<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F/A
<TABLE>
<C> <S>
(MARK ONE)
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR
(g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 1-14672
</TABLE>
PETROFINA
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
N/A KINGDOM OF BELGIUM
(Translation of registrant's (Jurisdiction of incorporation
name into English) or organization)
</TABLE>
52 RUE DE L'INDUSTRIE
B-1040 BRUSSELS, BELGIUM
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the
Act:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
<S> <C>
Ordinary Voting Shares New York Stock Exchange*
American Depositary Shares each representing New York Stock Exchange
one-tenth of one Ordinary Voting Share
</TABLE>
Securities registered or to be registered pursuant to Section 12(g) of the
Act: None
Securities for which there is a reporting obligation pursuant to Section
15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of the close of the period covered by the annual
report.
23,459,774 Ordinary Voting Shares (as of December 31, 1998)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark which financial statement item the registrant has
elected to follow.
Item 17 [ ] Item 18 [X]
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* Not for trading, but only in connection with the registration of American
Depositary Shares, pursuant to the requirements of the Securities and Exchange
Commission.
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<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
EXCHANGE RATES............................................................. 2
ENFORCEABILITY OF CIVIL LIABILITIES UNDER U.S. FEDERAL SECURITIES LAWS..... 2
GLOSSARY................................................................... 3
ABBREVIATIONS.............................................................. 4
CONVERSION TABLE........................................................... 4
PART I
Item 1. Description of Business..................................... 5
Item 2. Description of Property..................................... 28
Item 3. Legal Proceedings........................................... 28
Item 4. Control of Registrant....................................... 28
Item 5. Nature of Trading Market.................................... 29
Item 6. Exchange Controls and Other Limitations Affecting Security
Holders..................................................... 31
Item 7. Taxation.................................................... 32
Item 8. Selected Consolidated Financial Data........................ 36
Item 9. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 38
Item 9A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 54
Item 10. Directors and Officers of Registrant........................ 56
Item 11. Compensation of Directors and Officers...................... 59
Item 12. Options to Purchase Securities from Registrant or
Subsidiaries................................................ 59
Item 13. Interest of Management in Certain Transactions.............. 60
PART II
Item 14. Description of Securities to be Registered.................. 60
PART III
Item 15. Defaults upon Senior Securities............................. 60
Item 16. Changes in Securities and Changes in Security for Registered
Securities.................................................. 60
PART IV
Item 17. Financial Statements........................................ 60
Item 18. Financial Statements........................................ 60
Item 19. Financial Statements and Exhibits........................... 61
</TABLE>
i
<PAGE> 3
IN THIS ANNUAL REPORT, (i) REFERENCES TO THE "COMPANY" ARE TO PETROFINA
S.A., AND (ii) REFERENCES TO "PETROFINA" OR THE "GROUP" ARE TO THE COMPANY AND
ITS CONSOLIDATED SUBSIDIARIES. FOR DEFINITIONS OF OTHER TERMS USED HEREIN, SEE
THE GLOSSARY BELOW.
The Company has prepared its consolidated financial statements in
accordance with U.S. generally accepted accounting principles ("U.S. GAAP"). For
more information, see Note 1 to the Consolidated Financial Statements in Item
18.
PetroFina's financial statements were previously presented in Belgian
francs (BEF). A Belgian Royal Decree dated December 15, 1998 permits Belgian
companies to restate financial statements in Euro ("Euro" or "EUR"). All current
year and comparative financial statement amounts in this Annual Report have been
restated in Euro based on the January 1, 1999 conversion rate of 1 Belgian franc
= 0.02479 Euro (1 Euro = BEF 40.3399). PetroFina's comparative financial
statements in Euro depict the same trends as would have been presented if the
Group had continued to present its financial statements in Belgian francs.
PetroFina's financial statements will not be comparable to the financial
statements of other companies reporting in Euro that have restated amounts from
a currency other than Belgian francs.
EXCHANGE RATES
Most currency amounts in this Annual Report are expressed in Euro or in
United States dollars ("dollars" or "US $"). Solely for the reader's
convenience, this Annual Report contains translations of certain Euro amounts
into dollars. These translations should not be considered representations that
the Euro amounts actually represent such dollar amounts or could be converted
into dollars at specified rates.
The Euro is the common currency of the European Monetary Union adopted by
11 member states on January 1, 1999. It is a single currency shared by the
participating member states of Belgium, Germany, Spain, France, Ireland, Italy,
Luxembourg, the Netherlands, Austria, Portugal and Finland. As of January 1,
1999 the European Central Bank has the power to direct monetary policy of the
participating member states, including money supply and official interest rates
for the Euro. During a three-year transition period ending January 1, 2002, the
Belgian franc, along with other legal currencies, will remain legal tender,
although conversion rates between currencies will be computed based on the Euro
rate established by the European Central Bank. See Item 9. "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
more information.
Beginning on January 4, 1999, the Federal Reserve Bank of New York began
reporting the Euro/dollar exchange rate in place of the individual currencies of
the participating European Monetary Union members. Unless otherwise stated, the
convenience translations herein have been made at 0.8466 Euro per dollar (US
$1.1812 per Euro), the noon buying rate in New York City for cable transfers in
Euro as certified for customs purposes by The Federal Reserve Bank of New York
(the "Noon Buying Rate") on January 4, 1999.
1
<PAGE> 4
DOLLAR/EURO EXCHANGE RATES
The table below sets forth, for the periods and dates indicated, certain
information concerning the exchange rate of dollar per Euro based on the Noon
Buying Rate. For periods prior to January 1, 1999, the table arrives at the
Euro/ dollar exchange rate by converting historical Noon Buying Rates based on
the January 1, 1999 conversion rate of 1 Belgian franc = 0.02479 Euro (1 Euro =
BEF 40.3399). Such rates were not used by the Company in the preparation of its
consolidated financial statements included herein.
<TABLE>
<CAPTION>
AT END AVERAGE
YEAR OF PERIOD RATE(1) HIGH LOW
---- --------- ------- ----- -----
(DOLLAR PER EURO)
<S> <C> <C> <C> <C>
1994........................................................ 0.7895 0.8223 0.9056 0.7618
1995........................................................ 0.7295 0.7261 0.7918 0.6926
1996........................................................ 0.7861 0.7690 0.8000 0.7313
1997........................................................ 0.9192 0.8899 0.9623 0.7873
1998........................................................ 0.8518 0.8996 0.9544 0.8228
1999(through March 31, 1999)................................ 0.9252 0.9043 0.9331 0.8466
</TABLE>
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(1) The average of the exchange rates on the last business day of each full
month during the relevant period.
On January 13, 1999, the Noon Buying Rate was 1.1698 Euro per dollar (US $
0.8548 per Euro).
On April 23, 1999, the Noon Buying Rate was 1.0634 Euro per dollar (US $
0.9404 per Euro).
Fluctuations in the exchange rate will affect the dollar equivalent of the
Euro price of PetroFina Shares on the Brussels Stock Exchange and, as a result,
are likely to affect the market price of PetroFina ADSs in the United States.
Such fluctuations would also affect the dollar amounts received by holders of
the PetroFina ADSs on conversion by the Depositary (as defined below) of cash
dividends paid in Euro on the PetroFina Shares underlying the PetroFina ADSs.
For information regarding the effects of currency fluctuations on PetroFina's
results, see "Item 9. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
ENFORCEABILITY OF CIVIL LIABILITIES UNDER U.S. FEDERAL SECURITIES LAWS
PetroFina is a Belgian corporation (societe anonyme/naamloze vennootschap).
Most of its officers and directors and some of its counsel and accountants named
in this Annual Report are not subject to the jurisdiction of the United States
because they are neither citizens nor residents of the United States.
Substantially all of the assets of these persons and a substantial portion of
the assets of PetroFina and its subsidiaries are located outside the United
States. As a result, it may not be possible for you to bring a lawsuit in the
United States against these persons.
If you were able to bring a lawsuit in the United States against these
persons, it might not be possible for you to enforce any judgments you were able
to obtain. PetroFina's Belgian counsel, Liedekerke, Wolters, Waelbroeck &
Kirkpatrick, has advised PetroFina that Belgian courts will not automatically
enforce judgments of U.S. federal or state courts that are based on U.S. federal
securities laws against PetroFina, its non-U.S. subsidiaries, controlling
persons, directors, officers or experts named in this Annual Report. Under
Belgian law, actions for enforcement of judgments of courts of the United States
will be successful only if the Belgian court confirms the substantive
correctness of the U.S. court's judgment and is satisfied that the judgement (a)
is not contrary to Belgian public policy or law, (b) did not violate the rights
of the defendant and (c) is not subject to further appeal under U.S. law. The
Belgian court must also be satisfied as to the authenticity of the text of the
U.S. court's judgment.
2
<PAGE> 5
GLOSSARY
Unless the context indicates otherwise, the following terms have the meanings
shown below:
"acreage".................. The total area, expressed in acres, over which
PetroFina has interests in exploration or
production. "Net acreage" is PetroFina's interest,
expressed in acres, in the relevant exploration or
production area.
"aromatics"................ Organic compounds, such as benzene, which contain
one or more unsaturated cyclic structures with
delocalized electrons.
"ADRs"..................... American Depositary Receipts evidencing PetroFina
ADSs.
"barrels" or "bbls"........ Barrels of crude oil, including condensate and
natural gas liquids.
"catalytic cracking"....... A process by which hydrocarbon molecules are broken
down (cracked) into lighter fractions by the action
of a catalyst.
"condensate"............... Light hydrocarbon substances produced with natural
gas which condense into liquid at normal
temperatures and pressures associated with surface
production equipment.
"conversion"............... Transformation of heavy fractions into light ones.
The term "deep conversion" refers to one such
process used for heavy fuel oils.
"crude oil"................ Crude oil, including condensate and natural gas
liquids.
"desulphuration"........... A generic name given to processes used to eliminate
or reduce various degrees of sulphur in petroleum
products.
"distillation"............. A process by which liquids are separated or refined
by vaporization followed by condensation.
"LPG"...................... Liquefied petroleum gas.
"PetroFina ADSs"........... American Depositary Shares representing the
PetroFina Shares. Each PetroFina ADS represents
one-tenth of one PetroFina Share.
"PetroFina Shares"......... Ordinary voting shares of PetroFina S.A.
"proved reserves".......... Proved oil and gas reserves are the estimated
quantities of crude oil, natural gas and natural
gas liquids which geological and engineering data
demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs
under existing economic and operating conditions.
"proved developed
reserves".................. Proved developed oil and gas reserves are reserves
that can be expected to be recovered through
existing wells with existing equipment and
operating methods. Additional oil and gas expected
to be obtained through the application of fluid
injection or other improved recovery techniques for
supplementing natural forces and mechanisms of
primary recovery are included as "proved developed
reserves" only after testing by a pilot project or
after the operation of an installed program has
confirmed through production response that
increased recovery will be achieved.
"proved undeveloped
reserves".................. Proved undeveloped oil and gas reserves are
reserves that are expected to be recovered from new
wells on undrilled acreage, or from existing wells
where a relatively major expenditure is required
for recompletion, but does not include reserves
attributable to any acreage for which an
application of fluid injection or other improved
recovery technique is contemplated, unless such
techniques have been proved effective by actual
tests in the area and in the same reservoir.
3
<PAGE> 6
"steam cracking"........... A process by which hydrocarbon molecules are split
(cracked) into lighter fractions by steam.
"stream day"............... A day when a refinery is in operation.
ABBREVIATIONS
<TABLE>
<S> <C> <C> <C>
bbl......... barrel /d.......... per day
cf.......... cubic feet /y.......... per year
boe......... barrels of oil equivalent m........... thousand
t........... tonne M........... million
bpsd........ barrels per stream day B........... billion
</TABLE>
CONVERSION TABLE
<TABLE>
<S> <C> <C>
1 barrel..................... = 42 U.S. gallons
1 barrel of oil equivalent... = 1 barrel of crude oil = 6,000 cubic feet of gas(1)
1 barrel of crude oil per
day........................ = approximately 50 tonnes of
crude oil (33 API) per year
1 cubic meter................ = 35,315 cubic feet
1 kilometer.................. = approximately 0.62 miles
1 square kilometer........... = 247.1 acres
1 tonne...................... = 1 metric ton = 1,000 kilograms
(approximately 2,203
pounds)
1 tonne of crude oil......... = 1 metric ton of crude oil = approximately 7.3 barrels
of crude oil (assuming a
specific gravity of 33
degrees API (American
Petroleum Institute))
</TABLE>
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(1) Natural gas is converted to barrels of oil equivalent using an
industry-accepted ratio of cubic feet of actual gas per barrel.
4
<PAGE> 7
PART I
ITEM 1. DESCRIPTION OF BUSINESS
PetroFina is an international integrated oil and gas company active in all
sectors of the petroleum industry: exploration and production, refining,
marketing of refined petroleum products, petrochemicals and paints.
Headquartered in Brussels (Belgium), the Group has a global presence and employs
approximately 14,500 people. Founded in 1920, the Company is the twelfth largest
publicly traded integrated oil and gas company in the world (based on market
capitalization).
PetroFina's operations are organized into four principal business segments:
(1) Upstream (exploration, development and production of crude oil and natural
gas and marketing of natural gas), (2) Downstream (refining, supply and trading
and marketing), (3) Chemicals and (4) Paints.
Upstream. PetroFina currently pursues exploration, development and
production of crude oil and natural gas in 10 countries. In 1998, the Group's
average daily production was 225,500 barrels of oil equivalent per day.
PetroFina estimates that the Group's consolidated proved reserves at December
31, 1998 were 871 million barrels of oil equivalent. Crude oil represented 74%
and natural gas represented 26% of these reserves. PetroFina's reserves are
located principally in the North Sea (Norway and United Kingdom) and the United
States. The Group also markets its U.S. natural gas production through a
division of the Upstream segment. PetroFina's Upstream strategy is to
concentrate its activities in selected geographic areas where it believes it has
technical expertise and good partnerships with governmental bodies and other
commercial producers.
Downstream. PetroFina is engaged in refining crude oil into motor fuels
(gasoline, diesel, jet fuels), kerosene, heating oil, other fuels, base
chemicals and feedstocks for chemical production through six refineries in
Europe, the United States and Angola. As of January 1, 1999, the Group's share
of the refineries' aggregate installed refining capacity was approximately
758,000 barrels per day. PetroFina's marketing operations include a network of
approximately 6,000 service stations in Europe and the United States, marketing
petroleum products under the brand name "FINA." PetroFina's supply and trading
divisions are also engaged in wholesale trading of crude oil and petroleum
products.
Chemicals. PetroFina produces monomers (ethylene, propylene and styrene),
polyolefins (polypropylene and high-density polyethylene), styrene polymers and
copolymers (polystyrene and thermoplastic elastomers) for industrial use, as
well as oleochemicals. In 1998, PetroFina produced 2,040 thousand tonnes of
monomers and 2,213 thousand tonnes of polymers. As of December 31, 1998,
PetroFina was among the top four producers of polypropylene in the world, the
top four producers in the European high-density polyethylene market and the top
three producers in the United States polystyrene market (in each case, based on
combined production capacity and sales volume). The Group has chemical plants at
Antwerp, Feluy, Ghent and Oelegem in Belgium and at La Porte (Texas), Carville
(Louisiana) and Bayport (Texas) in the United States.
Paints. PetroFina owns the Sigma Coatings Group ("Sigma"), which is the
fifth largest producer of decorative paints in Europe based on sales. Sigma also
produces industrial, anti-corrosion and marine paints.
UPSTREAM
OVERVIEW OF UPSTREAM ACTIVITIES
The Upstream segment includes all activities associated with the
exploration, development and production of PetroFina's oil and gas interests,
which are presently located in ten countries, as well as the Group's natural gas
marketing operations. The Group focuses its Upstream activities on the following
core geographic areas: the North Sea, Italy, the United States and Africa. As a
result, PetroFina has discontinued its exploration activities in a number of
non-strategic areas. In addition to its operations in the core areas, PetroFina
has continued to evaluate several other regions with high potential in the
Middle East and the Caspian Sea area in order to assure the future replacement
of its reserves.
As of December 31, 1998, PetroFina had approximately 29,300 square
kilometers (7,240,000 acres) of net exploration acreage. Consistent with
industry practice, PetroFina often holds a percentage interest in its
5
<PAGE> 8
acreage, with the balance held by other joint venture partners (which generally
include other oil companies, state oil companies or government entities).
Contractual arrangements between co-venturers generally are governed by an
operating agreement, which provides for costs, entitlements to production and
liabilities to be shared according to percentage interests, and for one
co-venturer to be appointed operator to conduct operations under the overall
supervision and control of an operating committee consisting of a representative
of each co-venturer. While operating agreements generally provide for
liabilities to be borne by the co-venturers according to their respective
percentage interests, licenses from the relevant government authority generally
provide that the co-venturers are jointly and severally liable for their
obligations to that government authority under the applicable license. These
obligations generally include the removal or decommissioning of installations
upon the cessation of operations. PetroFina has interests in producing acreage
in eight countries and currently acts as an operator in eight countries. See
"Upstream Activities by Geographic Region" below for descriptions of the Group's
principal producing fields.
The table below shows the Group's current Upstream activities by country.
<TABLE>
<CAPTION>
EXPLORATION PRODUCTION OPERATOR
----------- ---------- --------
<S> <C> <C> <C>
EUROPE:
Italy.................................................. x x x
Norway................................................. x x x
United Kingdom......................................... x x x
NORTH AND SOUTH AMERICA:
United States.......................................... x x x
Canada................................................. x x
AFRICA:
Angola................................................. x x x
Libya.................................................. x x x
Democratic Republic of Congo (formerly Zaire).......... x x
ASIA:
Vietnam................................................ x x
Azerbaijan............................................. x
</TABLE>
The table below sets forth selected financial data for PetroFina's Upstream
segment for each of the years indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
------------------------------
1998 1997 1996
------- ------- -------
(IN MILLIONS OF EURO)
<S> <C> <C> <C>
Total operating revenue..................................... 2,192 2,188 1,617
Inter-segment sales......................................... (587) (900) (772)
Operating revenues to non-affiliates........................ 1,605 1,288 845
Operating income............................................ 294 627 599
</TABLE>
EXPLORATION
PetroFina's exploration strategy is to exploit its knowledge and position
in key areas where it has an established operating base (the North Sea, Italy,
the United States and Africa), to continue its exploration activities in areas
where exploration has previously been restricted and which have significant
potential (the Caspian Sea and the Middle East) and to extend its activities in
areas which have the potential for large discoveries (deep offshore Gulf of
Mexico and Libya). PetroFina continuously seeks to consolidate and optimize its
portfolio of net exploration acreage.
PetroFina's total capital expenditures for exploration activities amounted
to EUR 97 million, EUR 113.4 million and EUR 85.64 million, for the years ended
1998, 1997 and 1996, respectively. In 1998, PetroFina participated in 26
exploratory wells, for 13 of which it was operator, and added 4,944 square
kilometers (1,222,000 acres) to its portfolio of net exploration acreage.
Approximately 50% of the completed wells either discovered new potential
reserves of crude oil or natural gas or upgraded existing discoveries.
6
<PAGE> 9
PetroFina also removed 2,988 square kilometers (738,000 acres) of acreage in
1998 from its portfolio of net exploration acreage where appraisals indicated a
low probability of commercial reserves.
DEVELOPMENT
The development stage occurs after completion of exploration and appraisal
and prior to hydrocarbon production and involves the development of production
facilities including platforms and pipelines. For offshore reserves the
development stage can involve substantial expenditures and time, especially in
areas without existing production infrastructure. PetroFina invested EUR 436.6
million, EUR 456.7 million and EUR 356.7 million, for the years ended 1998, 1997
and 1996, respectively, for development and production facilities.
PetroFina's current activities include new development projects in the
North Sea, North America, Italy and offshore West Africa, as well as
redevelopment of producing facilities in the North Sea and onshore Africa.
The five most significant new development projects currently underway are:
(1) the water injection project on the Eldfisk field in the Greater Ekofisk Area
in the Norwegian sector of the North Sea, (2) the Badami oil field development
offshore Alaska (production start-up from first wells occurred in August 1998),
(3) the Genesis oil and gas field in the Gulf of Mexico (production start-up
occurred end of January 1999), (4) the onshore Tempa Rossa oil field development
in the Appennine Mountains of southern Italy (production start-up expected in
2002) and (5) the offshore development project of the Girassol field in the deep
waters offshore Angola (production start-up expected in 2001).
PetroFina's largest and most productive Upstream asset, the Ekofisk complex
in the Norwegian sector of the North Sea, has been completely redeveloped at a
cost of US $2.63 billion. PetroFina's share of the cost was approximately US
$750 million. Production through the new installations started in August 1998,
and during March 1999 PetroFina's share of the production from the Ekofisk
complex reached an approximate rate of 90,000 barrels of oil and PetroFina
expects natural gas production to reach 150 million cubic feet per day in 2000.
For additional information regarding this redevelopment project, see "Upstream
Activities by Geographic Region -- Europe" below.
PRODUCTION
The Group's net production in 1998 was 51 million barrels of oil and 187
billion cubic feet of gas, which corresponds to an average daily production of
225,500 barrels of oil equivalent per day. This production is about 7% lower
than in 1997 and 3% lower than in 1996 and 1995. Europe is the most significant
production area, contributing 88% of total oil production and 61% of total gas
production, or 76% of combined production. The United States contributes 19% of
the Group's aggregate combined production, and the balance comes from Africa.
7
<PAGE> 10
The following table shows PetroFina's net production for each of the years
indicated by hydrocarbon type and country:
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ ------------------
OIL GAS OIL GAS OIL GAS
--- --- --- --- --- ---
(MBBL/D) (MCF/D) (MBBL/D) (MCF/D) (MBBL/D) (MCF/D)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
EUROPE
Italy............................. -- 8 -- 8 -- 7
Norway............................ 86 174 93 252 89 299
United Kingdom.................... 33 130 36 102 31 106
NORTH AMERICA
Canada............................ -- 6 -- 5 -- 4
United States..................... 11 195 11 205 11 161
AFRICA
Libya............................. 1
Democratic Republic of Congo
(formerly Zaire)................ 3 -- 3 -- 4 --
--- --- --- --- --- ---
Consolidated Total..................... 134 513 143 572 135 577
EQUITY COMPANIES
Angola............................ 6 -- 5 -- 3 --
--- --- --- --- --- ---
Total........................ 140 513 148 572 138 577
</TABLE>
Approximately 90% of the Group's crude oil production is sold to the
Downstream segment, which refines the production. The refined products are
either used by the Chemicals segment, sold through the Group's wholesale and
retail petroleum marketing activities or sold through the Group's supply and
trading activities. The rest of the Group's oil and gas production is sold to
third parties. See "Downstream."
RESERVES
At December 31, 1998, the Group's consolidated combined net proved crude
oil and natural gas reserves were approximately 871 million barrels of oil
equivalent, approximately three-quarters of which were oil. 77% of the proved
reserves are located in Europe, 16% in the United States and 7% in Africa.
The table below sets forth PetroFina's estimated worldwide consolidated net
proved reserves as of the dates indicated (including both developed and
undeveloped reserves).
<TABLE>
<CAPTION>
NET PROVED RESERVES AT DECEMBER 31,
-----------------------------------------------------------------------
PERCENTAGE PERCENTAGE PERCENTAGE
CHANGE FROM CHANGE FROM CHANGE FROM
1998 1997 1997 1996 1996 1995 1995
----- ----------- ----- ----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Crude Oil (Mbbl).............. 648 11.1 583 3.7 562 2.2 550
Natural Gas (Bcf)............. 1,336 (15.9) 1,588 (8.8) 1,742 (1.3) 1,765
Combined(1) (Mboe)............ 871 2.7 848 (0.6) 853 1.1 844
</TABLE>
- ---------------
(1) See "Conversion Table" for the ratio used to convert cubic feet of natural
gas to boe.
PetroFina's internal petroleum reservoir engineers estimate proved reserves
using geological and engineering data to determine whether the crude oil or
natural gas in known reservoirs is reasonably certain to be recoverable under
existing economic and operating conditions. This process involves making
subjective judgments. Consequently, measures of reserves are not precise and are
subject to revision. PetroFina's oil and gas reserves are reviewed annually to
take into account, among other things, production levels, field reviews, the
addition of new reserves from discoveries and acquisitions, disposals of
reserves and economic factors. PetroFina's worldwide net proved reserves shown
above exclude the net proved reserves of its non-consolidated company in Angola,
in which PetroFina's proportionate share represented 21.8 million barrels of oil
as of December 31, 1998, 24.4 million barrels of oil as of December 31, 1997 and
25.7 million barrels of oil as of December 31, 1996. For further information
concerning PetroFina's net proved reserves at December 31,
8
<PAGE> 11
1998, 1997 and 1996. See "Item 18. Financial Statements -- Supplemental Oil and
Gas Information (Unaudited)."
PetroFina's net proved reserves of crude oil and natural gas (calculated on
an oil equivalent basis) have remained stable over the three years ended
December 31, 1998. Over the three-year period from 1996 to 1998, reserve
additions were approximately 285 million barrels of oil equivalent, replacing
114% of production, before deducting sales of reserves in place during this
period. The Group has replaced disposed reserves with new discoveries, improved
enhanced recovery techniques and reserves revisions. The Group's ability to
continue to replace its crude oil and natural gas reserves depends on the
successful outcome of its exploration activities, primarily in Europe and the
United States.
NATURAL GAS MARKETING
The Natural Gas Marketing division markets the Group's United States
natural gas production, as well as third-party produced gas.
UPSTREAM ACTIVITIES BY GEOGRAPHIC REGION
Europe
In NORWAY, the Group holds an interest in 10 offshore licenses and acts as
operator in block 24/9.
As of January 1, 1999 the Group has a 28.5% interest in the Ekofisk,
Eldfisk and Embla fields and a 21% interest in the Tor field. PetroFina's proved
reserves in Norway as of December 31, 1998 were 525 million barrels of oil
equivalent. Total production in 1998 from these fields net to PetroFina was 31.4
million barrels of crude oil and 63.4 billion cubic feet of natural gas.
The redevelopment of the Ekofisk complex, known as Ekofisk II, included two
major new platforms, a drilling and production platform and a platform for
processing and transportation of oil and gas. While enhancing long-term safety,
this investment allows extended incremental recovery and a significant reduction
in operating costs. At the same time, the Ekofisk partners decided to close
certain smaller, substantially depleted fields like West Ekofisk, Cod, Edda,
Albuskjell and Tommeliten rather than connecting them to Ekofisk II. In
connection with this redevelopment, the government of Norway extended
PetroFina's operating license from 2011 to 2028. No further royalties are due to
the government of Norway since Ekofisk II became operational in October 1998.
However, in exchange for its contribution of 5% of the redevelopment costs, the
government of Norway earns 5% of the production starting from January 1, 1999,
and PetroFina's interest decreased at that point from 30% to 28.5%.
Enhanced recovery techniques, such as water injection and gas injection,
are very important for the Ekofisk field and injection facilities are being
installed for the Eldfisk field and evaluated for the Tor field. In the Ekofisk
field, for instance, the enhanced recovery program is expected to result in an
additional recovery over the life of the field for the Ekofisk partners of more
than 1 billion barrels of oil equivalent.
Oil produced at Ekofisk and its satellite fields is transported by pipeline
to Teesside in the United Kingdom where it is processed. The natural gas is
transported by pipeline to Emden in northern Germany where it is sold to a
consortium of European buyers. The Group holds interests in the oil pipeline
(28.4%), the gas pipeline and the gas processing plant in Emden (Germany)
(12.9%), and the liquid processing facilities in Teesside (United Kingdom)
(23.75%).
In the UNITED KINGDOM ("U.K."), the Group has interests in 74 offshore
blocks, and is the operator in 21 of them. Twelve of these blocks are located in
the area west of the Shetland Islands and 12 others are in the Atlantic Margin
Tranches 21 and 30 (PetroFina operates six of them).
In the U.K., the Group has an active exploration program including
drilling, appraisal, and continual portfolio consolidation. On average, the
Group has participated in five exploratory wells per year since 1992.
Geographically, the Group's activities are focused in areas with existing
infrastructure for production and transport. Discoveries in the U.K. have
contributed approximately 154 million barrels of oil equivalent to PetroFina's
portfolio of proved reserves since 1992, and PetroFina's proved reserves in the
U.K. as of December 31, 1998 were 97 million barrels of oil equivalent.
9
<PAGE> 12
The Group's total net oil production in the U.K. for 1998 was 12.1 million
barrels. As of December 31, 1998, net oil production was approximately 33,000
barrels per day, primarily from the three T-block fields (i.e., Toni, Tiffany
and Thelma) and the Alba field. PetroFina has a 30% interest in T-block, which
produced at a combined field production rate of 50,000 barrels per day in late
1998. At the same time, the Alba field, in which PetroFina holds a 12.65%
interest, produced at a field rate of 80,000 barrels per day.
The Group's gas production in the U.K. totaled 47.4 billion cubic feet in
1998. 33% of this quantity came from the Audrey and Ann fields in which the
Group has a 42.78% interest, while 18% came from the recently developed Armada
field. Another 12% came from the Hewett field (18.57% interest), a field that
has been producing since the late 1960s, and from its extension, Delilah, put on
production during 1998. The balance came from several smaller gas fields such as
Alison, Amethyst, Dawn and Everest and from the associated gas produced in the
three T-block fields.
In ITALY, the Group holds interests in 33 onshore and six offshore licenses
and is operator of 11 of them. PetroFina's proved reserves in Italy as of
December 31, 1998 were 48.5 million barrels of oil equivalent.
In 1998, it was determined that the Tempa Rossa field, which stretches over
three licenses in the southern Appennine Mountains, should be unified. After the
unification, which will be finalized during 1999, the Group will own an interest
of 25% in the field. In each of the wells drilled, a vertical oil column of over
1,000 meters was encountered. During the course of the next decade, the Group
plans a phased development of the field. Initial production under the first
phase, which will include eight production wells, is planned for 2002. The oil,
which is heavy and has a significant sulphur content, will require special
treatment and, therefore, will present both a technical and a marketing
challenge.
North and South America
In the UNITED STATES ("U.S."), the Group's holdings include interests in 85
blocks in the Gulf of Mexico (more than 60 of which are deep water blocks), and
the Group is the operator in 11 of them. The Group also has interests in four
blocks offshore California and 82 blocks offshore Alaska in the Beaufort Sea
(PetroFina is operator in 18 blocks). The Group holds additional onshore
interests in 18 states. Over one-third of the Group's acreage in the U.S. is
located in Texas.
At the end of 1998, total exploration acreage in the United States amounted
to 6,575 square kilometers (1,625,000 acres). The Group's exploration activities
in the U.S. are conducted primarily offshore in the Gulf of Mexico and in the
Beaufort Sea, and onshore in the Gulf States region.
The Group's U.S. exploration activities increased steadily from 1995 after
an extensive portfolio consolidation program caused drilling activity to slow in
1994. In 1998, 1997 and 1996 exploration expenditures in the U.S. amounted to
EUR 30.2 million, EUR 50.8 million, and EUR 41.9 million, respectively. The
Group participated in 49, 50, and 29 exploratory wells, respectively, during
these three years. Since 1992, discoveries in the United States have contributed
130 million barrels of oil equivalent to PetroFina's portfolio of proved
reserves, and PetroFina's proved reserves in the U.S. as of December 31, 1998
were 138 million barrels of oil equivalent.
In 1998, PetroFina's total net production in the United States was 4
million barrels of oil and 71 billion cubic feet of gas.
Onshore the Group has concentrated its exploration efforts in Texas,
Louisiana, Mississippi and Arkansas where several discoveries have been made,
such as in the King Bee, Fandango and McAllen-Pharr areas. During the 1990s the
Group also implemented several tertiary recovery projects in the Permian basin,
including at West Brahaney, North Robertson and East Penwell.
Offshore Louisiana, in the Gulf of Mexico, the Group is concentrating on
deep water prospects. It holds a 30.5% interest in the Mississippi Canyon block
441 field which has produced gas and condensates since 1992. The Group owns a
4.95% working interest in the Genesis field (Green Canyon blocks), the
development of which was finished late 1998 with production start-up of oil and
gas occurring at the end of January 1999.
Offshore Alaska, in the Beaufort Sea, the Badami oil field, which was
discovered in 1990 and in which the Group has a working interest of 30%, is
currently being developed. Production from the first wells started
10
<PAGE> 13
in late August 1998. The oil produced at Badami is transported over 25 miles to
the existing Endicott field and from there it enters into the Trans Alaska
pipeline to Valdez in southern Alaska.
In CANADA, PetroFina produces approximately 6 million cubic feet of natural
gas per day through its participation in two discoveries. The Group also
participates in exploration activities in western Canada.
Africa
In ANGOLA, PetroFina is the operator in fields located in the onshore Congo
basin. Its share of oil production from these fields in 1998 totaled 2 million
barrels. Production in Angola has been increasing steadily as a result of the
rehabilitation plan of the Soyo area following damage to wells and installations
in 1993 and 1994 during the civil war. The total daily production operated by
PetroFina had increased to 20,000 barrels by the beginning of 1998. The oil from
the Congo basin is exported through an offshore, third-party-operated terminal.
PetroFina's interest in Upstream activities in Angola is reflected in the
Consolidated Financial Statements according to the equity method of accounting.
See "Item 18. Financial Statements."
Offshore Angola, the Group has a 5% interest in a joint venture formed for
the exploration and appraisal of Block 17. Since the discovery of the Girassol
field in 1996, three other important oil fields were discovered: Dalia, Rosa and
Lirio. Initial production tests indicated flow rates between 11,000 and 16,000
barrels per day for each of those wells as well as for the appraisal wells
already drilled on the Girassol and Dalia fields. While the joint venture is
continuing its exploration efforts by drilling other structures in the block,
the development of the Girassol field began in 1998 and first production is
expected in 2001. Pre-engineering studies are being carried out on the Dalia
field.
In 1998, PetroFina was awarded the operatorship in Angola offshore deep
water block 19 with a 30% interest. The Group has also been awarded the
operatorship of the onshore concession Cabinda South in which it holds a 45%
interest.
In the DEMOCRATIC REPUBLIC OF CONGO (formerly Zaire), the Group is the
operator with a 54.5% interest in three coastal onshore licenses. Its share of
the oil produced from six different fields was about 1 million barrels in 1998.
A five-year redevelopment plan involving these fields started at the end of
1997.
The Group is an operator with a 60% interest in three licenses of the Sirte
oil basin in LIBYA, where it has drilled ten wells. These wells have resulted in
two small discoveries, which are being evaluated through an extended production
test that started in December 1997 and which will run for two years. The initial
gross production was 5,000 barrels per day.
East Asia
In VIETNAM, the Group is the operator, with a 70% interest, of offshore
blocks 46, 50 and 51. Since 1996, seven wells drilled in these blocks have made
hydrocarbon discoveries. During 1997, a three-dimensional seismic survey was
conducted in order to determine the potential of these discoveries and
development feasibility studies were started. One of the discovery wells
confirmed that the Bunga Kekwa field, in which production started in 1997,
stretches into block 46. Bunga Kekwa is located in the zone that is jointly
managed by Vietnam and Malaysia. PetroFina is currently evaluating the
unitization of the field.
Central Asia
PetroFina has a 5% interest in a block offshore AZERBAIJAN covering the
Lenkoran and Talysh structures in the Caspian Sea. First drilling is expected in
the year 2000.
11
<PAGE> 14
DOWNSTREAM
OVERVIEW OF DOWNSTREAM ACTIVITIES
The Downstream segment includes PetroFina's crude oil refining, supply and
trading, and wholesale and retail petroleum products marketing activities.
With respect to refining, PetroFina's strategy is to be an efficient
operator of individual refineries with the flexibility to adapt to different
crude and feedstock supplies in order to enable it to meet changing market
requirements. PetroFina's supply and trading activity is focused on obtaining
both (1) crude oil and other raw materials needed for the Group's refinery
operations and (2) refined petroleum products to meet the needs of the Group's
marketing activities. The marketing activities focus on wholesale and retail
sales of refined petroleum products and lubricants, primarily in Europe and the
United States.
The table below sets forth selected financial data for PetroFina's
Downstream segment for each of the years indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
------- ------- -------
(IN MILLIONS OF EURO)
<S> <C> <C> <C>
Total operating revenue..................................... 13,087 14,178 12,304
Inter-segment sales......................................... (346) (420) (341)
Operating revenues to non-affiliates........................ 12,741 13,758 11,963
Operating income............................................ 162 298 129
</TABLE>
REFINING
As of January 1, 1999, PetroFina had six refineries, in which the Group's
aggregate share of the total installed crude processing capacity was 37 million
tonnes per year (758,000 bpsd): (1) Fina Raffinaderij Antwerpen ("FRA") in
Antwerp (Belgium), (2) Lindsey Oil Refinery ("LOR") (PetroFina interest 50%) in
Killingholme (U.K.), (3) the Port Arthur Refinery in Texas (U.S.), (4) the Big
Spring Refinery in Texas (U.S.), (5) Raffineria di Roma ("RdR") (PetroFina
interest 57.5%) in Rome (Italy) and (6) the Luanda Refinery in Angola. In
addition, the Group has access to refining capacity in France through various
processing contracts.
In refining, the Group's objectives are (1) to enhance refining flexibility
by optimizing the production of gasolines, middle distillates and chemical
feedstocks compared to heavy fuel oil, (2) to improve energy efficiency and (3)
to increase the integration of PetroFina's refineries with its chemical plants.
Fulfillment of these objectives will help the Group meet the growing demand for
high value-added products and for products which conform to more stringent
environmental standards.
The refining industry has suffered from continuing erosion of refining
margins during the 1990s. Technological improvements in plant efficiency and
expectations for future product demand have led to an imbalance in the market
between capacity and product demand. While the eventual market effect of the
structural oversupply is expected to be the closure of less efficient plants,
the short-term effect is continued adverse pressure on the sector's
profitability. At the same time, the refining industry requires ongoing capital
investments to enable it to meet future product specifications, especially those
related to environmental regulatory developments.
To counteract the industry conditions described above and to achieve its
strategy, the Group has sought to optimize the size and efficiency of its
refining and lubricating oil blending plants and its retail stations, while
maintaining regional balance between refined product supply and retail station
demand. In addition, the Group intends to continue to upgrade the capacity of
its individual refining units in Europe and the United States. Over the
three-year period ended December 31, 1998, the Group invested EUR 270.2 million
in its refineries.
12
<PAGE> 15
The table below sets forth PetroFina's share of the daily crude oil
refining capacities of the Group's refineries.
<TABLE>
<CAPTION>
GROUP'S SHARE OF DAILY
CRUDE OIL
REFINERY CAPACITY AT
JANUARY 1, 1999 IN BPSD(1)
--------------------------
<S> <C>
FRA......................................................... 320
LOR(2)...................................................... 105
Port Arthur................................................. 183
Big Spring.................................................. 60
RdR(3)...................................................... 49
---
CONSOLIDATED TOTAL.......................................... 717
EQUITY COMPANIES
Luanda(4).............................................. 41
---
TOTAL....................................................... 758
</TABLE>
- ---------------
(1) In the case of refineries that are not wholly owned by the Group, the
indicated capacity represents the Group's proportionate share of the total
refining capacity of the refinery.
(2) PetroFina interest 50%.
(3) PetroFina interest 57.5%.
(4) This refinery is owned and operated by a non-consolidated subsidiary.
The table below sets forth, for the years indicated, the amount of crude
oil processed for PetroFina's account at the Group's refineries (excluding the
Luanda refinery).
<TABLE>
<CAPTION>
1998 1997 1996
----- ---- ----
<S> <C> <C> <C>
Actual throughput (Mt/y).................................... 34.34 32.9 31.8
Utilization................................................. 95.4% 97.3% 98.1%
Total installed capacity (Mt/y)............................. 36 35.8 32.4
</TABLE>
Europe
PetroFina's European refining units are considered industry leaders in
terms of flexibility of access to market through pipeline facilities and captive
local consumption, as well as to the sea and convenient shipping facilities, and
conversion ratings (the ability to produce value-added products) having one of
the highest conversion to distillation ratios in Europe (40%, compared to an
industry average of 32%). The high desulphuration capacity of middle distillates
and fuel oils allows the Group to comply with the European Union's year 2000
sulphur specification for diesel and fuel oils without major additional
investments. The MTBE units (defined below) at FRA and LOR, the TAME unit
(defined below) at LOR and the catalytic reforming unit with a continuous
catalyst regeneration system at FRA give the Group the ability to supply
directly the whole of its European retail network's demand for high octane
unleaded gasoline.
Antwerp. FRA is the Group's largest refinery, accounting for over 42% of
the Group's total crude distillation capacity, and is the fourth largest
refinery in Western Europe (based on throughput capacity).
FRA has an installed atmospheric distillation capacity of 16 million tonnes
of crude oil per year with associated vacuum distillation capacity for the
treatment of residue feedstocks and the capacity to process condensate in other
downsteam units. It has two catalytic crackers with a total capacity of 4.5
million tonnes per year whose capacity has increased by approximately 10% over
the last ten years and whose conversion of heavy fractions into light products
has increased by approximately 5% over the past ten years. It also has a
visbreaker (a cracking process plant which, at moderate temperatures, reduces
the viscosity of heavy petroleum fractions) with a capacity of 2.5 million
tonnes per year; product desulphuration units and sulphur recovery plants; an
MTBE (Methyl-Tertiary-Butyl-Ether) unit with capacity of 180,000 tonnes per
year; a jet fuel treatment unit with capacity of 680,000 tonnes per year; and a
propylene fractionation unit able to produce 200,000 tonnes of chemical grade
propylene per year. An alkylation unit, which has a capacity of 270,000 tonnes
per year, as well as a catalytic reforming unit with a continuous catalytic
regeneration section,
13
<PAGE> 16
which has a capacity of 2.3 million tonnes per year, permits the manufacture of
several grades of unleaded gasoline in the European Union ("EU") in response to
increasingly stringent environmental specifications.
Since 1994, FRA has been equipped with a deep conversion facility with a
capacity of 4 million tonnes per year. This facility enables FRA to produce,
after desulphuration, a high quality product slate from "poorer" quality crudes,
making it one of the most modern and efficient refineries in Europe.
The Group has begun construction of a unit to increase its production of
aromatics (including xylene) to 800,000 tonnes per year by the year 2000, with a
corresponding decrease in gasoline production. PetroFina plans to invest
approximately EUR 99 million in this unit. PetroFina has signed a long-term
supply agreement with Amoco under which Amoco will purchase xylene produced at
FRA.
The Group signed a contract with Electrabel, the Belgian electricity
company, in January 1998, to build a 126 megawatt cogeneration unit at FRA,
which will be fully operational by the end of 1999.
Lindsey Oil Refinery. The Group owns a 50% interest in LOR at Killingholme
in the northeast of England, which has an installed atmospheric distillation
capacity of 10 million tonnes per year with associated vacuum distillation units
which can also treat imported residue feedstocks. LOR has a catalytic cracker
(which was upgraded recently to increase gasoline production and conversion and
to meet anticipated environmental regulations) with a capacity of 2.5 million
tonnes per year; two semi-regenerative catalytic reforming units with a total
capacity of 1.4 million tonnes per year; a visbreaker with a capacity of 1.6
million tonnes per year, and desulphuration units and sulphur recovery plants.
It also has a kerosene treatment unit with a capacity of 780,000 tonnes of jet
fuel per year; a kerosene dearomatization unit with a capacity of 140,000 tonnes
per year; and a bitumen production unit with a capacity of 600,000 tonnes per
year. The refinery also has a catalytic polymerization unit, with a feedstock
capacity of 120,000 tonnes per year, that transforms light olefins from the
cracker into gasoline, as well as two propylene fractionating units, with a
capacity of 160,000 tonnes per year and an alkylation unit (equipped with a
hydroisomerization feedstock preparation section) with a capacity of 250,000
tonnes per year. The refinery has an MTBE unit with a capacity of 100,000 tonnes
per year and a TAME (Tertiary-Amyl-Methyl-Ether) unit with a capacity of 50,000
tonnes per year.
Since 1992, the Group has completed capital projects involving system
automation for managing oil products, finished product loading and catalytic
cracking capacity increases. In addition, in a joint venture with a major
electric utility company, in November 1996, the Group completed the installation
of a 40 megawatt cogeneration unit to produce electricity and steam to supply
LOR's own needs, while leaving a substantial proportion of electricity for sale.
The cogeneration unit reduces the refinery's energy costs in an environmentally
sensitive manner.
Rome. In Italy, the Group owns a 57.5% interest in RdR, a refinery near
Rome. The refinery has an installed atmospheric distillation capacity of 4.0
million tonnes per year and a vacuum distillation unit with a capacity of
630,000 tonnes per year. RdR has a visbreaker with a capacity of 1.7 million
tonnes per year, distillate desulphuration units and a sulphur plant for liquid
sulphur recovery. It is equipped with a semi-regenerative catalytic reformer
unit with a capacity of 600,000 tonnes per year, a kerosene treatment unit with
a capacity to produce 530,000 tonnes of jet fuel per year and an isomerization
unit with a capacity of 240,000 tonnes per year.
A new benzene saturation unit was commissioned in November 1997. This unit
produces low benzene gasoline to be marketed in the Rome region.
United States
Port Arthur. The Port Arthur refinery, on the Texas Gulf coast, has an
installed atmospheric distillation capacity of 8.8 million tonnes per year with
associated vacuum distillation capacity. Since 1991, it has had a catalytic
cracking unit with a capacity of 3.3 million tonnes per year. In the 1980s an
upgrading program reduced the output of lower value heavy residues to 8% and
allowed the production of unleaded gasoline following the installation of a
reforming unit with a continuous regeneration system. In addition, this program
included a vacuum bottom deasphalting unit with a capacity of 1.0 million tonnes
per year and a desulphuration unit for heavy cracker feedstock with a capacity
of 1.4 million tonnes per year. The Port Arthur
14
<PAGE> 17
refinery also has a 36-megawatt cogeneration unit which supplies most of the
refinery's electricity and steam requirements. This cogeneration unit, which was
installed in 1988, substantially reduced the plant's operating costs. The
refinery also has distillate desulphuration units with associated sulphur
recovery plants and an alkylation unit with a capacity of 210,000 tonnes per
year. The complex includes a unit for the extraction of aromatics from gasoline,
which supplies half of the benzene feedstock requirements of the Group's
petrochemical plants in the United States, and an isomerization unit with a
capacity of 373,000 tonnes per year.
Big Spring. The Big Spring refinery, in Howard County, Texas, has an
installed atmospheric distillation capacity of 2.9 million tonnes per year and
an associated vacuum distillation unit; a catalytic cracker with a capacity of
1.2 million tonnes per year; an alkylation unit with a capacity of 195,000
tonnes per year; a solvent deasphalting unit with a capacity of 560,000 tonnes
per year; and desulphuration with associated sulphur recovery units.
This refinery also has a semi-regenerative catalytic reformer unit with a
capacity of 850,000 tonnes per year and an aromatic extraction unit for benzene
recovery, with a capacity of 30,000 tonnes of benzene per year. In 1996, the
fluid catalytic cracking unit was upgraded which increased the conversion
capacity by 7%. The refinery is linked by a third-party pipeline network to the
major regional markets that are served by the refinery: El Paso (Texas),
Albuquerque (New Mexico) and Tucson (Arizona).
Africa
Luanda. The Group owns the only refinery in Angola, which is in Luanda. It
has an installed atmospheric distillation capacity of 2 million tonnes per year,
a semi-regenerative catalytic reformer with a capacity of 85,000 tonnes per year
and a vacuum unit with a capacity of 140,000 tonnes per year. The Group's
activities at the Luanda refinery are conducted by a non-consolidated subsidiary
of the Company. The prices of refined products are fixed by the government so
that the Group obtains a specified return on its capital invested in the
refinery.
SUPPLY AND TRADING
The Group's supply and trading activities are focused principally on the
supply of its refineries, as well as its marketing entities. Its supply
departments are active in both physical and, to a limited extent, futures
markets.
Spot and term crude oil and feedstocks supply contracts cover the quantity
and quality requirements of PetroFina's refineries in excess of feedstock
supplied by the Group's Upstream activity. Exchange agreements allow the Group
to ensure the security and the optimization of the supply of petroleum products
to its various marketing organizations. Like most other oil companies, the Group
uses hedging tools to moderate its exposure to short-term fluctuations in crude
and products prices. See "Item 9A. Quantitative and Qualitative Disclosures
About Market Risk."
The supply and trading division's activities include the trading of
significant amounts of refined petroleum products (including the trading of
liquefied petroleum gas) on the international markets, mainly in Europe and in
the United States. It also manages the supply of the feedstocks required by Fina
Antwerp Olefins petrochemical complex.
15
<PAGE> 18
The table below sets forth selected information with respect to the Group's
sales and supply of crude oil (produced by PetroFina and by third parties) for
each of the years indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS OF TONNES)
<S> <C> <C> <C>
PETROFINA CRUDE PROCESSED IN PETROFINA REFINING SYSTEM:
Europe(1)................................................. 4,701 5,399 4,625
United States............................................. 0 0 1,118
------ ------ ------
Total................................................ 4,701 5,399 5,743
PETROFINA CRUDE SOLD TO THIRD PARTIES:
Europe(1)................................................. 1,461 869 1,095
United States............................................. 469 507 506
------ ------ ------
Total................................................ 1,930 1,376 1,601
THIRD-PARTY CRUDE PURCHASED AND PROCESSED IN PETROFINA
REFINING SYSTEM:
Europe(1)................................................. 18,661 16,717 17,175
United States............................................. 10,893 9,569 8,943
------ ------ ------
Total................................................ 29,554 26,286 26,118
THIRD-PARTY CRUDE PURCHASED AND RESOLD TO THIRD PARTIES:
Europe(1)................................................. 788 703 419
United States............................................. 8,659 5,730 1,370
------ ------ ------
Total................................................ 9,447 6,433 1,789
</TABLE>
- ---------------
(1) Europe includes Europe and the rest of the world, other than the United
States.
For additional information, see "Item 9A. Quantitative and Qualitative
Disclosures About Market Risk."
MARKETING
PetroFina markets refined petroleum products (such as gasoline, diesel,
heating oil, and industrial, aviation and marine fuels, as well as bitumen) and
lubricants throughout the world under the brand name FINA. Its primary sales
activity is, however, concentrated in Europe and the United States. PetroFina
also conducts some marketing activities, with a special emphasis on lubricants,
in a number of countries in Africa and Asia. In 1998, the Group's sales volume
of refined products and lubricants amounted to 39.8 million tonnes, a 3%
increase over 1997.
The table below sets forth by geographic area for the years indicated the
Group's sales of refined petroleum products and lubricants for the periods
indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS OF TONNES)
<S> <C> <C> <C>
Europe.............................................. 27,231 26,161 25,278
United States....................................... 12,615 12,540 12,016
------ ------ ------
Total............................................... 39,846 38,701 37,294
</TABLE>
PetroFina's marketing activities are divided into two sectors: retail and
commercial. The retail activities are those carried out mainly through its
network of approximately 6,000 retail service stations in Europe and the United
States. At December 31, 1998, 3,542 service stations were located in nine
European countries and 2,375 in the United States. The commercial or wholesale
activities are bulk sales to both distributors and direct consumers, which
include the aviation and marine markets as well as the sale of heating and
industrial oils.
16
<PAGE> 19
PetroFina's marketing strategy for its retail and commercial operations is
to concentrate in geographic areas where it has logistical strengths,
particularly areas near its refineries and storage terminals or near third-
party depots where the Group obtains products through exchange agreements. In
order to achieve its marketing objectives, the Group has embarked on a series of
asset exchanges, acquisitions and disposals, especially in the U.K., France, the
Netherlands, Norway and Germany. At the same time, the Group is improving the
efficiency of its retail network by reducing its operating costs and upgrading
the quality of its network. Operating costs are being reduced on a per unit sold
basis through consolidation of the existing retail network to focus on fewer,
but higher volume, service stations. The upgrading program includes, among other
things, a new visual identification program and enhanced customer services, such
as a new convenience store concept and expanded car wash facilities, at the
service stations.
The Group supplies jet fuel to approximately 100 airlines at various major
European and U.S. airports. The majority of the sales are supplied directly from
the Group's refineries, which enables PetroFina to provide, by its control over
the supply chain, a secure and cost effective supply source. Annual sales of jet
fuels increased by 4.4% in 1998 to 2.3 million tonnes. PetroFina also supplies
marine fuels to seagoing and other vessels from supply points in ports located
near its refineries.
The Group produces lubricant products at its three blending plants located
in Europe and East Asia. These products are sold in more than 50 countries.
Continuous product innovation is necessary in this highly competitive market
because of consumer demand for environmentally acceptable products, the
increasing efficiency of engines and the technical development of industrial
plants. The Group's strategy is to concentrate on selected market segments for
which PetroFina has developed an expertise, such as special vehicle dealers and
transport companies, which use automotive oils, and the steel industry, paper
mills and building materials industry, which use industrial lubricants.
The Group also produces high-quality greases at its Beverwijk plant in the
Netherlands, which are marketed to heavy industries, such as the iron and steel
industry, and paper mills or cement factories.
The Group's total lubricants and greases sales amounted to approximately
271,000 tonnes in 1998.
PetroFina sponsors FINA racing teams that participate at various European
and U.S. car races and use Fina fuel and high performance lubricants.
Europe
In Europe, the FINA retail network extends through Belgium, England,
France, Germany, Italy, Luxembourg, the Netherlands, Norway and Spain. The Group
also conducts wholesale or lubricant marketing activities in Denmark, Poland,
Portugal and Switzerland.
The table below sets forth the number of FINA service stations in Europe by
country for the last three years.
<TABLE>
<CAPTION>
NUMBER OF STATIONS
AT DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Belgium................................................ 501 523 531
France................................................. 435 437 451
Germany................................................ 371 398 432
Italy.................................................. 1,354 1,394 1,385
Luxembourg............................................. 18 18 18
The Netherlands........................................ 196 192 172
Norway(1).............................................. 185 180 201
Spain.................................................. 80 68 64
United Kingdom......................................... 402 424 452
----- ----- -----
Total............................................. 3,542 3,634 3,706
</TABLE>
- ---------------
(1) In March 1999, PetroFina sold its Norwegian Downstream business and used the
proceeds to acquire a portfolio of service stations in the Netherlands.
Beginning January 1, 1998.
17
<PAGE> 20
The table below sets forth the number of stations in Europe owned by the
Group, FINA-branded distributor stations and the total number of stations over
the three years indicated.
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Group-owned stations................................... 1,762 1,826 1,855
FINA-branded distributor stations...................... 1,780 1,808 1,851
----- ----- -----
Total stations.................................... 3,542 3,634 3,706
</TABLE>
PetroFina is pursuing a retail network consolidation and upgrading program
across Europe, seeking to concentrate sales volume at a smaller number of more
efficient sites in selected regions, while at the same time reinforcing and
harmonizing the "FINA" brand image.
The Group continues to increase the number of service stations under direct
management thus improving customer service and the commitment of the network's
employees.
During the three years ended December 31, 1998, the Group reduced the
number of service stations throughout its European network by 7.1%, while it
increased its average sales volume per site by 29.9%.
At the end of 1994, PetroFina launched the Eurotrafic card, an
international electronic payment system aimed at corporate customers. The card,
which is accepted in 4,500 service stations in 13 European countries, provides
fleet management services, such as VAT (value added tax) recovery, toll payments
and roadside assistance. Loyalty cards aimed at both business and private
customers are also being developed by PetroFina's marketing subsidiaries on a
country-by-country basis.
In its home country, Belgium, PetroFina has a retail market share of
approximately 13%, while its Italian network is the largest contributor (29%) to
the Group's European retail sales. The Group also has a significant retail
market share in Britanny (France) and Eastern England. Currently, the largest
capital budgets in terms of retail network are in Italy and Germany. In Italy a
program of 10 to 12 new service stations per year is planned for the Rome,
Lombardy and Tuscany regions, while at the same time existing sites with the
most favorable prospects for a long term future are being modernized and
re-imaged. In Germany, more than 20% of the European retail budget is being
directed to new sites and the modernization of the network in three key regions:
the Rhein-Main metropolitan area, central Germany, and southwestern Germany.
Elsewhere in Europe, the Group is actively developing a retail network in
northern Spain, while consolidating its position in the Benelux and the U.K.
PetroFina is reinforcing its position in bulk wholesale and commercial
markets throughout its nine European core countries, especially in areas around
its refineries and its main depots. In Europe, the aggregate sales in these
markets amounted to 15 million tonnes in 1998.
A new lubricants blending and packaging plant at Ertvelde (Belgium) with a
capacity of 120,000 tonnes per year, serves as the Group's logistical center for
the northern European market. Additional Group production, blending and
packaging takes place at Valdemoro (Spain), which serves southern Europe. In
January 1998, the Group sold its blending plant at Duisburg (Germany), which
allows PetroFina to concentrate its lubricants' production at Ertvelde (Belgium)
and achieve important economies of scale.
The Group also wholesales bitumen, particularly from FRA, LOR and RdR, its
Antwerp, Killingholme and Rome refineries, which produce 480,000 tonnes per
year. In the U.K., the Group is active in the bitumen market through its
subsidiary LanFina.
United States
In the United States, marketing activities have been divided into two
geographical business units since 1994 with the aim of reducing costs,
increasing productivity and improving customer service. The U.S. marketing focus
is to enable the maximization of PetroFina's refinery utilization through both
FINA branded and unbranded fuel sales.
18
<PAGE> 21
The table below sets forth the number of stations in the United States
owned by the Group, the number of FINA-branded distributor stations and the
total number of stations as of the end of each of the three years indicated.
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Group-owned stations................................... 0 53 38
FINA-branded distributor stations...................... 2,375 2,606 2,540
----- ----- -----
Total stations....................................... 2,375 2,659 2,578
</TABLE>
The Southeastern Business Unit manages supply and marketing activities in,
and east of, the Dallas/Ft. Worth area in Texas and throughout the Gulf States
region, including the Port Arthur refinery. The Southwestern Business Unit
manages marketing activities west of Ft. Worth, Texas (principally, west Texas
and New Mexico) and includes crude gathering operations and the Big Spring
refinery. As of January 1, 1996, the Group took a 34.4% interest in Southwest
Convenience Stores, which owns and operates 168 convenience stores in west Texas
and New Mexico under exclusive licensing arrangements using the 7-Eleven brand
and which is supplied with all its fuel requirements by the Group.
CHEMICALS
PetroFina's Chemicals segment produces and markets petrochemicals (base
chemicals, monomers, polymers) and oleochemicals. The Group conducts a wide
range of chemical activities at five plants in Europe and five plants in the
United States. These plants, which are close to large markets, have access to
some of the world's largest harbors and best transportation networks (pipelines,
rivers, channels, railways and highways). These logistical advantages enable
PetroFina to deliver high-quality products at low cost. Over the last three
years, PetroFina has invested an aggregate of EUR 593 million in its chemical
monomer and polymer production facilities.
PetroFina's customers use petrochemicals to manufacture such things as
flexible and rigid packaging, fibers for carpets, specialty films, wire and
cable. Through its research and development activities, PetroFina is extending
the Group's range of products and services, utilizing a customer-driven
approach.
The Chemicals segment's strategy for growth is based on three principles:
(1) extensive integration from crude oil to polymers; (2) use of large plants to
maximize efficiency; and (3) developing differentiated products, while remaining
a low-cost producer. Where appropriate, this strategy has been pursued through
joint ventures.
The table below sets forth selected financial data for the Chemicals
segment for each of the years indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
(IN MILLIONS OF EURO)
<S> <C> <C> <C>
Total operating revenue............................. 1,982 2,312 1,943
Inter-segment sales................................. (101) (127) (84)
Operating revenues to non-affiliates................ 1,881 2,185 1,859
Operating income.................................... 184 259 281
</TABLE>
19
<PAGE> 22
The table below shows the Group's year-end petrochemical production
capacity at the dates indicated.
<TABLE>
<CAPTION>
CAPACITY AT DECEMBER 31,
------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS OF TONNES)
<S> <C> <C> <C>
EUROPE
Ethylene........................................ 780 680 676
Propylene....................................... 675 610 580
Aromatics....................................... 200 200 200
High density polyethylene....................... 500 450 450
Elastomers...................................... 80 80 80
Polypropylene................................... 420 400 385
UNITED STATES
Propylene....................................... 500 270 270
Aromatics....................................... 615 580 580
Styrene......................................... 480 480 476
Polystyrene..................................... 500 465 450
Polypropylene................................... 1,000 700 680
High density polyethylene....................... 385 191 191
</TABLE>
EUROPE
The Group's European chemical activities are carried out in five plants in
Belgium located at Antwerp (two plants), Feluy, Ertvelde and Oelegem. These
plants, which are operated by Company subsidiaries and a joint venture, produce
a variety of monomers, polymers, base chemicals and oleochemicals.
Petrochemicals
Consistent with the segment's strategy, PetroFina's petrochemical plants
are integrated with its refineries. More than 40% of the feedstocks used in its
European plants are supplied from internal sources, and the refineries are able
to use return streams of various by-products, including hydrogen, from the
chemical plants.
20
<PAGE> 23
The table below illustrates, in a simplified and schematic manner, the major
changes which the main products of PetroFina's European petrochemical plants
undergo, as well as their vertical integration.
[FLOWCHART]
(1) The Group operates a polystyrene plant on behalf of the
third party to whom PetroFina sold its interest in March
1996.
The Group's European chemical products are marketed through a "FINA
Chemicals" branded organization supported by offices throughout Western Europe,
Poland, Russia and Asia. This organization works closely with the plants and the
Group's research and development center in Feluy to better respond to customer
needs.
Antwerp. The Group's petrochemical activities in Antwerp are carried out
at two plants close to FRA, its Antwerp refinery. These plants are operated by
the Company's subsidiary Fina Chemicals Antwerp and a joint venture in which the
Group has a 65% interest, Fina Antwerp Olefins ("FAO"). The Group's refining and
petrochemical center in Antwerp (Belgium), one of the world's largest, benefits
from its location in a
21
<PAGE> 24
geographical area that must import significant quantities of base chemicals to
meet local demand. Feedstocks produced at FRA are converted to monomers such as
ethylene and propylene at FAO.
FAO operates three steam crackers with a capacity of 1.2 million tonnes of
ethylene per year, following a 100,000 tonnes per year debottlenecking program,
which represents more than 5% of total installed capacity in Western Europe. FAO
is connected by pipeline network to more than 40% of the Western European
ethylene market. It also operates a 20,000 tonne capacity ethylene storage
terminal. The Group is studying further expansions of ethylene production to be
implemented over the coming years to meet its captive and long-term customers'
needs.
FAO also has a production capacity of 550,000 tonnes per year of chemical
grade propylene. This propylene, together with propylene from FRA, can be
transported by pipeline to various customers or to the Group for the production
of polypropylene, or stored in FAO's 10,000 tonne capacity propylene storage
terminal. Ethylene and other monomers from FAO are converted at the nearby Fina
Chemicals Antwerp facilities and at Fina Chemicals Feluy into high-density
polyethylene and thermoplastic elastomers.
FAO also produces aromatics, cyclohexane and other by-products which are
sold to the market or used by the adjacent refineries. The Group is also
planning to build a large aromatic extraction unit, fed by FRA, LOR and FAO.
Fina Chemicals Antwerp operates several high- and medium-density
polyethylene production lines in Antwerp and Feluy with a combined total
capacity as of December 31, 1998, of 500,000 tonnes per year, a 50,000 tonne per
year increase over 1997, representing about 11% of the total installed capacity
in Europe. Ethylene monomer is received directly, via pipeline, from Fina
Antwerp Olefins securing supply and feedstock efficiencies for the Group.
Antwerp's unique location, with its excellent port facilities, access to
pipelines and transportation networks and its location in a large and dense
industrial area enable it to serve customers competitively with higher
value-added products on a global basis. The Group's polyethylene sales are
focused on a few applications where it can supply competitive products and
services, such as pipes, blow molding, specialty films, and wires and cables for
the construction, packaging and automotive industries. It has developed a
metallocene catalyst technology which enables it to produce promising
medium-density grades for film applications, and it has other grades under
development.
Fina Chemicals Antwerp also operates a thermoplastic elastomer plant with a
capacity of 80,000 tonnes per year. The main applications are bitumen
modification for roofing and road applications, footwear, additives and plastic
modifications such as transparent food packaging. The Group is able to supply
these high value-added products competitively because of the plant's size and
its ability, through its technology, to use cheaper feedstocks.
Feluy. In March 1995, Fina Chemicals Feluy became a wholly owned
subsidiary of the Company as a result of the acquisition of the remaining 50%
interest from its former joint venture partner. Fina Chemicals Feluy owns a
polypropylene (homopolymer and propylene-ethylene copolymer) plant with two
production lines at Feluy which has a capacity of 420,000 tonnes per year, which
represents about 6% of total installed capacity in Europe. The Group has a
project to build a third polypropylene production line at this plant. In
addition, in 1991 it built a High Density Polyethylene ("HDPE") line with a
capacity of 150,000 tonnes per year. The plant is supplied with ethylene and
propylene by two pipelines directly linked to the Group's chemical facilities in
Antwerp. PetroFina has fully utilized its capacity at this plant for several
years. Polypropylene is a widely used raw material for the manufacture of many
commonly used fibers, films, extrusion and injection applications and
thermoformed products, such as garden furniture and containers. The Group's
sales of polypropylene are focused on those applications in which it can supply
high-quality products and services and reach higher market share. It is also
developing partnerships with global customers that can be supplied from its U.S.
plants.
In March 1996, the Group sold its 50% interest in a polystyrene plant in
Feluy. Fina Chemicals Feluy continues to operate the plant with a capacity of
170,000 tonnes per year on behalf of the third party to whom PetroFina sold its
interest.
22
<PAGE> 25
Oleochemicals
Ertvelde and Oelegem. PetroFina produces oleochemicals (fatty acids, fatty
alcohols and glycerin and their derivatives such as esters, amines and
stearates) at its plants at Ertvelde near the port of Ghent and at Oelegem near
Antwerp.
The Group's Ertvelde and Oelegem plants have a combined production capacity
of 275,000 tonnes per year of fatty acids, fatty alcohols, glycerin, esters and
other derivatives. Oleochemicals, which are produced from renewable raw
materials, such as vegetable oils and animal fats, have a wide range of
applications including personal care products, detergents, cosmetics,
lubricants, drilling muds, plastic additives and pharmaceuticals. PetroFina's
fatty acids capacity is about 16% of the total effective capacity in Western
Europe. Its fatty alcohols plant utilizes the Group's proprietary technology
from which it can gain a competitive advantage over other fatty acid producers.
The Group's most recent developments include a range of high performance and
biodegradable grades, which are well positioned to benefit from the increasing
demand for both high performance and environmentally friendly products.
UNITED STATES
All of the Group's chemicals activities in the United States take place in
five plants located along the coast of the Gulf of Mexico. Each of these plants
produces either monomers or polymers.
Carville. At Carville (Louisiana) the Group has two plants: a fully
integrated polystyrene production plant and a 50% interest in the adjacent
Cos-mar monomer plant. The Group's plants in Carville reflect the Group's
strategy of achieving economies of scale through integration and through the use
of large-scale facilities.
The Cos-mar monomer plant is the world's largest styrene plant of its type.
The plant provides the Carville polystyrene plant with styrene for polystyrene
production. In turn, benzene from the Port Arthur refinery is used as a
feedstock to produce styrene. The Cos-mar plant recently was upgraded to
increase its production capacity to 950,000 tonnes per year. In 1998, 1997 and
1996 it operated at full capacity. The Group is in the process of developing a
new technology for monomer production at the Cos-mar plant, which has the
potential to lower both its capital and operating costs.
The Carville polystyrene plant is the world's largest single-site,
high-impact and crystal polystyrene plant with a capacity of 465,000 tonnes per
year. All the Group's U.S. polystyrene production is now concentrated in
Carville with four production lines, which are based on proprietary technology.
The most recent line began production in August 1996 and increased the Group's
annual capacity by 115,000 tonnes.
La Porte. The La Porte plant, located near Houston, Texas, is the world's
largest single-site polypropylene production plant, on the basis of capacity.
Major raw materials are supplied through six pipelines connected to various
refineries, steam crackers and propylene splitters. The plant produces bulk
homopolymers and random copolymers from nine lines utilizing the Group's
proprietary technology. The plant's total polypropylene capacity is 1,000,000
tonnes per year. Capacity was increased by 7% in 1996 following several
debottlenecking projects. A ninth line with block co-polymer capability came
on-line in the fourth quarter of 1998, to increase, with other minor
debottleneckings, total capacity to its present level. Its current capacity
represents approximately 14% of total installed capacity in the United States.
The plant operated at maximum capacity in 1998, 1997 and 1996.
The Group has a one-third interest in a joint venture that owns and
operates a splitter plant at Mont Belvieu, Texas. The splitter upgrades
propylene from refinery grade into polymer grade in order to supply the La Porte
plant. This plant doubled its capacity following the introduction of a second
splitter in the summer of 1996 to 225,000 tonnes per year of polymer grade
propylene. The Group is constructing a third line/splitter and then will
debottleneck the first two splitters.
Bayport. The Bayport plant, in Texas, produces HDPE-grade polyethylene.
The Group acquired the plant in 1992, and its capacity has increased from
160,000 to 385,000 tonnes per year during the past five years. A second line was
built at the Bayport plant which became operational in the fall of 1998 and
increased the plant's annual capacity by an additional 200,000 tonnes. This new
line will use the same technology as that
23
<PAGE> 26
which is currently used at the Feluy and Antwerp plants, and will provide the
Group with additional commercial synergies with its European polyethylene
production.
Port Arthur. In 1997, the Group signed a letter of intent with BASF
Aktiengesellschaft ("BASF") to build the world's largest liquid steam cracker
(the "Steam Cracker Joint Venture") adjacent to the Group's refinery located in
Port Arthur, Texas which will produce 820,000 tonnes of ethylene and 880,000
tonnes of propylene annually. On May 8, 1998, the Board of Directors of the
Company and the Board of Directors of BASF approved the Steam Cracker Joint
Venture.
PAINTS
The Sigma Coatings Group ("Sigma"), which is wholly owned by the Company,
consists of several companies that produce and sell paints and protective
coatings. Sigma has three principal divisions: decorative paints, marine and
anti-corrosion paints and industrial coatings.
Sigma's headquarters are in Amsterdam (the Netherlands), and it is active
principally in Belgium, Denmark, France, Germany, Italy, the Netherlands, Saudi
Arabia, the U.K. and the U.S. The main Sigma plants are located in the
Netherlands (Amsterdam, Uithoorn, Den Bosch), Belgium (Manage, Deurne), Germany
(Bochum), France (Valdoie), Saudi Arabia (Dammah), the U.K. (Buckingham,
Deeside) and the U.S. (Harvey, Louisiana).
The table below sets forth selected financial information for the Paints
segment for each of the years indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
--------------------
1998 1997 1996
---- ---- ----
(IN MILLIONS OF EUR)
<S> <C> <C> <C>
Total operating revenue..................................... 780 780 730
Inter-segment sales......................................... 0 0 0
Operating revenues to non-affiliates........................ 780 780 730
Operating income............................................ 45 40 30
</TABLE>
Sigma's decorative paints are sold principally under the SIGMA, HISTOR,
NOVEMAIL, RAMBO and GAUTHIER brand names. Decorative paints, which account for
approximately 49% of Sigma's revenues, are sold primarily in Europe. Sigma is
one of the two largest producers of decorative paints in the Netherlands, the
second largest in Belgium and the fifth largest in Western Europe (in each case
based on sales). In addition, the Group has a 20% interest in the largest
producer of decorative paints in Saudi Arabia and is responsible for the
management of that company, which markets the SIGMA brand.
Sigma markets its marine paints worldwide and its anti-corrosion paints
primarily in Europe and also in the United States. Sales of marine and
anti-corrosion paints account for almost 27% of Sigma's revenues. Sigma is the
fifth largest producer of marine paints in the world based on sales.
Industrial coatings, which include Joinery sales previously included in the
Decorative business, account for approximately 18% of Sigma's revenues, and are
marketed primarily in Europe, although Sigma has licensed some of its
proprietary technology outside Europe. Sigma is the second largest European
producer of industrial coil coatings.
RESEARCH AND DEVELOPMENT
In 1998, the Group's research and development expenses were EUR 78 million
compared to EUR 80 million in 1997 and EUR 76 million in 1996.
PetroFina conducts most of its research and development activities in its
three research centers located at Feluy (Belgium), La Porte (Texas) and
Amsterdam (the Netherlands). These research centers aim to improve the
production processes in the Group's refineries and chemical and paints plants,
as well as to develop new, more competitive products, applications and processes
and to provide technical assistance to
24
<PAGE> 27
customers. In recent years, research developments have resulted in advances in
the areas of desulphuration, special fuels, lubricants, polymers, oleochemicals
and paints.
PetroFina's research center at Feluy brings together on one site the
Group's main research and development activities in Europe, namely in refining,
catalysts, plastics, oleochemicals, fuels and lubricants. This centralization
enhances the coordination and integration of the research activities. The Feluy
research center is adjacent to one of PetroFina's major chemical manufacturing
plants, which enables the Group to integrate its research with operations. In
the United States, research and development activities covering the Group's
processes and products are consolidated in a research center located on-site at
the Group's La Porte chemical plant. The third research center is located in
Amsterdam where it is physically integrated with the Paints segment's main
production facility. This center specializes in paints and cooperates closely
with the Feluy research center.
OTHER MATTERS
COMPETITIVE, POLITICAL AND ECONOMIC FACTORS
There is strong competition both within the oil industry and with other
industries in supplying the energy needs of industry and consumers. The oil
industry is also particularly subject to regulation and intervention by
governments throughout the world in such matters as the award of exploration and
production interests; the imposition of specific drilling obligations;
environmental protection controls; price controls and transfer pricing
restrictions; control over the development, production rate and abandonment of a
field; restrictions, requirements or sanctions imposed on companies and their
products and services, because of, or with respect to, ownership, affiliations
or operations in certain foreign countries; and, possibly, nationalization,
expropriation or cancellation of contract rights. The oil industry is also
subject to the payment of royalties and taxation, which tend to be high compared
with those payable in respect of other commercial activities. Some of the
Group's oil reserves are located in countries outside Western Europe and North
America, certain of which individually may be considered politically and
economically unstable. Reserves recovery and the related operations are subject
to certain risks, including the establishment of export limits, the
renegotiation of contracts, the nationalization or renationalization of assets,
other risks relating to changes in local government regimes and policies and
resulting changes in business customs and practice, payment delays, currency
exchange restrictions and losses and impairment of operations due to actions of
insurgent groups. PetroFina attempts to conduct its business and financial
affairs in order to protect against such political and economic risks.
Although oil prices are primarily subject to international supply and
demand, political developments and the outcome of meetings at the Organization
of Petroleum Exporting Countries can also affect world oil supply and oil
prices. Crude oil and petroleum products have proven to be deflationary in
nature over the long-term and consequently the industry is faced with continuous
pressure to control costs to protect profitability. Crude oil prices are
generally denominated in dollars while sales of the Group's refined products are
denominated in a variety of currencies. PetroFina is, therefore, subject to the
risks of fluctuations in exchange rates and crude oil prices. It attempts to
limit its short-term risks in these areas by engaging in hedging and similar
activities in the currency and oil commodity markets. The introduction of the
Euro has eliminated exchange rate risks within the member states of the EU
participating in the European Monetary Union. For additional information, see
"Item 9A. Quantitative and Qualitative Disclosures About Market Risk."
REGULATION OF UPSTREAM ACTIVITIES
PetroFina's exploration and production activities are conducted in a number
of different countries and are therefore subject to a broad range of legislation
and regulations. These cover virtually all aspects of exploration and production
activities, including matters such as land tenure, production rates, royalties,
pricing, environmental protection, export, taxes and foreign exchange. The terms
and conditions of the leases, licenses and contracts vary from country to
country. Outside the United States, these leases, licenses and contracts are
generally granted by or entered into with a government entity or state company,
while in the United States they are generally entered into with private property
owners. These arrangements usually take the form of licenses or production
sharing agreements.
25
<PAGE> 28
Licenses (or concessions) give the holder the exclusive right to explore
for and exploit a commercial discovery. Under a license, the holder bears the
risks of exploration, development, and production activities and provides the
financing for these operations. A license holder is generally required to pay
production taxes or royalties, which may be in cash or in kind. In certain
cases, the government entity or state company may acquire a participation in the
concession.
Production sharing agreements entered into with a government entity or
state company generally obligate the Group and its partners to provide all the
financing and bear the risk of exploration and production activities in exchange
for a share of the production remaining after royalties, if any. In some
instances, a fixed or variable percentage of this production is reserved for the
recovery of the Group's cost (cost oil) and the remainder (profit oil) is shared
with the government entity or state company on a fixed or volume-dependent
basis. The right of the Group to recover cost oil is limited in certain cases by
a requirement that the cost oil not exceed a maximum percentage of production.
This right is also limited in certain cases by a requirement that PetroFina's
costs be amortized over a specific period of time. In other cases, the
government entity or state company will participate in the rights and
obligations of PetroFina and will share in the costs of development and
production. Such participation can be across the venture or be on a per field
basis.
In certain countries, separate licenses are required for exploration and
production activities and, in certain cases, production licenses are limited to
a portion of the area covered by the exploration license. Both exploration and
production licenses are generally for specific periods of time (except for
production licenses in the United States which remain in effect until production
ceases). The term of the Group's licenses and the extent to which these licenses
may be renewed vary from area to area.
The Group is required in certain countries to relinquish a portion of the
acreage covered by a license as a condition to obtaining a renewal of the
license. The Group may also be required in certain countries to relinquish
acreage (or to surrender a license) under other circumstances. These
circumstances, which vary by area, may include the failure to obtain a
production license within a specified period of time or the failure to have a
field development plan approved within a specified period of time. PetroFina
believes that these requirements have not materially affected its operations.
In general, the Group is required to pay income tax on income generated
from production activities (whether under a license or production sharing
agreement). In addition, depending on the area, the Group's production
activities may be subject to a range of other taxes, levies and assessments,
including special petroleum taxes.
ENVIRONMENTAL MATTERS
The Group's operations are subject to laws and regulations of the EU,
Belgium, the United States and other countries in which it conducts activities
relating to the protection of the environment. These laws and regulations, which
change frequently, address the general impact of industrial operations on the
environment, as well as focus specifically on certain activities, including
emissions and toxic waste disposal. Environmental violations may result in
civil, criminal and tort liabilities.
Environmental factors are an important consideration in planning, designing
and operating all PetroFina facilities. A General Manager is responsible for the
coordination and implementation of environmental policies for the Company and
its subsidiaries. Each of the Company's subsidiaries conducts significant
programs to ensure that operations are carried out in an environmentally
acceptable manner. In 1998, 1997 and 1996 the Group spent over EUR 54 million,
EUR 37 million, and EUR 34 million, respectively, on environmental programs that
included improving or constructing hydrodesulphuration units and hydrogen plants
at its refineries in order to comply with new EU fuel specifications,
construction of vapor recovery units at major depots, loading facilities and
service stations to meet EU requirements, as well as site restorations and
remediation activities.
Due to the nature of its business, environmental laws increasingly impact
PetroFina's operations and make some risk of environmental costs and liabilities
inherent to its business, as it is for other companies engaged in the same field
of activities. Although PetroFina's management is not aware of any conditions
that would result in a liability material to the Group as a whole, under
existing environmental laws there can be no assurance that such liabilities will
not be incurred. For additional information regarding environmental
26
<PAGE> 29
matters, see "Item 9. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Environmental Costs."
UNCERTAINTY INHERENT IN INDUSTRY
Oil and gas exploration and production, as well as PetroFina's refining and
chemical operations, require high levels of investment and have particular
economic risks and opportunities. These activities are subject to natural
hazards and other uncertainties, including those relative to the physical
characteristics of oil and gas fields, refineries and chemical plants.
LICENSING AND PROPRIETARY TECHNOLOGY
Licensing of PetroFina's proprietary technology relating to polystyrene,
thermoplastic elastomers, paints, dewaxing of diesel fuel and propylene
purification has increased significantly and now extends to countries such as
China, Japan, Taiwan, Korea and Saudi Arabia. Some countries, such as China, do
not protect a company's intellectual property to the same extent as the laws of
the U.S. or European countries.
EMPLOYEE MATTERS
During 1998, the Group had an average of 14,489 employees. In recent years,
there have been no significant strikes or work stoppages. Information regarding
the Group's pension and benefit plans is contained in Note 19 of the
Consolidated Financial Statements included in "Item 18. Financial Statements."
ACQUISITION OF FINA, INC.
On August 5, 1998, Fina, Inc., a Delaware corporation and U.S. subsidiary
of the Company ("Fina, Inc."), held a special meeting of stockholders to vote on
the Agreement and Plan of Merger dated as of February 17, 1998, as amended (the
"Merger Agreement") and merger (the "Merger") pursuant to which Fina, Inc. would
become an indirect wholly-owned subsidiary of the Company. At that meeting,
Fina, Inc. stockholders approved the Merger and Merger Agreement and immediately
thereafter the Merger was consummated.
Pursuant to the Merger Agreement, each share of Fina, Inc. common stock,
par value US $.50 per share (a "Fina Share"), outstanding immediately prior to
the effective time of the Merger (other than Fina Shares owned by the Company or
its subsidiaries and Fina Shares for which a stockholder exercised appraisal
rights) was converted into the right to receive (A) US $60 plus (B) one warrant
(a "PetroFina Warrant") to purchase nine-tenths (0.9) of one PetroFina ADS, each
PetroFina ADS representing one-tenth (0.1) of one PetroFina Share. The PetroFina
Warrants are exercisable until the close of business on August 5, 2003 and have
an exercise price of US $42.25 per PetroFina ADS, subject to adjustment. Thus, a
holder of 10 PetroFina Warrants may purchase nine PetroFina ADSs for an
aggregate purchase price of US $380.25. The PetroFina Warrants are listed on The
New York Stock Exchange, Inc.
On September 23, 1998, the Delaware Court of Chancery entered an order
approving the terms of the settlement of all lawsuits filed against the Company,
Fina, Inc. and certain directors of Fina, Inc. arising out of the announcement
of the Merger, and dismissing with prejudice all claims between plaintiff class
members and the defendants.
PENDING TRANSACTION
On December 1, 1998, five of PetroFina's largest shareholders, Electrafina
SA, Compagnie Nationale a Portefeuille, S.A. (Fibelpar), Tractabel N.V.,
Electrabel N.V. and Fortis AG (the "Contributing Shareholders"), announced their
intention to exchange all their PetroFina Shares, which represent approximately
41% of the outstanding PetroFina Shares, for shares of TOTAL S.A. ("TOTAL").
TOTAL has announced that the proposed transaction will be accomplished in
two steps. In the first step, following approval by the TOTAL shareholders and
regulatory approval by European and American competition authorities, the
Contributing Shareholders will contribute to TOTAL the 9,614,190 PetroFina
Shares that they hold in exchange for new shares of TOTAL at an exchange ratio
of nine TOTAL shares for two PetroFina Shares. The PetroFina Shares contributed
by the Contributing Shareholders will be effective January 1, 1998, excluding
the gross dividend of BEF 460 (11.4304 EUR) per PetroFina Share paid to all
27
<PAGE> 30
PetroFina shareholders on January 13, 1999. Then, following completion of this
contribution, TOTAL will file with the Belgian Commission on Banking and Finance
("CBF") a notice and document to make a public offer (the "Public Exchange
Offer") to acquire all remaining PetroFina Shares, using the same exchange ratio
offered to the Contributing Shareholders.
The PetroFina Board of Directors (the "Board") met on December 8, 1998 to
analyze the proposed transaction. After careful consideration and review of the
strategic and operational elements of the transaction, the Board approved the
proposed transaction in principle, but final Board approval remains subject to
review of the prospectus setting forth the terms of the Public Exchange Offer.
The Board also announced that it had retained JP Morgan and Paribas as financial
advisers to assist it in delivering a fairness opinion on the proposed
transaction.
TOTAL announced on January 14, 1999 that its shareholders had approved the
proposed transaction and related matters, and that the proposed transaction
remains subject to approval from European and U.S. regulatory authorities.
TOTAL has also announced that the TOTAL FINA group resulting from the
Public Exchange Offer will be listed on the stock exchanges of Paris, Brussels,
London and New York. Following the Public Exchange Offer, TOTAL will appoint
Albert Frere, Paul Desmarais, Sr. and Thierry de Rudder to the Board of
Directors of the TOTAL FINA group. Mr. Frere will be named a Vice-Chairman of
the Board of Directors and Francois Cornelis will become a Vice-Chairman of the
group's Executive Committee.
ITEM 2. DESCRIPTION OF PROPERTY
See "Item 1. Description of Business" for a description of PetroFina's
principal plants and its reserves and sources of crude oil and natural gas.
ITEM 3. LEGAL PROCEEDINGS
PetroFina is involved in a number of legal proceedings incidental to the
normal conduct of its business. It does not believe that liabilities relating to
such proceedings are likely to be, in the aggregate, material to its
consolidated financial condition.
ITEM 4. CONTROL OF REGISTRANT
The completion of the exchange by the Contributing Shareholders is expected
to result in a change of control of the Company. See "Item 1. Description of
Business -- Pending Transaction."
Based on the information provided in a Schedule 13G filed with the
Commission on February 16, 1999 (the "Schedule 13G"), the Company has set forth
below the number and percentages of PetroFina Shares owned by each person known
by the Company to own beneficially more than 10% of the outstanding PetroFina
Shares. Information in the notes to the table is also based on information in
the Schedule 13G.
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF OF PETROFINA SHARES
SHAREHOLDER PETROFINA SHARES AND VOTING POWER
- ----------- ---------------- -------------------
<S> <C> <C>
Groupe Bruxelles Lambert S.A. and affiliated
companies(1)(2)(3)(4)..................................... 5,505,029 22.06%
Societe Generale de Belgique S.A. and affiliated
companies(1)(3)(5)........................................ 2,530,307 10.8%
Compagnie Nationale a Portefeuille(1)(3).................... 1,518,218 6.5%
</TABLE>
- ---------------
(1) GBL (and its affiliated companies), SGB (and its affiliated companies), S.A.
Fortis A.G. N.V. ("Fortis") (and its affiliated companies), and Sofina S.A.
("Sofina") may be deemed to be members of a group with respect to the
PetroFina Shares. Fortis and Sofina own 390,839 PetroFina Shares (1.9%) and
318,627 PetroFina Shares (1.4%), respectively. The number of PetroFina
Shares set forth next to each of GBL and SGB does not include PetroFina
Shares owned by each other, Fortis or Sofina.
(2) Includes 5,305,029 PetroFina Shares held by Electrafina, an affiliate of
GBL, and 342,893 PetroFina Shares held directly or indirectly by Group AXA.
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<PAGE> 31
(3) CNP and GBL may be deemed to be members of a group with respect to the
PetroFina Shares owned by each of them. The number of PetroFina Shares set
forth next to each of GBL and CNP does not include PetroFina Shares owned by
each other. CNP, on the one hand, and SGB, Sofina and Fortis, on the other
hand, have expressly disclaimed that they are members of a group with
respect to the PetroFina Shares beneficially owned by each other. CNP has
advised the Company that its shares are held by INVESTOR.
(4) Albert Frere, Chairman of the Company's Board of Directors, may be deemed to
control GBL and CNP.
(5) Includes 1,275,772 PetroFina Shares held by S.A. Tractebel N.V., 1,241,000
PetroFina Shares held by S.A. Electrabel N.V., 12,280 PetroFina Shares held
by S.A. Contassur N.V. and 1,255 PetroFina Shares held by
Beleggingsmaatschappij voor Noord-Belgie (NOBEMA) N.V.
GBL and SGB have informed the Company of an agreement entered into in 1989
(the "1989 Agreement") in relation to their respective PetroFina Shares. In a
press release on March 8, 1989, they indicated that their common objective was
to provide the Company with long-term, stable shareholders and to support its
long-term strategy for the benefit of shareholders and staff generally. By
virtue of their ownership of PetroFina Shares and the 1989 Agreement, GBL and
SGB may be deemed to control the Company within the meaning of Rule 12b-2 under
the Securities Exchange Act of 1934, as amended.
The Company is aware that the 1989 Agreement was entered into by GBL and
SGB on behalf of themselves and their respective affiliates and, in the case of
SGB, on behalf of Fortis and Sofina and, in the case of GBL, on behalf of Royale
Belge S.A. and Generale des Eaux S.A. At present, Royale Belge and Vivendi
(ex-Generale des Eaux) are no longer bound by this agreement. The Company is
also aware that the 1989 Agreement contains provisions pursuant to which GBL and
SGB have agreed to: (i) limit their ownership of PetroFina Shares to 25% and
12.5%, respectively, subject to certain exceptions; (ii) consult with each other
on such matters as the determination of strategic plans of the Company and its
affiliates, changes to the Articles, the issuance of PetroFina Shares, the
incurrence of indebtedness, significant acquisitions and dispositions, any
takeover attempted by a third party, dividend policy and the appointment of
executive officers of the Company; (iii) have representation on the Board of
Directors proportional to their ownership of PetroFina Shares, with GBL
designating a director as Chairman of the Company and SGB designating a director
as a Vice-Chairman; and (iv) grant each other a right of first refusal with
respect to the PetroFina Shares if either party decides to sell its PetroFina
Shares. The Company understands that the 1989 Agreement will terminate upon the
effective date of the exchange by the Contributing Shareholders of their
PetroFina Shares for TOTAL shares. See "Item 10. Directors and Officers of
Registrant -- Board of Directors."
The Company is aware that its officers and directors as a group own at
least 15,150 PetroFina Shares. However, because the PetroFina Shares are held
partially in bearer form, the Company cannot identify precisely the number of
PetroFina Shares held by the officers and directors as a group. In addition,
certain directors of the Company, including Mr. Frere and Mr. Desmarais, Sr.,
are affiliates of the shareholders identified in the table above and could be
deemed beneficial owners of the PetroFina Shares identified in the table above.
See "Item 10. Directors and Officers of Registrant -- Board of Directors."
ITEM 5. NATURE OF TRADING MARKET
MARKET FOR PETROFINA SHARES
The principal trading market for the PetroFina Shares is the Belgian Stock
Exchange ("BSE") in Belgium where the PetroFina Shares are listed continuously
on the Forward Market. In 1998, the PetroFina Shares were one of the most
actively traded equity security on the BSE. The PetroFina Shares are an
important component of the Bel 20 Index, which is a broad-based index of 20 of
Belgium's significant, publicly traded companies. As of March 1, 1999 PetroFina
was the fourth largest index component, accounting for 8% of the Index.
PetroFina Shares are also a component of the Dow Jones Euro Stoxx 50 Index,
which is a capitalization weighted index of 50 leading European Monetary
Union-zone publicly traded companies, and the FTSE Eurotop 100 which is composed
of 100 heavily traded European stocks.
29
<PAGE> 32
The table below sets forth, for the periods indicated, the reported high
and low closing prices in Euro for the PetroFina Shares on the BSE:
<TABLE>
<CAPTION>
PRICE PER
PETROFINA SHARE
(EURO)
---------------
HIGH LOW
---- ---
<S> <C> <C>
1996
First Quarter............. 235.00 203.77
Second Quarter............ 247.65 212.20
Third Quarter............. 254.09 228.81
Fourth Quarter............ 266.49 231.04
1997
First Quarter............. 317.30 249.13
Second Quarter............ 347.05 286.94
Third Quarter............. 386.71 325.98
Fourth Quarter............ 374.32 309.87
1998
First Quarter............. 356.35 310.49
Second Quarter............ 386.09 338.38
Third Quarter............. 396.63 285.08
Fourth Quarter............ 444.97 277.02
</TABLE>
As of January 1, 1999 PetroFina Shares began trading in Euro. The table
above converted the historical trading prices from Belgian Francs to Euro based
on the January 1 exchange rate of 1 BEF = 0.02479 Euro.
Official trading on the BSE is carried out using a fully-computerized order
matching system, the NTS (New Trading System). Securities are listed either on
the Forward Market which contains the largest and most liquid domestic and
foreign securities, or on the Spot Market, which contains small and midcap
companies. On the Forward Market, depending on the liquidity of the security in
question, listing takes place continuously from 10:00 am to 4:30 pm, Brussels
time, or semi-continuously with a double quotation at 10:15 am and 4:15 pm,
Brussels time. The PetroFina Shares are listed continuously on the Forward
Market. Settlements of securities listed on the Forward Market, based on a "Cash
on Delivery" system, take place at the end of a two-week period, the
"quinzaine," according to a fixed timetable.
The BSE is governed by a two-tier supervisory system: the Management
Committee of the BSE and the CBF. The Management Committee of the BSE, appointed
by members of the BSE, acts as an autonomous market authority, responsible for
the organization and the operation of the stock market. The CBF oversees the
activities of the BSE authorities and acts as a second-tier supervisory body
with respect to the market.
Transactions can be effected only by members of the BSE. Members include
credit or financial institutions, brokerage firms and members of other EU stock
exchanges.
The PetroFina Shares are also listed on the stock exchanges of Amsterdam,
Frankfurt, London and Paris and on the Swiss Stock Exchange and are quoted on
SEAQ International.
TRADING IN THE UNITED STATES
Citibank serves as depositary with respect to the PetroFina ADSs which have
traded on the NYSE since September 3, 1997 and in the OTC market in the United
States since 1990. Each PetroFina ADS represents one-tenth (0.1) of one
PetroFina Share. As of December 31, 1998 there were 3,071,820 PetroFina ADSs
outstanding (representing 1.3% of the outstanding PetroFina Shares), held by 64
registered PetroFina ADS holders. All such PetroFina ADSs were held by U.S.
residents. In addition, 7,193 registered PetroFina Shares (representing 0.03% of
the outstanding PetroFina Shares) are held by U.S. residents.
PETROFINA ADSS
The table below sets forth, for the period indicated, the reported high and
low quotations in dollars for the PetroFina ADSs during the periods in which
they traded in the OTC market and the high and low closing sale
30
<PAGE> 33
prices for the PetroFina ADSs after September 3, 1997. The fourth quarter of
1997 represents the first full quarter of trading on the NYSE.
<TABLE>
<CAPTION>
PRICE PER ADS
(US$)
------------------
HIGH LOW
---- ---
<S> <C> <C>
1996
First Quarter......... 31.609 26.984
Second Quarter........ 31.328 27.359
Third Quarter......... 32.297 29.547
Fourth Quarter........ 31.000 30.750
1997
First Quarter......... 35.500 31.250
Second Quarter........ 36.625 33.250
Third Quarter......... 39.375(1) 36.500(1)
39.500(2) 36.313(2)
Fourth Quarter........ 42.000 35.750
1998
First Quarter......... 38.000 33.375
Second Quarter........ 42.375 36.000
Third Quarter......... 43.000 34.375
Fourth Quarter........ 49.250 34.500
</TABLE>
- ---------------
(1) Reflects trading prior to the NYSE listing on September 3, 1997.
(2) Reflects trading on the NYSE from September 3, 1997 through September 30,
1997.
PETROFINA WARRANTS
The table below sets forth, for the periods indicated, the reported high
and low closing prices in dollars for the PetroFina Warrants on the NYSE. On
August 5, 1998, the Company issued 4,451,060 PetroFina Warrants as part of the
consideration offered in connection with the Merger of Fina, Inc. For a
description of this transaction, see "Item 1. Description of
Business -- Acquisition of Fina, Inc." Each PetroFina Warrant may be exercised
to purchase nine-tenths (0.9) of one PetroFina ADS. The PetroFina Warrants are
exercisable at any time until the close of business August 5, 2003 and have an
exercise price of US $42.25 per PetroFina ADS. Thus, a holder of 10 PetroFina
Warrants may purchase nine PetroFina ADSs for an aggregate purchase price of US
$380.25. As of March 1, 1999, 2101 PetroFina Warrants had been exercised.
<TABLE>
<CAPTION>
PRICE PER PETROFINA
WARRANT
(US$)
--------------------
HIGH LOW
---- ---
<S> <C> <C>
1998
Third Quarter(1)........ 5.000 3.125
Fourth Quarter.......... 9.563 2.313
</TABLE>
- ---------------
(1) The PetroFina Warrants began trading on NYSE on August 8, 1998.
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
EXCHANGE CONTROLS
Belgian exchange control regulations impose no limitations on the amount of
cash payments that may be remitted by the Company to residents of the United
States. However, when there is a transfer of funds by the Company an obligation
to notify the Institut belgo/Luxembourgeois du change/Belgisch-Luxemburgs
Wisselinstituut arises. If the transfer of funds is handled by Belgian financial
institutions, that institution will give the required notification. In addition,
the Company has arranged with a number of European and U.S. financial
institutions, including the Depositary, to handle such payments or transfers of
funds and make the required notification.
31
<PAGE> 34
OWNERSHIP OF PETROFINA SHARES BY NON-BELGIAN PERSONS
Under Belgian law, if an individual or a company intends to acquire the
joint or exclusive control of the Company through one or more transactions
relating to the PetroFina Shares, the acquiror must notify the CBF of the
contemplated transaction at least five days before its completion. If the price
of the contemplated transfer includes a control premium, the acquiror must offer
to all other shareholders of the Company to be acquired the opportunity to sell
their PetroFina Shares at the highest price offered by the acquiror for
PetroFina Shares during the 12 months preceding the acquisition of control of
the Company. The acquiror must give the other shareholders this opportunity
within 30 days after its acquisition of control either (i) in the form of a
public takeover bid or (ii) pursuant to an undertaking to support the stock
price of the acquired company on the relevant stock exchange.
Public takeover bids must be made for all the outstanding voting securities
of the Company. Prior to making a bid, a bidder must issue a prospectus which is
approved by the CBF. Any bid made by or on behalf of either a non-EU national or
non-EU company is required to be approved by the Belgian Minister of Finance. In
case of a public takeover bid, the European Commission must approve the
transaction, if (i) the combined worldwide revenues of both the bidder and the
Company to be acquired exceed EUR 2,500 million, (ii) the combined revenues of
the bidder and the Company to be acquired in at least three EU member states
exceed EUR 100 million, (iii) the revenues of each of the bidder and the Company
to be acquired from each of such three EU member states exceed EUR 25 million
and (iv) the total community-wide turnover of the bidder and the Company to be
acquired individually exceed EUR 100 million.
Public takeover bids are subject to the supervision of the CBF. If the CBF
determines that a takeover bid is contrary to the interests of the stockholders
of the Company, it may suspend the takeover bid for a maximum of 72 hours and
request the President of the Commercial Court in the district of the Company's
registered office (Brussels) to prohibit the bid and suspend the exercise of the
rights attached to any PetroFina Shares that were acquired in connection
therewith.
Under Belgian law, a company must notify the Minister for Economic Affairs,
the Minister of Finances, as well as the relevant Secretary of State for
regional Economy prior to any transaction which will transfer more than
one-third of the capital of a company that is located in Belgium and has equity
("fonds propres/eigen vermogen") in excess of EUR 2.5 million.
ITEM 7. TAXATION
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS RELATING TO PETROFINA ADSS
The following discussion summarizes the material U.S. federal income tax
consequences to U.S. Holders of the ownership, disposition or exercise of
PetroFina ADSs. The discussion considers only U.S. Holders that own PetroFina
ADSs as capital assets within the meaning of Code Section 1221.
The following discussion is based on current provisions of the Code,
current and proposed Treasury Regulations promulgated thereunder, administrative
and judicial interpretations as of the date hereof, and the U.S.-Belgium Income
Tax Convention that entered into force October 13, 1972 as amended through the
Supplementary Protocol, signed on December 31, 1987 (the "Treaty"), all of which
are subject to change, possibly on a retroactive basis.
Except to the extent discussed below, the discussion does not consider the
U.S. tax consequences to a Non-U.S. Holder. This discussion of U.S. federal
income tax consequences does not purport to be a comprehensive description of
all of the tax considerations that may be relevant to a holder of PetroFina
ADSs, nor does it address the effect of any applicable foreign, state, local or
other tax laws. Further, the discussion does not consider holders that are
subject to special tax treatment, including dealers in securities, financial
institutions, insurance companies, tax-exempt organizations, persons subject to
the alternative minimum tax, current or prior holders (directly or indirectly)
of 10% or more of the voting shares of the Company, holders of securities held
as part of a "straddle," "hedge" or "conversion transaction," or U.S. Holders
whose "functional currency" (within the meaning of Section 985(b) of the Code)
is not the dollar. EACH HOLDER OF PETROFINA ADSs SHOULD CONSULT ITS OWN TAX
ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES OF OWNING, DISPOSING AND EXERCISING
OF PETROFINA ADSs.
32
<PAGE> 35
In addition, this summary does not address the U.S. federal income tax
consequences were the Company determined to be a passive foreign investment
company ("PFIC") for U.S. federal income tax purposes. Generally, a PFIC is a
foreign corporation that has passive income that equals or exceeds 75% of its
total gross income or passive assets that represent at least 50% of its total
assets by fair market value. The Company does not believe it is currently, and
does not expect to become, a PFIC. U.S. Holders should consult their own tax
advisors concerning the U.S. federal income tax consequences of holding
PetroFina ADSs if the Company were considered to be a PFIC.
U.S. Holders
As used herein, a "U.S. Holder" of a PetroFina ADS means an individual that
is a citizen or resident of the U.S. (including certain former citizens and
former long time residents), a corporation, partnership or other entity created
or organized in or under the laws of the U.S. or any political subdivision
thereof, an estate the income of which is subject to U.S. federal income
taxation regardless of its source, or a trust if (i) a U.S. court is able to
exercise primary supervision over the administration of the trust and (ii) one
or more U.S. persons have the authority to control all substantial decisions of
the trust. A "Non-U.S. Holder" is a holder that is not a U.S. Holder.
Ownership of PetroFina ADSs. In general, for U.S. federal income tax
purposes U.S. Holders of PetroFina ADSs will be treated as the owners of the
underlying PetroFina Shares. Distributions on PetroFina ADSs will constitute
dividends for U.S. federal income tax purposes to the extent of current and
accumulated earnings and profits of the Company as determined under U.S. federal
income tax principles. The dollar value of such dividends will be includible in
the gross income of a U.S. Holder as ordinary income on the day on which the
dividends are received by the Depositary, without reduction for any Belgian
taxes withheld at source, and will not be eligible for the dividends received
deduction allowed to corporations under Section 243 of the Code. For purposes of
determining the dollar value of any distributions to a U.S. Holder,
distributions paid in Belgian francs will be converted into a dollar amount
calculated by reference to the exchange rate in effect on the day they are
received by the Depositary. U.S. Holders should consult their own tax advisors
regarding the treatment of foreign currency gain or loss, if any, on any Belgian
francs received which are not converted into dollars on the day the Belgian
francs are received by the Custodian.
To the extent, if any, that a U.S. Holder receives a distribution on
PetroFina ADSs that would otherwise constitute a dividend for U.S. federal
income tax purposes but that exceeds current and accumulated earnings and
profits of the Company, such distribution will be treated first as a non-taxable
return of capital reducing the U.S. Holder's basis in the PetroFina ADSs. Any
such distribution in excess of the U.S. Holder's basis in the PetroFina ADSs
will be treated as a capital gain.
Generally, U.S. Holders will have the option of claiming the amount of any
Belgian income taxes withheld on a dividend distribution to them as either a
deduction from gross income or, subject to the limitations described below, as a
dollar-for-dollar credit against their U.S. federal income tax liability. A
deduction or foreign tax credit will not be available with respect to Belgian
income taxes that may be refunded to a U.S. Holder pursuant to the Treaty. A
U.S. Holder that elects to deduct Belgian income taxes from gross income may do
so only for a taxable year in which the U.S. Holder claims a federal income tax
deduction with respect to all foreign income taxes. Individuals who do not claim
itemized deductions, but instead utilize the standard deduction, may not claim
the amount of the Belgian income taxes in respect of distributions on the
PetroFina ADSs as a deduction from their gross income, but such amount may be
claimed as a credit against the individual's U.S. federal income tax liability.
The amount of Belgian income taxes for which U.S. Holders may claim a credit in
any year is subject to certain complex limitations and restrictions, which must
be determined on an individual basis by each U.S. Holder. The limitations set
out in the Code include, among others, new holding period requirements enacted
pursuant to the Taxpayer Relief Act of 1997 and rules under which foreign tax
credits allowable with respect to specific classes of income cannot exceed the
U.S. federal income taxes otherwise payable with respect to each class of
income. Dividends paid by the Company generally will be foreign source "passive
income" (or, in the case of certain holders, "financial services income") for
U.S. foreign tax credit purposes. Foreign income taxes exceeding the credit
limitation for the year of payment or accrual of such tax can be carried back
for two taxable years and forward for five taxable years, in order to reduce
U.S. federal income taxes subject to a credit limitation applicable in each of
such
33
<PAGE> 36
years. Other restrictions on the foreign tax credit include a limitation which
generally prevents use of the credit in any taxable year to reduce liability for
U.S. individual and corporate alternative minimum tax by more than 90%. Holders
should consult their tax advisors regarding limitations on the foreign tax
credit, including the new holding period requirements referenced above.
Disposition of PetroFina ADSs. Upon the sale, exchange or other
disposition of PetroFina ADSs, a U.S. Holder generally will recognize capital
gain or loss in an amount equal to the difference between such U.S. Holder's
adjusted tax basis in the PetroFina ADSs and the amount realized on the
disposition. Such capital loss generally will be long-term capital gain or loss
if the holding period of PetroFina ADSs exceeds one year at the time of the
disposition. Certain non-corporate taxpayers (including individuals) are
eligible for preferential rates of taxation on long-term capital gain. The
deductibility of capital losses is subject to limitations.
Gain or loss realized by a U.S. Holder on a sale, exchange or other
disposition of PetroFina ADSs generally will be treated as U.S. source income or
loss for U.S. foreign tax credit purposes.
NON-U.S. HOLDERS
A Non-U.S. Holder generally will not be subject to U.S. federal income tax
on dividends paid by PetroFina with respect to PetroFina ADSs unless such income
is effectively connected with the conduct by the Non-U.S. Holder of a trade or
business within the U.S. and such Non-U.S. Holder is not otherwise eligible for
applicable treaty benefits. A Non-U.S. Holder of PetroFina ADSs will not be
subject to U.S. federal income tax on gain from the sale or other disposition of
PetroFina ADSs unless (i) such gain is effectively connected with the conduct by
the Non-U.S. Holder of a trade or business in the United States and such Non-
U.S. Holder is not otherwise eligible for applicable treaty benefits or (ii) in
the case of gain realized by an individual Non-U.S. Holder, the Non-U.S. Holder
is present in the United States for 183 days or more in the taxable year of the
sale and certain other conditions are satisfied.
U.S. Information Reporting and Backup Withholding
Under certain circumstances, the Internal Revenue Service requires
"information reporting" and "backup withholding" at a rate of 31% with respect
to payments of dividends on PetroFina ADSs and the proceeds of disposition of
PetroFina ADSs. Information reporting generally applies to U.S. Holders. A U.S.
Holder will be subject to backup withholding at a rate of 31% on payments of
dividends on PetroFina ADSs or the proceeds of disposition of PetroFina ADSs
only if the U.S. Holder (i) fails to provide a TIN on a properly completed Form
W-9, (ii) furnishes an incorrect TIN, (iii) is notified by the Internal Revenue
Service that the U.S. Holder has failed to properly report payment of dividends
or interest, or (iv) fails, under certain circumstances, to certify, under
penalties of perjury, that it has furnished a correct TIN. Information and
backup withholding will not apply with respect to payments made to certain
exempt recipients, such as corporations and tax exempt organizations.
The payment of the proceeds of a Non-U.S. Holder's disposition of PetroFina
ADSs or the payment of dividends on PetroFina ADSs to or through the U.S. office
of a broker or through a non-U.S. branch of a U.S. broker generally will be
subject to information reporting and backup withholding at a rate of 31% unless
the holder either certifies its status as a Non-U.S. Holder under penalties of
perjury or otherwise establishes an exemption. As a result of recently issued
Treasury regulations, these certification and exemption procedures may change
for payments made on or after January 1, 2000. Consequently, Non-U.S. Holders
may be required to provide new information and certifications in order to avoid
information reporting and backup withholding with respect to such payments. The
payment of the proceeds of the disposition by a Non-U.S. Holder of PetroFina
ADSs or the payment of dividends on PetroFina ADSs to or through a non-U.S.
office of a non-U.S. broker will not be subject to backup withholding or
information reporting unless the non-U.S. broker has certain U.S. relationships.
Any amounts withheld under the backup withholding rules from a payment to
either a U.S. or a Non-U.S. Holder will be refunded (or credited against the
holder's U.S. federal income tax liability, if any) provided that the required
information is furnished to the Internal Revenue Service.
34
<PAGE> 37
CERTAIN BELGIAN INCOME TAX CONSIDERATIONS OF HOLDING AND DISPOSING OF PETROFINA
ADSs.
The following discussion summarizes the material Belgian income tax
consequences to U.S. persons, and to other non-residents of Belgium who do not
have a permanent establishment in Belgium, of the ownership, disposition or
exercise of PetroFina ADSs.
Dividends -- U.S. Holder
In general, under Belgian law, the Belgian tax imposed on a dividend paid
to a non-resident that does not have a "permanent establishment" in Belgium will
be limited to the amount of the withholding tax, the current rate of which is
25%. This dividend withholding tax may be subject to reduction, however,
pursuant to income tax treaties that Belgium has entered into with other
countries. Pursuant to the Treaty, dividends paid by the Company to a U.S.
Holder that does not have a "permanent establishment" in Belgium generally will
be subject to a Belgian withholding tax at a reduced rate of 15%. Such
withholding is reduced, however, to 5% in the case of a corporation which owns
directly at least 10% of the Company's voting stock. Whether a Non-U.S. Holder
who is not a Belgian resident qualifies for a reduced rate of Belgian
withholding tax will depend upon whether such Non-U.S. Holder is a citizen or
resident of, or organized under the laws of, a country that has an income tax
treaty with Belgium that provides for a reduced rate of withholding tax and
whether the holder otherwise satisfies any conditions in the treaty necessary to
be eligible for the reduced rate of withholding tax.
Although there are exceptions, in general, the full Belgian withholding tax
must be withheld by the Company (that is, the amount of withholding upon the
payment of the dividend is not reduced to reflect the Treaty rate), and the U.S.
Holder may make a claim for reimbursement for amounts withheld in excess of the
Treaty rate. The reimbursement form can be obtained from the Bureau Central de
Taxation Bruxelles-Etranger, Place Jean Jacobs, 10, B-1000 Brussels, upon
presentment of a form stamped by the U.S. Internal Revenue Service and the
document proving cashing of the dividend. The relevant form may be obtained from
the Depositary or Parent "Service a l'actionnaire," 52 Rue de l'Industrie,
B-1040 Brussels (Tel. +32-2-288.99.45/Fax +32-2-288.35.95). If the Forms 61,66
(U.S. IRS Certificate of Residence) and 276 (Belgian Ministry of Finance) are
properly completed and sent to the Depositary three working days prior to the
dividend payment date, the beneficial owner of the dividend will obtain the
reduced withholding tax rate at source. Prospective holders should consult their
own tax advisors as to whether they qualify for reduced withholding upon the
payment of dividends, and as to the procedural requirements for obtaining
reduced withholding upon the payment of dividends or for making claims for
reimbursement.
Under Belgian tax law the rate of the withholding tax can be reduced to 0%
in the case of dividends paid by a Belgian corporation to certain U.S.
organizations that are not engaged in any activity of a lucrative nature and are
exempt from United States federal income tax. For instance, organizations either
constituted and operated exclusively to administer or provide pension,
retirement or other employee benefits or operated exclusively for religious,
charitable, scientific, educational or public purposes may qualify for the 0%
withholding tax rate. To benefit from this reduced rate, the qualified U.S.
Holders should sign a specific form, available by request from the "Service a
l'actionnaire" or included in the annual report, and send it back either to the
Depositary three working days before the dividend payment date to obtain the
reduced withholding tax rate at source or to the "Directeur regional des
contributions, Bruxelles II-societes, avenue Louise 233-245, B-1050 Bruxelles"to
be refunded the excess withholding tax.
Dividends -- Non-U.S. Holder
As discussed above, Belgian tax law generally imposes a 25% withholding tax
on a dividend paid to a nonresident that does not have a "permanent
establishment" in Belgium. Whether a Non-U.S. Holder who is not a Belgian
resident qualifies for a reduced rate of Belgian withholding tax will depend
upon whether it is a resident of, or organized under the laws of, a country that
has an income tax treaty with Belgium that provides for a reduced rate of
withholding tax and whether the holder otherwise satisfies any conditions in the
treaty necessary to be eligible for the reduced rate of withholding tax.
Non-U.S. Holders entitled to a reduced withholding tax under a treaty may make
claim for reimbursements for overwithheld amounts. Reimbursement forms can be
obtained from the address listed in the discussion of "-- Dividends -- U.S.
Holders" above.
35
<PAGE> 38
Capital Gains
U.S. persons and other non-residents of Belgium who do not have a permanent
establishment in Belgium will not be subject to Belgian income tax on the sale
or other disposition of PetroFina ADSs. Individual non-residents of Belgium with
a permanent establishment in Belgium will be subject to Belgian taxation on the
disposition of PetroFina ADSs, and such shareholders should consult their tax
advisors about the tax consequences to them of disposing of PetroFina ADSs.
Estate and Gift Tax
A transfer of PetroFina ADSs by reason of death will be subject to Belgian
estate tax ("droits de succession/successierechten") only if the deceased had
his domicile or the seat of his estate in Belgium at the time of his death. The
estate tax shall be due on the whole estate of the deceased wherever the assets
are located.
A transfer of PetroFina ADSs by gift will be subject to a Belgian gift
registration tax ("droits d'enregistrement/registratierechten") only if it is
made through a notary deed in Belgian. A gift in bearer form does not have to be
made through a notary deed to be valid and effective. The registration tax
should not apply to gifts of PetroFina ADSs recorded in a notary deed that is
executed outside of Belgium.
ITEM 8. SELECTED CONSOLIDATED FINANCIAL DATA
The following financial information with respect to the five years ended
December 31, 1998 has been derived from the Company's audited consolidated
financial statements. The audited consolidated financial statements for the
years ended December 31, 1998, 1997, 1996 and 1995 have been prepared in
accordance with U.S. GAAP. The consolidated financial statements for the period
ended December 31, 1994 have been prepared in accordance with Belgian GAAP.
The Group financial statements were previously presented in Belgian francs.
A Belgian Royal Decree dated December 15, 1998 permits Belgian companies to
restate financial statements and notes in Euro. All current year and comparative
financial statements in this Annual Report have been restated in Euro based on
the rate of 40.3399 BEF per Euro effective January 1, 1999. PetroFina's
financial statements as reported in Euro depict the same trends as would have
been presented if the Company had continued to present its financial statements
in Belgian francs. PetroFina's financial statements will not be comparable to
the financial statements of other companies reporting in Euro that have restated
amounts from a currency other than Belgian francs.
The information for the three years ended December 31, 1998, 1997 and 1996
should be read in conjunction with the consolidated financial statements and
notes included in "Item 18. Financial Statements."
36
<PAGE> 39
PETROFINA S.A. AND SUBSIDIARIES
SUMMARY OF FINANCIAL AND OPERATING DATA
(IN EURO MILLION, EXCEPT PER SHARE DATA AND NUMBER OF SHARES)
<TABLE>
<CAPTION>
U.S. GAAP BELGIAN GAAP
--------- ------------
FOR THE YEAR ENDED AND AT DECEMBER 31,
--------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
FINANCIAL
Operating Revenue............... 17,093 18,057 15,459 13,850 14,237
Depreciation, depletion and
amortization................. 731 712 589 559 565
Exploration costs............... 67 108 75 104 65
Operating Income................ 683 1,161 976 763 688
Net earnings.................... 466 547 395 293 249
Net basic earnings per share.... 19.89 23.42 17.00 12.62 10.71
Diluted net earnings per
share........................ 19.88 23.42 17.00 12.52 10.71
Cash dividends per share........ 11.40 9.92 8.73 7.93 6.94
Cash dividends per share (US
$)(1)........................ 12.50 11.44 11.07 10.83 8.22
Capital expenditures............ 1,256 1,082 822 740 669
Long term obligations........... 1,609 1,487 1,223 1,109 1,279
Total assets.................... 9,635 10,005 9,092 8,277 8,449
Stockholders' equity............ 3,981 3,865 3,347 3,051 3,061
Average Shares outstanding...... 23,440,102 23,350,612 23,252,764 23,252,414 23,252,126
Ratio of earnings to fixed
charges(%)................... 3.59 6.21 5.27 4.19 3.53
OPERATIONS
Crude oil, condensate, and
natural gas liquids produced
(in million barrels of oil
equivalent).................. 49.1 52.2 49.3 50.7 42.8
Natural gas produced (in billion
cubic feet).................. 187.4 208.9 210.7 204.0 211.7
Refinery throughput crude oil
(thousands barrels per
day)......................... 695.6 669.0 645.3 597.8 593.8
Major chemicals and plastics
produced (in thousand
tonnes)...................... 4,253 4,070 3,774 3,460 3,300
Employees (average for the
year)........................ 14,489 14,675 13,588 13,653 14,013
</TABLE>
- ---------------
(1) Based on the Noon Buying Rate on the first day dividends are available for
payment. See "Exchange Rates."
DIVIDENDS
PetroFina has paid dividends on the PetroFina Shares in each year for at
least the past 50 years. Future dividends will depend on the Company's earnings,
financial condition and other factors. The payment and amount of dividends are
subject to the recommendation of the Board of Directors and declaration by the
Company's shareholders at the annual ordinary general shareholders' meeting. The
Company's Articles of Association provide that the Board of Directors may pay an
interim dividend as an advance against the annual dividend.
Dividends paid to holders of PetroFina ADSs will be subject to a charge by
the Depositary for any expenses incurred by the Depositary in the conversion of
Euro to dollars. For a summary of certain United States federal and Belgian tax
consequences to holders of PetroFina Shares and PetroFina ADSs, see "Item 7.
Taxation."
37
<PAGE> 40
The table below sets forth for the years indicated, the amount of dividends
paid per PetroFina Share.
<TABLE>
<CAPTION>
DIVIDEND DIVIDEND DIVIDEND
PER PER PER
PETROFINA PETROFINA PETROFINA
SHARE SHARE ADS
--------- --------- ---------
(EURO) (US $)(1) (US $)(1)
<S> <C> <C> <C>
1994........................................................ 6.94 8.22 0.940(3)
1995........................................................ 7.93 10.83 1.075
1996........................................................ 9.73 11.07 1.12
1997........................................................ 9.92 11.44 1.14
1998........................................................ 11.40 12.50 1.25
1999........................................................ 11.40 13.39 1.34
</TABLE>
- ---------------
(1) Based on the Noon Buying Rate on the first day dividends are available for
payment. See "Exchange Rates."
(2) Dividend paid by the Depositary per PetroFina ADS.
(3) Includes $0.129 paid to holders of Petrofina ADSs in connection with a
rights offering to holders of PetroFina Shares.
In January 1999, the Company paid a dividend of Euro 11.40 per PetroFina
Share in respect of the Company's 1998 earnings. Based on the Noon Buying Rate
on January 13, 1999, the dollar equivalent of this dividend was US $1.34. On
January 13, 1999, the Depositary paid a gross dividend of US $1.34 per PetroFina
ADS to all holders of PetroFina ADSs as of January 13th, 1999.
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The information in this section should be read in conjunction with the
information contained in the consolidated financial statements and related notes
included in "Item 18. Financial Statements." The consolidated financial
statements for the years ended December 31, 1998, 1997, 1996 and 1995 have been
prepared in accordance with U.S. GAAP. See also "Item 8. Selected Consolidated
Financial Data."
The Group financial statements were previously presented in Belgian francs.
A Belgian Royal Decree dated December 15, 1998 permits Belgian companies to
restate financial statements and notes in Euro. All current year and comparative
financial statements in this Annual Report have been restated in Euro based on
the rate of 40.3399 BEF per Euro effective January 1, 1999. PetroFina's
financial statements as reported in Euro depict the same trends as would have
been presented if the Company had continued to present its financial statements
in Belgian francs. The historical results of a non-Belgian company would be
restated in Euro based upon the January 1, 1999 exchange ratio between its legal
currency and the Euro, effectively "fixing" the historical exchange rate between
the Belgian franc and other legal currency. Thus, the results of Belgian and
non-Belgian companies restating in Euro would not be comparable because it is
likely the actual exchange ratio between the two currencies differed materially
from the implied exchange ratio.
This Annual Report contains certain forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Such
statements appear in a number of places in this Annual Report including, without
limitation, under "Item 1. Description of Business," "Item 9. Management's
Discussion and Analysis of Financial Condition and Results of Operations," "Item
9A. Quantitative and Qualitative Disclosures About Market Risk" and information
related to the impact of the year 2000 and European Monetary Union issues
contain forward-looking statements. PetroFina's business is subject to risks and
uncertainties beyond PetroFina's control. All subsequent written and oral
forward-looking statements attributable to PetroFina and persons acting on its
behalf are qualified in their entirety by the cautionary statements contained in
this section and elsewhere in this Annual Report. Forward-looking statements
include information in the Annual Report where statements are preceded by,
followed by or include the words "projects," "estimates," "believes," "expects,"
"assumes," "anticipates" or similar expressions. For such statements, PetroFina
claims the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995.
38
<PAGE> 41
The following important factors, together with others that appear with the
forward-looking statements, could affect the Group's actual results and could
cause the Group's actual consolidated results to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the Group,
including information in this Annual Report. PetroFina's operating results are
generally affected by a variety of factors, including movements in crude oil
prices and refining and chemical margins and currency exchange rates. Higher
crude oil prices generally have a positive effect on operating income of the
Group, as its Upstream oil and gas business benefits from the resulting increase
in prices realized from production. Lower crude oil prices generally have a
corresponding negative effect. Overall in 1998 average prices for crude oil have
been at their lowest levels during the past two decades, and the prospects for
the foreseeable future look to be about the same. See "Item 1. Description of
Business -- Upstream -- Reserves." The effect of changes in crude oil prices on
PetroFina's Downstream activities depends upon the speed at which the prices of
refined petroleum products adjust to reflect such changes. Fluctuations of the
Euro against other currencies, especially the dollar, can have significant
effects on PetroFina's consolidated financial statements. Prices for crude oil
are normally set in dollars. Chemical products are generally priced in local
currency but based, in Europe, on Euro benchmark prices. Generally, the Group's
operating income is improved by a strengthening of the dollar against the Euro.
In addition, the effects of translation of local currency financial statements
of PetroFina's non-Belgian subsidiaries can influence comparative results of
operations. See also "Item 9A. Quantitative and Qualitative Disclosures About
Market Risk."
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the Group for the
years indicated.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
------- ------- -------
(IN EUR MILLION EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
CONSOLIDATED DATA
Operating Revenue........................................... 17,049 18,023 15,423
Earnings from Investments, Equity Interests................. 44 34 36
------- ------- -------
Total Revenue.......................................... 17,093 18,057 15,459
======= ======= =======
Cost of Product Sold, Duties & Excise Taxes................. (13,094) (13,630) (11,563)
Direct Operating Expenses................................... (1,497) (1,441) (1,352)
Sales, General & Administrative Costs....................... (794) (754) (686)
Depreciation, Depletion & Amortization...................... (731) (712) (589)
Exploration Costs........................................... (67) (108) (75)
Other Operating Costs....................................... (215) (228) (190)
Early Retirement Costs...................................... (12) (23) (28)
------- ------- -------
Operating Income............................................ 683 1,161 976
Interest and Net Financial Items............................ (79) (114) (125)
------- ------- -------
Earnings Before Income Taxes and Minority Interests......... 604 1,047 851
Income Taxes................................................ (132) (484) (438)
Minority Interest........................................... (6) (16) (18)
------- ------- -------
Net Income.................................................. 466 547 395
======= ======= =======
Basic Earnings per Share.................................... 19.89 23.42 17.00
Diluted Earnings per Share.................................. 19.88 23.42 17.00
</TABLE>
39
<PAGE> 42
All the amounts were restated in Euros based on the January 1, 1999 rate
(40.3399 BEF per Euro).
SEGMENT DATA
<TABLE>
<CAPTION>
OTHER
UPSTREAM DOWNSTREAM CHEMICALS PAINTS ACTIVITIES CONSOLIDATED
-------- ---------- --------- ------ ---------- ------------
(IN EUR MILLION)
<S> <C> <C> <C> <C> <C> <C>
1998
Operating Revenue.................. 2,192 13,086 1,982 780 42 18,082
Inter-segment Sales................ (587) (345) (101) (1,033)
Operating Revenue from Non
Affiliates....................... 1,605 12,741 1,881 780 42 17,049
Operating Income (Loss)............ 294 162 184 45 (2) 683
Capital Expenditures............... 534 281 277 38 126 1,256
1997
Operating Revenue.................. 2,188 14,178 2,312 780 12 19,470
Inter-segment Sales................ (900) (420) (127) (1,447)
Operating Revenue from Non
Affiliates....................... 1,288 13,758 2,185 780 12 18,023
Operating Income (Loss)............ 627 298 259 40 (63) 1,161
Capital Expenditures............... 571 250 223 25 13 1,082
1996
Operating Revenue.................. 1,617 12,304 1,943 730 26 16,620
Inter-segment Sales................ (772) (341) (84) -- (1,197)
Operating Revenue from Non
Affiliates....................... 845 11,963 1,859 730 26 15,423
Operating Income (Loss)............ 599 129 281 30 (63) 976
Capital Expenditures............... 446 222 91 29 34 822
</TABLE>
GROUP RESULTS 1998 VS 1997
In 1998, consolidated net income was EUR 466 million (BEF 18.8 billion)
compared to EUR 547 million (BEF 22.1 billion) in 1997, a decrease of 15%.
Group consolidated net income was unfavorably influenced by:
- Decreases in petroleum and petrochemical product prices which caused not
only a reduction in operating results but also losses and write-downs on
inventories of EUR 208 million (BEF 8.4 billion) after tax;
- Accelerated depreciation in accordance with SFAS 121 (Impairment of
Long-Lived Assets) of EUR 45 million (BEF 1.8 billion) net of tax
effects;
- Provisions for an important change in estimate for dismantlement costs
and site restoration on the Maureen field in the North Sea (U.K.) of EUR
15 million (BEF 0.6 billion) net of tax effects; and
- Early retirement costs and other charges of EUR 15 million (BEF 0.6
billion) after tax.
These charges were partially offset by gains on asset disposals of EUR 74
million (BEF 3.0 billion) after-tax and by other revenue of EUR 41 million (BEF
1.7 billion) related to refunds of excess insurance premiums and by the
recognition of tax loss carryforwards on U.S. subsidiaries for an amount of EUR
55 million (BEF 2.2 billion). After taking into account these changes for the
same period, PetroFina's share of earnings on a replacement cost basis increased
to EUR 573 million (BEF 23.1 billion) in 1998 from EUR 568 million (BEF 22.9
billion) in 1997. The replacement cost basis method calculates the cost of
products sold using the average quoted market prices for raw materials for the
month in which the sale occurred.
Operating income excluding these items decreased from EUR 1,227 million in
1997 to EUR 910 in 1998. This decrease, largely in the Upstream segment which
was down EUR 310 million, was adversely influenced by a drop in crude oil price
of about 33%, a reduction in U.S. natural gas price of 20% and production
decreases of 8% primarily resulting from technical problems associated with the
start-up of Ekofisk II in the North Sea.
The Group's consolidated operating revenue in 1998 was EUR 17 billion, a
decrease of EUR 974 million, or 5%, from 1997. A EUR 2.8 billion decrease
related to sales prices was partially offset by increases of EUR 1.1 billion
resulting from higher sales volume and EUR 137 million resulting from the
appreciation of the
40
<PAGE> 43
dollar and other European currencies against the Belgian franc. Financial
charges decreased by EUR 35 million (BEF 1.4 billion) due to an increase of EUR
15 million in capitalized interest, EUR 10 million in gain on marketable
securities held by insurance affiliates and increases in exchange rate gains of
EUR 15 million.
The decrease in Upstream operating income resulted in lower taxes by EUR
237 million (BEF 9.6 billion). As a result, a lower proportion of Group earnings
before tax are attributable to Norwegian production activities. Norwegian
production activities carry a higher tax burden due to specific petroleum tax
legislation in Norway.
Basic earnings per share were EUR 19.89 in 1998 compared to EUR 23.42 in
1997.
Consolidated Cash Flow, defined as consolidated net income adjusted for
depreciation and other current year non-cash provisions to net income, increased
to EUR 1,425 million (BEF 57.5 billion) in 1998 from EUR 1,417 million (BEF 57.2
billion) in 1997.
UPSTREAM: REVIEW OF OPERATIONS
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- --------------------- ---------------------
NORTH NORTH NORTH
EUROPE(1) AMERICA EUROPE(1) AMERICA EUROPE(1) AMERICA
---------- -------- ---------- -------- ---------- --------
(IN EUR MILLION, EXCEPT NUMBER OF EMPLOYEES, PRODUCTION AND RESERVES)
<S> <C> <C> <C> <C> <C> <C>
Operating Revenue(2)................... 910 1,282 1,216 972 1,040 577
Equity in Net Income of Non
Consolidated Investees............... 15 1 17 2 22 --
----- ------ ------- ----- ------- -----
Total Revenue..................... 925 1,283 1,233 974 1,062 577
Operating Expense, Excluding
Depreciation and Exploration
Expense.............................. (353) (1,136) (370) (771) (263) (433)
Depreciation, Depletion and
Amortization......................... (242) (76) (205) (86) (164) (57)
Exploration Expense.................... (52) (15) (55) (53) (44) (31)
Other Operating Expense................ (24) (16) (24) (16) (46) (2)
----- ------ ------- ----- ------- -----
Operating Income (loss)................ 254 40 579 48 545 54
===== ====== ======= ===== ======= =====
Capital Expenditures................... 367 167 378 193 321 125
Total Assets........................... 1,585 803 1,620 752 1,430 563
===== ====== ======= ===== ======= =====
Crude Oil Production (in million
barrels)(3).......................... 45.1 4.0 48.2 4.0 45.3 4.0
Natural Gas Production (in Bcf)........ 113.9 73.5 132.3 76.6 151.9 58.8
Proved Oil Reserves (in million
barrels)(3).......................... 576.9 71.5 510.3 72.6 485.0 77.3
Proved Gas Reserves (in Bcf)........... 930.3 405.6 1,188.0 400.3 1,349.2 392.8
Total Proved Reserves (in million
barrels of oil
equivalent)(3)(4)............... 732.0 139.1 708.3 139.3 709.9 142.8
===== ====== ======= ===== ======= =====
Average Number of Employees............ 322 394 345 493 372 453
===== ====== ======= ===== ======= =====
</TABLE>
- ---------------
(1) Europe includes Europe and the rest of the world other than North America.
(2) Includes inter-segment revenue.
(3) Excluding equity affiliates.
(4) 1 barrel of oil equivalent = 1 barrel of crude oil = 6000 cubic feet of gas.
OPERATING REVENUE
Operating revenue in 1998 was EUR 2.2 billion, a figure comparable to 1997.
The maintenance of sales revenues is explained by :
- Increases in natural gas marketing volumes primarily in the U.S. (535
billion cubic feet in 1998 compared to 310 billion cubic feet in 1997)
that resulted in a rise in operating revenue of EUR 323 million;
41
<PAGE> 44
- Capital gains on assets sold and other items which generated additional
revenues of EUR 62 million and
- Appreciation of the dollar against the Belgian franc that resulted in an
increase in operating revenues of EUR 15 million.
These revenue increases were totally offset by the effect of the decline in
the price of crude oil and natural gas of EUR 316 million and by production
volume decreases of EUR 93 million.
In Europe, operating revenue decreased by EUR 306 million to EUR 910
million in 1998. The reduction of crude oil and natural gas production of 6.2
million barrels of oil equivalent caused a decrease in revenues of EUR 75
million. The weakening in the price of crude oil by $ 6.30 per barrel to $ 12.66
per barrel resulted in a reduction in operating revenues by EUR 249 million. The
decrease in natural gas marketing volumes was accompanied by a reduction in
operating revenue of EUR 15 million.
These reductions in operating revenue were partially offset by EUR 12
million related to exchange rate variations and by a gain of EUR 21 million from
the renegotiation of natural gas contract prices on the Audrey field in the
North Sea (U.K.).
Crude oil production was 123,600 barrels per day down from 132,000 barrels
per day in 1997. The production shutdown associated with the start-up of the new
Ekofisk II complex and consequent technical problems resulted in production
declines of 7,000 barrels per day in Norway. In the United Kingdom, natural
field production declines were partially offset by full year production of the
Armada field, brought into production in 1997 (down 3,000 barrels per day).
Natural gas production was 312 million cubic feet per day compared to 362
million cubic feet per day in 1997. The Norwegian production decrease, 78
million cubic feet per day, was due to, as with the crude oil situation,
technical problems related to the start-up of Ekofisk II. This was partially
offset by higher North Sea production from the Armada field in the U.K.
In North America, operating revenue increased by 32% to EUR 1,282 million.
An increase in natural gas trading volumes of 221 billion cubic feet
resulted in an increase to operating revenue of EUR 338 million. The decrease in
crude oil price of $ 6.50 per barrel to $ 11.80 per barrel and in natural gas of
$ 0.20 per thousand cubic feet to $ 2.46 per thousand cubic feet resulted in a
reduction in operating revenues of EUR 57 million. Gains on assets sold
increased to EUR 41 million.
OPERATING INCOME
Upstream operating income was EUR 294 million in 1998 compared to EUR 627
million in 1997, a reduction of 53%.
In Europe, 1998 operating income was EUR 254 million, down 56% from EUR 579
million in 1997. Operating expenses decreased due to lower third party gas sales
partially offset by an increase in provision for dismantlement costs and site
restoration on the Maureen field.
The unit depletion rate (unit of production method) was $ 3.05 per barrel
in 1998 compared with $ 3.06 per barrel in 1997. The crude oil price decrease
resulted in an impairment write-down of EUR 87 million on capitalized costs of
North Sea fields in the U.K. In 1997, a decrease in recoverable reserves from
the Ann and Alison fields resulted in an impairment write-down of EUR 12
million. Lifting cost was $ 4.20 per barrel in 1998 compared to $ 4.14 per
barrel in 1997.
Exploration expenses were comparable to last year at EUR 52 million and EUR
55 million for 1998 and 1997, respectively.
In North America, operating income was EUR 40 million in 1998 compared to
EUR 48 million in 1997.
The unit depletion rate (unit of production method) decreased to $ 4.93 per
barrel in 1998 from $ 5.51 per barrel in 1997 due to asset sales and the
development of new, lower-cost fields. Lifting costs were $ 3.68 per barrel in
1998 compared to $ 3.58 per barrel in 1997. Exploration expenses decreased from
EUR 53 in 1997 to EUR 15 million in 1998 due to lower dry hole costs.
42
<PAGE> 45
On a global basis, in 1998, PetroFina participated in 21 exploration wells
compared to 27 wells in 1997. Approximately 48% of the wells drilled resulted in
additional potential reserves. PetroFina's interest in exploration drilling
represented 41.0% in 1998 compared to 40.4% in 1997.
The drilling program in 1998 resulted in additions to reserves of 97
million barrels of oil equivalent, thereby allowing 121% of production to be
replaced.
DOWNSTREAM: REVIEW OF OPERATIONS
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------- -------------------
NORTH NORTH NORTH
EUROPE(1) AMERICA EUROPE(1) AMERICA EUROPE(1) AMERICA
--------- ------- --------- ------- --------- -------
(IN EUR MILLION, EXCEPT NUMBER OF EMPLOYEES,
REFINING THROUGHPUT AND PRODUCTS SOLD)
<S> <C> <C> <C> <C> <C> <C>
Operating Revenue(2)................... 10,977 2,109 11,468 2,710 9,989 2,315
Equity in Net Income of
Non-Consolidated Investees........... 16 -- 18 -- 20 --
------- ------ ------- ------ ------ ------
Total Revenue..................... 10,993 2,109 11,486 2,710 10,009 2,315
Operating Expense, Excluding
Depreciation......................... (10,551) (2,037) (10,977) (2,562) (9,613) (2,254)
Depreciation, Depletion and
Amortization......................... (202) (57) (214) (55) (180) (46)
Other Operating Expense................ (59) (34) (61) (29) (75) (27)
======= ====== ======= ====== ====== ======
Operating Income (Loss)................ 181 (19) 234 64 141 (12)
======= ====== ======= ====== ====== ======
Capital Expenditures................... 207 74 208 42 164 58
Total Assets...................... 3,288 1,021 3,605 1,230 3,514 1,070
======= ====== ======= ====== ====== ======
Refining Throughput (in thousand bbls
per day)............................. 474.5 221.1 445.3 223.7 440.6 204.7
Refined Products Sold (in thousand
tons)................................ 27,231 12,615 26,161 12,540 25,278 12,016
======= ====== ======= ====== ====== ======
Average Number of Employees............ 5,656 1,205 5,452 1,233 4,475 1,161
======= ====== ======= ====== ====== ======
</TABLE>
- ---------------
(1) Europe includes Europe and the rest of the world other than North America.
(2) Includes inter-segment revenue.
(3) Includes capital gains on sales of assets of EUR 24 million.
OPERATING REVENUE
Downstream operating revenue in 1998 was EUR 13,086 million compared to EUR
14,178 million in 1997, a decrease of 8%. The decrease in revenues resulted
primarily from reductions in petroleum product prices of approximately EUR 2,344
million. This was partially offset by excise tax increases of EUR 474 million,
exchange rate fluctuations of EUR 95 million and gains on asset sales of EUR 42
million. Increases in product sales volumes contributed EUR 657 million.
The average petroleum product price decreased by 26% for gasoline, 31% for
gasoil and 27% for fuels. Sales volumes for lubricants and non-fuel products
increased by 13%. Sales volumes for petroleum products increased by 3% on
average, and network sales improved by 6.4%.
In Europe, operating revenues decreased by EUR 491 million to EUR 10,977
million, a reduction of 4%.
Sales revenue decreased by EUR 586 million for petroleum products. Product
price reductions resulted in a decrease of EUR 1,165 million, partially offset
by excise taxes of EUR 474 million. Higher sales volumes contributed EUR 806
million. In addition, currency exchange rate fluctuations improved operating
revenue by EUR 69 million.
Revenues from lubricants and shop products improved by EUR 58 million. Gain
from the partial sale of African subsidiaries and the sale of a lubricants plant
in Germany and other assets resulted in increased revenue of EUR 31 million.
43
<PAGE> 46
In North America, operating revenue was EUR 2,109 million, a decrease of
EUR 601 million from 1997. Sales quantities increased by 4% and resulted in
improved revenues by EUR 98 million. However, price decreases resulted in lower
revenues of EUR 736 million. Currency exchange rate fluctuations decreased
revenues by EUR 37 million.
OPERATING INCOME
Downstream operating income was EUR 162 million in 1998 compared to EUR 298
million in 1997. Excluding write-downs and losses on inventory of EUR 209
million and gains on asset disposals of EUR 37 million, operating income was EUR
335 million, an improvement of 12% over 1997.
In Europe, operating income was EUR 181 million. Excluding write-downs and
losses on inventory of EUR 156 million and gains on asset disposals of EUR 37
million, operating income was EUR 300 million, an improvement of 28% over 1997.
Refining throughput reached a record level of 474,500 barrels per day in
1998, an increase of 6.6% over 1997. In 1998, throughput improvement, crude
optimization and reduction of operating expenses improved refining operating
income by 6% compared to 1997 while industry refining margins in Northwest
Europe improved 2% from $ 2.40 per barrel to $ 2.45 per barrel in 1998.
Marketing operating income improved in all countries. Network sales increased by
6.4% while the market grew at only 2.4% on average. In the framework of customer
service, the Group resumed increasing the number of directly managed sales
outlets. The reduction in management fees and the increase in non-fuel shop
margins more than offset the resulting increase in personnel expenses.
In North America, operating losses were EUR 19 million compared to an
operating profit of EUR 64 million in 1997. Excluding write-downs and losses on
inventory of EUR 53 million and a loss on an asset disposal of EUR 1 million,
operating income was EUR 35 million, a decline of 41% from 1997. 1998 was
characterized by a drop in refining margins. Industry refining margins decreased
from $ 3.80 per barrel in 1997 to $ 3.00 per barrel in 1998. The Group's
reduction in refining margin was limited to $ 0.50 per barrel due to
optimization of the U.S. refineries.
CHEMICALS: REVIEW OF OPERATIONS
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- --------------------- ---------------------
NORTH NORTH NORTH
EUROPE(1) AMERICA EUROPE(1) AMERICA EUROPE(1) AMERICA
---------- -------- ---------- -------- ---------- --------
(IN EUR MILLION, EXCEPT NUMBER OF EMPLOYEES AND VOLUMES PRODUCED)
<S> <C> <C> <C> <C> <C> <C>
Operating Revenue(2)................... 1,189 793 1,381 931 1,154 789
Equity in Net Income (Loss) of
Non Consolidated Investees........... 1 (1) (4) (1) (1)
----- ----- ------ ----- ----- -----
Total Revenue..................... 1,190 792 1,377 930 1,154 788
Operating Expense, Excluding
Depreciation......................... (981) (679) (1,133) (780) (965) (575)
Depreciation, Depletion and
Amortization......................... (77) (34) (80) (30) (74) (25)
Other Operating Expense................ (13) (14) (13) (12) (11) (11)
===== ===== ====== ===== ===== =====
Operating Income....................... 119 65 151 108 104 177
===== ===== ====== ===== ===== =====
Capital Expenditures................... 87 190 80 143 48 43
Total Assets...................... 909 861 930 766 885 557
===== ===== ====== ===== ===== =====
Monomers Production (in thousand
tons)................................ 1,279 761 1,241 659 1,123 610
Polymers Production (in thousand
tons)................................ 910 1,303 899 1,271 880 1,161
===== ===== ====== ===== ===== =====
Average Number of Employees............ 1,886 872 1,920 913 1,876 932
===== ===== ====== ===== ===== =====
</TABLE>
- ---------------
(1) Europe includes Europe and the rest of the world other than North America.
(2) Includes inter-segment revenue.
44
<PAGE> 47
OPERATING REVENUE
Operating revenue in 1998 was EUR 1,982 million compared with EUR 2,312
million in 1997. This decline of 14% was primarily caused by decreases in sales
prices, resulting from overcapacity in certain markets (notably Asia) and by the
drop in petroleum product prices. New production records were reached in both
monomers and polymers with increases of 1% and 2%, respectively. Operating
revenues in Europe decreased from 1997 by EUR 192 million to EUR 1,189 million
in 1998. In monomers, ethylene and propylene sales prices decreased by 19% and
32%, respectively, while polymer sales prices dropped 12% on average. Sales
volumes were comparable to those in 1997.
In North America, operating revenue decreased by 15% in 1998 to EUR 793
million, reflecting a decrease across the board of all product categories. Sales
volumes increased by 0.5% for all products while sales prices declined 18% on
average.
OPERATING INCOME
Chemicals operating income was EUR 184 million. Excluding write-downs and
losses on inventory of EUR 54 million, operating income was EUR 238 million in
1998 compared to EUR 259 million in 1997. Good manufacturing and marketing
performance in a weak economic environment limited the decline in operating
income to 8% compared to 1997. In Europe, excluding write-downs and losses on
inventory, operating income was EUR 131 million in 1998 compared to EUR 151
million in 1997. The decline in operating income was largely in the monomers
business. The industry's steam cracker margins fell from EUR 89.2 per tonne in
1997 to EUR 84.3 per tonne in 1998. The decline in naptha prices of 29%
partially offset the drop in ethylene and propylene prices. Globally, polymer
margins were stable in 1998 compared with 1997.
In North America, excluding write-downs and losses on inventory, operating
income was EUR 107 million in 1998, comparable to 1997. Styrene prices continued
to fall during 1998; however margins improved an average of 20% in 1998 due to a
reduction in raw material costs. Margins improved an average 20% in 1998 while
polyethylene and polypropylene margins declined 16% and 13%, respectively
primarily as a result of decreasing sales prices.
In December 1998, a new polymer line came into production, increasing the
annual capacity of the La Porte plant to 1 million tonnes. In addition, a new
production unit started up at the Bayport plant in October 1998 doubling its
annual polyethylene capacity to 385,000 tonnes.
PAINTS: REVIEW OF OPERATIONS
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
(IN EUR MILLION EXCEPT NUMBER
OF EMPLOYEES)
<S> <C> <C> <C>
Operating Revenue(1)........................................ 780 780 730
Equity in Net Income of Non Consolidated Investees.......... -- 1 1
===== ===== =====
Total Revenue.......................................... 780 781 731
Operating Expense, Excluding Depreciation................... (700) (705) (662)
Depreciation, Depletion and Amortization.................... (22) (23) (21)
Other Operating Expense..................................... (13) (13) (18)
===== ===== =====
Operating Income............................................ 45 40 30
===== ===== =====
Capital Expenditures........................................ 38 25 29
Total Assets........................................... 501 488 464
===== ===== =====
Average Number of Employees................................. 3,627 3,822 3,878
===== ===== =====
</TABLE>
- ---------------
(1) Includes inter-segment revenue.
OPERATING REVENUE
In 1998, Paints operating revenue was EUR 780 million, which was
substantially the same as 1997 revenue. In decorative paints, results improved
primarily in France and the Benelux countries. The sale of the
45
<PAGE> 48
U.K. branch resulted in a revenue decline of 3.5%, although it generated a gain
on asset disposal of EUR 2.2 million.
The marine and anti-corrosion coatings business withstood the Asian crisis
with operating revenues increasing 3% in a market undergoing restructuring.
Strong sales increases in the U.S., Italy and Korea also increased operating
revenue.
Operating revenue of the industrial paints business also reached new
records with an increase of approximately 8%, mainly in Belgium.
OPERATING INCOME
Excluding the gain on disposal of the decorative paint business in the U.K.
of EUR 2.2 million in 1998 and costs associated with the closure of factories in
Germany and Denmark of EUR 3.0 million in 1997, operating results were EUR 43
million in 1998, which was substantially the same as 1997.
GROUP RESULTS 1997 VS 1996
1997 NET INCOME
In 1997, net income reached a record level of EUR 547 million (23.42 EUR
per share) compared to EUR 395 million (17,00 EUR per share) in 1996,
representing an increase of 39%. The Group's return on equity was 15.2% in 1997
compared to 12.4% in 1996. The return on capital employed increased in 1997 to
10.5% from 8.9% in 1996.
Consolidated Cash Flow, defined as consolidated net income adjusted for
depreciation and other current year non-cash provisions to net income, was EUR
1,417 million compared to EUR 1,090 million in 1996. The 1997 consolidated cash
flow also represents a record for the Group.
Compared to 1996, the increase in consolidated net income reflects a EUR
152 million improvement in Group operating income combined with lower financial
charges resulting from higher capitalization of interest on Upstream development
projects. Of the 1997 increase in operating income, EUR 169 million is related
to Downstream from higher margins and throughputs at the Group's Europe and
North America refineries. Upstream operating income improved by EUR 28 million
as increases in production and the dollar appreciation overcame the effect of
lower crude oil prices. Chemicals operating income decreased by EUR 22 million
due primarily to the unfavorable net effect of North America product price
developments. Paints operating income showed improvement of 10 million in 1997
compared to 1996.
The Group's consolidated operating revenue in 1997 was EUR 18 billion, an
increase of 17%, or EUR 2.6 billion, from the previous year. Of the increase,
EUR 793 million is the result of appreciation of the US dollar and other
European currencies versus the Belgian franc, EUR 495 million reflect increases
in sales volumes, EUR 620 million are related to sales prices, and EUR 718
million reflect increases in petroleum product excise duties.
During 1997, reductions in the statutory tax rates in Italy and the United
Kingdom resulted in a reduction of total income tax expense of EUR 31 million
through the recording of a deferred tax credit (in accordance with US GAAP).
Excluding this effect of tax rate changes, the Group's effective tax rate was
49.3% in 1997 compared to 51.5% in 1996. The lower effective tax rate reflects
the improvement in Downstream operating income. As a result, a lower percentage
of Group earnings before tax are attributable to Norwegian production
activities. Norwegian production activities carry a higher tax burden due to
specific petroleum tax legislation in Norway.
UPSTREAM: REVIEW OF OPERATIONS
OPERATING REVENUE
Operating revenue in 1997 was EUR 2.2 billion compared to EUR 1.6 billion
in 1996, an increase of 35%. Increases in production volumes and gas marketing
activities contributed EUR 295 million to the overall increase. The appreciation
of the US dollar and other European currencies versus the Belgian franc resulted
in an additional EUR 290 million increase in reported operating revenue.
Decreases in worldwide crude prices
46
<PAGE> 49
were primarily offset by higher North America natural gas prices. The net effect
of price developments during 1997 resulted in a EUR 12 million reduction in
operating revenue compared to 1996.
In Europe, the operating revenue increased 17% to EUR 1.2 billion in 1997.
Crude oil production in 1997 was 48.2 million barrels, an increase from 1996 of
2.9 million barrels, while natural gas production in 1997 was 132.3 billion
cubic feet, a decrease from 1996 of 19.6 billion cubic feet. The operating
revenue included revenues derived from 29 billion cubic feet of gas trading.
Reported operating revenue from Europe benefited in 1997 from the appreciation
of the US dollar by 16% and the British pound by 21% against the Belgian franc.
Realized crude oil prices dropped $1.95 per BBL to $18.96 per BBL.
Of the production increase in Europe, 3,900 barrels per day was due to the
drilling of new wells in the context of the Ekofisk II redevelopment project in
Norway. An additional 5,000 barrels per day of the total production increase was
attributable to a full year's production from the Thelma field and increased
flows from the Alba field after a successful de-bottlenecking project. Natural
gas production in Europe decreased by 19.6 billion cubic feet, due mainly to
Norway. In the United Kingdom, natural gas production was stable, increases
resulting from the production start of the Armada and Everest fields and from a
re-determination of ownership percentages for the Audrey field. The United
Kingdom increases were offset by a reduction in natural gas production from
Hewett and the Ann/Alison fields.
In North America, operating revenue increased 68% to EUR 972 million in
1997. Natural gas volumes sold, which includes production and volumes sold
through the Group's natural gas marketing activity, increased from 183 billion
cubic feet in 1996 to 281 billion cubic feet in 1997. Of the volume increase,
17.8 billion cubic feet related to natural gas production increases is
attributable to successful step-out drilling programs at core properties in
South Texas and North Louisiana. Natural gas well-head prices increased from
$2.41 in 1996 to $2.57 per thousand cubic feet in 1997. Although crude
production was level between the periods, the average crude oil well-head price
decreased by $1.40 per barrel to $17.90 per barrel. Both operating revenue and
operating income include a gain on sale of assets amounting to EUR 7.4 million
in 1997.
OPERATING INCOME
Upstream operating income was EUR 627 million in 1997 compared to EUR 599
million in 1996, an increase of 4%. The increase was due to operating revenue
developments partially reduced for the effect of lower margins realized in North
America on natural gas marketing activity and an increase in exploration costs.
In 1997, PetroFina participated in the drilling of 27 exploration wells
compared to 29 wells in 1996. Approximately 55% of wells drilled originate from
existing discoveries of oil and gas reserves, thus allowing for the better
evaluation of existing prospects. PetroFina's weighted average working interest
in exploratory wells drilled was 40.4% in 1997 compared to 29.4 % in 1996.
In Europe, operating income was EUR 579 million compared to EUR 545 million
in 1996, an increase of 6.4%. The depletion rate of $ 3.06 per barrel (on a
units-of-production basis) was largely unchanged in 1997 versus 1996. The impact
of gradually commissioning Ekofisk II facilities, and downward revisions of Ann/
Alison reserves (-17.6 billion cubic feet) were virtually absorbed by the impact
of positive revisions in the estimated Norwegian reserves. The downward revision
in Ann/Alison's recoverable reserves resulted in an impairment writedown in
Ann/Alison capitalized cost of EUR 12.4 million. Lifting costs have decreased to
$4.14 per barrel in 1997 from $4.29 per barrel in 1996 due to efficiencies in
production facilities.
Exploration expenses for Europe amounted to EUR 55 million in 1997 compared
to EUR 44 million in 1996.
In North America, operating income was EUR 48 million in 1997 compared to
EUR 54 million in 1996. The decrease in operating income mainly reflects higher
dry hole expenses and lower natural gas marketing margins, partially offset by
positive net developments in operating revenues. The increase in development
costs and the downward revision in oil and gas reserves have led to an increase
in the unit depletion rate (unit of production method) from $5.19 per barrel in
1996 to $5.51 per barrel in 1997. Lifting costs have decreased
47
<PAGE> 50
from $4.20 per barrel in 1996 to $3.58 per barrel in 1997. The drilling program
in 1997 resulted in additions to reserves of 18 million barrels of oil
equivalent, thereby allowing 121% of production to be replaced.
DOWNSTREAM: REVIEW OF OPERATIONS
OPERATING REVENUE
Downstream operating revenue in 1997 was EUR 14.2 billion compared to EUR
12.3 billion in 1996, an increase of 15%. Increases in European petroleum
product prices more than offset reductions in North American realized prices,
leading to a net increase in operating revenue in 1997 of EUR 446 million. The
appreciation of the dollar and other European currencies versus the Belgian
franc resulted in an additional EUR 470 million of reported operating revenue.
Increases in product sales volumes, shop sales and service station revenues
contributed the remainder of the 1997 increase. In addition, excise duties,
which do not affect Group operating income, increased by EUR 719 million in 1997
compared to 1996. Total petroleum products sold increased by 4% in 1997 to 38.7
million tons compared to 1996.
In Europe, operating revenue increased by 15% to EUR 11.5 billion in 1997
compared to EUR 10.0 billion in 1996. Excluding the effect of higher excise
duties, the increase was EUR 835 million. Of this net increase, EUR 545 million
related to increased product prices, EUR 174 million related to the reporting
effect of currency exchange rate fluctuations, EUR 99 million related to
increases in quantities sold, and EUR 50 million related to other operating
revenues. Operating revenue of 1996 included EUR 25 million of gain on the
disposal of assets.
In North America, the operating revenue was EUR 2.7 billion in 1997
compared to EUR 2.3 billion in 1996. Appreciation of the dollar against the
Belgian franc contributed EUR 296 million increase in reported operating
revenue, increases in quantities sold contributed EUR 74 million, and higher
excise duties added EUR 74 million. A decrease in average sale prices of
petroleum products resulted in a EUR 99 million reduction in operating revenue
compared to 1996. Shop sales and other operating revenue grew during 1997 by EUR
50 million.
OPERATING INCOME
Downstream operating income was EUR 298 million in 1997 compared to EUR 129
million in 1996. The growth in operating income is due to better refining
performances, increased margins on European petroleum product sales, and the
appreciation of the US dollar versus the Belgian franc.
In Europe, Downstream refining throughput reached 445.310 barrels per day
in 1997 compared to 440.550 barrels per day in 1996. The 1997 refining
throughput was a new record for the Group and was accomplished in spite of a
temporary shutdown of the Killingholm refinery in the United Kingdom for
scheduled maintenance. Higher throughput and advantageous blending of crude oil
feedstocks had a direct effect on Downstream operating income. The Group
estimates that standard refining margins in northern European refineries
increased on average $0.10 per barrel to $2.42 per barrel in 1997. The average
refining margin for the Group's Europe refining activity grew by $0.56 per
barrel in 1997 and remains above the estimated per barrel margin of the northern
European industry.
Marketing operating income in Europe improved in all countries where the
Group operates with the exception of Norway, which remained adversely affected
by severe price competition. Network sales have improved by 3% while the market
growth was 1% on average during 1997. In accordance with the Group's marketing
strategy, the Group restructured the management arrangements for a number of
sales outlets which brought the stations under direct management. The reduction
in management fees and the increase in non-fuel shop margins more than offset
the resulting increase in personnel expenses.
In North America, 1996 was characterized by very low industry wide Gulf
Coast refining margins. In 1997, Gulf Coast refining margins improved which,
together with record throughput volumes at the Group's North America refineries,
resulted in improved refining yields and performance. Compared to 1996, Gulf
Coast refining margins increased by $0.80 per barrel for the industry. The
Group's average refining margins increased by $1.17 per barrel in 1997.
Throughput in 1997 reached 223,700 barrels per day, a record high for the Group.
Throughput in 1996 was 204,700 barrels per day and was affected by two temporary
refinery shutdowns for scheduled maintenance.
48
<PAGE> 51
The increased operating income from refining operations was partially
absorbed by losses incurred in the supply business resulting from lower crude
oil prices and by a decrease in Marketing margins caused by lower North America
product prices.
CHEMICALS: REVIEW OF OPERATIONS
OPERATING REVENUE
Operating revenue for the Chemicals segment increased by 19% to EUR 2.3
billion in 1997 from EUR 1.9 billion in 1996. For substantially all of the
Group's product range, record production volumes were achieved. As a result,
quantities of monomers and polymers sold increased by 6%, or EUR 149 million, in
1997. Exchange rate fluctuations increased reported operating revenue by EUR 124
million. Average sales price developments, particularly for Europe monomer
products, contributed EUR 99 million to the increase. 1996 operating revenue
included a gain on sales of assets amounting to EUR 7 million.
In Europe, operating revenue increased by EUR 227 million to EUR 1,381
million in 1997, representing a 19.5% increase from 1996. The Group experienced
price increases and volume increases within practically its entire range of
monomer and polymer products. Monomer price developments, while still below 1995
levels, were positive in 1997 with price increases experienced both for ethylene
and propylene.
In North America, operating revenue increased by 18% to EUR 931 million in
1997. Excluding the effect on operating revenue from the appreciation of the US
dollar, the increase was 3%. Sales volumes increased by 9.5% to contribute EUR
74 million to operating revenue in 1997 versus 1996. However, sales prices
declined by 7% in the same period, adversely effecting comparative 1997
operating revenue by EUR 50 million. North American styrene prices dropped to
the lowest level since 1993 due primarily to the impact of new production coming
on-line during the year.
OPERATING INCOME
Chemicals operating income was EUR 259 million in 1997 compared to EUR 281
million in 1996, or a decrease of 8%. Increased plant efficiency due to higher
production volume, increased Europe monomers (ethylene and propylene) margins
and increased contribution from higher sales quantities were more than offset by
the impact of reduced polymers margins and lower North American styrene margins.
In Europe, operating income was EUR 151 million in 1997 compared to EUR 104
million in 1996. The improved performance is essentially linked to monomers,
which have benefited from price stability of raw materials while experiencing
some restoration in the sales price for ethylene and propylene. For polymer
products, sales prices also increased in 1997, but to a lesser extent and were
not sufficient to offset the increase in monomer prices. Monomers are the
principal raw material for polymer production.
In North America, operating income was EUR 108 million in 1997, which is
39% below the 1996 operating income of EUR 177 million. Unfavorable product
price developments in North America more than offset the economies of scale
realized at the Group's plants from higher production volumes. Sales volumes
have grown by 9% but margins decreased by 50% due to unfavorable price
developments resulting from greater industry capacity coming on-stream and due
to increases in raw materials prices. The impact of declining margins was
partially negated by the reporting effect of the appreciation in the dollar
versus Belgian franc.
PAINTS: REVIEW OF OPERATIONS
OPERATING REVENUE
Paints operating revenue was EUR 780 million in 1997 compared to EUR 730
million in 1996, an increase of 7%. This increase was the result of higher sales
volumes, contributing EUR 35 million, and the effect of exchange rates on
reported operating revenues, contributing EUR 12 million. The increase in
operating revenue is related mainly to the Marine, Anti-corrosion and Industrial
sectors. The Decorative paints sector, while experiencing different developments
in different countries, overall experienced slightly higher operating revenue in
1997 compared to 1996.
49
<PAGE> 52
OPERATING INCOME
Operating income was EUR 40 million in 1997 compared to EUR 30 million in
1996. In both years, the operating income of Paints includes the direct costs of
redevelopment activities for the Decorative paints sector, principally in France
and Germany. The increase in 1997 operating income is the result of improved
production capacity utilization, improved margins emanating from lower raw
material costs, and from reductions in operating costs resulting from the
redevelopment activities. The above improvements were partially offset by a
write off of EUR 3 million for plant closure decisions in Germany and in
Denmark.
IMPACT OF INFLATION AND CHANGING PRICES
The Group's operations are not seasonal but are sensitive to crude oil and
natural gas pricing, margins between crude oil and refined products, and
chemicals margins. These factors are beyond the Group's ability to influence and
are the result of global market developments. In the past, crude oil, natural
gas and product prices have fluctuated in response to market and political
forces. Oil and natural gas prices are also influenced by regional factors such
as regional supply, alternative fuel costs, and weather. See also "Risk
Management and Financial Instruments."
The general rate of inflation in most major countries where the Group
operates has been relatively low in recent years. Associated impacts on
operating costs have been countered by cost reductions from productivity
improvements. Inflation has not been a factor influencing production and product
pricing. Inflation does affect the cost of acquiring replacement property,
plants and equipment. The replacement cost of property, plants and equipment is
generally greater than the historical cost as a result of inflation. To a
certain degree, the effect of inflation on replacement costs is countered by
cost reductions due to improved technologies and applied knowledge.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
PetroFina defines "Cash Flow," for purposes of its Belgian financial
reporting, as consolidated net income adjusted for depreciation and other
current year provisions to net income. Because "Cash Flow" as so defined
excludes the effect of changing working capital items, it is different from Cash
Flow provided by operating activities as reported in the Consolidated Statements
of Cash Flows. See "Item 18. Financial Statements -- Consolidated Statements of
Cash Flows."
Cash Flow amounted to EUR 1,425 million, EUR 1,417 million and EUR 1,090
million in 1998, 1997 and 1996, respectively.
Cash provided by operating activities was EUR 1,094 million, EUR 1,337
million and EUR 913 million in 1998, 1997 and 1996, respectively. Cash flow from
operating activities totaled EUR 1,094 million in 1998, down EUR 243 million
from 1997. Major sources of funds were net income of EUR 466 million and
non-cash provisions including depreciation and depletion of EUR 953 million. The
decrease in 1998 cash flow from operations compared to 1997 is the result of
lower earnings and increased working capital requirements.
Capital expenditures, which include investment in affiliates and
exploration expenses, amounted to EUR 1,256 million, EUR 1,082 million and EUR
822 million in 1998, 1997 and 1996, respectively.
Total debt increased EUR 223 million to EUR 2,458 million in 1998. This
increase was financed mostly with the issuance of short-term commercial paper
fully supported by long-term credit facilities. As of December 31, 1998, the
Group had available long-term committed and unused credit facilities totaling
approximately EUR 1.4 billion.
PetroFina believes that cash provided by operations together with available
liquidity from existing facilities will be sufficient to fund the Group's
planned capital expenditures, working capital requirements, debt and interest
repayments and dividends for the foreseeable future.
Net cash used in financing activities was EUR 27 million, EUR 273 million
and EUR 199 million in 1998, 1997 and 1996, respectively. Dividend payments
amounted to EUR 267 million, EUR 231 million and EUR 203 million in 1998, 1997
and 1996, respectively.
50
<PAGE> 53
Consolidated shareholders' equity was EUR 3,981 million, EUR 3,865 million
and EUR 3,347 at the end of 1998, 1997 and 1996, respectively. The Group's ratio
of interest-bearing debt to equity was 60% at the end of 1998, 53% at the end of
1997, and 60% at the end of 1996.
CAPITAL AND EXPLORATION EXPENDITURES
Capital and exploration expenditures for 1998 amounted to EUR 1,256 million
compared to EUR 1,082 million for 1997 and EUR 822 million in 1996. These
expenditures included capitalized interest of EUR 55 million in 1998, compared
to EUR 40 million and EUR 21 million in 1997 and 1996, respectively. Of the 1998
capitalized interest amount, EUR 39 million related to Upstream.
Upstream capital and exploration expenditure totaled EUR 534 million in
1998, a decrease of 6% from EUR 571 million in 1997. European capital and
exploration expenditure amounted to EUR 367 million compared to EUR 378 million
in 1997 while North American expenditure amounted to EUR 167 million and EUR 193
million in 1998 and 1997, respectively. The largest expenditures related to the
Ekofisk re-development, which was completed during 1998, while EUR 34 million
and EUR 136 million were expended for various field development activities in
the U.K. and North America, respectively. The remainder was principally incurred
in exploration activities. Of the total exploration expenditure of EUR 97
million in 1998, EUR 52 million was expensed.
Downstream capital expenditures in 1998 totaled EUR 281 million compared to
EUR 250 million in 1997. The amounts reflected an increase in expenditures
devoted to the extension and enhancement of the Group's marketing network in
Europe.
Chemicals capital expenditures in 1998 totaled EUR 277 million compared to
EUR 223 million. Polymer production expansion programs, particularly in North
America, totaled EUR 180 million in 1998.
The 1999 capital expenditure budget is currently estimated to be EUR 1,054
million, EUR 392 million for Upstream, EUR 331 million for Downstream, EUR 273
million for Chemicals and EUR 58 million for Paints and other activities.
Petrofina expects to fund 1999 capital expenditures primarily with cash flow
generated by operations.
YEAR 2000
PetroFina initiated a company-wide effort to address the issues that may
arise when computer programs and embedded microprocessors are unable to properly
distinguish the Year 2000. If not corrected, computer applications and
date-sensitive equipment with embedded systems could cease to operate or
generate erroneous data. The Group has appointed a project manager who
coordinates Year 2000 activities in all countries in which PetroFina operates
and reports progress on a regular basis to a specially formed executive board.
Critical information and operating systems, including embedded microprocessors,
have been inventoried and assessed. The Group's information technology (IT)
systems are significantly Year 2000 compliant as a result of being primarily
recent-release SAP software.
PetroFina's approach includes the following five phases: (1) awareness:
forming working groups at each of the plants and subsidiaries and informing
customers and suppliers of plans and actions; (2) inventory: inventorying
central systems, subsidiaries, and operating sites then arranging further
external audits of major production facilities; (3) assessment and remediation
planning: scheduling remediation or replacement activities and analyzing plant
central control systems with the assistance of original suppliers; (4)
remediation, including communicating with important suppliers and critical
customers: to understand their compliance status and monitoring progress in
accordance with the nature of the supply or service to protect the interests of
the Group; (5) control testing and contingency planning: testing critical
central IT systems and embedded systems in addition to developing contingency
plans. The Group's Year 2000 activities have encountered no significant delays
with all critical and important IT and embedded systems expected to be Year 2000
compliant by the second quarter 1999.
51
<PAGE> 54
STATUS OF PETROFINA'S YEAR 2000 READINESS PROGRAM
<TABLE>
<CAPTION>
ACTUAL AS OF COMPLETION
DECEMBER 1998 TARGET
------------- --------------
<S> <C> <C>
Awareness................................................... 100%
Inventory................................................... 100%
Assessment and remediation
IT critical systems....................................... 95% April 1999
Other important applications.............................. 60% June 1999
Embedded systems.......................................... 60% June 1999
Suppliers and partners.................................... ongoing June 1999
Testing and contingency
Central IT testing........................................ limited June 1999
Other critical IT testing................................. limited September 1999
Contingency plans......................................... ongoing October 1999
</TABLE>
The estimated incremental cost of PetroFina's Year 2000 compliance efforts,
including costs through joint ventures and partnerships, is estimated to be EUR
25 million, of which about EUR 10 million had been expended as of December 31,
1998. The total budget includes approximately EUR 14 million solely related to
Year 2000 compliance software upgrades or repairs, which is expensed as
incurred. The estimated total cost of hardware and system replacement to improve
business functionality and provide Year 2000 compliance is EUR 11 million. These
costs may qualify for capitalization. All Year 2000 costs are funded with
cashflow from operations and, based on current plans, are not considered
material to the Group's financial results. No significant IT or other projects
have been deferred as a result of the Year 2000 effort.
The failure for Year 2000 reasons of critical systems or relationships with
customers or suppliers could have a material adverse effect on PetroFina's
results of operations, liquidity or financial condition. PetroFina currently
believes that the most reasonably likely worst-case scenario is that there may
be some Year 2000 disruptions that could affect isolated business operations for
a short time. Disruptions should not be long term or have a significant effect
on PetroFina's financial results. PetroFina believes that the compliance program
currently implemented will significantly reduce the risk of a major Year 2000
business interruption. Given the varying state of readiness of different
countries in which PetroFina operates and the varying degree of preparations of
suppliers and external services, the potential impact of disruptions cannot be
reasonably estimated. PetroFina will continue to work with customers and
suppliers throughout 1999 to assess whether they are Year 2000 compliant. In
addition, PetroFina is identifying possible scenarios involving failures for
Year 2000 reasons of materially important IT and non-IT systems or materially
important relationships with customers and suppliers and developing contingency
plans for mitigating such failures. Contingency guidelines for operational and
support services were first drafted in November 1998 with the help of outside
consultants. PetroFina continues to analyze possible risks associated with the
Year 2000 issue, assess the probability and effect of these risks on business
operations and formulate plans to mitigate disruptions. In the second quarter of
1999 the contingency plans will be reviewed with business management teams and
approved by management. The contingency plans should be complete by October
1999. Because of uncertainties, the actual effect of Year 2000 issues may be
different from the current assessment.
EUROPEAN MONETARY UNION
On January 1, 1999, eleven participating member nations of the EU adopted
the Euro as their official legal currency. Fixed conversion rates were
established between the Euro and the existing national currencies. PetroFina is
a supporter of the rapid adoption of the single European currency. The Group
started to transact business in Euro with customers, suppliers, shareholders,
banks and the capital markets as necessary during the transition period
beginning January 1, 1999, and the Group has implemented a plan convert its
business systems to Euro by the fourth quarter of 1999. The deadline for
conversion to the Euro is January 1, 2002. The Group has significant
manufacturing and marketing in the participating countries and anticipates that
there will be increased efficiencies from the introduction of the Euro, although
no estimate has been made and there can be no assurance as to such efficiencies.
PetroFina expects to incur costs of Euro 4 million on Euro-related
52
<PAGE> 55
expenditures through 2002, of which Euro 1 million has been spent. PetroFina
adopted the Euro as its reporting currency on December 31, 1998. The Group does
not expect that the introduction of the Euro will have a material impact on
financial condition, liquidity or results of operations.
ENVIRONMENTAL COSTS
PetroFina is engaged in industrial operations that are subject to
environmental risks. In this context, the Group is subject to changing
environmental laws and regulations which may in the future require the Group to
meet more stringent emissions standards or take remediation actions for
contaminated sites.
The Group has accrued EUR 261 million as of December 31, 1998 related to
the estimated costs of site restorations and remediation activities. Accruals
are established when the Group determines that events have occurred which
require remediation under existing laws and regulations related to plants or
other facilities, currently owned or previously disposed. Due to inherent
uncertainties of the estimation process and the background of changing laws and
regulations, it is reasonably possible that provisions will be subject to
revision. In addition, new conditions related to PetroFina's operations that
would require future expenditures could be discovered. The amount of such future
costs is not determinable due to the unknown existence and extent of corrective
actions that may be necessary.
The Group's recent major capital expenditure programs in its Downstream and
Chemicals segments over the past six years have been carried out with due
consideration to the requirements of existing and expected legal and regulatory
environmental developments regarding air and water emissions as well as
compliance with the EU's Stage I vapor recovery requirements at major depots,
loading facilities and service stations.
The Stage II vapor recovery requirements would place stringent obligations
at all petrol service stations (within the EU). In certain countries, where the
majority of the Group's European retail operations are located, legislation has
already been adopted requiring compliance of all newly built and certain
categories of existing stations.
The Group's new service station building programs and station rebuilding
programs have been designed to enable the stations to comply with future Stage
II requirements with minimal additional costs or to provide current compliance
where necessary.
At certain older stations, the cost of Stage II compliance is not
considered justifiable. Current and future legislation will result in closure of
a number of stations for the Group as well as for most of its competitors. The
Group has assessed the implication of current legislation and the potential
impact of implementation in those countries not yet concerned. The Group
believes that the measures do not affect the Group's competitive market
position, nor do they materially affect the Group's consolidated financial
position, results of operations or cash flows.
NEW ACCOUNTING PRONOUNCEMENTS
In 1998, the Group adopted the provisions of three Statement of Financial
Accounting Standards (SFAS): SFAS 130, Reporting Comprehensive Income, SFAS 131,
Disclosures about Segments of an Enterprise and Related Information and SFAS
132, Employers' Disclosures about Pensions and Other Postretirement Benefits (an
amendment of FASB Statements No. 87, 88 and 106). Required disclosures have been
made and prior years' information has been reclassified for the impact of FASB
Statements 130, 131 and 132. The cumulative effect of adopting these three new
standards was not material to the Group's financial statements as the SFAS's
related primarily to disclosure items.
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivative Instruments and Hedging Activities; which revises the
accounting for derivative financial instruments. The Group is currently
analyzing the impact of this statement, which is required to be adopted in 2000,
and does not expect the statement to have a material impact on the Group's
financial position, results of operations or cash flows.
53
<PAGE> 56
ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FINANCIAL INSTRUMENTS
INTEREST RATE SENSITIVITY
The tables below provide information about PetroFina's financial
instruments that are sensitive to interest rate changes. These include long term
debt and interest rate swaps.
For long term debt, the table presents principal cash flows and the average
interest rates related to these cash flows per expected maturity date, after
currency swap effects. For interest rate swaps, the table presents for the next
five years and thereafter the nominal contract amounts by expected maturity date
and the weighted average of the interest rates related to these amounts. Nominal
amounts are used to calculate the contractual payments to be exchanged under the
contracts. Weighted average variable rates are based on implied forward rates of
the yield curve on December 31, 1998. The information is presented in EUR
equivalent, which is PetroFina's reporting currency. Cash flows are denominated
in various currencies, as indicated in parentheses.
EXPECTED MATURITY DATE ON DECEMBER 31, 1998
<TABLE>
<CAPTION>
TOTAL
NOMINAL FAIR
1999 2000 2001 2002 2003 THEREAFTER VALUE VALUE
---- ---- ---- ---- ---- ---------- ------- -----
(EUR EQUIVALENT IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long Term Debt
-- Fixed Rate (US$)................ 53.6 48.6 133.4 24.6 52.0 38.0 350.2 379.9
Average Interest Rate................ 6.86% 6.89% 6.97% 7.36% 6.93% 9.01%
-- Fixed Rate (EUR)................ 0.1 238.1 0.1 0.1 0.1 2.7 241.2 255.0
Average Interest Rate................ 4.80% 8.84% 9.53% 10.70% 10.70% 0.94%
-- Fixed Rate (GBP)................ 3.3 0.9 0.6 0.2 -- -- 5.0 5.3
Average Interest Rate................ 10.15% 10.67% 10.63% 10.50% -- --
-- Fixed Rate (Other).............. -- -- 0.4 -- 0.8 0.1 1.3 1.2
Average Interest Rate................ -- -- 2.50% -- 2.50% --
-- Variable Rate (US$)............. -- 0.5 55.7 415.7 85.7 129.3 686.9 686.9
Average Interest Rate................ -- 5.39% 5.25% 5.27% 5.40% 5.47%
-- Variable Rate (NOK)............. 13.6 28.9 28.9 28.9 28.9 168.8 298.0 297.9
Average Interest Rate................ 6.30% 5.11% 5.66% 5.83% 5.81% 5.89%
-- Variable Rate (EUR)............. 2.1 2.1 2.1 2.1 2.1 89.0 99.5 99.7
Average Interest Rate................ 3.35% 3.16% 3.56% 3.87% 4.18% 4.53%
----- ----- ----- ----- ----- ----- ------ -------
-- Total Long Term Debt
(including current portion of
long term debt).................. 72.8 319.0 221.2 471.6 169.6 427.9 1,682.1 1,726.0
===== ===== ===== ===== ===== ===== ====== =======
</TABLE>
The table above summarizes PetroFina's long term debt after currency swap
effects which convert 5 million equivalent EUR of Spanish peseta denominated
debt into USD denominated debt and 300 million equivalent EUR of USD denominated
debt into NOK denominated debt. The other category includes debts denominated in
DKK and JPY.
EXPECTED MATURITY DATE ON DECEMBER 31, 1998
<TABLE>
<CAPTION>
TOTAL
NOMINAL FAIR
1999 2000 2001 2002 2003 THEREAFTER VALUE VALUE
---- ---- ---- ---- ---- ---------- ------- -----
(EUR EQUIVALENT IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Rate Swaps
-- Variable to Fixed (US$).............. 42.0 -- 43.0 77.0 135.0 215.0 512.0 (36.0)
-- Average Pay Rate..................... 7.64% -- 6.22% 7.68% 7.21% 6.95%
-- Average Receive Rate................. 5.01% -- 5.28% 5.43% 5.53% 5.58%
Fixed to Variable (US$)................... -- -- 122.0 21.0 28.0 -- 171.0 7.0
-- Average Pay Rate..................... -- -- 5.35% 5.42% 5.53% --
-- Average Receive Rate................. -- -- 6.87% 6.58% 6.71% --
---- -- ----- ---- ----- ----- ----- -----
Total Interest Rate Swaps........ 42.0 -- 165.0 98.0 163.0 215.0 683.0 (29.0)
==== == ===== ==== ===== ===== ===== =====
</TABLE>
54
<PAGE> 57
PetroFina tries to use the most cost-effective means to fund the Group's
operating and capital needs. Fixed or variable debt will be borrowed in various
currencies. To manage risk arising from fluctuations in interest rates and
currency exchange rates, and therefore maintain the efficient debt mix,
PetroFina utilizes currency and interest rate swaps.
After currency and interest rate swaps, approximately 56% of PetroFina's
long term debt is fixed rate debt. The main currencies of denomination of this
fixed long term debt are Belgian franc (shown above as EUR) and United States
dollars. Approximately 73% of the fixed long term debt is denominated in USD,
62% of the long term debt is USD debt and 47% of the variable rate debt is also
denominated in USD.
Due to the current currency mix of PetroFina's debt, the Group is exposed
to changes in short term US interest rates. However, it is widely believed that
this does not pose a significant risk as a substantial portion of the Group's
cash flows are generated by U.S. subsidiaries or by dollar-related activities,
which are positively correlated to the changes in short term U.S. interest
rates.
EXCHANGE RATE SENSITIVITY
The table below provides information concerning PetroFina's financial
instruments by functional currency. This information is presented in EUR
equivalent. Information on instruments that are sensitive to foreign currency
exchange rates are thereby summarized, including debt denominated in currencies
other than the company's reporting currency and currency swap agreements.
Principal cash flows from debt obligations are presented by expected maturity
dates with their related weighted average interest rates. For the currency swap
agreements, the table presents for the next five years and thereafter the
nominal contract amounts by expected maturity date and the weighted average of
the exchange rates related to these amounts. Nominal amounts are used to
calculate the contractual payments to be exchanged under the contracts.
EXPECTED MATURITY DATE
<TABLE>
<CAPTION>
TOTAL
NOMINAL FAIR
1999 2000 2001 2002 2003 THEREAFTER VALUE VALUE
---- ---- ---- ---- ---- ---------- ------- -----
(EUR EQUIVALENT IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
On-balance Sheet Financial Instruments:
-- GBP (pound sterling) Functional
Currency Debt
-- Fixed Rate (ESP).................... 1.56 1.56 1.56 0.77 -- -- 5.45 6.13
-- Average Interest Rate............... 8.2% 8.2% 8.2% 8.2% --
-- Fixed Rate (US$).................... 2.82 2.82 2.82 2.82 11.29 36.70 59.27 74.20
-- Average Interest Rate............... 9.1% 9.1% 9.1% 9.1% 9.1% 9.1%
Derivative Financial Instruments:
-- GBP (pound sterling) Functional
Currency
-- Currency Swap (Receive ESP/Pay US$)
-- Contract Amount..................... 11.0 11.0 (3.0)
-- Average Exchange Rate............... 0.0088
</TABLE>
The Group will normally enter into currency swaps to manage its exposure to
adverse movements in exchange rates on its foreign currency denominated debt.
Neither the currency swaps nor the related foreign currency denominated
debt instruments have been included in the above tables when such swaps
effectively eliminate the foreign currency exposure in the cash flows of the
related foreign currency denominated debt instrument. As a result, the total
nominal value and fair value of the above currency swaps will vary slightly from
the derivative instruments disclosures in the audited financial statements.
PetroFina also enters into foreign exchange forward contracts to manage its
exposure to fluctuations in foreign currency denominated receivables and
payables. Most of these contracts mature within three months.
Management believes that these financial instruments do not subject
PetroFina to material risk due to foreign exchange movements because gains or
losses on these contracts will offset gains or losses on the assets, liabilities
and transactions being hedged. See Note 14 to the Consolidated Financial
Statements.
55
<PAGE> 58
COMMODITY PRICE SENSITIVITY
PetroFina also enters into crude oil and refined products futures and
forward contracts to minimize short term price risks related to the supply and
sale of these products, respectively. Natural gas futures are also used to hedge
Upstream's North America equity production. At December 31, 1998, the fair value
of these commodity derivative instruments was EUR 6 million.
The value of these contracts is sensitive to changes in commodity prices.
If the price of the underlying commodities change, it would have the same effect
on the fair value of the Group's commodity derivative instruments. Based on an
undiscounted cash flow approach, decreasing the forward rates of these
commodities by 10% would decrease the fair value of these instruments by EUR 1.5
million, while increasing the forward rates by 10% would increase the fair value
of these instruments by EUR 1.5 million. Given that there is no economic basis
for predicting the magnitude of the change that will occur, the Company has
assumed a 10% positive and negative change.
The level of derivative commodity instruments is immaterial to the Group's
actual level of transactions. Therefore the changes in fair values noted above
would not have a material effect on the Group's results of operations or
financial position.
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT
BOARD OF DIRECTORS
Set forth below for each director of the Company as of March 15, 1999, are
his name, position with the Company, the date as of which he initially commenced
serving as a director, the date his current term as a director expires and his
citizenship. All directors listed below are citizens of Belgium, except for Mr.
Vieira (Portugal); Messrs. Calvet, Dejouany and Mestrallet (France); and Messrs.
Desmarais, Sr., Desmarais, Jr. and Mulroney (Canada). Mr. de Rudder and Mr.
Samyn are citizens of both Belgium and France, and Mr. Beffa is a citizen of
both France and Switzerland.
<TABLE>
<CAPTION>
DIRECTOR TERM
NAME POSITION SINCE EXPIRES
---- -------- -------- -------
<S> <C> <C> <C>
Albert Frere.................................. Chairman 1986 2001
Francois Cornelis............................. Vice Chairman, Chief Executive 1986 2001
Officer & Managing Director
Etienne Davignon.............................. Vice Chairman 1990 2002
Axel de Broqueville........................... Executive Director, Chemicals 1989 2001
Michel-Marc Delcommune........................ Executive Director, Corporate 1992 2001
Finance
Henrique Bandeira Vieira...................... Executive Director, Marketing 1990 2002
Jean-Louis Beffa.............................. Director 1988 2000
Yves Boel..................................... Director 1986 2001
Jacques Calvet................................ Director 1990 2001
Guy Dejouany.................................. Director 1990 2002
Paul Desmarais, Sr............................ Director 1988 2000
Paul Desmarais, Jr............................ Director 1992 2001
Paul Janssen.................................. Director 1987 1999
Jean-Pierre de Launoit........................ Director 1987 1999
Gerard Mestrallet............................. Director 1994 2000
Brian Mulroney................................ Director 1994 2000
Thierry de Rudder............................. Director 1990 2003
Gilles Samyn.................................. Director 1990 2002
Luc Wauters................................... Director 1984 2002
</TABLE>
56
<PAGE> 59
Mr. Desmarais, Sr. and Mr. Desmarais, Jr. are father and son. Mr. Vieira
and Mr. Delcommune are brothers-in-law.
Baron Albert Frere is Chairman and Managing Director of Groupe Bruxelles
Lambert S.A. He is also Chairman of the Boards of Directors of Electrafina S.A.,
Erbe S.A., and Frere-Bourgeois S.A.; Vice President of COBEPA S.A.; and
Vice-Chairman and Managing Director of Pargesa Holding S.A. He is also a
director of CLT-UFA, LVMH and TF1. He is a member of the Supervisory Board of
Suez Lyonnaise des Eaux S.A. and an honorary member of the Council of Regents of
the Banque Nationale de Belgique. He was elected a director of the Company in
1986 and Chairman in 1990.
Mr. Francois Cornelis was elected a director in 1986, Managing Director and
Chief Executive Officer of Parent in 1990 and Vice-Chairman in 1991. He
graduated from the University of Louvain with a degree in mechanical engineering
in 1973 and joined PetroFina in the same year. He has held a number of positions
in various areas within the Group, including in the United Kingdom, the United
States and Belgium. In March 1984 he became Assistant General Manager attached
to the Chairman. He serves as Chairman to several Group subsidiaries. He is a
member of the European Advisory Board of the NYSE and a member of the European
Round Table of Industrialists. He has been Chairman of Europia since 1995.
Viscount Etienne Davignon is the Executive Chairman of Societe Generale de
Belgique S.A. He is a director of various companies both within and outside the
Societe Generale de Belgique group of companies. He has been active in public
affairs, in particular in the Belgian Ministry of Foreign Affairs, as the first
president of the International Energy Agency and as vice-president of the
European Commission. He was elected a director and Vice-Chairman of the Company
in 1990.
Mr. Axel de Broqueville graduated from the University of Louvain with a
degree in electronic engineering in 1966 and also holds an M.S. in Aeronautics
from Imperial College, London. He joined PetroFina in 1970 and held a number of
positions in Belgium and the United States before returning to PetroFina's
headquarters in Brussels. In 1985 he became Senior Vice-President, Chemicals and
was elected an Executive Director of the Company in 1989.
Mr. Michel-Marc Delcommune graduated from the University of Liege with a
degree in chemical engineering in 1971 and holds an M.B.A. from Cornell
University. He is a member of the International Advisory Board of Cornell
University and Chairman of the Financial Executives Council of the Conference
Board of Europe. He joined PetroFina in 1972. His occupations were mainly in
Data Processing and in Exploration and Production Departments in Belgium and
abroad. In 1986, he was appointed Vice-President of Corporate Finance and
Insurance and Senior Vice-President in 1990. In 1992, he was elected Executive
Director of the Company.
Mr. Henrique Bandeira Vieira graduated as a mining engineer from the
University of Lisbon in 1958, and holds an M.S. in Petroleum Engineering from
Stanford University and an M.B.A. from Boston University. He joined PetroFina in
1959 and has held several positions both in upstream and downstream in the
United States, Angola, Belgium and the U.K. In 1985 he became Senior Vice
President, Exploration and Production and he was elected an Executive Director
of the Company in 1990. In 1997 he was appointed Executive Director, Marketing.
Mr. Jean-Louis Beffa is the Chairman and Chief Executive Officer of
Compagnie de Saint-Gobain and Vice-Chairman of Vivendi S.A. He is also a member
of the Board of Directors of Banque Nationale de Paris. He was elected a
director of the Company in 1988.
Mr. Yves Boel is the Chairman of the Board of Directors and Chairman of the
Executive Committee of Sofina S.A. He is also Vice-Chairman of Tractebel S.A.
and a director of GIB. He was elected a director of the Company in 1986.
Mr. Jacques Calvet is a director of Vivendi S.A., the Athena Group, Societe
Generale S.A. (France), and the Publicite Francaise. He is a member of the
Supervisory Board of Groupe Andre S.A., AXA-UAP and Cottin Freres and a
consulting advisor to the Banque de France. He has been active in public
affairs, in particular at the French Ministry of Economy and Finance, and has
been the President of the Board of Management of Peugeot S.A. He was elected a
director of the Company in 1990.
57
<PAGE> 60
Mr. Guy Dejouany is Honorary President of Vivendi S.A. He is a member of
the Board of Directors of Vivendi S.A., Alcatel, Canal+, Havas, Electrafina S.A.
and Societe Generale S.A. He is also a member of the Supervisory Board of
AXA-UAP. He was elected a director of the Company in 1990.
Mr. Paul Desmarais, Sr. is the Chairman of the Executive Committee and a
Director of Power Corporation of Canada. Mr. Desmarais also serves as Chairman
of the International Advisory Council to Power Corporation of Canada. He is
Chairman of the Board and Managing Director of Pargesa Holding S.A.
(Switzerland), a director of a large number of other companies. He is also a
member of the International Advisory Committee of Chase Manhattan Bank, N.A.,
Barrick Gold Corporation, China International Trust and Investment Corporation
(CITIC) and of the Supervisory Board of AXA-UAP and of Compagnie Financiere de
Paribas. He was elected a director of the Company in 1988.
Mr. Paul Desmarais, Jr. is the Chairman of the Board and Co-Chief Executive
Officer of Power Corporation of Canada. He is also Chairman of the Board of
Power Financial Corporation, Vice-President of the Supervisory Board of IMETAL
and a director of a large number of other companies. He is a member of the Board
of INSEAD. He was elected a director of the Company in 1992.
Baron Paul Janssen is the Chairman of Janssen Research Foundation
Worldwide. He is the author of a number of scientific publications and the owner
of a large number of patents. He was elected a director of the Company in 1987.
Count Jean-Pierre de Launoit is Chairman of Royale Belge S.A., and RTL-TVi.
He is a director of GIB Group and of Groupe Bruxelles Lambert France. He was
elected a director of the Company in 1987.
Mr. Gerard Mestrallet is the Chairman of the Managing Board of Suez
Lyonnaise des Eaux. He is also Vice-Chairman of the Board and chairman of the
Executive Committee of Societe Generale de Belgique and Chairman of the Board of
Tractebel. He is also a director of Compagnie de Saint-Gobain, and a member of
the Supervisory Board of AXA. He was elected a director of the Company in 1994.
The Right Honorable Brian Mulroney was the Prime Minister of Canada from
1984 until 1993. In 1993, Mr. Mulroney became a Senior Partner in Ogilvy
Renault. He is Chairman of Forbes Global Business and Finance and Chairman of
the International Advisory Board of Barrick Gold Corporation and a director of
other large companies. He was elected a director of the Company in 1994.
Mr. Thierry de Rudder is Managing Director of Groupe Bruxelles Lambert S.A.
and Electrafina. He is also a member of the Board of Directors of Audiofina,
Compagnie Nationale a Portefeuille S.A., Monument Oil and Gas p1c., Tractebel
and Societe Generale de Belgique S.A. He was elected a director of the Company
in 1990.
Mr. Gilles Samyn is Managing Director of Frere-Bourgeois, Compagnie
Nationale a Portefeuille S.A. and Erbe S.A. He is a member of the Executive
Committee of Pargesa and Groupe Bruxelles Lambert, and a Director of other
companies including IMETAL and CLT-UFA. He is the Chairman of the Board of
various companies including Transcor. He was elected a director of the Company
in 1990.
Baron Luc Wauters is Honorary Chairman of Kredietbank N.V. (KBC-Bank) and
of Almanij N.V. He was elected a director of the Company in 1984.
In accordance with Belgian law governing a societe anonyme/naamloze
vennootschap, the Company's affairs are managed by its Board of Directors (the
"Board"). Responsibility for management of the Company's daily affairs has been
conferred by the Board to its Vice-Chairman & Chief Executive Officer, its
Executive Directors, General Managers and Secretary General, acting and making
decisions in pairs.
Under Parent's Articles, the Board consists of not less than 7, nor more
than 20, members. The Board is presently composed of 19 members. Shareholders of
the Company entitled to vote at ordinary general shareholders' meetings elect
the directors.
In May 1990, the Board adopted a resolution regarding the composition of
the Board. Pursuant to the resolution, of the then twenty directors, six were to
be officers of the Company, four were to be independent persons, six were to be
proposed by Groupe Bruxelles Lambert S.A. ("GBL"), three were to be proposed by
Societe Generale de Belgique S.A. ("SGB"), and one was to be proposed by
Compagnie Nationale Portefeuille S.A. ("CNP") (which is presently affiliated
with GBL). Of the nineteen directors currently on
58
<PAGE> 61
the Board, six are associated with GBL (Messrs. Frere, Dejouany, de Launoit, de
Rudder, Desmarais, Sr., and Desmarais, Jr.), three are associated with SGB
(Messrs. Davignon, Boel and Mestrallet), one is associated with CNP (Mr. Samyn),
four are executive officers of the Company (Messrs. Cornelis, de Broqueville,
Delcommune and Vieira), and five are regarded by GBL and SGB as not associated
with GBL, SGB or CNP (Messrs. Beffa, Calvet, Janssen, Mulroney and Wauters). See
also "Item 4. Control of Registrant."
The Company's Articles currently provide that each director elected by the
shareholders may serve for a term not to exceed six years. Directors need not be
Belgian nationals, and there is no limitation on the number of terms that a
director may serve. Under Belgian law, the Board has full executive authority to
manage the affairs of the Company in the Company's interest. Pursuant to the
Company's Articles, the Board has the power to perform all acts necessary or
useful to achieve the corporate purpose, except for those reserved by law to the
general shareholders' meeting. In addition to reviewing and monitoring the
Company's business, the powers generally held by the Board include the oversight
of the Company's year-end and semi-annual accounts, the presentation of the
year-end accounts to the shareholders and the convening of general shareholders'
meetings. Under Belgian law, directors may be liable for damages to the Company
in case of improper performance of their duties. They may be liable for damages
to the Company and to third parties for infringement of the Articles or the
Belgian company law or tortious conduct. Under certain circumstances, directors
may also be criminally liable.
There are three committees of the Board: (1) the Compensation Committee,
which recommends director compensation; (2) the Finance and Audit Committee,
which oversees PetroFina's accounting standards, election of auditors and
financial reporting; and (3) the Core Committee, which serves in an advisory
capacity to the Group's management on important corporate matters. No executive
officers of the Company serve on the Compensation Committee.
EXECUTIVE OFFICERS
The Company's current executive officers and the first date as of which he
served as an executive officer are set forth below.
<TABLE>
<CAPTION>
EXECUTIVE
NAME POSITION OFFICER SINCE
---- -------- -------------
<S> <C> <C>
Francois Cornelis..................... Chief Executive Officer and Managing Director 1984
Axel de Broqueville................... Executive Director, Chemicals 1985
Michel-Marc Delcommune................ Executive Director, Corporate Finance, 1990
Information Technology and Telecommunications
and Human Resources
Henrique Bandeira Vieira.............. Executive Director, Marketing 1985
William Bracke........................ General Manager, Research 1990
Wayne Brenckle........................ General Manager, Manufacturing and Logistics 1990
Jean Castelein........................ General Manager, Health, Safety, Environment 1995
& Quality
Quentin de Borrekens.................. General Manager, Supply 1998
Francois Vincke....................... Secretary General, Legal 1988
</TABLE>
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS
For the year ended December 31, 1998, the aggregate amount paid by the
Company for compensation of its directors and executive officers as a group (27
persons) for services in all capacities was approximately EUR 4.8 million. As of
December 31, 1998, the aggregate amount accrued by the Company to provide
pension, retirement and other similar benefits for these directors and officers
as a group was approximately EUR 2.5 million.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
Under Belgian law, shareholders of the Company have preferential
subscription rights, in proportion to the number of PetroFina Shares held by
them, in respect of issues of new PetroFina Shares for cash by the Company. This
preferential subscription right, however, may be either limited or removed by a
resolution passed at a general meeting of shareholders. At the general meeting
of shareholders on May 10, 1996, the Board was authorized, for a period of five
years (expiring on June 22, 2001) to limit or remove the preferential
59
<PAGE> 62
subscription rights in connection with an increase in the Company's subscribed
capital of up to EUR 372 million (BEF 15 billion) (8,055,054 PetroFina Shares).
Such permission may be renewed, through a vote at a general meeting of
shareholders. The Board has removed the preferential subscription rights with
respect to the issuance of the PetroFina Warrants and the issuance of PetroFina
ADSs upon exercise of the PetroFina Warrants.
On May 29, 1997, the Company decided to issue warrants ("Employee
Warrants") to purchase 150,000 PetroFina Shares to its employees, including its
executive officers. The Employee Warrants have an exercise price of EUR 309.87
per PetroFina Share and will expire on June 30, 2000. On June 30, 1998, 39,340
Employee Warrants were exercised. No Employee Warrants will be issued to any
director who is not also an executive officer of the Company.
On August 5, 1998, the Company issued 4,451,060 PetroFina Warrants as part
of the consideration offered in connection with the consummation of the Merger.
Each PetroFina Warrant may be exercised to purchase nine-tenths (0.9) of one
PetroFina ADS. The PetroFina Warrants are exercisable at any time prior to the
close of business on August 5, 2003 and have an exercise price of US $42.25 per
PetroFina ADS. Thus, a holder of 10 PetroFina Warrants may purchase nine
PetroFina ADSs for an aggregate purchase price of US $380.25. As of March 1,
1999, 2101 PetroFina Warrants had been exercised. See "Item 1. Description of
Business -- Acquisition of Fina, Inc."
Other than the Employee Warrants and the PetroFina Warrants, there are no
outstanding options or warrants to acquire PetroFina Shares.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
Neither any executive officer or director of the Company, nor any associate
of any such person is indebted to the Company or any of its subsidiaries.
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED
Not applicable.
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED SECURITIES
Not applicable.
PART IV
ITEM 17. FINANCIAL STATEMENTS
Not applicable.
ITEM 18. FINANCIAL STATEMENTS
See pages F-1 through F-40, incorporated herein by reference.
60
<PAGE> 63
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Reports of Independent Auditors............................. F-1
Consolidated Balance Sheets at December 31, 1998, 1997 and
1996...................................................... F-9
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997 and 1996.......................... F-10
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996.......................... F-11
Consolidated Statements of Shareholders' Equity............. F-12
Consolidated Statements of Comprehensive Income............. F-12
Notes to Consolidated Financial Statements.................. F-13
Financial Statement Schedule................................ F-39
</TABLE>
(B) EXHIBITS
The following documents are filed as part of this Registration Statement:
Exhibit 23.1 Consent of Deloitte & Touche
Exhibit 23.2 Consent of Klynveld Peat Marwick Goerdeler Reviseurs
d'Enterprises
Exhibit 23.3 Consent of Klynveld Peat Marwick Goerdeler Reviseurs d'
Enterprises
Exhibit 23.4 Consent of KPMG Accountants, NV
Exhibit 23.5 Consent of KPMG LLP
Exhibit 23.6 Consent of KPMG Peat Marwick
Exhibit 23.7 Consent of KPMG Audit Plc
Exhibit 23.8 Consent of KPMG
61
<PAGE> 64
SIGNATURES
Pursuant to the requirements of Section 12 the Securities Exchange Act of
1934 as amended, the registrant certifies that it meets all of the requirements
for filing on Form 20-F and has duly caused this annual report to be signed on
its behalf by the undersigned, thereunder duly authorized.
PetroFina
By: /s/ MICHEL-MARC DELCOMMUNE
------------------------------------
Name: Michel-Marc Delcommune
Title: Executive Director
By: /s/ FRANCOIS VINCKE
------------------------------------
Name: Francois Vincke
Title: Secretary General, Legal
Date: April 30, 1999
62
<PAGE> 65
[DELOITTE & TOUCHE LOGO]
INDEPENDENT AUDITORS' REPORT
To the Directors and Shareholders of
PetroFina S.A.
We have audited the accompanying consolidated balance sheets of PetroFina
S.A. and subsidiaries as of December 31, 1998, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity, comprehensive income
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit the financial statements of certain subsidiaries which statements
reflect total assets constituting 16.8%, 45.0% and 51.5%, respectively, of
consolidated total assets at December 31, 1998, 1997 and 1996, and total
revenues constituting 10.6%, 33.9% and 46.6%, respectively of consolidated total
revenues for the years then ended. Those financial statements were audited by
other auditors whose reports have been furnished to us, and our opinion, insofar
as it relates to the amounts included for such subsidiaries, before conversion
to generally accepted accounting principles in the United States, is based
solely on the reports of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards 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. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits (which include the conversion
to generally accepted accounting principles in the United States) and the
reports of the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors,
such consolidated financial statements present fairly, in all material respects,
the financial position of PetroFina at December 31, 1998, 1997 and 1996, and the
results of its operations and cash flows for the years then ended in conformity
with generally accepted accounting principles in the United States.
/s/ Michel Denayer
Michel Denayer
Statutory Auditor
Deloitte & Touche Reviseurs d'Entreprises scc
Brussels, Belgium
March 23, 1999
F-1
<PAGE> 66
[KPMG LOGO]
INDEPENDENT AUDITORS REPORT
To the Directors of
Fina Europe NV
We have audited the balance sheets of Fina Europe NV (a 99,9 percent
subsidiary of PetroFina S.A.) as of 31 December 1998, 1997 and 1996 and related
statements of income for each of the three years in the period ended December
31, 1998 (not presented separately herein). 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 in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether these 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. An audit also includes assessing the accounting principles used and
significant estimates by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Fina Europe N.V. at December
31, 1998, 1997 and 1996, and the results of its operations for each of the three
years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles in Belgium.
Antwerp, Belgium
March 22, 1999
Klynveld Peat Marwick Goerdeler Reviseurs d'Entreprises
Represented by
/s/ L. Ruysen
L. Ruysen
F-2
<PAGE> 67
[KPMG LOGO]
INDEPENDENT AUDITORS REPORT
To the Directors of
Fina Raffinaderij Antwerpen NV
We have audited the balance sheets of Fina Raffinaderij Antwerpen NV (a
99,9 percent subsidiary of PetroFina S.A.) as of December 31 1998, 1997 and 1996
and related statements of income for each of the three years in the period ended
December 31, 1998 (not presented separately herein). 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 in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether these 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. An audit also includes assessing the accounting principles used and
significant estimates by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Fina Raffinaderij Antwerpen
N.V. at December 31, 1998, 1997 and 1996, and the results of its operations for
each of the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles in Belgium.
Antwerp, Belgium
March 22, 1999
Klynveld Peat Marwick Goerdeler Reviseurs d'Entreprises
Represented by
/s/ L. Ruysen
L. Ruysen
F-3
<PAGE> 68
[KPMG LOGO]
INDEPENDENT AUDITORS' REPORT
To the Directors of
PetroFina S.A.
We have audited the balance sheets of Sigma Coatings B.V. (a wholly-owned
subsidiary of PetroFina S.A.) as of December 31, 1998, 1997 and 1996 and the
related statements of income for each of three years in the period ended
December 31, 1998 (not presently separately herein). 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 in accordance with auditing standards generally
accepted in the United States. Those standards 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. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Sigma Coatings B.V. as of
December 31, 1998, 1997 and 1996, and the results of its operations for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles in the Netherlands.
The Hague, the Netherlands, March 23, 1999
/s/ KPMG Accountants NV
Ref: J.F.C. van Everdingen
F-4
<PAGE> 69
[KPMG LOGO]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Petrofina S.A.:
We have audited the accompanying consolidated balance sheets of Petrofina
Delaware, Incorporated and subsidiaries (a wholly-owned subsidiary of PetroFina
S.A.) as of December 31, 1997 and 1996, and the related consolidated statements
of earnings, stockholder's equity and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Petrofina
Delaware, Incorporated and subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
Dallas, Texas
January 26, 1998
F-5
<PAGE> 70
[KPMG LOGO]
INDEPENDENT AUDITORS' REPORT
To the Directors of
PetroFina S.A.
We have audited the balance sheets of Brittany Insurance Company Ltd. (a
wholly-owned subsidiary of PetroFina S.A.) as of December 31, 1998, 1997 and
1996 and related statements of income and cash flows for each of the years in
the three-year period ended December 31, 1998 (not presented separately herein).
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 in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
an audit to obtain reasonable assurance about whether these 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. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Brittany Insurance Company
Ltd. at December 31, 1998, 1997 and 1996 and the results of its operations and
cash flows for each of the years in the three-year period ended December 31,
1998 in conformity with generally accepted accounting principles in the United
States.
/s/ KPMG PEAT MARWICK
Chartered Accountants
Hamilton, Bermuda
March 22, 1999
F-6
<PAGE> 71
[KPMG LOGO]
REPORT OF INDEPENDENT AUDITORS
To the Directors of
Fina Plc
We have audited the balance sheet of Fina plc (a wholly-owned subsidiary of
PetroFina SA) as of December 31, 1996 and the related statements of profit and
loss and cash flows for the year then ended. 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 in accordance with auditing standards generally
accepted in the United Kingdom that are substantially equivalent to auditing
standards generally accepted in the United States. Those standards 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. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
The basis of valuation of stock in the accompanying balance sheets, which
has been applied consistently since 1971, does not comply with Statement of
Standard Accounting Practice Number 9 (Revised) in that cost is ascertained, in
part, on a last in first out basis. Were stock to have been valued on a first
in first out basis, the value of stock in the balance sheet would have
increased by (pound sterling)4,880,000 as of December 31, 1996 and the profit
before taxation for the year ended December 31, 1996 would have increased by
(pound sterling)1,788,000.
In our opinion, except for the effects of valuation of stock as discussed
in the preceding paragraph, the financial statements referred to above present
fairly, in all material respects, the financial position of Fina plc as of
December 31, 1996 and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles in
the United Kingdom.
/s/ KPMG AUDIT PLC
KPMG Audit Plc
Chartered Accountants
Registered Auditor
London, England
April 14, 1997
F-7
<PAGE> 72
[KPMG LOGO]
REPORT OF INDEPENDENT AUDITORS
To the Directors of
Fina Exploration Norway SCA:
We have audited the balance sheet of The Branch of Fina Exploration Norway
SCA (a wholly-owned subsidiary of Petrofina SA) as of December 31, 1996 and the
related statements of profit and loss and cash flows for the year then ended.
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 in accordance with auditing standards generally
accepted in Norway that are substantially equivalent to auditing standards
generally accepted in the United States. Those standards 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Branch of Fina
Exploration Norway SCA as of December 31, 1996, and the results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles in Norway.
Sandvika, January 27, 1997
KPMG as
/s/ Jorgen Lorentzen-Styr
Jorgen Lorentzen-Styr
F-8
<PAGE> 73
PETROFINA
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(in EUR million)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------
1998 1997 1996
----- ------ -----
<S> <C> <C> <C>
FIXED ASSETS
Intangible Assets........................................... 65 56 50
Goodwill.................................................... 88 1 1
Tangible Assets............................................. 5,738 5,829 5,235
Financial Assets............................................ 213 171 163
Other Assets................................................ 320 291 278
----- ------ -----
6,424 6,348 5,727
CURRENT ASSETS
Stocks...................................................... 978 1,278 1,194
Trade Debtors............................................... 1,581 1,823 1,712
Other Debtors............................................... 407 301 270
Marketable Securities....................................... 179 165 121
Cash and Cash Equivalents................................... 66 90 68
----- ------ -----
3,211 3,657 3,365
Total Assets...................................... 9,635 10,005 9,092
===== ====== =====
CREDITORS AMOUNTS FALLING DUE WITHIN ONE YEAR
Finance Debt................................................ 849 748 884
Income Tax Payable.......................................... 61 221 251
Trade Creditors............................................. 1,102 1,306 1,140
Other Creditors............................................. 813 917 918
----- ------ -----
2,825 3,192 3,193
CREDITORS AMOUNTS FALLING DUE AFTER ONE YEAR
Finance Debt................................................ 1,609 1,487 1,223
PROVISIONS FOR LIABILITIES AND CHARGES
Deferred Taxation........................................... 560 658 565
Other Provisions............................................ 658 633 621
----- ------ -----
2,827 2,778 2,409
Minority Interest........................................... 2 170 143
SHAREHOLDERS' EQUITY
Subscribed Capital (EUR 46.16 par value, shares issued and
outstanding: 1998--23,459,774, 1997--23,420,432,
1996--23,252,863)......................................... 1,083 1,081 1,073
Share Premium............................................... 676 647 603
Retained Earnings........................................... 2,870 2,671 2,355
Accumulated Other Comprehensive Income...................... (648) (534) (684)
----- ------ -----
3,981 3,865 3,347
Total Liabilities and Shareholders' Equity........ 9,635 10,005 9,092
===== ====== =====
</TABLE>
See accompanying notes to consolidated financial statements.
All amounts were restated in Euros based on the January 1, 1999 rate (40.3399
BEF per EUR).
F-9
<PAGE> 74
PETROFINA
CONSOLIDATED STATEMENTS OF INCOME
(in EUR million, except number of shares and per share data)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Operating Revenue including Duties and Excise Taxes...... 17,049 18,023 15,423
Earnings from Investments, Equity Interests.............. 44 34 36
---------- ---------- ----------
Total Revenue............................................ 17,093 18,057 15,459
Cost of Products Sold.................................... (6,817) (7,828) (6,433)
Duties and Excise Taxes.................................. (6,277) (5,802) (5,130)
Direct Operating Expenses................................ (1,497) (1,441) (1,352)
Sales, General and Administrative Costs.................. (794) (754) (686)
Depreciation, Depletion and Amortization................. (731) (712) (589)
Exploration Costs........................................ (67) (108) (75)
Other Operating Costs.................................... (215) (228) (190)
Early Retirement Costs................................... (12) (23) (28)
---------- ---------- ----------
OPERATING INCOME......................................... 683 1,161 976
Interest Expense......................................... (132) (116) (138)
Other Financial Income, Net.............................. 53 2 13
---------- ---------- ----------
Income before Taxes and Minority Interests............... 604 1,047 851
Current Income Tax....................................... (181) (417) (404)
Deferred Income Tax...................................... 49 (67) (34)
Minority Interest........................................ (6) (16) (18)
---------- ---------- ----------
NET INCOME............................................... 466 547 395
Basic Earnings per Share................................. 19.89 23.42 17.00
Diluted Earnings per Share............................... 19.88 23.42 17.00
Weighted average number of Shares used to calculate
(Basic)................................................ 23,440,102 23,350,612 23,252,764
Weighted average number of Shares used to calculate
(Diluted).............................................. 23,453,053 23,350,612 23,252,764
</TABLE>
See accompanying notes to consolidated financial statements.
All amounts were restated in Euros based on the January 1, 1999 rate (40.3399
BEF per Euro).
F-10
<PAGE> 75
PETROFINA
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in EUR million)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net Income.................................................. 466 547 395
Minority Interest........................................... 6 16 18
Adjustments to Reconcile Net Earnings to Net Cash Provided
by Operating Activities:
Depreciation, Depletion, and Amortization (including
exploration costs)(1)................................ 798 802 648
Provisions for Liabilities and Charges................. (11) (29) (8)
Provisions for Losses on Trade debtors and Stocks...... 215 14 3
Deferred Income Taxes.................................. (49) 67 34
------ ------ -----
Equity in Net Income of Affiliated Companies Net of
Dividend
Received............................................. (18) (6) (8)
Gain on Sales of Assets................................ (72) (12) (33)
Changes in Working Capital:
-- Trade Debtors.................................. 157 (13) (166)
-- Stocks......................................... 61 (25) (17)
-- Trade Creditors................................ (164) 78 71
-- Other Creditors................................ (58) (55) 79
-- Income Tax Payable............................. (148) (39) (21)
-- Other.......................................... (89) (8) (82)
------ ------ -----
Net Cash Provided by Operating Activities......... 1,094 1,337 913
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Expenditure Including Exploration Expenses(1)....... (1,235) (1,072) (799)
Proceeds from Sales of Assets............................... 166 39 103
Investments in Affiliates................................... (21) (10) (23)
------ ------ -----
Net Cash Used in Investing Activities............. (1,090) (1,043) (719)
CASH FLOWS FROM FINANCING ACTIVITIES
Additions to Long Term Debt................................. 403 435 344
Payments of Long Term Debt.................................. (226) (234) (417)
Net Change in Short Term Notes Payable...................... 206 (282) 86
Warrant Exercise Proceeds................................... 31 52 --
Minority Interest........................................... (167) -- --
Dividend Paid to the Minority Interest...................... (7) (13) (9)
Dividend Paid............................................... (267) (231) (203)
------ ------ -----
Net Cash Used in Financing Activities............. (27) (273) (199)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (23) 21 (5)
Cash and Cash Equivalents at Beginning of Year.............. 90 68 71
Cash and Cash Equivalents at End of Year.................... 66 90 68
Effect of Exchange Rate Changes............................. (1) 1 2
------ ------ -----
Net Increase (Decrease) in Cash and Cash Equivalents........ (23) 21 (5)
Income Taxes Paid........................................... (331) (453) (324)
Interest Paid............................................... (166) (170) (171)
</TABLE>
- ------------------
(1) Includes cash exploration expenses of EUR 52 million in 1998, EUR 73 million
in 1997 and EUR 45 million in 1996.
See accompanying notes to consolidated financial statements.
All amounts were restated in Euros based on the January 1, 1999 rate (40.3399
BEF per Euro).
F-11
<PAGE> 76
PETROFINA
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in EUR million except number of shares and per share data)
<TABLE>
<CAPTION>
ORDINARY SHARES ISSUED
----------------------- OTHER TOTAL
SUBSCRIBED SHARE RETAINED COMPREHENSIVE SHAREHOLDERS'
NUMBER CAPITAL PREMIUM EARNINGS INCOME EQUITY
---------- ---------- ------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1995...... 23,252,451 1,073 603 2,163 (787) 3,052
Warrants Exercised............. 412 --
Net Income 1996................ 395 395
Dividend Declared and Paid
(EUR 8.73 Per Share)......... (203) (203)
Foreign Currency Translation... 103 103
---------- ----- --- ----- ---- -----
Balance December 31, 1996...... 23,252,863 1,073 603 2,355 (684) 3,347
Warrants Exercised............. 167,569 8 44 52
Net Income 1997................ 547 547
Dividend Declared and Paid
(EUR 9.92 Per Share)......... (231) (231)
Foreign Currency Translation... 150 150
---------- ----- --- ----- ---- -----
Balance December 31, 1997...... 23,420,432 1,081 647 2,671 (534) 3,865
Warrants Exercised............. 39,342 2 29 31
Net Income 1998................ 466 466
Dividend Declared and Paid
(EUR 11.40 Per Share)........ (267) (267)
Foreign Currency Translation... (107) (107)
Minimum Pension Liabilities.... (7) (7)
Balance December 31, 1998...... 23,459,774 1,083 676 2,870 (648) 3,981
========== ===== === ===== ==== =====
</TABLE>
The subscribed capital and share premium of PetroFina S.A. constitutes the
nondistributable portion of Shareholders' Equity and is not available for
dividend purposes. Included in Shareholders' Equity for the Group are retained
earnings of certain subsidiary companies, under current debt covenants or
companies' acts, amounting to EUR 961 million that are not currently available
for dividend distribution within the Group at December 31, 1998.
The Extraordinary General Meeting of January 4, 1999 approved the payment
of a dividend of EUR for 11.40 per share (BEF 460, USD 1.34 per ADS). This
dividend was payable January 13, 1999.
The Company has issued and outstanding 23,459,774 shares as of December 31,
1998 with aggregate subscribed capital of EUR 1,082,762,600 (EUR 46.16 per
share). By decision of the Company's shareholders, the Company's Board of
Directors is authorized to increase statutory capital by EUR 362.3 million
(representing 7,848,942 shares).
The authorization is valid for a five-year period and available for renewal
at the end of the five-year term.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Net Income.................................................. 466 547 395
Other comprehensive Income, net of tax :
Foreign currency translation............................ (107) 150 103
Minimum pension liabilities............................. (7)
---- --- ---
Other comprehensive income.............................. (114) 150 103
COMPREHENSIVE INCOME........................................ 352 697 498
</TABLE>
F-12
<PAGE> 77
PETROFINA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements present the financial
position, results of operations and cash flows of PetroFina S.A. and its
consolidated subsidiaries (the "Group" or "PetroFina") and have been prepared in
accordance with United States generally accepted accounting principles ("US
GAAP").
PetroFina's financial statements were previously presented in Belgian
francs. A Belgian Royal Decree dated December 15, 1998 permits Belgian companies
to restate financial statements in Euro (EUR). All amounts presented are in EUR
million unless otherwise indicated. All current year and comparative financial
statement amounts in this Annual Report have been restated in Euro based on the
January 1, 1999 conversion rate of 1 Belgian franc = 0.02479 Euro (1 Euro = BEF
40.3399). PetroFina's comparative financial statements in Euro depict the same
trends as would have been presented if the Group had continued to present its
financial statements in Belgian francs. PetroFina's financial statements will
not be comparable to the financial statements of other companies reporting in
Euro that have restated amounts from a currency other than Belgian francs.
Following Belgian accounting laws, the Group is obliged to prepare its
financial statements in accordance with Belgian accounting principles. Following
article 8 of the Royal Decree dated 1st September 1986 concerning annual
financial statements and consolidated financial statements, the Belgian
Commission on Banking and Finance (la Commission Bancaire et Financiere)
authorized PetroFina to depart from article 6 of the previous mentioned Royal
Decree. This departure allows PetroFina to prepare and publish the financial
statements under US GAAP. This authorisation is contingent upon the following
conditions :
- PetroFina follows all US GAAP requirements.
- PetroFina abides by all mandatory rules of the 7th European
Directive.
The decision by PetroFina to prepare and publish its financial statements
in accordance with US GAAP was based on the following :
- The listing of PetroFina securities on the New York Stock Exchange
obligates the Group to meet the reporting requirements of the United
States Securities and Exchange Commission. The Group is required to
prepare US GAAP financial statements or to prepare a reconciliation
to US GAAP.
- The Group's desire to publish comparable financial information
following the same format as other major worldwide energy companies.
In preparing the financial statements following US GAAP, the Group has
found no material contradiction with the mandatory rules of the 7th European
Directive.
USE OF ESTIMATES
The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
BASIS OF CONSOLIDATION
Subsidiaries in which the Group's holdings exceed 50% are consolidated in
the financial statements, unless effective control is limited due to contractual
provisions or governmental restrictions. The Group consolidates certain jointly
controlled entities in accordance with the proportionate consolidation method.
Under U.S. GAAP these companies should be accounted for under the equity method
(see note 22). All material intercompany transactions are eliminated in
consolidation.
The equity method of accounting is used for investments in which the
investment provides the Group with the ability to exercise significant influence
over the operating and financial policies of the investee company. In the
absence of other evidence, such influence is presumed to exist for investments
in companies
F-13
<PAGE> 78
PETROFINA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
in which the Group's direct or indirect ownership is between 20% and 50% of
total voting rights. Under the equity method, the Group's share of profits and
losses of associated companies is included in the consolidated income statement
and the carrying value of the Group's investment is adjusted.
The cost method of accounting is used for investments in which the Group's
ownership is less than 20% or for investees where the Group is unable to
exercise significant influence.
A full list of consolidated companies and companies excluded from the scope
of consolidation is available from the Public Relations and Communication
Department of PetroFina S.A., rue de l'Industrie 52, B-1040 Brussels.
FOREIGN CURRENCY TRANSACTIONS
Foreign currency transactions are recorded at the exchange rate on the date
of origin. Monetary assets and liabilities denominated in a foreign currency are
revalued at each balance sheet date for the effect of exchange rate changes
between the date of origin and settlement date. The resulting gains and losses
on revaluation are recorded in the consolidated income statement as other
financial income or expense.
The Group financial statements were previously produced in Belgian Francs
(BEF). In accordance with the Royal Decree dated December 15, 1998, the Group
has decided to present its consolidated financial statements and balance sheet
notes in Euros. The 1998, 1997 and 1996 financial statements were restated into
Euros based on the rate 40.3399 BEF per Euro effective January 1, 1999.
PetroFina's comparative financial statements in Euros depict the same
trends as would have been presented if the company had continued to present its
financial statements in Belgian Francs.
Furthermore, the financial statements for periods prior to January 1, 1999
will not be comparable to the financial statements of other companies that
report in Euros and that restated amounts from a different currency than Belgian
Francs.
TRANSLATION TO REPORTING CURRENCY
The income statements of foreign subsidiaries are translated into BEF at
the average rate of exchange prevailing during the year and translated in Euros
based on the rate of January 1st, 1999 (40.3399 BEF per Euro). Balance sheets
are translated at the exchange rate at the balance sheet date. Differences
arising on the translation of financial statements of foreign subsidiaries are
recorded to shareholders' equity as cumulative foreign currency translation
adjustments.
Exchange rate differences attributable to loans and forward exchange
agreements in foreign currencies that are designated as a hedge of the net
assets of a foreign subsidiary are recorded directly to shareholders' equity,
together with the corresponding translation difference on the hedged net assets.
DERIVATIVE FINANCIAL INSTRUMENTS
PetroFina manages risk arising from fluctuations in interest rates and
currency exchange rates by using derivative financial instruments, and risks
from fluctuations in the price of crude oil, refined products, and natural gas
by using derivative commodity instruments. PetroFina does not enter into
derivative instruments for speculative trading purposes.
PetroFina's derivative financial instruments currently include interest
rate swaps, currency swaps, and foreign exchange forward contracts. The interest
rate swaps are accounted for under the accrual basis of accounting. The foreign
exchange forward contracts and currency swaps are recorded at cost and adjusted
for changes in the spot exchange rates at the reporting date. With respect to
derivative commodity instruments, PetroFina currently enters into crude oil and
refined product futures and forwards and natural gas futures.
F-14
<PAGE> 79
PETROFINA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Interest rate swap agreements are used by PetroFina to manage its interest
costs and reduce interest rate risk by managing the overall mix of fixed and
floating rate debt. PetroFina is able to modify the interest characteristics of
its debt portfolio (fixed versus floating rate basis). Interest differentials
are recorded on an accrual basis as an adjustment to interest expense and
interest payable.
Currency swaps and foreign exchange forward contracts are used by PetroFina
to manage funding costs and its exposure to fluctuations in foreign currency
denominated receivables and payables. This activity is intended to protect
PetroFina cash flows from adverse short term fluctuations in foreign currencies.
Gains and losses attributable to these contracts resulting from changes in
exchange rates are accrued in other current receivables/liabilities and
recognized as an adjustment to other financial income and expense in the period
in which the change occurs.
When a hedged obligation is terminated without being replaced by another
qualifying hedged item, the designated interest rate or currency swap is
recorded at fair value.
Crude oil and refined products futures and forwards are used to minimize
price risks related to the supply and sale of these products, respectively. Any
realized or unrealized changes in fair value are accrued in other current
receivables/liabilities and recognized as a component of operating expenses in
the period in which the change occurs.
Natural gas futures are used to hedge designated equity production. Gains
and losses on these qualifying hedges are deferred and included in the
measurement of the related transaction, in the month of production.
Derivative instruments are either exchange-traded or with counterparties of
high credit quality. Therefore the risk of nonperformance by the counterparties
is considered to be negligible.
CASH AND CASH EQUIVALENTS
The Group considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents.
MARKETABLE SECURITIES
The Group's investments in marketable securities are classified as
"trading" and are recorded at fair value. Changes in fair value, both unrealized
gains and unrealized losses, are recognized in each period's income statement.
STOCKS
Inventories are valued at the lower of cost or net realizable value. Crude
feedstocks, finished petroleum products and chemical products inventories are
valued according to the LIFO method (last in/first out). All other inventories
are valued at the lower of average cost (which approximates cost on a first
in/first out basis) or net realizable value. The costs of finished products
include raw material costs, direct costs and related production overhead costs
but exclude any interest charges. Net realizable value is defined as the
estimated selling price (in the normal course of business) of an inventory item
less the costs of completion and selling expenses.
TANGIBLE ASSETS
Cost
PetroFina follows the "successful efforts" method of accounting for the
cost of oil and gas exploration and production operations.
Lease acquisition costs related to properties held for oil, gas and mineral
exploration and production are capitalized when incurred. Unproved properties
with acquisition costs which are individually significant are
F-15
<PAGE> 80
PETROFINA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
assessed on a property-by-property basis, and a loss is recognized, by provision
of a valuation allowance, when the assessment indicates an impairment in value.
Unproved properties with acquisition costs which are not individually
significant are generally aggregated and the portion of such costs estimated to
be non productive, based on historical experience, is amortized on an average
holding period basis.
Exploratory costs, excluding the costs of exploratory wells, are charged to
expense as incurred. Costs of drilling exploratory wells, including
stratigraphic test wells, are capitalized pending determination whether the
wells have found proved reserves which justify commercial development. If such
reserves are not found within one year or the Group has not commenced or
committed to additional drilling, the drilling costs are charged to exploration
expenses. All development costs related to proved oil and gas reserves are
capitalized. Interest is capitalized as a component of the cost of construction
for development projects in progress. Normal maintenance and repairs are charged
to expense as incurred. Renewals, betterments and major repairs that extend the
useful life or productivity of PP&E are capitalized and the assets replaced, if
any, are retired.
Impairment and Depreciation
For purposes of determining and recognizing impairment of long-lived
assets, the applicable carrying value is evaluated against the undiscounted
projection of net future pre-tax cash flows. The applicable grouping of assets
are based on the lowest practicable levels of identifiable cash flows,
consistent with the manner in which those assets are managed. If an impairment
exists, the carrying value is adjusted to the estimated fair value.
Assets to be disposed of are carried at the lower of amortized cost or fair
value less cost to sell.
The capitalized costs related to producing activities, including tangible
and intangible costs, are amortized by field on the unit-of-production basis by
applying the ratio of produced oil and gas during the period to beginning of the
period proved developed oil and gas reserves. Estimated future restoration and
abandonment costs are accrued each period based on the associated
unit-of-production rate.
Depreciation of PP&E related to facilities other than producing properties
is provided using the straight-line method, over the asset's estimated useful
life. Typical useful lives of facilities are as follows :
<TABLE>
<S> <C>
- -- machinery & equipment 10 to 20 years
- -- buildings 20 years
- -- other 3 to 5 years
</TABLE>
INTANGIBLE ASSETS
Intangible assets primarily consist of patents, licences, goodwill, and
capitalized software development costs for internal use. Intangible assets are
depreciated over their estimated economic life, ranging from 5 years to 20
years. Goodwill related to the buy-out of minority interests in PetroFina's US
subsidiary is amortized over a 40 years period due to the strategic value of the
US operation.
ENVIRONMENTAL EXPENDITURES
The estimated future costs for known environmental remediation requirements
are accrued when it is probable that a liability has been incurred and the
amount of remediation costs can be reasonably estimated. These amounts are the
undiscounted, future estimated costs under existing regulatory requirements and
using existing technology. Other environmental expenditures, principally
maintenance or preventive in nature, are recorded when expended and are expensed
or capitalized as appropriate.
INCOME TAXES
Income taxes are accounted for pursuant to the liability method. Under the
liability method, deferred tax assets and liabilities are measured as the tax
effected value of differences between the carrying values of assets
F-16
<PAGE> 81
PETROFINA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
and liabilities for financial reporting and their tax basis. Deferred income tax
expense is the change during the year in the deferred tax assets and
liabilities. Effects of changes in tax laws and tax rates are recognized at the
date the tax law changes are enacted. Deferred taxes are not provided on
undistributed earnings of most subsidiaries as such earnings are deemed to be
indefinitely reinvested. A valuation allowance is recorded when necessary to
reduce deferred tax assets to the amount that is more likely than not to be
realized.
REVENUE RECOGNITION
Oil and gas sales are inclusive of production royalties paid in cash. Crude
oil and petroleum products trading activities are recorded in Sales and Costs of
sales when physical delivery takes place. Exchanges of crude oil and petroleum
products involving other oil companies are excluded from sales.
The Group uses the entitlement method for recording natural gas sales
revenues. Under the entitlement method, revenue is based on the Group's net
working interest in field production. Deliveries of natural gas in excess of the
company's working interest are recorded as liabilities while under-deliveries
are recorded as assets. Such differences are temporary in nature and have been
insignificant.
EARNINGS PER SHARE
Earnings per share is based on net income divided by the weighted average
number of shares of common stock outstanding. When dilutive, stock warrants are
included in dilutive earnings per share.
RECLASSIFICATION
Certain amounts in the 1997 and 1996 financial statements have been
reclassified to conform to the 1998 presentation.
PENDING TRANSACTION
On December 1, 1998, five of PetroFina's largest shareholders, Electrafina
S.A., Compagnie Nationale a Portefeuille, S.A. (Fibelpar), Tractebel N.V.,
Electrabel N.V. and Fortis AG (the "Contributing Shareholders"), announced their
intention to exchange all their PetroFina Shares, which represent approximately
41% of the outstanding PetroFina Shares, for shares of TOTAL.
TOTAL has announced that the proposed transaction will be accomplished in
two steps. In the first step, following approval by the TOTAL shareholders and
regulatory approval by European and American competition authorities, the
Contributing Shareholders will contribute to TOTAL the 9,614,190 PetroFina
Shares that they hold in exchange for new shares of TOTAL at an exchange ratio
of nine TOTAL shares for two PetroFina Shares. The PetroFina Shares contributed
by the Contributing Shareholders will be effective January 1, 1998, excluding
the gross dividend of BEF 460 (11.4304 EUR) per PetroFina Shares paid to all
PetroFina shareholders on January 13, 1999. Then, following completion of this
contribution, TOTAL will file with the Belgian Commission on Banking and Finance
("CBF") a notice and document to make a public offer (the "Public Exchange
Offer") to acquire all remaining PetroFina Shares, using the same exchange ratio
offered to the Contributing Shareholders.
The PetroFina Board of Directors (the "Board") met on December 8, 1998 to
analyze the proposed transaction. After careful consideration and review of the
strategic and operational elements of the transaction, the Board approved the
proposed transaction in principle, but final Board approval remains subject to
review of the prospectus setting forth the terms of the Public Exchange Offer.
The Board also announced that it had retained JP Morgan and Paribas as financial
advisers to assist it in delivering a fairness opinion on the proposed
transaction.
F-17
<PAGE> 82
PETROFINA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
TOTAL announced on January 14, 1999 that its shareholders had approved the
proposed transaction and related matters and that the proposed transaction
remains subject to approval from European and U.S. regulatory authorities.
TOTAL has also announced that it expects that the TOTAL FINA group
resulting from the Public Exchange Offer will be listed on the stock exchanges
of Paris, Brussels, London and New York. Following the Public Exchange Offer,
TOTAL will appoint Albert Frere, Paul Desmarais, Sr. and Thierry de Rudder to
the Board of Directors of the TOTAL FINA group. Mr. Frere will be named a
Vice-Chairman of the Board of Directors and Francois Cornelis will become a
Vice-Chairman of the group's Executive Committee.
(2) SEGMENT DATA
The Group is a fully integrated energy company. The Group's principal lines
of business are crude oil and natural gas exploration and production and natural
gas marketing ("Upstream"), petroleum products refining, supply and
transportation and marketing ("Downstream"), chemicals manufacturing and
marketing ("Chemicals") and paint manufacturing and marketing ("Paints"). The
Group sells refined products in both the wholesale and retail markets. Natural
gas is sold primarily to marketers. Chemical products are primarily sold to
manufacturers of fiber, film, packaging and consumable products. Raw materials
are readily available and the Group is not dependent upon a single or limited
number of suppliers.
The majority of the Group inter-segment transactions are priced at market.
F-18
<PAGE> 83
PETROFINA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) SEGMENT DATA -- (CONTINUED)
Information regarding the Group's industry and geographic segments are as
follows:
<TABLE>
<CAPTION>
1998
-----------------------------------------------------------------
UPSTREAM DOWNSTREAM CHEMICALS PAINTS OTHER CONSOLIDATED
-------- ---------- --------- ------ ----- ------------
<S> <C> <C> <C> <C> <C> <C>
EUROPE(1)
- --------------------------------------------
OPERATING REVENUE:
Operating Revenue....................... 910 10,977 1,189 780 42 13,898
Inter-segment........................... (471) (286) (87) -- -- (844)
Operating Revenue from Non Affiliates... 439 10,691 1,102 780 42 13,054
Equity in Net Income of Affiliated
Companies................................. 15 16 1 -- 11 43
Operating Income............................ 254 181 119 45 22 621
Identifiable Assets......................... 1,585 3,288 909 501 494 6,777
Depreciation, Depletion and Amortization.... (242) (202) (77) (22) (11) (554)
Exploration Expenses........................ (52) -- -- -- -- (52)
Capital Expenditures........................ 367 207 87 38 21 720
NORTH AMERICA
- --------------------------------------------
OPERATING REVENUE:
Operating Revenue....................... 1,282 2,109 793 -- -- 4,184
Inter-segment........................... (116) (59) (14) -- -- (189)
Operating Revenue from Non Affiliates... 1,166 2,050 779 -- -- 3,995
Equity in Net Income/(Loss) of Affiliated
Companies................................. 1 -- (1) -- 1 1
Operating Income/(Loss)..................... 40 (19) 65 -- (24) 62
Identifiable Assets......................... 803 1,021 861 -- 173 2,858
Depreciation, Depletion and Amortization.... (76) (57) (34) -- (10) (177)
Exploration Expenses........................ (15) -- -- -- -- (15)
Capital Expenditures........................ 167 74 190 -- 105 536
CONSOLIDATED
- --------------------------------------------
OPERATING REVENUE:
Operating Revenue....................... 2,192 13,086 1,982 780 42 18,082
Inter-segment........................... (587) (345) (101) -- -- (1,033)
Operating Revenue from Non Affiliates... 1,605 12,741 1,881 780 42 17,049
Equity in Net Income of Affiliated
Companies................................. 16 16 -- -- 12 44
Operating Income/(Loss)..................... 294 162 184 45 (2) 683
Identifiable Assets......................... 2,388 4,309 1,770 501 667 9,635
Depreciation, Depletion and Amortization.... (318) (259) (111) (22) (21) (731)
Exploration Expenses........................ (67) -- -- -- -- (67)
Capital Expenditures........................ 534 281 277 38 126 1,256
</TABLE>
- ---------------
(1) Europe includes Europe and other parts of the world outside North America
for Upstream, Downstream and Other segments. Other parts of the world
represent less than 1% of the operating revenues, profit, and total assets
of the respective segment.
F-19
<PAGE> 84
PETROFINA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) SEGMENT DATA -- (CONTINUED)
<TABLE>
<CAPTION>
1997
-----------------------------------------------------------------
UPSTREAM DOWNSTREAM CHEMICALS PAINTS OTHER CONSOLIDATED
-------- ---------- --------- ------ ----- ------------
<S> <C> <C> <C> <C> <C> <C>
EUROPE(1)
- ---------------------------------------------
OPERATING REVENUE:
Operating Revenue.......................... 1,216 11,468 1,381 780 11 14,856
Inter-segment.............................. (737) (330) (112) -- -- (1,179)
Operating Revenue from Non Affiliates...... 479 11,138 1,269 780 11 13,677
Equity in Net Income (Loss) of Affiliated
Companies.................................. 17 18 (4) 1 1 33
Operating Income/(Loss)...................... 579 234 151 40 (41) 963
Identifiable Assets.......................... 1,620 3,605 930 488 421 7,064
Depreciation, Depletion and Amortization..... (205) (214) (80) (23) (12) (534)
Exploration Expenses......................... (55) -- -- -- -- (55)
Capital Expenditures......................... 378 208 80 25 6 697
NORTH AMERICA
- ---------------------------------------------
OPERATING REVENUE:
Operating Revenue.......................... 972 2,710 931 -- 1 4,614
Inter-segment.............................. (163) (90) (15) -- -- (268)
Operating Revenue from Non Affiliates...... 809 2,620 916 -- 1 4,346
Equity in Net Income (Loss) of Affiliated
Companies.................................. 2 -- (1) -- -- 1
Operating Income/(Loss)...................... 48 64 108 -- (22) 198
Identifiable Assets.......................... 752 1,230 766 -- 193 2,941
Depreciation, Depletion and Amortization..... (86) (55) (30) -- (7) (178)
Exploration Expenses......................... (53) -- -- -- -- (53)
Capital Expenditures......................... 193 42 143 7 385
CONSOLIDATED
- ---------------------------------------------
OPERATING REVENUE:
Operating Revenue.......................... 2,188 14,178 2,312 780 12 19,470
Inter-segment.............................. (900) (420) (127) -- -- (1,447)
Operating Revenue from Non Affiliates...... 1,288 13,758 2,185 780 12 18,023
Equity in Net Income (Loss) of Affiliated
Companies.................................. 19 18 (5) 1 1 34
Operating Income/(Loss)...................... 627 298 259 40 (63) 1,161
Identifiable Assets.......................... 2,372 4,835 1,696 488 614 10,005
Depreciation, Depletion and Amortization..... (291) (269) (110) (23) (19) (712)
Exploration Expenses......................... (108) -- -- -- -- (108)
Capital Expenditures......................... 571 250 223 25 13 1,082
</TABLE>
- ---------------
(1) Europe includes Europe and other parts of the world outside North America
for Upstream, Downstream and Other segments. Other parts of the world
represent less than 1% of the operating revenues, profit, and total assets
of the respective segment.
F-20
<PAGE> 85
PETROFINA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) SEGMENT DATA -- (CONTINUED)
<TABLE>
<CAPTION>
1996
-----------------------------------------------------------------
EUROPE(1) UPSTREAM DOWNSTREAM CHEMICALS PAINTS OTHER CONSOLIDATED
- --------- -------- ---------- --------- ------ ----- ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUE:
Operating Revenue......................... 1,040 9,989 1,154 730 25 12,938
Inter-segment............................. (643) (257) (73) -- -- (973)
Operating Revenue from Non Affiliates..... 397 9,732 1,081 730 25 11,965
Equity in Net Income (Loss) of Affiliated
Companies................................. 22 20 1 (6) 37
Operating Income/(Loss)..................... 545 141 104 30 (46) 774
Identifiable Assets......................... 1,430 3,514 885 464 489 6,782
Depreciation, Depletion and Amortization.... (164) (180) (74) (21) (18) (457)
Exploration Expenses........................ (44) -- -- -- -- (44)
Capital Expenditures........................ 321 164 48 29 25 587
----- ------ ----- --- --- ------
NORTH AMERICA
- --------------------------------------------
OPERATING REVENUE:
Operating Revenue......................... 577 2,315 789 -- 1 3,682
Inter-segment............................. (129) (84) (11) -- -- (224)
Operating Revenue from Non Affiliates..... 448 2,231 778 -- 1 3,458
Equity in Net Income (Loss) of Affiliated
Companies................................. -- -- (1) -- -- (1)
Operating Income/(Loss)..................... 54 (12) 177 -- (17) 202
Identifiable Assets......................... 563 1,070 557 -- 120 2,310
Depreciation, Depletion and Amortization.... (57) (46) (25) -- (4) (132)
Exploration Expenses........................ (31) -- -- -- -- (31)
Capital Expenditures........................ 125 58 43 -- 9 235
----- ------ ----- --- --- ------
CONSOLIDATED
- --------------------------------------------
OPERATING REVENUE:
Operating Revenue......................... 1,617 12,304 1,943 730 26 16,620
Inter-segment............................. (772) (341) (84) -- -- (1,197)
Operating Revenue from Non Affiliates..... 845 11,963 1,859 730 26 15,423
Equity in Net Income (Loss) of Affiliated
Companies................................. 22 20 (1) 1 (6) 36
Operating Income/(Loss)..................... 599 129 281 30 (63) 976
Identifiable Assets......................... 1,993 4,584 1,442 464 609 9,092
Depreciation, Depletion and Amortization.... (221) (226) (99) (21) (22) (589)
Exploration Expenses........................ (75) -- -- -- -- (75)
Capital Expenditures........................ 446 222 91 29 34 822
</TABLE>
- ---------------
(1) Europe includes Europe and other parts of the world outside North America
for Upstream, Downstream and Other segments. Other parts of the world
represent less than 1% of the operating revenues, profit, and total assets
of the respective segment.
(3) RESEARCH AND DEVELOPMENT COSTS
Research and development costs incurred and expensed amounted to EUR 78
million in 1998, EUR 80 million in 1997 and EUR 76 million in 1996.
F-21
<PAGE> 86
PETROFINA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) INTANGIBLE ASSETS AND GOODWILL
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Patents & licences.......................................... 71 68 68
Customer goodwill........................................... 66 62 54
Other intangible assets..................................... 83 95 83
---- ---- ----
220 225 205
Accumulated amortization.................................... (155) (169) (155)
---- ---- ----
65 56 50
GOODWILL.................................................... 156 68 68
Accumulated amortization.................................... (68) (67) (67)
---- ---- ----
88 1 1
</TABLE>
(5) TANGIBLE ASSETS
A summary of tangible assets follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Land & buildings............................................ 1,105 1,194 1,114
Plant & equipment........................................... 6,332 6,004 5,548
Proved oil & gas properties................................. 4,578 4,175 3,662
Unproved oil & gas properties............................... 406 444 416
Other tangible assets....................................... 314 323 245
Assets under construction................................... 337 827 422
------ ------ ------
13,072 12,967 11,407
Accumulated depreciation, depletion and amortization........ (7,334) (7,138) (6,172)
------ ------ ------
5,738 5,829 5,235
</TABLE>
Capitalized interest included in capital expenditures amounted to EUR 55
million in 1998, to EUR 40 million in 1997 and to EUR 21 million in 1996.
(6) FINANCIAL ASSETS
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Companies accounted for under equity method................. 165 130 102
Other companies............................................. 41 33 53
Loans....................................................... 7 8 8
--- --- ---
213 171 163
</TABLE>
(7) OTHER ASSETS
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Deferred tax assets, net.................................... 56 38 51
Other long term receivables................................. 264 253 227
--- --- ---
320 291 278
</TABLE>
F-22
<PAGE> 87
PETROFINA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) STOCKS
<TABLE>
<CAPTION>
1998 1997 1996
---- ----- -----
<S> <C> <C> <C>
A summary of inventories follows:
-- Petroleum products..................................... 445 701 684
-- Chemicals products and paints.......................... 370 407 342
-- Other products and materials........................... 163 170 168
--- ----- -----
978 1,278 1,194
</TABLE>
The carrying value of crude oil, finished petroleum products and chemical
products inventories accounted for using the LIFO method amounted to EUR 732
million at December 31, 1998, EUR 1,027 million at December 31, 1997 and EUR 947
million at December 31, 1996. The excess of replacement cost of these
inventories over LIFO was approximately nil, EUR 27 million and EUR 154 million
for the same periods.
(9) TRADE DEBTORS
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Trade debtors............................................... 1,651 1,892 1,782
Write-downs on debtors...................................... (70) (69) (70)
----- ----- -----
1,581 1,823 1,712
</TABLE>
(10) OTHER DEBTORS
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Taxes & withholding taxes to be recovered................... 95 57 59
Deferred tax assets, net.................................... 39 71 23
Deferred charges and accrued income......................... 88 78 68
Others...................................................... 185 95 120
--- --- ---
407 301 270
</TABLE>
(11) INCOME TAX PAYABLE
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
At the beginning of the year................................ 221 251 157
Current income tax expense.................................. 181 417 404
Taxes paid during the year.................................. (331) (453) (324)
Translation effects......................................... (10) 6 14
---- ---- ----
61 221 251
</TABLE>
(12) OTHER CREDITORS
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Other taxes (VAT)........................................... 74 93 80
Accrued expenses and deferred income........................ 143 138 162
Excise duties............................................... 300 322 334
Salary and social benefits.................................. 83 91 93
Other....................................................... 213 273 249
--- --- ---
813 917 918
</TABLE>
F-23
<PAGE> 88
PETROFINA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(13) CURRENT AND LONG TERM FINANCIAL DEBTS
SHORT TERM BORROWINGS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Bank Obligations............................................ 431 596 680
Commercial Paper............................................ 343 39 144
Other....................................................... 2 1 23
--- --- ---
776 636 847
Current portion of Long Term Debt........................... 73 112 37
--- --- ---
849 748 884
</TABLE>
Weighted average interest rates on outstanding borrowings at December 31,
1998, 1997 and 1996 were 5.96%, 6.33% and 5.84% respectively.
LONG TERM BORROWINGS
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Bonds and Notes (rates from 3.0% to 10.0% maturing through
2003)..................................................... 514 580 882
Bank Obligations (rates from 1.0% to 10.75% maturing through
2010)..................................................... 1,155 981 317
Capital Lease Obligations................................... 9 34 22
Other....................................................... 4 4 39
----- ----- -----
1,682 1,599 1,260
Less current portion........................................ (73) (112) (37)
----- ----- -----
1,609 1,487 1,223
</TABLE>
LONG TERM BORROWINGS BY CURRENCY
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Excludes the effects of currency swap transactions
US Dollars.................................................. 1,329 1,220 785
BEF......................................................... 238 241 279
DEM (German Mark)........................................... 1 1 153
NLG (Netherlands Gulden).................................... 100 101 5
Other currencies............................................ 14 36 38
----- ----- -----
1,682 1,599 1,260
</TABLE>
As of December 31, 1998 the Group had committed and unused credit
facilities with various banks in various currencies totaling EUR 1,398 million.
Commitment fees associated with these credit facilities range from 0.07% to
0.20% on undrawn amounts. The Group intends to use borrowings under these
facilities to finance the repayment of EUR 686 million of commercial paper
classified as long term bank obligations at December 31, 1998.
Fixed and variable rate debt is borrowed in the most cost-effective means
to manage risk arising from fluctuations in interests rates. PetroFina's
interest rate swaps convert EUR 512 million of variable rate debt to an average
fixed rate of 7.10%, and EUR 171 million of fixed rate debt to an average
variable rate of 5.40% as of December 31, 1998.
F-24
<PAGE> 89
PETROFINA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(13) CURRENT AND LONG TERM FINANCIAL DEBTS -- (CONTINUED)
The aggregate maturities of long term borrowings (in EUR million) are as
follows: 1999 EUR 73 million -- 2000 EUR 319 million -- 2001 EUR 220
million -- 2002 EUR 472 million -- 2003 EUR 170 million and later EUR 428
million.
Certain notes and credit facilities contain provisions that limit mergers
and sales of assets, limit the incurrence of indebtedness and restrict payments
within subsidiaries of the Group.
No material amounts of current or long term debt are collateralized by
Group assets.
(14) FINANCIAL INSTRUMENTS
Amounts related to PetroFina's financial instruments were as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
1998 1997 1996
------------------------------------------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET FINANCIAL INSTRUMENTS:
Marketable securities.................... 179 179 165 165 121 121
Long term debt........................... 1,682 1,726 1,599 1,641 1,260 1,317
DERIVATIVE INSTRUMENTS:
Interest rate swaps...................... (7) (29) (5) (19) 2 (13)
Currency swaps........................... (1) (3) (2) (3) (5) (7)
Forward foreign exchange contracts....... 1 1 3 3 (4) (4)
Commodity contracts...................... 6 6 -- -- 5 5
</TABLE>
PetroFina's notional amount of debt covered under interest rate swaps
totaled approximately EUR 683 million, EUR 803 million and EUR 662 million, and
under currency swaps totaled approximately EUR 296 million, EUR 107 million and
EUR 176 million at December 31, 1998, 1997 and 1996, respectively. Amounts to be
paid or received under these agreements are accrued on the balance sheet over
the life of the swap agreements. The fair value of the swap agreements are not
recognized in the consolidated financial statements since they are accounted for
as hedges of the underlying debt instruments.
For the periods ended December 31, 1998, 1997 and 1996, PetroFina had
forward foreign exchange buy contracts of EUR 667 million, EUR 1,220 million and
EUR 850 million, respectively, principally denominated in Belgian franc and US
dollar, and sell contracts of EUR 668 million, EUR 1,220 million and EUR 855
million, respectively, principally denominated in German mark, French franc,
Norwegian krone, and British pound and US dollar. Because these contracts are of
a short term nature (principally less than six months) their fair value and
carrying value are approximately the same.
Also for the periods ended December 31, 1998, 1997 and 1996, the Company
had crude oil and refined products futures and forward buy contracts of notional
amounts of EUR 117 million, EUR 37 million and EUR 102 million, respectively;
and sell contracts of notional amounts of EUR 85 million, EUR 57 million and EUR
40 million, respectively. These contracts are recorded at fair value. Natural
gas contracts are insignificant at December 31, 1998, 1997 and 1996.
The carrying value of cash and cash equivalents, accounts receivable, and
accounts payable approximated their fair values due to the short term maturities
of these instruments. The estimated fair values of other financial instruments,
including debt and risk management instruments summarized above, have been
determined using available market information and valuation methodologies,
primarily discounted cash flow analysis.
F-25
<PAGE> 90
PETROFINA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(15) INCOME TAXES
Current tax expense for 1998, 1997 and 1996 was EUR 181 million, EUR 417
million and EUR 404 million, respectively. Deferred tax expense for 1998, 1997
and 1996 was EUR (49) million, EUR 67 million and EUR 34 million, respectively.
THE COMPONENTS OF DEFERRED INCOME TAX EXPENSE FOR EACH YEAR WERE AS
FOLLOWS:
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED
DECEMBER 31,
---------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Deferred tax expense, excluding items below................. (83) 86 6
Benefits of tax loss carryforwards.......................... 31 25 12
Effect of foreign tax rate changes.......................... 1 (31) --
Net change in valuation allowance........................... 2 (13) 16
--- --- --
Deferred income tax expense................................. (49) 67 34
</TABLE>
ACTUAL INCOME TAX EXPENSE DIFFERS FROM THE EXPECTED INCOME TAX EXPENSE
USING THE BELGIAN STATUTORY INCOME TAX RATE AS FOLLOWS:
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED
DECEMBER 31,
----------------------
1998 1997 1996
----- ------ -----
<S> <C> <C> <C>
Income before tax and minority interest..................... 604 1,047 851
Expected income tax at statutory tax rate of 40.17%......... 243 421 342
-- foreign tax rate differences........................... 72 171 148
-- uplift benefit(1)...................................... (45) (28) (30)
-- non deductible expenses................................ 11 25 17
-- tax free income........................................ (69) (55) (53)
-- change in valuation allowance.......................... 2 (13) 16
-- effect of foreign tax rate changes(2).................. 1 (31) --
-- capital losses......................................... (68) -- --
-- other.................................................. (15) (6) (2)
--- ----- ---
Total income tax expense.................................... 132 484 438
</TABLE>
- ---------------
(1) Uplift is a special deduction allowed against revenues from oil and gas
activities on the Norwegian continental shelf.
(2) Effect primarily of tax rates reduction in the U.K. and in Italy in 1997.
F-26
<PAGE> 91
PETROFINA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(15) INCOME TAXES -- (CONTINUED)
THE DEFERRED INCOME TAX ASSETS AND LIABILITIES ARE AS FOLLOWS:
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED
DECEMBER 31,
------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Deferred income tax assets:
-- tax loss carryforwards.............................. 210 205 234
-- deferred uplift(1).................................. 60 58 50
-- provisions and accrued liabilities.................. 102 52 94
-- investment deductions............................... 12 9 12
-- AMT credits(2)...................................... 174 118 90
-- other............................................... 24 13 9
Valuation allowance......................................... (159) (169) (214)
---- ---- ----
Net deferred income tax assets.............................. 423 286 275
Deferred income tax liabilities:
-- PP&E related(3)..................................... (777) (736) (630)
-- untaxed reserves.................................... (116) (125) (150)
---- ---- ----
Total deferred income tax liabilities....................... (893) (861) (780)
---- ---- ----
Net deferred income tax liability........................... (470) (575) (505)
</TABLE>
- ---------------
(1) uplift is a special deduction allowed against revenues from oil and gas
activities on the Norwegian continental shelf
(2) AMT credits relate to the alternative minimum tax system in the United
States and are credit carryforwards available to reduce future regular
income taxes
(3) primarily related to depreciation and depletion rate differences
AT THE END OF 1998, PETROFINA HAD TAX LOSS CARRYFORWARDS OF EUR 541 MILLION
PRIMARILY IN BELGIUM, FRANCE, GERMANY AND THE USA. CARRYFORWARD AMOUNTS (WHICH
ARE NOT RATE EFFECTED) EXPIRE AS FOLLOWS:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
-----------------------
<S> <C>
1999........................................................ --
2000........................................................ 5
2001........................................................ 2
2002........................................................ 3
2003........................................................ 1
After 2003.................................................. 85
Without expiration.......................................... 445
</TABLE>
F-27
<PAGE> 92
PETROFINA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(16) STATEMENT OF INCOME
a) PERSONNEL COSTS
<TABLE>
<CAPTION>
PROPORTIONAL
FULL CONSOLIDATION CONSOLIDATION TOTAL
------------------------ ------------------ ------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
------ ------ ------ ---- ---- ---- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Personnel employed (average) (number of employees)
Operational employees......... 4,467 4,466 3,923 428 443 438 4,895 4,909 4,361
Administrative employees...... 4,860 5,371 4,896 274 282 286 5,134 5,653 5,182
Management.................... 4,166 3,878 3,807 294 235 238 4,460 4,113 4,045
------ ------ ------ --- --- --- ------ ------ ------
13,493 13,715 12,626 996 960 962 14,489 14,675 13,588
2. Personnel costs (in EUR million)
Salaries & direct social
benefits.................... 551 544 472 44 43 41 595 587 513
Employee's social security
contributions............... 119 114 111 12 13 12 131 127 123
Other payroll costs........... 51 46 39 3 6 6 54 52 45
------ ------ ------ --- --- --- ------ ------ ------
721 704 622 59 62 59 780 766 681
</TABLE>
b) INTEREST EXPENSES
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Interest expense on interest-bearing debt................. (187) (156) (159)
Capitalized interest relating to assets under
construction........................................... 55 40 21
------ ------ ------
(132) (116) (138)
</TABLE>
c) OTHER FINANCIAL INCOME NET
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income relating to marketable securities, cash and financial
loans..................................................... 38 24 25
Other financial income...................................... 27 13 5
Financial transaction costs................................. (20) (25) (14)
Exchange rate gain (loss), net.............................. 8 (10) (3)
---- ---- ----
53 2 13
</TABLE>
(17) COMMITMENTS
PetroFina occupies certain marketing and production facilities and uses
certain equipment under leasing arrangements. Total rental expense incurred was
EUR 139 million, EUR 134 million and EUR 118 million for 1998, 1997 and 1996,
respectively. Future minimum rental commitments as at December 31, 1998, under
operating leases having non cancellable lease terms in excess of one year are
detailed in the following schedule. Sublease rentals, contingent rentals, and
capital lease obligations are not significant.
LEASE EXPENSE
<TABLE>
<S> <C>
1999................................................. 75
2000................................................. 63
2001................................................. 52
2002................................................. 40
2003................................................. 35
Thereafter........................................... 92
</TABLE>
F-28
<PAGE> 93
PETROFINA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(17) COMMITMENTS -- (CONTINUED)
The Group has contractual commitments to spend approximately EUR 60 million
related to construction in progress at various locations at December 31, 1998.
The Group provided various bank guarantees to both third parties and
non-consolidated companies for EUR 55 million at December 31, 1998. The fair
value is not readily determinable for these guarantees.
The Group receives and grants certain customs guarantees with third
parties. Guarantees granted and received amount to EUR 523 million and EUR 280
million, respectively, at December 31, 1998.
(18) CONTINGENCIES
In its normal course of business, the Group is involved in various legal,
fiscal and environmental proceedings. Management is of the opinion that the
result of these proceedings will not have a material impact on the Group's
financial position or results of operations.
The Group is subject to legislation regarding environmental laws and
regulations. This legislation regulates the discharge of materials into the
environment and may require the Group to incur future obligations to investigate
the effects of the release or disposal of certain petroleum, chemical and
mineral substances at various sites; to remediate or restore these sites; to
compensate others for damage to property and natural resources and for
remediation and restoration costs.
At December 31, 1998, 1997 and 1996, the Group's accrued environmental
liabilities include EUR 152 million, EUR 108 million and EUR 92 million
respectively, for dismantlement and removal costs primarily related to the
Group's interests in worldwide offshore production facilities. These costs are
accrued by the Group on the units-of-production method.
At December 31, 1998, 1997 and 1996, the Group's recorded accrued
liabilities for environmental remediation efforts were EUR 261 million, EUR 237
million and EUR 235 million, respectively. At December 31, 1998, 1997 and 1996,
accrued environmental costs include EUR 15 million, EUR 17 million and EUR 16
million, respectively, for remediation sites in the United States where the
Group has been named as a Potentially Responsible Party under United States
Superfund legislation.
The Group has determined these liabilities based on judgments made as to
the extent of and mechanisms for environmental remediation and the current
levels of costs for equipment and services. While there are certain assumptions
inherent in this process and changes to such assumptions could produce ranges in
the amount of expected remediation costs, it is PetroFina's belief that the
amounts accrued and disclosed represent the most probable amount. The likelihood
of material losses in excess of recorded amounts at known remediation sites is
remote.
(19) EMPLOYEE BENEFIT PLANS
Pension plans
The Group maintains a number of defined benefit pension plans covering most
categories of employees. Plan benefits are generally based on employees' years
of service and latest salaries earned. The plans are administered by independent
pension trusts, insurance companies or internally. Funded pension plan assets
are primarily invested in fixed income securities, real estate, and marketable
equity securities. Actuarial values are determined by independent experts. The
method used for the determination of the annual service cost and projected
benefits obligations is the projected unit credit method.
The aggregate benefit obligation for plans with benefit obligations in
excess of plan assets was EUR 110 million, EUR 97 million and EUR 91 million in
1998, 1997 and 1996, respectively. The fair value of assets for these plans is
zero for all years shown. In addition to providing pension benefits, certain
health care and life insurance benefits are provided to active and certain
retired employees who meet eligibility requirements
F-29
<PAGE> 94
PETROFINA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(19) EMPLOYEE BENEFIT PLANS -- (CONTINUED)
defined in plan documents. The health care benefits in excess of certain limits
and the life insurance benefits are insured.
<TABLE>
<CAPTION>
OTHER POST-RETIREMENT
PENSION BENEFITS BENEFITS
--------------------------------------------------------------- ------------------------------
BELGIAN PLANS NON BELGIAN
------------------------------ ------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit Obligation at the
Beginning of the Year......... 212.2 207.8 198.6 730.4 557.4 488.3 59.2 47.7 46.8
Service Cost................... 11.1 10.4 10.7 21.1 19.2 17.5 1.4 1.1 1.0
Interest Cost.................. 15.4 15.0 14.0 47.3 44.9 39.4 4.1 4.0 3.6
Participant's Contributions.... 2.9 2.7 2.9 2.4 2.6 2.3 0.9 0.9 0.8
Amendments..................... 8.2 0.9 -- (0.9) -- -- -- -- --
Actuarial (Gain)/Loss.......... 17.9 (13.6) (2.3) (11.9) 74.7 (0.2) (1.5) 1.9 (2.5)
Acquisitions................... -- -- -- 1.2 0.2 -- -- -- --
Divestitures................... -- -- -- (8.1) -- -- -- -- --
Currency Exchange.............. -- -- -- (30.9) 62.3 37.3 (3.8) 7.6 (4.9)
Benefit Payments............... (16.1) (11.0) (16.1) (30.8) (30.9) (27.2) (4.2) (4.0) 2.9
Benefit Obligation at the End
of the Year................... 251.6 212.2 207.8 719.8 730.4 557.4 56.1 59.2 47.7
CHANGE IN PLAN ASSETS:
Fair Value of Plan Assets at
Beginning of Year............. 231.1 217.7 204.8 829.3 641.4 529.1 -- -- --
Actual Return on Plan Assets... 31.6 18.1 21.1 47.9 122.8 76.3 -- -- --
Acquisitions................... -- -- -- 1.2 0.2 -- -- -- --
Divestitures................... -- -- -- (10.2) -- -- -- -- --
Employer Contributions......... 14.8 3.6 5.0 5.6 8.0 6.2 3.3 3.1 2.1
Participant's Contributions.... 2.9 2.7 2.9 2.4 2.6 2.3 0.9 0.9 0.8
Currency Exchange.............. -- -- -- (44.4) 85.2 54.7 -- -- --
Benefit Payments............... (16.1) (11.0) (16.1) (30.8) (30.9) (27.2) (4.2) (4.0) (2.9)
Fair Value of Plan Assets at
End of Year................... 264.3 231.1 217.7 801.0 829.3 641.4 -- -- --
FUNDED STATUS:
Funded Status at End of Year... 12.7 18.9 9.9 81.2 98.9 84.0 (56.1) (59.2) (47.7)
Unrecognized Net Actuarial
(Gain)/Loss................... (15.6) 1.0 (9.5) (13.8) (23.0) (36.4) 0.2 1.9 (0.9)
Unrecognized Transition
Amount........................ (3.1) (3.6) (4.1) (32.5) (42.5) (45.4) -- -- --
Unrecognized Prior Service
Cost.......................... 8.6 (21.4) -- 1.6 1.9 1.2 (0.1) (0.2) (0.2)
Net Amount Recognized.......... 2.6 (5.1) (3.7) 36.5 35.3 3.4 (56.0) (57.5) (48.8)
AMOUNTS RECOGNIZED IN STATEMENT
OF FINANCIAL POSITION:
Prepaid Benefit Cost........... 2.3 -- -- 136.7 126.6 89.5 -- -- --
Accrued Benefit Cost........... -- (5.1) (3.7) (113.7) (93.3) (86.4) (56.0) (57.5) (48.8)
Intangible Asset............... 0.3 -- -- 6.2 2.0 0.3 -- -- --
Accumulated Other Comprehensive
Income........................ -- -- -- 7.3 -- -- -- -- --
Net Amount Recognized.......... 2.6 (5.1) (3.7) 36.5 35.3 3.4 (56.0) (57.5) (48.8)
COMPONENTS OF NET PERIODIC
BENEFIT COST:
Service Cost................... 11.1 10.4 10.7 21.1 19.2 17.5 1.4 1.1 1.0
Interest Cost.................. 15.4 15.0 14.0 47.3 44.9 39.4 4.1 4.0 3.6
Expected Return of Plan
Assets........................ (18.0) (16.7) (14.4) (65.9) (62.1) (49.3) -- -- --
Amortization of Prior Service
Cost.......................... 0.6 -- -- 0.2 (0.6) 0.2 (0.1) --
Amortization of Transition
Amount........................ (0.5) (0.5) (0.5) (6.9) (7.0) (5.8) -- -- --
Curtailment (Gain)/Loss........ -- -- -- (0.5) -- -- -- -- --
Recognized Net Actuarial
(Gain)/Loss................... (1.6) (3.2) (2.9) 1.6 (3.7) (5.0) -- -- --
Net Periodic Benefit
(Gain)/Loss................... 7.0 5.0 6.9 (3.1) (9.3) (3.0) 5.4 5.1 4.6
WEIGHTED AVERAGE ASSUMPTIONS:
Discount Rate.................. 6.50% 7.00% 7.00% 6.22% 7.15% 7.71% 7.00% 7.25% 7.75%
Expected Return on Plan
Assets........................ 7.75% 8.25% 8.25% 9.02% 9.38% 9.43%
Rate of Compensation
Increase...................... 4.50% 5.00% 5.00% 3.77% 4.69% 4.63%
Inflation Rate................. 2.50% 2.50% 3.00% 2.19% 3.48% 3.58%
</TABLE>
The health care cost annual trend rate assumed for 1998, for pre-65 and
post-65 years of age, was 6.55% and 6.43%, respectively. For 1999, this rate was
assumed to be 6.27% and 6.07%, respectively, and gradually
F-30
<PAGE> 95
PETROFINA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(19) EMPLOYEE BENEFIT PLANS -- (CONTINUED)
decrease to 6 % and 5 %, respectively. The health care cost trend rate has a
significant effect on the amounts reported. Increasing the trend rate by one
percentage point in each year would increase the accumulated post-retirement
benefit obligation by EUR 4.7 million as of December 31, 1998 and net periodic
post-retirement benefit cost by EUR 0.4 million for 1998.
(20) OTHER PROVISIONS
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Provisions for site restoration............................. 261 237 235
Pensions and similar commitments............................ 220 202 185
Other....................................................... 177 194 201
--- --- ---
658 633 621
</TABLE>
(21) COMMON STOCK AND WARRANTS
PetroFina had issued and outstanding 23,459,774, 23,420,432 and 23,252,863
ordinary shares as at December 31, 1998, 1997 and 1996 respectively. The average
number of shares used to calculate basic earnings per share was 23,440,102,
23,350,612 and 23,252,764 for 1998, 1997 and 1996 respectively. For the year
1998 the average number of shares used to calculate diluted earnings per share
was 23,453,053.
In June 1997, the Company issued for its personnel a debenture loan with
warrants.
The loan of 9.3 million EUR is composed of 75,000 bonds worth 123.95 EUR
each, to which are attached 150,000 warrants. Each warrant grants the holder the
right to purchase one PetroFina share at 309.87 EUR per share on the following
dates: June 30th 1998, 1999 and 2000. The maturity date of the debenture loan is
set to be June 30, 2000, to the extent that warrants have not been exercised
before. The Board of Directors approved 150,000 additional shares for issuance
at its May 1997 meeting.
As allowed by Statement of Financial Accounting Standards 123, "Accounting
for Stock-Based Compensation," the Group does not recognize compensation expense
on the grant of warrants. If compensation expense had been determined based upon
the fair value of the warrants on the date of the grant, the Group's net income
and earnings per share on both a basic and diluted basis would have been reduced
by EUR 6 million, or EUR 0.24 per share in 1997. The weighted average fair value
of PetroFina warrants issued in 1997 was EUR 36.93. There were no warrants or
options issued to employees in 1998 or 1996. The fair value of each warrant was
estimated on the date of grant using a Black-Scholes pricing model for European-
type warrants with the following assumptions for 1997: risk free rate of 4.0%
(3-year Belgian Government bond yield), expected life of 3 years, volatility of
17% and a dividend yield of 2.8%.
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- --------------------- ---------------------
AVERAGE EXERCISE AVERAGE EXERCISE AVERAGE EXERCISE
SHARES PRICE (EUR) SHARES PRICE (EUR) SHARES PRICE (EUR)
------- ----------- ------- ----------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year 150,000 309.87 -- -- -- --
Granted -- -- 150,000 309.87 -- --
Exercised (39,340) 309.87 -- -- -- --
Expired/Cancelled -- -- -- -- -- --
------- ------ ------- ------ ---- ----
Outstanding at end of year 110,660 309.87 150,000 309.87 -- --
======= ====== ======= ====== ==== ====
Exercisable at end of year 110,660 309.87 150,000 309.87 -- --
======= ====== ======= ====== ==== ====
</TABLE>
PetroFina issued 4,451,060 warrants in conjunction with the merger of Fina,
Inc. during August 1998. Each warrant entitles the holder to purchase
nine-tenths (0.9) of one ordinary voting share of PetroFina for an exercise
price of US$ 42.25 per PetroFina ADS. The warrants are exercisable for a period
of five years from issuance.
F-31
<PAGE> 96
PETROFINA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(22) INVESTMENTS IN JOINT VENTURES
The Group consolidates certain jointly owned companies in accordance with
proportional consolidation principles, which under U.S. GAAP would be accounted
for under the equity method. The aggregate effect of applying the equity methods
of accounting would be a decrease in the Group's total assets of EUR 44 million
in 1998 and EUR 35 million in 1997 and an increase of EUR 47 million in 1996.
This difference in accounting has no effect on shareholders' equity or net
income. These jointly owned companies represent two industrial facilities, two
smaller plants, and one marketing company. All the above companies operate in
either the Group's Downstream or Chemical segments.
PetroFina's proportionate interests in the joint ventures, included in the
Group's consolidated financial statements, are as follows :
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
DECEMBER 31,
Current assets.............................................. 85 107 124
Noncurrent assets........................................... 450 463 457
Current liabilities......................................... (174) (190) (114)
Noncurrent liabilities...................................... (314) (307) (317)
FOR THE YEAR ENDED DECEMBER 31,
Operating revenues.......................................... 310 323 297
Operating income............................................ 23 20 21
Net gain(loss).............................................. 6 2 (2)
Cash flows provided by/used in :
-- Operating activities................................... 70 93 59
-- Financing activities................................... (42) (32) 3
-- Investing activities................................... (101) (90) (60)
</TABLE>
(23) RELATED PARTY TRANSACTIONS
The Group accounts for certain companies following the equity method of
accounting. The Group's investment in these companies is included in Financial
assets. The equity affiliates are primarily engaged in exploration, production,
refining, distribution and marketing of crude oil, petroleum products and paints
in the United Kingdom, France, Holland, the United States and Angola.
Accounts and Notes Receivable in the Consolidated Balance Sheet include EUR
42 million, EUR 7 million and EUR 5 million at December 31, 1998, 1997 and 1996,
respectively, of amounts due from equity affiliates. Accounts Payable include
EUR 46 million, EUR 27 million and EUR 63 million at December 31, 1998, 1997 and
1996, respectively, of amounts due to equity affiliates. Sales to related
parties were EUR 2 million for 1998, EUR 3 million for 1997 and EUR 14 million
for 1996. Sales prices are determined on arms-length principles.
(24) FINANCIAL RELATIONS WITH DIRECTORS AND MANAGERS
Salaries attributed to staff in charge of daily management (four executive
directors with permanent functions and eight general managers) as well as the
managers of the main subsidiaries amounted to EUR 6.0 million.
Bonuses allocated to directors and to the eight general managers amounted
to EUR 2.9 million.
(25) OIL AND GAS RESERVES PER GEOGRAPHIC AREA (UNAUDITED)
The following table presents the Company's estimate of its proved oil and
gas reserves, for each foreign geographic area in which significant reserves are
located. The proved reserve estimates have been prepared by the Company's
internal petroleum reservoir engineers. Proved reserves are the estimated
quantities of crude
F-32
<PAGE> 97
PETROFINA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(25) OIL AND GAS RESERVES PER GEOGRAPHIC AREA (UNAUDITED) -- (CONTINUED)
oil, natural gas and natural gas liquids which geological and engineering data
demonstrate to be reasonably certain of recovery in future years from known
reservoirs under existing economic and operating conditions. Estimates are
expected to change as future information becomes available.
CRUDE OIL (INCLUDING CONDENSATES AND NGL)
<TABLE>
<CAPTION>
EUROPE
AND REST OF NORTH EQUITY
THE WORLD AMERICA AFFILIATES TOTAL
----------- ------- ---------- ------
(in million barrels)
<S> <C> <C> <C> <C>
PROVED DEVELOPED AND UNDEVELOPED RESERVES
At December 31, 1995...................................... 514.82 34.66 26.08 575.56
Production of the year.................................. (45.28) (3.95) (0.89) (50.12)
Sales of minerals in place.............................. -- (0.74) -- (0.74)
Purchases of minerals in place.......................... 0.68 1.13 -- 1.81
Extensions and discoveries.............................. 0.54 43.30 -- 43.84
Revisions of previous estimates......................... 14.14 2.91 0.56 17.61
Improved recovery....................................... 0.08 0.08
------ ----- ----- ------
At December 31, 1996...................................... 484.98 77.31 25.75 588.04
------ ----- ----- ------
Production of the year.................................. (48.18) (3.96) (1.72) (53.86)
Sales of minerals in place.............................. -- (3.84) -- (3.84)
Purchases of minerals in place.......................... -- 0.50 -- 0.50
Extensions and discoveries.............................. 15.74 3.30 -- 19.04
Revisions of previous estimates......................... 3.22 (0.68) 0.32 2.86
Improved recovery(1).................................... 54.49 54.49
------ ----- ----- ------
At December 31, 1997...................................... 510.25 72.63 24.35 607.23
------ ----- ----- ------
Production of the year.................................. (45.11) (3.97) (1.98) (51.06)
Sales of minerals in place.............................. -- (0.99) -- (0.99)
Purchases of minerals in place.......................... 9.74 0.30 -- 10.04
Extensions and discoveries.............................. 73.37 2.40 -- 75.77
Revisions of previous estimates......................... 28.68 1.13 (0.52) 29.29
------ ----- ----- ------
At December 31, 1998...................................... 576.93 71.50 21.85 670.28
------ ----- ----- ------
PROVED DEVELOPED RESERVES
At December 31, 1996...................................... 342.59 21.42 25.75 389.76
At December 31, 1997...................................... 352.06 17.99 24.35 394.40
At December 31, 1998...................................... 375.39 18.95 21.85 416.19
</TABLE>
- ---------------
(1) In 1997, the amounts for improved recovery included 35 million barrels for
the water injection program for Eldfisk and 19.5 million barrels for the
redevelopment of Congolese fields.
F-33
<PAGE> 98
PETROFINA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(25) OIL AND GAS RESERVES PER GEOGRAPHIC AREA (UNAUDITED) -- (CONTINUED)
NATURAL GAS
<TABLE>
<CAPTION>
EUROPE
AND REST OF NORTH EQUITY
THE WORLD AMERICA AFFILIATES TOTAL
----------- ------- ---------- --------
(in billion of cubic feet)
<S> <C> <C> <C> <C>
PROVED DEVELOPED AND UNDEVELOPED RESERVES
At December 31, 1995.................................... 1,427.78 337.19 1,764.97
Production of the year................................ (151.91) (58.77) (210.68)
Sales of minerals in place............................ -- (5.20) (5.20)
Purchases of minerals in place........................ 12.18 4.77 16.95
Extensions and discoveries............................ 10.92 134.62 145.54
Revisions of previous estimates....................... 50.24 (19.84) 30.40
-------- ------ --------
At December 31, 1996.................................... 1,349.21 392.77 1,741.98
-------- ------ --------
Production of the year................................ (132.30) (76.58) (208.88)
Sales of minerals in place............................ -- (3.71) (3.71)
Purchases of minerals in place........................ -- 0.20 0.20
Extensions and discoveries............................ 6.42 88.47 94.89
Revisions of previous estimates....................... (77.90) (0.82) (78.72)
Improved recovery(1).................................. 42.56 -- 42.56
-------- ------ --------
At December 31, 1997.................................... 1,187.99 400.33 1,588.32
-------- ------ --------
Production of the year................................ (113.89) (73.47) (187.36)
Sales of minerals in place............................ -- (35.71) (35.71)
Purchases of minerals in place........................ 2.61 1.06 3.67
Extensions and discoveries............................ 14.53 114.22 128.75
Revisions of previous estimates....................... (160.92) (0.80) (161.72)
-------- ------ --------
At December 31, 1998.................................... 930.32 405.63 1,335.95
-------- ------ --------
PROVED DEVELOPED RESERVES
At December 31, 1996.................................... 801.24 249.61 1,050.85
At December 31, 1997.................................... 916.27 260.09 1,176.36
At December 31, 1998.................................... 710.50 232.20 942.70
</TABLE>
- ---------------
(1) In 1997, the amounts for improved recovery included 42.4 billion cubic feet
for the water injection program for Eldfisk.
F-34
<PAGE> 99
PETROFINA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RESULTS OF OPERATIONS FOR PRODUCING ACTIVITIES
The following table presents the results of operations for oil and gas
producing activities for the three years ended December 31,
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ------------------------ ------------------------
NORTH NORTH NORTH
EUROPE AMERICA TOTAL EUROPE AMERICA TOTAL EUROPE AMERICA TOTAL
------ ------- ----- ------ ------- ----- ------ ------- -----
(in EUR million)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Sales and other operating revenues.... 346 83 429 403 88 491 377 58 435
Transfers............................. 471 116 587 737 150 887 643 108 751
Operating Costs......................... 298 63 361 324 56 380 292 41 333
Exploration Expenses.................... 52 15 67 55 53 108 44 31 75
Depreciation, Depletion and
Amortization.......................... 242 76 318 205 86 291 164 57 221
--- --- --- --- --- --- --- --- ---
Income Before Taxes..................... 225 45 270 556 43 599 521 36 557
Income Tax Expenses..................... 157 21 178 396 14 410 388 11 399
--- --- --- --- --- --- --- --- ---
Results of Operations from Producing
Activities (Excluding Interest
Costs).............................. 68 24 92 161 29 190 133 25 158
=== === === === === === === === ===
Group's Share of Equity Method
Investees' Results of Operations for
Producing Activities.................. 15 1 16 17 2 19 22 -- 22
=== === === === === === === === ===
</TABLE>
F-35
<PAGE> 100
PETROFINA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COSTS INCURRED ON OIL & GAS PROPERTIES
A summary of costs incurred in oil and gas property acquisition,
exploration and development activities, (both capitalized and charged to
expense) for the periods noted follows:
<TABLE>
<CAPTION>
EUROPE AND NORTH
REST OF THE WORLD AMERICA TOTAL
----------------- ------- -----
(in EUR million)
<S> <C> <C> <C>
1998
Acquisition of unproved properties.......................... -- 10 10
Acquisition of proved properties............................ 9 1 10
Exploration costs........................................... 75 32 107
Development costs........................................... 292 134 426
--- --- ---
TOTAL............................................. 376 177 553
--- --- ---
1997
Acquisition of unproved properties.......................... 2 12 14
Exploration costs........................................... 70 36 106
Development costs........................................... 315 153 468
--- --- ---
TOTAL............................................. 387 201 588
--- --- ---
1996
Acquisition of unproved properties.......................... -- 6 6
Acquisition of proved properties............................ -- 3 3
Exploration costs........................................... 52 29 81
Development costs........................................... 281 91 372
--- --- ---
TOTAL............................................. 333 129 462
--- --- ---
</TABLE>
The Group's share of equity affiliates' costs incurred for property
acquisition, exploration and development was EUR 4 million in 1998, EUR 1
million in 1997 and EUR 3 million in 1996.
SUPPLEMENTAL OIL & GAS DATA -- CAPITALIZED COSTS
<TABLE>
<CAPTION>
1998 1997 1996
------------------------- ------------------------- -------------------------
NORTH NORTH NORTH
EUROPE AMERICA TOTAL EUROPE AMERICA TOTAL EUROPE AMERICA TOTAL
------ ------- ------ ------ ------- ------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Proved Oil and Gas Properties.... 3,495 1,083 4,578 3,135 1,040 4,175 2,846 816 3,662
Unproved Oil and Gas
Properties..................... 294 112 406 307 137 444 276 140 416
Support facilities and other..... 177 152 329 557 200 757 349 128 477
------ ----- ------ ------ ----- ------ ------ ----- ------
3,966 1,347 5,313 3,999 1,377 5,376 3,471 1,084 4,555
------ ----- ------ ------ ----- ------ ------ ----- ------
Less Accumulated Depreciation
Depletion, Amortization and
Impairment..................... (2,526) (739) (3,265) (2,510) (771) (3,281) (2,178) (621) (2,799)
------ ----- ------ ------ ----- ------ ------ ----- ------
1,440 608 2,048 1,489 606 2,095 1,293 463 1,756
------ ----- ------ ------ ----- ------ ------ ----- ------
Share of Net Capitalized Costs of
Equity Affiliates.............. 20 27 21
</TABLE>
F-36
<PAGE> 101
PETROFINA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND CHANGES
THEREIN RELATING TO PROVED OIL AND GAS RESERVES (UNAUDITED)
The following table, which presents a standardized measure of discounted
future net cash flows and changes therein relating to proved oil and gas
reserves, is presented pursuant to United States Statement of Financial
Accounting Standards No. 69. In computing this data, assumptions other than
those required by the Financial Accounting Standards Board could produce
different results. Accordingly, the data should not be considered as
representative of the fair market value of the Company's proved oil and gas
reserves.
Future cash inflows were computed by applying year end realized prices for
oil and gas production to estimated year end quantities of proved reserves.
Future price changes were considered only to the extent provided by contractual
agreements in existence at the date of computation.
Future development and production costs are computed by estimating the
expenditures to be incurred in developing and producing the proved oil and gas
reserves, at the end of the year, based on year end costs. Future income tax
expenses were computed by applying the year end statutory tax rate adjusted for
tax credits, less the tax basis of the properties involved. The impact of
changes in the year end taxes on future pre-tax net cash flows relating to
proved oil and gas reserves is considered to the extent that these changes are
legislated. The standardized measure of discounted future cash flows represents
the present value of estimated future net cash flows using a discount rate of
10%.
<TABLE>
<CAPTION>
1998 1997 1996
------------------------- ------------------------- -------------------------
NORTH NORTH NORTH
EUROPE AMERICA TOTAL EUROPE AMERICA TOTAL EUROPE AMERICA TOTAL
------ ------- ------ ------ ------- ------ ------ ------- ------
(in EUR million)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Future cash inflows.............. 7,211 1,247 8,458 10,376 1,666 12,042 12,017 2,344 14,361
Future production and development
costs.......................... (4,189) (525) (4,714) (4,661) (707) (5,368) (4,515) (694) (5,209)
Future income tax expenses....... (1,657) (130) (1,787) (3,423) (204) (3,627) (5,110) (457) (5,567)
FUTURE NET CASH FLOWS............ 1,365 592 1,957 2,292 755 3,047 2,392 1,193 3,585
------ ----- ------ ------ ----- ------ ------ ----- ------
10% annual discount for estimated
timing of cash flows........... (457) (243) (700) (833) (289) (1,122) (885) (505) (1,390)
------ ----- ------ ------ ----- ------ ------ ----- ------
Standardized measure of
discounted future net cash
flows.......................... 908 349 1,257 1,459 466 1,925 1,507 688 2,195
------ ----- ------ ------ ----- ------ ------ ----- ------
Enterprise's share of equity
method investee's standardized
measure of discounted future
net cash flows................. 17 -- 17 36 -- 36 48 -- 48
</TABLE>
F-37
<PAGE> 102
PETROFINA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CHANGE IN THE STANDARDIZED MEASURE
STANDARDIZED MEASURE
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(in EUR million)
<S> <C> <C> <C>
STANDARDIZED MEASURE (beginning of year).................... 1,925 2,195 1,340
Change in sales prices related to future production......... (1,527) (1,500) 1,320
Change in estimated future lifting and development costs.... 12 (262) (61)
Sales and transfers of oil and gas produced during the
period, net of production costs........................... (664) (1,019) (886)
Extensions, discoveries and improved recovery, less related
costs..................................................... 330 437 441
Revisions in previously estimated quantities................ (304) (286) 355
Previously estimated development costs incurred during the
period.................................................... 435 398 368
Sales of minerals in place.................................. (31) (24) (23)
Purchases of minerals in place.............................. 10 3 53
Accretion of discount....................................... 377 557 310
Net change in income taxes(*)............................... 813 1,241 (1,179)
Exchange effect............................................. (119) 185 157
------ ------ ------
STANDARDIZED MEASURE (END OF YEAR).......................... 1,257 1,925 2,195
</TABLE>
- ---------------
(*) A significant portion of the Group's production is located on the Norwegian
continental shelf. These activities carry a higher tax burden due to
specific petroleum tax legislation enacted in Norway.
F-38
<PAGE> 103
SCHEDULE II
PETROFINA
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
BALANCE AT
BEGINNING CHARGED TO COSTS BALANCE AT END
OF PERIOD AND EXPENSES DEDUCTIONS(1) OF PERIOD
---------- ---------------- ------------- --------------
(in EUR million)
<S> <C> <C> <C> <C>
December 31, 1996
-- allowance for doubtful receivables.... 62 11 (3) 70
-- inventory valuation reserve........... 21 (8) -- 13
December 31, 1997
-- allowance for doubtful receivables.... 70 5 (6) 69
-- inventory valuation reserve........... 13 9 (9) 13
December 31, 1998
-- allowance for doubtful receivables.... 69 7 (6) 70
-- inventory valuation reserve........... 13 208 -- 221
</TABLE>
- ---------------
(1) Utilization and monetary adjustments
F-39
<PAGE> 104
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS
--------
<S> <C> <C>
Exhibit 23.1 Consent of Deloitte & Touche
Consent of Klynveld Peat Marwick Goerdeler Reviseurs
Exhibit 23.2 d'Enterprises
Consent of Klynveld Peat Marwick Goerdeler Reviseurs d'
Exhibit 23.3 Enterprises
Exhibit 23.4 Consent of KPMG Accountants, NV
Exhibit 23.5 Consent of KPMG LLP
Exhibit 23.6 Consent of KPMG Peat Marwick
Exhibit 23.7 Consent of KPMG Audit Plc
Exhibit 23.8 Consent of KPMG
</TABLE>
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
PetroFina S.A.
We consent to the incorporation by reference in this Registration Statement of
PetroFina S.A. on Form S-8 (File No. 333-61145) of our report dated March 23,
1999, appearing in the Annual Report on Form 20-F of PetroFina S.A. for the year
ended December 31, 1998.
/s/ MICHEL DENAYER
Michel Denayer
Statutory Auditor
DELOITTE & TOUCHE
Reviseurs d'Entreprises s.c.c.
Brussels, Belgium
April 28, 1999
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors of Fina Europe NV
We consent to the incorporation by reference in this Registration Statement of
PetroFina SA on Form S-8 (File No. 333-61145) of our report dated March 22,
1999, appearing in the Annual Report on Form F-20 of PetroFina SA for the year
ended December 31, 1998, relating to the balance sheets of Fina Europe NV as of
December 31, 1998, 1997 and 1996 and the related statements of income for each
of the years in the three year period ended December 31, 1998.
April 27, 1999
Antwerp, Belguim
Klynveld Peat Marwick Goerdeler Reviseurs d'Enterprises
Represented by
/s/ L. RUYSEN
L. Ruysen
<PAGE> 1
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors of Fina Raffinaderij Antwerpen NV
We consent to the incorporation by reference in this Registration Statement of
PetroFina SA on Form S-8 (File No. 333-61145) of our report dated March 22,
1999, appearing in the Annual Report on Form F-20 of PetroFina SA for the year
ended December 31, 1998, relating to the balance sheets of Fina Raffinaderij
Antwerpen NV as of December 31, 1998, 1997 and 1996 and the related statements
of income for each of the years in the three year period ended December 31,
1998.
April 27, 1999
Antwerp, Belguim
Klynveld Peat Marwick Goerdeler Reviseurs d'Enterprises
Represented by
/s/ L. RUYSEN
L. Ruysen
<PAGE> 1
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors of Sigma Coatings B.V.:
We consent to the incorporation by reference in this Registration Statement of
PetroFina S.A. on Form S-8 (File No. 333-61145) of our report dated March 22,
1999, appearing in the Annual Report on Form 20-F of PetroFina S.A. for the year
ended December 31, 1998, relating to the balance sheets of Sigma Coatings B.V.
as of December 31, 1998, 1997 and 1996 and the related statements of income for
each of the years in the three year period ended December 31, 1998.
/s/ KPMG Accountants NV
KPMG Accountants NV
The Hague, the Netherlands
April 27, 1999
<PAGE> 1
EXHIBIT 23.5
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
PetroFina S.A.:
We consent to the incorporation by reference in the Registration Statement of
PetroFina S.A. on Form S-8 (File No. 333-61145) of our report dated January 26,
1998, relating to the consolidated balance sheet of Petrofina Delaware,
Incorporated as of December 31, 1997 and 1996 and the related consolidated
statements of earnings, stockholder's equity and cash flows for the years then
ended, which report appears in the December 31, 1998 Annual Report on Form 20-F
of PetroFina S.A.
/s/ KPMG LLP
April 27, 1999
Dallas, Texas
<PAGE> 1
EXHIBIT 23.6
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors of Brittany Insurance Company Ltd.:
We consent to the incorporation by reference in this Registration Statement of
PetroFina S.A. on Form S-8 (File No. 333-61145) of our report dated March 22,
1999, appearing in the Annual Report on Form 20-F of PetroFina S.A. for the year
ended December 31, 1998, relating to the balance sheets of Brittany Insurance
Company Ltd. as of December 31, 1998, 1997 and 1996 and the related statements
of income and cash flows for each of the years in the three year period ended
December 31, 1998.
/s/ KPMG PEAT MARWICK
Chartered Accountants
Hamilton, Bermuda
April 27, 1999
<PAGE> 1
EXHIBIT 23.7
INDEPENDENT AUDITORS' CONSENT
To the Directors of Fina Plc:
We consent to the incorporation by reference in this Registration Statement of
PetroFina S.A. on Form S-8 (File No. 333-61145) of our report dated April 14,
1997, appearing in the Annual Report on Form 20-F of PetroFina S.A. for the year
ended December 31, 1998, relating to the balance sheet of Fina Plc as of
December 31, 1996 and the related statements of profit and loss and cash flows
for the year then ended.
/s/ KPMG Audit Plc
KPMG Audit Plc
Chartered Accountants
Registered Auditor
London, England
April 27, 1999
<PAGE> 1
EXHIBIT 23.8
INDEPENDENT AUDITORS' CONSENT
To the Directors of Fina Exploration Norway SCA:
We consent to the incorporation by reference in this Registration Statement of
PetroFina S.A. on Form S-8 (File No. 333-61145) of our report dated January 27,
1997, appearing in the Annual Report on Form 20-F of PetroFina S.A. for the year
ended December 31, 1998, relating to the balance sheet of The Branch of Fina
Exploration Norway SCA as of December 31, 1996 and the related statements of
profit and loss and cash flows for the year then ended.
KPMG as represented by
/s/ Jorgen Lorentzen-Styr
Jorgen Lorentzen-Styr
Sandvika, Norway
April 27, 1999
