ireland 100% Conoco Limited
-----------------------------------------------------------------------------------------------------------------------------------
Salt Lake Terminal Co. Delaware 100% Pioneer Investments Corp.
-----------------------------------------------------------------------------------------------------------------------------------
San Jacinto Eastern Corporation Delaware 100% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
San Jacinto Service Company Delaware 100% San Jacinto Eastern Corporation
-----------------------------------------------------------------------------------------------------------------------------------
Sentinel Concessions, Inc. Texas 49% Kayo Oil Company
-----------------------------------------------------------------------------------------------------------------------------------
Sentinel Transportation, LLC Delaware 40% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Siam Conoco Land Ltd. Thailand 100% Siam Conoco Terminal Co., Ltd.
-----------------------------------------------------------------------------------------------------------------------------------
Siam Conoco Terminal Co., Ltd. Thailand 30% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Sime Conoco Energy Sdn. Bhd. Malaysia 49% Conoco Jet (Malaysia) Sdn. Bhd.
-----------------------------------------------------------------------------------------------------------------------------------
Smartshop NV (formerly S.E.C.Q.) Belgium 100% Societe Europeenne Des Carburants (SECA)
-----------------------------------------------------------------------------------------------------------------------------------
Societe Europeenne Des Carburants (SECA) Belgium 100% Conoco Continental Holding GmbH
-----------------------------------------------------------------------------------------------------------------------------------
SRW Cogeneration Limited Partnership Delaware 99% Conoco Global Power Assets Sabine Inc.
1% Conoco Global Power Development - Sabine Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Statoil Methanol A/S Norway 18.125% Conoco Norway Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Turcas Petrol A.S. (formerly Tabas Petrolculuk A.S.) Turkey 27.64% Conoco Petroleum Operations Inc.
-----------------------------------------------------------------------------------------------------------------------------------
TCH LLC Utah 25% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
The Standard Shale Products Company Colorado 99.318% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Tjeldbergodden Luftgassfabrikk DA Norway 11.88% Conoco Norway Inc.
-----------------------------------------------------------------------------------------------------------------------------------
TLC International LDC Cayman Islands 35.625% Conoco Global Energy Company
-----------------------------------------------------------------------------------------------------------------------------------
Ursa Oil Pipeline Company LLC Delaware 15.96% Conoco Offshore Pipe Line Company
-----------------------------------------------------------------------------------------------------------------------------------
Vanguard Energy Investors L.P. Delaware 10% Conoco Equity Investments Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Venture Coke Company Delaware 50% Conoco Inc. (formerly Continental Oil Company)
-----------------------------------------------------------------------------------------------------------------------------------
Waha Oil Co. of Libya, Inc. Libya 16.6% Continental Oil Company of Libya
-----------------------------------------------------------------------------------------------------------------------------------
Warwickshire Oil Storage Limited England 33.33% Conoco Limited
-----------------------------------------------------------------------------------------------------------------------------------
Wasia Limited England 100% CUKL Holding Limited
-----------------------------------------------------------------------------------------------------------------------------------
World Wide Transport, Inc. Liberia 100% Conoco A.G.
-----------------------------------------------------------------------------------------------------------------------------------
Yellowstone Pipe Line Company Delaware 46% Conoco Pipe Line Company
-----------------------------------------------------------------------------------------------------------------------------------
Zeller & CIE S.A.R.L. France 50% Conoco Mineraloel GmbH
-----------------------------------------------------------------------------------------------------------------------------------
Zuataducto, S.R.L. Venezuela 100% Petrozuata C.A.
-----------------------------------------------------------------------------------------------------------------------------------
|
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-65977, 333-65979, 333-65983, 333-65985, 333-69253, 333-80953, 333-80955, 333-80957, 333-80951, 333-80959) and on Form S-3 (No. 333-88573) of Conoco Inc. of our report dated February 16, 2000 relating to the financial statements, which appears in the Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
March 10, 2000
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears below appoints each of (1) Michael A. Gist, the Corporate Secretary of Conoco Inc., a Delaware corporation (the "Company"), (2) Robert W. Goldman, the Senior Vice President, Finance of the Company and (3) W. David Welch, Controller and Principal Accounting Officer of the Company, and each of them, severally, as such person's true and lawful attorney or attorneys-in-fact and agent or agents, each of whom shall be authorized to act with or without the other, with full power of substitution and resubstitution, for such person and in such person's name, place and stead, in any and all capacities, to execute and file, or cause to be filed, with the Securities and Exchange Commission, any and all amendments to the Company's Annual Report on Form 10-K for the year ended December 31, 1999, and all materials required by the Securities Exchange Act of 1934, as amended, with full power and authority to each of said attorneys-in-fact and agents to do and perform in the name and on behalf of such person, each and every act and thing whatsoever that is necessary, appropriate or advisable in connection with any or all the above-described matters and to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them or their substitutes, may lawfully do or cause to be done by virtue hereof.
/s/ ARCHIE W. DUNHAM February 22, 2000
------------------------------------ -------------------------------
Archie W. Dunham Date
/s/ ROBERT W. GOLDMAN February 22, 2000
------------------------------------ -------------------------------
Robert W. Goldman Date
/s/ RUTH R. HARKIN February 22, 2000
------------------------------------ -------------------------------
Ruth R. Harkin Date
/s/ FRANK A. MCPHERSON February 22, 2000
------------------------------------ -------------------------------
Frank A. Mcpherson Date
/s/ WILLIAM K. REILLY February 22, 2000
------------------------------------ -------------------------------
William K. Reilly Date
/s/ WILLIAM R. RHODES February 22, 2000
------------------------------------ -------------------------------
William R. Rhodes Date
/s/ FRANKLIN A. THOMAS March 6, 2000
------------------------------------ -------------------------------
Franklin A. Thomas Date
/s/ A. R. "TONY" SANCHEZ, JR. February 22, 2000
------------------------------------ -------------------------------
A. R. "Tony" Sanchez, JR. Date
|
| ARTICLE 5 |
| This schedule contains summary financial information extracted from the annual financial statements for the year 1999 and 1998 of Conoco Inc. and consolidated subsidiaries. The schedule is qualified in its entirety by reference to such financial statements. |
| MULTIPLIER: 1,000,000 |
| PERIOD TYPE | 12 MOS | 12 MOS |
| FISCAL YEAR END | DEC 31 1999 | DEC 31 1998 |
| PERIOD START | JAN 01 1999 | JAN 01 1998 |
| PERIOD END | DEC 31 1999 | DEC 31 1998 |
| CASH | 317 | 394 |
| SECURITIES | 0 | 0 |
| RECEIVABLES | 1,735 | 1,191 1 |
| ALLOWANCES | 0 | 0 |
| INVENTORY | 703 | 807 |
| CURRENT ASSETS | 3,068 | 2,770 |
| PP&E | 22,476 | 22,094 |
| DEPRECIATION | 11,241 | 10,681 |
| TOTAL ASSETS | 16,375 | 16,075 |
| CURRENT LIABILITIES | 3,758 | 2,725 |
| BONDS | 4,080 | 4,689 2 |
| PREFERRED MANDATORY | 0 | 0 |
| PREFERRED | 0 | 0 |
| COMMON | 6 | 6 |
| OTHER SE | 4,555 | 4,438 |
| TOTAL LIABILITY AND EQUITY | 16,375 | 16,075 |
| SALES | 27,039 | 22,796 |
| TOTAL REVENUES | 27,309 | 23,168 |
| CGS | 14,781 | 11,751 |
| TOTAL COSTS | 25,781 | 22,275 3 |
| OTHER EXPENSES | 0 | 0 |
| LOSS PROVISION | 0 | 0 |
| INTEREST EXPENSE | 311 | 199 |
| INCOME PRETAX | 1,217 | 694 |
| INCOME TAX | 473 | 244 |
| INCOME CONTINUING | 744 | 450 |
| DISCONTINUED | 0 | 0 |
| EXTRAORDINARY | 0 | 0 |
| CHANGES | 0 | 0 |
| NET INCOME | 744 | 450 |
| EPS BASIC | 1.19 | .95 4 |
| EPS DILUTED | 1.17 | .95 4 |
| 1 | Includes notes receivable related parties |
| 2 | Includes long term borrowings related parties of $4,596 for 1998. |
| 3 | Cost of goods sold, operating expenses; selling, general and administrative expenses; stock option provision; exploration expense; depreciation, depletion and amortization; and taxes other than on income. |
| 4 | Basic earnings per share and diluted earnings per share |
EXHIBIT 99.1
CONSENT OF SOLOMON ASSOCIATES
We hereby consent to the use in the 1999 Form 10-K of Conoco Inc., of our name in reference to ranking of the performance of Conoco's European refineries which appear in such 1999 Form 10-K, to be filed on or about March 15, 2000. We also consent to the reference to us as "an independent benchmarking company."
/s/ M. D. HANNAN President Solomon Associates, Inc. March 3, 2000 |