ITEM 3. LEGAL PROCEEDINGS
In June of 1997, Conoco experienced pipeline spills on its Seminoe pipeline at Banner, Wyoming and Lodge Grass, Montana. In response to these spills, the U.S. Department of Justice advised Conoco in August 2000 that the U.S. Government is contemplating a legal proceeding under the Clean Water Act against Conoco. Governmental monetary sanctions resulting from this matter could be in excess of $100,000.
In June 1998, the United States Environmental Protection Agency (USEPA) and the Louisiana Department of Environmental Quality (LDEQ) conducted a multi-media environmental inspection of Conoco's Lake Charles refinery. The U.S. and the State of Louisiana, in response to the inspection findings, filed an enforcement action under the Clean Water Act and Clean Air Act. The parties have negotiated a settlement requiring Conoco to pay a civil penalty of $240,000.
On August 31, 1998, the LDEQ issued a notice of violation against Conoco for alleged failure to maintain control equipment to control emissions from the sulfur pits at the Lake Charles refinery. Conoco is awaiting final State of Louisiana approval of a settlement for this matter. Under the settlement, Conoco has agreed to pay a civil penalty of $75,000 and complete a supplemental environmental project.
On November 17, 1999, Conoco received a notice of violation from the New Mexico Environmental 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 time frame after the tests were completed. The notice of violation contained a draft penalty calculation of $160,656. Settlement negotiations are ongoing.
In February 2000, Conoco voluntarily disclosed the results of a self-initiated environmental audit of its Ponca City refinery to the Oklahoma Department of Environmental Quality (ODEQ). In response to the audit findings, Conoco and the ODEQ entered into cooperative negotiations to address compliance issues identified by the audit. As a result, Conoco and the ODEQ have entered into a consent order to resolve these issues. The
consent order assessed monetary sanctions against Conoco in the amount of $462,000, $363,000 of which is intended to be satisfied by the timely implementation of a supplemental environmental project.
On March 27, 2000, the Montana Department of Environmental Quality (MDEQ) issued a notice of violation to Conoco for alleged exceedences of Montana's 3-hour SO2 limit at the Billings refinery. On March 5, 2001, the MDEQ reported that it intended to seek a civil penalty in the amount of $2.96 million against Conoco for this violation. At the same time, the MDEQ also reported that Conoco may be allowed to mitigate the penalty by undertaking a project beneficial to the environment.
Between August and November 2000, Conoco voluntarily disclosed the results of self-initiated environmental audits of each of its Ponca City, Denver and Billings refineries to the USEPA and the ODEQ, Colorado Department of Public Health and the Environment (CDPHE) and the MDEQ, respectively. In response to the audit findings, Conoco has entered into cooperative negotiations with each of the USEPA, ODEQ, CDPHE and MDEQ to address compliance issues identified by these audits. These negotiations are ongoing, but are expected to be resolved in separate consent orders. Governmental monetary sanctions resulting from each of these matters could be in excess of $100,000.
The USEPA has advised Conoco that it is contemplating the filing of a civil enforcement action against Conoco for alleged violations of the Federal Clear Air Act at each of Conoco's Billings, Denver, Lake Charles and Ponca City refineries. Governmental monetary sanctions resulting from each of these matters could be in excess of $100,000.
Conoco is subject to various lawsuits and claims involving a variety of matters including, along with other oil companies, actions challenging oil and gas royalty and severance tax payments, actions related to gas measurement and valuation methods, actions related to joint interest billings to operating agreement partners, and claims for damages resulting from leaking underground storage tanks. As a result of the separation agreement with DuPont, Conoco has also assumed responsibility for current and future claims related to certain discontinued chemicals and agricultural chemicals businesses operated by Conoco in the past. In general, the effect on future financial results is not subject to reasonable estimation because considerable uncertainty exists. Conoco believes the ultimate liabilities resulting from such lawsuits and claims may be significant 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 2000 to a vote of security holders through the solicitation of proxies or otherwise.
EXECUTIVE OFFICERS OF THE REGISTRANT
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(1) As of March 12, 2001.
Set forth below is information concerning the current executive officers.
Archie W. Dunham has been Chairman of the Board of Conoco since August 12, 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. Mr. Dunham is also a member of the boards of directors of Louisiana-Pacific Corporation, Phelps Dodge Corporation and Union Pacific 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 a past 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 the Memorial Hermann Healthcare System in Houston and the board of trustees of the Houston Symphony, the George Bush Presidential Library and the Smithsonian Institution. Mr. Dunham is also President and a trustee of the Houston Grand Opera.
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 U.S. and in the U.K., and was formerly Conoco's Vice President, Refining Marketing Europe; Vice President North American 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 and the Houston Music Hall Foundation.
Robert E. McKee III has been an Executive Vice President for Conoco since 1992, and was a Senior Vice President of DuPont until October 27, 1998 with responsibility for worldwide exploration and production. 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 (U.K.) 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 U.S. 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 a past 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 U.S. 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.
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 2,162, and Class B common stock was 6,077 at March 1, 2001.
QUARTERLY COMMON STOCK PRICES AND DIVIDENDS
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.
Dividends were declared on a quarterly basis throughout 2000 and 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, the date of Conoco's initial public offering, to December 31, 1998, and is equivalent to $.19 per share for a full quarter. Conoco declared a first quarter cash dividend on January 22, 2001, of $.19 per share on each outstanding share of Class A common stock and Class B common stock, payable March 10, 2001, to shareholders of record as of February 10, 2001.
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 as the Board of Directors deems relevant.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
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(1) Includes petroleum excise taxes of $6,774, $6,492, $5,801, $5,349 and $5,461 for 2000, 1999, 1998, 1997 and 1996, respectively.
(2) Includes a non-cash stock option provision of $236 for 1998.
(3) Includes cash exploration overhead and operating expense, dry hole costs and impairments of unproved properties.
(4) Includes after-tax exchange gains (losses) of $38, $6, $32, $21 and $(7) for 2000, 1999, 1998, 1997 and 1996, 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.
ITEM 7.
ITEM 7. 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 with certainty. Accordingly, our actual outcomes and results may differ materially from what we have expressed or forecasted in the forward-looking statements. Any differences could result from a variety of factors, including the following:
o fluctuations in crude oil and natural gas prices and refining and marketing margins;
o potential failure or delays in achieving expected reserve or production levels from existing and future oil and gas development projects due to operating hazards, drilling risks and the inherent uncertainties in predicting oil and gas reserves and oil and gas reservoir performance;
o unsuccessful exploratory drilling activities;
o failure of new products and services to achieve market acceptance;
o unexpected cost increases or technical difficulties in constructing or modifying company manufacturing and refining facilities;
o unexpected difficulties in manufacturing, transporting or refining synthetic crude oil;
o ability to meet government regulations;
o potential disruption or interruption of our production facilities due to accidents or political events;
o international monetary conditions and exchange controls;
o liability for remedial actions under environmental regulations;
o liability resulting from litigation;
o general domestic and international economic and political conditions; and
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 consolidated financial statements for 1998 are presented on a carve-out basis prepared from DuPont's historical accounting records, and include the historical operations of both entities owned by Conoco and operations transferred to Conoco by DuPont at the time of the initial public offering. In this context, no direct ownership relationship existed among all the various units comprising Conoco. Accordingly, net cash distribution to owner prior to the initial public offering included funds transferred between Conoco and DuPont for operating needs, cash dividends paid and other equity transactions.
Effective at the time of the initial public offering, Conoco's capital structure was established and the transfer to Conoco of certain subsidiaries previously owned by DuPont was substantially complete, resulting in direct ownership of those subsidiaries. Accordingly, for periods subsequent to the initial public offering, financial information is presented on a consolidated basis.
The consolidated statement of income includes all revenues and costs directly attributable to Conoco. These costs include costs for facilities, functions and services used by Conoco at shared sites and costs for certain functions and services performed by centralized DuPont organizations and directly charged to Conoco based on usage. In addition, services performed by Conoco on DuPont's behalf are directly charged to DuPont. The results of operations also include allocations of DuPont's general corporate expenses through the date of the initial public offering.
Prior to the date of the initial public offering, all charges and allocations of cost for facilities, functions and services performed by DuPont organizations for Conoco are deemed paid by Conoco to DuPont, in cash, in the period in which the cost was recorded in the consolidated financial statements. Allocations of current income taxes receivable or payable are similarly considered remitted, in cash, by or to DuPont in the period the related income taxes were recorded. Subsequent to the initial public offering, such costs are billed directly under transitional service agreements, and income taxes are paid directly to the taxing authorities, or to DuPont, as appropriate.
All of the allocations and estimates in the consolidated financial statements are based on assumptions that management believes are reasonable under the circumstances. However, these allocations and estimates are not necessarily indicative of the costs and expenses that would have resulted if Conoco had been operated as a separate entity for periods prior to the initial public offering.
Conoco has three operating segments -- upstream, downstream and emerging businesses. 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. Emerging businesses operating segment activities include the development of new businesses beyond our traditional operations with the potential to contribute substantially to long-term growth. Conoco has five reporting segments. Four reporting segments reflect the geographic division between the U.S. and international operations for its upstream and downstream businesses. One reporting segment is for emerging businesses. Corporate includes general corporate expenses, financing costs and other non-operating items, and captive insurance operations.
Conoco 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 billion, averaging about $400 million a year, through the disposal of marginal and non-strategic producing properties, while upgrading and redirecting its exploration portfolio and increasing its ownership in large-scale properties. As a result, we have increased production by 23 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 and natural gas prices in 2000 increased substantially from the prices experienced during 1999. West Texas Intermediate crude oil averaged $30.15 per barrel for 2000, an increase of $10.91 from $19.24 per barrel in 1999. In addition, NYMEX natural gas spot prices averaged $3.71 per thousand cubic feet (mcf) in 2000, up $1.44 from $2.27 per mcf in 1999. Conoco generated record-setting results for the year, largely due to these dramatic price increases. Also contributing to the higher earnings for 2000 were healthy refining margins in the U.S. and Europe.
Prices for crude oil, natural gas and refined products also are 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 U.S. government also can expose Conoco's operations to risk. The U.S. 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 U.S. 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 2000 increased $1,222 million to $3,438 million versus $2,216 million in 1999. Cash provided by operations before changes in operating assets and liabilities increased $1,376 million compared to 1999, primarily due to higher crude oil, natural gas and natural gas liquids prices, along with stronger refining margins and higher dividends from equity affiliates. Negative changes to net operating assets and liabilities of $154 million were due to increased inventories and funds required for the recent commencement of a service contract in Syria, partially offset by decreases in accounts receivable and higher taxes payable.
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, partially offset by an increase in accounts receivable.
INVESTING ACTIVITIES
CAPITAL EXPENDITURES AND INVESTMENTS
Total capital expenditures and investments in 2000, including investments in affiliates and acquisitions, were $2,796 million, an increase of 56 percent versus 1999 capital expenditures and investments of $1,787 million. The increase was primarily due to significant acquisitions in the U.K. and U.S., as well as increased capital spending in Indonesia, Vietnam, the Caspian Sea and the Gulf of Mexico. During 2000, 77 percent of total capital expenditures and investments were upstream-related, with a majority devoted to the acquisition of producing acreage in the North Sea, gas processing plants in Canada and the U.S. and in our Petrozuata joint venture in Venezuela. Worldwide, approximately $204 million was spent on exploratory drilling and leasing. The increase in 2000 downstream capital expenditures and investments primarily resulted from the upgrade to our Lake Charles refinery to enable it to process Petrozuata synthetic crude. Emerging businesses capital expenditures and investments were essentially unchanged versus 1999, as our initial capital expenditures and investments in our carbon fibers business were offset by a decrease in capital spending in our power business. The increase in corporate capital expenditures and investments was primarily due to investments in several e-commerce initiatives and computer hardware and software costs.
Total capital expenditures and investments in 1999, including investments in affiliates and acquisitions, were $1,787 million, a decrease of 29 percent versus 1998 capital expenditures and 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 expenditures and investments were upstream-related, 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 and our Petrozuata joint venture, as well as continued development of various fields in the U.K. and the Norwegian sectors of the North Sea. Worldwide, approximately $156 million was spent on exploratory drilling and leasing. The reduction in 1999 downstream capital expenditures and investments primarily resulted from the late 1998 completion of the Melaka refinery, a joint venture with Petronas and Statoil, in Malaysia. The increase in emerging businesses capital expenditures and investments was primarily due to project costs associated with construction of power-generating facilities. Corporate capital expenditures and investments decreased due to the absence of software costs incurred in 1998.
In 2001, Conoco expects its capital expenditures and investments, including investments in affiliates and acquisitions, to be about $2,400 million. We expect about $1,800 million will be spent on upstream projects for worldwide exploration, production and natural gas activities, while about $400 million will be spent on downstream projects and about $200 million on emerging businesses projects.
Upstream
Upstream capital expenditures and investments totaled $2,153 million in 2000. The increase of $901 million, or approximately 72 percent, compared to $1,252 million in 1999, was primarily the result of the acquisitions of Saga U.K. Ltd. from Norske Hydro ASA of Norway and gas processing plants in the U.S. Additionally, we increased our capital spending in the Caspian Sea, Indonesia and the U.S.
Upstream capital expenditures and 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.
United States
U.S. capital expenditures and investments were $667 million in 2000, an increase of $254 million, or 62 percent, compared to 1999 capital expenditures and investments of $413 million. Expenditures during 2000 were focused on continued development of the Lobo field in South Texas and the San Juan field in New Mexico, as well as the acquisition of gas processing plants in the U.S. Expenditures were also centered on the deepwater Gulf of Mexico with the drilling of the Princess discovery near the Ursa field and the drilling of an appraisal well in the Magnolia discovery to confirm the field's commerciality.
U.S. capital expenditures and investments were $413 million in 1999, a decrease of $375 million, or 48 percent, compared to 1998 capital expenditures and 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.
International
International capital expenditures and investments were $1,486 million in 2000, an increase of $647 million, or 77 percent, compared to $839 million in 1999. The 2000 expenditures were focused on the acquisition of Saga U.K. Ltd. and natural gas processing and gathering assets in Canada, continued developmental spending in the North Sea, exploratory drilling in the North Sea and Indonesia, development of Petrozuata and construction of a natural gas pipeline system offshore Indonesia.
International capital expenditures and 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 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.
During 2000, Conoco agreed to acquire an equity interest in the Grane oil field located in the Norwegian North Sea. We will purchase a 6.4 percent interest from Statoil for $60 million and expect to invest an
additional $120 million in development costs over the next two to three years. The field, which is expected to produce for 30 years, is planned to begin production in 2003, and at plateau, is expected to add more than 13,000 barrels of oil per day to Conoco's Norwegian production. The acquisition is expected to close in early 2001, subject to Norwegian government approval.
Downstream
Downstream capital expenditures and investments for 2000 totaled $545 million, an increase of $83 million, or 18 percent, versus $462 million in 1999, primarily reflecting increased expenditures in the U.S.
For 1999, downstream capital expenditures and investments totaled $462 million, a decrease of $71 million, or 13 percent, versus $533 million in 1998. The difference in 1999 versus 1998 expenditures was primarily attributable to the completion of the Melaka refinery in late 1998.
United States
For 2000, U.S. capital expenditures and investments totaled $344 million, an increase of $130 million, or 61 percent, versus 1999 capital expenditures and investments of $214 million. Expenditures in 2000 were focused on the new units being installed at our Lake Charles, Louisiana, refinery to process acidic synthetic crude from Petrozuata and expansion of pipeline assets in the Rocky Mountain region, as well as our ongoing refining and marketing operations.
For 1999, U.S. capital expenditures and investments totaled $214 million, an increase of $13 million, or 6 percent, versus 1998 capital expenditures and 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.
International
Conoco made international capital expenditures and investments of $201 million during 2000, a decrease of $47 million, or 19 percent, from the $248 million spent in 1999. Expenditures in 2000 were focused on supporting our refining operations, including upgrades to meet future clean fuels specifications in Europe, as well as growth in selected retail markets.
Conoco made international capital expenditures and 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 in Malaysia and the Humber refinery in the U.K.
In February 2001, Conoco and Petronas announced they had signed a memorandum of understanding with Statoil to acquire the Norwegian state oil company's 15 percent share of the Melaka refinery. Conoco and Petronas expect the Share Purchase Agreement to be signed by the end of March 2001.
Emerging Businesses
During 2000, emerging businesses capital expenditures and investments totaled $72 million, compared to $69 million in 1999. Investments in 2000 were focused on the construction of the 8 million-pound-per-year carbon fibers manufacturing plant in Ponca City, Oklahoma. Construction began during 2000 and mechanical completion of the plant is expected late in 2001. There was an offsetting decrease in the capital expenditures associated with our power business.
During 1999, emerging businesses capital expenditures and investments totaled $69 million, an increase of $68 million from 1998 capital expenditures and investments of $1 million, primarily related to project costs associated with the construction of power-generating facilities.
Corporate
During 2000, corporate capital expenditures and investments totaled $26 million, an increase of $22 million from 1999 capital expenditures and investments of $4 million. The increased expenditures during 2000 were
primarily related to investments in e-commerce initiatives and technology-related investments in hardware and software.
During 1999, corporate capital expenditures and investments totaled $4 million, a decrease of $13 million, or 76 percent, from 1998 capital expenditures and investments of $17 million. During 1998, the company invested $17 million for computer software.
PROCEEDS FROM SALES OF ASSETS AND SUBSIDIARIES
Conoco's 2000 disposition proceeds were $222 million, up $60 million, or 37 percent, from $162 million in 1999, due to a greater number of large asset dispositions in 2000, including the sale of gas processing plants in Oklahoma, retail outlets in the Dallas-Fort Worth area and Gulf Coast region, and our interest in a pipeline in the southeastern U.S.
Conoco's 1999 disposition proceeds were $162 million, down $559 million, or 78 percent, from $721 million in 1998, due to a smaller number of large asset dispositions in 1999. There were no significant proceeds from any one asset sale in 1999.
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 and 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 U.S. commercial paper program that is fully supported by an unsecured $2,000 million revolving credit facility with a syndicate of U.S. and international banks. The U.S. 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.
During 2000, Conoco initiated a euro 500 million European commercial paper program, which gives Conoco the ability to issue commercial paper in the European market at any time with maturities not to exceed 183 days. The program is an alternative to the use of U.S. commercial paper and is not expected to increase Conoco's current debt level. This program will complement the $2,000 million U.S. commercial paper program and is fully supported by our existing revolving credit facility. At December 31, 2000, there was $187 million of commercial paper outstanding, with a weighted-average interest rate of 6.8 percent, of which $85 million was denominated in foreign currencies. At December 31, 1999, U.S. commercial paper outstanding was $628 million with a weighted-average interest rate of 6.6 percent.
In 1996, various upstream subsidiaries contributed assets to Conoco Oil & Gas Associates L.P. for a general partnership interest of 67 percent. Vanguard Energy Investors L.P. then purchased the remaining 33 percent as a limited partner. In December 1999, Conoco elected to retire Vanguard's $302 million minority interest and terminate the Conoco Oil & Gas Associates partnership.
In November 1999, Conoco and Armadillo Investors L.L.C. formed Conoco Gas Holdings L.L.C. Conoco contributed certain domestic upstream assets for a 75 percent common member interest and cash, and Armadillo contributed cash for a 25 percent preferred member interest. 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.
The net effect of these 1999 transactions resulted in a minority interest balance of $335 million at December 31, 1999. Minority interest at December 31, 2000 was $337 million.
In early 2001, Conoco's management approved plans to acquire the minority interest in Conoco Gas Holdings L.L.C. from Armadillo L.L.C. This acquisition is expected to result in a reduction of $185 million in minority interest with an increase in long-term debt of $171 million and a reduction in cash of $14 million.
Total Conoco debt was $4,394 million at December 31, 2000, down $349 million versus $4,743 million at year-end 1999. The total debt-to-capitalization ratio was 43.8 percent at December 31, 2000, and 51.0 percent at December 31, 1999.
In February 2001, Conoco announced a new $1,000 million stock buyback program over a three-year period. Conoco Class A and B share repurchases will be made from time to time in the open market or possibly, under certain circumstances, through private transactions, as our financial condition and market conditions warrant. The new program replaces an existing buyback program intended solely to offset the dilution associated with employee compensation plans.
RESULTS OF OPERATIONS
CONSOLIDATED RESULTS
SPECIAL ITEMS
Net income includes the following non-recurring items (special items) on an after-tax basis:
Special items in 2000 included a $27 million gain from the sale of U.S. natural gas processing assets. This asset sale was part of Conoco's effort to move away from a midstream business of scattered assets in mature areas toward a more profitable business built on centralized, large-scale gas processing systems.
The following charges also were recorded during the year:
o property impairments of $29 million;
o $24 million write-down of inventories to market value;
o $16 million from U.S. downstream litigation charges; and
o $4 million from discontinued businesses.
The after-tax property impairments were as a result of our write-off of $26 million related to our 37.5 percent interest in a Colombian power venture, due to a combination of continuing weak demand and unsatisfactory rate regulations, and a $3 million write-off of U.S. refinery assets. The $24 million write-down of inventories at year-end was the result of significant declines in crude oil and finished product prices during December. The write-down occurred at our Melaka refinery joint venture as Dubai crude oil prices fell from $33 per barrel to $23 per barrel during December. The $4 million loss was for settlement costs associated with the separation agreement from DuPont related to a discontinued business.
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 included $107 million in gains from several unrelated asset sales. The gains consisted 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 part of Conoco's ongoing strategic portfolio management program designed to improve profitability by disposing of marginal properties and concentrating operations in 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;
o other losses of $42 million for litigation settlements; and
o a one-time stock option provision of $183 million.
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 U.S. upstream properties and a $6 million after-tax write-down of an international upstream property.
The $63 million write-down of inventories 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.
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.
Net income before special items (earnings before special items) totaled $1,948 million in 2000, $782 million in 1999 and $721 million in 1998.
2000 VERSUS 1999
Conoco's 2000 net income of $1,902 million was up 156 percent from $744 million in 1999. Earnings before special items of $1,948 million in 2000 were 149 percent higher than the $782 million in 1999. The increase in earnings before special items was primarily the result of higher crude oil, natural gas and natural gas liquids prices, increased volumes, lower dry hole costs and stronger refining margins. Partly offsetting these improvements were weaker co-product margins, lower European marketing earnings and higher operating costs associated with increased volumes and higher energy costs.
Sales and other operating revenues of $38,737 million in 2000 increased 43 percent compared to $27,039 million in 1999, primarily driven by higher crude oil and natural gas prices and improved refined product prices and volumes. Downstream sales and other operating revenues were $29,536 million, up 38 percent compared to $21,455 million in 1999. Crude oil and refined product buy/sell and natural gas and electric power resale activities in 2000 totaled $9,044 million, up 71 percent compared to $5,299 million in 1999. The increase was primarily due to higher crude oil, natural gas and refined product prices, slightly offset by reduced power trading activities.
Income from equity affiliates for 2000 was $277 million, up $127 million, or 85 percent, compared to $150 million in 1999. Additional crude oil volumes from our Petrozuata joint venture and higher crude oil and natural gas prices primarily drove this increase.
Other income for 2000 was $273 million, up 128 percent from $120 million in 1999, primarily due to the gain on the sale of natural gas processing assets in the U.S., revenue from our Syrian service contract, foreign exchange gains and additional interest income. These improvements were partly offset by the $26 million write-off of our 37.5 percent interest in a Colombian power venture.
Cost of goods sold totaled $23,921 million in 2000, an increase of 62 percent compared to $14,781 million in 1999. The increase is primarily attributable to higher feedstock costs associated with higher crude oil prices.
Operating expenses were $2,215 million in 2000, up 8 percent from the $2,060 million for 1999, primarily due to higher energy costs and higher overall compensation charges due to variable compensation based on higher earnings in 2000.
Selling, general and administrative expenses for 2000 amounted to $794 million, down 2 percent compared to $809 million in 1999.
During 2000, exploration expenses totaled $279 million, an increase of $9 million, or 3 percent, compared to $270 million in 1999. The higher expenses were primarily driven by deepwater Gulf of Mexico seismic purchases, partially offset by lower dry hole costs.
Depreciation, depletion and amortization (DD&A) for 2000 totaled $1,301 million, an increase of $108 million, or 9 percent, compared to $1,193 million in 1999 due to higher production volumes and the write-down of a non-operating natural gas processing plant.
Provision for income taxes for 2000 was $1,556 million, an increase of 229 percent compared to $473 million for 1999. This increase was primarily the result of higher pretax income in 2000. The effective tax rate in 2000 was approximately 45 percent versus 39 percent in 1999. The higher effective tax rate was due to a greater portion of 2000 earnings being generated by operations in countries with higher tax rates and the reduced impact of U.S. alternative fuels tax credits on higher pretax income in 2000.
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 emerging businesses 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.
Income from equity affiliates for 1999 was $150 million, up $128 million compared to $22 million in 1998. Earnings improvements associated with increased crude oil volumes and higher crude oil prices from our Petrozuata and Polar Lights joint ventures primarily drove this increase.
Other income for 1999 was $120 million, down 66 percent from $350 million in 1998, primarily due to lower gains on the sale of assets and reduced interest income.
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 the 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 a higher exploration success rate, also resulted in lower dry hole costs.
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.
UPSTREAM SEGMENT RESULTS
The following tables set forth for Conoco (including equity affiliates), Conoco (excluding equity affiliates) and its equity affiliates, the 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, 2000. Average sales prices exclude proceeds from sales of interests in oil and gas properties.
- ---------- (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.
2000 VERSUS 1999
Upstream after-tax operating income was $1,867 million in 2000, up 118 percent from $856 million in 1999, principally due to higher crude oil, natural gas and natural gas liquids prices, increased U.S. petroleum liquids production, increased international natural gas production and lower dry hole costs. These improvements were partly offset by a drop in U.S. natural gas volumes due to the disposition of our Grand Isle
assets and natural field decline. Upstream earnings before special items were $1,840 million in 2000, an increase of 115 percent from $856 million in 1999.
Including equity affiliates, Conoco's worldwide net realized crude oil price was $26.08 per barrel for 2000, an improvement of $8.99 per barrel, or 53 percent, versus $17.09 per barrel for 1999, primarily driven by strong demand, as well as by members of OPEC adhering to production quotas implemented in early 1999. Worldwide net realized natural gas prices averaged $3.07 per mcf for 2000, compared to $2.12 per mcf for 1999, an improvement of 45 percent. U.S. natural gas prices increased from $1.99 per mcf in 1999 to $3.42 per mcf in 2000, up 72 percent, while international natural gas prices averaged $2.75 per mcf in 2000, up $.48 from $2.27 per mcf in 1999. The increase in U.S. gas prices was largely due to increased demand during an extended and severe winter season. Worldwide petroleum liquids production in 2000, including Conoco's share from its equity affiliates, was 370,000 barrels per day versus 359,000 barrels per day in 1999, a 3 percent increase. Conoco's 2000 worldwide natural gas production, including its share from equity affiliates, was up 3 percent to 1,705 million cubic feet per day from 1999 production of 1,660 million cubic feet per day. Conoco's total net hydrocarbon production, including its share from equity affiliates, was 654,000 BOE per day, an increase of 3 percent over 1999.
U.S. upstream earnings before special items totaled $692 million in 2000, a 115 percent increase from $322 million in 1999. The increase was largely due to higher crude oil, natural gas and natural gas liquids prices and increased petroleum liquids production. These improvements were partly offset by higher exploration expenses, higher DD&A associated with field mix and lower natural gas production. U.S. petroleum liquids production, including Conoco's share from its equity affiliates, was up 6,000 barrels per day to 80,000 barrels per day, as a result of additional volumes from the Ursa field, partially offset by the disposition of our Grand Isle assets and natural field decline. U.S. natural gas production, including Conoco's share from its equity affiliates, was 814 million cubic feet per day, 66 million less than in 1999, due primarily to the disposition of our Grand Isle assets and natural field decline. U.S. production costs were $4.27 per BOE, up $.60 per BOE, compared to $3.67 per BOE in 1999, due to an increase in price-driven production taxes.
International upstream earnings before special items were $1,148 million, an improvement of 115 percent, from $534 million in 1999. This was due primarily to higher crude oil, natural gas and natural gas liquids prices; improved earnings from equity affiliates; lower dry hole costs; and increased natural gas volumes. These improvements were partly offset by lower petroleum liquids production and higher DD&A associated with field mix. International petroleum liquids production, including our share from equity affiliates, increased 2 percent, or 5,000 barrels per day, to 290,000 barrels per day in 2000. The increase is primarily attributable to higher production in Norway and Venezuela, and the acquisition of Saga U.K. Ltd. This increase was partly offset by downtime at the U.K. Banff field and natural decline in other U.K. fields. In 2000, the 891 million cubic feet per day of international natural gas production, including our share from equity affiliates, was up 14 percent, or 111 million cubic feet per day, over 1999, due primarily to our acquisitions in Canada and our Saga acquisition in the U.K., and higher production from the Britannia, Vampire and V-fields in the North Sea. International production costs were $4.06 per BOE, down 4 percent from $4.24 per BOE in 1999, due to higher production volumes in Norway and the U.K.
1999 VERSUS 1998
Upstream after-tax operating income was $856 million in 1999, up 69 percent from $506 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 $856 million in 1999, an increase of 73 percent from $495 million in 1998.
Including equity affiliates, Conoco's worldwide net realized crude oil price was $17.09 per barrel for 1999, an improvement of $4.95 per barrel, or 41 percent, versus $12.14 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 mcf for 1999, compared to $2.24 per mcf for 1998, a reduction of 5 percent. U.S. natural gas prices increased slightly from $1.97 per mcf to $1.99 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 from 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 $322 million in 1999, a 36 percent increase from $237 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, including Conoco's share from its equity affiliates, 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, including Conoco's share from its equity affiliates, 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 $3.67 per BOE, down $.09 per BOE, compared to $3.76 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, including Conoco's share from its equity affiliates, 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 at Petrozuata, and was partly offset by lower-cost recovery volumes in Indonesia. In 1999, the 780 million cubic feet per day of international natural gas production, including Conoco's share from its equity affiliates, 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 $4.24 per BOE, down 4 percent from $4.43 per BOE in 1998, due to higher production volumes at our Petrozuata joint venture.
DOWNSTREAM SEGMENT RESULTS
2000 VERSUS 1999
Downstream after-tax operating income was $412 million in 2000, up 66 percent compared to $248 million in 1999. Downstream earnings before special items totaled $455 million in 2000, an increase of 71 percent from $266 million in 1999.
In 2000, U.S. downstream earnings before special items totaled $201 million, which was $64 million, or 47 percent, higher than $137 million in 1999. The increase was attributable to significantly improved refining margins, offset partly by weaker margins for co-products, such as petroleum coke and asphalt, lower marketing margins and reduced earnings in our lubricants and specialty products business, as a result of higher feedstock
costs. Additionally, earnings were reduced due to higher operating costs, including energy and variable compensation charges.
International downstream earnings before special items were $254 million in 2000, an increase of 97 percent from $129 million in 1999, reflecting stronger refinery margins, partly offset by weaker co-product margins as a result of higher crude oil costs and lower European marketing earnings.
Conoco's refineries operated at 93 percent capacity in 2000 versus 96 percent in 1999. The decrease is primarily due to downtime in connection with the major modifications at our Lake Charles refinery to enable it to process Petrozuata synthetic crude.
1999 VERSUS 1998
Downstream after-tax operating income was $248 million in 1999, down 16 percent compared to $297 million in 1998. Downstream earnings before special items totaled $266 million in 1999, a decline of 30 percent from $382 million in 1998.
In 1999, U.S. downstream earnings before special items totaled $137 million, $77 million, or 36 percent, lower than $214 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.
Excluding the Melaka refinery, which came online in August of 1998, Conoco's refineries operated at 98 percent capacity in 1999 versus 99 percent in 1998. Including the Melaka refinery, Conoco's refineries operated at 96 percent capacity in 1999.
EMERGING BUSINESSES SEGMENT RESULTS
2000 VERSUS 1999
Emerging businesses after-tax operating losses were $69 million in 2000, an impairment of $34 million from losses of $35 million in 1999, primarily resulting from the $26 million write-off of Conoco's 37.5 percent interest in a Colombian power venture, and from higher operating expenses required to grow these new businesses. Emerging businesses operating losses before special items for 2000 were $43 million, up $8 million from the $35 million loss in 1999.
1999 VERSUS 1998
Emerging businesses after-tax operating losses were $35 million in 1999, essentially unchanged as compared to losses of $31 million in 1998. There were no special items for 1999 and 1998 in emerging businesses.
CORPORATE SEGMENT RESULTS
2000 VERSUS 1999
Corporate after-tax losses were $104 million in 2000, an impairment of $6 million from losses of $98 million in 1999. Corporate losses before special items for 2000 were $100 million, an impairment of $22 million from $78 million in 1999, reflecting larger advertising and compensation costs and an increase in other administrative costs associated with becoming an independent company.
1999 VERSUS 1998
Corporate after-tax losses were $98 million in 1999, an improvement of $152 million from losses of $250 million in 1998, primarily resulting from the recording in 1998 of the $183 million one-time, after-tax, non-cash stock option provision. Corporate losses before special items for 1999 were $78 million, an impairment of $25 million from $53 million in 1998, due to increased administrative costs associated with becoming an independent company.
INTEREST AND OTHER NON-OPERATING EXPENSES NET OF TAX
2000 VERSUS 1999
Interest and other non-operating expenses of $204 million for 2000 were down $23 million, or 10 percent, versus $227 million in 1999, primarily the result of foreign currency exchange gains and higher interest income due to higher average cash balances as a result of increased crude oil and natural gas prices. These benefits were partially offset by higher interest expense on debt due to higher interest rates.
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. Year-end 1999 results do not include comparable gains.
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 II (MACT II) 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 our financial condition, results of operations or liquidity.
Estimated pretax environmental expenses charged to current operations totaled about $165 million in 2000, compared to approximately $127 million in 1999 and $131 million in 1998. 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 78 percent of total annual environmental expenses in 2000 resulted from our U.S. operations.
Capital expenditures for environmental control facilities totaled approximately $115 million in 2000, compared to about $81 million in 1999 and $53 million in 1998. The 2000 increase is primarily attributable to a capital spending increase of $15 million in European downstream operations to comply with regulations requiring cleaner-burning fuels and $11 million largely associated with the construction of a new acidic crude unit installed at our Lake Charles refinery. Conoco estimates that capital expenditures will be about $101 million in 2001, including about $28 million for complying with European clean fuel 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. We are positioning ourselves to be able to supply the low-sulfur gasoline as mandated by the new Tier 2 regulations by the required date of 2004. We currently are assessing the compliance costs that will be incurred. While it is premature to accurately estimate these costs, they are expected to be in line with the estimate of two to three cents per gallon included in the Tier 2 regulations.
Early in 2001, the EPA published final rules controlling the future sulfur content of on-road diesel fuel emissions. Conoco will be assessing the requirements to comply with the new rules, which will take effect in June 2006. It is too early to fully assess the compliance costs that may be incurred to meet the on-road diesel requirements. Similar rules controlling the future sulfur content of off-road diesel fuel emissions have not yet been finalized, and therefore it is too early to estimate the costs to comply with those standards.
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 and foreign laws were approximately $34 million in 2000, $33 million in 1999 and $27 million in 1998. 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 also has 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, 2000, Conoco had been notified of potential liability under CERCLA or comparable state law at about 17 sites around the U.S., with active remediation under way at seven of those sites. Conoco received notice of potential liability at two new sites during 2000, compared with four similar notices in 1999 and one in 1998. Expenditures associated with CERCLA and similar state remediation activities were not significant for Conoco in 2000, 1999 or 1998.
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 $25 million in 2000, $26 million in 1999 and $17 million in 1998. 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, 2000.
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, 2000, Conoco's balance sheet included an accrued liability of $119 million, compared to $109 million at year-end 1999, for future site remediation costs. Approximately 88 percent of Conoco's environmental reserve at December 31, 2000, was attributable to RCRA and similar remediation liabilities (excluding voluntary remediations) and 12 percent to CERCLA liabilities. During 2000, remediation accruals resulted in a $35 million charge, compared to a $6 million charge in 1999 and a $2 million charge in 1998.
TAX MATTERS
In connection with the separation from DuPont and the initial public offering, Conoco and DuPont entered into a tax sharing agreement. Several matters under the tax sharing agreement remain in dispute between Conoco and DuPont and currently are being arbitrated. Conoco currently expects that DuPont's obligations to Conoco could total up to approximately $250 million, plus interest. DuPont also has made claims related to the dispute, to which Conoco has taken exception. The amount of such claims is not material. The effect of the dispute currently is not reflected in Conoco's financial statements, and regardless of the outcome of this dispute, Conoco believes the result will not be material to its financial position or results of operations.
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 was 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.
The euro has been adopted by 12 EMU countries as their local currency. The most recent country was Greece, which joined the EMU and adopted the euro in January 2001. The euro is 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 two months from this date, both legacy currencies and the euro will be legal tender. However, when legacy currencies are offered, any change returned will be in euro. For some countries, the legacy currency will be withdrawn at the end of this two-month period. For other countries, the legacy currency cannot be used for commerce after the two-month period, but can be exchanged for euro at banks until the legacy currency is withdrawn on July 1, 2002.
Conoco 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).
In preparation for the introduction of the euro, Conoco reviewed the impact of the euro's introduction 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 were reviewed for euro compliance, including
assessment of risks from third parties. Euro implementation progress within Conoco is reported periodically to management. Amounts spent to date, and anticipated future expenditures, for Conoco's conversion to the euro are not material.
Because of the staggered introduction of the euro regarding non-cash and cash transactions, Conoco developed 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 had the capability to conduct electronic transfers in euro commencing January 1, 1999. Conoco has an implementation plan to convert its accounting and reporting systems from legacy currency to the euro before January 1, 2002, for those operations that are in EMU countries. This primarily will be accomplished via 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 our retail outlets is under way. The conversion program varies between countries. Examples of the conversion program include:
o conversion tables between EMU legacy currencies and the euro displayed at gasoline stations;
o stickers placed on the gasoline pumps with the equivalent euro price per liter;
o "Euro corners" installed in the shop part of stations with calculators and examples so the customers can practice converting from their EMU legacy currency to the euro; and
o the euro equivalent total printed 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 and modification of systems. Conoco does not 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 its assets and long-term strategy, Conoco would make organizational realignments consistent with furthering the efficiency of operations and taking advantage of synergies created by upgrading its asset portfolio. Associated with the announcement, Conoco recorded an $82 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 made under existing company severance policies, generally based on years of service up to a maximum amount that varied by country.
During 1999, 704 employees left Conoco as part of the implementation of the realignment plans, with related charges against the restructuring reserve of $68 million. In the fourth quarter 1999, estimates of the number of severances were revised due to changes in operational requirements. The original number of estimated severances was reduced by 137 positions, primarily in our upstream business, to 838 positions. The reduction of positions eliminated resulted in a corresponding reduction in the restructuring reserve of $3 million that was recorded in the fourth quarter 1999. Total charges and adjustments to the reserve during 1999 were $71 million, resulting in a December 31, 1999 reserve balance of $11 million.
During the first half of 2000, 79 employees left Conoco as part of the realignment plans. Related charges against the reserve totaled $6 million. The remaining reserve balance of $5 million was reversed into earnings in the second quarter of 2000.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Hedging Activities," which made certain amendments to SFAS No. 133. These Standards, which were required to be adopted by Conoco on January 1, 2001, modify the criteria for identifying derivative instruments and require that derivatives, whether in stand-alone contracts or, in certain cases, those embedded into other contracts, be recorded at their fair value as assets or liabilities on the balance sheet. In addition, the Standards prescribe the accounting for the gain or loss resulting from changes in the fair value of derivatives designated as hedging instruments as follows:
o the gain or loss on a fair value hedge (a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment) is recognized in earnings in the period of change together with the offsetting gain or loss on the hedged item;
o the gain or loss on a cash flow hedge (a hedge of the exposure to variable cash flow of a forecasted transaction) is initially reported as a component of other comprehensive income and subsequently reclassified into earnings when the forecasted transaction affects earnings;
o the gain or loss on a foreign currency hedge (a hedge of an exposure to risk of changes in foreign currency exchange rates) is initially reported as a component of other comprehensive income and subsequently reclassified into earnings when the foreign currency transaction affects earnings; and
o the ineffective portion of the gain or loss on derivatives designated as hedging instruments is recognized in earnings in the period of change.
Conoco adopted SFAS No. 133 and SFAS No. 138 on January 1, 2001. As part of the preparation for adoption of these Standards, Conoco completed an evaluation of its Risk Management Policy and a review of its underlying business activities in order to identify contractual arrangements that qualify as derivative financial instruments pursuant to the requirements of the Standards. Consistent with its Risk Management Policy, which was not changed as a result of this evaluation, Conoco intends to use stand-alone derivative financial instruments to manage its commodity price, foreign currency rate and interest rate risks. In addition, Conoco intends to continue to conduct limited amounts of trading for profit unrelated to its underlying physical business using stand-alone commodity derivative financial instruments. Pursuant to these Standards, such trading for profit contracts will continue to be reported on the balance sheet at fair value consistent with the current treatment afforded such contracts under existing generally accepted accounting principles.
Upon initial adoption of the Standards on January 1, 2001, Conoco recorded a cumulative transition gain of $37 million after-tax into net income, which was mainly the result of certain derivative instruments that did not meet the conditions for hedge accounting pursuant to the Standards, and $1 million into other comprehensive income to reflect the fair value of derivatives as cash flow hedges. In addition, $297 million was recorded as assets and $259 million was recorded as liabilities.
SFAS No. 133 and SFAS No. 138 are complex and subject to a potentially wide range of interpretations in their application. As such, in 1998 the FASB established the Derivative Implementation Group (DIG) task force specifically to consider and to publish official interpretations of issues arising from the implementation of these Standards. The DIG currently is considering several issues, and the potential exists for additional issues to be brought under its review. Therefore, if subsequent DIG interpretations of these Standards are different than Conoco's initial application, it is possible that the impact of Conoco's implementation, as stated above, will be modified.
Conoco's Risk Management Policy is further explained in note 25 to the consolidated financial statements.
ITEM 7A.
ITEM 7A. 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. 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 major financial institutions and other established companies in the petroleum industry. Although Conoco, in the event of nonperformance by these counterparties, is exposed to credit loss, this exposure is managed through credit approvals, limits and monitoring procedures and limits to the period over which unpaid balances are allowed to accumulate. Conoco has not experienced nonperformance by counterparties to these contracts, and no material loss would be expected from any such nonperformance.
COMMODITY PRICE RISK
Conoco enters into energy-related futures, forwards, swaps and options in various markets:
o to balance its physical systems;
o to meet customer needs; and
o to manage its price exposure on anticipated crude oil, natural gas, refined product and electric power transactions.
These instruments provide a natural extension of the underlying cash market and are used to physically acquire a portion of supply requirements. The commodity futures market has greater liquidity and longer trading periods than the cash market, and is one method of managing price risk in the energy business.
Conoco's policy is generally to be exposed to market pricing for commodity purchases and sales. From time to time, management may use derivatives to establish longer-term positions to hedge the price risk for Conoco's equity crude oil and natural gas production, as well as its refinery margins. Specifically, we have taken action to mitigate our exposure to volatile crude oil prices through the purchase of crude oil put options, which reduce our downside risk while maintaining our upside potential.
Conoco does limited amounts of trading for profit unrelated to its underlying physical business. After-tax gain or loss from trading for profit activities has not been material.
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 following table.
- --------- (1) Includes derivative instruments that can be settled in cash or by physical delivery of the commodity.
(2) Includes purchased crude oil put options with a strike price of $22.00 (West Texas Intermediate equivalent) per barrel on 63 million barrels during the period of April through December 2001.
The fair values of the futures contracts are based on quoted market prices obtained from the New York Mercantile Exchange or the International Petroleum Exchange of London. The fair values of swaps and other over-the-counter instruments are estimated based on quoted market prices of comparable contracts and approximate the gain or loss that would have been realized if the contracts had been closed out at 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 oil 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 exposures to foreign currency rate risk. Examples include firm commitments for capital projects, certain local currency tax payments and dividends, and cash returns from net investments in foreign affiliates to be remitted within the coming year.
In conjunction with our European commercial paper program, initiated in 2000, Conoco entered into foreign currency swaps for all non-U.S. dollar notes issued in order to receive the U.S. dollar equivalent proceeds upon note issuance and to lock in the forward foreign currency rate on note maturity. At December 31, 2000, the U.S. dollar equivalent of all non-U.S. dollar notes outstanding was $85 million, all of which were
swapped to the U.S. dollar. The notional amount of the forward portion of these swaps was $81 million, and the estimated fair value was $86 million.
At December 31, 2000, Conoco had open foreign currency exchange derivative instruments of $45 million, related to anticipated foreign currency capital investments, with an estimated fair value of $42 million. Conoco had no open foreign currency exchange derivative instruments at December 31, 1999. A 10 percent adverse change in foreign currency exchange rates would change the fair value of the derivative instruments by $4 million.
INTEREST RATE RISK
Conoco manages any material risk arising from exposure to interest rates by using a combination of financial derivative instruments. This program was developed to manage the fixed and floating interest rate mix of Conoco's total debt portfolio and related overall cost of borrowing.
At December 31, 2000, and at December 31, 1999, Conoco had no significant open interest rate financial derivative instruments.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
REPORT OF MANAGEMENT
Management of Conoco Inc. is responsible for preparing the accompanying consolidated financial statements and other information. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles considered by management to present fairly Conoco's financial position, results of operations and cash flows. The consolidated financial statements include some amounts that are based on management's best estimates and judgments.
Conoco's system of internal controls is designed to provide reasonable assurance as to the protection of assets against loss from unauthorized use or disposition, and the reliability of financial records for preparing financial statements and maintaining accountability for assets. Conoco's business ethics policy is the cornerstone of our internal control system. This policy sets forth management's commitment to conduct business worldwide with the highest ethical standards and in conformity with applicable laws. The business ethics policy also requires that all documents supporting transactions clearly describe their true nature and that all transactions be properly reported and classified in the financial records. An extensive internal audit program monitors Conoco's system of internal controls. Management believes Conoco's system of internal controls meets the objective noted above.
Conoco's independent accountants, PricewaterhouseCoopers LLP, have audited the consolidated financial statements. The purpose of their audit is to independently affirm the fairness of management's reporting of financial position, results of operations and cash flows. Management has made available to PricewaterhouseCoopers LLP all of Conoco's financial records and related data, as well as the minutes of the stockholders' and directors' meetings. To express the opinion set forth in their report, PricewaterhouseCoopers LLP studies and evaluates the internal controls to the extent they deem necessary. The adequacy of Conoco's internal control systems and the accounting principles employed in financial reporting are under the general oversight of the Audit and Compliance Committee of the Board of Directors. This committee also has responsibility for employing the independent accountants, subject to stockholder ratification. All members of this committee are independent of Conoco, in compliance with the rules of the New York Stock Exchange. The independent accountants and the internal auditors have direct access to the Audit and Compliance Committee, and they meet with the Audit and Compliance Committee from time to time, with and without management present, to discuss accounting, auditing and financial reporting matters.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and the Board of Directors of Conoco Inc.
In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, of stockholders' equity/owner's net investment and accumulated other comprehensive loss, and of cash flows present fairly, in all material respects, the financial position of Conoco Inc. and its subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas February 19, 2001
CONOCO INC.
CONSOLIDATED STATEMENT OF INCOME
See accompanying notes to consolidated financial statements.
CONOCO INC.
CONSOLIDATED BALANCE SHEET
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)
See accompanying notes to consolidated financial statements.
CONOCO INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
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 has three operating segments--upstream, downstream and emerging businesses. Activities of the upstream operating segment include exploring for, developing, producing and selling crude oil, natural gas and natural gas liquids. Downstream operating segment activities include refining crude oil and other feedstocks into petroleum products; buying and selling crude oil and refined products; and transporting, distributing and marketing petroleum products. Emerging businesses operating segment activities include the development of new businesses beyond our traditional operations with the potential to contribute substantially to long-term growth. Conoco has five reporting segments. Four of these reporting segments reflect geographic division between U.S. and international operations in upstream and downstream businesses, and one segment is for emerging businesses. Corporate includes general corporate expenses, financing costs and other non-operating items and captive insurance operations.
The initial public offering of the Class A common stock of Conoco commenced on October 21, 1998. The initial public offering consisted of approximately 191 million shares of Class A common stock issued at a price of $23 per share and represented E.I. du Pont de Nemours and Company's (DuPont) first step in the planned divestiture of Conoco. After the initial public offering, DuPont owned 100 percent of Conoco's Class B common stock (approximately 437 million shares), representing approximately 70 percent of Conoco's outstanding common stock and approximately 92 percent of the combined voting power of all classes of voting stock of Conoco. On August 6, 1999, DuPont concluded an exchange offer to its stockholders, which resulted in all 437 million shares of Class B common stock being distributed to DuPont stockholders. The exchange offer was the final step in DuPont's planned divestiture of Conoco.
Prior to the date of the initial public offering, operations were conducted by Conoco and, in some cases, subsidiaries of DuPont. The accompanying consolidated financial statements for 1998 are presented on a carve-out basis prepared from DuPont's historical accounting records and include the historical operations of both entities owned by Conoco and operations transferred to Conoco by DuPont at the time of the initial public offering. In this context, no direct ownership relationship existed among all the various units comprising Conoco. Accordingly, cash distribution to owner prior to the initial public offering included funds transferred between Conoco and DuPont for operating needs, cash dividends paid and other equity transactions.
Effective at the time of the initial public offering, Conoco's capital structure was established and the transfer to Conoco of certain subsidiaries previously owned by DuPont was substantially complete, resulting in direct ownership of those subsidiaries. Accordingly, for periods subsequent to the initial public offering, financial information is presented on a consolidated basis.
The consolidated statement of income includes all revenues and costs directly attributable to Conoco. These costs include costs for facilities, functions and services used by Conoco at shared sites and costs for certain functions and services performed by centralized DuPont organizations and directly charged to Conoco based on usage. In addition, services performed by Conoco on DuPont's behalf are directly charged to DuPont. The results of operations also include allocations of DuPont's general corporate expenses through the date of the initial public offering.
Prior to the date of the initial public offering, all charges and allocations of cost for facilities, functions and services performed by DuPont organizations for Conoco are deemed paid by Conoco to DuPont, in cash, in the period in which the cost was recorded in the consolidated financial statements. Allocations of current income taxes receivable or payable are similarly considered remitted, in cash, by or to DuPont in the period the related income taxes were recorded. Subsequent to the initial public offering, such costs are billed directly under transitional service agreements, and income taxes are paid directly to the taxing authorities, or to DuPont, as appropriate.
All of the allocations and estimates in the consolidated financial statements are based on assumptions that management believes are reasonable under the circumstances. However, these allocations and estimates are not necessarily indicative of the costs and expenses that would have resulted if Conoco had been operated as a separate entity for periods prior to the initial public offering.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The accounts of wholly owned and majority owned subsidiaries are included in the consolidated financial statements. All intercompany balances have been eliminated. The equity method is used to account for investments in corporate entities, partnerships and limited liability companies in which Conoco exerts significant influence, generally having a 20 percent to 50 percent ownership interest. Conoco's 50.1 percent noncontrolling interest in Petrozuata C.A., located in Venezuela, is accounted for using the equity method. The equity method is used because the minority shareholder, a subsidiary of PDVSA, the national oil company of the Bolivarian Republic of Venezuela, has substantive participating rights. Undivided interests in oil and gas properties under joint operating agreements and in transportation assets are combined on a proportionate gross basis. Other investments, excluding marketable securities, are carried at cost.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Actual results may differ from those estimates and assumptions.
Revenue Recognition
Revenues are recorded when title passes to the customer. Revenues from the production of oil and gas properties in which Conoco has interests with other companies are recorded on the basis of sales to customers. Differences between these sales and our share of production are not significant. Revenues from construction service contracts are recorded on a percentage-of-completion method.
Cash Equivalents
Cash equivalents represent investments with maturities of three months or less from the time of purchase. They are carried at cost plus accrued interest, which approximates fair value.
Inventories
Inventories are carried at the lower of cost or market. Cost is determined under the last-in, first-out (LIFO) method for inventories of crude oil and petroleum products. Cost for remaining inventories, principally materials and supplies, is generally determined by the average cost method. Market is determined on a regional basis and any lower of cost or market write-down is recorded as a permanent adjustment to the cost of inventory.
Property, Plant and Equipment (PP&E)
PP&E is carried at cost, including interest capitalized on construction projects. Depreciation of PP&E, other than oil and gas properties, is generally computed on a straight-line basis over the estimated economic lives of the facilities, which for major assets range from 14 to 25 years. When assets that are part of a composite group are retired, sold, abandoned or otherwise disposed of, the cost, net of sales proceeds or salvage value, is charged against the accumulated reserve for depreciation, depletion and amortization (DD&A). Where depreciation is accumulated for specific assets, gains or losses on disposal are included in period income.
Minor maintenance and repairs are charged to expense; replacements and improvements are capitalized.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Major Maintenance
Conoco accrues in advance for planned major maintenance. Costs accrued, which are classified as liabilities on the balance sheet, are primarily related to work to be done as part of refinery turnarounds and drydock maintenance for tankers, barges and boats.
Oil and Gas Properties
Conoco follows the successful efforts method of accounting. Under successful efforts, the costs of property acquisitions, successful exploratory wells, development wells and related support equipment and facilities are capitalized. The costs of producing properties are amortized at the field level on a unit-of-production method.
Unproved properties, which are individually significant, are periodically assessed for impairment. The impairment of individually insignificant properties is recorded by amortizing the costs based on past experience and the estimated holding period. Exploratory well costs are expensed in the period a well is determined to be unsuccessful. All other exploration costs, including geological and geophysical costs, production costs and overhead costs, are expensed in the period incurred.
The estimated costs of dismantlement and removal of oil and gas related facilities are accrued over the properties' productive lives using the unit-of-production method and recognized as a liability as the amortization expense is recorded.
Impairment of Long-lived Assets
Long-lived assets, with recorded values that are not expected to be recovered through future cash flows, are written down to current fair value through additional amortization or depreciation provisions. Fair value is generally determined from estimated discounted future net cash flows. Upstream properties are evaluated at the field level.
Environmental Costs
Environmental expenditures are expensed or capitalized, as appropriate, depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations, and that do not have future economic benefit, are expensed. Liabilities related to future costs are recorded on an undiscounted basis when environmental assessments and/or remediation activities are probable and the costs can be reasonably estimated.
Stock Compensation
Conoco applies the intrinsic value method of accounting for stock options as prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Pro forma information regarding changes in net income and earnings per share data, if the accounting prescribed by Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," had been applied, is presented in note 22.
Income Taxes
The provision for income taxes has been determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the financial and tax basis of Conoco's assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that some or all of the deferred tax asset will not be realized.
Prior to the date of the initial public offering, Conoco was included in the DuPont consolidated tax return, and the provision for income taxes was determined using the loss benefit method. Under the loss benefit method, the current tax provision or benefit is allocated based on the expected amount to be paid or received from the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE)
consolidated group. Benefits of losses and credit carry forwards are recorded when members of the consolidated group expect to realize such benefits. The pro forma effect on the consolidated statement of income, reflecting the provision for income taxes on a separate return basis prior to the initial public offering, is not material. For periods ending after the initial public offering, Conoco has filed separate tax returns. Accordingly, for periods subsequent to the initial public offering, the provision for income taxes has been determined on a separate tax return basis.
Provision has been made for income taxes on unremitted earnings of subsidiaries and affiliates, except in cases in which earnings are deemed to be permanently invested.
Foreign Currency Translation
The local currency is the functional currency for Conoco's integrated western European and some eastern European petroleum operations. The euro has been adopted as the local currency by the 12 countries participating in the European Economic and Monetary Union. For those participating countries in which Conoco operates, the euro concurrently became Conoco's functional currency. For subsidiaries whose functional currency is the local currency, assets and liabilities denominated in local currency are translated into U.S. dollars at end-of-period exchange rates. The resultant translation adjustment is a component of accumulated other comprehensive loss (see note 21). Monetary assets and liabilities denominated in currencies other than the local currency are remeasured into the local currency prior to translation into U.S. dollars. The resultant exchange gains or losses, together with their related tax effects, are included in income in the period in which they occur. Revenue and expenses are translated into U.S. dollars at the average exchange rates in effect during the period.
For subsidiaries where the U.S. dollar is the functional currency, all foreign currency asset and liability amounts are remeasured into U.S. dollars at end-of-period exchange rates. Inventories, prepaid expenses and PP&E are exceptions to this policy and are remeasured at historical rates. Foreign currency revenue and expenses are remeasured at average exchange rates in effect during the year. Exceptions to this policy include all expenses related to balance sheet amounts that are remeasured at historical exchange rates. Exchange gains and losses arising from remeasured foreign-currency-denominated monetary assets and liabilities are included in current period income.
Commodity Hedging and Trading Activities
Conoco enters into energy-related futures, forwards, swaps and options in various markets:
o to balance its physical systems;
o to meet customer needs; and
o to manage its price exposure on anticipated crude oil, natural gas, refined product and electric power transactions.
Gains and losses on non-trading contracts that are designated as hedges are deferred and included in the measurement of the related transaction. Changes in market values of all other derivative contracts are reflected in income in the period the change occurs.
In the event a derivative designated as a hedge is terminated prior to the maturity of the hedged transaction, gains or losses at termination are deferred and included in the measurement of the hedged transaction. If a hedged transaction matures, is sold, extinguished or terminated prior to the maturity of a derivative designated as a hedge of such transaction, then the gains or losses associated with the derivative, through the maturity date of the transaction, are included in the measurement of the hedged transaction. The derivative also is reclassified as for trading purposes. Derivatives designated as a hedge of an anticipated transaction are reclassified as for trading purposes if the anticipated transaction is no longer expected to occur.
In the consolidated statement of cash flows, Conoco reports the cash flows resulting from its hedging activities in the same category as the related item that is being hedged.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Reclassifications
Certain data in the prior years' financial statements have been reclassified to conform to the 2000 presentation.
Recent Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," which made certain amendments to SFAS No. 133. These Standards, which were required to be adopted by Conoco on January 1, 2001, modify the criteria for identifying derivative instruments and require that derivatives, whether in stand-alone contracts or, in certain cases, those embedded into other contracts, be recorded at their fair value as assets or liabilities in the balance sheet. In addition, the Standards prescribe the accounting for the gain or loss resulting from changes in the fair value of derivatives designated as hedging instruments as follows:
o the gain or loss on a fair value hedge (a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment) is recognized in earnings in the period of change together with the offsetting gain or loss on the hedged item;
o the gain or loss on a cash flow hedge (a hedge of the exposure to variable cash flow of a forecasted transaction) is initially reported as a component of other comprehensive income and subsequently reclassified into earnings when the forecasted transaction affects earnings;
o the gain or loss on a foreign currency hedge (a hedge of an exposure to risk of changes in foreign currency exchange rates) is initially reported as a component of other comprehensive income and subsequently reclassified into earnings when the foreign currency transaction affects earnings; and
o the ineffective portion of the gain or loss on derivatives designated as hedging instruments is recognized in earnings in the period of change.
Conoco adopted SFAS No. 133 and SFAS No. 138 on January 1, 2001. As part of the preparation for adoption of these Standards, Conoco completed an evaluation of its Risk Management Policy and a review of its underlying business activities in order to identify contractual arrangements that qualify as derivative instruments pursuant to the requirements of the Standards. Consistent with its Risk Management Policy, which was not changed as a result of this evaluation, Conoco intends to use stand-alone derivative instruments to manage its commodity price, foreign currency rate and interest rate risks. In addition, Conoco intends to continue to conduct limited amounts of trading for profit unrelated to its underlying physical business using stand-alone commodity derivative instruments. Pursuant to these Standards, such trading for profit contracts will continue to be reported on the balance sheet at fair value consistent with the current treatment afforded such contracts under existing generally accepted accounting principles.
Upon initial adoption of the Standards on January 1, 2001, Conoco recorded a cumulative transition gain of $37 after-tax into net income, which was mainly the result of certain derivative instruments that did not meet the conditions for hedge accounting pursuant to the Standards, and $1 into other comprehensive income to reflect the fair value of derivatives intended as cash flow hedges. In addition, $297 was recorded as assets and $259 was recorded as liabilities.
SFAS No. 133 and SFAS No. 138 are complex and subject to a potentially wide range of interpretations in their application. As such, in 1998 the FASB established the Derivative Implementation Group (DIG) task force specifically to consider and to publish official interpretations of issues arising from the implementation of these Standards. The DIG currently is considering several issues, and the potential exists for additional issues to be brought under its review. Therefore, if subsequent DIG interpretations of these Standards are different than Conoco's initial application, it is possible that the impact of Conoco's implementation, as stated above, will be modified.
Conoco's Risk Management Policy is further explained in note 25 to these financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE)
3. TRANSACTIONS WITH DUPONT
As disclosed in note 1, DuPont ceased to be a related party effective August 6, 1999. However, the 1999 and 1998 consolidated financial statements included related party transactions with DuPont involving services such as cash management, other financial services, purchasing, legal, computer, corporate aviation and general corporate expenses that were provided between Conoco and DuPont organizations. For periods prior to the initial public offering, the costs of services were directly charged or allocated between Conoco and DuPont using methods management believes were reasonable. These methods included negotiated usage rates, dedicated asset assignment and proportionate corporate formulas involving assets, revenues and employees. Such charges and allocations were not necessarily indicative of what would have been incurred if Conoco had been a separate entity.
Amounts charged to Conoco for these services were $21 for 1999 and $121 for 1998. These amounts were principally included in selling, general and administrative expenses. Conoco provided DuPont services such as computer, legal and purchasing, as well as certain technical and plant operating services. Charges for these services amounted to $15 for 1999 and $61 for 1998. These charges to DuPont were treated as reductions, as appropriate, of cost of goods sold, operating expenses or selling, general and administrative expenses.
Interest expense charged by DuPont was $91 for 1999 and $264 for 1998. Interest charged by DuPont reflected market-based interest rates. A portion of historical related party interest cost and other interest expense was capitalized as cost associated with major construction projects. Interest income from DuPont was $43 for 1998, and also reflected market-based interest rates.
Sales and other operating revenues included sales of products from Conoco to DuPont, principally natural gas and gas liquids supplied to several DuPont plant sites. These sales totaled $211 for 1999 and $427 for 1998. Also included for 1998 was $20 in revenues from insurance premiums charged to DuPont for property and casualty coverage outside the U.S. Purchases of products from DuPont during these periods were not material. Subsequent to the initial public offering, these intercompany arrangements between DuPont and Conoco, excluding insurance coverage provided to DuPont, were provided under transition service agreements or other long-term agreements.
In April 1999, Conoco issued and sold in a public offering $4,000 in senior fixed-rate debt securities with a weighted-average interest rate of 6.49 percent. The $3,970 net proceeds of this offering were used to repay a portion of Conoco's separation-related indebtedness to DuPont that was incurred in 1998. The remaining debt owed to DuPont was repaid in May 1999 with proceeds from a commercial paper program (see note 15).
4. OTHER INCOME
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(1) 2000 includes a gain of $42 from the sale of Oklahoma gas properties. 1998 includes a gain of $89 from the sale of certain upstream properties in the North Sea and the U.S.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE)
5. TAXES OTHER THAN ON INCOME
6. INTEREST AND DEBT EXPENSE
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(1) Interest paid, net of amounts capitalized, was $331 in 2000, $297 in 1999 and $145 in 1998.
7. PROVISION FOR INCOME TAXES
Total income taxes paid worldwide were $1,030 in 2000, $493 in 1999 and $714 in 1998.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE)
At December 31, 2000 and 1999, deferred taxes were classified in the consolidated balance sheet as follows:
The significant components of deferred tax liabilities/(assets) at December 31, 2000 and 1999 were as follows:
Valuation allowances, which reduce deferred tax assets to an amount that will more likely than not be realized, decreased $43 in 2000. This reflects a $123 decrease related to tax assets representing operating losses, which Conoco determined will more likely than not be realized in future years and tax loss carry forwards that have been relinquished or expired. This decrease is partially offset by an $80 increase used to offset tax assets representing operating and tax losses incurred in exploration, production and start-up operations. Valuation allowances increased $29 in 1999 primarily reflecting an $80 increase in the valuation allowance used to offset operating losses incurred in exploration, production and start-up operations, partially offset by a $51 decrease related to tax assets representing operating losses.
Under the tax laws of various jurisdictions in which Conoco operates, deductions or credits that cannot be fully utilized for tax purposes during the current year may be carried forward. These loss carry forwards, subject to statutory limitations, can reduce taxable income or taxes payable in a future year. At December 31, 2000, the tax effect of such loss carry forwards approximated $442. Of this amount, $166 has no expiration date, $76 expires in 2001, $6 expires in 2002, $39 expires in 2003, $71 expires in 2004 and $84 expires in 2005 and later years.
In connection with the separation from DuPont and the initial public offering, Conoco and DuPont entered into a tax sharing agreement. Several matters under the tax sharing agreement remain in dispute between Conoco and DuPont and are currently being arbitrated. Conoco currently expects that DuPont's obligations to Conoco could total up to approximately $250, plus interest. DuPont also has made claims related to the dispute, to which Conoco has taken exception. The amount of such claims is not material. The effect of the dispute currently is not reflected in Conoco's financial statements and, regardless of the outcome of this dispute, Conoco believes the result will not be material to its financial position or results of operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE)
An analysis of Conoco's effective income tax rate follows:
Income before income taxes was based on the location of the corporate unit to which such earnings are attributable. However, since such earnings were often subject to taxation in more than one country, the income tax provision shown above, as U.S. or non-U.S., does not correspond to the earnings as set forth in the following table.
Unremitted earnings of international subsidiaries totaling $1,661 at December 31, 2000, and $1,488 at December 31, 1999, were deemed to be permanently invested. No deferred tax liability was recognized for the remittance of such earnings. It is not practicable to estimate the income tax liability that might be incurred if such earnings were remitted to the U.S.
8. EARNINGS PER SHARE
Basic earnings per share (EPS) is computed by dividing net income (the numerator) by the weighted-average number of common shares outstanding plus the effects of certain Conoco employee and director awards and fee deferrals that are invested in Conoco stock units (the denominator). Diluted EPS is similarly computed, except that the denominator is increased to include the dilutive effect of outstanding stock options awarded under Conoco's compensation plans (see note 22).
As described in note 1, Conoco's capital structure was established at the time of the initial public offering. In accordance with SEC Staff Accounting Bulletin No. 98, the capitalization of Class B common stock has been retroactively reflected for the purpose of presenting earnings per share for periods prior to the initial public offering. For the periods subsequent to the initial public offering, basic EPS reflects the weighted-average number of shares of Class A and Class B common stock and deferred award units outstanding. Corresponding diluted EPS includes the dilutive effect of an additional 8,405,998 shares for 2000, an additional 9,241,896 shares for 1999 and an additional 1,659,816 shares for 1998. These additional shares for 1998 represent the weighted-average dilutive effect of outstanding stock options that resulted from the concurrent cancellation of DuPont stock options at the date of the initial public offering and the issuance of options with respect to Class A common stock.
The denominator is based on the following weighted-average number of common shares outstanding:
Variable stock options for 3,124,146 shares of Class A and Class B common stock were outstanding at December 31, 2000 and 1999. At December 31, 1998, variable stock options for 1,724,146 shares of Class A and
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Class B common stock were outstanding. These options were not included in the computation of diluted EPS because the threshold price required for these options to be vested had not been reached.
Common shares held as treasury stock are deducted in determining the number of shares outstanding.
Fixed stock options for 89,530; 30,972; and 28,796 shares of Class A common stock were not included in the diluted earnings per share calculation for 2000, 1999 and 1998, respectively, because the exercise price was greater than the average market price.
9. ACCOUNTS AND NOTES RECEIVABLE
Included in the preceding table are accounts and notes receivable from affiliated companies (see note 12) of $548 at December 31, 2000, and $115 at December 31, 1999.
The carrying value of accounts and notes receivable approximates fair value because of their short maturity.
See note 27 for a description of operating segment markets and associated concentrations of credit risk.
10. INVENTORIES
The excess of market over book value of inventories valued under the LIFO method was $643 and $430 at December 31, 2000 and 1999, respectively. In the fourth quarter of 1998, a write-down to market of $97 was made in accordance with Conoco's inventory valuation policy (see note 2). Inventories valued at LIFO represented 81 percent and 78 percent of consolidated inventories at December 31, 2000 and 1999, respectively.
During 2000, certain inventory quantities were reduced, resulting in a partial liquidation of the LIFO basis. The 2000 liquidation of inventories, carried at lower costs prevailing in prior years, as compared with the replacement costs of these inventories, had no material effect on net income. The effect of a liquidation of the LIFO basis during 1999 decreased cost of goods sold by approximately $67 and increased net income by approximately $42, or $.07 per diluted share. There was no material effect on net income in 1998 for LIFO reductions.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE)
11. PROPERTY, PLANT AND EQUIPMENT
PP&E includes downstream assets acquired under capital leases of $36 at December 31, 2000, and December 31, 1999. Related amounts included in accumulated DD&A were $16 at December 31, 2000, and $15 at December 31, 1999.
12. SUMMARIZED FINANCIAL INFORMATION FOR AFFILIATED COMPANIES
Summarized consolidated financial information for Petrozuata C.A. (50.1 percent noncontrolling interest) and other affiliated companies for which Conoco uses the equity method of accounting (see note 2, "Basis of Consolidation") is shown below. "Other Affiliates" includes the financial information of, among others, the following: Ceska Rafinerska, a.s. (16.33 percent), CFJ Properties (50 percent), Excel Paralubes (50 percent), Malaysian Refining Company Sdn. Bhd. (40 percent), Pocahontas Gas Partnership (50 percent) and Polar Lights Company (50 percent).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE)
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(1) For 2000, Conoco's equity in Petrozuata's earnings totaled $147.
(2) Equity affiliate borrowings of $979 in 2000 and $1,005 in 1999 were guaranteed by Conoco or DuPont, on behalf of and indemnified by Conoco. These amounts are included in the guarantees disclosed in note 26. In addition, Conoco owns 2.0 billion shares of Turcas Petrol A.S., of which 909 million shares at December 31, 2000, and 1.3 billion shares at December 31, 1999, were pledged to a group of Turkish banks that issued letters of credit in support of a $70 long-term debt instrument.
Equity affiliate sales to Conoco amounted to $804 in 2000, $720 in 1999 and $412 in 1998. Equity affiliate purchases from Conoco totaled $2,200 in 2000, $1,519 in 1999 and $1,219 in 1998.
Dividends received from equity affiliates were $132 in 2000, $77 in 1999 and $105 in 1998. Conoco's equity in undistributed earnings of its affiliated companies was $446 at December 31, 2000, and $366 at December 31, 1999.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE)
13. OTHER ASSETS
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(1) Includes $223 at December 31, 2000, and $10 at December 31, 1999, attributable to a long-term service contract to develop gas and condensate infrastructure in Syria. Once the infrastructure is in place, this amount is recoverable from the gas and condensate revenue stream generated over a period up to five years commencing in late 2001.
(2) Includes intangible assets of $10 at December 31, 2000, and $14 at December 31, 1999.
14. ACCOUNTS PAYABLE
Included in the preceding table are accounts payable to affiliated companies (see note 12) of $573 at December 31, 2000, and $100 at December 31, 1999.
Payables to banks represent checks issued on certain disbursement accounts but not presented to the banks for payment. The amounts above are carried at historical cost, which approximate fair value because of their short maturity.
15. SHORT-TERM BORROWINGS AND CAPITAL LEASE OBLIGATIONS
These amounts are carried at historical cost, which approximate fair value because of their short maturity.
At December 31, 2000 and December 31, 1999, Conoco had an unsecured $2,000 revolving credit facility with a syndicate of U.S. and international banks. The terms consist of a 364-day committed facility in the amount of $1,350 and a five-year committed facility in the amount of $650. At December 31, 2000 and at December 31, 1999, Conoco had no outstanding borrowings under the credit facility. The five-year committed facility had over three years remaining at December 31, 2000.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Conoco maintains a $2,000 U.S. commercial paper program that is fully supported by the credit facility. The program gives Conoco the ability to issue commercial paper at any time with various maturities not to exceed 270 days.
During 2000, Conoco initiated a euro 500 million European commercial paper program, which gives Conoco the ability to issue commercial paper in the European market at any time with maturities not to exceed 183 days. The program is an alternative to the use of U.S. commercial paper and is not expected to increase Conoco's current debt level. This program will complement the $2,000 U.S. commercial paper program and is fully supported by our existing revolving credit facility.
At December 31, 2000, there was $187 of commercial paper outstanding, with a weighted-average interest rate of 6.8 percent, of which $85 was denominated in foreign currencies. At December 31, 1999, U.S. commercial paper of $628, with a weighted-average interest rate of 6.6 percent, was outstanding.
The weighted-average interest rate on short-term borrowings and capital lease obligations outstanding was 6.3 percent at December 31, 2000, and 6.4 percent at December 31, 1999.
16. OTHER ACCRUED LIABILITIES
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(1) In December 1998, Conoco announced that as a result of a comprehensive review of its assets and long-term strategy, Conoco would make organizational realignments consistent with furthering the efficiency of operations and taking advantage of synergies created by upgrading its asset portfolio. Associated with the announcement, Conoco recorded an $82 pretax ($52 after-tax) charge to operating expense in the fourth quarter of 1998. Nearly all of this charge represented termination payments and related employee benefits to be made to the estimated 975 persons in both upstream and downstream businesses affected by the restructuring. Payments were made under existing company severance policies, generally based on years of service up to a maximum amount that varied by country.
During 1999, 704 employees left Conoco as part of the implementation of the realignment plans, with related charges against the restructuring reserve of $68. In the fourth quarter 1999, estimates of the number of severances were revised due to changes in operational requirements. The original number of estimated severances was reduced by 137 positions, primarily in our upstream business, to 838 positions. The reduction of positions eliminated resulted in a reduction in the restructuring reserve of $3 that was recorded in the fourth quarter 1999. Total charges and adjustments to the reserve during 1999 were $71, resulting in a December 31, 1999 reserve balance of $11.
During the first half of 2000, 79 employees left Conoco as part of the realignment plans. Related charges against the reserve totaled $6. The remaining reserve balance of $5 was reversed into earnings in the second quarter of 2000.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE)
17. LONG-TERM BORROWINGS AND CAPITAL LEASE OBLIGATIONS
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(1) Weighted-average interest rate was 7.5 percent at December 31, 2000, and 7.4 percent at December 31, 1999.
Maturities of long-term borrowings, together with sinking fund requirements for years ending after December 31, 2001, are $3 for 2002, $3 for 2003, $1,353 for 2004, $3 for 2005 and $4 for 2006. Long-term borrowings and capital lease obligations outstanding at December 31, 2000 approximate fair value. At December 31, 1999, these outstanding obligations had an estimated fair value of $3,839. These estimates were based on quoted market prices for the same or similar issues.
18. OTHER LIABILITIES AND DEFERRED CREDITS
19. MINORITY INTERESTS
In 1996, various upstream subsidiaries contributed assets to Conoco Oil & Gas Associates L.P. for a general partnership interest of 67 percent. Vanguard Energy Investors L.P. then purchased the remaining 33 percent as a limited partner. In December 1999, Conoco elected to retire Vanguard's $302 minority interest and terminate the Conoco Oil & Gas Associates partnership.
In November 1999, Conoco and Armadillo Investors L.L.C. formed Conoco Gas Holdings L.L.C. Conoco contributed certain domestic upstream assets for a 75 percent common member interest and cash, and Armadillo contributed cash for a 25 percent preferred member interest. Armadillo is entitled to a cumulative annual preferred dividend on its investment of 7.16 percent. Armadillo's share of Conoco Gas Holdings' 2000 earnings was $15, while its share of 1999 earnings was $2. The net minority interest in Conoco Gas Holdings held by Armadillo was $185 at December 31, 2000 and December 31, 1999.
In December 1999, Conoco formed Conoco Corporate Holdings L.P. by contributing certain corporate assets. The limited partner interest was sold to Highlander Investors L.L.C. for $141, or an initial net 47 percent interest. Highlander is entitled to a cumulative annual priority return on its investment of 7.86 percent. Highlander's share of
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Conoco Corporate Holdings' 2000 earnings was $11, while its share of 1999 earnings was $1. The net minority interest in Conoco Corporate Holdings held by Highlander was $141 at December 31, 2000 and December 31, 1999.
The net effect of these 1999 transactions resulted in a minority interest balance of $335 at December 31, 1999. Minority interest at December 31, 2000 was $337.
20. STOCKHOLDERS' EQUITY
As described in note 1, Conoco's capital structure was established at the time of the initial public offering in October 1998. A summary of the activity in common shares outstanding for 1998, 1999 and 2000 is presented as follows:
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(1) To offset dilution from issuances under compensation plans.
(2) Purchased Class B shares must be retired in accordance with Conoco's certificate of incorporation.
At December 31, 2000 and 1999, 250,000,000 shares of preferred stock were authorized. Of this amount, 1,000,000 shares were designated as Series A Junior Participating Preferred Stock and reserved for issuance on the exercise of preferred stock purchase rights under Conoco's Share Purchase Rights Plan. Each issued share of Class A and Class B common stock has one preferred stock purchase right attached to it. No preferred shares have been issued, and the rights currently are not exercisable.
During 1999, Conoco recorded a $26 reduction of additional paid-in capital to reflect an adjustment to capitalization from owner at the initial public offering. This reduction was primarily related to tax adjustments of $52, partially offset by a $31 adjustment in book value for various subsidiaries transferred from DuPont to Conoco as part of the separation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Dividends declared and paid on Class A and Class B common stock for 2000 and 1999 are shown as follows:
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(1) The first quarter 1999 dividend was determined on a pro rata basis covering the period from October 27, 1998 to December 31, 1998, and is equivalent to $.19 per share for a full quarter.
Conoco declared a first quarter cash dividend on January 22, 2001, of $.19 per share on each outstanding share of Class A and Class B common stock. This quarterly dividend will be paid on March 10, 2001, to all shareholders of record as of February 10, 2001.
21. ACCUMULATED OTHER COMPREHENSIVE LOSS
Balances of related after-tax components comprising accumulated other comprehensive loss are summarized in the following table:
The following table summarizes the changes in the related components of other comprehensive loss, which are reported net of associated income tax effects:
22. COMPENSATION PLANS
TRANSITION FROM DUPONT PLANS TO CONOCO PLANS
Until the date of the initial public offering, employees of Conoco participated in stock-based compensation plans administered through DuPont and involving options to acquire DuPont common stock. At the time of the initial public offering, Conoco employees held a total of 10,964,917 stock options for DuPont common stock and 1,333,135 stock appreciation rights (SARs) with respect to DuPont common stock.
At the time of the initial public offering, Conoco gave those persons the option, subject to specific country tax and legal requirements, to participate in a program involving the cancellation of all or part of their DuPont stock options or SARs. Upon such cancellation, Conoco issued comparable options to acquire Conoco Class A common stock or SARs with respect to Conoco Class A common stock. The substitute stock options and other awards had the same vesting provisions, option periods and other terms and conditions as the DuPont options and awards they replaced. Further, these substitute stock options had the same ratio of the exercise price per share to the market value per share, and the same aggregated difference between market value and exercise price as the DuPont stock
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE)
options. A total of 8,921,508 DuPont stock options and 745,358 DuPont SARs were cancelled. Conoco then issued 24,275,690 stock options for Conoco Class A common stock and 2,279,834 SARs with respect to Conoco Class A common stock. The Conoco stock options and SARs had comparable terms and conditions to the previous DuPont options and SARs. The new program was deemed a change in the terms of certain awards granted to Conoco employees. As a result, Conoco incurred a non-cash charge to compensation expense of $236 in the fourth quarter of 1998, with a corresponding increase in additional paid-in capital. DuPont retained responsibility for delivery of DuPont common stock to Conoco employees when retained DuPont stock options are exercised.
AWARDS UNDER DUPONT PLANS
Stock option awards under the DuPont Stock Performance Plan were granted to key employees of Conoco prior to the initial public offering and were "fixed" and/or "variable" as defined by APB Opinion No. 25. The purchase price of shares subject to option is the market price of DuPont stock at the date of grant.
During 1997, variable stock option grants were made to certain senior management and are subject to forfeiture. The forfeiture would occur if, within five years from the date of grant, the market price of DuPont common stock did not achieve a price of $75 per share for 50 percent of the options and $90 per share for the remaining 50 percent. During 1998, before the initial public offering, the $75 price was reached and options with that hurdle price became fixed and exercisable. All of the outstanding variable DuPont options with a $90 per share hurdle price at the time of the initial public offering were cancelled and substituted with options for Conoco Class A common stock with a hurdle price of $32.88 per share.
AWARDS UNDER CONOCO PLANS
The 1998 Stock and Performance Incentive Plan provides incentives to certain corporate officers and non-employee directors who can contribute materially to the success and profitability of Conoco and its subsidiaries, and provides for substitution of certain existing DuPont awards in connection with the initial public offering. Awards may be in the form of cash, stock, stock options or SARs with respect to Class A and Class B common stock (further reference to common stock in this note refers to Conoco Class A and B common stock). This plan also provides for the Conoco Global Variable Compensation Plan. The Conoco Global Variable Compensation Plan is an annual management incentive program for officers and certain non-officer employees with awards made in cash and stock. Stock options and SARs granted under the 1998 Stock and Performance Incentive Plan (except those granted to substitute for DuPont awards):
o are awarded at market price on the date of grant;
o have a 10-year life;
o generally vest one year from date of grant; and
o may be subject to exercise restrictions, such as the attainment of specific stock price targets or the passage of time.
For certain senior management, certain shares can be deferred as stock units for a designated future delivery. These shares include both:
o shares receivable from the exercise of nonqualified options, with respect to Class A common stock granted under the 1998 Stock and Performance Incentive Plan of Conoco to substitute for cancelled 1998 DuPont stock options; and
o incremental new Conoco stock options granted from the date of the initial public offering.
In 1999, a variable option grant to acquire 1,400,000 shares of Class B common stock was made to Conoco's Chairman, President and Chief Executive Officer. Of this grant, 50 percent is subject to forfeiture if, within three years from the date of grant, the market price of Conoco Class B common stock does not achieve a price of $35 per share for five consecutive days. The remaining 50 percent of the grant is subject to forfeiture if, within five years
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE)
from the date of grant, the market price of Conoco Class B common stock does not achieve a price of $42 per share for five consecutive days. The exercise price is $26.50, which was the market price on the grant date.
The maximum number of shares of common stock and stock options granted under the plan is limited to the highest of 20,000,000 or 3.3 percent of outstanding shares of common stock. Awards made in substitution for DuPont awards do not count against the number of shares available under the plan. At December 31, 2000, and December 31, 1999, respectively, 12,028,155 shares and 15,078,195 shares of common stock were available for issuance under the plan.
Conoco adopted the 1998 Key Employee Stock Performance Plan to attract and retain employees. The plan will accomplish this by enhancing the proprietary and personal interests of employees in Conoco's success and profitability. Awards to employees may be made in the form of Conoco stock options or SARs, both with respect to common stock. Such awards granted under this plan (except to substitute for DuPont awards) are awarded under the same terms and conditions of the 1998 Stock and Performance Incentive Plan as described above. The maximum number of shares of common stock and stock options granted under the plan is limited to the higher of 18,000,000 or 3 percent of outstanding shares of common stock. Awards made in substitution for DuPont awards do not count against the number of shares available under the plan. At December 31, 2000 and 1999, respectively, 10,556,261 and 14,615,564 shares of common stock were available for issuance under the plan.
Under both the 1998 Stock and Performance Incentive Plan and the 1998 Key Employee Stock Performance Plan, reload options are available upon the exercise of stock options. These reload options include a condition that shares received from the exercise of the original option may not be sold for at least two years. Under a reload option, the number of new options granted is equal to the number of shares required to satisfy the total exercise price of the original option. Reload options are granted at the market price of the stock on the reload grant date.
The 1998 Global Performance Sharing Plan is a broad-based plan under which, on the date of the initial public offering, grants of stock options and SARs with respect to Class A common stock were made to certain non-officer employees. This was done to encourage a sense of proprietorship and an active interest in the financial success of Conoco and its subsidiaries. The stock options and SARs were awarded:
o at the price of the initial public offering ($23 per share);
o have a 10-year life; and
o become exercisable in one-third increments on the first, second and third anniversaries of the grant date.
Currently, there are no additional shares available for issuance under this plan.
Most stock options granted under Conoco plans are fixed and have no intrinsic value at grant date. The 1,724,146 options granted to substitute for cancelled DuPont options granted in 1997 and the 1,400,000 variable options granted on August 17, 1999, are the exceptions to this fixed status. Except for the fourth quarter 1998 charge related to the one-time offer to cancel DuPont options and substitute Conoco options, no compensation expense has been recognized for fixed options.
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:
The following table summarizes information concerning outstanding and exercisable fixed Conoco options at December 31, 2000. For total variable options outstanding at December 31, 2000, the weighted-average remaining contractual life was 7.1 years.
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:
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:
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(1) For 2000, Conoco's historical volatility is used. However, due to insufficient history, the volatility of Conoco stock was estimated by referencing oil industry experience trends in 1999 and DuPont experience trends in 1998. The expected life for exercise of Conoco stock options was estimated by using DuPont experience trends.
The following table sets forth pro forma information as if Conoco had adopted the optional recognition provisions of SFAS No. 123 (see note 1):
The incremental fair value for cancellation and substitution of stock options originally granted before adoption of SFAS No. 123 was zero because intrinsic value exceeds fair value.
Compensation expense recognized in income for stock-based employee compensation awards was $4 for 2000, $24 for 1999 and $229 for 1998. The year 1998 includes a one-time charge of $236 for the cancellation of DuPont stock options described above.
Prior to the initial public offering, the Conoco Unit Option Plan awarded SARs with respect to DuPont common stock to key salaried employees in certain grade levels who showed early evidence of the ability to assume significant responsibility and leadership. At the time of the initial public offering, 1,131,494 unit options were outstanding, of which 593,722 were cancelled and substituted with comparable SARs with respect to Conoco Class A common stock under Conoco's 1998 Key Employee Stock Performance Plan. Effective with the initial public
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE)
offering, no new grants were made or are planned out of the Conoco Unit Option Plan. At December 31, 2000, outstanding unit options based on Conoco Class A common stock were 1,330,485, and at December 31, 1999, outstanding unit options based on Conoco Class A common stock were 1,469,287. For these same time periods, outstanding unit options based on DuPont common stock were 403,115 and 466,436, respectively. The related liability provisions totaled $21 at December 31, 2000, and $23 at December 31, 1999.
Through the date of the initial public offering, certain Conoco employees who participated in the DuPont Variable Compensation Plan received grants of stock and cash. Overall amounts were dependent on financial performance of DuPont and Conoco and other factors, and were subject to maximum limits as defined by the plan. Amounts charged against earnings in anticipation of awards to be made later were $39 in 1998. Actual cash and stock awards made in 1999 for the 1998 plan year totaled $24. These awards were made out of the Conoco 1998 Stock and Performance Incentive Plan based on performance standards set previously in the DuPont Variable Compensation Plan. Both the DuPont Variable Compensation Plan and the Conoco 1998 Stock and Performance Incentive Plan allow future delivery of stock awards.
Beginning with the 1999 plan year, grants of stock and cash are made from the Conoco 1998 Stock and Performance Incentive Plan according to the financial performance of Conoco and its business units. Awards are subject to maximum limits as defined by the plan. Amounts charged against earnings during 2000 in anticipation of awards to be made in 2001 were $62, while amounts charged against earnings during 1999 in anticipation of awards to be made in 2000 were $52. Awards actually distributed in 2001 for the 2000 plan year amounted to $65. Awards actually distributed in 2000 for the 1999 plan year amounted to $49.
Under the Conoco 1998 Stock and Performance Incentive Plan, employees were offered the opportunity to cancel DuPont shares, which were granted under previous awards, and receive substitute shares of Conoco Class A common stock for designated future delivery. At December 31, 2000, 60,072 shares of DuPont stock and 282,576 shares of Conoco Class A common stock were awaiting delivery. Conoco recognized a liability of $3 for the delivery of DuPont shares.
Awards under the separate Conoco Challenge Program may be granted in cash to employees not covered by the Variable Compensation Plan. This plan provides awards based on meeting financial goals and upholding Conoco's core values. Overall amounts are dependent on Conoco's earnings and cash provided by operations. Beginning with the 1999 plan year, awards also are adjusted up or down based on a measure of Conoco's shareholder return as compared to a group of selected benchmark competitors. All payout amounts are subject to maximum limits as defined by the plan. Amounts charged against earnings for the current year and to adjust for over/under accruals in prior years totaled $63 for 2000, $40 in 1999, and $22 in 1998. Awards made for plan years were $56 for 2000, $40 for 1999, and $19 for 1998.
23. PENSIONS AND OTHER POST-RETIREMENT BENEFITS
Prior to the split-off, Conoco participated in the DuPont U.S. tax qualified defined benefit pension plan. In 1999, Conoco established a U.S. tax qualified defined benefit pension plan (Conoco plan) which was spun off from the DuPont U.S. tax qualified defined benefit pension plan. The Conoco plan covers substantially all U.S. non-retail employees, as well as about half of all U.S. retail employees, and provides essentially the same benefits to Conoco employees as the DuPont plan provided to these employees. In addition, Conoco has separate U.S. non-tax qualified defined benefit pension plans covering certain U.S. and international employees. The benefits for the plans mentioned in this paragraph are based primarily on years of service and the average of the employees' highest 36 consecutive months' pay. Conoco's funding policy for the U.S. tax qualified plan is consistent with the funding requirements of federal laws and regulations. The nonqualified plans are not funded. In 1999, however, Conoco set up a "Rabbi Trust," which may be funded in the future. A Rabbi Trust sets aside assets to pay for benefits under a nonqualified pension plan, but those assets remain subject to claims of Conoco's general creditors in preference to the claims of plan participants and beneficiaries.
With respect to the DuPont U.S. tax qualified defined benefit pension plan, Conoco and DuPont agreed upon an amount of approximately $820 at the date of the initial public offering to be transferred to a separate trust for Conoco's pension plan. The transfer value was adjusted for benefit payments and investment returns from the date of the initial public offering to the transfer date. The adjusted value transferred in July and September 2000 totaled
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE)
$858. At December 31, 1999, prior to the transfer, the estimated value of the amount to be transferred was $884.
DuPont allocated the pension obligations based on Conoco's individual employees covered by the plan. The unrecognized prior service cost and unrecognized net gain were allocated in proportion to Conoco's projected benefit obligation to the total projected benefit obligation of the DuPont plan. The net periodic pension cost components included in the following table also are based on the foregoing allocation factors.
Pension coverage is provided to the extent appropriate for employees of Conoco's international subsidiaries through separate plans. Obligations under such plans are systematically provided for by depositing funds with trustees, under insurance policies or by book reserves.
Conoco and certain subsidiaries also provide medical and life insurance benefits to U.S. retirees and survivors. The associated plans, principally health, are not funded, and approved claims are paid from Conoco's funds. Under the terms of these plans, Conoco reserves the right to change, modify or discontinue the plans. Conoco has communicated to plan participants that any increase in the annual health care escalation rate above 4.5 percent will be borne by the participants. Therefore, Conoco does not expect an increase to the accumulated post-retirement benefit obligation or the other post-retirement benefit cost.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE)
The following table reflects information concerning benefit obligations, plan assets, funded status and recorded values. Pension benefits for 1999 include amounts associated with Conoco's portion of what was previously the DuPont U.S. tax qualified defined benefit pension plan.
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(1) Before reduction for associated deferred tax savings of $19 at December 31, 2000, and $14 at December 31, 1999 (see note 21).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE)
At December 31, 2000, U.S. defined benefit plan assets consisted primarily of common stocks. No Conoco common stock was included in the holdings. At December 31, 1999, the U.S. defined benefit plan assets consisted principally of common stocks, including 34,809 shares of Conoco common stock.
24. INVESTING ACTIVITIES
Purchases of businesses in 2000 included $545 for Saga U.K. Ltd. There were no significant purchases in 1999. Purchases in 1998 included $929 for upstream natural gas properties in South Texas.
Non-cash additions to PP&E were $41 for 2000, zero for 1999 and $162 for 1998.
For 2000, total proceeds from sales of assets of $222 included the sale of Oklahoma gas plants and the sale of retail assets in the Dallas-Fort Worth area and the Gulf Coast region. There were no significant proceeds from any one asset sale in 1999. Proceeds in 1998 included $245 from the sale of certain U.S. and North Sea upstream properties, $156 from various U.S. downstream asset sales and $54 from the sale of a downstream office building in Europe.
25. FINANCIAL INSTRUMENTS AND OTHER RISK MANAGEMENT ACTIVITIES
Conoco operates in the worldwide crude oil, refined product, natural gas, natural gas liquids and electric power markets and is exposed to fluctuations in hydrocarbon prices, foreign currency rates and interest rates. These fluctuations can affect revenues and the cost of operating, investing and financing. Conoco's management has used and intends to continue to use financial and commodity-based derivative contracts to reduce the risk in overall earnings and cash flow when the benefits provided are anticipated to more than offset the risk management costs involved.
Conoco has established a Risk Management Policy that provides guidelines for entering into contractual arrangements (derivatives) to manage its commodity price, foreign currency rate and interest rate risks. The Conoco Risk Management Committee has:
o an ongoing responsibility for the content of this policy;
o principal oversight responsibility to ensure that Conoco is in compliance with the policy; and
o responsibility to ensure that procedures and controls are in place for the use of commodity, foreign currency and interest rate instruments.
These procedures clearly establish derivative control and valuation processes, routine monitoring and reporting requirements, and counterparty credit approval procedures. Additionally, to assess the adequacy of internal controls, Conoco's internal audit group reviews these risk management activities. The audit results are then reviewed by both the Conoco Risk Management Committee and by management.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE)
The counterparties to these contractual arrangements are limited to major financial institutions and other established companies in the petroleum industry. Although Conoco, in the event of nonperformance by these counterparties, is exposed to credit loss, this exposure is managed through credit approvals, limits and monitoring procedures and limits to the period over which unpaid balances are allowed to accumulate. Conoco has not experienced nonperformance by counterparties to these contracts, and no material loss would be expected from any such nonperformance.
COMMODITY PRICE RISK
Conoco enters into energy-related futures, forwards, swaps and options in various markets:
o to balance its physical systems;
o to meet customer needs; and
o to manage its price exposure on anticipated crude oil, natural gas, refined product and electric power transactions.
These instruments provide a natural extension of the underlying cash market and are used to physically acquire a portion of supply requirements. The commodity futures market has greater liquidity and longer trading periods than the cash market, and is one method of managing price risk in the energy business.
Conoco's policy is generally to be exposed to market pricing for commodity purchases and sales. From time to time, management may use derivatives to establish longer-term positions to hedge the price risk for Conoco's equity crude oil and natural gas production, as well as its refinery margins. Specifically, we have taken action to mitigate our exposure to volatile crude oil prices through the purchase of crude oil put options, which reduce our downside risk while maintaining our upside potential.
Conoco does limited amounts of trading for profit unrelated to its underlying physical business. After-tax gain or loss from trading for profit activities has not been material.
FOREIGN CURRENCY RISK
Conoco has foreign currency exchange rate risk resulting from operations in over 40 countries around the world. Conoco does not comprehensively hedge its exposure to currency rate changes, although it may choose to selectively hedge exposures to foreign currency rate risk. Examples include firm commitments for capital projects, certain local currency tax payments and dividends, and cash returns from net investments in foreign affiliates to be remitted within the coming year.
In conjunction with our European commercial paper program, initiated in 2000, Conoco enters into foreign currency swaps for all non-U.S. dollar notes issued in order to receive the U.S. dollar equivalent proceeds upon note issuance and to lock in the forward foreign currency rate on note maturity. At December 31, 2000, the U.S. dollar equivalent of all non-U.S. dollar notes outstanding was $85, all of which were swapped to the U.S. dollar. The notional amount of the forward portion of these swaps was $81, and the estimated fair value was $86.
At December 31, 2000, Conoco had open foreign currency exchange derivative instruments of $45, related to anticipated foreign currency capital investments, with an estimated fair value of $42. Conoco had no open foreign currency exchange derivative instruments at December 31, 1999.
INTEREST RATE RISK
Conoco manages any material risk arising from exposure to interest rates by using a combination of financial derivative instruments. This program was developed to manage the fixed and floating interest rate mix of Conoco's total debt portfolio and related overall cost of borrowing.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE)
At December 31, 2000 and at December 31, 1999, Conoco had no significant open interest rate financial derivative instruments.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying values of most financial instruments are based on historical costs. The carrying values of marketable securities, receivables, payables and short-term obligations approximate their fair value because of their short maturity.
Long-term borrowings and capital lease obligations outstanding at December 31, 2000, of $4,138 approximate fair value. Obligations outstanding at December 31, 1999, of $4,080 had an estimated fair value of $3,839. These estimates were based on quoted market prices for the same or similar issues, or the current rates offered to Conoco for issues with the same remaining maturities.
SUMMARY OF OUTSTANDING COMMODITY DERIVATIVE FINANCIAL INSTRUMENTS
The following table provides a summary of the fair values, carrying amounts and notional values of outstanding commodity financial instruments at December 31, 2000 and 1999.
Notional amounts represent the face amount of the contractual arrangements and are not a measure of market or credit exposure. The fair value of swaps and other over-the-counter instruments are estimated based on quoted market prices of comparable contracts. These estimated values approximate the gain or (loss) that would have been realized if the contracts had been closed out at the balance sheet date. Carrying amounts represent the receivable (payable) position recorded in the consolidated balance sheet.
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(1) Includes derivative instruments that can only be settled in cash.
(2) Includes purchased crude oil put options with a strike price of $22.00 (West Texas Intermediate equivalent) per barrel on 63 million barrels during the period of April through December 2001.
26. COMMITMENTS AND CONTINGENT LIABILITIES
Conoco uses various leased facilities and equipment in its operations. Future minimum lease payments under noncancelable operating leases are $231 for 2001, $276 for 2002, $251 for 2003, $124 for 2004, $112 for 2005 and $585 for subsequent years. Future minimum lease payments are not reduced by $46 of noncancelable minimum sublease rentals, where Conoco continues to be the primary obligator under the original leases. Rental expense under operating leases was $274 in 2000, $301 in 1999 and $214 in 1998. Rental revenue under operating subleases was $11 in 2000, $15 in 1999 and $16 in 1998.
Conoco has various purchase commitments for materials, supplies, services and items of permanent investment incident to the ordinary conduct of business. Such commitments are not at prices in excess of current market. Additionally, Conoco has obligations under international contracts to purchase natural gas over periods up to 19 years. Due to the significant strengthening of market prices, these long-term purchase obligations are at prices lower than December 31, 2000 quoted market prices. However, at December 31, 1999, these obligations were at prices in
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE)
excess of year-end 1999 quoted market prices. No material annual gain or loss is expected from these long-term commitments.
Conoco is subject to various lawsuits and claims involving a variety of matters including, along with other oil companies, actions challenging oil and gas royalty and severance tax payments, actions related to gas measurement and valuation methods, actions related to joint interest billings to operating agreement partners, and claims for damages resulting from leaking underground storage tanks. As a result of the separation agreement with DuPont, Conoco also has assumed responsibility for current and future claims related to certain discontinued chemicals and agricultural chemicals businesses operated by Conoco in the past. In general, the effect on future financial results is not subject to reasonable estimation because considerable uncertainty exists. The ultimate liabilities resulting from such lawsuits and claims may be material to results of operations in the period in which they are recognized.
On May 2, 2000, a jury in federal court in Virginia found that Conoco infringed patents of General Technology Applications (GTA) involving part of a process for manufacturing a flow improver product. The amount awarded as damages was $55. We have appealed the verdict. Conoco remains convinced that the evidence clearly demonstrates that Conoco's process does not infringe the GTA patents, and that the trial court decision will be reversed.
Conoco also is subject to contingencies pursuant to environmental laws and regulations that in the future may require further action to correct the effects on the environment of prior disposal practices or releases of petroleum substances by Conoco or other parties. Conoco has accrued for certain environmental remediation activities consistent with the policy set forth in note 2. Conoco assumed environmental remediation liabilities from DuPont related to certain discontinued chemicals and agricultural chemicals businesses operated by Conoco in the past that are included in the environmental accrual. The accrual amounted to $119 at December 31, 2000, and $109 at December 31, 1999. In management's opinion, this accrual was appropriate based on existing facts and circumstances. Under adverse changes in circumstances, potential liability may exceed amounts accrued. In the event future monitoring and remediation expenditures are in excess of amounts accrued, they may be significant to results of operations in the period recognized. However, management does not anticipate they will have a material adverse effect on the consolidated financial position of Conoco.
Conoco or DuPont, on behalf of and indemnified by Conoco, has directly guaranteed obligations of certain affiliated companies and others. These guarantees totaled $1,090 at December 31, 2000, and $1,138 at December 31, 1999. The balance at December 31, 2000, included $706 and $167 associated with Petrozuata and Polar Lights, respectively. Conoco had no indirect guarantees as of December 31, 2000. At December 31, 1999, Conoco had indirectly guaranteed various debt obligations under agreements with certain affiliated and other companies to provide specified minimum revenues from shipments or purchases of products. These indirect guarantees totaled $7. No material loss is anticipated by reason of such agreements and guarantees.
Conoco's operations, particularly oil and gas exploration and production, can be affected by changing economic, regulatory and political environments in the various countries in which Conoco operates, including the U.S. In certain locations, host governments have imposed restrictions, controls and taxes. In others, political conditions have existed that may threaten the safety of employees and Conoco's continued presence in those countries. Internal unrest or strained relations between a host government and Conoco or other governments may affect Conoco's operations. Those developments have, at times, significantly affected Conoco's operations and related results and are carefully considered by management when evaluating the level of current and future activity in such countries. Conoco does take various steps to minimize its financial exposure to loss including, in certain cases, obtaining risk insurance coverage. Areas in which Conoco has a significant active presence include Canada, the Czech Republic, Germany, Indonesia, Malaysia, Nigeria, Norway, Russia, Syria, the United Arab Emirates, the U.K., the U.S., Venezuela and Vietnam.
27. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION
Conoco has three operating segments that comprise the structure used by senior management to make key operating decisions and assess performance. These are the upstream, downstream and emerging businesses segments. Upstream operating segment activities include exploring for, developing, producing and selling crude oil, natural gas and natural gas liquids. Activities of the downstream operating segment include refining crude oil and other feedstocks into petroleum products; buying and selling crude oil and refined products; and transporting,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE)
distributing and marketing petroleum products. Activities of the emerging businesses operating segment include the development of new businesses beyond our traditional operations. Conoco has five reporting segments. Four reporting segments reflect the geographic division between the U.S. and international operations of its upstream and downstream businesses. One reporting segment is for emerging businesses. Corporate includes general corporate expenses, financing costs and other non-operating items and captive insurance operations.
There were several factors driving Conoco's revised segment reporting and the subsequent creation of the emerging businesses operating segment in the fourth quarter of 2000. The most important of these factors was the desire to differentiate new businesses from our traditional operations. These businesses have the potential to contribute substantially to our long-term growth and are built on our core businesses. This segment includes Conoco's emerging power, carbon fibers and natural gas refining businesses.
Conoco sells its products worldwide. In 2000, about 59 percent of sales were made in the U.S. and 36 percent of sales were made in Europe. In 1999, about 54 percent of sales were made in the U.S. and 41 percent of sales were made in Europe. Major products include crude oil, natural gas and refined products that are sold primarily in the energy and transportation markets. Conoco's sales are not materially dependent on any single customer or small group of customers. Transfers between segments are on the basis of estimated market values.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE)
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(1) Includes after-tax benefits (charges) from special items:
(2) Includes sales of purchased products substantially at cost:
Sales to equity affiliates totaled $2,200 for 2000, $1,519 for 1999 and $1,219 for 1998. The majority of these sales was in downstream and represented refined products.
(3) Capital employed is equivalent to the sum of stockholders' equity/owner's net investment and borrowings (both short-term and long-term). Borrowings include amounts due to related parties, net of associated notes receivable. Amounts identified for operating segments comprise those assets and liabilities not deemed to be of a general corporate nature, including cash and cash equivalents, financing-oriented items and aviation investment.
(4) Investment in affiliates (including advances) for Petrozuata was $693 and $445 for 2000 and 1999, respectively.
(5) ROCE is a measure of annual net income before special items, excluding after-tax debt cost incurred, generated as a percentage of the two-year average capital employed.
(6) Includes investments in affiliates.
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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 $58 for 2000, $54 for 1999 and $51 for 1998.
SUPPLEMENTAL PETROLEUM DATA (UNAUDITED) (DOLLARS IN MILLIONS)
OIL AND GAS PRODUCING ACTIVITIES
Supplemental Petroleum Data disclosures are presented in accordance with the provisions of SFAS No. 69, "Disclosures about Oil and Gas Producing Activities."
Accordingly, volumes of reserves and production exclude royalty interests of others, and royalty payments are reflected as reductions in revenues.
RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES
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(1) Includes exploration operating expenses, dry hole costs and impairment of unproved properties.
(2) Includes gain/(loss) on disposal of fixed assets and other miscellaneous revenues and expenses.
(3) Includes Conoco's net share of equity affiliate information.
SUPPLEMENTAL PETROLEUM DATA (UNAUDITED) (DOLLARS IN MILLIONS)
COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION, EXPLORATION AND DEVELOPMENT ACTIVITIES (1)
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(1) These data comprise all costs incurred in the activities shown, whether capitalized or charged to expense at the time they were incurred.
(2) Does not include properties acquired through property trades.
(3) Acquisition costs of properties are shown before a gross up for SFAS No. 109 "Accounting For Income Taxes" of $204 in 2000, $48 in 1999 and $55 in 1998.
(4) Includes acquisition costs associated with petroleum reserves acquired in the North Sea in 2000 and 1998.
(5) Includes Conoco's net share of equity affiliate information.
CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING ACTIVITIES
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(1) Includes acquisition costs associated with petroleum reserves acquired in the North Sea in 2000 and 1998.
(2) Includes Conoco's net share of equity affiliate information.
SUPPLEMENTAL PETROLEUM DATA (UNAUDITED) (IN MILLIONS OF BARRELS)
ESTIMATED PROVED RESERVES OF OIL (1)
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(1) Oil reserves comprise crude oil and condensate, and natural gas liquids expected to be removed for Conoco's account from its natural gas deliveries.
(2) Includes reserves acquired through property trades.
(3) Includes reserves acquired in the North Sea in 2000 and 1998.
(4) Includes reserves disposed of through property trades.
(5) Includes Conoco's net share of equity affiliate information.
SUPPLEMENTAL PETROLEUM DATA (UNAUDITED) (IN BILLION CUBIC FEET)
ESTIMATED PROVED RESERVES OF GAS
- --------- (1) Includes revisions due to wet gas and NGL accounting realignment in the U.S. This resulted in net additional reserves of 11 MMBOE in 2000.
(2) Includes other regions' price-driven revisions to gas reserve entitlements under production sharing contracts and similar arrangements.
(3) Includes reserves acquired through property trades.
(4) Includes reserves acquired in the North Sea in 2000 and 1998.
(5) Includes reserves disposed of through property trades.
(6) Includes Conoco's net share of equity affiliate information.
SUPPLEMENTAL PETROLEUM DATA (UNAUDITED)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES
The following information has been prepared in accordance with SFAS No. 69, which requires the standardized measure of discounted future net cash flows to be based on year-end prices, costs and statutory income tax rates and a 10 percent annual discount rate. Specifically, the per-barrel oil prices used to calculate the December 31, 2000 data averaged $25.29 for the U.S., $21.75 for Europe and $21.23 for other regions. The gas prices per thousand cubic feet averaged $9.79 for the U.S., $3.15 for Europe and $5.43 for other regions. Because prices used in the calculation are as of December 31, the standardized measure could vary significantly from year to year based on market conditions at that specific date.
The projections should not be viewed as realistic estimates of future cash flows nor should the "standardized measure" be interpreted as representing current value to Conoco. Material revisions to estimates of proved reserves may occur in the future; development and production of the reserves may not occur in the periods assumed; actual prices realized are expected to vary significantly from those used; and actual costs also may vary. Conoco's investment and operating decisions are not based on the following information, 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
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(1) Includes $263 at year-end 1998 attributable to Conoco Oil & Gas Associates L.P., in which there was a minority interest with an approximate 20 percent average revenue share.
(2) Includes Conoco's net share of equity affiliate information.
SUMMARY OF CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES
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(1) Includes Conoco's net share of equity affiliate information.
CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE)
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(1) Excludes other income and equity in earnings of affiliates of $167, $149, $110 and $124 in each of the quarters in 2000 and $24, $77, $76 and $93 in each of the quarters in 1999.
(2) Excludes provision for income taxes.
(3) Includes $8 ($.01 per share - diluted) reflecting a $27 gain from the sale of natural gas processing assets in the U.S. partially offset by a $16 loss for litigation provisions and $3 for the write-off of related refinery assets.
(4) Includes $4 ($.01 per share - diluted) for settlement costs associated with the separation agreement from DuPont related to a discontinued business.
(5) Includes $26 ($.04 per share - diluted) for the write-off of our share of a Colombian power venture.
(6) Includes $24 ($.04 per share - diluted) related to the write-down of an international refinery venture's inventories to market value.
(7) Earnings per share for the year may not equal the sum of the quarterly earnings per share due to changes in average shares outstanding (see note 8 to the consolidated financial statements).
(8) Conoco's Class A common stock and Class B common stock are listed on the New York Stock Exchange (trading symbols: COC.A and COC.B). Class A common stock commenced trading on October 22, 1998, subsequent to Conoco's initial public offering. Class B common stock commenced trading on August 16, 1999, subsequent to the conclusion of DuPont's exchange offer, which resulted in 100 percent of Class B common stock being distributed to DuPont shareholders. Prices are reported by the New York Stock Exchange.
(9) Includes $38 ($.06 per share - diluted) related to U.S. downstream litigation and corporate settlement charges.
ITEM 9.
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 2001 annual meeting proxy statement filed in connection with the annual meeting of stockholders to be held on May 8, 2001.
ITEM 10.
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 "2001 Proxy Statement") for its annual meeting of stockholders to be held on May 8, 2001, 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 33).
ITEM 11.
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 2001 proxy statement, which sections are incorporated herein by reference.
ITEM 12.
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 2001 proxy statement, which sections are incorporated herein by reference.
ITEM 13.
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 2001 proxy statement, which section is incorporated herein by reference.
PART IV
ITEM 14.
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.
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, 2000.
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.
Included on page 110 of this annual report on Form 10-K is financial statement schedule II -- Valuation and qualifying accounts.
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 October 19, 2000 between Conoco and Archie W. Dunham(7) 10.2# -- Conoco Inc. Key Employee Severance Plan, as amended(8) 10.3# -- Conoco Inc. Key Employee Temporary Severance Plan, as amended(9) 10.4# -- Conoco Inc. Salary Deferral and Savings Restoration Plan, as amended(10) 10.5# -- Directors' Charitable Gift Plan, as amended(10) 10.6# -- Deferred Compensation Plan for Nonemployee Directors, as amended May 12, 1999(11) 10.7# -- Form Indemnity Agreement with Directors(12) 10.8# -- 1998 Stock and Performance Incentive Plan, as amended October 28, 1999(13) 10.9# -- 1998 Key Employee Stock Performance Plan, as amended October 28, 1999(14) 10.11# -- Rabbi Trust Agreement dated December 17, 1999(15) 11 -- Statement re: Computation of Per Share Earnings(7) 12 -- Computation of Ratio of Earnings to Fixed Charges(7) 21.1 -- List of Principal Subsidiaries of the Registrant(7) 23.1 -- Consent of PricewaterhouseCoopers LLP(7) 24 -- Power of Attorney(16) 99.1 -- Consent of Solomon Associates(7)
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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) Filed herein.
(8) Incorporated by reference to exhibit 10.1 of Conoco's Form 10-Q for the quarter ended June 30, 2000.
(9) Incorporated by reference to exhibit 10.2 of Conoco's Form 10-Q for the quarter ended June 30, 2000.
(10) Incorporated by reference to exhibit of the same number of Conoco's registration statement on Form S-1, Registration No. 333-88573.
(11) Incorporated by reference to exhibit 10.1 of Conoco's Form 10-Q for the quarter ended March 31, 1999.
(12) Incorporated by reference to exhibit 10.19 of Conoco's registration statement on Form S-1, Registration No. 333-60119.
(13) Incorporated by reference to exhibit 10.6 of Conoco's Form 10-Q for the quarter ended September 30, 1999.
(14) Incorporated by reference to exhibit 10.7 of Conoco's Form 10-Q for the quarter ended September 30, 1999.
(15) Incorporated by reference to exhibit of the same number of Conoco's Form 10-K for the fiscal year ended December 31, 1999.
# 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
1. A current report on Form 8-K, dated February 22, 2001 was filed by Conoco on February 22, 2001. In this report, we filed our 2000 audited financial statements.
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Stockholders and the Board of Directors of Conoco Inc.:
Our audit of the consolidated financial statements referred to in our report dated February 19, 2001 appearing in the 2000 Annual Report to Shareholders of Conoco Inc. (which report and consolidated financial statements are included in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas March 9, 2001
CONOCO INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (IN MILLIONS OF DOLLARS)
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 12th day of March 2001.
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 12th day of March, 2001, by the following persons on behalf of the registrant in the capacities indicated:
*BY: /s/ MICHAEL A. GIST --------------------------- Michael A. Gist Attorney-in-Fact
INDEX TO EXHIBITS
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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) Filed herein.
(8) Incorporated by reference to exhibit 10.1 of Conoco's Form 10-Q for the quarter ended June 30, 2000.
(9) Incorporated by reference to exhibit 10.2 of Conoco's Form 10-Q for the quarter ended June 30, 2000.
(10) Incorporated by reference to exhibit of the same number of Conoco's registration statement on Form S-1, Registration No. 333-88573.
(11) Incorporated by reference to exhibit 10.1 of Conoco's Form 10-Q for the quarter ended March 31, 1999.
(12) Incorporated by reference to exhibit 10.19 of Conoco's registration statement on Form S-1, Registration No. 333-60119.
(13) Incorporated by reference to exhibit 10.6 of Conoco's Form 10-Q for the quarter ended September 30, 1999.
(14) Incorporated by reference to exhibit 10.7 of Conoco's Form 10-Q for the quarter ended September 30, 1999.
(15) Incorporated by reference to exhibit of the same number of Conoco's Form 10-K for the fiscal year ended December 31, 1999.
# Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K.