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Filed Pursuant to Rule 424(b)(4)
Registration Nos. 333-60119; 333-65969
PROSPECTUS
[CONOCO LOGO]
191,456,427 Shares
Conoco Inc.
CLASS A COMMON STOCK
------------------------
Of the 191,456,427 shares of the Class A Common Stock of Conoco Inc. (the
"Company" or "Conoco") being offered, 172,310,784 shares are being offered
initially in the United States and Canada by the U.S. Underwriters (the "U.S.
Offering") and 19,145,643 shares are being offered initially outside the United
States and Canada by the International Underwriters (the "International
Offering" and, together with the U.S. Offering, the "Offerings"). Each share of
Class A Common Stock will have attached one Preferred Share Purchase Right (a
"Right") which will initially trade together with the share. All of the shares
of Class A Common Stock offered hereby are being sold by the Company. The price
to public and the underwriting discount per share will be identical for both
Offerings. Prior to these Offerings, there has been no public market for the
Class A Common Stock. See "Underwriters" for a discussion of the factors
considered in determining the initial public offering price.
The Company has two classes of authorized common stock consisting of Class A
Common Stock offered hereby and Class B Common Stock (collectively, the "Common
Stock"). See "Description of Capital Stock." Holders of Class A Common Stock are
entitled to one vote per share and holders of Class B Common Stock are entitled
to five votes per share on each matter submitted to a vote of stockholders.
Prior to the Offerings, E. I. du Pont de Nemours and Company ("DuPont")
indirectly owned 100 percent of the outstanding shares of the Company's Common
Stock, and immediately after completion of the Offerings, DuPont, through its
ownership of 100 percent of the outstanding Class B Common Stock, will
indirectly own 69.5 percent of the Company's Common Stock representing 91.9
percent of the combined voting power of all classes of voting stock of the
Company. Accordingly, DuPont will continue to control the Company. DuPont has
advised the Company that DuPont intends to offer its remaining Conoco shares in
a tax-free split-off expected to be completed within 12 months of the date
hereof. See "Prospectus Summary -- Separation From DuPont," "Arrangements
Between the Company and DuPont" and "Principal Stockholder."
------------------------
The Class A Common Stock has been approved for listing on the New York Stock
Exchange ("NYSE") under the trading symbol "COC," subject to official notice of
issuance.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 16 FOR INFORMATION CONCERNING CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PRICE $23 A SHARE
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<TABLE>
<S> <C> <C> <C>
UNDERWRITING
PRICE TO DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
----------------- -------------------- -----------------
Per Share................................................... $23.0000 $.9177 $22.0823
Total....................................................... $4,403,497,821 $175,699,563 $4,227,798,258
</TABLE>
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriters."
(2) Does not reflect expenses of the Offerings (estimated to be $20 million)
as these expenses will be paid by DuPont. See "Arrangements Between the
Company and DuPont -- Restructuring, Transfer and Separation Agreement."
------------------------
The Class A Common Stock is offered, subject to prior sale, when, as, and if
accepted by the Underwriters named herein and, subject to approval of certain
legal matters by Cravath, Swaine & Moore, counsel for the Underwriters, and to
certain other conditions. It is expected that delivery of the Class A Common
Stock will be made on or about October 27, 1998 at the offices of Morgan Stanley
& Co. Incorporated, New York, New York, against payment therefor in immediately
available funds.
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MORGAN STANLEY DEAN WITTER
CREDIT SUISSE FIRST BOSTON
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
J.P. MORGAN & CO. SALOMON SMITH BARNEY
BT ALEX. BROWN SCHRODER & CO. INC.
October 21, 1998
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NO DEALER, SALESPERSON OR ANY OTHER PERSON IS AUTHORIZED IN CONNECTION WITH
ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION
NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE CLASS A COMMON STOCK
AND THE RIGHTS OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY TO ANY PERSON IN
ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREBY WILL UNDER ANY
CIRCUMSTANCES IMPLY THAT THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT
AS OF ANY DATE SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------------------
UNTIL NOVEMBER 15, 1998 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERINGS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
In addition to the Offerings, this Prospectus also relates to the offering
to Conoco employees of options to purchase Class A Common Stock and stock
appreciation rights with respect to Class A Common Stock upon surrender by such
employees of their options to purchase common stock of DuPont and of stock
appreciation rights with respect to DuPont common stock. See
"Management -- Treatment of Outstanding Stock Options and Stock Appreciation
Rights."
------------------------
For investors outside the United States: No action has been or will be
taken in any jurisdiction by the Company or by any Underwriter that would permit
a public offering of the Class A Common Stock or possession or distribution of
this Prospectus in any jurisdiction where action for that purpose is required,
other than in the United States. Persons into whose possession this Prospectus
comes are required by the Company and the Underwriters to inform themselves
about and to observe any restrictions as to the offering of the Class A Common
Stock and the distribution of this Prospectus.
References to "dollars" and "$" in this Prospectus are to United States
dollars.
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary.................... 5
Risk Factors.......................... 16
Use of Proceeds....................... 21
Dividend Policy....................... 22
Capitalization........................ 23
Selected Historical and Pro Forma
Financial Information............... 24
Pro Forma Combined Financial
Statements.......................... 27
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 37
Business.............................. 57
Management............................ 86
Arrangements between the Company and
DuPont.............................. 108
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Principal Stockholder................. 114
Description of Capital Stock.......... 115
Shares Eligible for Future Sale....... 124
Material United States Federal Tax
Considerations for Non-U.S. Holders
of Class A Common Stock............. 125
Underwriters.......................... 127
Legal Matters......................... 132
Experts............................... 132
Available Information................. 133
Index to Combined Financial
Statements.......................... F-1
Annex A -- Report of DeGolyer and
MacNaughton......................... A-1
</TABLE>
3
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CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON
STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT THE CLASS A COMMON STOCK IN
CONNECTION WITH THE OFFERINGS, AND MAY BID FOR AND PURCHASE THE SHARES OF CLASS
A COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITERS."
DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION
This Prospectus contains forward-looking statements relating to the
Company's operations that are based on management's current expectations,
estimates and projections about the Company and the petroleum industry. Words
such as "expects," "intends," "plans," "projects," "believes," "estimates" and
similar expressions are used to identify such forward-looking statements. These
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions that are difficult to predict. Further, certain
forward-looking statements are based upon assumptions as to future events that
may not prove to be accurate. Therefore, actual outcomes and results may differ
materially from what is expressed or forecast in such forward-looking
statements.
Factors that could cause actual results to differ materially include, but
are not limited to, crude oil and natural gas prices; refining and marketing
margins; potential failure to achieve expected production from existing and
future oil and gas development projects; lack of exploration success; potential
disruption or interruption of the Company's production facilities due to
accidents or political events; international monetary conditions and exchange
controls; potential liability for remedial actions under existing or future
environmental regulations; and potential liability resulting from pending or
future litigation. In addition, such statements could be affected by general
domestic and international economic and political conditions. See "Risk
Factors."
ORGANIZATION OF THE COMPANY
Since 1981, business operations of the Company have been conducted by
various entities owned directly or indirectly by DuPont. Prior to the Offerings,
these operations will have been substantially reorganized and, as of the
Offerings, certain entities and, in some cases, assets, liabilities, and related
operations will be transferred between the Company and DuPont. See "Arrangements
Between the Company and DuPont." Unless the context otherwise indicates,
references in this Prospectus to "Conoco" or the "Company" are references to
Conoco Inc. (formerly Conoco Energy Company), its wholly owned and majority
owned subsidiaries (collectively, the "Combined Subsidiaries"), and its
ownership interest in equity affiliates (corporate entities, partnerships,
limited liability companies and other ventures in which Conoco exerts
significant influence by virtue of its ownership interest, typically between 20
and 50 percent). Unless the context otherwise indicates, references in this
Prospectus to "DuPont" are references to E. I. du Pont de Nemours and Company
and its consolidated subsidiaries. Financial information included herein is
presented in accordance with Generally Accepted Accounting Principles and
accounts for the Company's interests in equity affiliates using the equity
method of accounting. References in this Prospectus to "Common Stock" are to the
Class A Common Stock and Class B Common Stock of the Company. See "Description
of Capital Stock."
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information and financial statements and
related notes appearing elsewhere in this Prospectus. Unless otherwise
indicated, the information contained in this Prospectus gives effect to the
transactions described below under "-- Separation from DuPont."
THE COMPANY
Conoco is a major, integrated, international energy company operating in 40
countries worldwide. The Company was founded in 1875 and acquired by DuPont in
1981 and is involved in both the "Upstream" and "Downstream" segments of the
petroleum business. Upstream activities include exploring for, and developing,
producing and selling crude oil, natural gas and natural gas liquids. Downstream
activities include refining crude oil and other feedstocks into petroleum
products, buying and selling crude oil and refined products and transporting,
distributing and marketing petroleum products. As of December 31, 1997, Conoco
had proved worldwide reserves of 2.6 billion barrels of oil equivalent ("BOE"),
38 percent of which were natural gas. Conoco owns or has equity interests in
nine refineries worldwide, with a total crude oil and condensate processing
capacity of approximately 799,000 barrels per day (including the new Melaka
refinery in Malaysia, which Conoco expects will be completed in the fourth
quarter of 1998). The Company also has a marketing network of approximately
7,900 outlets in the United States, Europe and Asia. Based on public filings,
for the year ended December 31, 1997, Conoco ranked eighth in the worldwide
production of petroleum liquids by U.S.-based companies, eleventh in the
production of natural gas and eighth in refining throughput. Over that same
period, Conoco reported net income of $1,097 million on total revenues of $26.3
billion.
UPSTREAM
Conoco has ownership interests in producing properties in the United
States, Canada, the United Kingdom, Norway, Venezuela, Indonesia, the United
Arab Emirates, Russia and Nigeria. For the year ended December 31, 1997, North
America and Western Europe represented 29 percent and 36 percent, respectively,
of total reserves and 45 percent and 38 percent, respectively, of total
production. Conoco's interest in proved reserves from the Petrozuata joint
venture in Venezuela represented 26 percent of the Company's total reserves as
of December 31, 1997.
In 1997, the Company's production averaged 654,000 BOE per day, consisting
of 453,000 barrels of petroleum liquids (including natural gas liquids from gas
plant ownership) and 1.2 billion cubic feet of natural gas per day. Based on
1997 annual production of 209 million BOE (excluding natural gas liquids from
gas plant ownership), the Company had a reserve life of 12.4 years as of
December 31, 1997. Over the last five years, Conoco has replaced an average of
190 percent of the crude oil and natural gas it has produced each year. In
addition, Conoco has concentrated on improving its Upstream portfolio by
lowering costs, consolidating operations, rationalizing assets and refocusing
its exploration efforts. Over the past five years, Conoco has sold hundreds of
small, marginal interests, reducing the number of fields in which it owns an
interest from approximately 700 in 1990 to 136 as of June 30, 1998, while
maintaining production essentially constant on a BOE basis. At the same time,
Conoco has increased its profitability on a BOE basis.
As Conoco has reduced its marginal interests, it has increased its share of
larger, longer-lived and more profitable projects. The Company believes these
projects will contribute to 1999 production and significantly increase Conoco's
production rates over current levels in future years. In North America, these
projects include development of the Lobo trend in South Texas and the Ursa field
in the Gulf of Mexico. In 1997, the Company substantially increased its holdings
in the Lobo trend in South Texas through the acquisition of approximately $0.9
billion of natural gas properties and transportation assets (the "Lobo
Acquisition"). Since June 30, 1997, gross natural gas production from Conoco's
Lobo trend assets has increased from approximately 450 million cubic feet per
day to approximately 700 million cubic feet per day at June 30, 1998. The
Company expects to spend $1 billion between 1997 and 2002 to develop its leases
in the Lobo trend. Conoco also has a 16 percent interest in the Shell-operated
Ursa field ("Ursa"), one of the largest discoveries to date
5
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in the deepwater Gulf of Mexico. The Company expects first production from Ursa
in mid-1999 and that peak gross production from Ursa will be 150,000 barrels of
petroleum liquids and 400 million cubic feet of natural gas per day. Conoco also
has significant producing properties in the San Juan Basin in New Mexico, the
Permian Basin in West Texas, the foothills east of the Canadian Rocky Mountains
and the Central Appalachian Basin in Virginia. The Company also ranks as the
fourth largest natural gas liquids ("NGLs") producer in the United States with
ownership interests in 25 plants located in Colorado, Louisiana, New Mexico,
Oklahoma and Texas.
Conoco has a significant portfolio of producing properties, discoveries and
near-term development projects in the United Kingdom and Norway. Conoco has a 42
percent ownership interest in the Britannia field ("Britannia"), one of the
largest natural gas fields in the United Kingdom sector of the North Sea, which
Conoco operates jointly with Chevron. First production from Britannia occurred
in August 1998 and the Company estimates that the field will have a production
life of 30 years. The Company believes that Britannia has the potential to
produce between 650 and 740 million cubic feet of natural gas per day (gross).
Conoco also has an 18.125 percent interest in the Heidrun field in Norway, where
production began in 1995 and is currently averaging 205,000 barrels of petroleum
liquids per day (gross). Conoco was the operator for the construction and
installation of the Heidrun tension leg platform. In addition to Conoco's
interests in Britannia and Heidrun, Conoco also has interests in a number of
other offshore fields including the Miller, Statfjord, Alba, MacCulloch, Banff,
Viking, Vulcan and Murdoch fields and the Clair discovery in the United Kingdom
and the Statfjord and Troll fields in Norway. Clair, which is operated by
British Petroleum, is one of the largest undeveloped oil discoveries in Western
Europe. Conoco operates the MacCulloch and Banff fields, both of which will
employ innovative floating production, storage and offtake ("FPSO") technology.
Conoco is also the sixth largest oil producer in Norway.
In Venezuela, Conoco holds a 50.1 percent non-controlling equity interest
in Petrozuata C.A. ("Petrozuata"), a joint venture with PDVSA Petroleo y Gas
S.A., a subsidiary of Petroleos de Venezuela ("PDVSA"), the national oil company
of the Republic of Venezuela. Petrozuata, the first venture of its kind in
Venezuela, will upgrade extra heavy crude oil into a lighter, partially
processed refinery feedstock similar to crude oil ("Synthetic Crude") and
by-products using the Company's proprietary delayed coking technology. The
Petrozuata joint venture agreement has a 35-year term and Conoco's equity
interest in proved reserves from Petrozuata is 680 million barrels of oil,
representing 26 percent of the Company's total reserves at December 31, 1997.
Petrozuata began producing extra heavy crude oil in August 1998, and the Company
expects Petrozuata to have production of 120,000 barrels per day (gross) by the
time the project's upgrading facility becomes operational.
Conoco is also working to expand its existing operations in the Asia
Pacific and Russia/Caspian Sea regions into additional major business areas. In
Asia Pacific, Conoco is the operator under a production sharing contract
relating to Block B of the Indonesian sector of the Natuna Sea, which the
Company believes may contain in excess of one trillion cubic feet of natural gas
(Conoco's interest in the Block B production sharing contract is 40 percent).
The Company is one of several companies party to an agreement with Pertamina,
the Indonesian state oil company, pursuant to which Conoco and other companies
in the region intend to jointly market natural gas from Natuna to companies in
Singapore, assuming satisfaction of certain conditions. In Russia, Conoco has
signed a memorandum of understanding with OAO Lukoil ("Lukoil"), the Russian
Federation's largest oil company, to jointly study the development of petroleum
reserves in the 1.2 million acre block known as the Northern Territories in the
Timan-Pechora region in Northern Russia, which includes the large undeveloped
Yuzhno Khilchuyu oilfield. Such a development would complement the Company's
producing Polar Lights joint venture, the first joint venture between Russia and
a Western oil company to develop a major new oil field.
Since 1996, Conoco has pursued and continues to implement an exploration
strategy focused on acquiring large acreage positions in areas that are
relatively under-explored. The purpose of these acreage acquisitions has been to
establish Conoco at an early stage in areas that have the potential for large
discoveries. Conoco has acquired significant acreage in the deepwater Gulf of
Mexico, the Atlantic Margin of the North Sea, the La Luna trend in Northern
South America and the Caribbean, and selected basins in the Asia Pacific region.
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Conoco has applied 3D seismic and other technologies to evaluate its acreage,
and has recently begun drilling programs to test the potential of this acreage.
Conoco is the seventh largest leaseholder in the deepwater Gulf of Mexico, with
interests in 271 leases in over 1,000 feet of water. Conoco has a 100 percent
interest in 130 of these leases and jointly owns 76 of the remaining leases on a
50/50 basis with Shell. In late 1998, Conoco intends to commence a five-year,
$400 million deepwater drilling program in the Gulf of Mexico with one of two
highly sophisticated drillships being constructed for joint ventures between
Conoco and R&B Falcon Corporation.
For the year ended December 31, 1997, Upstream reported earnings of $884
million on sales and other operating revenues of $5.3 billion. Capital
investments, including the Lobo Acquisition, were $2.5 billion in 1997 and are
expected to be $1.8 billion in 1998, with the largest expenditures being made in
the continued development of the Lobo trend, Britannia, Petrozuata and Ursa.
DOWNSTREAM
The Company's Downstream activities are predominately located in North
America and Europe, with additional operations being developed in the Asia
Pacific region. The Company operates four wholly owned refineries in the United
States and one in the United Kingdom. It also has equity interests in one
refinery in Germany, two refineries in the Czech Republic and the Melaka
refinery, which is nearing completion in Malaysia. Total refined product sales
were approximately one million barrels per day in 1997. Marketing activities
include selling gasoline, diesel fuels and motor oils under the "Conoco", "Jet",
"Seca" and other brand names through approximately 4,900 outlets in the United
States, 2,900 outlets in Europe and 100 outlets in Asia. Approximately 23
percent of these outlets are Company-owned.
Conoco has significantly improved its competitive position by increasing
asset utilization and reducing overhead and operating costs. The Company
instituted major efficiency enhancing projects at its principal refineries in
both the U.S. and Europe. The Company's Humber refinery in the United Kingdom
and the Company's joint venture OMW refinery in Germany (in which the Company
owned a 25 percent interest) were ranked in the top quartile of Western European
refineries in 1996 (in the net margin, return on investment, processing
efficiency and volumetric expansion categories) by Solomon Associates, an
independent benchmarking company. This ranking was based on both financial and
operating performance. This competitive position was further improved through
synergies gained by formation of the MiRO joint venture (an 18.75 percent
Company interest), which combined the OMW refinery with a neighboring Esso
refinery.
Downstream's principal strengths include the processing of heavy, high
sulfur and acidic crudes, upgrading bottom-of-the-barrel feedstocks via coking
technology, running low-cost, high-volume retail marketing operations and
developing specialty products. Approximately 50 percent of the Company's
worldwide refining capacity is designed to process heavy, high sulfur crude.
This allows the Company to purchase cheaper grades of crude oil with high levels
of sulfur and to process them into high grade petroleum products. Recent
investments designed to capitalize on these strengths include Excel Paralubes, a
50/50 joint venture between the Company and Pennzoil Company ("Pennzoil"), which
recently completed construction of a $500 million lube oil hydrocracker at the
Company's Lake Charles, Louisiana, refinery that produces hydrocracked base oil.
The Company made $235 million in improvements in the Lake Charles refinery to
facilitate this project. The Company also recently upgraded its refinery in the
United Kingdom to process acidic North Sea crude oils. Recent expansion projects
include the Company's new joint venture refinery in Melaka, Malaysia (in which
the Company has a 40 percent interest) which will have a gross refining capacity
of 100,000 barrels per day. Startup of the Melaka refinery was initiated in
August 1998 with the commissioning of the crude unit. A staggered startup of the
other units in the refinery will occur between August and November 1998. By
developing and applying its coking technology to nearly all of its refineries,
the Company has become a world leader in the petroleum coke market and the
manufacture of specialty cokes for use in the steel and aluminum industries. The
Company has also established a marketing presence in Central and Eastern Europe,
and Southeast Asia, where it is a leading operator of low-cost, high-volume
retail stations.
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For the year ended December 31, 1997, Downstream reported earnings of $307
million on sales and other operating revenues of $20.0 billion. Downstream
capital investments were $558 million in 1997. The Company expects to make
capital investments of approximately $600 million in 1998, primarily relating to
the completion of the Melaka refinery, expansion of European and Asian retail
operations and the upgrading of its U.S. and European refineries, including
initial work at Lake Charles to facilitate the processing of Petrozuata
Synthetic Crude.
BUSINESS STRATEGY
Conoco intends to pursue a growth-oriented business strategy by: (a)
exploiting growth opportunities where Conoco has existing major areas of
operation, (b) creating at least two new major business areas in Northern South
America and the Caribbean, and the Asia Pacific, Middle East or Russia/Caspian
Sea regions and (c) continuing to improve the profitability, efficiency and
effectiveness of its existing operations. Specifically, the Company intends to:
- Manage its portfolio to increase the proportion of Upstream assets
relative to Downstream assets and the proportion of large-scale,
long-lived, early-life cycle assets relative to mature assets.
- Achieve significant near-term production growth through the
implementation of large-scale projects such as Petrozuata, Britannia,
Lobo and Ursa.
- Seek opportunities created by worldwide privatizations and the opening of
new markets previously closed to private investment.
- Apply its strengths in carbon upgrading, project management, deepwater
technology, natural gas processing, seismic processing and
interpretation, and the ability to present integrated Upstream/
Downstream solutions to host governments and other institutions in new
and emerging markets.
- Pursue exploration activities that have significant value creation
potential by concentrating on areas that are under-explored.
- Capitalize on the Company's ability to convert low-cost, heavy, high
sulfur and acidic crude oils into high-value light oil products.
- Continuously rationalize its asset base, contain costs, optimize its
investment portfolio, and improve operating reliability.
In all of its activities, the Company will strive to act in accordance with its
core values: operating safely, protecting the environment, acting ethically and
valuing all people.
RISK FACTORS
Prospective investors should consider carefully the matters set forth under
the caption "Risk Factors," as well as the other information set forth in this
Prospectus, including the uncertainty of supply and demand in the crude oil,
natural gas and refined products markets, the volatility of crude oil, natural
gas and refined product prices, the possibility of sustained depressed prices,
the Company's need to replace its crude oil and natural gas reserves depleted
through production, the uncertainty of the Company's estimates of its proved
reserves, control of the Company by DuPont prior to the divestiture of its
ownership interest in the Company, changes in the Company's ongoing relationship
with DuPont, competition, drilling risks, operating hazards, potential
disruption or interruption of the Company's production or refining facilities
due to political events, international monetary conditions and exchange
controls, the potential adverse effects of disparate voting rights of two
classes of Common Stock, the impact of environmental and other governmental
regulation, certain anti-takeover provisions in the Company's Certificate of
Incorporation and By-laws, the absence of a prior public market for the Class A
Common Stock, and the presence of a significant number of shares of Common Stock
which are eligible for future sale by DuPont. One or more of such matters could
negatively impact the Company's ability to implement successfully its business
strategy as described above.
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THE OFFERINGS
Class A Common Stock
Offered:
U.S. Offering............ 172,310,784 shares
International Offering... 19,145,643 shares
Total................. 191,456,427 shares
Common Stock to be
outstanding after the
Offerings(1):
Class A Common Stock..... 191,456,427 shares
Class B Common Stock..... 436,543,573 shares
Total................. 628,000,000 shares
Use of Proceeds............ The net proceeds of approximately $4,228 million to
be received by the Company from the Offerings will
be used to repay outstanding indebtedness owed to
DuPont. See "Use of Proceeds."
Dividend Policy............ The Company currently intends to pay quarterly cash
dividends of $.19 per share on the Class A Common
Stock and Class B Common Stock, subject to
financial results and declaration by the Board of
Directors. The Company expects to pay an initial
dividend in March 1999 representing a pro rata
dividend for the period from the date of the
Offerings to December 31, 1998. There can be no
assurance, however, that this dividend or any
future dividends will be declared or paid. See
"Dividend Policy."
Voting Rights:
Class A Common Stock..... 1 vote per share
Class B Common Stock..... 5 votes per share
Other Common Stock
Provisions................. Apart from the different voting rights described
above, the holders of Class A Common Stock and
Class B Common Stock generally have identical
rights, except that the holders of Class A Common
Stock are not eligible to vote on any alteration of
the powers, preferences or special rights of the
Class B Common Stock that would not adversely
affect the Class A Common Stock. See "Description
of Capital Stock."
Proposed NYSE symbol....... "COC"
Rights..................... One Right will be attached to each share of Class A
Common Stock sold in the Offerings. See
"Description of Capital Stock -- Anti-Takeover
Effects of Certain Certificate and By-Law
Provisions -- Rights Plan."
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(1) Does not include shares of Class A Common Stock that will be issuable in
connection with Common Stock-based employee benefit awards awarded at the
time of the Offerings (not all of which will be immediately exercisable),
and other Common Stock-based employee benefit awards that will be issued
upon cancellation of DuPont stock-based employee benefit awards. See
"Management -- Compensation of Executive Officers" and "-- Treatment of
Outstanding Stock Options and Stock Appreciation Rights."
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SEPARATION FROM DUPONT
Since 1981, the Company's business operations have been conducted by
various entities owned directly or indirectly by DuPont. In May 1998, DuPont and
the Company announced their intention to create a separate company composed of
the oil and gas businesses and operations that will comprise the Company after
the Offerings, and the associated assets and liabilities of such businesses and
operations (the "Separation"). The Company believes that the Separation will be
substantially completed, including the transfer of substantially all of such
assets and liabilities, by the date of the Offerings. DuPont has announced that
it intends to divest its remaining ownership interest in Conoco within 12 months
of the date hereof through a "split-off" (an offering to DuPont shareholders of
the opportunity to exchange shares of DuPont common stock for Class B Common
Stock of Conoco). The split-off will be subject to (i) certain legal conditions,
including the receipt of a favorable tax ruling from the Internal Revenue
Service as to the tax-free nature of the split-off, and (ii) the absence of any
material change in market conditions or other unanticipated circumstances that
cause the Board of Directors of DuPont to conclude that such transaction was not
in the best interests of the shareholders of DuPont.
The Separation is intended to establish the Company as a stand-alone entity
with objectives separate from those of DuPont. DuPont and the Company believe
that the Separation will (a) create a structure which will enable the Company to
have better access to capital markets, (b) permit the Company to adopt a more
aggressive investment program in new and capital-intensive oil and gas projects,
(c) facilitate future partnerships, combinations and other arrangements with
other entities in the oil and gas business, (d) allow the Company to offer
incentives to its employees that are more closely linked to the Company's
performance and (e) facilitate comparisons with other major, international
integrated energy companies.
After completion of the Offerings, DuPont will own 100 percent of the
outstanding Class B Common Stock, which will represent 91.9 percent of the
combined voting power of all classes of voting stock of the Company. See
"Principal Stockholder." Until such time as DuPont holds less than 50 percent of
the voting power of outstanding common stock of the Company, DuPont will be able
to control the vote on all matters submitted to stockholders, including the
election of directors and the approval of extraordinary corporate transactions.
See "Risk Factors -- Control by DuPont; Potential Conflicts of Interest."
Historically, the Company and its business operations have derived tangible
and intangible benefits from being owned by DuPont. The Company and DuPont have
entered into certain ancillary agreements which govern various interim and
ongoing relationships between the two companies, including agreements with
respect to employee benefit arrangements, information management, the provision
of interim services, financing arrangements, tax sharing, environmental
liabilities and various commercial arrangements, such as the supply of natural
gas by the Company to DuPont. While these agreements will continue to benefit
the Company, the Company is only entitled to the ongoing assistance of DuPont
for a limited time and it may not enjoy benefits from its relationship with
DuPont beyond the term of the agreements. These agreements were in most cases
developed in connection with the Separation and were not the result of
arm's-length negotiations between independent parties. See "Risk
Factors -- Limited Operating History; Limited Relevance of Historical Financial
Information" and "Arrangements Between the Company and DuPont."
In July 1998, a dividend of $7.5 billion was paid by the Company to DuPont
in the form of a promissory note. The promissory note is due January 2, 2000 and
bears interest at an annual interest rate of 6.0125 percent. The Company will
use the net proceeds of the Offerings and its cash and cash equivalents in
excess of $225 million (excluding $70 million of additional monetary assets held
by the Company's captive insurance company and its subsidiaries) at the end of
the month in which the Offerings occur to repay or purchase debt owed to DuPont.
On September 28, 1998, the Company declared a dividend of a receivable from
DuPont evidenced by a promissory note in the amount of $700 million.
DuPont has historically guaranteed certain obligations and liabilities of
the Company and its subsidiaries and affiliates. Certain of these guarantees
will remain in place after the Separation pursuant to their terms. The Company
will indemnify DuPont for any liabilities DuPont may incur pursuant to these
guarantees.
10
<PAGE> 10
Certain international assets relating primarily to the business of DuPont
may be held by the Company or its subsidiaries at the closing of the Offerings
pending receipt of consents or other approval or satisfaction of other
applicable foreign requirements necessary for the transfer of such assets to
DuPont. In addition, certain international assets relating primarily to the
business of the Company may be held by DuPont or other of its subsidiaries at
the closing of the Offerings pending receipt of consents or approvals or
satisfaction of other applicable foreign requirements necessary for the transfer
of such assets to the Company. The financial and other information included
herein assumes the consummation of all such transactions. Additionally, such
information reflects the inclusion of certain subsidiaries of DuPont which will
not be owned by the Company as of the closing of the Offerings and which DuPont
will not thereafter be obligated to transfer to the Company. DuPont and the
Company intend to negotiate for the sale of such subsidiaries within the six
months following the Offerings at a purchase price equal to their then fair
market value. DuPont and the Company estimate that the fair market value of such
subsidiaries at August 1998 was approximately $20 million and cannot predict at
what price any such sale may occur. All of the above subsidiaries, which are
immaterial to total assets and results of operations of the Company, have been
included in the Combined Financial Statements.
Following the Offerings, certain pension assets will be held in trust with
the DuPont Pension and Retirement Plan. As of the date on which DuPont ceases to
own securities representing 80 percent or more of the voting power and
representing 80 percent or more of the economic value of all of the outstanding
shares of Common Stock, the Company will adopt a qualified defined benefit
retirement plan. In this event, the trust associated with the Company plan will
receive, assuming satisfaction of certain conditions, a transfer of assets and
liabilities on behalf of the Company's current and former employees from the
DuPont Pension and Retirement Plan. Other employee benefit trusts established by
the Company will continue following the Separation.
The Separation Agreement (as defined in "Arrangements Between the Company
and DuPont") provides that the Company will, subject to certain exceptions,
apply the net proceeds of any additional indebtedness or the issuance of equity
securities by the Company, including the net proceeds of the Offerings, to repay
debt owed to DuPont.
Generally, all one-time costs, including fees and taxes, directly relating
to the Offerings or the Separation are to be paid by DuPont under the terms of
the Separation Agreement.
11
<PAGE> 11
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table sets forth summary combined historical and pro forma
financial data of the Company as of the dates and for the periods indicated. The
statement of income data for each of the years in the three-year period ended
December 31, 1997, and the historical balance sheet data as of December 31, 1996
and 1997, have been derived from the Combined Financial Statements audited by
PricewaterhouseCoopers LLP, independent accountants. The statement of income
data for the years ended December 31, 1993 and 1994, and the six months ended
June 30, 1997 and 1998, and the historical balance sheet data as of December 31,
1993, 1994, 1995, and June 30, 1998 are based on the accounting records of
DuPont which, in the opinion of the Company's management, include all
adjustments necessary for the fair presentation of the financial position at
such dates and the results of operations for such respective interim periods.
The results for the six months ended June 30, 1998, are not necessarily
indicative of results to be expected for the full fiscal year or any interim
period. The financial information included herein may not necessarily reflect
the results of operations, financial position and cash flows of the Company in
the future or what the results of operations, financial position and cash flows
would have been had the Company been a separate, stand-alone entity during the
periods presented.
The pro forma financial data have been derived from the Pro Forma Combined
Financial Statements which were prepared by the Company to illustrate the
estimated effects of the Offerings and related transactions described in the
Notes to the Pro Forma Combined Financial Statements as if the Offerings and
related transactions had occurred as of the beginning of the periods presented,
for purposes of the pro forma combined statements of income and as of June 30,
1998, for purposes of the pro forma combined balance sheet. In addition, the Pro
Forma Combined Financial Statements do not purport to represent what the results
of operations or financial position of the Company would actually have been if
the Offerings and related transactions had in fact occurred on such dates or to
project the results of operations or financial position of the Company for any
future period or date. The following data should be read in conjunction with,
and are qualified by reference to, the Combined Financial Statements, the
Interim Combined Financial Statements, the Pro Forma Combined Financial
Statements, and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus.
POST-OFFERINGS CHARGE
Subject to completion of the Offerings, the Company and DuPont expect to
give certain current employees of the Company the option, subject to specific
country tax and legal requirements, to participate in a program (the "Option
Program") involving the cancellation of all or part of their options to purchase
DuPont common stock or appreciation rights ("SARs") with respect to DuPont
common stock and the issuance by the Company upon such cancellation of
comparable options to acquire Class A Common Stock or SARs with respect to Class
A Common Stock. Participation in the Option Program will be deemed a change in
the terms of certain awards granted to Conoco employees. As a result, the
Company will incur a non-cash charge to compensation expense, in the quarter the
Offerings are completed, of approximately $192 million after-tax depending on
the number of outstanding Conoco employee options to purchase DuPont common
stock canceled. Since the cancellation and issuance would be a one-time event
occurring after the Offerings, the charge is not reflected in the Pro Forma
financial information included in this Prospectus. See "Management -- Treatment
of Outstanding Stock Options and Stock Appreciation Rights."
12
<PAGE> 12
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
AS ADJUSTED AS ADJUSTED FOR
SIX MONTHS ENDED FOR THE YEAR THE SIX MONTHS
YEAR ENDED DECEMBER 31, JUNE 30, ENDED ENDED
----------------------------------------------- ----------------- DECEMBER 31, JUNE 30,
1993 1994 1995 1996 1997 1997 1998 1997 1998
------- ------- ------- ------- ------- ------- ------- ------------ ---------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Total Revenues(1).......... $19,687 $19,433 $20,518 $24,416 $26,263 $12,600 $11,486 $26,179 $11,433
Cost of Goods Sold and
Other Operating
Expenses................. 11,349 10,640 11,146 14,560 16,226 7,667 6,754 16,226 6,754
Selling, General and
Administrative
Expenses................. 651 679 728 755 726 355 370 726 370
Exploration Expenses....... 361 357 331 404 457 192 176 457 176
Depreciation, Depletion and
Amortization............. 1,428 1,244 1,067 1,085 1,179 516 505 1,179 505
Taxes Other Than on
Income(1)................ 4,652 5,477 5,823 5,637 5,532 2,669 2,896 5,532 2,896
Interest and Debt
Expense.................. 67 63 74 74 36 24 1 204 92
------- ------- ------- ------- ------- ------- ------- ------- -------
Income Before Income
Taxes.................... 1,179 973 1,349 1,901 2,107 1,177 784 1,855 640
Provision for Income
Taxes.................... 424 551 774 1,038 1,010 590 254 928 218
------- ------- ------- ------- ------- ------- ------- ------- -------
Net Income(2)...... $ 755 $ 422 $ 575 $ 863 $ 1,097 $ 587 $ 530 $ 927 $ 422
======= ======= ======= ======= ======= ======= ======= ======= =======
Segment Net Income:
Upstream................... $ 481 $ 498 $ 492 $ 681 $ 884 $ 454 $ 359
Downstream................. 324 241 233 289 307 181 181
Corporate and Other(2)..... (50) (317) (150) (107) (94) (48) (10)
------- ------- ------- ------- ------- ------- -------
$ 755 $ 422 $ 575 $ 863 $ 1,097 $ 587 $ 530
======= ======= ======= ======= ======= ======= =======
Pro Forma Earnings Per
Share:
Basic.................... $ 1.75 $ 0.93 $ 0.84 $ 1.48 $ 0.67
Diluted.................. $ 1.72 $ 0.92 $ 0.83 $ 1.46 $ 0.66
Pro Forma Weighted Average
Shares Outstanding:
Basic.................... 628 628 628 628 628
Diluted.................. 637 637 637 637 637
OTHER DATA:
Cash Provided by
Operations............... $ 2,132 $ 2,143 $ 1,924 $ 2,396 $ 2,876 $ 855 $ 548
Capital Expenditures and
Investments.............. 1,743 1,665 1,837 1,944 3,114 1,815 1,050
</TABLE>
- ---------------
(1) Includes petroleum excise taxes of $4,478, $5,291, $5,655, $5,461 and $5,349
for 1993 through 1997 and $2,577 and $2,806 for the first six months of 1997
and 1998, respectively.
(2) Includes after-tax exchange gains (losses) of $60, $(143), $(40), $(7), and
$21 for 1993 through 1997 and $5 for both the first six months of 1997 and
1998, and $(25) for the pro forma as adjusted for 1997 and $(8) for the pro
forma as adjusted for the first six months of 1998.
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, AS ADJUSTED
----------------------------------------------- JUNE 30, JUNE 30,
1993 1994 1995 1996 1997 1998 1998
------- ------- ------- ------- ------- -------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and Cash Equivalents.............................. $ 271 $ 319 $ 286 $ 846 $ 1,147 $ 829 $ 225
Working Capital........................................ 1,893 1,790 999 862 567 276 869
Net Property, Plant and Equipment...................... 9,473 9,522 9,758 10,082 10,828 11,048 11,048
Total Assets........................................... 14,809 15,271 14,229 15,226 17,062 17,164 15,995
Long-Term Borrowings -- Related Parties................ 2,102 2,279 2,141 2,287 1,450 1,181 --
Long-Term Borrowings -- Other Related Party............ -- -- -- -- -- -- 4,853
Other Long-Term Borrowings and Capital Lease
Obligations.......................................... 304 342 65 101 106 103 103
Owner's Net Investment and Accumulated Other
Comprehensive Loss/Stockholders' Equity.............. 7,462 7,274 6,754 6,579 7,896 8,223 4,493
</TABLE>
13
<PAGE> 13
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Proved Reserves at December 31(1):
Oil (MMbbls)(2)...................... 983 988 977 973 1,624
Natural Gas (Bcf).................... 3,971 4,674 5,048 5,396 5,861
Total Proved Reserves (MMBOE)(3)..... 1,645 1,767 1,818 1,872 2,601
International Proved Reserves (% of
Total)............................... 58% 61% 63% 65% 73%
Reserve Replacement Ratio(1)........... 89% 157% 127% 126% 448%
Reserve Life (years)(1)(4)............. 7.7 8.2 9.3 8.9 12.4
Finding and Development Costs per
BOE(1)(3)(5)......................... $ 6.79 $ 6.24 $ 5.39 $ 4.84 $ 3.63
Average Daily Production(1):
Oil (Mbbls/day)(2)................... 434 436 424 454 453
Natural Gas (MMcf/day)............... 1,301 1,327 1,126 1,211 1,203
Total Production (MBOE/day)(3)....... 651 657 612 656 654
Average Production Costs per
BOE(3)(6)............................ $ 3.97 $ 3.59 $ 3.92 $ 3.84 $ 4.21
Refinery Capacity at December 31
(Mbbls/day)(1)(7).................... 595 602 621 743 754
Refinery Utilization(7)................ 95% 99% 97% 83% 91%
Total Refinery Inputs
(Mbbls/day)(1)(8).................... 674 697 721 732 780
Sales of Refined Products
(Mbbls/day)(1)....................... 876 931 983 998 1,048
Retail Marketing Outlets at December
31(9):
United States ....................... 5,008 5,196 5,125 4,976 4,903
International........................ 2,454 2,438 2,390 2,874 2,971
</TABLE>
- ---------------
(1) Includes the Company's share of equity affiliates.
(2) Includes crude oil, condensate, and NGLs expected to be removed for the
Company's account from its natural gas production. Average Daily Production
also includes NGLs acquired through gas plant ownership of 67, 69, 78, 80,
and 79 Mbbls/day for 1993 through 1997, respectively.
(3) 6,000 cubic feet of natural gas = one barrel-of-oil-equivalent (BOE).
(4) Total Proved Reserves at December 31 divided by annual production for the
year ended December 31, excluding NGLs from gas plant ownership.
(5) Finding and development costs per BOE represent a trailing five-year average
for each year displayed.
(6) Excludes equity affiliates and processed NGLs.
(7) Based on capacity to process crude oil and condensate (excludes other
feedstocks).
(8) Includes crude oil, condensate and other feedstocks.
(9) Represents outlets owned by the Company and others that sell the Company's
refined products.
RECENT RESULTS
The Company's third quarter results have been negatively affected by market
conditions that continue to affect the petroleum industry in general. The
Company's worldwide net realized prices in the third quarter of 1998 for crude
oil and natural gas were $12.29 per barrel and $2.08 per thousand cubic feet,
respectively, compared to $12.45 per barrel and $2.15 per thousand cubic feet,
respectively, in the second quarter of 1998. Prices for crude oil and natural
gas were $17.96 per barrel and $2.17 per thousand cubic feet, respectively, in
the third quarter of 1997. Oil production in the third quarter of 1998 was
292,000 barrels per day compared to production of 314,000 barrels per day in the
second quarter of 1998 and production of 325,000 barrels per day in the third
quarter of 1997. Natural gas production for the third quarter of 1998 was 1,374
million cubic feet per day compared to 1,318 million cubic feet per day in the
second quarter of 1998 and 1,205 million cubic feet per day in the third quarter
of 1997. The increase in natural gas production in the third quarter of 1998 as
compared to the second quarter of 1998 and the third quarter of 1997 was due to
higher production from the Company's South Texas operations. Refining margins
per barrel for Downstream activities in the third quarter of 1998 were slightly
higher than margins in the second quarter of 1998 but lower than margins for the
third quarter of 1997.
Based on the cumulative effect of these factors, the Company's Upstream and
Downstream segment earnings before material non-recurring items for the third
quarter of 1998 were $223 million compared to $200 million of such earnings for
the second quarter of 1998 and $252 million of such earnings for the third
quarter of 1997. Due to higher interest and debt expense associated with the
$7.5 billion promissory note owed to DuPont, combined net income for the third
quarter of 1998 was $183 million compared to $214 million in the second quarter
of 1998 and $289 million in the third quarter of 1997. The Company intends to
repay or purchase a portion of the outstanding indebtedness owed to DuPont with
the estimated net proceeds from the Offerings of approximately $4,228 million.
See "Use of Proceeds."
14
<PAGE> 14
SUMMARY RESERVE DATA
The following table sets forth summary information as of the dates
indicated with respect to the estimated proved reserves of oil and natural gas
of the Company at year-end for 1996 and 1997. Unless otherwise noted, all
information in this Prospectus relating to oil and natural gas reserves is based
upon estimates prepared by the Company and reflects the Company's net interest
after royalties. At the request of the Company, DeGolyer and MacNaughton,
independent petroleum engineering consultants, carried out an independent
evaluation of the reserves of selected properties representing approximately 80
percent in present value of the Company's reserves at December 31, 1997. The
results obtained by DeGolyer and MacNaughton with respect to reserves at
December 31, 1997 do not show significant differences from those reported by the
Company. DeGolyer and MacNaughton has delivered to the Company a summary letter
report describing its procedures and conclusions, a copy of which appears as
Annex A hereto. See "Risk Factors -- Uncertainty of Estimates of Proved
Reserves" and "Business -- Upstream -- Oil and Natural Gas Reserves."
<TABLE>
<CAPTION>
PROVED RESERVES
AT DECEMBER 31,
---------------- % INCREASE
1996 1997 (DECREASE)
------ ------ ----------
(NET AFTER ROYALTY BASIS)(1)
<S> <C> <C> <C>
United States:
Oil (MMbbls)(2)........................................... 299 277 (7)
Natural Gas (Bcf)......................................... 2,155 2,605 21
----- -----
Total proved reserves (MMBOE)(3).......................... 658 711 8
International:
Oil (MMbbls)(2)........................................... 674 1,347 100
Natural Gas (Bcf)......................................... 3,241 3,256 --
----- -----
Total proved reserves (MMBOE)(3).......................... 1,214 1,890 56
Worldwide:
Total proved reserves (MMBOE)(3).......................... 1,872 2,601 39
===== =====
</TABLE>
- ---------------
(1) Includes the Company's share of equity affiliate reserves.
(2) Reserves comprise crude oil, condensate and NGLs expected to be removed for
the Company's account from its natural gas production.
(3) 6,000 cubic feet of natural gas = one barrel-of-oil-equivalent (BOE).
15
<PAGE> 15
RISK FACTORS
In evaluating the Company and its business, prospective investors should
consider carefully the following risk factors in addition to the other
information contained herein. This Prospectus contains forward-looking
statements that involve risks and uncertainties. Actual results may differ
materially from those expressed or implied by such forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in the following risk factors.
VOLATILITY OF OIL AND GAS PRICES; RECENT SUBSTANTIAL PRICE DECLINE
The Company's profitability will be determined in large part by the
difference between the prices received for the natural gas, natural gas liquids,
crude oil and refined products produced by the Company and the costs of finding,
developing, producing, refining and marketing these resources. Prices for crude
oil, natural gas, and refined products are subject to wide fluctuation in
response to changes in global and regional supply over which the Company has no
control, including political developments and the ability of the Organization of
Petroleum Exporting Countries ("OPEC") and other producing nations to set and
maintain production levels and prices. Prices for crude oil, natural gas and
refined products are also affected by changes in demand for these products,
which may result from global events beyond the Company's control, as well as
supply and demand in industrial markets, such as the steel and aluminum markets.
Reduced Asian demand, as a result of the recent economic downturn in Asia, has
negatively affected crude oil and product prices elsewhere, including in the
Company's core markets. Even relatively modest declines in crude oil and natural
gas prices and refined product margins may adversely affect the Company's
financial condition, liquidity, and results of operations. A substantial decline
in crude oil prices occurred in late 1997 and is continuing in 1998. Recently,
West Texas Intermediate crude oil prices fell to 12-year lows as measured in
absolute dollars (and 25-year lows as measured in inflation-adjusted dollars),
closing at $11.58 a barrel on June 15, 1998. Lower oil and natural gas prices
may reduce the amount of oil and natural gas the Company can produce
economically, and existing contracts that the Company has entered into may
become uneconomical as a result of changing prices. From time to time, the
Company may attempt to mitigate the effect of price fluctuations by hedging
specific exposures, although there can be no assurance that these efforts will
be successful. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
RISKS OF GLOBAL OPERATIONS
Local political and economic factors in international markets over which
the Company has no control may have a material adverse effect on the Company's
financial condition and results of operations. Approximately 41 percent of the
Company's sales in 1997 were derived from markets outside the United States. The
Company conducts exploration and production operations in 18 countries including
the United States, Canada, the United Kingdom, Norway, Venezuela, the United
Arab Emirates, Indonesia, Russia and Nigeria. The Company has interests in
refineries located in the United Kingdom, Germany, the Czech Republic and
Malaysia, and conducts marketing and crude oil supply operations in foreign
countries, primarily in Europe and Southeast Asia. Risks associated with
operations in international markets also include changes in foreign governmental
policies, and other political, economic or diplomatic developments which are not
within the control of the Company, including changes in crude oil, natural gas
or refined product pricing policies, taxation policies, changing political
conditions and international monetary fluctuations. Recent turmoil in regions
such as Russia and Southeast Asia has subjected the Company's operations there
to increased risk of political and economic instability, the risks of war,
embargoes and expropriation and nationalization with or without compensation,
confiscatory taxation, renegotiation or nullification of existing concessions
and contracts, and increased risks of fluctuating currency values, hard currency
shortages and currency controls. Civil unrest and changes in government are also
potential hazards.
The profitability of the Company's operations (both domestic and
international) is similarly exposed to risks due to actions of the United States
government through tax and other legislation, executive order and commercial
restrictions. Various agencies of the United States and other governments have
from time to time imposed restrictions on the Company's ability to operate in or
gain attractive opportunities in various
16
<PAGE> 16
countries. Actions by both the United States and host governments have affected
operations significantly in the past and will continue to do so in the future.
The Company is also exposed to fluctuations in foreign currency exchange
rates. The Company does not intend to comprehensively hedge its exposure to
currency rate changes, although it may choose to selectively hedge certain
working capital balances, firm commitments, cash returns from affiliates and/or
tax payments. There can be no assurance that these efforts will be successful.
CONTROL BY DUPONT; POTENTIAL CONFLICTS OF INTEREST
After completion of the Offerings, DuPont will own 69.5 percent of the
Company's outstanding Common Stock and approximately 91.9 percent of the
combined voting power of all classes of voting stock of the Company. After the
Offerings, and prior to the divestiture of its ownership interest in the
Company, DuPont through its ability to elect the Board of Directors of the
Company, will be in a position to continue to control all matters affecting the
Company, including the composition of the Board of Directors and, through it,
any determination with respect to the direction and policies of the Company,
acquisition or disposition of assets, future issuances of Common Stock or other
securities of the Company, the Company's incurrence of debt, and any dividend
payable on the Common Stock. See "Principal Stockholder."
Conflicts of interest may arise between the Company and DuPont in a number
of areas relating to their past and ongoing relationships including the nature,
quality and pricing of services rendered by the Company to DuPont or by DuPont
to the Company, potential competitive business activities, shared marketing
functions, tax and employee benefit matters, indemnity agreements, sales or
distributions by DuPont of all or any portion of its ownership interest in the
Company, or DuPont's ability to control the management and affairs of the
Company. The Company's Chairman of the Board, Edgar S. Woolard, Jr., its
President and Chief Executive Officer, Archie W. Dunham, and its director
nominee, William K. Reilly, currently serve, and will continue to serve after
the closing of the Offerings, as directors of DuPont. Gary M. Pfeiffer, a
director of the Company, is also an officer of DuPont. For purposes of governing
their on-going relationship, the Company and DuPont have or will enter into
various agreements involving the provision of services such as natural gas and
gas liquids supply, cash management and other financial services, purchasing,
legal, and computer services. It is the policy of Conoco and DuPont that such
services will generally be provided on terms and conditions comparable to those
granted to an unaffiliated third party for similar services. However, because
these agreements were negotiated in the context of a parent-subsidiary
relationship, there can be no assurance that these agreements, or the
transactions provided for therein, will be effected on terms at least as
favorable to the Company as could have been obtained from unaffiliated third
parties. There can be no assurance that DuPont and the Company will be able to
resolve any potential conflict or that, if resolved, the Company would not
receive more favorable resolution if it were dealing with an unaffiliated party.
See "Prospectus Summary -- Separation from DuPont" and "Arrangements Between the
Company and DuPont."
RISK OF REFINANCING DEBT OWED TO DUPONT
Upon the occurrence of the intended split-off, mandatory prepayment
provisions will be triggered in the promissory notes (including the $7.5 billion
note, the revolving credit agreement and the Employee Benefit Note) representing
the debt owed by the Company to DuPont (the aggregate principal amount of which
immediately after the Offerings is expected to be $4,853 million). As a result,
the Company anticipates that it will be required to refinance debt owed to
DuPont within 12 months of the date hereof. There can be no assurance that the
Company will be able to refinance this debt on terms as favorable as those
existing with respect to the debt owed to DuPont.
UNCERTAINTY OF ESTIMATES OF PROVED RESERVES
There are numerous uncertainties inherent in estimating quantities of
proved oil and natural gas reserves. The reserve data set forth in this
Prospectus represent estimates only. Reservoir engineering is an inherently
subjective and inexact process of estimating underground accumulations of oil
and natural gas that cannot be measured in an exact manner. Estimates of
economically recoverable oil and natural gas reserves and future
17
<PAGE> 17
net cash flows are based on a number of variable factors and assumptions (some
or all of which may prove to be incorrect over time) related to reserve
performance that require evaluation by engineers interpreting the available
geologic, engineering and economic data, as well as price and other economic
factors, many of which may be beyond the control of the Company. The reliability
of these estimates depends on the quality and quantity of technical and economic
data, the production performance of the reservoirs and extensive engineering
judgment. Results of drilling, testing and production after the date of the
estimates may require substantial upward or downward revisions. Adverse changes
in economic conditions may render it uneconomical to produce certain reserves.
Actual production, revenues and expenditures with respect to the Company's
reserves will likely vary from estimates, and such variances may be material.
See "Business -- Upstream -- Oil and Natural Gas Reserves."
HIGHLY COMPETITIVE MARKET
Each of the segments in which the Company operates is highly competitive.
The Company's competitors include major integrated petroleum companies, state
oil companies controlled by foreign governments, independent oil, natural gas,
pipeline, refining and marketing companies and alternative fuel producers, many
of which have larger financial and other resources than the Company.
Upstream competes with numerous companies in the industry to find and
obtain new sources of supply, and to produce oil and gas in a cost-effective and
efficient manner. The Company also actively competes for reserve acquisitions,
exploration leases, licenses and concessions and skilled industry personnel.
Downstream competitive factors include product improvement and new product
development through research and technology, and efficient manufacturing and
distribution systems. In the marketing phase of the business, competitive
factors include site location, name recognition, customer loyalty, ease of
access, store management, product selection, pricing, hours of operation, store
safety, cleanliness, product promotions, product quality, customer programs,
customer service and marketing.
RESERVE REPLACEMENT; DRILLING RISKS
The Company's ability to achieve its growth objectives is highly dependent
upon its level of success in finding, acquiring or gaining access to additional
reserves. In general, the volume of production from oil and natural gas
properties declines as reserves are depleted, with the rate of decline depending
on reservoir characteristics. Except to the extent the Company conducts
successful exploration and development activities or acquires properties
containing proved reserves, or both, the proved reserves of the Company will
decline as reserves are produced. The Company's exploration and development
activities expose it to inherent risks of drilling, including the risk that no
economically productive natural gas or oil reservoirs will be encountered. The
costs of drilling, completing and operating wells are often uncertain and
numerous factors beyond the Company's control may cause drilling operations to
be curtailed, delayed or cancelled. The Company's future drilling, exploration
and acquisition activities may not be successful and, if unsuccessful, such
failure would have an adverse effect on the Company's future results of
operations and financial condition.
OPERATING HAZARDS
The Company's operations are subject to certain operating hazards such as
well blowouts, collapsed wells, explosions, uncontrolled flows of oil, natural
gas or well fluids, fires, formations with abnormal pressures, pipeline ruptures
or spills, refinery explosions, surface or marine transportation incidents,
pollution, releases of toxic gas and other environmental hazards and risks. In
addition, the Company conducts significant operations offshore, which are
subject to additional hazards of marine operations, such as capsizing, collision
and damage or loss from severe weather. All such hazards could result in loss of
human life, significant property and equipment damage, environmental pollution,
impairment of operations and substantial losses to the Company. Such hazards
have adversely affected the Company in the past, and litigation arising from a
catastrophic occurrence in the future at one of the Company's locations may
result in the Company being named as a defendant in lawsuits asserting
potentially large claims. In addition, the Company is exposed to risks inherent
in any business such as equipment failures, accidents, theft, strikes, protests
and sabotage that could disrupt or
18
<PAGE> 18
interrupt operations. In accordance with customary industry practices, the
Company maintains insurance against some, but not all, such risks and losses.
See "Business -- Operating Hazards and Insurance."
ENVIRONMENTAL RISKS
The Company incurs, and expects to continue to incur, substantial capital
and operating costs to comply with various federal, state, local and foreign
laws and regulations covering the discharge of material into the environment or
otherwise relating to clean-up or protection of the environment, including costs
to remediate certain contamination at various owned and previously owned
facilities, as well as third-party sites where the Company's products or wastes
have been handled or disposed. These regulatory requirements continue to
increase in both number and complexity and affect the Company's operations with
respect to, among other things: the discharge of pollutants into the
environment; the handling, use, storage, transportation, disposal and clean-up
of hazardous materials and hazardous and non-hazardous wastes; and the
dismantlement, abandonment, and restoration of oil and gas properties and
Company facilities at the end of their useful lives. The costs to comply with
complex environmental laws and regulations, as well as internal voluntary
programs, are significant. Estimated pre-tax environmental expenses charged to
current operations totaled about $136 million, before insurance recoveries, in
1997, as compared to approximately $162 million in 1996 and $129 million in
1995. These expenses include remediation accruals, operating maintenance and
depreciation costs for solid waste, air and water pollution control facilities
and the costs of certain other environmental activities. Capital expenditures
for environmental control facilities totaled approximately $50 million in 1997,
as compared to approximately $78 million in 1996 and $68 million in 1995. The
Company estimates that capital expenditures for pollution control facilities
will total approximately $51 million in 1998, and approximately $52 million in
1999. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Environmental Expenditures." There can be no assurance
that costs to comply with such requirements will not materially increase in the
future. In addition, the U.S. Environmental Protection Agency (the "EPA") and
other rulemaking bodies have from time to time changed minimum product
specifications in such a manner as to require the Company to make major
investments or incur significant additional operating expenses. Developments
such as the adoption of new laws and regulations, the imposition of more onerous
requirements in permits, increasingly strict enforcement of existing laws and
regulations or the discovery of previously unknown contamination may require
future expenditures to modify operations, install pollution control equipment,
perform site clean-ups or curtail Conoco's operations. There can be no assurance
that such future expenditures or curtailments will not have a material adverse
effect on the Company. See "Business -- Environmental Regulation," "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Environmental Expenditures" and Note 25 to the Combined Financial
Statements.
GOVERNMENT REGULATION
The Company's operations are subject to extensive government regulations
which are subject to change from time to time in response to economic or
political conditions. Matters subject to regulation include discharge permits
for drilling operations, reports concerning operations, the spacing of wells,
unitization and pooling of properties, gasoline formulation and taxation. From
time to time, regulatory agencies have imposed price controls and limitations on
production by restricting the rate of flow of oil and natural gas wells below
actual production capacity in order to conserve supplies of oil and natural gas.
Because legal requirements are frequently changed and subject to interpretation,
the Company is unable to predict the ultimate cost of compliance with these
requirements or their effect on operations.
RISK OF YEAR 2000 NONCOMPLIANCE
Many existing computer programs were designed and developed without
considering the upcoming change in the century, which could lead to the failure
of computer applications or create erroneous results by or at the year 2000.
This issue is referred to as the "Year 2000 Issue." The Year 2000 Issue is a
broad business issue, whose impact extends beyond traditional computer hardware
and software to possible failure of automated plant systems and instrumentation,
as well as to business third parties. Also, there can be no guarantee that third
parties of business importance to Conoco will successfully reprogram or replace,
and test,
19
<PAGE> 19
all of their own computer hardware, software and process control systems to
ensure such systems are Year 2000 compliant. Failure by the Company, third
parties of business importance to the Company and/or other constituents such as
governments to become Year 2000 compliant on a timely basis could have a
material adverse effect on the Company's financial position and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Year 2000."
ADVERSE EFFECT ON VALUE AND LIQUIDITY OF CLASS A COMMON STOCK FROM DISPARATE
VOTING RIGHTS OF CLASS A COMMON STOCK AND CLASS B COMMON STOCK
The differential in the voting rights of the Class A Common Stock and Class
B Common Stock both prior to and following the intended split-off could
adversely affect the value of the Class A Common Stock to the extent that
investors or any potential future purchaser of the Company's Common Stock
ascribes value to the superior voting rights of the Class B Common Stock. The
existence of two separate classes of Common Stock could result in less liquidity
for either class of Common Stock than if there were only one class of Common
Stock. The holders of Class A Common Stock and Class B Common Stock generally
have identical rights except that (i) holders of Class A Common Stock are
entitled to one vote per share while holders of Class B Common Stock are
entitled to five votes per share on all matters to be voted on by stockholders
and (ii) holders of Class A Common Stock are not eligible to vote on any
alteration of the powers, preferences, or special rights of the Class B Common
Stock that would not adversely affect the holders of Class A Common Stock.
Holders of Class A Common Stock and Class B Common Stock are entitled to class
votes on amendments to the Certificate of Incorporation of the Company (the
"Certificate of Incorporation") that would alter or adversely affect the powers,
preferences or special rights of the shares of their respective class. See
"Prospectus Summary -- Separation From DuPont" and "Description of Capital
Stock."
LIMITED OPERATING HISTORY; LIMITED RELEVANCE OF HISTORICAL FINANCIAL INFORMATION
Since 1981, the Company's business operations have been conducted by
various entities owned directly or indirectly by DuPont, and the Company has had
no independent operating history. Following the Offerings, the Company will be
required to supplement its financial, administrative and other resources to
provide services necessary to operate successfully as an independent public
company. In addition, the financial information included herein may not
necessarily reflect the results of operations, financial position and cash flows
of the Company in the future or what the results of operations, financial
position and cash flows would have been had the Company been a separate,
stand-alone entity during the periods presented. The financial information
included herein does not reflect many significant changes that will occur in the
capital structure, funding and operations of the Company as a result of the
Separation and the Offerings. See "Arrangements Between the Company and DuPont,"
"Pro Forma Combined Financial Statements" including the discussion of the
assumptions reflected therein, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- General."
CERTAIN ANTI-TAKEOVER PROVISIONS
The Certificate of Incorporation, the By-laws of the Company (the
"By-laws"), the Rights and applicable provisions of the Delaware General
Corporation Law (the "DGCL") contain various provisions that may inhibit the
acquisition of control of the Company without the approval of the Company's
Board of Directors. Certain provisions of the Certificate of Incorporation and
the By-laws, among other things, classify the Company's Board of Directors into
three classes, each of which (after an initial transition period) will serve for
staggered three-year periods. The Company's Board of Directors has the authority
to issue shares of Preferred Stock in one or more series and to fix the rights
and preferences of the shares of any such series without stockholder approval.
Any series of Preferred Stock will be senior to the Common Stock with respect to
dividends, liquidation rights and, possibly, voting. The ability to issue
Preferred Stock could have the effect of discouraging unsolicited acquisition
proposals. In addition, the Board of Directors has adopted a Rights Plan
providing for the issuance of Rights, which would cause substantial dilution to
a person or group that attempts to acquire the Company on terms not approved in
advance by the Company's Board of Directors. With certain exceptions, Section
203 of the DGCL imposes certain restrictions on mergers and other business
20
<PAGE> 20
combinations between the Company and any holder of 15 percent or more of the
Common Stock. In addition, certain provisions of the Certificate of
Incorporation and By-laws (i) require advance notice for actions to be taken at
annual meetings and director nominations, (ii) require mergers and certain other
extraordinary corporate transactions in certain circumstances to meet certain
fair price criteria and (iii) depending on DuPont's level of ownership, restrict
the ability to remove directors without cause or for stockholders to take action
by written consent or call special meetings of stockholders. See "Description of
Capital Stock -- Anti-Takeover Effects of Certain Certificate and By-Law
Provisions."
ABSENCE OF PRIOR PUBLIC MARKET FOR CLASS A COMMON STOCK; POSSIBLE VOLATILITY OF
STOCK PRICE; NO ASSURANCE OF DIVIDENDS
Prior to the Offerings, there has been no public market for the Class A
Common Stock. Although the Class A Common Stock has been approved for listing on
the NYSE, subject to official notice of issuance, there can be no assurance that
an active trading market will develop or continue upon completion of the
Offerings, or that purchasers of the Class A Common Stock will be able to resell
their Class A Common Stock at prices equal to or greater than the initial public
offering price. The initial public offering price of the Class A Common Stock
has been determined by negotiations among DuPont, the Company and the
representatives of the Underwriters and may not be indicative of either the
actual value of the Company or the market price of the Class A Common Stock
after the Offerings. The price at which the Class A Common Stock will trade in
the public market after the Offering may be less than the initial public
offering price. In addition, the market price of the Class A Common Stock could
be subject to significant fluctuations in response to a number of factors,
including variations in quarterly and yearly operating results, changes in crude
oil and natural gas prices, the success of the Company's business strategy,
competition, changes in government policies affecting the Company and market
conditions for energy or petroleum stocks in general. Moreover, stock markets
have recently experienced significant price and volume fluctuations unrelated or
disproportionate to the operating performance of affected companies.
The determination of the amount of cash dividends, if any, to be declared
and paid will depend upon declaration by the Company's Board of Directors and
upon the Company's financial condition, results of operations, cash flow, the
level of its capital and exploration expenditures, its future business prospects
and such other matters that the Company's Board of Directors deems relevant.
There can be no assurance that any dividends will be declared or paid. See
"Dividend Policy."
ADVERSE EFFECT ON MARKET PRICE DUE TO SHARES ELIGIBLE FOR FUTURE SALE
Sales, or the real or perceived possibility of sales, of a significant
number of shares of Common Stock in the public market following the Offerings
could adversely affect prevailing market prices for the Class A Common Stock.
Upon completion of the Offerings, DuPont will hold 100 percent of the
outstanding Class B Common Stock, representing 91.9 percent of the combined
voting power of all classes of voting stock of the Company. Following the
expiration of the 180 day lock-up period with respect to the Offerings, DuPont
may sell such shares subject to the requirements of the Securities Act. DuPont
has indicated its intention to divest its remaining ownership interest in the
Company in a tax-free split-off to be completed within 12 months of the date
hereof. See "Prospectus Summary -- Separation From DuPont." DuPont will have
rights to require the Company to register Common Stock held by DuPont for sale
in public offerings. See "Arrangements Between the Company and
DuPont -- Registration Rights Agreement." No predictions can be made as to the
effect, if any, that market sales of such shares, or the availability of such
shares for future sale, will have on the market price of the Class A Common
Stock. See "Shares Eligible for Future Sale" and "Underwriters."
USE OF PROCEEDS
The net proceeds from the sale of the Class A Common Stock offered hereby,
after deducting the underwriting discounts and commissions payable by the
Company, are approximately $4,228 million. The Company will use the net proceeds
of the Offerings, plus a portion of its cash and cash equivalents, to repay or
purchase a portion of the indebtedness owed by certain subsidiaries of the
Company to DuPont under certain intercompany notes (the "Intercompany Notes").
The Intercompany Notes will consist of (i) a promissory
21
<PAGE> 21
note in the principal amount of $7.5 billion, due January 2, 2000, and bearing
interest at a rate of 6.0125 percent per annum, (ii) a promissory note in the
principal amount of approximately $827 million, due January 2, 2000, and bearing
interest at a rate equal to the six-month LIBOR plus 0.375 percent per annum (or
5.965 percent per annum in the current period), (iii) several Norwegian Kroner
denominated promissory notes with an aggregate principal amount of approximately
$447 million after conversion to U.S. dollars at June 30, 1998, having various
maturity dates (ranging from October 1998 to January 2000 and having a remaining
weighted average maturity of 11 months as of June 30, 1998), and bearing
interest at a rate equal to the six-month NIBOR plus 0.375 percent per annum (or
5.565 percent per annum in the current period) and (iv) a promissory note
(which, depending on the balance on October 31, 1998 of net borrowings from
DuPont, at the completion of the Offerings is expected to be, and will be capped
at, $240 million in principal amount), due on demand, and bearing an interest
rate during any calendar month based on the interest rate on DuPont's commercial
paper during the preceding month (or 5.65% in October 1998).
The net proceeds of the Offerings will be applied, first, to pay accrued
interest on the $7.5 billion promissory note and then to pay principal on such
promissory note to the extent necessary to reduce the principal amount to $4.846
billion; second, to purchase the Kroner denominated notes described in clause
(iii) of the preceding paragraph and pay accrued interest thereon; third, to
repay, in whole or in part, the $827 million note referred to in clause (ii) of
the preceding paragraph and pay accrued interest thereon; and fourth, to repay,
in whole or in part, the note referred to in clause (iv) of the preceding
paragraph. To the extent the net proceeds of the Offerings, together with the
Company's cash and cash equivalents in excess of $225 million (excluding $70
million of additional monetary assets held by the Company's captive insurance
company and its subsidiaries and excluding any cash and cash equivalents held by
Petrozuata) at the end of the month following completion of the Offerings, are
insufficient to repay or purchase in full the notes referred to in clauses (ii),
(iii) and (iv) of the preceding paragraph, the holders of such notes will
contribute the remaining balance of the notes to the Company (provided that a
portion of the notes referred to in clauses (ii) and (iv) of the preceding
paragraph may remain outstanding in lieu of all or part of the promissory note
in the principal amount of approximately $7 million described in "Arrangements
Between the Company and DuPont -- Intercompany Notes.") The $7.5 billion
promissory note was incurred in payment of a dividend in July 1998. The
promissory note with a principal amount of approximately $827 million was
incurred to finance the purchase by the Company of certain loans made by DuPont
to the Company. The purchased loans, as well as the several promissory notes
with an aggregate principal amount of approximately $447 million, were incurred
to finance certain capital expenditures, acquisitions and working capital. The
promissory note referred to in clause (iv) of the preceding paragraph was
incurred to finance working capital needs of the Company.
Following the application of the net proceeds from the Offerings and the
utilization of a portion of the Company's cash and cash equivalents in
connection with the matters discussed in "Arrangements Between the Company and
DuPont -- Intercompany Notes," the Company (excluding Petrozuata) will have
approximately $225 million in cash and cash equivalents (excluding $70 million
of additional monetary assets held by the Company's captive insurance company
and its subsidiaries) at the end of the month in which the Offerings occur.
DIVIDEND POLICY
The Company currently intends to pay to its stockholders a dividend of $.19
per quarter ($.76 annually) per share of Class A Common Stock and Class B Common
Stock. The first dividend is expected to be paid in March 1999, representing a
pro rata dividend for the period from the date of the Offerings to December 31,
1998. There can be no assurance, however, that this dividend, or any future
dividend, will be declared or paid.
The determination of the amount of cash dividends (including the initial
quarterly dividend referred to above), if any, to be declared and paid will
depend upon declaration by the Company's Board of Directors and upon the
Company's financial condition, results of operations, cash flow, the level of
its capital and exploration expenditures, its future business prospects and such
other matters that the Company's Board of Directors deems relevant.
22
<PAGE> 22
CAPITALIZATION
The following table sets forth the combined capitalization of the Company
as of June 30, 1998, pro forma to reflect the transactions related to the
Separation as of June 30, 1998, and pro forma as adjusted to reflect the
Offerings as of June 30, 1998 and the application of the estimated net proceeds
as described herein under "Use of Proceeds."
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
---------------------------------------
PRO FORMA, AS
ACTUAL PRO FORMA(1) ADJUSTED(1)
------- ------------- -------------
(IN MILLIONS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Short-term borrowings -- related parties(2)............. $ 1,087 $ 272 $ --
Other short-term borrowings and capital lease
obligations(2)........................................ 51 51 51
Long-term borrowings -- related parties(2).............. $ 1,181 $1,002 $ --
Long-term borrowings -- other related party(2).......... -- 7,500 4,853
Other long-term borrowings and capital lease
obligations(2)........................................ 103 103 103
Owner's Net Investment:
Class A Common Stock, $0.01 par value; 3.0 billion
shares authorized; 191.5 million shares issued and
outstanding for pro forma, as adjusted(3).......... -- -- 2
Class B Common Stock, $0.01 par value; 1.6 billion
shares authorized; 436.5 million shares issued and
outstanding for pro forma, as adjusted............. -- -- 4
Additional paid-in capital............................ -- -- 4,222
Owner's net investment and accumulated other
comprehensive loss/stockholders' equity............ 8,223 272 265
------- ------ ------
Total capitalization.......................... $10,645 $9,200 $9,500
======= ====== ======
</TABLE>
- ---------------
(1) See "Pro Forma Combined Financial Statements."
(2) For a description of the Company's borrowings, see Notes 3, 14, 16 and 28 to
the Combined Financial Statements.
(3) Excludes shares of Class A Common Stock issuable upon exercise of options
granted under the Company's employee compensation plans. See "Management."
23
<PAGE> 23
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following table sets forth selected combined historical and pro forma
financial data of the Company as of the dates and for the periods indicated. The
statement of income data for each of the years in the three-year period ended
December 31, 1997 and the historical balance sheet data as of December 31, 1996
and 1997 have been derived from the Combined Financial Statements audited by
PricewaterhouseCoopers LLP, independent accountants. The statement of income
data for the years ended December 31, 1993 and 1994 and the six months ended
June 30, 1997 and 1998 and the historical balance sheet data as of December 31,
1993, 1994, 1995 and June 30, 1998 are based on the accounting records of DuPont
which, in the opinion of the Company's management, include all adjustments
necessary for the fair presentation of the financial position at such dates and
the results of operations for such respective interim periods. The results for
the six months ended June 30, 1998, are not necessarily indicative of results to
be expected for the full fiscal year or any interim period. The financial
information included herein may not necessarily reflect the results of
operations, financial position and cash flows of the Company in the future or
what the results of operations, financial position and cash flows would have
been had the Company been a separate, stand-alone entity during the periods
presented.
The pro forma financial data have been derived from the Pro Forma Combined
Financial Statements, which were prepared by the Company to illustrate the
estimated effects of the Offerings, the Separation and related transactions
described in the Notes to the Pro Forma Combined Financial Statements as if the
Offerings, the Separation and related transactions had occurred as of the
beginning of the periods presented, for purposes of the pro forma combined
statements of income and as of June 30, 1998 for purposes of the pro forma
combined balance sheet. In addition, the Pro Forma Combined Financial Statements
do not purport to represent what the results of operations or financial position
of the Company would actually have been if the Offerings, the Separation and
related transactions had in fact occurred on such dates or to project the
results of operations or financial position of the Company for any future period
or date. The following data should be read in conjunction with, and are
qualified by reference to, the Combined Financial Statements, the Interim
Combined Financial Statements, the Pro Forma Combined Financial Statements, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
POST-OFFERINGS CHARGE
Subject to completion of the Offerings, the Company and DuPont expect to
give certain current employees of the Company the option, subject to specific
country tax and legal requirements, to participate in the Option Program, which
involves the cancellation of all or part of their options to purchase DuPont
common stock or SARs with respect to DuPont common stock and the issuance by the
Company upon such cancellation of comparable options to acquire Class A Common
Stock or SARs with respect to Class A Common Stock. Participation in the Option
Program will be deemed a change in the terms of certain awards granted to Conoco
employees. As a result, the Company will incur a non-cash charge to compensation
expense, in the quarter the Offerings are completed, of approximately $192
million after-tax depending on the number of outstanding Conoco employee options
to purchase DuPont common stock canceled. Since the cancellation and issuance
would be a one-time event occurring after the Offerings, the charge is not
reflected in the Pro Forma financial information included in this Prospectus.
See "Management -- Treatment of Outstanding Stock Options and Stock Appreciation
Rights."
24
<PAGE> 24
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
AS ADJUSTED AS ADJUSTED FOR
SIX MONTHS ENDED FOR THE YEAR THE SIX MONTHS
YEAR ENDED DECEMBER 31, JUNE 30, ENDED ENDED
----------------------------------------------- ----------------- DECEMBER 31, JUNE 30,
1993 1994 1995 1996 1997 1997 1998 1997 1998
------- ------- ------- ------- ------- ------- ------- ------------ ---------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Total Revenues(1).......... $19,687 $19,433 $20,518 $24,416 $26,263 $12,600 $11,486 $26,179 $11,433
Cost of Goods Sold and
Other Operating
Expenses................. 11,349 10,640 11,146 14,560 16,226 7,667 6,754 16,226 6,754
Selling, General and
Administrative
Expenses................. 651 679 728 755 726 355 370 726 370
Exploration Expenses....... 361 357 331 404 457 192 176 457 176
Depreciation, Depletion and
Amortization............. 1,428 1,244 1,067 1,085 1,179 516 505 1,179 505
Taxes Other Than on
Income(1)................ 4,652 5,477 5,823 5,637 5,532 2,669 2,896 5,532 2,896
Interest and Debt
Expense.................. 67 63 74 74 36 24 1 204 92
------- ------- ------- ------- ------- ------- ------- ------- -------
Income Before Income
Taxes.................... 1,179 973 1,349 1,901 2,107 1,177 784 1,855 640
Provision for Income
Taxes.................... 424 551 774 1,038 1,010 590 254 928 218
------- ------- ------- ------- ------- ------- ------- ------- -------
Net Income(2)...... $ 755 $ 422 $ 575 $ 863 $ 1,097 $ 587 $ 530 $ 927 $ 422
======= ======= ======= ======= ======= ======= ======= ======= =======
Segment Net Income:
Upstream................... $ 481 $ 498 $ 492 $ 681 $ 884 $ 454 $ 359
Downstream................. 324 241 233 289 307 181 181
Corporate and Other(2)..... (50) (317) (150) (107) (94) (48) (10)
------- ------- ------- ------- ------- ------- -------
$ 755 $ 422 $ 575 $ 863 $ 1,097 $ 587 $ 530
======= ======= ======= ======= ======= ======= =======
Pro Forma Earnings Per
Share:
Basic.................... $ 1.75 $ 0.93 $ 0.84 $ 1.48 $ 0.67
Diluted.................. $ 1.72 $ 0.92 $ 0.83 $ 1.46 $ 0.66
Pro Forma Weighted Average
Shares Outstanding:
Basic.................... 628 628 628 628 628
Diluted.................. 637 637 637 637 637
OTHER DATA:
Cash Provided by
Operations............... 2,132 2,143 1,924 2,396 2,876 855 548
Capital Expenditures and
Investments.............. 1,743 1,665 1,837 1,944 3,114 1,815 1,050
</TABLE>
- ---------------
(1) Includes petroleum excise taxes of $4,478, $5,291, $5,655, $5,461 and $5,349
for 1993 through 1997 and $2,577 and $2,806 for the first six months of 1997
and 1998, respectively.
(2) Includes after-tax exchange gains (losses) of $60, $(143), $(40), $(7), and
$21 for 1993 through 1997 and $5 for both the first six months of 1997 and
1998, and $(25) for the pro forma as adjusted for 1997 and $(8) for the pro
forma as adjusted for the first six months of 1998.
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, AS ADJUSTED
------------------------------------------ JUNE 30, JUNE 30,
1993 1994 1995 1996 1997 1998 1998
------ ------ ------ ------ ------ -------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and Cash Equivalents............................. $ 271 $ 319 $ 286 $ 846 $1,147 $ 829 $ 225
Working Capital....................................... 1,893 1,790 999 862 567 276 869
Net Property, Plant and Equipment..................... 9,473 9,522 9,758 10,082 10,828 11,048 11,048
Total Assets.......................................... 14,809 15,271 14,229 15,226 17,062 17,164 15,995
Long-Term Borrowings -- Related Parties............... 2,102 2,279 2,141 2,287 1,450 1,181 --
Long-Term Borrowings -- Other Related Party........... -- -- -- -- -- -- 4,853
Other Long-Term Borrowings and Capital Lease
Obligations......................................... 304 342 65 101 106 103 103
Owner's Net Investment and Accumulated Other
Comprehensive Loss/Stockholders' Equity............. 7,462 7,274 6,754 6,579 7,896 8,223 4,493
</TABLE>
25
<PAGE> 25
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Proved Reserves at December
31(1):
Oil (MMbbls)(2)............. 983 988 977 973 1,624
Natural Gas (Bcf)........... 3,971 4,674 5,048 5,396 5,861
Total Proved Reserves
(MMBOE)(3)................ 1,645 1,767 1,818 1,872 2,601
International Proved Reserves
(% of Total)................ 58% 61% 63% 65% 73%
Reserve Replacement Ratio
(1)......................... 89% 157% 127% 126% 448%
Reserve Life (years)(1)(4).... 7.7 8.2 9.3 8.9 12.4
Finding and Development Costs
per BOE (1)(3)(5)........... $ 6.79 $ 6.24 $ 5.39 $ 4.84 $ 3.63
Average Daily Production(1):
Oil (Mbbls/day)(2).......... 434 436 424 454 453
Natural Gas (MMcf/day)...... 1,301 1,327 1,126 1,211 1,203
Total Production
(MBOE/day)(3)............. 651 657 612 656 654
Average Production Costs per
BOE(3)(6)................... $ 3.97 $ 3.59 $ 3.92 $ 3.84 $ 4.21
Refinery Capacity at December
31 (Mbbls/day)(1)(7)........ 595 602 621 743 754
Refinery Utilization(7)....... 95% 99% 97% 83% 91%
Total Refinery Inputs
(Mbbls/day)(1)(8)........... 674 697 721 732 780
Sales of Refined Products
(Mbbls/day)(1).............. 876 931 983 998 1,048
Retail Marketing Outlets at
December 31(9):
United States .............. 5,008 5,196 5,125 4,976 4,903
International............... 2,454 2,438 2,390 2,874 2,971
</TABLE>
- ---------------
(1) Includes the Company's share of equity affiliates.
(2) Includes crude oil, condensate, and NGLs expected to be removed for the
Company's account from its natural gas production. Average Daily Production
also includes NGLs acquired through gas plant ownership of 67, 69, 78, 80,
and 79 Mbbls/day for 1993 through 1997, respectively.
(3) 6,000 cubic feet of natural gas = one barrel-of-oil-equivalent (BOE).
(4) Total Proved Reserves at December 31 divided by annual production for the
year ended December 31 (excluding NGLs from gas plant ownership).
(5) Finding and development costs per BOE represent a trailing five-year average
for each year displayed.
(6) Excludes equity affiliates and processed NGLs.
(7) Based on capacity to process crude oil and condensate (excludes other
feedstocks).
(8) Includes crude oil, condensate and other feedstocks.
(9) Represents outlets owned by the Company and others that sell the Company's
refined products.
26
<PAGE> 26
PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited Pro Forma Combined Financial Statements of the
Company for the year ended December 31, 1997, the six months ended June 30, 1997
and 1998, and as of June 30, 1998, were prepared by the Company to illustrate
the estimated effects of the Offerings, the Separation and related transactions
described in the Notes hereto as if they had occurred as of the beginning of the
period presented, for purposes of the pro forma combined statements of income,
and as of June 30, 1998, for purposes of the pro forma combined balance sheet.
Management believes that the assumptions used provide a reasonable basis for
presenting the significant effects directly attributable to the Offerings, the
Separation and related transactions. The Pro Forma Combined Financial Statements
do not purport to represent what the results of operations or financial position
of the Company would actually have been if the Offerings, the Separation and
related transactions had in fact occurred on such dates or to project the
results of operations or financial position of the Company for any future period
or date. These statements should be read in connection with, and are qualified
by reference to, the Combined Financial Statements, the Interim Combined
Financial Statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," included elsewhere in this Prospectus.
27
<PAGE> 27
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
E. I. DU PONT DE NEMOURS AND COMPANY
We have examined the pro forma and offering adjustments reflecting the
offering, separation and related transactions described in Note 1 and the
application of those adjustments to the historic amounts in the accompanying pro
forma combined statement of income of Conoco, the petroleum business of E. I. du
Pont de Nemours and Company, for the year ended December 31, 1997. The historic
combined statement of income for the year ended December 31, 1997 is derived
from the historical combined statement of income for the year ended December 31,
1997 of Conoco, which was audited by us, appearing elsewhere herein. Such pro
forma and offering adjustments are based upon management's assumptions as
described in Notes 1 and 2. Our examination was made in accordance with
standards established by the American Institute of Certified Public Accountants
and, accordingly, included such procedures as we considered necessary in the
circumstances.
The objective of this pro forma financial information is to show what the
significant effects on the historical financial information might have been had
the offering, separation and related transactions occurred at an earlier date.
However, the pro forma combined statement of income is not necessarily
indicative of the results of operations that would have been attained had the
above-mentioned offering, separation and related transactions actually occurred
earlier.
In our opinion, management's assumptions provide a reasonable basis for
presenting the significant effects directly attributable to the above-mentioned
offering, separation and related transactions described in Notes 1 and 2, the
related pro forma and offering adjustments give appropriate effect to those
assumptions, and the pro forma as adjusted column reflects the proper
application of those adjustments to the historic combined statement of income
amounts in the pro forma combined statement of income for the year ended
December 31, 1997.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
October 21, 1998
28
<PAGE> 28
REVIEW REPORT OF INDEPENDENT ACCOUNTANTS ON
PRO FORMA COMBINED FINANCIAL INFORMATION
To the Board of Directors and Shareholders of
E. I. du Pont de Nemours and Company
We have reviewed the pro forma and offering adjustments reflecting the
offering, separation and related transactions described in Note 1 and the
application of those adjustments to the historic amounts in the accompanying pro
forma combined balance sheet of Conoco, the petroleum business of E. I. du Pont
de Nemours and Company, as of June 30, 1998, and the pro forma combined
statements of income for the six-month periods ended June 30, 1997 and 1998. The
historic combined balance sheet as of June 30, 1998 and the historic combined
statements of income for the six-month periods ended June 30, 1997 and 1998 are
derived from the historical unaudited interim combined financial statements of
Conoco, which were reviewed by us, appearing elsewhere herein. Such pro forma
and offering adjustments are based on management's assumptions as described in
Notes 1 and 2. Our review was conducted in accordance with standards established
by the American Institute of Certified Public Accountants.
A review is substantially less in scope than an examination, the objective
of which is the expression of an opinion on management's assumptions, the pro
forma adjustments and the application of those adjustments to historical
financial information. Accordingly, we do not express such an opinion.
The objective of this pro forma financial information is to show what the
significant effects on the historical information might have been had the
offering, separation and related transactions occurred at an earlier date.
However, the pro forma combined financial statements are not necessarily
indicative of the results of operations or related effects on financial position
that would have been attained had the above-mentioned offering, separation and
related transactions actually occurred earlier.
Based on our review, nothing came to our attention that caused us to
believe that management's assumptions do not provide a reasonable basis for
presenting the significant effects directly attributable to the above-mentioned
offering, separation and related transactions described in Notes 1 and 2, that
the related pro forma and offering adjustments do not give appropriate effect to
those assumptions, or that the pro forma as adjusted column does not reflect the
proper application of those adjustments to the historic financial statement
amounts in the pro forma combined balance sheet as of June 30, 1998, and the pro
forma combined statements of income for the six-month periods ended June 30,
1997 and 1998.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
October 21, 1998
29
<PAGE> 29
PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA OFFERING PRO FORMA
HISTORIC ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
-------- ----------- --------- ----------- -----------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Total Revenues.......................... $26,263 $ (11)(a) $26,241 $ (62)(n) $26,179
(11)(b)
Cost of Goods Sold and Other Operating
Expenses.............................. 16,226 -- 16,226 -- 16,226
Selling, General and Administrative
Expenses.............................. 726 -- 726 -- 726
Exploration Expenses.................... 457 -- 457 -- 457
Depreciation, Depletion and
Amortization.......................... 1,179 -- 1,179 -- 1,179
Taxes Other Than on Income.............. 5,532 -- 5,532 -- 5,532
Interest and Debt Expense............... 36 404(a) 440 (236)(o) 204
------- ----- ------- -------- -------
Income Before Income Taxes.............. 2,107 (426) 1,681 174 1,855
Provision for Income Taxes.............. 1,010 (123)(c) 887 41(o) 928
------- ----- ------- -------- -------
Net Income.................... $ 1,097 $(303) $ 794 $ 133 $ 927
======= ===== ======= ======== =======
Pro Forma Earnings Per Share:
Basic................................. $ 1.48
Diluted............................... $ 1.46
Pro Forma Weighted Average Shares
Outstanding:
Basic................................. 628
Diluted............................... 637
</TABLE>
See Notes to Pro Forma Combined Financial Statements
30
<PAGE> 30
PRO FORMA COMBINED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA OFFERING PRO FORMA
HISTORIC ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
-------- ----------- --------- ----------- -----------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Total Revenues.............................. $12,600 $ (6)(a) $12,585 $ (60)(n) $12,525
(9)(b)
Cost of Goods Sold and Other Operating
Expenses.................................. 7,667 -- 7,667 -- 7,667
Selling, General and Administrative
Expenses.................................. 355 -- 355 -- 355
Exploration Expenses........................ 192 -- 192 -- 192
Depreciation, Depletion and Amortization.... 516 -- 516 -- 516
Taxes Other Than on Income.................. 2,669 -- 2,669 -- 2,669
Interest and Debt Expense................... 24 199(a) 223 (118)(o) 105
------- ----- ------- ----- -------
Income Before Income Taxes.................. 1,177 (214) 963 58 1,021
Provision for Income Taxes.................. 590 (62)(c) 528 11(o) 539
------- ----- ------- ----- -------
Net Income........................ $ 587 $(152) $ 435 $ 47 $ 482
======= ===== ======= ===== =======
Pro Forma Earnings Per Share:
Basic..................................... $ 0.77
Diluted................................... $ 0.76
Pro Forma Weighted Average Shares
Outstanding:
Basic..................................... 628
Diluted................................... 637
</TABLE>
PRO FORMA COMBINED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA OFFERING PRO FORMA
HISTORIC ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
-------- ----------- --------- ----------- -----------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Total Revenues.............................. $11,486 $ (33)(a) $11,453 $ (20)(n) $11,433
Cost of Goods Sold and Other Operating
Expenses.................................. 6,754 -- 6,754 -- 6,754
Selling, General and Administrative
Expenses.................................. 370 -- 370 -- 370
Exploration Expenses........................ 176 -- 176 -- 176
Depreciation, Depletion and Amortization.... 505 -- 505 -- 505
Taxes Other Than on Income.................. 2,896 -- 2,896 -- 2,896
Interest and Debt Expense................... 1 209(a) 210 (118)(o) 92
------- ----- ------- ----- -------
Income Before Income Taxes.................. 784 (242) 542 98 640
Provision for Income Taxes.................. 254 (58)(c) 196 22(o) 218
------- ----- ------- ----- -------
Net Income........................ $ 530 $(184) $ 346 $ 76 $ 422
======= ===== ======= ===== =======
Pro Forma Earnings Per Share:
Basic..................................... $ 0.67
Diluted................................... $ 0.66
Pro Forma Weighted Average Shares
Outstanding:
Basic..................................... 628
Diluted................................... 637
</TABLE>
See Notes to Pro Forma Combined Financial Statements
31
<PAGE> 31
PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1998
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA OFFERING AS
HISTORIC ADJUSTMENTS PRO FORMA ADJUSTMENTS ADJUSTED
-------- ----------- --------- ----------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Cash and Cash Equivalents.................... $ 829 $ (439)(d) $ 123 $ 4,228(i) $ 225
(267)(e) (3,928)(j)
377(l)
(575)(m)
Restricted Cash.............................. 575(m) 575
Marketable Securities........................ 7 -- 7 -- 7
Accounts and Notes Receivable................ 1,252 -- 1,252 -- 1,252
Notes Receivable -- Related Parties.......... 465 612(d) 377 (377)(l) --
(700)(h)
Inventories.................................. 981 981 -- 981
Prepaid Expenses............................. 305 -- 305 -- 305
------- ------- ------- ------- -------
Total Current Assets................ 3,839 (794) 3,045 300 3,345
Net Property, Plant and Equipment............ 11,048 -- 11,048 -- 11,048
Investment in Affiliates..................... 1,141 -- 1,141 -- 1,141
Long-Term Notes Receivable -- Related
Parties.................................... 612 (612)(d) -- -- --
Other Assets................................. 524 (63)(d) 461 -- 461
------- ------- ------- ------- -------
Total Assets........................ $17,164 $(1,469) $15,695 $ 300 $15,995
======= ======= ======= ======= =======
LIABILITIES AND OWNER'S NET INVESTMENT
Accounts Payable............................. $ 1,129 $ -- $ 1,129 $ -- $ 1,129
Short-Term Borrowings -- Related Parties..... 1,087 (815)(d) 272 (272)(j) --
Other Short-Term Borrowings and Capital Lease
Obligations................................ 51 -- 51 -- 51
Income Taxes................................. 253 -- 253 -- 253
Other Accrued Liabilities.................... 1,043 -- 1,043 -- 1,043
------- ------- ------- ------- -------
Total Current Liabilities........... 3,563 (815) 2,748 (272) 2,476
------- ------- ------- ------- -------
Long-Term Borrowings -- Related Parties...... 1,181 (179)(d) 1,002 (1,002)(j) --
Long-Term Borrowings -- Other Related
Party...................................... -- 7,500(g) 7,500 (2,654)(j) 4,853
7(k)
Other Long-Term Borrowings and Capital Lease
Obligations................................ 103 -- 103 -- 103
Deferred Income Taxes........................ 1,861 (24)(f) 1,837 -- 1,837
Other Liabilities and Deferred Credits....... 1,925 -- 1,925 -- 1,925
------- ------- ------- ------- -------
Total Liabilities................... 8,633 6,482 15,115 (3,921) 11,194
------- ------- ------- ------- -------
Minority Interests........................... 308 -- 308 -- 308
Owner's Net Investment and Accumulated Other
Comprehensive Loss/Stockholders' Equity.... 8,223 (7,500)(g) 272 4,228(i) 4,493
(267)(e) (7)(k)
24(f)
492(d)
(700)(h)
------- ------- ------- ------- -------
Total Liabilities and Owner's Net
Investment/Stockholders' Equity... $17,164 $(1,469) $15,695 $ 300 $15,995
======= ======= ======= ======= =======
</TABLE>
See Notes to Pro Forma Combined Financial Statements
32
<PAGE> 32
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
(1) BASIS OF PRESENTATION
The unaudited pro forma combined statements of income of the Company for
the year ended December 31, 1997, and the six months ended June 30, 1997 and
1998, and the unaudited pro forma combined balance sheet as of June 30, 1998
(collectively "the Pro Forma Combined Financial Statements") have been prepared
from the Combined Financial Statements and Interim Combined Financial Statements
presented elsewhere in this Prospectus. The Pro Forma Combined Financial
Statements are based on numerous assumptions and include the adjustments
explained in Note 2 below. The unaudited pro forma combined statements of income
have been prepared as if the Offerings, Separation and related transactions
described in the following paragraph had occurred as of the beginning of the
period presented. The unaudited pro forma combined balance sheet has been
prepared as if the Offerings, Separation and related transactions described in
the following paragraph had occurred as of June 30, 1998.
In July 1998, a dividend of $7,500 was declared and paid in the form of a
promissory note by the Company to all shareholders of record as of July 20,
1998. On September 28, 1998, the Company declared a dividend of a receivable
from DuPont evidenced by a promissory note in the amount of $700 million. Prior
to or concurrently with the consummation of the Offerings the following
transactions will have occurred as provided for in the Separation Agreement: (a)
to structure the Company on a stand-alone basis, certain subsidiaries and assets
and liabilities will be transferred between DuPont and Conoco; (b) intercompany
loans in existence prior to the Offerings will be settled to the extent
specified; (c) the Company will deliver a promissory note to DuPont as
settlement for DuPont stock options held by Conoco employees and other employee
benefits related liabilities; (d) the Company will use the net proceeds of the
Offerings to repay a portion of the Long-Term Borrowings -- Other Related Party;
and (e) DuPont and Conoco will enter into certain agreements with respect to
employee benefit arrangements, information management, the provision of interim
services, financing arrangements, tax sharing, environmental liabilities and
various commercial arrangements. The transactions described above, excluding the
Offerings, are referred to herein collectively as the "Transactions." See
"Arrangements between the Company and DuPont."
The Pro Forma Combined Financial Statements do not purport to represent
what the results of operations or financial position of the Company would
actually have been if the Offerings and Transactions had in fact occurred on
such dates or to project the results of operations or financial position of the
Company for any future date or period. These statements should be read in
conjunction with, and are qualified by reference to, the Combined Financial
Statements, the Interim Combined Financial Statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus.
The pro forma adjustments are based upon currently available information
and contain certain estimates and assumptions. Should DuPont's ownership
interest fall below 50 percent, pro forma Selling, General and Administrative
expenses and guarantee and letter of credit fees would increase by approximately
$15 to $20 on a full year basis. In addition, certain changes are scheduled to
be made in services historically provided to DuPont by the Company. These
changes primarily include ceasing to provide insurance coverage to DuPont which
historically has been provided through a Company-owned captive insurance company
and entering into new contractual commitments related to fees charged by Conoco
for services provided to DuPont such as research and development and securing
supplies of natural gas for various DuPont facilities. The effect of these
scheduled changes are not expected to be material to the Company's results of
operations and are not reflected in the Pro Forma Combined Financial Statements.
Certain international assets relating primarily to the business of DuPont
may be held by the Company or its subsidiaries at the closing of the Offerings
pending receipt of consents or other approval or satisfaction of other
applicable foreign requirements necessary for the transfer of such assets to
DuPont. In addition, certain international assets relating primarily to the
business of the Company may be held by DuPont or other of its subsidiaries at
the closing of the Offerings pending receipt of consents or approvals or
satisfaction of other
33
<PAGE> 33
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS)
applicable foreign requirements necessary for the transfer of such assets to the
Company. The financial and other information included herein assumes the
consummation of all such transactions. Additionally, such information reflects
the inclusion of certain subsidiaries of DuPont which will not be owned by the
Company as of the closing of the Offerings, and which DuPont will not thereafter
be obligated to transfer to the Company. DuPont and the Company intend to
negotiate for the sale of such subsidiaries within the six months following the
Offerings at a purchase price equal to their then fair market value. DuPont and
the Company estimate that the fair market value of such subsidiaries at August
1998 was approximately $20 and cannot predict at what price any such sale may
occur. All of the above subsidiaries, which are immaterial to total assets and
results of operations of the Company, have been included in the Combined
Financial Statements.
Subject to completion of the Offerings, the Company and DuPont expect to
give certain current employees of the Company the option, subject to specific
country tax and legal requirements, to participate in the Option Program, which
involves the cancellation of all or part of their options to purchase DuPont
common stock or SARs with respect to DuPont common stock and the issuance by the
Company upon such cancellation of comparable Class A Common Stock options, or
SARs with respect to Class A Common Stock. Participation in the Option Program
will be deemed a change in the terms of certain awards granted to Conoco
employees. As a result, the Company will incur a non-cash charge to compensation
expense, in the quarter the Offerings are completed, of approximately $192
after-tax, depending on the number of outstanding Conoco employee options to
purchase DuPont common stock canceled. Since the cancellation and issuance would
be a one-time event occurring after the Offerings, the charge is not reflected
in the Pro Forma Combined Financial Statements. See "Management -- Treatment of
Outstanding Stock Options and Stock Appreciation Rights."
The Company estimates that approximately 81 percent of all outstanding
DuPont stock options and SARs held by Conoco employees will be voluntarily
canceled in the Option Program. See "Prospectus Summary -- Separation From
DuPont."
Management believes the estimates and assumptions provide a reasonable
basis for presenting the significant effects of the Offerings and Transactions
as contemplated in the Separation Agreement, and that the pro forma adjustments
give appropriate effect to these estimates and assumptions and are properly
applied in the Pro Forma Combined Financial Statements.
(2) PRO FORMA ADJUSTMENTS
Unaudited Pro Forma Combined Statements of Income
(a) Reflects a decrease in interest income due to settlement of Notes
Receivable -- Related Parties and incremental interest expense resulting from
the Company's new debt structure. The incremental interest expense was
calculated by multiplying the Long-Term Borrowings -- Related Parties ($1,002),
and Short-Term Borrowings -- Related Parties ($272) and the new Long-Term
Borrowings -- Other Related Party ($7,500) by an annual interest rate of 6.0125
percent on those borrowings and subtracting the historical related party
interest cost of $124 for 1997, and $65 and $55 for the six months ended June
30, 1997 and 1998, respectively. The historical related party interest cost is
net of capitalized interest of $94, $44 and $57, for these periods,
respectively.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 JUNE 30, 1997 JUNE 30, 1998
----------------- ------------- -------------
<S> <C> <C> <C>
Decrease to Interest Income................... (11) (6) (33)
Increase to Interest and Debt Expense......... 404 199 209
</TABLE>
(b) Reflects the impact of changes in currency exchange rates on certain
intercompany loans denominated in foreign currencies purchased by the Company
from DuPont as part of the restructuring and settlement of notes prior to the
Offerings provided for in the Separation Agreement. These loans are to
34
<PAGE> 34
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
Western European petroleum operations for which the local currency has been
designated as the functional currency.
(c) Reflects the impact of the Pro Forma Adjustments (primarily increased
interest expense resulting from the Company's new debt structure) and a separate
return income tax calculation method on the Provision for Income Taxes. The
historic tax provision was calculated on a loss benefit method (See Note 2 to
the Combined Financial Statements). In accordance with SEC Staff Accounting
Bulletin No. 55, the Pro Forma Provision for Income Taxes is calculated using a
separate return method. The Pro Forma Combined Statements of Income for the year
ended December 31, 1997 and for the six months ended June 30, 1997 and June 30,
1998 reflect a reduction in the Pro Forma Provision for Income Taxes of
approximately $8, $0 and $0, respectively, due to the change to the separate
return method of presentation. The reduction in Pro Forma Provision for Income
Taxes is primarily attributable to the utilization of additional foreign tax
credits against the provision for U.S. taxes, offset by a reduction in tax
benefits resulting from the transfer of international exploration subsidiaries
from the original tax jurisdiction to another tax jurisdiction. See also
"Arrangements Between the Company and DuPont -- Tax Sharing Agreement" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Tax Matters."
Unaudited Pro Forma Combined Balance Sheet as of June 30, 1998
(d) Reflects the settlement, and transactions necessary for settlement, of
intercompany notes in existence prior to the Offerings as provided for in the
Separation Agreement.
(e) The Company will use a portion of its cash ($247) to acquire certain
subsidiaries from DuPont and to refund prepaid insurance premiums to DuPont.
Additionally, an estimated $20 will be available to acquire certain other assets
from DuPont subsequent to the Offerings if such transactions take place. As
these assets are held under common control, they are accounted for at their
historical book value. As a result, their acquisition or potential future
acquisition at estimated fair value has been reflected as a charge to Owner's
Net Investment. Any deferred tax assets related to these acquisitions or
potential future acquisitions have been fully reserved.
(f) The pro forma separate return tax calculation reflects a reduction in
deferred tax liabilities of $24 principally resulting from the transfer of
international production subsidiaries from the original tax jurisdiction to
another tax jurisdiction.
(g) Reflects that in July 1998, a dividend of $7,500 was declared and paid
by the Company in the form of a promissory note, to all shareholders of record
as of July 20, 1998. The Promissory Note is due January 2, 2000 and bears
interest at an annual interest rate of 6.0125 percent.
(h) Reflects a dividend in September 1998 by the Company to DuPont of $700
of the balance in Notes Receivable -- Related Parties.
Offering Adjustments
(i) Represents the receipt by Conoco of $4,228 in proceeds from the
Offerings (consisting of the sale of 191.5 million shares at $23 per share, net
of underwriting discounts of $176).
(j) Represents the use of net proceeds to repay the indebtedness to DuPont
as described in "Use of Proceeds."
(k) The Separation Agreement provides that a subsidiary of the Company will
issue a promissory note to DuPont in an amount equal to the sum of: (i) an
agreed level of future appreciation of DuPont stock options or SARs held by
active Conoco employees who do not participate in the Option Program; (ii) an
amount calculated to result in an approximately equal sharing between the
Company and DuPont of the after-tax cost
35
<PAGE> 35
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS)
that would result from an assumed exercise of all DuPont stock options and SARs
held by active Conoco employees outstanding immediately prior to the Offerings
(including those to be cancelled upon issuance of Company stock options and
SARs), based on the appreciated value of the options at the time of the
Offerings; and (iii) $10.4 in consideration for other employee benefits related
liabilities assumed by DuPont for employees transferring between the two
companies. This note will be non-interest bearing with a due date of January 2,
2000 and have a principal amount determined in accordance with the Separation
Agreement. Alternatively, a portion of the Long-Term Borrowings -- Related
Parties, determined pursuant to the Separation Agreement, may remain outstanding
in lieu of all or part of this note. Assuming an estimate of the value at the
date of the Offerings and that 81 percent of all outstanding DuPont stock
options and SARs are voluntarily cancelled in the Option Program, the principal
amount is projected to be $7. If the principal amount determined in accordance
with the Separation Agreement is negative, DuPont will instead make a
corresponding cash payment to the Company.
(l) Reflects the collection of the remaining balance in Notes
Receivable -- Related Parties.
(m) Represents a reclassification for restricted cash related to the excess
of net proceeds of $575 to be used to repay borrowings due DuPont incurred
subsequent to June 30, 1998. As provided in the Separation Agreement, the
Company will have cash and cash equivalents of $225 and Long-Term
Borrowings -- Other Related Party, excluding the amount discussed in (k), of
$4,846.
(n) Reflects the impact of changes in currency exchange rates on certain
intercompany loans denominated in foreign currencies purchased by the Company
from DuPont after the Offerings. These loans are to Western European petroleum
operations for which the local currency has been designated as the functional
currency.
(o) Represents the reduction of interest expense and the associated
increase in income taxes resulting from the payment to DuPont of the borrowings
described in (j) and the tax impact of the adjustment described in (n) above.
(3) EARNINGS PER SHARE
Unaudited pro forma basic earnings per share includes both the Class A and
the Class B common shares deemed to be outstanding as of the date of the
Offerings. Pro forma diluted earnings per share includes the dilutive effect of
the 8.6 million shares of Class A Common Stock issuable upon exercise of Company
stock options, after applying the treasury stock method, which are expected to
be issued in the Option Program upon cancellation of outstanding DuPont stock
options, using the anticipated weighted-average exercise price of the
outstanding options and the price per share of the Offerings. In accordance with
SEC Staff Accounting Bulletin No. 98, pro forma basic and diluted earnings per
share have been presented for the most recent annual and subsequent interim
periods only.
36
<PAGE> 36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following section contains forward-looking statements including,
without limitation, statements relating to the Company's plans, strategies,
objectives, expectations, intentions and resources. See "Disclosure Regarding
Forward-Looking Information" and "Risk Factors." The Company does not undertake
to update, revise or correct any of the forward-looking information.
The discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with the Combined Financial
Statements of the Company, the unaudited Supplemental Information to the
Combined Financial Statements, the unaudited Interim Combined Financial
Statements of the Company and the notes to each of these appearing elsewhere in
this Prospectus.
Since 1981, the Company's business operations have been conducted by
various entities, owned directly or indirectly, by DuPont. In conjunction with
the Offerings, certain businesses are being realigned so these operations can be
conducted as wholly owned subsidiaries of Conoco. The Combined Financial
Statements are presented on a "carve out" basis and include the historical
operations of the entities owned by Conoco and operations to be transferred to
Conoco by DuPont. In this context, no direct ownership relationship existed
among all the various units comprising Conoco; accordingly, DuPont and its
subsidiaries' net investment in Conoco ("Owner's Net Investment") is shown in
lieu of Stockholders' Equity in the Combined Financial Statements. The Combined
Financial Statements included herein have been prepared from DuPont's historical
accounting records.
The Combined Statement of Income includes all revenues and costs directly
attributable to Conoco, including costs for facilities, functions and services
used by Conoco at shared sites and costs for certain functions and services
performed by centralized DuPont organizations and directly charged to Conoco
based on usage. In addition, services performed by Conoco on DuPont's behalf are
reflected in the accompanying Combined Financial Statements. The results of
operations also include allocations of (i) costs for administrative functions
and services performed on behalf of Conoco by centralized staff groups within
DuPont and (ii) DuPont's general corporate expenses.
All charges and allocations of costs for facilities, functions and services
performed by DuPont organizations for Conoco have been deemed to have been paid
by Conoco to DuPont, in cash, in the period in which the costs were recorded in
the Combined Financial Statements. Allocations of current income taxes
receivable or payable are deemed to have been remitted, in cash, by or to DuPont
in the period the related income taxes were recorded.
All of the allocations and estimates in the Combined Financial Statements
are based on assumptions management believes are reasonable under the
circumstances. However, these allocations and estimates are not necessarily
indicative of the costs and expenses that would have resulted if Conoco had
operated as a separate entity.
Business operations are grouped into three segments: Upstream, Downstream
and Corporate and Other. The Upstream segment explores for, develops, produces
and sells crude oil, natural gas and natural gas liquids. The Downstream segment
refines crude oil and other feedstocks into petroleum products, buys and sells
crude oil and refined products, and transports, distributes and markets
petroleum products. Corporate and Other includes general corporate expenses,
financing costs and other non-operating items and results for electric power and
related-party insurance operations.
The Company considers portfolio optimization to be an ongoing business
strategy and continuously seeks to rationalize its investment portfolio in order
to maximize profitability. Over the past five years the Company has generated
proceeds of approximately $1,750 million, averaging about $350 million a year
through the disposal of marginal and nonstrategic producing properties, by
upgrading and redirecting its exploration portfolio and by increasing its
ownership in larger scale properties. As a result, the Company has maintained
production essentially constant on a BOE basis while undergoing this
rationalization. The Company's policy is
37
<PAGE> 37
to report material gains and losses from individual asset sales as non-recurring
items when reporting Combined Net Income.
The Company's revenue and profitability are largely determined by the
difference between prices received for crude oil, natural gas, natural gas
liquids and refined products produced and the costs of finding, developing, and
producing those resources. The Company conducts its activities through wholly
and majority owned subsidiaries and, increasingly, through equity affiliates.
This trend of conducting business in the petroleum industry through equity
affiliates is expected to increase in the future as the Company attempts to
minimize either the capital or political risks associated with new large scale,
high impact projects. In addition, the Company conducts its Upstream and
Downstream activities in 40 countries worldwide and is subject to various tax
rates, some significantly higher than U.S. rates, which can result in
variability in revenues and profitability. Other potential sources of
variability in the Company's revenues are crude oil and refined product buy/sell
contracts and natural gas and electric power resale activities.
Buy/sell contracts are the marketing of crude oil or refined products,
which are produced or refined by other companies and purchased by the Company
for resale. The vast majority of crude oil buy/sell contracts are geared at
repositioning purchased crude oil for supplying the Company's refineries and
optimizing its transportation assets. The Company also engages in some buy/sell
crude oil contracts in pursuit of trading profit opportunities. Each side of the
contract, i.e., the buy side and the sell side, is accounted for and settled
independently of the other. Although differentials (reflecting differences in
quality or location) between the sales revenue and the cost are relatively
immaterial, the gross amounts reported for both revenue and cost are material.
A substantial decline in crude oil prices began in late 1997 and is
continuing in 1998, with crude oil prices currently at their lowest level in
over a decade. These lower prices had a significant negative impact on the
Company's results in the first half of 1998 and are expected to continue to
negatively impact 1998 financial results.
Subject to completion of the Offerings, the Company and DuPont expect to
give certain current employees of the Company the option, subject to specific
country tax and legal requirements, to participate in the Option Program, which
involves the cancellation of all or part of their options to purchase DuPont
common stock or SARs with respect to DuPont common stock and the issuance by the
Company upon such cancellation of comparable options to acquire Class A Common
Stock or SARs with respect to Class A Common Stock. Participation in the Option
Program will be deemed a change in the terms of certain awards granted to Conoco
employees. As a result, the Company will incur a non-cash charge to compensation
expense in the quarter the Offerings are completed of approximately $192 million
after-tax depending on the number of outstanding Conoco employee options to
purchase DuPont common stock or SARs canceled. Since the cancellation and
issuance would be a one-time event, occurring after the Offerings, the charge is
not reflected in the Pro Forma financial information included in this
Prospectus. See "Management -- Treatment of Outstanding Stock Options and Stock
Appreciation Rights."
38
<PAGE> 38
RESULTS OF OPERATIONS
COMBINED RESULTS
A summary of the Company's Sales and Other Operating Revenues and Combined
Net Income, by business segment, is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- -----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
SALES AND OTHER OPERATING REVENUES
Upstream..................................... $ 3,270 $ 4,726 $ 5,254 $ 2,679 $ 2,475
Downstream................................... 17,038 19,425 20,033 9,649 8,534
Corporate and Other.......................... 20 79 509 147 339
------- ------- ------- ------- -------
Total Sales and Other Operating
Revenues.............................. $20,328 $24,230 $25,796 $12,475 $11,348
======= ======= ======= ======= =======
COMBINED NET INCOME
Upstream
United States.............................. $ 258 $ 314 $ 445 $ 241 $ 144
International.............................. 234 367 439 213 215
------- ------- ------- ------- -------
Total Upstream.......................... $ 492 $ 681 $ 884 $ 454 $ 359
Downstream
United States.............................. $ 112 $ 172 $ 216 $ 130 $ 86
International.............................. 121 117 91 51 95
------- ------- ------- ------- -------
Total Downstream........................ $ 233 $ 289 $ 307 $ 181 $ 181
Corporate and Other.......................... (150) (107) (94) (48) (10)
------- ------- ------- ------- -------
Combined Net Income..................... $ 575 $ 863 $ 1,097 $ 587 $ 530
======= ======= ======= ======= =======
</TABLE>
SPECIAL ITEMS
Combined net income includes the following material non-recurring items
("Special Items") on an after-tax basis:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------- --------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Asset sales.................................. $ -- $ 35 $240 $ 24 $54
Property impairments......................... (45) (63) (167) -- --
Tax rate changes............................. -- -- 30 -- --
Environmental insurance litigation
recoveries................................. -- 44 -- -- --
Employee separation costs.................... -- (22) -- -- --
Other........................................ -- -- (23) -- (28)
---- ---- ---- ---- ---
Total Special Items..................... $(45) $ (6) $ 80 $ 24 $26
==== ==== ==== ==== ===
</TABLE>
First half 1998 Special Items reflect a $23 million gain on the sale of
North Sea producing and non-producing properties and a $31 million gain from the
sale of an international subsidiary versus a $24 million gain from the sale of
US producing properties in the first half of 1997. Other losses in the first
half of 1998 reflect anticipated costs of $28 million to resolve various
litigation claims.
Special Items in 1997 include $240 million in gains from asset sales
consisting of $191 million associated with both producing and non-producing
properties in the North Sea and $49 million in the United States. Such asset
sales are part of the Company's rationalization program, designed to improve
profitability by
39
<PAGE> 39
disposing of marginal properties and concentrating operations on core
properties. A U.K. tax rate change also provided a $30 million benefit in 1997.
Largely offsetting these benefits were property impairments of $167 million,
with $55 million attributable to the write-down of an office building held for
sale in Europe and $112 million reflecting the impairment of certain
international non-revenue producing properties. Other losses of $23 million
include litigation settlements.
Special Items in 1996 include $35 million in gains from asset sales
consisting of $19 million associated with the sale of the Company's retail
marketing business in Ireland and $16 million from the sale of producing and
non-producing properties in the United States. Environmental insurance
litigation recoveries also resulted in a $44 million benefit. Offsetting these
benefits was a $63 million impairment associated with a write-down of an
investment in a European gas marketing joint venture and employee separation
costs of $22 million.
Special Items in 1995 reflect $45 million in property impairments
associated with implementation of Statement of Financial Accounting Standards
No. 121 -- "Accounting for Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed of."
Combined net income before Special Items ("Earnings Before Special Items")
was $504 million in the first half of 1998, $1,017 million in 1997, $869 million
in 1996 and $620 million in 1995.
First Half 1998 versus First Half 1997
The Company had first half combined net income of $530 million in 1998,
down 10 percent from $587 million in the first half of 1997. The Company had
Earnings Before Special Items of $504 million in the first half of 1998, down 10
percent from $563 million in the first half of 1997. Lower Earnings Before
Special Items primarily reflects lower net realizable crude oil and natural gas
prices. The effect of lower crude oil and natural gas prices was partly offset
by higher natural gas volumes, increased oil production in countries with lower
effective tax rates, lower exploration expenses, improved international
Downstream margins and the favorable resolution of certain tax issues.
Sales and Other Operating Revenues for the first half of 1998 were $11.3
billion, down nine percent from the first half of 1997, primarily due to a
decrease in worldwide crude oil and natural gas prices and lower refined product
volumes and prices. Crude oil and refined product buy/sell and natural gas and
electric power resale activities in the first half of 1998 totaled $2.4 billion,
down three percent compared to $2.5 billion in the first half of 1997.
Cost of Goods Sold and Other Operating Expenses for the first half of 1998
totaled $6.8 billion, a decrease of $0.9 billion, or 12 percent, compared to
$7.7 billion in the first half of 1997, primarily due to lower crude oil,
natural gas and refined product prices and slightly lower crude oil and refined
product volumes offset partly by higher natural gas production.
Selling, General and Administrative Expenses for the first half of 1998
totaled $370 million, an increase of $15 million, or four percent, compared to
$355 million in the first half of 1997, primarily due to higher costs in
international Downstream marketing operations resulting from retail marketing
expansion activities in countries with better growth potential over the
long-term.
Exploration Expenses for the first half of 1998 totaled $176 million, a
decline of $16 million, or eight percent, compared to $192 million in the first
half of 1997, due to lower amortization of non-producing leasehold properties in
the United States and lower exploration overhead and operating expenses
resulting from seismic surveys conducted in 1997 in the Gulf of Paria located
between Venezuela and Trinidad and the Merida Andes foothills in Venezuela,
offset by higher international dry hole costs.
Depreciation, Depletion and Amortization for the first half of 1998 totaled
$505 million, or two percent lower, compared to $516 million in the first half
of 1997.
Provision for Income Taxes for the first half of 1998 totaled $254 million,
down 57 percent compared to $590 million for the first half of 1997. This
reflects an effective tax rate of approximately 32 percent in the first half of
1998 compared to 50 percent in the first half of 1997 due to increased oil
production in countries with lower effective tax rates and the favorable
resolution of certain tax issues.
40
<PAGE> 40
1997 versus 1996
Combined net income for 1997 of $1,097 million was up 27 percent from $863
million the prior year. The Company had Earnings Before Special Items of $1,017
million in 1997, up 17 percent from $869 million in 1996. The increase was
attributable to improved U.S. natural gas prices and higher international
natural gas volumes in addition to stronger worldwide Downstream product margins
and increased worldwide refinery production.
Sales and Other Operating Revenues of $25.8 billion in 1997 were up six
percent compared to $24.2 billion in the prior year, as higher Downstream
product prices and volumes, increased international natural gas volumes and
stronger domestic natural gas prices more than compensated for lower crude oil
prices. Crude oil and refined product buy/sell and natural gas and electric
power resale activities in 1997 totaled $5.5 billion, up 32 percent compared to
$4.2 billion in 1996.
Cost of Goods Sold and Other Operating Expenses in 1997 totaled $16.2
billion, up 11 percent compared to $14.6 billion in 1996, due to higher refined
product volumes and crude oil and refined product buy/sell contract activity and
natural gas and electric power resale activities.
Selling, General and Administrative Expenses in 1997 totaled $726 million,
a decrease of $29 million, or four percent, compared to $755 million in 1996,
primarily due to one-time costs in 1996 for retail expansion activities in the
U.S.
Exploration Expenses in 1997 totaled $457 million, an increase of $53
million, or 13 percent, compared to $404 million in 1996, due to higher
international exploration overhead and operating costs primarily from seismic
surveys conducted in the Gulf of Paria located between Venezuela and Trinidad
and in the Merida Andes foothills in Venezuela, higher international dry hole
costs and an adjustment of certain non-producing U.S. leasehold properties.
Depreciation, Depletion and Amortization in 1997 totaled $1,179 million, an
increase of $94 million, or nine percent, compared to $1,085 million in 1996 due
to higher depreciation resulting from a write down of an office building held
for sale in the U.K. and an impairment of certain international non-revenue
producing properties partially offset by lower depreciation in U.S. Downstream
operations.
Provision for Income Taxes totaled $1,010 million in 1997, down three
percent compared to $1,038 million in 1996. The lower provision reflects an
effective tax rate of approximately 48 percent in 1997 compared to 55 percent in
1996. The decrease in the effective tax rate was primarily due to a lower
proportion of earnings from operations in countries with higher effective tax
rates.
1996 versus 1995
Combined net income for 1996 of $863 million was up 50 percent from $575
million in 1995. The Company had Earnings Before Special Items of $869 million
in 1996, up 40 percent from $620 million in 1995. The improvement was due to
higher crude oil and natural gas prices, higher international crude oil and
natural gas volumes, and higher refining margins. Partly offsetting these
benefits were startup costs related to the Humber refinery's new vacuum unit in
the United Kingdom.
Sales and Other Operating Revenues of $24.2 billion in 1996 were up 19
percent compared with $20.3 billion in 1995, principally resulting from higher
worldwide crude oil and natural gas prices and higher international crude oil
and natural gas volumes, partly offset by lower industry-wide marketing prices.
Crude oil and refined product buy/sell contracts and natural gas and electric
power resale activities in 1996 totaled $4.2 billion, up 67 percent compared to
$2.5 billion in 1995.
Cost of Goods Sold and Other Operating Expenses in 1996 totaled $14.6
billion, an increase of $3.5 billion or 31 percent, compared to $11.1 billion in
1995 due to higher crude oil and natural gas prices and higher volumes for crude
oil, natural gas and refined products, higher purchased refined product costs
and increased activity from crude oil and refined products buy/sales and natural
gas resales.
41
<PAGE> 41
Selling, General and Administrative Expenses in 1996 totaled $755 million,
an increase of $27 million, or four percent, compared to $728 million in 1995,
primarily due to one-time costs for retail marketing expansion activities in the
U.S.
Exploration Expenses in 1996 totaled $404 million, an increase of $73
million, or 22 percent, compared to 1995 of $331 million, primarily due to
higher exploration overhead and operating costs in the United States and Norway
and higher U.S. and international dry hole costs.
Depreciation, Depletion and Amortization in 1996 totaled $1,085 million, an
increase of $18 million, or 2 percent, compared to $1,067 in 1995, primarily due
to higher depreciation from Eastern European retail marketing expansion
activities and impairments of certain international non-revenue producing
properties offset partially by lower depreciation in U.S. Downstream operations.
Provision for Income Taxes totaled $1,038 in 1996, up 34 percent compared
to $774 million in 1995. This reflects a relatively constant effective tax rate
of approximately 55 percent in 1996 compared to 57 percent in 1995.
UPSTREAM SEGMENT RESULTS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------ -----------
1995 1996 1997 1997 1998
------ ------ ------ ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Combined Net Income............................... $492 $681 $884 $454 $359
Special Items..................................... 39 58 (147) (24) (54)
---- ---- ---- ---- ----
Earnings Before Special Items..................... $531 $739 $737 $430 $305
==== ==== ==== ==== ====
</TABLE>
First Half 1998 versus First Half 1997
Upstream combined net income was $359 million in the first half of 1998,
down 21 percent from $454 million in the first half of 1997. Upstream Earnings
Before Special Items was $305 million in the first half of 1998, down 29 percent
from $430 million in the first half of 1997.
The Company's worldwide net realized crude oil price was $13.01 per barrel
for the first half of 1998, down $6.17 per barrel, or 32 percent, from $19.18
per barrel in the first half of 1997. Excess supply caused by weak Asian demand,
higher crude oil production from OPEC producing countries and warmer winter
weather caused the sharp drop in crude oil prices. Worldwide natural gas prices
averaged $2.37 per thousand cubic feet (mcf) for the first half, compared with
$2.62 per mcf in the same period in 1997 because of warmer winter weather. Lower
worldwide natural gas prices were primarily driven by lower natural gas prices
outside the United States. Worldwide crude oil and condensate production in the
first half of 1998 was 317,000 barrels per day versus 319,000 barrels per day in
the first half of 1997. Worldwide natural gas production in the first half of
1998 was up eight percent to 1,307 million cubic feet per day from 1,210 million
cubic feet per day in the first half of 1997.
U.S. Upstream Earnings Before Special Items totaled $144 million in the
first half of 1998, down 34 percent from $217 million in the comparable period
of 1997. Lower U.S. Upstream Earnings Before Special Items was due to lower
crude oil and natural gas prices and lower crude oil volumes due to asset
dispositions and crude oil production declines. These factors more than offset
benefits from increased natural gas production and lower exploration expenses.
Natural gas volumes were up 16 percent as increased production from the holdings
in the South Texas Lobo trend acquired in 1997 more than offset the decline in
natural gas production elsewhere.
Outside the United States, Upstream Earnings Before Special Items was $161
million, down 24 percent, from $213 million in the comparable period in 1997,
primarily due to lower crude oil and natural gas prices offset by higher natural
gas volumes, lower exploration expenses, and the favorable resolution of certain
tax issues. Despite slightly lower crude oil volumes resulting from the sale of
the Company's interest in the mature
42
<PAGE> 42
Ula and Gyda fields in Norway, earnings benefited from higher production from
countries with relatively lower tax rates (primarily the United Kingdom and
Nigeria).
1997 versus 1996
Upstream combined net income was $884 million in 1997, up 30 percent,
compared to $681 million in 1996. Upstream Earnings Before Special Items totaled
$737 million in 1997, essentially unchanged from the previous year.
Worldwide natural gas prices were up 14 percent to $2.51 per mcf in 1997
from $2.21 per mcf in 1996 resulting primarily from higher U.S. industry demand.
Worldwide net realized crude oil prices were $18.58 per barrel, down $1.53 per
barrel, or eight percent, from $20.11 per barrel in 1996. Crude oil prices
declined despite higher crude oil demand and strong crude oil production growth,
which included initial exports of Iraqi crude oil. Worldwide crude oil and
condensate production averaged 337,000 barrels per day for the year, up slightly
versus 1996. Worldwide natural gas deliveries in 1997 of 1,203 million cubic
feet per day were essentially unchanged from 1,211 million cubic feet per day in
1996 as higher international natural gas volumes were offset by lower domestic
natural gas volumes.
U.S. Upstream Earnings Before Special Items totaled $396 million, up 30
percent from $305 million in 1996, due to higher gas prices which more than
offset lower crude oil prices. U.S. production costs per BOE were $4.23, up
$0.12 per BOE or 3 percent, compared to $4.11 per BOE in 1996, due to higher
production taxes.
Outside the United States, Earnings Before Special Items was $341 million,
down 21 percent from $434 million in 1996 due to lower crude oil prices, partly
offset by increased crude oil and natural gas volumes associated with the first
year of oil production from Nigeria and increased production from the Heidrun
and Troll fields in Norway and the Canadian Foothills. International production
costs per BOE were $4.19 per BOE, up $0.51 per BOE, or 14 percent, compared to
$3.68 per BOE in 1996, resulting from FPSO lease costs on new fields in the
United Kingdom and costs incurred on development projects that have not yet
begun production.
1996 versus 1995
Upstream combined net income was $681 million in 1996, up 38 percent,
compared with $492 million in 1995. Upstream Earnings Before Special Items
totaled $739 million in 1996, up 39 percent from $531 million in 1995.
The Company's worldwide net realized crude oil price averaged $20.11 per
barrel for 1996, up 22 percent from $16.52 per barrel in 1995. Higher crude oil
prices were the result of colder weather, stronger worldwide economic growth and
tight inventories. Worldwide natural gas prices averaged $2.21 per mcf in 1996,
compared to $1.86 per mcf in 1995 resulting from stronger worldwide demand.
Worldwide crude oil and condensate production was 336,000 barrels per day for
1996 compared to 317,000 barrels per day in 1995. Worldwide natural gas
deliveries were 1,211 million cubic feet per day in 1996 compared to 1995
deliveries of 1,126 million cubic feet per day due to higher international
natural gas volumes, offset partly by lower U.S. natural gas volumes.
U.S. Upstream Earnings Before Special Items totaled $305 million, up $40
million, or 15 percent, versus the prior year due to higher crude oil and
natural gas prices. U.S. production costs per BOE were $4.11 per BOE, up $0.33
per BOE, or 9 percent, compared to $3.78 per BOE in 1995, due to higher
production taxes.
Outside the United States, Earnings Before Special Items was $434 million,
up $168 million, or 63 percent, versus $266 million earned in 1995, due to
higher crude oil and natural gas prices and higher international natural gas
volumes. International natural gas volumes increased 23 percent due to
production increases in the United Kingdom and the Canadian Foothills.
International production costs per BOE were $3.68 per BOE, down $0.34 per BOE,
or 8 percent, compared to $4.02 per BOE in 1995, due to higher crude production
from the Heidrun field in Norway.
43
<PAGE> 43
DOWNSTREAM SEGMENT RESULTS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------ -----------
1995 1996 1997 1997 1998
------ ------ ------ ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Combined Net Income............................... $233 $289 $307 $181 $181
Special Items..................................... 6 (52) 67 -- 28
---- ---- ---- ---- ----
Earnings Before Special Items..................... $239 $237 $374 $181 $209
==== ==== ==== ==== ====
</TABLE>
First Half 1998 versus First Half 1997
Downstream combined net income was $181 million in the first half of 1998
and the first half of 1997. Downstream Earnings Before Special Items totaled
$209 million in the first half of 1998, up 15 percent from $181 million in the
first half of 1997, due to higher European refined product margins.
U.S. Downstream Earnings Before Special Items was $114 million in the first
half of 1998, down $16 million, or 12 percent from $130 million in the first
half of 1997, due to lower marketing margins and lower refined product sales
volumes.
International Downstream Earnings Before Special Items was $95 million in
the first half of 1998, up 86 percent, from $51 million in the comparable period
in 1997, reflecting higher refinery runs from less downtime from scheduled
maintenance at the Humber refinery and improved refining and marketing margins
offset by slightly lower refined product sales volumes. In the United Kingdom, a
continued strengthening of retail marketing prices resulted in higher marketing
margins.
1997 versus 1996
Downstream combined net income was $307 million, up six percent from $289
million in 1996. Downstream Earnings Before Special Items increased 58 percent
to $374 million in 1997, compared with $237 million in the prior year. Worldwide
refined product sales volumes were 1,048,000 barrels per day in 1997, up five
percent versus 1996.
In the United States, Downstream Earnings Before Special Items was $239
million versus $136 million in 1996, an increase of 76 percent. The improvement
was attributable to strong refining margins, reduced operating costs and higher
refined product volumes from the new Lake Charles, Louisiana, hydrocracker
expansion project.
International Downstream Earnings Before Special Items was $135 million, up
34 percent from $101 million in the comparable period in 1996, primarily due to
higher European refining margins and increased refinery production from the
Humber refinery's new vacuum unit in the U.K.
The Company's refineries ran at 91 percent capacity in 1997, 10 percent
higher than 1996. The increase was primarily due to less downtime incurred in
1997, compared to 1996 when major expansions were taking place at the Lake
Charles and Humber refineries.
1996 versus 1995
Downstream combined net income was $289 million, up 24 percent from $233
million in 1995. Downstream Earnings Before Special Items of $237 million in
1996 was essentially unchanged from $239 million in 1995, as improved refining
margins were offset by higher marketing product costs. Worldwide refined product
sales volumes were 998,000 barrels per day in 1996, up from 983,000 barrels per
day in 1997.
In the United States, Downstream Earnings Before Special Items was $136
million in 1996 compared with $122 million in 1995, an increase of 11 percent,
reflecting gradually improving retail margins despite higher marketing product
costs and startup costs relating to the new hydrocracker unit at the Lake
Charles refinery.
44
<PAGE> 44
International Downstream Earnings Before Special Items was $101 million,
down 14 percent versus $117 million in 1995, attributable to startup and other
costs relating to the Humber refinery's new vacuum unit in the United Kingdom.
The Company's refineries ran at 83 percent of capacity in 1996, down 14
percent from 1995 due to more downtime incurred in 1996 relating to the major
expansions at the Lake Charles and Humber refineries.
CORPORATE AND OTHER SEGMENT RESULTS
Corporate and Other combined net income includes:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------ ---------------
1995 1996 1997 1997 1998
------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net Interest Income (Expense).................. $ 5 $ 28 $ 35 $ 10 $ 39
Exchange Gains (Losses)........................ (40) (7) 21 5 5
Other Corporate Expenses(1).................... (115) (128) (150) (63) (54)
----- ----- ----- ---- ----
Combined Net Income............................ $(150) $(107) $ (94) $(48) $(10)
===== ===== ===== ==== ====
</TABLE>
- ---------------
(1) Includes general corporate expenses, other non-operating items and results
for electric power and related-party insurance operations.
First Half 1998 versus First Half 1997
Corporate and Other results for the first half of 1998 were a loss of $10
million, an improvement of $38 million versus the comparable period in 1997,
primarily reflecting an improvement in Net Interest Income (Expense) due to
lower average related-party borrowings in the first half of 1998 versus 1997.
On July 20, 1998, a dividend of $7,500 million was declared and paid by the
Company in the form of a promissory note to shareholders of record as of July
20, 1998. The resulting increase in debt will substantially increase the amount
of interest expense incurred by the Company in the third and fourth quarters of
1998. See "Pro Forma Combined Financial Statements."
1997 versus 1996
Corporate and Other reported a loss of $94 million in 1997, an improvement
of $13 million from 1996 results. Net Interest Income (Expense) in 1997 was
improved by $7 million versus 1996, primarily due to increased after-tax
capitalized interest on major Upstream development projects. The Company
incurred an after-tax exchange gain of $21 million in 1997 compared with a loss
of $7 million in 1996, primarily reflecting the impact of Norwegian Kroner and
British Pound exchange rate movements on U.S. dollar-denominated working capital
balances. Other Corporate Expenses were $22 million higher in 1997 versus 1996
due to additional costs associated with the Company's emerging electric power
business and other miscellaneous items.
1996 versus 1995
Corporate and Other reported a loss of $107 million in 1996, an improvement
of $43 million over 1995. Net Interest Income (Expense) in 1996 improved $23
million versus 1995, primarily reflecting increased after-tax capitalized
interest on major Upstream development projects. The Company incurred an
after-tax exchange loss of $7 million in 1996, compared with a loss of $40
million in 1995, primarily attributable to the January 1, 1996 change in
reporting to reflect the local currency as the functional currency for the
Company's integrated Western European operations. (See Note 2 to the Combined
Financial Statements).
45
<PAGE> 45
LIQUIDITY AND CAPITAL RESOURCES
CASH PROVIDED BY OPERATIONS
Cash provided by operations in the first half of 1998 decreased $307
million to $548 million versus $855 million in the first half of 1997. Cash
provided by operations before changes in operating assets and liabilities
decreased $53 million compared to the first half of 1997, primarily due to lower
net realized crude oil and natural gas prices partially offset by higher natural
gas volumes and improved international Downstream margins. Negative changes to
net operating assets and liabilities of $254 million were due to higher tax
payments attributable to 1997 asset sales, a decrease in accounts payable
largely offset by a decrease in accounts receivable due to lower crude oil
prices and the timing of payments on other operating liabilities.
Cash provided by operations increased $480 million to $2,876 million during
1997, a 20 percent increase over $2,396 million in 1996, as cash provided by
operations before changes in operating assets and liabilities improved $34
million compared to 1996. Positive changes to net operating assets and
liabilities of $446 million were principally due to the $303 million received
from a contract for future sales of natural gas to Centrica, a United Kingdom
gas marketing company.
Cash provided by operations increased $472 million to $2,396 million during
1996, a 25 percent increase over $1,924 million in 1995. The improvement from
1995 reflects a $263 million increase in 1996 cash provided by operations before
changes in operating assets and liabilities, primarily due to higher crude oil
and natural gas prices, higher international crude oil and natural gas volumes
and higher refinery margins. Positive changes to net operating assets and
liabilities of $209 million were primarily due to timing of payments on
operating liabilities and tax payments.
CAPITAL EXPENDITURES AND INVESTMENTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------ -----------------
1995 1996 1997 1997 1998
------ ------ ------ ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Upstream.................................. $1,224 $1,264 $2,533 $1,611 $ 804
Downstream................................ 613 680 558 196 241
Corporate and Other....................... -- -- 23 8 5
------ ------ ------ ------ ------
$1,837 $1,944 $3,114 $1,815 $1,050
====== ====== ====== ====== ======
United States............................. $ 760 $ 618 $1,761 $1,187 $ 469
International............................. 1,077 1,326 1,353 628 581
------ ------ ------ ------ ------
$1,837 $1,944 $3,114 $1,815 $1,050
====== ====== ====== ====== ======
</TABLE>
The Company's capital expenditure program promotes the Company's
growth-oriented business strategy by continuing to invest in existing core areas
where efficiencies and profitability can be enhanced and by targeting funds into
new high potential areas where long-term growth opportunities can be realized.
Total capital investments, including investments in affiliates and
acquisitions, were $3.1 billion in 1997, a 60 percent increase over 1996. This
increase primarily reflects the $0.9 billion spent in connection with the Lobo
Acquisition. Capital investments in 1996 and 1995 were $1.9 and $1.8 billion,
respectively. The six percent increase in 1996 from 1995 is primarily
attributable to increased investment in Upstream operations in Europe and, in
particular, development of the Britannia gas field. Exploration capital
investments were approximately $0.2 billion each year in 1997, 1996 and 1995.
The Company expects to make capital investments of $2.4 billion during
1998, up approximately 14 percent versus 1997 capital investments excluding the
Lobo Acquisition. Approximately 60 percent of 1998 capital investments are
targeted outside the United States. Approximately 70 percent of 1998 capital
investments are allocated to Upstream, with a majority of this devoted to
development projects in South Texas, deepwater Gulf of Mexico, Venezuela, the
U.K. and Norway. Approximately $0.2 billion will also be devoted to exploratory
drilling. Downstream capital investments are targeted at completion of the
Melaka
46
<PAGE> 46
refinery, expansion of retail marketing operations, particularly in Europe, and
upgrades and maintenance of existing facilities. The Company has also earmarked
approximately $50 million for its emerging electric power business. The
Company's capital investment program may be adjusted as business conditions
warrant. See also "Business."
Upstream
Upstream capital investments totaled $2.5 billion in 1997, an increase of
100 percent over 1996, primarily reflecting the $0.9 billion Lobo Acquisition.
The Lobo Acquisition added significant reserves and 1,150 miles of natural gas
gathering and transportation pipeline, providing direct access to major Texas
intrastate and interstate pipelines. As a result, the Company is the largest
natural gas producer in the area, and one of the three largest natural gas
producers in Texas. Upstream capital investments were $1.3 billion and $1.2
billion in 1996 and 1995, respectively.
-- United States
During 1997, the Company spent $1.5 billion on capital projects in the
United States. Besides the $0.9 billion Lobo Acquisition and exploratory
drilling, expenditures focused on development of the partner-operated Ursa field
in deepwater Gulf of Mexico, construction of two deepwater drillships,
acquisition of additional reserves and exploratory acreage in the San Juan Basin
and expansion of onshore natural gas operations. The Ursa field development,
operated by Shell, represents the Company's most important current development
project in the Gulf of Mexico. The project involves installing a new generation
tension leg platform in approximately 3,800 feet of water. First production is
scheduled for 1999. The construction of the two deepwater drillships is pivotal
in achieving the Company's growth plans in the Gulf of Mexico. The Company has
increased its deepwater holdings in the Gulf of Mexico, and exploration within
these holdings will be carried out by the two highly sophisticated deepwater
drillships. The first of these two vessels is expected to be in service in late
1998.
In 1996, U.S. capital investments were $0.4 billion, with expenditures
focused on continuing operations and development. Capital investments were $0.5
billion in 1995 and included the acquisition of two South Texas gas fields from
Enron Oil & Gas Company. These two gas fields were located near existing Company
assets and offered considerable potential development.
-- International
International capital investments totaled nearly $1.0 billion in 1997, up
16 percent from 1996. The Company continued to develop the Britannia gas field
in the U.K. North Sea. The Britannia gas field is one of the largest natural gas
fields in the U.K. North Sea, and the Company's proved reserves in the field
include 1.1 trillion cubic feet of natural gas and 52 million barrels of
petroleum liquids at December 31, 1997. First production from Britannia occurred
in August 1998. Britannia development is an example of the Company's strategy to
increase production and reserves through large, long-lived projects. Other
significant capital investments were made for exploratory drilling and
development projects such as the Petrozuata joint venture in Venezuela, the
Ukpokiti field offshore Nigeria, the Visund field in the Norwegian North Sea, a
methanol plant in Norway and the Boulton gas field in the U.K. North Sea.
In 1996, international capital investments were $0.9 billion, up 14 percent
compared to $0.8 billion in 1995. The 1996 increase reflects expenditures to
develop the Britannia field and $67 million to fund the Company's share of
losses incurred by a European gas marketing joint venture. These increases were
partially offset by reduced capital expenditures due to the Heidrun field in
Norway coming on stream in late 1995.
Downstream
Downstream capital investments totaled $558 million in 1997, a decrease of
18 percent versus 1996, primarily reflecting completion of the acidic crude
vacuum unit at the Company's Humber refinery in the U.K. as well as the
acquisition of an equity interest in two refineries in the Czech Republic during
1996. Downstream capital investments were $680 and $613 million in 1996 and
1995, respectively. The 11 percent
47
<PAGE> 47
increase in 1996 versus 1995 reflects increased expenditures for construction of
the Melaka refinery and acquisition of equity interests in two Czech refineries,
somewhat offset by decreased expenditures on the Lake Charles refinery's
hydrocracker expansion project, and construction of retail marketing outlets in
Thailand during 1995.
-- United States
During 1997, the Company spent $227 million on Downstream capital projects
in the United States, up four percent from 1996, with the majority of these
funds being used to support continuing operations and optimization of retail
marketing operations. The Company also invested funds for an equity interest in
Penreco, a joint venture with Pennzoil that will produce and market highly
refined specialty petroleum products.
Capital investments in 1996 totaled $218 million, down 26 percent from
1995. The most significant investments related to the completion of the 45,000
barrel per day expansion of the Lake Charles refinery's sour crude oil
processing capability to support the Excel Paralubes lube oil hydrocracker,
another joint venture with Pennzoil. The lube oil hydrocracker converts low
quality, high sulphur crude oil into base oil of extremely high purity and
enhances the value of the Company's finished lubricants business by producing
improved motor oils, transmission fluids and industrial lubes blended from
hydrocracked base oils.
Investments in 1995 totaled $293 million and included costs for the
construction of a plant to produce LiquidPower(TM), the acquisition of 61 retail
marketing outlets, and initial costs associated with the Lake Charles refinery
expansion. The manufacturing plant for LiquidPower(TM) allowed the Company to
meet growing demand for this product. LiquidPower(TM) is a flow improver, which
allows operators of crude oil and product pipelines to maintain throughput
levels with fewer electric pump stations, thereby significantly lowering
operating costs.
-- International
During 1997, the Company spent $331 million on Downstream international
capital investments, down 28 percent from 1996, due to expenditures in 1996
relating to costs for the acidic crude vacuum unit at the Company's Humber
refinery. The installation of the vacuum unit at the Humber refinery allowed the
refinery to process acidic crude oil, including equity crude oil from the
Heidrun field. The vacuum unit incorporated special metallurgy and the Company
believes that Humber is the only refinery in Europe capable of processing
unblended acidic crude. Expenditures in 1997 focused on strengthening the
Company's retail marketing position in core markets such as Germany, Austria and
the Nordic countries, expanding in targeted retail growth markets in Central and
Eastern Europe, Spain, Turkey and the Asia Pacific region, and continuing the
construction of the Melaka refinery, which is expected to begin operations in
the second half of 1998. The Company believes that the Melaka refinery, 40
percent owned by the Company, will provide a source of product to support the
Company's expanding marketing activities in the Asia Pacific region.
Capital investments in 1996 totaled $462 million, up 44 percent from 1995
and included costs for the acidic crude vacuum unit at the Company's Humber
refinery, construction expenditures related to the Melaka refinery, acquisition
of equity interests in two Czech refineries, and expansion of retail marketing
operations, particularly in Eastern Europe. The acquisition of the equity
interests in the two Czech refineries supported the expansion of the Company's
retail marketing operations in the emerging markets in Eastern Europe, including
the Czech Republic, Poland, Hungary and Slovakia.
In 1995, the Company made capital investments of $320 million including
investments in the Humber and Melaka refinery projects, an acquisition of a 28.9
percent equity interest in a Turkish distribution and marketing company, and the
opening of retail marketing outlets in Thailand. The acquisition of the equity
interest in the Turkish distribution and marketing company enabled the Company
to increase its market share in Turkey's emerging motor fuels market.
48
<PAGE> 48
Corporate and Other
Capital investments in 1997 were $23 million, most of which represents the
Company's investment in electric power generation projects in international
equity affiliates. Because of deregulation within this industry, the Company
expects to continue to pursue projects which leverage the economic advantages of
the Company's energy production activities and the demand for energy in DuPont
or third party manufacturing operations.
There were no capital investments in Corporate and Other during 1996 and
1995.
FINANCING
The Company's ability to maintain and grow its operating income and cash
flow is dependent upon continued capital spending. The Company believes its
future cash flow from operations and its borrowing capacity should be sufficient
to fund its dividends, if any, debt service, capital expenditures, and working
capital requirements.
Cash flow in 1996 includes a $269 million benefit from the formation of a
partnership, Conoco Oil and Gas Associates, L.P. ("COGA"), in which the Company
has a general partnership interest of 67 percent. The remaining 33 percent is
owned by Vanguard Energy Investors L.P. ("Vanguard"), of which the Company owns
10 percent. In 1996, certain of the Company's subsidiaries contributed assets
with an aggregate fair value of $613 million to COGA for a general partnership
interest. Cash of $300 million was contributed by Vanguard as limited partner
and under the terms of the partnership agreement, COGA can require an additional
cash contribution of up to $200 million from Vanguard prior to December 31,
1998. The net result of this transaction was to increase minority interest by
$297 million.
Vanguard is entitled to a cumulative annual priority return on its
investment and participation in residual earnings at rates established in the
partnership agreement. The priority return rate, currently 6.5 percent, is
negotiated every four years commencing in 1999. If at that time Vanguard and the
Company are unable to agree on a priority return for the subsequent four-year
period, then the partnership would be dissolved, with COGA being required to
liquidate the partnership and distribute cash and properties to the partners
based on their individual interests. The estimated impact of such an event is a
cash outflow not materially different from the recorded amount of minority
interest. See Note 18 to the Combined Financial Statements.
Prior to the Separation, the businesses transferred to the Company were
funded through DuPont. Apart from limited recourse project financings related to
various joint ventures, equipment lease facilities and financing of certain
refinery equipment and other smaller financings, the Company has had limited
indebtedness to third parties. After the Offerings, the Company's operations
will be funded through related party debt with DuPont. The Company and DuPont
will enter into a Revolving Credit Agreement under which DuPont will provide the
Company with a revolving credit facility in principal amount of up to $500
million. The term of DuPont's commitment under this facility will begin upon
satisfaction of certain conditions and continue until the earlier of (i) October
11, 1999 or (ii)(a) the date on which DuPont's direct or indirect voting power
in the Company falls below 50 percent of the outstanding voting power of the
Company or (b) DuPont's election to terminate its commitment as the result of an
unremedied event of default. Loans under the Revolving Credit Agreement will be
subject to mandatory prepayment to the extent the Company's cash and cash
equivalents exceed $325 million or such higher amount as the Company and DuPont
may agree. Loans under this facility will bear interest at a rate equal to
30-day LIBOR plus 0.20 percent per annum and may be voluntarily prepaid without
penalty or premium. The Company intends to refinance related party debt with a
combination of commercial paper, bank debt and public debt. See "Arrangements
Between the Company and DuPont and "Risk Factors -- Risk of Refinancing Debt
Owed to DuPont."
49
<PAGE> 49
RECENT RESULTS
The Company's third quarter results have been negatively affected by market
conditions that continue to affect the petroleum industry in general. The
Company's worldwide net realized prices in the third quarter of 1998 for crude
oil and natural gas were $12.29 per barrel and $2.08 per thousand cubic feet,
respectively, compared to $12.45 per barrel and $2.15 per thousand cubic feet,
respectively, in the second quarter of 1998. Prices for crude oil and natural
gas were $17.96 per barrel and $2.17 per thousand cubic feet, respectively, in
the third quarter of 1997. Oil production in the third quarter of 1998 was
292,000 barrels per day compared to production of 314,000 barrels per day in the
second quarter of 1998 and production of 325,000 barrels per day in the third
quarter of 1997. Natural gas production for the third quarter of 1998 was 1,374
million cubic feet per day compared to 1,318 million cubic feet per day in the
second quarter of 1998 and 1,205 million cubic feet per day in the third quarter
of 1997. The increase in natural gas production in the third quarter of 1998 as
compared to the second quarter of 1998 and the third quarter of 1997 was due to
higher production from the Company's South Texas operations. Refining margins
per barrel for Downstream activities in the third quarter of 1998 were slightly
higher than margins in the second quarter of 1998 but lower than margins for the
third quarter of 1997.
Based on the cumulative effect of these factors, the Company's Upstream and
Downstream segment earnings before material non-recurring items for the third
quarter of 1998 were $223 million compared to $200 million of such earnings for
the second quarter of 1998 and $252 million of such earnings for the third
quarter of 1997. Due to higher interest and debt expense associated with the
$7.5 billion promissory note owed to DuPont, combined net income for the third
quarter of 1998 was $183 million compared to $214 million in the second quarter
of 1998 and $289 million in the third quarter of 1997. The Company intends to
repay or purchase a portion of the outstanding indebtedness owed to DuPont with
the estimated net proceeds from the Offerings of approximately $4,228 million.
See "Use of Proceeds."
MARKET RISKS
The Company operates in the worldwide crude oil, refined product, natural
gas and natural gas liquids markets and is exposed to fluctuations in interest
rates, foreign currency exchange rates and hydrocarbon prices that can affect
the revenues and cost of operating, investing and financing. The Company's
management has and intends to use financial and commodity based derivative
contracts to reduce the risk in the Company's overall earnings and cash flow
when the benefits of avoiding disruption of the Company's value creation process
(primarily long-term exploration and capital investment programs) are
anticipated to more than offset the risk management costs involved.
The Company has established a Financial Risk Management Policy Framework
that provides guidelines for entering into contractual arrangements
(derivatives) to manage the Company's commodity price, foreign currency exchange
rate, and interest rate risks. The Conoco Risk Management Committee has ongoing
responsibility for the content of this policy and has principal oversight
responsibility for compliance with the policy framework by ensuring proper
procedures and controls are in place. These procedures establish derivative
control and valuation processes, routine monitoring and reporting requirements
and counterparty credit approval procedures. Additionally, the Company's
internal audit group conducts routine reviews of these risk management
activities to assess the adequacy of internal controls and the audit results are
reviewed by the Conoco Risk Management Committee and by operating management.
The counterparties to these contractual arrangements are limited to major
financial institutions and other major companies in the petroleum business.
Although the Company is exposed to credit loss in the event of nonperformance by
these counterparties, this exposure is managed through credit approvals, limits
and monitoring procedures, and limits to the period over which unpaid balances
are allowed to accumulate. The Company has not experienced nonperformance by
counterparties to these contracts, and no material loss would be expected from
any such individual nonperformance.
50
<PAGE> 50
COMMODITY PRICE RISK
The Company enters into energy-related futures, forwards, swaps and options
in various markets to balance its physical systems to meet customer needs and to
manage its exposure to price fluctuations on anticipated crude oil, natural gas,
refined product and electric power transactions. These instruments provide a
natural extension of the underlying cash market and are used to physically
acquire a portion of supply requirements and to manage pricing of near term
physical requirements. The commodity futures market has underlying principles of
increased liquidity and longer trading periods than the cash market and is one
method of managing price risk in the petroleum business.
From time to time, management may use derivatives to establish longer-term
positions to hedge the price risk for the Company's equity crude oil and natural
gas production as well as refinery margins.
Under the Company's policy, hedging includes only those transactions that
offset physical positions and reduce overall company exposure to prevailing
market price risk. Trading is defined as any transaction that does not meet the
definition of a hedge. After-tax gain/loss from risk trading has not been
material.
The fair value gain (loss) of outstanding derivative commodity instruments
and the change in fair value that would be expected from a 10 percent adverse
price change are shown in the table below:
<TABLE>
<CAPTION>
CHANGE
IN FAIR
VALUE FROM
10%
ADVERSE
PRICE
AT DECEMBER 31, 1997 FAIR VALUE CHANGE
-------------------- ---------- ----------
($ IN MILLIONS)
<S> <C> <C>
Crude Oil and Refined Products:
Hedging................................................... (3) (8)
Trading................................................... (6) (18)
Combined.................................................. (9) (26)
Natural Gas -- Hedging...................................... 8 (9)
Electric Power Trading...................................... -- --
</TABLE>
<TABLE>
<CAPTION>
CHANGE
IN FAIR
VALUE FROM
10%
ADVERSE
PRICE
AT JUNE 30, 1998 FAIR VALUE CHANGE
---------------- ---------- ----------
($ IN MILLIONS)
<S> <C> <C>
Crude Oil and Refined Products:
Hedging................................................... (7) (3)
Trading................................................... (11) (5)
Combined.................................................. (18) (8)
Natural Gas -- Hedging...................................... 10 (13)
Electric Power Trading...................................... -- --
</TABLE>
The fair values of the futures contracts are based on quoted market prices
obtained from the New York Mercantile Exchange or the International Petroleum
Exchange of London. The fair values of swaps and other over-the-counter
instruments are estimated based on quoted market prices of comparable contracts
and approximate the gain or loss that would have been realized if the contracts
had been closed out at year end.
All hedge positions offset physical positions exposed to the cash market;
none of these offsetting physical positions are included in the above table.
Price-risk sensitivities were calculated by assuming an across-the-board 10
percent adverse change in prices regardless of term or historical relationships
between the contractual price of the instrument and the underlying commodity
price. In the event of an actual 10 percent change in prompt month crude or
natural gas
51
<PAGE> 51
prices, the fair value of the Company's derivative portfolio would typically
change less than that shown in the table due to lower volatility in out-month
prices.
Additional details regarding accounting policy for these financial
instruments are set forth in Note 2 to the Combined Financial Statements.
FOREIGN CURRENCY EXCHANGE RATE RISK
The Company's operations in 40 countries expose it to foreign currency
exchange rate risk. The Company does not intend to comprehensively hedge its
exposure to currency rate changes, although it may choose to selectively hedge
certain working capital balances, firm commitments, cash returns from
subsidiaries and affiliates and/or tax payments. There can be no assurance these
efforts will be successful. Historically, the Company has selectively hedged
firm commitments. At July 31, 1998, the Company had no open foreign currency
hedged positions. Cash balances are maintained in U.S. dollars and foreign
currency denominations principally including U.K. Pounds, Deutsch Marks,
Norwegian Kroner and Swedish Kroner. The effect of foreign currency exchange
rate changes on cash increased cash balances $33 million in 1995, and decreased
cash balances $2 million in 1996 and $39 million in 1997. The Company has
experienced negative foreign currency impacts from currency revaluations in
Southeast Asia, but these losses have not been material.
INTEREST RATE RISK
Due to limited third party borrowings, the Company had no material interest
rate risk associated with the debt used to finance its operations. Certain major
capital investments were financed using project finance. The Company managed the
interest rate risk of these transactions, when appropriate, with a combination
of financial derivative instruments to balance the fixed and floating interest
rates. Subsequent to the Offerings, the Company intends to manage its interest
rate exposure using a combination of financial derivative instruments as part of
its program to manage the fixed and floating interest rate mix of the total
debt.
ENVIRONMENTAL EXPENDITURES
The costs to comply with complex environmental laws and regulations, as
well as internal voluntary programs, are significant and will continue to be so
in the foreseeable future. For example, the Company anticipates substantial
expenditures will be necessary to comply with Maximum Achievable Control
Technology ("MACT") standards to be promulgated by EPA under the Clean Air Act,
and specifications for motor fuels designed to reduce emissions of certain
pollutants from vehicles using such fuels. See "Business -- Environmental
Regulation -- Air Emissions." These costs may increase in the future, but are
not expected to have a material adverse effect on the Company's financial
condition, results of operations or liquidity.
Estimated pre-tax environmental expenses charged to current operations
totaled about $136 million, before insurance recoveries, in 1997 as compared to
approximately $162 million in 1996 and $129 million in 1995. These expenses
include the remediation accruals discussed below, operating maintenance and
depreciation costs for solid waste, air and water pollution control facilities
and the costs of certain other environmental activities. The largest of these
expenses resulted from the operation of wastewater treatment facilities and
solid waste management facilities and facilities for the control and abatement
of air emissions. Approximately 70 percent of total annual environmental
expenses resulted from the operations of the Company's business in the United
States.
Capital expenditures for environmental control facilities totaled
approximately $50 million in 1997, as compared to approximately $78 million in
1996 and $68 million in 1995. The Company estimates that capital expenditures
for pollution control facilities will total approximately $51 million in 1998
and approximately $52 million in 1999.
REMEDIATION EXPENDITURES
The Resource Conservation and Recovery Act ("RCRA") extensively regulates
the treatment, storage and disposal of hazardous waste and requires a permit to
conduct such activities. RCRA requires permitted
52
<PAGE> 52
facilities to undertake an assessment of environmental conditions at the
facility. If conditions warrant, the Company may be required to remediate
contamination caused by prior operations. In contrast to the Comprehensive
Environmental Response, Compensation, and Liability Act, as amended ("CERCLA"),
often referred to as "Superfund," the cost of corrective action activities under
the RCRA corrective action program is typically borne solely by the Company. The
Company anticipates significant ongoing expenditures for RCRA remediation
activities may be required over the next decade although annual expenditures for
the near term are not expected to vary significantly from the range of such
expenditures over the past few years. The Company's expenditures associated with
RCRA and similar remediation activities conducted voluntarily or pursuant to
state law were approximately $31 million in 1997, $34 million in 1996 and $32
million in 1995. In the long term, expenditures are subject to considerable
uncertainty and may fluctuate significantly.
The Company from time to time receives requests for information or notices
of potential liability from EPA and state environmental agencies alleging that
the Company is a potentially responsible party ("PRP") under CERCLA or an
equivalent state statute. The Company on occasion also has been made a party to
cost recovery litigation by those agencies or by private parties. These
requests, notices and lawsuits assert potential liability for remediation costs
at various sites that typically are not Company owned but allegedly contain
wastes attributable to the Company's past operations. As of December 31, 1997,
the Company had been notified of potential liability under CERCLA or state law
at about 15 sites around the United States, with active remediation under way at
seven of those sites. The Company received notice of potential liability at four
new sites during 1997 compared with one similar notice in 1996 and one in 1995.
The Company's expenditures associated with CERCLA and similar state remediation
activities were not significant in 1997, 1996 and 1995.
For most Superfund sites, the Company's potential liability will be
significantly less than the total site remediation costs because the percentage
of waste attributable to the Company versus that attributable to all other PRPs
is relatively low. Other PRPs at sites where the Company is a party typically
have had the financial strength to meet their obligations and, where they have
not, or where PRPs could not be located, the Company's own share of liability
has not materially increased. There are relatively few sites where the Company
is a major participant, and neither the cost to the Company of remediation at
those sites, nor at all CERCLA sites in the aggregate, is expected to have a
material adverse effect on the competitive or financial condition of the
Company.
Cash expenditures not charged against income for previously accrued
remediation activities under CERCLA, RCRA and similar state and foreign laws
were $19 million in 1997, $19 million in 1996 and $16 million in 1995. Although
future remediation expenditures in excess of current reserves are possible, the
effect of any such excess on future financial results is not subject to
reasonable estimation because of the considerable uncertainty regarding the cost
and timing of expenditures. See "Business -- Environmental Regulation" and "Risk
Factors -- Environmental Risks."
REMEDIATION ACCRUALS
The Company accrues for remediation activities when it is probable a
liability has been incurred and reasonable estimates of the liability can be
made. These accrued liabilities exclude claims against the Company's insurers or
other third parties and are not discounted. Many of these liabilities result
from CERCLA, RCRA and similar state laws that require the Company to undertake
certain investigative and remedial activities at sites where the Company
conducts or once conducted operations or at sites where Company-generated waste
was disposed. The accrual also includes a number of sites identified by the
Company that may require environmental remediation, but which are not currently
the subject of CERCLA, RCRA or state enforcement activities. Over the next
decade, the Company may incur significant costs under both CERCLA and RCRA.
Considerable uncertainty exists with respect to these costs and under adverse
changes in circumstances, potential liability may exceed amounts accrued as of
December 31, 1997.
Remediation activities vary substantially in duration and cost from site to
site depending on the mix of unique site characteristics, evolving remediation
technologies, diverse regulatory agencies and enforcement policies and the
presence or absence of potentially liable third parties. Therefore, it is
difficult to develop reasonable estimates of future site remediation costs. At
December 31, 1997, the Company's balance sheet
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<PAGE> 53
included an accrued liability of $144 million as compared to $152 million and
$137 million at year-end 1996 and 1995, respectively. Approximately 84 percent
of the Company's environmental reserve at December 31, 1997 was attributable to
RCRA and similar remediation liabilities (excluding voluntary remediations) and
16 percent to CERCLA liabilities. During 1997, remediation accruals of $13
million, offset by $54 million in insurance proceeds, resulted in a credit to
pre-tax income of $41 million, compared to credits of $70 million and $13
million in 1996 and 1995, respectively, also resulting from insurance
recoveries. No significant additional recoveries are expected.
TAX MATTERS
As a result of the Separation and the Offerings, and possible subsequent
transactions, the Company likely will not be able to combine the results of its
operations with those of DuPont in reporting income for U.S. federal, state, and
non-U.S. income tax purposes. The Company believes this will not have a material
adverse effect on the Company's earnings. At the time the Company is no longer
included in DuPont's consolidated U.S. federal income tax return (which is
expected to occur immediately following the Offerings), it may become exposed to
having its U.S. tax liability computed under the U.S. federal alternative
minimum tax. Such a computation could have a material adverse effect on the
year-to-year timing of the Company's cash flow.
As of December 31, 1997, the Company had deferred tax assets in the amount
of $1,065 million. Of this amount, $417 million related to tax benefits from
operating losses incurred in start-up operations, including exploration and U.S.
foreign tax credit carryforwards. These benefits were substantially offset by a
valuation reserve. The Company believes it is more likely than not the balance
of the deferred tax assets will be realized in future years.
YEAR 2000
Historically, certain computerized systems have had two digits rather than
four digits to define the applicable year, which could result in recognizing a
date using "00" as the year 1900 rather than the year 2000. This could result in
major failures or miscalculations and is generally referred to as the "Year 2000
issue."
The Company recognizes that the impact of the Year 2000 issue extends
beyond traditional computer hardware and software to automated plant systems and
instrumentation, as well as to third parties. The Year 2000 issue is being
addressed within the Company by its individual business units, and progress is
reported periodically to management.
The Company has committed resources to conduct risk assessments and to take
corrective action, where required, within each of the following areas:
information technology, plant systems and external parties. Information
technology includes telecommunications as well as traditional computer software
and hardware in the mainframe, midrange and desktop environments. Plant systems
include all automation and embedded chips used in plant operations. External
parties include any third party with whom the Company interacts.
In the information technology area, inventory and assessment audits in the
mainframe and midrange environments are expected to be completed by the third
quarter of 1998 with corrective action scheduled for completion by the fourth
quarter of 1998, except for business application software which is expected to
be completed by the fourth quarter of 1999. Inventory and assessment audits of
telecommunications are expected to be completed by the third quarter of 1998,
with corrective action expected to be completed by the second quarter of 1999.
Finally, inventory and assessment audits in the desktop environment are expected
to be completed by third quarter of 1998, with corrective action expected to be
completed by third quarter of 1999.
In the plant systems area, 75 percent of the Company's business units have
completed their inventory and assessment audits; the remaining units are
expected to complete this work by fourth quarter 1998. The Company is relying on
vendor testing and certification with validation through limited internal
testing and/or industry test results. Downtime for normally scheduled plant
maintenance will be used to conduct testing, with corrective action expected to
be completed by second quarter of 1999.
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With respect to external parties, 65 percent of the Company's business
units have completed their inventory audit of critical external parties. The
remaining business units are expected to have completed this work by the fourth
quarter of 1998. Risk assessment is expected to be completed by the fourth
quarter of 1998, and monitoring of risk in this area will continue into 1999, as
many external parties will not have completed their work.
The total cost of Year 2000 activities is not expected to be material to
the Company's operations, liquidity or capital resources. Costs are being
managed within each business unit. The total estimated cost for the Company's
Year 2000 work is $47 million. 1997 costs were $5 million, and 1998 costs
through June 1998 were $9 million. Costs exclude expenditures for replacement
systems, which were previously scheduled.
Failure to address a Year 2000 issue could result in business disruption
that could materially affect the Company's operations, liquidity or capital
resources. The Company has contingency plans to address other issues such as oil
tanker spills and plant explosions. Typically these contingency plans address
the results of single events while the scope of Year 2000 issues may cause
multiple concurrent events for a longer duration. Development of contingency
plans for multiple concurrent events is expected to be completed by the first
quarter of 1999.
There is still uncertainty around the scope of the Year 2000 issue. At this
time the Company cannot quantify the potential impact of these failures. The
Company's Year 2000 program and contingency plans are being developed to address
issues within the Company's control. The program minimizes, but does not
eliminate, the issues of external parties.
EUROPEAN MONETARY UNION
Within Europe, the European Economic and Monetary Union (the "EMU") will
introduce a new currency, the Euro, on January 1, 1999. The new currency is in
response to the EMU's policy of economic convergence to harmonize trade policy,
eliminate business costs associated with currency exchange and to promote the
free flow of capital, goods and services.
On January 1, 1999, the participating countries are scheduled to adopt the
Euro as their local currency, initially available for currency trading on
currency exchanges and noncash (banking) transactions. The existing local
currencies, or legacy currencies, will remain legal tender through January 1,
2002. Beginning on January 1, 2002, Euro-denominated bills and coins will be
issued for cash transactions. For a period of six months from this date, both
legacy currencies and the Euro will be legal tender. On or before July 1, 2002,
the participating countries will withdraw all legacy currency and use
exclusively the Euro.
The Company has recognized the introduction of the Euro as a significant
event with potential implications for existing operations. Currently,
participating countries in the EMU where the Company operates include Austria,
Belgium, Finland, Germany and Spain. The Company expects nonparticipating
European Union countries, such as Great Britain, to eventually join the EMU.
The Company has committed resources to conduct risk assessments and to take
corrective actions, where required, to ensure the Company is prepared for the
introduction of the Euro. The Company has undertaken a review of the Euro
implementation and has concentrated on areas such as operations, finance,
treasury, legal, information management, procurement and others, both in
participating and nonparticipating European Union countries where the Company
operates. Also, a review of existing legacy accounting and business systems and
other business assets have been reviewed for Euro compliance, including
assessing any risks from third parties. Progress regarding Euro implementation
is reported periodically to management.
Because of the staggered introduction of the Euro regarding noncash and
cash transactions, the Company has developed its plans to address first its
accounting and business systems and second, its business assets. The Company
expects to be Euro compliant within its accounting and business systems by the
end of 1999 and compliant within its other business assets prior to the
introduction of the Euro bills and coins. Compliance in participating and
nonparticipating countries will be achieved primarily through upgraded systems,
which were previously planned to be upgraded. Remaining systems will be modified
to achieve compliance. The Company does not currently expect to experience any
significant operational disruptions or to incur any significant costs,
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including any currency risk, which could materially affect the Company's
liquidity or capital resources. The Company is preparing plans to address issues
within the transitional period when both legacy and Euro currencies may be
tendered.
Because of the competitive business environment within the petroleum
industry, the Company does not anticipate any long-term competitive implications
or the need to materially change its mode of conducting business as a result of
increased price transparency.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income," and Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information." Both Statements are
effective for fiscal years beginning after December 15, 1997, and are
disclosure-oriented statements. The Company adopted Statement No. 130 in the
first quarter of 1998 and the accompanying financial statements reflect
application of the provisions of this statement.
The Company is required to adopt Statement No. 131 for its 1998 annual
report and disclose segment information on the same basis used internally for
evaluating segment performance and deciding how to allocate resources to
segments. The Company is currently assessing the effect of the new disclosure;
however, the Company believes adoption of Statement No. 131 will have no
financial impact on the Company.
In February 1998, the Financial Accounting Standards Board issued Statement
No. 132, "Employers' Disclosure About Pension and Other Postretirement Benefits"
which revised disclosure requirements for pension and other postretirement
benefits. It does not affect the measurement of the expense of the Company's
pension and other postretirement benefits. The Company is required to adopt this
Statement for the 1998 Annual Report and is currently assessing the effect of
the new disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" which
requires that companies recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
The Company is required to adopt this Statement by the first quarter of 2000 and
is currently assessing the effect of the new standard.
Statement No. 133 provides, if certain conditions are met, that a
derivative may be specifically designated as (1) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an unrecognized
firm commitment (fair value hedge), (2) a hedge of the exposure to variable cash
flows of a forecasted transaction (cash flow hedge) or (3) a hedge of the
foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security or a
foreign-currency-denominated forecasted transaction (foreign currency hedge).
Under Statement No. 133, the accounting for changes in fair value of a
derivative depends on its intended use and designation. For a fair value hedge,
the gain or loss is recognized in earnings in the period of change together with
the offsetting loss or gain on the hedged item. For a cash flow hedge, the
effective portion of the derivative's gain or loss is initially reported as a
component of other comprehensive income and subsequently reclassified into
earnings when the forecasted transaction affects earnings. For a foreign
currency hedge, the gain or loss is reported in other comprehensive income as
part of the cumulative translation adjustment. For all other items not
designated as hedging instruments, the gain or loss is recognized in earnings in
the period of change.
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BUSINESS
GENERAL
Conoco, a major, integrated, international energy company, is involved in
both the Upstream and Downstream segments of the petroleum business. Upstream
activities include exploring for, and developing, producing and selling, crude
oil, natural gas and natural gas liquids. Downstream activities include refining
crude oil and other feedstocks into petroleum products, buying and selling crude
oil and refined products and transporting, distributing and marketing petroleum
products. The Company operates in 40 countries worldwide.
As of December 31, 1997, Conoco had proved worldwide reserves of 2.6
billion BOE, 38 percent of which were natural gas. Based on 1997 annual
production of 209 million BOE (excluding natural gas liquids from gas plant
ownership), the Company had a reserve life of 12.4 years as of December 31,
1997. Over the last five years, Conoco has replaced an average of 190 percent of
the oil and gas it has produced each year. Conoco owns or has equity interests
in nine refineries worldwide, with a total crude and condensate processing
capacity of approximately 799,000 barrels per day (including the new Melaka
refinery in Malaysia, which Conoco expects will be completed in the fourth
quarter of 1998). The Company has a marketing network of approximately 7,900
outlets in the United States, Europe and Asia. Based on public filings, for the
year ended December 31, 1997, Conoco ranked eighth in the worldwide production
of petroleum liquids by U.S.-based companies, eleventh in the production of
natural gas, and eighth in refining throughput. For that same period, Conoco
reported net income of $1,097 million on total revenues of $26.3 billion.
COMPANY HISTORY
The Company was founded in 1875 in Ogden, Utah, as the Continental Oil and
Transportation Company. In 1885, it was reincorporated with a new name,
Continental Oil Company, as part of the nationwide Standard Oil Trust. In its
early years, its principal operations were marketing oil and petroleum related
products, primarily in the Rocky Mountain area and in California. In 1913, two
years after the U.S. Supreme Court dissolved the Standard Oil Trust, the Company
was again independently incorporated. From 1913 to 1929, the Company evolved
into a fully integrated oil company, with operations in most states west of the
Mississippi River.
By 1929, Conoco had approximately 1,800 producing wells and had become one
of the largest retailers of gasoline in the Rocky Mountain area. In that year it
merged with the Marland Oil Company, an oil and gas company with wells and
marketing operations from Oklahoma to Maryland. After World War II, the Company
was an early participant in Gulf of Mexico exploration and production activities
and moved aggressively overseas with Upstream assets in many parts of the world
and Downstream assets in Western Europe. In 1981, Conoco was acquired by DuPont.
UPSTREAM
SUMMARY
Conoco is currently exploring for, developing or producing crude oil,
natural gas and/or natural gas liquids in 18 countries around the world. In
1997, production averaged 654,000 BOE per day, consisting of 453,000 barrels of
petroleum liquids (including natural gas liquids from gas plant ownership) and
1.2 billion cubic feet of natural gas per day. The bulk of this production came
from fields located in the United States, the United Kingdom and Norway, with
the remaining production coming from operations in Canada, the United Arab
Emirates, Indonesia, Nigeria and Russia.
In 1997, Conoco replaced nearly 450 percent of the oil and natural gas it
produced, adding 938 million BOE to the Company's worldwide proved reserves,
while producing 209 million BOE (excluding natural gas liquids from gas plant
ownership), for a net addition of 729 million BOE. A large part of the reserve
increase reflected the recording of 680 million barrels of proved oil reserves
for the Company's interest in Petrozuata. Excluding the recording of the
Petrozuata reserves, Conoco replaced approximately 123 percent of its 1997
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production. On December 31, 1997, the Company had proved reserves of 2.6 billion
BOE, consisting of 1,624 million barrels of petroleum liquids and 5,861 billion
cubic feet of natural gas, representing an increase of 58 percent on a BOE basis
since December 31, 1993.
In recent years, Conoco has significantly increased capital expenditures
through participation in several large scale development projects. Conoco's
capital investment in Upstream activities in 1997 was $2.5 billion, including
approximately $0.9 billion for the Lobo Acquisition and $171 million for the
continued development of Britannia. The Company expects to make Upstream capital
investments in 1998 of approximately $1.8 billion, the largest of which will be
made in continued development of the Lobo trend, Britannia, Ursa and Petrozuata.
The Company believes that all of these projects will contribute to Conoco's 1999
production and significantly increase Conoco's production rates over current
levels in future years.
The majority of Conoco's exploration and production assets are located in
North America (United States and Canada) and Western Europe (United Kingdom and
Norway). The producing properties in these areas generate cash to fund growth
opportunities around the world. Outside of North America and Western Europe,
Conoco's investment activities are focused on areas that have the potential to
become major business areas in the future, such as Northern South America and
the Caribbean, and the Asia Pacific, Middle East and Russia/Caspian Sea regions.
Conoco is exploring for oil and/or natural gas in 16 countries. Since 1996,
Conoco has pursued and continues to implement an exploration strategy focused on
acquiring large acreage positions in areas that are relatively under-explored.
The purpose of these acreage acquisitions has been to establish Conoco at an
early stage in areas that have the potential for large discoveries. Since 1996,
Conoco has acquired significant acreage positions in the deepwater Gulf of
Mexico, the Atlantic Margin of Northwest Europe, Northern South America and the
Caribbean, and selected basins in the Asia Pacific region. Conoco has applied 3D
seismic and other technologies to evaluate this acreage, and has recently begun
drilling programs to test the potential of this acreage.
The following table sets forth certain information regarding the Company's
producing properties.
<TABLE>
<CAPTION>
PROVED RESERVES
AS OF 1997
DECEMBER 31, 1997 PRODUCTION
REGION NATURE OF INTEREST (MMBOE)(1) (MBOE PER DAY)(1)
------ ------------------ ----------------- ------------------
<S> <C> <C> <C>
NORTH AMERICA
Lobo................................ lease 113 38
Gulf of Mexico (including Ursa)..... lease 89 36
San Juan Basin...................... lease 167 51
Permian Basin....................... lease 152 33
Canadian Foothills.................. lease 10 2
Central Appalachian Basin........... partnership 62 3
Other............................... 160 58
----- ---
Total North America:........ 753 221
WESTERN EUROPE
Britannia........................... license 237 --
Heidrun............................. license 150 43
Statfjord........................... license 108 68
Troll............................... license 125 8
Other............................... 311 129
----- ---
Total Western Europe........ 931 248
NORTHERN SOUTH AMERICA AND THE
CARIBBEAN
Petrozuata.......................... equity company 680 --
OTHER................................. 237 106
----- ---
Total................................. 2,601 575
===== ===
</TABLE>
- ---------------
(1) Includes crude oil, condensate, and NGLs expected to be removed for the
Company's account from its natural gas production. Average daily production
excludes NGLs of 79 Mbbls per day acquired through gas plant ownership.
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NORTH AMERICA
Production operations in North America are principally located in the Lobo
trend in South Texas, the Gulf of Mexico, the San Juan Basin in New Mexico, the
Permian Basin in West Texas, the foothills east of the Canadian Rockies and the
Central Appalachian Basin in Virginia. In 1997, North American operations
contributed approximately 24 percent of the Company's worldwide petroleum
liquids production and 64 percent of its worldwide natural gas production.
Proved North American reserves as of December 31, 1997, were 753 million BOE,
consisting of 286 million barrels of petroleum liquids and 2,801 billion cubic
feet of natural gas.
In recent years, Conoco has consolidated its exploration and production
operations in North America in order to increase profitability. Conoco sold
hundreds of smaller, less efficient properties, while acquiring an increased
interest in the Company's largest producing areas such as the San Juan Basin and
the Lobo trend. As a result, Conoco has reduced the number of fields in its
portfolio from approximately 700 in 1990 to 136 as of June 30, 1998, while
maintaining production essentially constant on a BOE basis. The Company has also
focused its exploration activities by reducing the number of exploration plays
being pursued in North America from over 30 in 1995 to less than 10 as of June
30, 1998. Exploration activity in North America is concentrated in the deepwater
Gulf of Mexico, the Permian Basin in West Texas, the San Juan Basin in New
Mexico and the foothills of the Canadian Rockies.
Over the near term, the Company's objectives are to maintain existing
production from current North American assets, while increasing production from
new wells in the Lobo trend and the deepwater Gulf of Mexico, widening its
exploration activities in the foothills of the Canadian Rockies and focusing on
its natural gas processing capabilities.
Lobo Trend in South Texas
Conoco is the largest natural gas producer in the Lobo trend, and a leading
producer, marketer and transporter of natural gas in South Texas. Conoco has 20
years of operating and drilling experience in the Lobo trend and currently holds
approximately 450,000 acres in the area under oil and gas leases. In 1997, in
accordance with its strategy to rapidly increase production through
participation in large development projects, the Company substantially increased
its holdings in South Texas as the result of the Lobo Acquisition. Assets
acquired by Conoco in this transaction included approximately 215,000 acres of
leases, 800 wells and 1,150 miles of natural gas gathering and transportation
pipeline, providing direct access to major Texas intrastate and interstate
pipeline systems. As a result of the Lobo Acquisition, Conoco is currently the
third largest natural gas producer in Texas.
Conoco's average working interest in its leases in the Lobo trend is 92
percent. A large number of the producing wells acquired in the Lobo Acquisition
were acquired subject to volumetric production payments. The holders of these
production payments are entitled to a specific volume of production from these
wells (averaging approximately 91 million cubic feet per day in 1998) until the
last of the production payments terminate in 2002.
With most of the Company's expanded Lobo holdings still undeveloped, the
Company has significantly increased drilling activity and, as of June 30, 1998,
had 14 rigs working continuously in the region. This development activity has
resulted in an increase in gross natural gas production in the region from
approximately 450 million cubic feet per day as of June 30, 1997 to
approximately 700 million cubic feet per day as of June 30, 1998. The Company
anticipates spending $1 billion between 1997 and 2002 to further develop its
leases in the Lobo trend. The Company's 1998 Lobo trend development program
includes the acquisition of new 3D seismic data and the drilling of over 200
wells.
Lobo Pipeline Company, a wholly owned subsidiary of the Company, owns a
1,150 mile intrastate natural gas pipeline system in South Texas (the "Lobo
Pipeline") and expects to implement an expansion plan designed to provide
transportation for the Company's gas production and that of third party
producers, laying 100 miles of pipeline per year for the next five years. During
the first two years, most of the pipeline added will be high-pressure trunklines
to support regional development.
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Gulf of Mexico
Conoco's current portfolio of producing properties in the Gulf of Mexico
includes approximately 10 fields operated by the Company and 16 operated by
other companies. The properties are in various stages of development, ranging
from properties that are fully developed to ones with considerable additional
development potential. The Company also holds interests in various offshore
platforms, pipelines and other infrastructure.
Conoco currently has 11 leases in production or under development in the
deepwater Gulf of Mexico. The Company's most important current development
project in the Gulf of Mexico is the Ursa field development. Ursa, operated by
Shell, is one of the largest discoveries to date in the deepwater Gulf of
Mexico. The Company holds a 16 percent interest in the field, along with Shell
(45 percent), British Petroleum (23 percent) and Exxon (16 percent). The Company
expects the Ursa tension leg platform to be installed by early 1999 in
approximately 3,800 feet of water, with first production scheduled for mid-1999.
The Company projects that peak gross production from the Ursa field will reach
150,000 barrels of petroleum liquids and 400 million cubic feet of gas per day.
Conoco's most important exploration program in North America is in the
deepwater Gulf of Mexico. Conoco is the seventh largest deepwater leaseholder in
the Gulf, with interests in 271 leases. Conoco has a 100 percent interest in 130
of these leases, and jointly owns 76 of the remaining leases on a 50-50 basis
with Shell. Since 1996, Conoco has acquired 3D seismic data over large portions
of the deepwater Gulf of Mexico to identify acreage to lease and to select
prospects for drilling. Seismic interpretation is now underway on many leases
and preparations for a multi-well drilling program are being made.
Conoco will carry out its deepwater Gulf of Mexico drilling program in
large part with one of two highly sophisticated deepwater drillships that are
being constructed for joint ventures between Conoco and R&B Falcon Corporation.
The Company expects the first of these vessels to be in service in late 1998,
when the Company expects to begin a five-year, $400 million drilling program in
the Gulf of Mexico. These drillships, which will be capable of drilling wells in
water depths of up to 10,000 feet, provide Conoco with the ability to explore in
areas that were previously inaccessible.
Other U.S. Producing Properties
Outside of South Texas and the Gulf of Mexico, Conoco's largest producing
properties in North America are located in the San Juan Basin of New Mexico, the
Permian Basin in West Texas and the Central Appalachian Basin in Virginia.
Conoco also has producing properties in the Williston Basin and the Hugoton
complex in the Oklahoma/Texas panhandle.
Conoco has a significant acreage position in the San Juan Basin. Conoco's
average daily net production from the San Juan Basin in 1997 was approximately
13,600 barrels of petroleum liquids and 227 million cubic feet of natural gas.
Conoco will continue to consider potential acquisitions in this basin to take
advantage of synergies resulting from its large asset base and gas plant in the
area.
Conoco has an interest in 29 fields in the Permian Basin, which is one of
the largest producing areas in North America. In the Permian Basin, the
Company's average daily net production in 1997 was approximately 25,800 barrels
of petroleum liquids and approximately 43 million cubic feet of gas. The Company
believes the use of 3D seismic technology, horizontal wells and other innovative
extraction technologies will allow Conoco to extend the productive life of many
of the mature fields in the Permian Basin.
Pocahontas Gas Partnership ("Pocahontas") is a 50/50 partnership between
the Company and DuPont's 50 percent-owned equity affiliate, Consolidation Coal
Company. Pocahontas produces and gathers coal bed methane ("CBM") prior to and
during coal mining operations in Virginia. The Company expects Pocahontas to
produce and gather approximately 38 million cubic feet per day of CBM from the
existing active mining area in 1998. The Company recently approved a major
expansion of the Pocahontas project to develop CBM outside of the existing
mining area. In the project, Pocahontas plans to drill approximately 800 wells
over 70,000 acres.
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Canadian Foothills
Conoco has had significant exploration success in the 1990s in the
foothills east of the Canadian Rockies. In this area, Conoco has an interest in
202,000 net acres, much of which has yet to be developed. As part of the
Canadian foothills development, Conoco participated in the construction of a gas
processing plant in 1997. In addition to the discoveries in the foothills trend,
Conoco has a significant interest in the Peco Gas Field, located just east of
the foothills. Conoco also owns 100 percent of the Peco gas processing plant,
which processes gas from both the Peco Field and the Lovett River Field, another
one of Conoco's discoveries in the area.
NATURAL GAS AND GAS PRODUCTS
The Company ranked as the fourth largest producer of NGLs in the United
States in 1997. In the United States, the Company owns interests in 25 natural
gas processing plants located in Colorado, Louisiana, New Mexico, Oklahoma and
Texas as well as approximately 10,000 miles of gathering lines. Seventeen of the
plants are operated by the Company.
The Company gathers natural gas, extracts the liquids and sells the
remaining residual gas. Most of the Company's raw gas liquids are supplied to
its processing operations, which further separate them into NGL products that
are used as feedstocks for gasoline and chemicals production. The Company
provides service to more than 800 natural gas producers and sells approximately
500 million cubic feet per day of residue gas to approximately 120 customers.
The Company's share of total NGLs resulting from processing activities at
the 25 plants in which the Company owns an interest averaged 65,900 barrels per
day in 1997. In 1997, approximately 30,000 barrels per day of additional NGLs
were attributable to processing of the Company's natural gas liquids in
third-party-operated plants. In addition, the Company's 50 percent-owned equity
affiliate, C&L Processors Partnership, has five natural gas processing plants in
Oklahoma and Texas. The Company's pro rata share of C&L's NGL production was
approximately 7,500 barrels per day in 1997.
The Company's other natural gas and gas products facilities in the United
States include the Lobo Pipeline, an 800-mile intrastate natural gas pipeline
system in Louisiana, natural gas and NGL pipelines in several other states,
three underground NGL storage facilities, a natural gas liquids fractionating
plant in Gallup, New Mexico with capacity of 19,000 barrels per day, and a 22.5
percent equity interest in Gulf Coast Fractionators, which owns a natural gas
liquids fractionating plant in Mt. Belvieu, Texas with capacity of 104,000
barrels per day.
WESTERN EUROPE
Conoco has a significant portfolio of producing properties in the United
Kingdom and Norway. Proved Western Europe reserves, as of December 31, 1997,
were 931 million BOE, consisting of 421 million barrels of petroleum liquids and
3,060 billion cubic feet of natural gas. In 1997, operations in Western Europe
contributed 46 percent of the Company's worldwide petroleum liquids production
and 36 percent of its natural gas production.
Britannia Field
Conoco has a 42 percent interest in the Britannia field, which is one of
the largest natural gas fields in the United Kingdom sector of the North Sea.
Britannia is a centerpiece of the Company's strategy to increase production and
reserves through large, long-lived projects. First production from Britannia
occurred in August 1998 and the Company estimates that the field will have a
production life of approximately 30 years. The Company's proved reserves at
Britannia include 1.1 trillion cubic feet of natural gas and 52 million barrels
of petroleum liquids at December 31, 1997. The Company believes Britannia has
the potential to produce between 650 and 740 million cubic feet of gas per day
(gross). Conoco and Chevron, the two largest interest holders in the field,
jointly operate Britannia.
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Southern North Sea Producing Properties
Conoco has various equity interests in 12 producing gas fields in the
Southern North Sea, a major gas producing area on the United Kingdom continental
shelf. These fields mostly feed into the Conoco-operated Theddlethorpe gas
processing facility through three Conoco-operated pipeline systems (Viking,
LOGGS and CMS). In 1997, Conoco's net production from the Southern North Sea was
108 billion cubic feet of natural gas.
Conoco believes there are additional development opportunities in the
Southern North Sea. One example is the Viking Phoenix project in which Conoco is
targeting the development of additional reserves using existing infrastructure
and new drilling and completion technology. The Company expects first production
from this development, for which Conoco's proved reserves were 174 billion cubic
feet of gas as of December 31, 1997, to occur by the end of 1998.
Other United Kingdom Properties and Discoveries
Conoco also has interests in the Miller (30 percent), Alba (12 percent),
Statfjord (4.8 percent in the United Kingdom/10.3 percent in the Norwegian
sector), MacCulloch (40 percent), and Banff (32 percent) fields, and the Clair
discovery (21 percent). Conoco operates the MacCulloch and Banff fields, both of
which will employ innovative floating production, storage and offtake
technology. British Petroleum operates the Miller field and the Clair discovery,
which is one of the largest undeveloped oil discoveries in Western Europe.
Interconnector Pipeline and Gas Sales
The Interconnector pipeline, which connects the United Kingdom and Belgium,
will facilitate marketing throughout Europe of the natural gas the Company
produces in the United Kingdom. The pipeline was installed in 1997, and is
expected to commence operation in October 1998. The Company has a 10 percent
interest in the $700 million project.
Norwegian Producing Fields
Conoco is the sixth largest oil producer in Norway. The Company has an
ownership interest in three of the largest fields in the country, Heidrun,
Statfjord and Troll. Conoco also has an interest in the Oseberg South (7.7
percent), Visund (9.1 percent), Jotun (3.75 percent), and Huldra (23.3 percent)
discoveries, which are in development, as well as the PL 203 (20 percent)
discovery.
Production from the Heidrun field began in 1995 and is currently averaging
205,000 barrels of petroleum liquids per day (gross). Conoco's share of the
proved reserves in the field, based on its 18.125 percent equity interest, is
123 million barrels of petroleum liquids and 164 billion cubic feet of natural
gas. Conoco was the operator for the construction and installation of Heidrun's
tension leg platform. Upon first production, Statoil assumed operatorship in
accordance with a pre-agreed arrangement. Associated gas from the Heidrun Field
serves as feedstock for a methanol plant that became operational in Norway in
1997. The plant, in which the Company holds an 18.125 percent interest, is
operated by Statoil.
Proved reserves from the Statfjord field have increased substantially over
the last five years as field performance has exceeded projections. Conoco, which
holds 10.3 and 4.8 percent interests in the Norwegian and United Kingdom sectors
of the field, respectively, had net proved reserves of 84 million barrels of
petroleum liquids and 142 billion cubic feet of natural gas in the field as of
December 31, 1997 (total for Norway and the United Kingdom). Conoco is
supporting work by Statoil, the operator of Statfjord, to determine ways to slow
the natural decline of the field, and increase reserves. The Company also owns a
1.66 percent interest in the Troll gas field, operated by Statoil, and has net
proved reserves in the field of 634 billion cubic feet of natural gas and 20
million barrels of petroleum liquids.
Exploration -- The Atlantic Margin
Exploration activity in Western Europe is focused on the deepwater Atlantic
Margin fairway, which runs from the Voring Basin off the coast of Norway to the
Porcupine Basin off of the west coast of Ireland. Along
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<PAGE> 62
the Atlantic Margin, Conoco has significant acreage positions in the Voring
Basin, the West of Shetlands and North Rockall Trough areas in the United
Kingdom and the Porcupine Basin. In 1997, the British government awarded Conoco
and three partners exploration licenses for two highly sought after deepwater
blocks, Blocks 204/14 and 204/15, in the West of Shetlands area. These blocks
are adjacent to a discovery in British Petroleum-operated Block 204/19. Conoco,
as operator of Blocks 204/14 and 204/15, has drilled and is evaluating one well
to test the potential of this acreage and expects to drill a second well in
1998.
NORTHERN SOUTH AMERICA AND THE CARIBBEAN
Petrozuata
Petrozuata is a key component of Conoco's strategy to increase production
and reserves through implementation of long-lived, large development projects
and to utilize its proprietary coking technology in other areas of its business.
Petrozuata is a joint venture between the Company, which holds a 50.1 percent
non-controlling equity interest (subject to an option held by the Venezuelan
investment entity SOFIP to purchase one percent of the joint venture from Conoco
that expires May 31, 1999), and PDVSA Petroleo y Gas S.A., a subsidiary of
PDVSA, which holds the remaining interest. Petrozuata, the first venture of its
kind in Venezuela, is developing an integrated operation to produce extra heavy
crude oil from known reserves in the Zuata region of the Orinoco Belt, transport
it to the Jose industrial complex on the north coast of Venezuela and upgrade it
into Synthetic Crude, with associated by-products of liquified petroleum gas,
sulfur, petroleum coke and heavy gas oil. Conoco's recorded proved reserves
relating to its interest in this project as of December 31, 1997 were 680
million barrels of oil. Drilling began in 1997 and currently approximately 50
horizontal wells are in various stages of development, with another 37 wells
planned by year-end 1999. The joint venture agreement has a 35-year term and
requires approval of both Conoco and PDVSA Petroleo y Gas S.A. for major
Petrozuata decisions.
The upgrading facility, which will employ the Company's proprietary delayed
coking technology, is currently under construction. The upgrader will be located
at Jose and is projected to become operational in 2000. Diluted extra-heavy
crude oil will be transported via a 36-inch pipeline from the field to the Jose
industrial complex. An adjacent 20-inch pipeline will return naphtha from the
upgrader to the field for use as a diluent. Petrozuata has also begun
construction of field processing and support facilities and marine facilities
for shipping Synthetic Crude and by-products.
Petrozuata began producing extra heavy crude oil in August 1998, and the
Company expects that Petrozuata's production will rise to 120,000 barrels
(gross) daily by the time the project's upgrading facility becomes operational.
Prior to completion of the upgrader, the extra heavy crude will be blended with
lighter oils and sold on world markets. Following completion of the upgrader,
the Synthetic Crude produced by Petrozuata will either be used as a feedstock
for the Company's Lake Charles refinery and a refinery operated by PDVSA, or
will be sold to third parties. The Company has entered into an agreement to
purchase up to 104,000 barrels per day of the Petrozuata Synthetic Crude for a
formula price over the term of the joint venture if Petrozuata is unable to sell
the production to third parties for higher prices. All Synthetic Crude sales
will be denominated in United States dollars. By-products produced by the
upgrader (principally coke and sulfur) will be sold to a variety of domestic and
foreign purchasers. The loading facilities at Jose will transfer Synthetic Crude
and some of the by-products to ocean tankers for export. Synthetic Crude sales
are expected to comprise more than 90 percent of the project's revenues.
The La Luna Trend
Exploration activity in Northern South America and the Caribbean is focused
on a geologic trend known as La Luna. In Venezuela, the Company conducted
seismic surveys in 1997 on the shallow water Gulf of Paria West block, located
between Venezuela and Trinidad, and on the Guanare block in the Merida Andes
foothills. The Company expects to begin drilling of prospects on these blocks in
1998. Conoco currently holds a 50 percent working interest in both the Gulf of
Paria West block, which it operates, and the Guanare block, which is operated by
Elf (in each case subject to dilution to 32.5 percent at the option of a PDVSA
affiliate).
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<PAGE> 63
In northwestern Colombia, seismic surveys have been completed in
partnership with Texaco on three tracts that Conoco acquired through a 50
percent farm-in. In 1998, Texaco has drilled two wells on the acreage (one
non-commercial discovery and one dry hole) and plans one additional well before
year-end. In addition, Conoco and Texaco recently acquired a fourth tract in a
joint bid.
In 1997, Conoco signed a production sharing contract for Blocks 4a and 4b,
two large, prospective blocks off Trinidad's east coast. A 3D seismic survey was
acquired over the acreage in 1997, and the Company expects to commence drilling
in late 1998 or early 1999. Conoco is operator of both blocks and has a 50
percent working interest, as does Texaco.
Seeking additional attractive opportunities in the La Luna Trend, Conoco
has conducted a two-year study of the hydrocarbon potential of the entire
offshore Barbados area. Encouraged by the study, Conoco has entered into a
commitment to acquire seismic data over 50 percent of the original study area
and has the option to enter a drilling program to test the potential of this
largely unexplored area.
Phoenix Park
The Company holds a 39 percent interest in Phoenix Park Gas Processors
Limited ("Phoenix Park"), a joint venture with the National Gas Company of
Trinidad and Tobago Limited, that processes and markets gas products in
Trinidad. Phoenix Park owns a gas processing plant, a fractionator producing
propane, mixed butane and natural gasoline, storage tanks and a liquefied
petroleum gas marine loading dock. These facilities produce over 13,000 barrels
per day (gross) of NGLs. Phoenix Park is currently implementing a significant
expansion of its facilities.
ASIA PACIFIC
The Company has a 30-year operating history in Indonesia. The focus of
Conoco's effort in the Asia Pacific region is the Company's operations in the
Indonesian sector of the Natuna Sea. In this area, Conoco is the operator of the
Block B and North West Natuna production sharing contracts ("PSCs").
West Natuna Gas Project
Conoco, as operator of the South Natuna Sea Block B PSC, along with the
other participants in Block B and the interest holders in the Block A and Kakap
PSCs, have formed the "West Natuna Group", with the aim of jointly marketing gas
from the West Natuna Area. In April 1997, Pertamina, the Indonesian state-owned
oil and gas company, entered into an agreement with a consortium (led by
Sembawang in Singapore) (the "Singapore Group") pursuant to which the parties
intend to negotiate natural gas purchase and sale agreements for the sale by
Pertamina of natural gas from specified fields in the PSCs operated by the West
Natuna Group (the "West Natuna Gas Project"). Pertamina and the Singapore Group
have now finalized (but not executed) a gas sales agreement. The current term of
the proposed purchase agreement provides for gas deliveries to begin by
mid-2001. The gas would be used for industrial purposes, primarily in power
generation and petrochemical plants, in Singapore.
For the project to proceed certain conditions must be satisfied, including
the completion of the design of a 463 kilometer 28-inch submarine pipeline to
transport the gas from the West Natuna Sea fields to Singapore, completion of
the tariff and offtake arrangements relating to the pipeline, agreement between
the West Natuna Group and Pertamina to gas supply and allocation terms, the
arrangement by the Singapore parties of offtake agreements for the gas, and the
extension of each of the PSCs. The Company has no control over the satisfaction
of these conditions, and there is no assurance that the conditions will be
satisfied or waived by the date required.
Assuming satisfaction of the above stated conditions and successful
negotiation of natural gas agreements among Pertamina and the Singapore Group,
up to one trillion cubic feet of natural gas could be supplied from gas fields
in Block B to the Singapore Group under the letter agreement Pertamina has
signed. First gas deliveries could begin by mid-2001, and the Company believes
Block B's share of production could reach 140 million cubic feet of gas daily.
Until all conditions necessary for project approval are met, no proved reserves
will be attributed to Conoco's interest in the West Natuna Gas Project.
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<PAGE> 64
Belida and Sembilang Fields, Indonesia
Conoco holds a 40 percent interest in and serves as operator of the Belida
and Sembilang oil fields in the Block B PSC. An ongoing infill drilling program
in the Belida Field maintained gross production in the range of 90,000 barrels
per day in 1997.
RUSSIA/CASPIAN SEA
The Company holds a 50 percent direct (plus a 4.7 percent indirect
interest) ownership interest in Polar Lights Company ("Polar Lights"), a Russian
limited liability company established in January 1992. Polar Lights, the first
Russian-Western joint venture to develop a major new oil field, was established
to develop the Ardalin oil field discovered in 1988 by the Russian state
enterprise GP Arkhangelskgeologia. Ardalin is located in the Arctic tundra some
1,000 miles northeast of Moscow. As of December 31, 1997, Conoco's share of
proved reserves is 43 million barrels of petroleum liquids, with an additional
eight million barrels of net proved reserves at the adjacent oil fields -- Kolva
and Dusushev. Polar Lights started producing oil in August 1994 and gross
production has increased from an average 21,000 barrels per day in 1994 to
37,000 barrels per day as of June 30, 1998. Oil is transported through the
existing Russian pipeline system and is then exported or sold on the domestic
market.
In March 1998, Conoco signed a memorandum of understanding with OAO Lukoil
("Lukoil"), Russia's largest oil company, to jointly study the development of
petroleum reserves in the 1.2-million-acre block known as the Northern
Territories in the Timan-Pechora region in Northern Russia, which includes the
large undeveloped Yuzhno Khilchuyu oil field. The memorandum of understanding
followed Lukoil's purchase in December 1997 of the controlling interest in OAO
Arkhangelskgeoldobycha (successor to GP Arkhangelskgeologia), the Company's
original partner in the Northern Territories.
In July 1998, the Company acquired a 15.667 percent interest in OAO
Arkhangelskgeoldobycha for approximately $33 million. OAO Arkhangelskgeoldobycha
owns a 30 percent interest in Polar Lights.
Conoco is also one of several foreign participants with Gazprom, the major
Russian gas company, in a project to assess the feasibility of developing
infrastructure and establishing a market for the extensive gas reserves believed
to be contained in the remote Shtokmanskoye field located in the Barents Sea.
WEST AFRICA
In 1997, Conoco, in partnership with Express Petroleum and Gas Company Ltd.
of Nigeria ("Express"), announced the production of first oil from the shallow
water Ukpokiti field, located offshore in the western Niger delta. Conoco
currently has a 90 percent revenue interest in the field. Total production from
the field is currently 20,000 barrels per day of oil, and Conoco's net proved
reserves as of December 31, 1997 were 13.2 million barrels of oil. Express
operates Ukpokiti with the Company providing technical and operational
assistance in the field's development. Field development included three remote
caisson-type structures, five wells, and the conversion of the Conoco VLCC
tanker "Independence" into a floating production and storage offtake vessel.
With a 1.7 million-barrel storage capacity, the vessel also serves as an export
terminal.
In addition to the Company's interest in the Ukpokiti field, Conoco has a
47.5 percent working interest in the deepwater OPL 220 license off the coast of
Nigeria, which is operated by Conoco and encompasses 600,000 acres. The Company
has acquired a 3D seismic survey and drilled two wells on this license. The
first well, which was drilled in 1997, found only gas and was noncommercial. The
second well was drilled in 1998 and encountered both oil and gas-filled sands.
Conoco and its partner Exxon are currently evaluating results from this second
well so that a decision can be made as to the future work program for the block.
MIDDLE EAST
In Dubai, United Arab Emirates, Conoco has operated four fields since their
discovery between 1966 and 1973. Currently the Company is using horizontal
drilling techniques and advanced reservoir drainage technology to enhance the
efficiency of the offshore production operations and improve recovery rates.
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<PAGE> 65
OIL AND NATURAL GAS RESERVES
The Company's estimated proved reserves at December 31, 1997 were 2.6
billion BOE (consisting of 1,624 million barrels of oil and 5,861 billion cubic
feet of natural gas), up 39 percent from December 31, 1996. This increase
largely reflects reserves associated with the Company's equity interest in
Petrozuata.
Oil and gas proved reserves cannot be measured precisely. Reserve estimates
are based on many factors related to reservoir performance which require
evaluation by engineers interpreting the available data, as well as price and
other economic factors. The reliability of these estimates at any point in time
depends on both the quality and quantity of the technical and economic data, the
production performance of the reservoirs as well as extensive engineering
judgment. Consequently, reserve estimates are subject to revision as additional
data become available during the producing life of a reservoir. When a
commercial reservoir is discovered, proved reserves are initially determined
based on limited data from the first well or wells. Subsequent data may better
define the extent of the reservoir and additional production performance, well
tests and engineering studies will likely improve the reliability of the reserve
estimate. See "Risk Factors -- Uncertainty of Estimates of Proved Reserves."
At the request of the Company, DeGolyer and MacNaughton, independent
petroleum engineering consultants, has carried out an independent evaluation of
selected properties representing approximately 80 percent of the Company's
proved reserves based on present value at December 31, 1997. The results
obtained by DeGolyer and MacNaughton with respect to reserves at December 31,
1997 do not show significant differences from those reported by the Company.
DeGolyer and MacNaughton has delivered to the Company its summary letter report
describing its procedures and conclusions, a copy of which appears as Annex A
hereto. No major discovery or other favorable or adverse event has occurred
since December 31, 1997 that would cause a significant change in the estimated
proved reserves as of that date.
The following table sets forth by region the Company's proved oil reserves
at year-end for the past five years:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ------
(MILLIONS OF BARRELS)
<S> <C> <C> <C> <C> <C>
PROVED OIL RESERVES(1)
COMBINED COMPANIES
United States.............................................. 344 336 294 299 277
Europe..................................................... 390 394 408 413 421
Other regions.............................................. 230 223 231 214 195
--- --- --- --- ------
Worldwide........................................ 964 953 933 926 893
SHARE OF EQUITY AFFILIATE RESERVES
Europe..................................................... 19 35 44 47 51
Other regions(2)........................................... -- -- -- -- 680
--- --- --- --- ------
Total oil reserves............................... 983 988 977 973 1,624
=== === === === ======
</TABLE>
- ---------------
(1) Oil reserves comprise crude oil, condensate and NGLs expected to be removed
for the Company's account from its natural gas production.
(2) Represents the Company's equity share of the Petrozuata venture in
Venezuela.
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<PAGE> 66
The following table sets forth the Company's natural gas reserves at
year-end for the past five years by region:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1993 1994 1995 1996 1997
----- ----- ----- ----- -----
(BILLIONS OF CUBIC FEET)
<S> <C> <C> <C> <C> <C>
PROVED NATURAL GAS RESERVES
COMBINED COMPANIES
United States.......................................... 1,802 1,749 1,891 1,822 2,235
Europe................................................. 1,752 2,431 2,649 3,068 3,060
Other regions.......................................... 126 150 169 173 196
----- ----- ----- ----- -----
Worldwide.................................... 3,680 4,330 4,709 5,063 5,491
SHARE OF EQUITY AFFILIATE RESERVES
United States.......................................... 291 344 339 333 370
----- ----- ----- ----- -----
Total natural gas reserves................... 3,971 4,674 5,048 5,396 5,861
===== ===== ===== ===== =====
</TABLE>
PRODUCTION DATA
The Company's oil and natural gas production averaged 654,000 BOE per day
in 1997, compared with 656,000 BOE per day in 1996. As a percentage of total
production, natural gas production was 31 percent in 1997 and 1996.
The table below shows the Company's interests in average daily oil
production and natural gas production for the past three years. Oil production
comprises crude oil and condensate produced for the Company's account, plus its
share of NGLs removed from natural gas production from owned leases and NGLs
acquired through gas plant ownership. Natural gas production represents the
Company's share of production from leases in which the Company has an ownership
interest.
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- -----
(THOUSANDS OF BARRELS
PER DAY)
<S> <C> <C> <C>
AVERAGE DAILY OIL PRODUCTION
COMBINED COMPANIES
Crude Oil, Condensate, and Natural Gas Liquids from
Owned Reserves:
United States........................................ 93 91 90
Europe............................................... 143 182 176
Other Regions........................................ 98 88 92
----- ----- -----
Subtotal.......................................... 334 361 358
Natural Gas Liquids from Gas Plant Ownership:
United States........................................ 65 67 66
----- ----- -----
Total Production.................................. 399 428 424
SHARE OF EQUITY AFFILIATES
Crude Oil, Condensate, and Natural Gas Liquids from
Owned Reserves........................................ 12 13 16
Natural Gas Liquids from Gas Plant Ownership........... 13 13 13
----- ----- -----
Total Production Equity Affiliates................ 25 26 29
----- ----- -----
Total Oil Production Per Day...................... 424 454 453
===== ===== =====
</TABLE>
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<PAGE> 67
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
(MILLIONS OF CUBIC FEET
PER DAY)
<S> <C> <C> <C>
AVERAGE DAILY NATURAL GAS PRODUCTION
COMBINED COMPANIES
Natural Gas from Owned Reserves:
United States........................................ 740 738 709
Europe............................................... 341 416 432
Other Regions........................................ 31 41 46
----- ----- -----
Total Deliveries.................................. 1,112 1,195 1,187
SHARE OF EQUITY AFFILIATES
Natural Gas from Owned Reserves:
United States........................................ 14 16 16
----- ----- -----
Total Natural Gas Production Per Day.............. 1,126 1,211 1,203
===== ===== =====
</TABLE>
See pages F-33 and F-34 for the annual production volumes of oil (crude
oil, condensate and natural gas liquids) and natural gas from proved reserves.
Proved oil production volumes exclude natural gas liquids from plant ownership.
PRODUCTION COST DATA
The following table sets forth the Company's average production costs per
BOE produced, average sales prices per barrel of crude oil and condensate sold
and average sales prices per MCF of natural gas sold, for the three-year period
ended December 31, 1997.
<TABLE>
<CAPTION>
TOTAL UNITED OTHER
WORLDWIDE STATES EUROPE REGIONS
--------- ------ ------ -------
(UNITED STATES DOLLARS)(1)
<S> <C> <C> <C> <C>
For the year ended December 31, 1997
Average production costs per barrel of oil equivalent
of petroleum produced(2)............................ $ 4.21 $ 4.23 $ 4.51 $ 3.40
Average sales prices of produced petroleum(3)
Per barrel of crude oil and condensate sold......... 18.58 17.93 18.93 18.35
Per MCF of natural gas sold......................... 2.51 2.34 3.25 1.41
For the year ended December 31, 1996
Average production costs per barrel of oil equivalent
of petroleum produced(2)............................ 3.84 4.11 4.13 2.50
Average sales prices of produced petroleum(3) Per
barrel of crude oil and condensate sold............. 20.11 18.68 20.94 19.47
Per MCF of natural gas sold......................... 2.21 1.90 2.92 1.24
For the year ended December 31, 1995
Average production costs per barrel of oil equivalent
of petroleum produced(2)............................ 3.92 3.78 4.82 2.49
Average sales prices of produced petroleum(3) Per
barrel of crude oil and condensate sold............. 16.52 15.53 16.95 16.56
Per MCF of natural gas sold......................... 1.86 1.44 2.96 1.13
</TABLE>
- ---------------
(1) Excludes the Company's share of equity affiliates.
(2) Average production costs per barrel of equivalent liquids, with natural gas
converted to liquids at a ratio of 6,000 cubic feet of gas to one barrel of
liquid.
(3) Excludes proceeds from sales of interest in oil and gas properties.
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<PAGE> 68
DRILLING AND PRODUCTIVE WELLS
The following table sets forth the Company's drilling wells and productive
wells by region as of December 31, 1997.
<TABLE>
<CAPTION>
TOTAL UNITED OTHER
WORLDWIDE STATES EUROPE REGIONS
--------- ------ ------ -------
(NUMBER OF WELLS)
<S> <C> <C> <C> <C> <C>
Number of wells drilling(1)(3)
Gross.................................................... 33 15 13 5
Net...................................................... 14 9 3 2
Number of productive wells(2)(3)
Oil
wells -- gross....................................... 7,761 7,173 278 310
-- net......................................... 2,657 2,523 26 108
Gas wells -- gross....................................... 8,749 8,486 169 94
-- net......................................... 4,210 4,089 33 88
</TABLE>
- ---------------
(1) Includes wells being completed.
(2) Approximately 80 gross (27 net) oil wells and 757 gross (271 net) gas wells,
all in the United States, have multiple completions.
(3) Excludes the Company's share of equity affiliates.
DRILLING ACTIVITY
The following table sets forth the Company's net exploratory and
development wells drilled by region for the three-year period ended December 31,
1997.
<TABLE>
<CAPTION>
TOTAL UNITED OTHER
WORLDWIDE STATES EUROPE REGIONS
--------- ------ ------ -------
(NUMBER OF NET WELLS COMPLETED)
<S> <C> <C> <C> <C> <C>
For the year ended December 31, 1997(1)
Exploratory -- productive............................... 7.1 3.7 1.6 1.8
-- dry...................................... 18.4 11.7 4.9 1.8
Development -- productive............................... 142.6 126.9 5.4 10.3
-- dry...................................... 10.2 7.2 0.0 3.0
For the year ended December 31, 1996(1)
Exploratory -- productive............................... 42.8 1.6 2.0 39.2
-- dry...................................... 20.5 10.3 4.0 6.2
Development -- productive............................... 89.9 73.1 6.1 10.7
-- dry...................................... 17.3 13.5 0.3 3.5
For the year ended December 31, 1995(1)
Exploratory -- productive............................... 34.2 12.8 1.4 20.0
-- dry...................................... 38.2 22.1 4.9 11.2
Development -- productive............................... 109.5 94.3 8.0 7.2
-- dry...................................... 13.7 10.7 0.0 3.0
</TABLE>
- ---------------
(1) Excludes the Company's share of equity affiliates.
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<PAGE> 69
DEVELOPED AND UNDEVELOPED PETROLEUM ACREAGE
The following table sets forth the Company's developed and undeveloped
petroleum acreage by region as of December 31, 1997.
<TABLE>
<CAPTION>
TOTAL UNITED OTHER
WORLDWIDE STATES EUROPE REGIONS
--------- ------ ------ -------
(THOUSANDS OF ACRES)
<S> <C> <C> <C> <C>
Developed acreage(1)
Gross.................................................. 7,555 2,663 1,129 3,763
Net.................................................... 3,341 1,559 317 1,465
Undeveloped acreage(1)
Gross.................................................. 108,803 2,749 4,984 101,070
Net.................................................... 80,017 2,103 1,648 76,266
</TABLE>
- ---------------
(1) Excludes the Company's share of equity affiliates.
The Company is not required to file, and has not filed on a recurring
basis, estimates of its total proved net oil and gas reserves with any U.S. or
non-U.S. governmental regulatory authority or agency other than the Department
of Energy (the "DOE") and the Securities and Exchange Commission (the
"Commission"). The estimates furnished to the DOE have been consistent with
those furnished to the Commission. They are not necessarily directly comparable,
however, due to special DOE reporting requirements such as requirements to
report in some instances on a gross, net or total operator basis, and
requirements to report in terms of smaller units. In no instance have the
estimates for the DOE differed by more than five percent from the corresponding
estimates reflected in total reserves reported to the Commission.
DOWNSTREAM
SUMMARY
Downstream operations encompass refining crude oil and other feedstocks
into petroleum products, buying and selling crude oil and refined products and
transporting, distributing and marketing petroleum products. Downstream
operations are organized regionally with operations in North America, Europe and
the Asia Pacific region. North American and European operations provided 60
percent and 46 percent, respectively, of total Downstream earnings in 1997,
partially offset by a small loss resulting from start-up activities in Asia
Pacific. Downstream's objective is to continue to provide an appropriate return
on investment by improving the competitiveness of the core business, while
providing free cash flow to fund growth in new Downstream businesses, as well as
elsewhere within the Company.
Conoco has made capital investments in Downstream activities averaging
approximately $617 million per year for the last three years. 1998 capital
investments in Downstream activities are also expected to be approximately $600
million.
Downstream's strengths are in processing heavy, high sulfur and acidic
crudes, upgrading bottom-of-the-barrel feedstocks via coking technology, running
low-cost, high-volume retail marketing operations and developing specialty
products. Approximately 50 percent of the Company's worldwide refining capacity
is designed to process heavy, high sulfur crude. The Humber refinery in the
United Kingdom can process about 44 percent acidic crudes in its crude slate.
The Company has applied its coking technology to nearly all of its refining
operations throughout the world. This has enabled the Company to become a world
leader in producing petroleum coke products, such as high-value graphite and
anode coke, which are used in the production of electrodes for the steel and
aluminum industries. Conoco has also licensed its fuel coking technology around
the world, which has in turn created other business development opportunities.
The Company produces and markets a full range of refined petroleum
products, including gasolines, diesel fuels, heating oils, aviation fuels, heavy
fuel oils, asphalts, lubricants, petroleum coke products and petrochemical
feedstocks. The Company owns and operates, or is a partner in the operation of,
nine refineries worldwide with a total crude and condensate capacity of 799,000
barrels per calendar day (including the new
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<PAGE> 70
Melaka refinery, which Conoco expects will be completed in the fourth quarter of
1998). Upon completion of Melaka, refining capacity will be distributed 62
percent in the United States, 33 percent in Europe and five percent in the Asia
Pacific region. Capacity has risen by over 175,000 barrels per day, or 29
percent, since year end 1995 as a result of the expansion of the Lake Charles
refinery, the upgrade of the Humber refinery, and the acquisition of its
interest in two refineries in the Czech Republic. In the United States, the
Company primarily markets through low-cost wholesale operations. The Company has
a growing marketing presence in Europe and Asia Pacific, where it is a leader in
operating low-cost, high-volume retail stations. In the first half of 1998,
refined product sales averaged 984,000 barrels per day, distributed 67 percent,
32 percent and 1 percent in the United States, Europe and the Asia Pacific
region, respectively.
NORTH AMERICA
Conoco's four U.S. refineries are fully integrated, high conversion
facilities, with design capacity to process over 50 percent high sulfur crude
oils, much of which is also heavy crude. A principal factor affecting the
profitability of the Company's North American operations is the price of refined
products in relation to the cost of crude oils and other feedstocks processed.
Because the Company is able to process a relatively large portion of heavy, high
sulfur crude oil, the cost advantage of these crude oils (such as those from
Mexico, Venezuela and Canada) over lighter, low sulfur crude oils (such as West
Texas Intermediate) is particularly significant. Over half of Conoco's U.S.
refining capacity is located in inland markets and therefore benefits from the
price differential for products produced and sold inland versus those produced
and sold on the Gulf Coast.
Integration of refining, transportation and marketing, and continuous
improvement initiatives, have resulted in increased profitability from
improvements in refinery reliability, utilization, product yield, and energy
usage. Since 1993, the Company has increased refining input at its four U.S.
refineries by 20 percent, while lowering average operating expenses by
approximately $1.70 per barrel of refinery input. The Company has improved
market share through geographic concentration of markets.
The Company intends to limit ongoing capital investments in Downstream
North America to a level that is less than half of Downstream North America's
operating cash flow for ongoing capital expenditures, excluding large,
non-discretionary, regulatory-driven projects and selected growth projects.
Capital expenditures for North America were approximately $227 million in 1997
and are expected to decline to approximately $170 million in 1998, reflecting
the completion of major projects. The Company is positioned to make the
necessary clean fuels investments at its refineries over the next five years in
support of changing motor fuel specifications. The Company also plans to make
investments at the Lake Charles refinery to facilitate processing of Petrozuata
Synthetic Crude.
Refining
The Company operates four wholly owned refineries in the United States. The
following tables outline the rated crude and condensate distillation capacity as
of December 31 for each of the past five years, and the average daily crude,
condensate and other inputs for each of the past five years.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(THOUSANDS OF BARRELS PER DAY)
<S> <C> <C> <C> <C> <C> <C>
REFINERY CRUDE AND CONDENSATE CAPACITY
Lake Charles, Louisiana................................... 175 182 191 226 226
Ponca City, Oklahoma...................................... 140 140 150 155 155 (1)
Denver, Colorado.......................................... 58 58 58 58 58
Billings, Montana......................................... 49 49 49 52 52
--- --- --- --- ---
Total........................................... 422 429 448 491 491
=== === === === ===
</TABLE>
- ---------------
(1) Subsequent to December 31, 1997, capacity has been upgraded to 160,000
barrels per day.
71
<PAGE> 71
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(THOUSANDS OF BARRELS PER DAY)
<S> <C> <C> <C> <C> <C>
REFINERY INPUTS(1)
Lake Charles, Louisiana
Crude and condensate(2)................................ 165 183 179 177 211
Other feedstocks....................................... 21 24 23 21 23
Ponca City, Oklahoma
Crude and condensate(2)................................ 135 144 151 150 161
Other feedstocks....................................... 3 2 5 2 2
Denver, Colorado
Crude and condensate(2)................................ 46 47 49 49 53
Other feedstocks....................................... 0 0 0 0 0
Billings, Montana
Crude and condensate(2)................................ 45 48 45 51 51
Other feedstocks....................................... 4 3 3 3 3
Total crude and condensate........................ 391 422 424 426 476
Total other feedstocks............................ 28 30 31 26 27
</TABLE>
- ---------------
(1) This table includes feedstocks in addition to crude and condensate on which
rated capacity is based.
(2) This table includes actual crude and condensate runs, which may exceed rated
capacity.
The Company's U.S. consolidated refined product yields by volume in 1997
were 46 percent motor gasoline, 40 percent middle distillates, including jet and
diesel fuel, 4 percent residual fuel oil and asphalt and 10 percent other
products, including petroleum coke, lubricants and liquefied petroleum gases.
Lake Charles Refinery and Related Facilities
The Company's Lake Charles refinery, located in Westlake, Louisiana, has a
crude capacity of 226,000 barrels per day and processes both heavy, high sulfur
crude oil and low sulfur crude oil. The refinery's Gulf Coast location provides
access to numerous cost-effective domestic and international crude oil sources.
The crude design capacity is approximately 56,000 barrels per day of local,
domestically supplied low sulfur crudes, with the remaining 170,000 barrels per
day being heavy, high sulfur crudes. While the types and origins of these lower
priced, heavy, high sulfur crudes can vary, the majority consists of Venezuelan
and Mexican crudes delivered via tanker. The Lake Charles refinery products can
be delivered by truck, rail or into major common carrier products pipelines
partially owned by the Company which serve the Eastern and Mid-continent United
States. In addition, refinery products can be sold into export markets through
the refinery's marine terminal.
The ability to refine both low-sulfur and heavy high sulfur crudes at the
Lake Charles refinery provides a competitive advantage to the Company by
enabling the refinery to produce from relatively low-cost feedstocks a full
range of products including LPG, gasolines, jet fuel, diesel fuel, petroleum
coke, lube oils and other specialty products. The refinery facilities include
fluid catalytic cracking, delayed coking and hydrodesulfurization units which
enable it to maximize the upgrade from the heavier crudes. A crude unit
expansion and a new catalytic reformer were completed in conjunction with the
Excel Paralubes project to take advantage of synergies generated between the two
facilities. The Company is making investments in the Lake Charles refinery so
that, in the future, it will be able to process Petrozuata Synthetic Crude.
Integration of fuels and specialty products plays an important role in
maximizing product value at the refinery. Intermediates produced from low-sulfur
crude processing allow the refinery to supply the heaviest, highest boiling
range material in the crude to the Cit-Con lube plant (owned by a 35
percent-owned equity affiliate of Conoco) for base oils, finished lubes and wax
production. Other intermediates are exchanged with a neighboring chemical plant
complex for further processing.
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<PAGE> 72
The refinery supplies high sulfur gas oil to Excel Paralubes (a 50/50 joint
venture between the Company and Pennzoil) which owns a hydrocracked lubricating
base oil facility. Excel Paralubes's state-of-the-art lube oil facility produces
nearly 17,000 barrels per day of high quality hydrocracked base oils,
representing approximately 10 percent of U.S. lubricating base oil production.
Hydrocracked base oils are second in quality only to synthetic base oils, but
are produced at a much lower cost. The refinery produces other specialty
intermediates for making solvents to supply the recently formed Penreco joint
venture company (also a joint venture with Pennzoil). Penreco manufactures and
markets highly refined specialty petroleum products for global markets.
The Lake Charles facilities also include a specialty coker and calciner
that manufacture the more highly valued graphite and anode petroleum cokes for
the steel and aluminum industries, and provide a substantial increase in light
oils production by converting the heaviest part of the heavy high sulfur crude
barrel into diesel fuel and gasoline. In addition, green petroleum coke is
supplied to a nearby coke calcining venture.
Ponca City Refinery
The Company's refinery located in Ponca City, Oklahoma, recently increased
its crude capacity to 160,000 barrels per day of light, high sulfur and light,
low sulfur crudes. Both foreign and domestic crudes are delivered by pipeline
from offshore, Oklahoma, Kansas, and North and West Texas fields. Finished
products are shipped by truck, rail and Company-owned and common carrier
pipelines to markets throughout the Mid-continent region.
The Ponca City refinery is a fully integrated, high-conversion facility
that produces a full range of products, including LPG, gasoline, jet fuel,
diesel and anode and fuel grade petroleum cokes. The refinery's facilities
include fluid catalytic cracking, delayed coking and hydrodesulfurization units
which enable it to produce high ratios of gasoline and diesel fuel from crude
oil.
Denver Refinery
The Company's Denver refinery, located in Commerce City, Colorado, has a
crude capacity of 58,000 barrels per day, processing a mixture of Canadian
heavy, high sulfur crudes, and domestic heavy, high sulfur crude oils and low
sulfur crude oils. Almost all crude oil processed at the refinery is transported
via pipeline. Products are delivered predominantly through a local truck loading
terminal to the east side of the Rockies but also by rail and pipelines to other
Colorado markets. The refined gasoline products from the Denver refinery help
supply the Company's marketing operations in the Rocky Mountain states.
The Denver refinery is a fully integrated refinery that produces a full
range of products including gasolines, jet fuels, diesel and asphalt. The
refinery's upgrading units enable it to process a crude slate containing nearly
50 percent heavy, high sulfur crude. The Company has a processing agreement with
a refinery located in Cheyenne, Wyoming, that has coking capabilities from which
the refinery receives intermediate feedstocks for processing into finished
products. The Denver refinery also supplies KC Asphalt (a 50/50 joint venture
between the Company and Koch Industries) with high quality asphalt products.
Both of these ventures enable the Company to turn relatively low value
intermediates into higher margin products.
Billings Refinery
The Company's Billings, Montana refinery has a crude capacity of 52,000
barrels per day, processing a mixture of over 80 percent Canadian heavy, high
sulfur crude plus domestic high sulfur and low sulfur crude oils all delivered
by pipeline. Products from the refinery are delivered via Company-owned
pipelines, rail, and trucks, supplying the Company's extensive branded marketing
in Eastern Washington and the Northern Rocky Mountain states. The refinery's
proximity to its primary source of crude and its ability to refine both low
sulfur and heavy-sulfur crudes provide the Company with significant competitive
advantages.
The Billings refinery is a fully integrated refinery that produces a full
range of products including gasolines, jet fuels, diesel and fuel grade
petroleum coke. The Billings refinery has a very high conversion rate and the
capability to process less expensive, very heavy high sulfur crudes. A delayed
coker converts heavy,
73
<PAGE> 73
high sulfur resid into higher value light oils. A gas oil hydrotreating unit and
hydrogen plant improve the light oil production yields and remove the additional
sulfur contained in these heavy, high sulfur crudes.
Marketing
In the United States, the Company markets gasoline, utilizing the Conoco
brand, in 33 states (20 of which represent primary markets), in the Southeast,
Mid-continent and Rocky Mountain regions. Market growth continues to be targeted
to those areas where the Company can obtain a strong market share and
geographical areas that leverage supply from the U.S. refineries and
distribution systems in which the Company has an ownership position. Increasing
operating market share has resulted in particularly strong brand recognition in
the Rocky Mountain and Mid-continent markets.
Conoco branded gasoline is sold through approximately 4,900 branded
stations in the United States, 84 percent through retail outlets owned by
independent wholesale marketers and 16 percent through 295 Company-owned stores
at year end 1997. The Company markets gasoline primarily through the wholesale
channel in the United States because it requires a lower capital investment than
retail but still provides a secure, branded outlet for the Company's products.
The Company also operates retail stations to establish brand standards and image
as well as to better understand the independent distributors in order to provide
programs and services to them and to the consumer. Building on this knowledge,
the Company has recently introduced "breakplace(R)," a new concept in
convenience store design. This new format, involving the complete redesign of an
outlet's exterior and interior, is designed to increase the frequency and
transaction size of customer visits by catering to the needs of the "convenience
connoisseur." There were 21 breakplace(R) locations as of May 31, 1998, and the
Company is licensing the trademark to marketers. Many more stores in the network
have adopted comprehensive offerings patterned after the format, thereby
supporting wholesale marketing and elevating the Company's brand perception to
the consumer.
At year-end 1997, CFJ Properties, a 50/50 joint venture between the Company
and Flying J, owned and operated 78 truck travel plazas that carry both the
Conoco and Flying J brands and provide a secure outlet for the Company's diesel
production. In addition, bulk sales of all refined petroleum products are made
to commercial, industrial and spot market customers.
Transportation
Conoco has approximately 6,500 miles of crude and product mainline
pipelines in the United States, including those partially owned and/or operated
by affiliates. The Company also owns and operates 37 finished product terminals,
six liquified petroleum gas terminals, one crude terminal and one coke-exporting
facility. The Company's crude pipeline interests and terminals provide integral
logistical links between crude sources and refineries to lower crude costs. The
product pipelines serve as secure links between refineries and key products
markets. In 1997, the Company had a 87 percent utilization rate in its pipelines
and a 68 percent utilization in its crude/product terminals. The Company has
historically had one of the highest pipeline utilization rates in industry
benchmarking studies. The Company's U.S. pipeline system transported an average
of 914,000 barrels per day in 1997. The Company's equity share of shipments on
affiliate pipelines was an additional 363,000 barrels per day.
The Company currently operates a fleet of seven crude oil tankers,
principally of Liberian registry, including five double hulled tankers. By the
end of 1998, the Company plans to operate a 100 percent double-hulled tanker
fleet in United States waters. Four vessels are used to provide secure
transportation to the Lake Charles refinery, two others are in use in the Asia
Pacific market and another is on lease to a third party for use as a shuttle
tanker for the Heidrun field in the North Sea, in which Conoco has an interest.
An eighth vessel is being used as a floating production storage and offtake
vessel off the coast of Nigeria. Two additional double-hulled tankers are
currently under construction and will be joining the fleet in the Gulf of Mexico
in 1999.
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<PAGE> 74
EUROPE
The Company's European refining and marketing activities include operations
in 17 countries, primarily in the United Kingdom and Germany. These two markets
accounted for 92 percent of the Company's European Downstream after-tax earnings
in 1997. The Company also has marketing operations in Austria, Belgium, Denmark,
Finland, France, Luxembourg, Norway, Sweden, and Switzerland. More recently it
has entered the faster growing markets of the Czech Republic, Hungary, Poland,
Slovakia, Spain and Turkey. The marketing operations in Central and Eastern
Europe and Turkey are complemented by a minority interest in two refineries in
the Czech Republic.
The Company's European Downstream strategy has been to operate low cost,
high volume retail outlets in selected key markets where the Company has a
competitive advantage, pursue opportunities in growth regions, and maintain its
Humber refinery and the MiRO joint venture refinery, in the United Kingdom and
Germany, respectively, as top performers in Europe. The Company plans to
redirect cash generated in its mature European businesses to other parts of
Upstream and Downstream operations and to the identified European growth
markets.
The Company has invested an average of $232 million per year over the past
five years in its Downstream European operations and expects to invest a similar
amount in 1998. The Company continues to implement relatively low-cost projects
in its refining operations designed to increase production and yields, while
reducing feedstock costs and operating expenses. The Company plans to continue
to direct capital expenditures for marketing operations, which are expected to
be approximately 50 percent of the European Downstream total capital
expenditures, toward construction of new stations in growth markets, primarily
in Central and Eastern Europe, but also in its areas of competitive strength in
Germany, Austria and the Nordic countries.
The Company's European Downstream profitability is affected by several
factors. As with all refining operations, the difference between the market
price of refined products and the cost of crude oil is the major factor. The
Company has strengths in its European refineries because it is able to process
lower cost crudes or upgrade other feedstocks into high value finished products.
In addition, since the United Kingdom refinery also processes fuel oil as a
feedstock, the price difference between low sulfur fuel oil and finished
products is important to earnings. European operations also include significant
retail marketing volumes and therefore earnings are driven by retail margins,
fuel and convenience product sales and operating expenses in the various
countries where the Company operates.
Refining
The Company's principal European refining operations are located in the
United Kingdom, Germany, and the Czech Republic. Since early 1996, the expansion
of the Company's Humber refinery in the United Kingdom, the formation of the
MiRO joint venture through consolidation with a neighboring German refinery and
the purchase of a share in a joint venture owning two Czech Republic refineries
have increased the Company's European crude refining capacity by approximately
52 percent (90,000 barrels per day). The Company has continuously upgraded its
refineries in Europe since the early 1990s and the configuration and output of
its refineries are two of the Company's primary sources of competitive
advantage. In 1996, the United Kingdom and German refineries ranked in the first
quartile of Western European refineries for financial and operating performance
(in the net margin, return on investment, processing efficiency and volumetric
expansion categories) as ranked by Solomon Associates, an independent
benchmarking company.
The Company has undertaken a major capital investment program totaling $449
million from 1993 through 1997 to process lower cost feedstocks and increase
conversion capacity, product quality and energy efficiency at the Humber
refinery. The Company plans to make approximately $46 million in capital
expenditures at the refinery in 1998 in order to continue to improve reliability
and efficiency. The Company is also participating in upgrading projects at its
joint venture owned refineries in Germany and the Czech Republic. In addition,
the Company intends to continue to invest to ensure that its European refineries
are capable of manufacturing products meeting European clean fuels
specifications.
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<PAGE> 75
The following tables outline the rated crude and condensate distillation
capacity as of December 31 for each of the past five years and the annual
average daily crude and condensate and other inputs for each of the past five
years.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(THOUSANDS OF BARRELS PER DAY)
<S> <C> <C> <C> <C> <C>
REFINERY CRUDE AND CONDENSATE CAPACITY
Humber Refinery, United Kingdom .......................... 130 130 130 180 180
MiRO Refinery, Germany(1)................................. 43 43 43 43 54
Czech Republic(2)......................................... -- -- -- 29 29
--- --- --- --- ---
Total(3).......................................... 173 173 173 252 263
=== === === === ===
</TABLE>
- ---------------
(1) The 1997 figure represents the Company's 18.75 percent interest in the MiRO
refinery complex at Karlsruhe, Germany. For the years 1996 and earlier,
Conoco's interest was 25 percent of the OMW refinery.
(2) Represents the Company's 16.33 percent interest in two Czech Republic
refineries.
(3) Does not include the Company's indirect 1.2 percent interest in a 95,000
barrel per day refinery in Mersin, Turkey acquired as a result of the
Company's marketing joint venture in Turkey.
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(THOUSANDS OF BARRELS PER DAY)
<S> <C> <C> <C> <C> <C>
REFINERY INPUTS(1)
Humber, United Kingdom(3)
Crude and condensate(2)................................ 131 125 133 121 137
Other feedstocks....................................... 62 59 74 76 56
MiRO, Germany(4)
Crude and condensate(2)................................ 46 46 46 47 51
Other feedstocks....................................... 16 15 13 13 11
Czech Republic(5)
Crude and condensate(2)................................ -- -- -- 22 21
Other feedstocks....................................... -- -- -- 1 1
Total crude and condensate(6)..................... 177 171 179 190 209
Total other feedstocks............................ 78 74 87 90 68
</TABLE>
- ---------------
(1) This table includes feedstocks in addition to crude and condensate on which
rated capacity is based.
(2) This table includes actual crude and condensate runs, which may exceed rated
capacity.
(3) The tie-in of a major expansion project and a major refinery maintenance
turnaround significantly affected the Humber Refinery's utilization in 1996
and 1997, respectively.
(4) The 1997 figure represents the Company's 18.75 percent interest in the MiRO
refinery complex at Karlsruhe, Germany. For the year 1996 and earlier years,
Conoco's interest was 25 percent of the OMW refinery.
(5) Represents the Company's 16.33 percent interest in two refineries in the
Czech Republic.
(6) Does not include the Company's 1.2 percent interest in a 95,000 barrel per
day refinery in Mersin, Turkey.
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<PAGE> 76
The yield of the Company's European refineries by product and country for
the year ended December 31, 1997, was as follows:
<TABLE>
<CAPTION>
UNITED CZECH
KINGDOM(1) GERMANY(2) REPUBLIC(3)
---------- ---------- -----------
<S> <C> <C> <C>
PERCENT OF TOTAL YIELD
Motor gasoline.................................... 38 43 22
Middle distillate................................. 41 38 35
Residual fuel oil and asphalt..................... 9 13 21
Other(1).......................................... 12 6 22
</TABLE>
- ---------------
(1) Other products primarily include petroleum coke, lubricants and liquefied
petroleum gases.
United Kingdom Refinery
The Company's wholly owned Humber refinery is located in North
Lincolnshire, England, and has a crude and condensate capacity of 180,000
barrels per day. Crude processed at the refinery is exclusively low-sulfur, and
is supplied primarily from the North Sea and includes lower cost, acidic crudes.
The refinery also processes up to 60,000 barrels per day of other intermediate
feedstocks, mostly vacuum gasoils and resid, which many other European
refineries are not able to process. The refinery's location on the east coast of
England provides for cost-effective North Sea crude imports and product exports
to European and world markets. The Humber refinery, one of the most
sophisticated refineries in Europe, is a full conversion refinery that produces
a full slate of light products and minimal fuel oil. The Company recently
increased crude capacity at the refinery and added a vacuum unit which allows
the refinery to process up to 80,000 barrels per day of the less expensive,
acidic North Sea crudes. The refinery also has two coking units with associated
calcining plants, which upgrade the heavy "bottoms" and imported feedstocks into
light oil products and high value graphite and anode petroleum cokes.
Approximately 50 percent of the light oils produced in the refinery are marketed
in the United Kingdom while the other products are sent to the rest of Europe
and the United States. This gives the refinery the flexibility to take full
advantage of inland and global export market opportunities.
Germany Refinery
The Mineraloel Raffinerie Oberrhein GmbH ("MiRO") refinery in Karlsruhe,
Germany, is a joint venture refinery with a crude and condensate capacity of
288,000 barrels per day. The MiRO joint venture arose from the combination in
1996, of the existing OMW refinery, in which the Company had a 25 percent share,
with an adjacent Esso refinery. The Company has an 18.75 percent interest in
MiRO and the Company's capacity share is 54,000 barrels per day. The other
owners of MiRO are DEA Mineraloel AG, Esso AG and Ruhr Oel GmbH (a 50/50 joint
venture between Veba and PDVSA). Approximately 55 percent of the refinery's
crude feedstock is low cost, high sulfur crude. The MiRO refinery complex is a
full upgrading refinery producing gasoline, middle distillates, residual fuel
oil and other products. The refinery has a high capacity to convert lower cost
feedstocks into high value products primarily with a fluid catalytic cracker and
delayed coker. The coker produces both fuel grade and specialty calcined cokes.
The creation of the MiRO joint venture has improved the refinery's
competitiveness and was driven by the synergy that existed between the two
facilities. Integrated operations have yielded improved product slates, which
better match local demand, and increased processing efficiency, while retaining
operational flexibility for the partners. The refinery processes crude and
feedstock supplied by each of the partners in proportion to their respective
ownership interests. Streamlining the two operations has allowed the Company to
eliminate less efficient processing units in both refineries, resulting in lower
operating costs.
Czech Republic Refineries
In late 1995, the Company, through participation in the newly formed Czech
Refining Company ("CRC"), acquired an interest in two refineries in the Czech
Republic. The other owners of CRC are
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<PAGE> 77
Unipetrol A.S., AgipPetroli, and Shell Overseas Investment B.V. The refinery at
Litvinov has a crude and condensate capacity of 109,800 barrels per day, and the
Kralupy refinery has a crude and condensate capacity of 67,500 barrels per day.
The Company's effective 16.33 percent ownership share of the combined capacity
is 29,000 barrels per day. Both refineries process mostly high sulfur crude,
with a large portion being Russian export blend delivered by pipeline at an
advantageous cost. The refineries have an alternative crude supply via a
pipeline from the Mediterranean.
The Company expects that completion of a visbreaker project at the Litvinov
refinery scheduled for the year 2000 will increase conversion rates and
significantly reduce fuel oil production. The Kralupy refinery is currently a
hydroskimming facility, but CRC is currently planning investment in major
conversion facilities, to reduce fuel oil production and increase light oil
yields. The two Czech refineries are operated as a single entity with
intermediate streams moving between the two facilities. CRC markets finished
products both inland and abroad. The Company intends to use its share of the
light oil production to support an expanding retail marketing network in Central
and Eastern Europe.
Marketing
The Company has marketing operations in 17 European countries. The
Company's European marketing strategy is to sell primarily through owned, leased
or joint venture retail sites using a low cost, high volume, low price strategy.
The Company intends to expand into identified growing markets, while
concurrently strengthening its market share in core markets such as Germany,
Austria and the Nordic countries. The Company is standardizing its European
retail operations in order to capture cost savings and prepare for a more
integrated Europe. The Company is continuing to reduce its cost structure for
marketing activities while also optimizing the growing income in the non-fuels
sector. The Company also markets aviation fuels, liquid petroleum gases, heating
oils, transportation fuels and marine bunkers to commercial accounts and into
the bulk or spot market.
The Company uses the "Jet" brand name to market its retail products in its
wholly owned operations in Austria, Czech Republic, Denmark, Finland, Germany,
Hungary, Norway, Poland, Slovakia, Sweden and the United Kingdom. In Belgium and
Luxembourg, it markets under the "Seca" brand. Stations throughout Europe also
display the "Conoco" brand. In addition, various joint ventures in which the
Company has an equity interest market products in Spain, Switzerland and Turkey
under the "Jet", "OK Co-op" and "Tabas" or "Turkpetrol" brand names,
respectively.
As of December 31, 1997, the Company had 1,968 branded marketing outlets in
its wholly owned European operations, of which 1,386 were Company-owned. Through
its joint venture operations in Turkey, Spain and Switzerland, the Company also
has an interest in another 928 retail sites. The largest branded site networks
are in Germany and the United Kingdom, which account for 63 percent of the total
net branded units. In Germany and Austria, where the Company has its biggest
network, 25 outlets were added during 1997. In the Nordic countries, the Company
has expanded from its base of unmanned sites in Sweden and Denmark into Norway
and Finland with 22 new stations in the last two years, bringing the total to
244 stations in the region. In response to weak fuel margins in the United
Kingdom over the past several years, the Company has restructured its operations
there, reducing the number of stations and focusing on locations where the
Company has a competitive advantage. The Company is continuing to reduce its
unit breakeven cost structure in the United Kingdom and is simultaneously
investing to take advantage of the growing income in the non-fuels sector.
The Company has been expanding in targeted growth markets in Central and
Eastern Europe (Czech Republic, Poland, Hungary and Slovakia) and has added 30
stations in the last year for a total of 101 stations at December 31, 1997. The
Company expects to continue this expansion in order to capture the demand growth
and rising margins expected in these inland markets. This marketing expansion
allows the Company to obtain further integration with products produced at the
Czech refineries. Similarly, the Company has invested in the growing markets of
Spain and Turkey where at the end of 1997 it had an interest, through its joint
ventures, in 80 and 766 sites, respectively. The joint venture marketing
operation in Turkey also provides the Company with a strategic position and
opportunity for Upstream ventures in this region.
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<PAGE> 78
ASIA PACIFIC
The Company is looking to the Asia Pacific region for much of its long-term
Downstream growth. Despite the recent economic downturn, the Company expects the
Asian market, in the long term, to grow faster than comparable markets. The
Company intends to establish at least 100,000 barrels per day of equity refining
capacity in the region long-term and expand its marketing operations to
integrate with the refining supply to capitalize on market deregulation and long
term regional demand growth.
The refinery in Melaka, Malaysia, has been built by a joint venture 40
percent owned by the Company (with partners Statoil and the Malaysian state oil
company, Petronas) and will have a crude capacity of 100,000 barrels per day.
Startup of the Melaka refinery was initiated in August 1998 with the
commissioning of the crude unit. Initial crude unit operation will be followed
shortly thereafter by the start-up of the reformer, hydrocracker and coker
units. The joint venture has a five-year tax holiday commencing with initial
operation. The feedstocks for the refinery will consist of up to approximately
70 percent high sulfur crude and 30 percent sweet crude.
This refinery will capitalize on the Company's proprietary coking
technology to upgrade low-cost feedstocks to higher-margin products. Initial
refinery units, in addition to the fuels delayed coker, include a crude and
vacuum distillation unit, a vacuum gas oil hydrocracker, naphtha and diesel
hydrotreater, catalytic reformer, and an isomerization unit. The refinery will
produce a full range of refined petroleum products to help meet the demand for
motor fuels and specialty products in the Asia Pacific region although the
process at Melaka is designed to maximize diesel production in concert with
industry demand in the region.
The Company intends to use its share of refined products from the refinery
to continue growing its retail marketing operations in Thailand, Malaysia and
throughout the Asia Pacific region. The balance of the Company's share of
production will be sold primarily in the spot market. The Company has its
regional crude and product supply and disposition operations centrally located
in Singapore.
The Company began marketing motor fuels in Thailand in 1993. Using a
high-volume/low-price strategy and marketing concepts and strategies that were
new to Thailand, the Company has already established a significant presence in
the Thai retail market. The Company is building more than 20 new Jet branded
retail outlets this year and by the end of 1998 expects to have almost 100
stores in operation. The Company plans to continue building new retail outlets
at a comparable pace until it has 200 stores in the country.
The Company has launched a retail marketing joint venture in Malaysia with
Sime Darby Bhd., a company that has a major presence in the business sector.
Capitalizing on the cost benefits of direct supply, the benefits of being the
first licensees since 1969 to establish retail marketing in Malaysia, and the
currently depressed prices of premium Malaysian real estate, the Company will
initially target major markets within 125 miles of the Melaka refinery. The
Company plans to have six stores operating by the first quarter of 1999.
SPECIALTY PRODUCTS
The Company sells a variety of high value lubricants and specialty products
to commercial, industrial and wholesale accounts worldwide, including lubes
(such as automotive and industrial lubricants and waxes), petroleum coke,
solvents and pipeline flow improvers. The Company's experience has been that
specialty products are attractive because their premium prices generate higher
margins and their markets are generally less cyclical than commodity markets.
The Company began marketing the HYDROCLEAR(TM) brand of lubricants with the
start-up of the Excel Paralubes plant in 1997. The HYDROCLEAR(TM) lubricants
were designed to compete with synthetics for a range of applications with
difficult operating conditions, along with the added value of non-toxicity.
Through its Penreco joint venture company, the Company also produces specialty
petroleum products for global markets.
The Company's technical expertise in carbon upgrading positions it as a
leader in the manufacture and marketing of specialty coke and coke products. The
Company manufactures high quality graphite coke at its Lake Charles and Humber
refineries for use in the global steel industry. It also globally markets anode
and
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<PAGE> 79
fuel coke produced at its Lake Charles, Ponca City, Billings and Humber
refineries. In addition, the Company participates in the Asia Pacific coke
market by providing technical and marketing expertise to its PetroCokes joint
venture with Sumitomo and Japan Energy.
The Company is a leader in the worldwide market for pipeline flow
improvers. Conoco's "LiquidPower(TM)" product is a flow improver for increasing
petroleum pipeline capacity by reducing friction loss. The Company also uses
"LiquidPower(TM)" in its own pipeline systems.
POWER
Conoco Global Power was founded in 1995 to leverage the economic advantages
of the Company's energy production activities and DuPont's demand for energy in
its manufacturing operations.
The Company has entered into a joint venture agreement to build a natural
gas fired cogeneration plant near Corpus Christi, Texas. Construction has begun
on the plant, which will be located adjacent to chemical complexes owned by
DuPont and OxyChem, Occidental Petroleum Corporation's chemicals division, the
Company's partner in this joint venture. OxyChem will operate the plant under a
long-term contract and will purchase a majority of the plant's electricity and
steam production. The plant is designed to produce 440 megawatts of power and
1.1 million pounds per hour of process steam. The plant will be a qualifying
facility under the Public Utility Regulatory Policies Act and expects to sell
excess electricity in the Texas power markets. Commercial operation of the plant
is expected by January 2000.
The Company and DuPont are evaluating a proposed cogeneration facility to
be located at DuPont's Orange, Texas chemical complex. The proposed facility
would be owned by a joint venture between Conoco and a yet to be selected
partner. The facility would provide a portion of the chemical complex's electric
and process steam requirements with much of the electric output being sold as
merchant power. DuPont would be the contract operator of the facility under a
long term operating agreement. A decision by DuPont on the proposal is
anticipated in the fourth quarter of 1998.
CORE VALUES
The Company is committed to four core values: operating safely, protecting
the environment, acting ethically and valuing all people. Conoco is a recognized
industry leader in both concern for the health and safety of its employees and
protecting the environment. In 1997, the Company achieved the lowest recordable
injury rate in its history. This performance earned it the lowest injury rate
among all major petroleum companies reporting to the American Petroleum
Institute, an achievement matched in ten out of the last 15 years.
Conoco is also an innovator both at recycling materials and at operating in
environmentally sensitive areas. In the United Kingdom, for example, the Company
successfully recycled over 99 percent of the Viking gas platforms, which it
redeployed from the North Sea. It has also operated in the Aransas National
Wildlife Refuge in South Texas for almost 60 years. In 1990, the Company took a
major step toward oil spill prevention with the decision to build only
double-hulled tankers -- a decision taken before law mandated such technology.
By the year 2000, the Company intends to have a U.S. fleet consisting entirely
of double-hulled vessels.
In order to maintain the highest ethical standards, the Company established
clear guidelines on business ethics which every employee agrees to follow. The
Company has established annual President's Awards for safety, environmental
protection and valuing all people performance. Valuing people includes seeking
diversity in the workforce, nationalizing a significant portion of its workforce
in each country where it operates as soon as practicable, responding to employee
ideas and concerns, treating everyone with dignity and respect, sharing the
financial success of the Company with substantially all employees through the
"Conoco Challenge" program, and helping employees contribute fully in achieving
business goals. The Company believes that these
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core values result in a motivated workforce with values and goals firmly aligned
with the strategic aims of the business.
These core values provide guidance to employees in working to meet the
expectations of customers, partners and host governments, and in respecting the
communities in which the Company does business.
ENVIRONMENTAL REGULATION
Together with other companies in the industries in which it operates, the
Company's operations are subject to numerous federal, state, local, European
Union and other foreign environmental laws and regulations concerning its oil
and gas operations, products and other activities, including legislation that
implements international conventions or protocols. In particular, these laws and
regulations require the acquisition of permits, restrict the type, quantities,
and concentration of various substances that can be released into the
environment, limit or prohibit activities on certain lands lying within
wilderness, wetlands and other protected areas, regulate the generation,
handling, storage, transportation, disposal and treatment of waste materials and
impose criminal or civil liabilities for pollution resulting from oil, natural
gas and petrochemical operations.
Governmental approvals and permits are currently, and may in the future be,
required in connection with the Company's operations. The duration and success
of obtaining such approvals are contingent upon many variables, many of which
are not within the Company's control. To the extent such approvals are required
and not obtained, operations may be delayed or curtailed, or the Company may be
prohibited from proceeding with planned exploration or operation of facilities.
Environmental laws and regulations are expected to have an increasing
impact on the Company's operations in most of the countries in which it
operates, although it is impossible to predict accurately the effect of future
developments in such laws and regulations on the Company's future earnings and
operations. Some risk of environmental costs and liabilities is inherent in
particular operations and products of the Company, as it is with other companies
engaged in similar businesses, and there can be no assurance that material costs
and liabilities will not be incurred. However, the Company does not currently
expect any material adverse effect upon its results of operations or financial
position as a result of compliance with such laws and regulations.
Protection and concern for the environment is one of the Company's core
values. The Company is an innovator both at recycling materials and operating
responsibly in environmentally sensitive areas. The Company operates oil and gas
production facilities, petroleum refineries, natural gas processing plants and
distribution facilities throughout the world. These facilities are subject to
various federal, state, local and foreign environmental laws and regulations. It
is Conoco's policy to fully meet or exceed legal and regulatory requirements
wherever it operates. To meet future environmental obligations, the Company is
engaged in a continuing program to develop effective measures to protect the
environment. This program includes research into reducing sulfur levels in heavy
fuel oils and diesel fuel, reducing benzene content in gasoline, reducing vapor
emissions at service stations, developing more effective methods of containing
and recovering offshore oil spills, improving the quality of emissions and
effluents from the Company's refineries and other facilities, developing and
installing monitoring systems at the Company's facilities and developing
environmental impact assessments before commencing major projects. For a
discussion of the Company's operating expenses and capital expenditures with
respect to environmental protection, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Environmental Matters."
Although future environmental obligations are not expected to have a material
adverse effect on the results of operations or financial condition of the
Company, there can be no assurance that future developments, such as
increasingly stringent environmental laws or enforcement thereof, will not cause
the Company to incur substantial environmental liabilities or costs.
AIR EMISSIONS
The operations of the Company are subject to regulations controlling
emissions of air pollutants. The primary legislation affecting the Company's
U.S. air emissions is the Federal Clean Air Act and its 1990
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Amendments (the "CAA"). Among other things, the CAA requires all major sources
of air emissions to obtain operating permits; the CAA also revised the
definition of "major source" such that additional equipment involved in oil and
gas production may now be covered by the permitting requirements. Although the
precise requirements of the CAA are not yet known, the Company may incur
substantial capital, operating and maintenance costs to comply with such
requirements.
The CAA requires EPA to promulgate regulations imposing Maximum Achievable
Control Technology ("MACT") standards to reduce emissions of certain air
pollutants from industrial facilities, such as Conoco's refineries,
transportation terminals and certain crude oil production operations. EPA has
promulgated MACT standards that are applicable to some of Conoco's operations,
and the Company's costs to comply with them have not been material. However,
MACT standards applicable to many of Conoco's other operations have yet to be
promulgated. Consequently, while it is not yet possible to predict accurately
the total actual expenditures that Conoco may incur to comply with these
standards, the Company anticipates that these costs may be substantial.
In June 1997, EPA revised the National Ambient Air Quality Standards
("NAAQS") for ozone and particulate matter, which will ultimately require more
stringent controls on stationary sources and cleaner-burning fuels in certain
parts of the United States. The financial impacts of these revisions cannot
reasonably be estimated until individual states adopt regulations to implement
the revised NAAQS, although Conoco believes that such impacts could be
substantial.
Under the CAA, EPA has promulgated a number of regulatory standards that
mandate a variety of specifications for motor fuels designed to reduce emissions
of certain air pollutants from vehicles burning such fuels. These regulated
fuels include gasoline and diesel fuels produced and marketed by Conoco. In
addition, many other countries in which Conoco produces or markets motor fuels
similarly regulate the composition of such products. The Company has already
incurred the costs of complying with such requirements that are currently in
effect. The European Parliament and European Union governments recently agreed
to enact legislation that, among other things, requires phased reductions of
sulfur and aromatics content in gasoline and diesel fuel and of benzene in
gasoline. While it is not yet possible to predict accurately the total actual
expenditures that Conoco may incur to comply with these requirements, the
Company anticipates that these costs may be substantial. EPA also continues to
consider further regulation of motor fuels composition specifications. Although
it is not yet possible to predict the precise composition specifications that
may be imposed by EPA in the future, and therefore, it is not yet possible to
predict accurately the total actual expenditures that may be incurred by Conoco
to produce motor fuels meeting future specifications, such expenditures could be
substantial.
In 1997, an international conference on global warming concluded an
agreement, known as the Kyoto Protocol, which called for reductions of certain
emissions that contribute to increases in atmospheric greenhouse gas
concentrations. The combustion of fossil fuels, such as crude oil, results in
emissions of the type sought to be reduced by the Kyoto Protocol. The treaty
codifying the Kyoto Protocol has not been ratified by the United States, but may
be in the future. In addition, other countries where Conoco has interests, or
may have interests in the future, have made commitments to the Kyoto Protocol
and are in various stages of formulating applicable regulations. Although it is
not yet possible to estimate accurately the total actual expenditures that may
be incurred by Conoco as a result of the Kyoto Protocol, such expenditures could
be substantial.
HAZARDOUS SUBSTANCES AND WASTE DISPOSAL
The Company currently owns or leases numerous properties that have been
used for many years for hardminerals production or natural gas and crude oil
production. Although the Company has utilized operating and disposal practices
that were standard in the industry at the time, hydrocarbons or other wastes may
have been disposed of or released on or under the properties owned or leased by
the Company. In addition, some of these properties have been operated by third
parties over whom the Company had no control. CERCLA and comparable state
statutes impose strict, joint and several liability on owners and operators of
sites and on persons who disposed of or arranged for the disposal of "hazardous
substances" found
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at such sites. RCRA and comparable state statutes govern the management and
disposal of wastes. Although CERCLA currently excludes petroleum from cleanup
liability, many state laws affecting the Company's operations impose clean-up
liability regarding petroleum and petroleum related products. In addition,
although RCRA currently classifies certain exploration and production wastes as
"nonhazardous," such wastes could be reclassified as hazardous wastes thereby
making such wastes subject to more stringent handling and disposal requirements.
If such a change in legislation were to be enacted, it could have a significant
impact on the Company's operating costs, as well as the gas and oil industry in
general. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Environmental Matters."
OIL SPILLS
Under the Federal Oil Pollution Act of 1990, as amended ("OPA"), (i) owners
and operators of onshore facilities and pipelines, (ii) lessees or permittees of
an area in which an offshore facility is located and (iii) owners and operators
of tank vessels ("Responsible Parties") are strictly liable on a joint and
several basis for removal costs and damages that result from a discharge of oil
into the navigable waters of the United States. These damages include, for
example, natural resource damages, real and personal property damages and
economic losses. OPA limits the strict liability of Responsible Parties for
removal costs and damages that result from a discharge of oil to $350 million in
the case of onshore facilities, $75 million plus removal costs in the case of
offshore facilities, and in the case of tank vessels, an amount based on gross
tonnage of the vessel. However, these limits do not apply if the discharge was
caused by gross negligence or wilful misconduct, or by the violation of an
applicable Federal safety, construction or operating regulation by the
Responsible Party, its agent or subcontractor or in certain other circumstances.
In addition, with respect to certain offshore facilities, OPA requires
evidence of financial responsibility in an amount of up to $150 million. Tank
vessels must provide such evidence in an amount based on the gross tonnage of
the vessel. OPA also requires offshore facilities, certain onshore facilities
and tank vessels to prepare spill response plans, which the Company has done,
for responding to a "worst case discharge" of oil. Failure to comply with these
requirements or failure to cooperate during a spill event may subject a
Responsible Party to civil or criminal enforcement actions and penalties.
OFFSHORE PRODUCTION
Offshore oil and gas operations in U.S. waters are subject to regulations
of the United States Department of the Interior which currently impose strict
liability upon the lessee under a Federal lease for the cost of clean-up of
pollution resulting from the lessee's operations, and such lessee could be
subject to possible liability for pollution damages. In the event of a serious
incident of pollution, the Department of the Interior may require a lessee under
Federal leases to suspend or cease operations in the affected areas. See
"-- Litigation and Other Contingencies."
SOURCES OF SUPPLY
During 1997, the Company supplemented its own crude oil production to meet
its refining requirements by the purchase of crude oil from both domestic and
international sources. Approximately 56 percent of the crude oil processed in
the Company's U.S. refineries in 1997 came from U.S. sources. The remainder of
crude processed came principally from Venezuela, Mexico and Canada. During 1997,
the Company's Humber refinery in the United Kingdom processed principally North
Sea crude oils. In the joint venture MiRO refinery, the Company processed
primarily Mediterranean crude oils in 1997. The Company's joint venture CRC
refineries in the Czech Republic process primarily Russian crudes.
To assure availability, the Company maintains multiple sources for most raw
materials, supplies, services and equipment, with no one company supplying a
substantial portion of the Company's needs. The Company also routinely leases or
charters equipment, such as drilling rigs, offshore supply boats, seismic boats,
pipeline laying equipment, derrick barges, and cranes. Availability of supply
and/or cost of such equipment has been a factor in the past, and could have a
detrimental impact on the Company in the future.
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RESEARCH AND DEVELOPMENT
The objectives of the Company's research and development programs are to
discover new products, processes and business opportunities in relevant fields,
and to improve existing products and processes. Research and development also
focuses on improving efficiency, safety and environmental protection. Worldwide
expenditures for research and development amounted to approximately $44 million
in 1997, $41 million in 1996 and $36 million in 1995. Approximately $46 million
is budgeted for research and development activities in 1998.
The capabilities of the Company's research and development group have been
augmented by its access to DuPont's corporate science and engineering resources.
Certain elements of DuPont's material science expertise and analytical
capabilities are relevant to the Company's oil and gas research and development
work. Following the Separation, the Company will continue to have access to
DuPont's corporate science and engineering expertise pursuant to transitional
agreements.
PATENTS AND TRADEMARKS
The Company owns and is licensed under various patents, which expire from
time to time, covering many products, processes and product uses. No individual
patent is of material importance to the Company's business as a whole. During
1997, the Company was granted seven U.S. and 26 non-U.S. patents. The Company
also has individual trademarks and brands for its products and services which
are registered in various countries throughout the world. None of these
trademarks and brands is considered material other than the "Conoco" and "Jet"
brands.
OPERATING HAZARDS AND INSURANCE
The Company's operations are subject to certain operating hazards such as
well blowouts, collapsed wells, explosions, uncontrolled flows of oil, natural
gas or well fluids, fires, formations with abnormal pressures, pipeline ruptures
or spills, refinery explosions, surface or marine transportation incidents,
pollution, releases of toxic gas and other environmental hazards and risks. In
accordance with customary industry practices, the Company maintains insurance
against some, but not all, such risks and losses. Given the Company's risk
profile and in accordance with the practices of a number of major, integrated,
international energy companies, Conoco does not carry business interruption
insurance. The Company's decision not to carry business interruption insurance
is based on several factors, including its spread of risk over five wholly owned
refineries (with some resultant ability to replace product during periods of
business interruption), a favorable loss history and loss prevention and safety
programs. The Company has elected to retain the risk where management believes
the cost of insurance, although available, is excessive relative to the risks
presented. In addition, pollution and environmental risks are generally not
fully insurable. See "Risk Factors -- Operating Hazards."
LITIGATION AND OTHER CONTINGENCIES
One proceeding instituted by governmental authorities is pending against
Conoco for alleged violations of RCRA with the potential for monetary sanctions
in excess of $100,000. Although regulatory authorities have requested a civil
penalty of $169,000 with respect to this proceeding, Conoco expects that the
matter will ultimately be resolved for a substantially smaller penalty.
On March 6, 1996, the Department of Justice filed a complaint in the United
States District Court for the District of Montana against Yellowstone Pipeline
Company ("YPL") and the Conoco Pipe Line Company as a part owner and operator of
YPL. The complaint alleges discharges of oil from a YPL pipeline in January 1993
and seeks civil penalties of up to $25,000 per day for each violation or up to
$1,000 for each barrel of oil discharged. Since the duration of the discharge is
in dispute, the penalty calculation is uncertain although it is expected to
exceed $100,000. The parties are attempting to negotiate a resolution of the
matter, including a supplemental environmental project that would constitute a
substantial part of a settlement with the government.
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Conoco has been assessed a monetary penalty in the amount of $298,000 by
the New Mexico Environmental Department, Air Quality Bureau. The demand was made
on June 18, 1998. New Mexico alleges that Conoco failed to obtain a permit under
the CAA and violated certain permit conditions in the existing permits. Conoco
assets affected are the Maljamar Gas Plant and the MCA field. Conoco expects to
obtain settlement by payment of a lesser monetary penalty and performance of a
supplemental environmental project.
On August 19, 1998, the EPA, Region VI issued an administrative complaint
against Conoco. This administrative complaint alleges noncompliance with
provisions of the general National Pollutant Discharge Elimination System permit
for the western portion of the outer continental shelf of the Gulf of Mexico.
The administrative complaint assesses a civil penalty of $137,500.
The Company is a defendant in a number of lawsuits and is involved in
governmental proceedings arising in the ordinary course of business, including
personal injury claims, environmental claims and leaking underground storage
tank claims and, along with other oil companies, actions challenging oil and gas
royalty, severance tax, and other payments, including claims based on posted
prices. The Company believes ultimate liabilities resulting from such lawsuits
and claims may be material to results of operations in the period in which they
are recognized, but will not materially affect the combined financial position
of the Company.
PROPERTIES
The Company owns its corporate headquarters, consisting of 16 three-story
buildings on a 62-acre site in Houston, Texas. The Company owns and leases
petroleum properties and operates production processing, refining, marketing,
power-generating, and research and development facilities worldwide. In
addition, the Company operates sales offices, regional purchasing offices,
distribution centers, and various other specialized service locations throughout
the world.
EMPLOYEES
The Company had approximately 16,400 employees as of June 30, 1998.
Approximately 1,400 employees at the Company's U.S. refineries are represented
by the Oil, Chemical and Atomic Workers International Union under separate
bargaining agreements for each refinery. These agreements cover wages, certain
benefit matters, grievance procedures and various employment conditions, and the
Company believes they are typical of the refining industry in the U.S. The
Company believes that its relations with its employees are good.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is information concerning the current executive officers
and current and prospective directors of the Company. Each director holds office
until his successor is duly elected and qualified or until his resignation or
removal if earlier. See "Description of Capital Stock -- Anti-Takover Effects of
Certain Certificate and By-Law Provisions -- Board of Directors."
<TABLE>
<CAPTION>
NAME AGE(2) POSITION WITH THE COMPANY
---- ------ -------------------------
<S> <C> <C>
Edgar S. Woolard, Jr.............. 64 Chairman of the Board of Directors
Archie W. Dunham.................. 59 President, Chief Executive Officer and Director
Ruth R. Harkin(1)................. 53 Director
Frank A. McPherson(1)............. 65 Director
Gary M. Pfeiffer.................. 48 Director
William K. Reilly(1).............. 58 Director
William R. Rhodes(1).............. 62 Director
Franklin A. Thomas(1)............. 64 Director
Gary W. Edwards................... 56 Executive Vice President, Refining, Marketing, Supply
and Transportation
Robert E. McKee III............... 52 Executive Vice President, Exploration Production
Robert W. Goldman................. 56 Senior Vice President, Finance, and Chief Financial
Officer
Rick A. Harrington................ 53 Senior Vice President, Legal, and General Counsel
</TABLE>
- ---------------
(1) Expected to be elected as a Director at the Company's first regular board
meeting following the Offerings.
(2) As of July 31, 1998.
Edgar S. Woolard, Jr. retired as Chairman of the Board of Directors of
DuPont on October 29, 1997, having served since 1989. He was named Chairman of
the Board of Conoco in July 1998. He remains a director of DuPont. Since he
joined DuPont in 1957, he occupied many technical and managerial positions at
various locations across the United States. From 1987 to 1989, Mr. Woolard
served as President and Chief Operating Officer of DuPont, and from 1989 to
1995, as Chairman and Chief Executive Officer. Mr. Woolard is a director of
Citigroup Inc. and Apple Computer, Inc. and a member of The Business Council,
the Board of Trustees of Winterthur Museum, the Christiana Care Corporation, the
Protestant Episcopal Theological Seminary in Virginia and the North Carolina
Textile Foundation. He is also a member of the National Academy of Engineering
and the Bretton Woods Committee.
Archie W. Dunham has been President and Chief Executive Officer of the
Company since 1996. He joined the Company in 1966 and subsequently held a number
of commercial and managerial positions within the Company and DuPont. He
currently serves on both companies' boards of directors. Mr. Dunham is also a
member of the Louisiana-Pacific Corporation Board of Directors and has been
elected a director of Phelps Dodge Corporation effective November 4, 1998. Mr.
Dunham is a former Executive Vice President, Exploration Production and
Executive Vice President, Refining, Marketing, Supply and Transportation for the
Company. He was also a Senior Vice President, Polymers and Senior Vice
President, Chemicals and Pigments for DuPont. He is a director of the American
Petroleum Institute, the National Petroleum Council, the U.S.-Russia Business
Council, the Greater Houston Partnership and Chairman of the United States
Energy Association. Mr. Dunham is a member of the Board of Visitors and the
Energy Center Board of Directors at the University of Oklahoma. He also serves
on the board of trustees of the Memorial Hermann Healthcare System in Houston,
the Houston Grand Opera, the Houston Symphony, the George Bush Presidential
Library and the Smithsonian Institution.
Ruth R. Harkin is Senior Vice President, International Affairs and
Government Relations of United Technologies Corporation ("UTC") and Chair of
United Technologies International, UTC's international representation arm.
Previously, Mrs. Harkin was the president and chief executive officer of the
Overseas Private Investment Corporation (OPIC) in the Clinton administration
from 1993 to 1997. Mrs. Harkin was
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elected as a prosecutor in the office of the County Attorney of Story County,
Iowa in 1973. She also served as Deputy General Counsel at the U.S. Department
of Agriculture and was Of Counsel at the law firm of Akin, Gump, Strauss, Hauer
& Feld. Mrs. Harkin is a member of the Board of Visitors of the College of
Business Administration, University of Iowa. She also sits on the Boards of the
Center for National Policy and the National Association of Manufacturers, and is
a Trustee of the Eurasia Foundation.
Frank A. McPherson retired as Chairman and Chief Executive Officer of
Kerr-McGee Corporation on February 1, 1997. He joined Kerr-McGee in 1957 and
held many technical, operational and managerial positions including President
from 1980 to 1983. He is a past director of the Federal Reserve Bank of Kansas
City and the Oklahoma State University foundation Board of Trustees. Mr.
McPherson serves on the boards of directors of Kimberly-Clark Corp., Bank of
Oklahoma, Tri-Continental Corporation, Seligman Quality Fund, Inc., Seligman
Select Municipal Fund, Inc., and the Seligman Group of Mutual Funds. He is also
a member of the boards of the American Petroleum Institute, Boys and Girls Clubs
of America, Baptist Medical Center, Oklahoma Chapter of Nature Conservancy,
Oklahoma City Chamber of Commerce, Oklahoma City Public School Foundation,
Oklahoma Medical Research Foundation and Oklahoma Foundation for Excellence in
Education.
Gary M. Pfeiffer has been Senior Vice President, Finance and Chief
Financial Officer of DuPont since 1997. Previously from 1994 to 1997, Mr.
Pfeiffer was Vice President and General Manager of DuPont Nylon, North America,
with responsibility for all of DuPont's nylon fiber and intermediate business in
North America. He has also served as Global Business Director, Nylon
Intermediates for DuPont Chemicals, from 1992 to 1994, and as Director - Finance
for DuPont Chemicals and Specialties Manufacturing, from 1991 to 1992. Since he
joined DuPont in 1974, Mr. Pfeiffer has held a number of technical and
managerial positions in the United States and overseas. He is also on the board
of the Hagley Museum and Library.
William K. Reilly is currently a member of the Board of Directors of DuPont
and is President and Chief Executive Officer of Aqua International Partners, an
investment group which finances water improvements in developing countries.
Formerly, Mr. Reilly was a visiting professor at the Institute of International
Studies at Stanford University and served as Administrator of the U.S.
Environmental Protection Agency from February 1989 to January 1993. Mr. Reilly
was president of the Conservation Foundation from 1973 to 1989 and, after its
affiliation with World Wildlife Fund in 1985, served as President of both
groups. He also serves on the boards of Royal Caribbean International and
Evergreen Holdings. He is Chairman of the Board of the American Farmland Trust
and serves on the boards of National Geographic Society, World Wildlife Fund and
Yale University. Mr. Reilly also serves as a member of the board of the Presidio
Trust of San Francisco.
William R. Rhodes is a Vice Chairman of Citicorp and its principal
subsidiary, Citibank. Mr. Rhodes is Vice Chairman of the Institute of
International Finance; a Director of the Private Export Funding Corporation; a
trustee and member of the Executive Council of the Council of the Americas; an
Executive Committee member of the Bretton Woods Committee and the U.S.-Russia
Business Council; and a founding member of the U.S. National Advisory Council to
the International Management Center. Other board memberships include The Group
of Thirty; the Americas Society; The African-American Institute; CHIPCo; and the
U.S.-Egypt Presidents' Council. He is also a member of the Council on Foreign
Relations, the Foreign Policy Association, and The Bankers Roundtable. Mr.
Rhodes is a past Chairman of the U.S. Advisory Committee of the Export-Import
Bank of the United States; past Chairman of the U.S. section of the
Venezuela-U.S. Business Council; past President of the Venezuela-American
Chamber of Commerce; and past President of the Bankers Association for Foreign
Trade. He is a Governor and Trustee of the New York and Presbyterian Hospital
and a Director of the New York City Partnership and Chamber of Commerce. He
serves as a trustee of Brown University and Chairman of the Board of Trustees of
the Northfield Mount Hermon School.
Franklin A. Thomas has been a consultant to the TFF Study Group, a
non-profit initiative assisting development in southern Africa, since April
1996. Mr. Thomas was President and Chief Executive Officer of The Ford
Foundation from 1979 to 1996. He also serves as a director of the Aluminum
Company of America, Citigroup Inc. and its subsidiary, Citibank, N.A., Cummins
Engine Company, Inc., Lucent Technologies, Inc. and PepsiCo, Inc.
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Gary W. Edwards has been Executive Vice President of the Company since
1991, with responsibility for worldwide refining, marketing, supply and
transportation. He is currently a Senior Vice President of DuPont. He joined the
Company in 1963, working at various locations throughout the United States and
in the United Kingdom, and was formerly the Company's Vice President, Refining
Marketing Europe; Vice President Refining, Marketing and Transportation; and
Vice President North American Marketing. Mr. Edwards has held a number of
managerial positions in Conoco Pipeline, Transportation, Natural Gas and Gas
Products, Logistics and Marketing. He is a Director of the American Petroleum
Institute and a previous director and Vice President of the European Petroleum
Industry Association in Brussels, Belgium. Mr. Edwards is Chairman of the Kansas
State University Engineering advisory council and a member of the Yellowstone
Park foundation advisory committee. He is a board member of Theatre Under the
Stars, Junior Achievement, Inc. (National) as well as Junior Achievement of
Southeast Texas, Target Hunger, Private Sector Initiative, and the Houston Music
Hall Foundation.
Robert E. McKee III has been an Executive Vice President for the Company
since 1992, with responsibility for worldwide exploration and production. He is
currently a Senior Vice President of DuPont. He was formerly the Company's
Executive Vice President for Corporate Strategy and Development, Senior Vice
President for Administration, Vice President of North American Refining and
Marketing and Vice President, Chairman and Managing Director of Conoco (UK)
Limited. Since he joined Conoco in 1968, Mr. McKee has worked at various
locations and held numerous managerial, operating, administrative and technology
positions both in the United States and overseas. He currently serves on the
board of directors of Consolidation Coal Company, a subsidiary of DuPont, and
the American Petroleum Institute. In addition, he is Chairman of the Southern
Regional Advisory Board of the Institute of International Education and a member
of the advisory committee of the University of Texas Engineering Department. Mr.
McKee also serves on the board of directors of the Houston Museum of Natural
Science and as Chairman of the President's Council of the Colorado School of
Mines.
Robert W. Goldman has been Senior Vice President, Finance, and Chief
Financial Officer of the Company since 1998 and was its Vice President, Finance
from 1991 to 1998. Mr. Goldman began his career with DuPont in 1965 and
subsequently held many technical and managerial positions within the finance,
tax and treasury functions. He is the former Vice President - Finance of DuPont
(Mexico), Vice President, Remington Arms Company and served as Director and
Comptroller of several operating departments of DuPont in Wilmington, Delaware.
Mr. Goldman transferred to the Company in 1988 as Vice President and Controller.
He is co-chairman of the Company's Risk Management Committee and is a member of
the American Petroleum Institute, a former chairman of its Accounting Committee
and currently serves on its Executive Committee of the General Committee on
Finance. He is also a member of the Financial Executives Institute and the
Executive Committee of the Board of Directors of the Alley Theatre in Houston,
Texas.
Rick A. Harrington has been Senior Vice President, Legal, and General
Counsel of the Company since 1998 and was Vice President and General Counsel of
the Company and Vice President and Assistant General Counsel of DuPont from 1994
to 1998. He joined DuPont in 1979 as a Senior Attorney, and subsequently held
the positions of Managing Counsel, Special Litigation, and Vice President and
General Counsel of Consolidation Coal Company, a subsidiary of DuPont. Prior to
joining DuPont, he was a partner in the firm of Arent, Fox, Kintner, Plotkin and
Kahn in Washington, D.C. where he specialized in antitrust litigation. Mr.
Harrington is a member of the bar of the District of Columbia, the District of
Columbia Court of Appeals and the Fifth Circuit Court of Appeals. He is a member
of the American Petroleum Institute General Committee on Law, the American
Corporate Counsel Association International Legal Affairs Committee, and the
University of Kansas School of Business Dean's Board.
Effective as of the closing of the Offerings, Messrs. Dunham, McKee,
Edwards and Harrington will resign as officers of DuPont.
ELECTION AND COMPENSATION OF DIRECTORS
The By-laws provide for a Board of Directors of not less than six nor more
than 15 directors, with the current number set at nine (eight of which have been
named as of the date hereof). Each member of the
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<PAGE> 88
Board of Directors holds office until the expiration of his or her term and
until his or her successor is elected and qualified. Vacancies on the Board of
Directors may be filled by the majority vote of directors then in office or by a
sole remaining director, or by stockholder vote if such vacancy was caused by
action taken by stockholders. DuPont elected the current members of the Board of
Directors on July 24, 1998. Edgar S. Woolard, Jr., Gary M. Pfeiffer, William K.
Reilly, William R. Rhodes and Franklin A. Thomas are nominees of DuPont under
the terms of the Separation Agreement. See "Arrangements Between the Company and
DuPont."
Directors who are officers of the Company or employees of DuPont will
receive no additional compensation for serving on the Board of Directors. At the
time of the Offerings, nonemployee members of the Board of Directors (including
those persons who have agreed to become nonemployee directors in connection with
the Offerings) will receive a special grant of an option to purchase Class A
Common Stock (each, a "Company Stock Option") with a present value of $30,000
and a grant of Company restricted stock units with respect to Class A Common
Stock with an aggregate value of $95,000. Future nonemployee Directors, upon
election to the Board, will receive a grant of Company restricted stock units
with respect to Class A Common Stock with an aggregate value equal to $95,000.
On an annual basis, nonemployee Directors will receive a fee of $30,000, and,
following the annual meeting, a grant of Company restricted stock units with
respect to Class A Common Stock with an aggregate value of $20,000 and Company
Stock Options with a present value of $30,000. Company Stock Options and Company
restricted stock units will be awarded pursuant to the terms of the 1998 Stock
and Performance Incentive Plan of the Company (described below). The present
value of Company Stock Options will be determined using a generally accepted
stock option valuation methodology. Annual fees may be, and awards of restricted
stock units will be, deferred pursuant to the terms of the Deferred Compensation
Plan for Nonemployee Directors (described below).
Board members will also be eligible to participate in a Charitable Gift
Plan, which provides that, upon a Director's death, the Company will make a
donation in an amount equal to $200,000 per year for five years to the
tax-exempt educational institutions or charitable organizations recommended by
such director and approved by the Company. Each director will be fully vested in
the Charitable Gift Plan upon completion of one year of service as director. The
Company may fund the Charitable Gift Plan through, among other vehicles, the
purchase of life insurance policies on the lives of the directors, of which
policies the Company would be the beneficiary and which policies the Company
would own. Employee directors may elect to participate in the plan provided they
bear their allocable cost of the plan. Directors derive no personal financial or
tax benefit from the Charitable Gift Plan, since the charitable, tax-deductible
donations and insurance proceeds, if any, accrue solely to the benefit of the
Company.
Board members who serve as Chairman of a standing Board committee will
receive a supplement of $5,000 annually. No additional fees will be paid for
serving on Board committees. No additional fees will be paid for attending Board
or committee meetings.
In lieu of the compensation payable to nonemployee directors described
above (other than participation in the Charitable Gift Plan), Edgar S. Woolard,
Jr., Chairman of the Board, will receive an annual fee of $300,000 and equity
grants with a present value of $700,000. The annual fee will commence at the
closing of the Offerings. An initial grant of Company restricted stock units
with a value of $100,000 and nonqualified Company Stock Options with a present
value of $1,300,000 will be made at the closing of the Offerings and will cover
a two-year period. Company restricted stock units and Company Stock Options will
be granted pursuant to the terms of the 1998 Stock and Performance Incentive
Plan and will have provisions consistent with those of the other nonemployee
directors.
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT AND COMPLIANCE COMMITTEE
The Audit and Compliance Committee has oversight responsibility for
Conoco's internal control structure, financial reporting, and legal compliance
program, including strategic oversight of corporate safety, health and
environmental policy and direction. The Audit and Compliance Committee selects
an independent accounting firm, subject to shareholder ratification, to audit
the financial statements of the Company. The
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<PAGE> 89
Audit and Compliance Committee also requests the Company's subsidiaries to
engage independent accountants, as deemed appropriate by the Audit and
Compliance Committee, to audit their respective financial statements. The Audit
and Compliance Committee ensures there is a corporate system in place to provide
timely and accurate information to senior management and the Board concerning
the Company's compliance with the law. The Audit and Compliance Committee meets
to consider matters raised by its members, internal legal staff, management,
internal auditing staff, and the independent accountants. It reports to the
Board of Directors a summary of its findings and recommendations. Members of the
Audit and Compliance Committee are independent from the Company's management and
free from any relationship that, in the opinion of the Board of Directors, would
interfere with the exercise of independent judgement. The Audit and Compliance
Committee will initially consist of Frank A. McPherson, Ruth R. Harkin, Gary M.
Pfeiffer and William R. Rhodes. Mr. McPherson will serve as chairman of the
Audit and Compliance Committee.
COMPENSATION COMMITTEE
The Compensation Committee is responsible for establishing certain
compensation policies consistent with corporate objectives and stockholder
interests. The Compensation Committee has responsibility for approving and/or
recommending to the Board levels of compensation for the President and Chief
Executive Officer, as well as stock options, performance awards and other stock
or cash-based awards for employee directors and executive officers. The
Compensation Committee also administers certain grants under the Company's
stock-based and other global performance-based compensation plans and adopts
and/or recommends to the full Board new plans or changes in compensation
programs. No member of the Compensation Committee may be an employee or officer
of the Company or any of its subsidiaries. The Compensation Committee will
initially consist of Franklin A. Thomas, William K. Reilly and Edgar S. Woolard,
Jr. Mr. Thomas will serve as chairman of the Compensation Committee.
Prior to the Offerings, the executive officers named in the Summary
Compensation Table below were participants in the executive compensation
programs of DuPont. The compensation committee of DuPont was responsible for the
review of those programs, and for grants awarded under those programs.
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
No present officer, director or director nominee currently owns any shares
of Conoco's Common Stock, all of which are currently owned by DuPont. The
following table sets forth the number of shares of DuPont common stock
beneficially owned on September 15, 1998, by each of the Company's directors,
director nominees, the executive officers named in the Summary Compensation
Table below and all directors, director nominees and executive officers of the
Company as a group. Except as otherwise noted, the individual director, director
nominee or executive officer or their family members had sole voting and
investment power with respect to such securities.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
NAME OWNED(1)(2)(3)(4)
---- -----------------
<S> <C>
Edgar S. Woolard, Jr....................................... 1,495,881(5)
Archie W. Dunham........................................... 834,541(6)
Frank A. McPherson......................................... 1,000(7)
Gary M. Pfeiffer........................................... 42,772(8)
William K. Reilly.......................................... 7,765
Gary W. Edwards............................................ 440,592(9)
Robert E. McKee III........................................ 372,264(10)
Robert W. Goldman.......................................... 102,246(11)
Rick A. Harrington......................................... 80,805(12)
Directors and Executive Officers as a Group (12 persons)... 3,377,866
</TABLE>
- ---------------
(1) No individual director, director nominee or named executive officer
beneficially owns 1 percent or more of the DuPont common stock, nor do the
directors and executive officers as a group.
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<PAGE> 90
(2) Mrs. Harkin, Mr. Rhodes and Mr. Thomas do not beneficially own any shares.
(3) Includes beneficial ownership of the following number of shares of DuPont
common stock which may be acquired within 60 days of September 15,
pursuant to stock options awarded under employee compensation plans of
DuPont: Mr. Woolard -- 1,101,240; Mr. Dunham -- 704,428; Mr.
Pfeiffer -- 31,126; Mr. Edwards -- 367,846; Mr. McKee -- 281,690; Mr.
Goldman -- 84,900; and Mr. Harrington -- 71,660. Messrs. Dunham, Edwards,
McKee, Goldman and Harrington have agreed to the cancellation of 100
percent of these options in the Option Program and the issuance upon such
cancellation of Company Stock Options, as described below under
"-- Treatment of Outstanding Stock Options and Stock Appreciation
Rights -- Option Program."
(4) The persons named in this table have sole voting power and investment
power with respect to all shares of DuPont common stock shown as
beneficially owned by them, subject to community property laws where
applicable and the information contained in this table and these notes.
(5) Includes (i) 20,000 shares owned by Mr. Woolard's spouse to which Mr.
Woolard disclaims beneficial ownership, (ii) 18,000 shares owned by The
Woolard Family Foundation, and (iii) 13,698 shares owned by family trusts
under which voting and investment power is shared by Mr. Woolard's
daughters.
(6) Includes (i) 91,880 shares held in Dunham Management Trust, a revocable
grantor trust, (ii) 6,243 shares held in deferred compensation and (iii)
13,000 shares owned by the Dunham Charitable Foundation.
(7) The 1,000 shares listed above are owned by Mr. McPherson and his spouse
jointly.
(8) Includes 1,807 shares held in deferred compensation.
(9) Includes 6,800 shares owned by the Edwards Charitable Foundation.
(10) Includes (i) 1,300 shares owned by a minor child of Mr. McKee, (ii) 298
shares owned by another child of Mr. McKee, (iii) 453 shares owned by a
minor grandchild of Mr. McKee, (iv) 453 owned by another minor grandchild
of Mr. McKee, and (v) 29,509 owned by the McKee Family Trust.
(11) Includes (i) 1,650 shares owned by Mr. Goldman's spouse, and (ii) 350
shares owned by a minor child of Mr. Goldman.
(12) Includes 50 shares owned by a child of Mr. Harrington.
Company Stock Options and other stock-based awards may be granted to
directors, officers and other key employees of the Company in the future under
the 1998 Stock and Performance Incentive Plan of the Company. See "-- Election
and Compensation of Directors."
TREATMENT OF OUTSTANDING STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
OPTION PROGRAM
Each individual who (i) is actively employed by the Company as of the date
of the closing of the Offerings (the "Effective Date"), (ii) either (a) was an
employee of the Company more than 20 days prior to the Effective Date or (b) was
designated as an individual who would become an employee of the Company and such
designation occurred more than 20 days prior to the Effective Date and (iii)
holds, as of the closing of the Offerings, options to purchase DuPont common
stock (each such option, a "DuPont Option") or appreciation rights with respect
to DuPont common stock (each such right, a "DuPont SAR") will have the option,
subject to specific country tax and legal requirements, effective as of the
closing of the Offerings, to surrender for cancellation in the Option Program
each such DuPont Option or DuPont SAR, whether or not vested or exercisable, and
upon such cancellation, the Company will issue to such employee a Company Stock
Option or an appreciation right with respect to Class A Common Stock (a "Company
SAR"), as applicable. In general, Company Stock Options that qualify as
incentive stock options, as defined in the Code ("Incentive Stock Options"), are
to be issued upon cancellation of DuPont Options that qualify as Incentive Stock
Options, and Company nonqualified stock options are to be issued upon
cancellation of DuPont nonqualified stock options. The number of shares subject
to each Company Stock Option and each Company SAR issued in the Option Program,
and the exercise price per share of each such Company Stock Option and Company
SAR, will be determined in the manner described below that will reflect, in the
aggregate, the difference
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between the exercise price of the DuPont Options and the fair market value per
share of DuPont common stock and, in the case of DuPont SARs, the appreciated
value of such SARs.
The exercise price applicable to each Company Stock Option and Company SAR
issued upon cancellation of DuPont Options and DuPont SARs (the "Company
Exercise Price") will be the price (rounded to the nearest fourth decimal)
obtained by dividing (i) the exercise price of the applicable DuPont Option or
DuPont SAR (the "DuPont Exercise Price") by (ii) the ratio (the "Option Ratio")
of (a) the average price (the "DuPont Share Price") of DuPont common stock over
the five trading days ending on the date the initial offering price to the
public of a share of Class A Common Stock in the Offerings is determined
(calculated as the average of the mean of the high and low prices of DuPont
common stock on each of these five days as reported on the NYSE) to (b) the
offering price to the public of the Class A Common Stock set forth on the cover
page of this Prospectus (the "IPO Price"). The DuPont Share Price is $62.9656.
Each such Company Stock Option will entitle the holder to purchase, and each
such Company SAR will relate to, the whole number of shares of Class A Common
Stock (rounded up to the nearest whole share, in the case of a nonqualified
stock option, and rounded down to the nearest whole share, in the case of an
Incentive Stock Option) obtained by multiplying the number of shares of DuPont
common stock underlying the applicable DuPont Option or DuPont SAR by the Option
Ratio. In the case of any DuPont Option that qualifies as an Incentive Stock
Option, the formula set forth above will be adjusted, if necessary, to comply
with the Code.
Mr. Dunham and the other executive officers named in the Summary
Compensation Table below have agreed to the cancellation in the Option Program
of 100 percent of their DuPont Options and DuPont SARs and the issuance upon
such cancellation of Company Stock Options and Company SARs.
All Company Stock Options and Company SARs issued upon cancellation of
DuPont Options and DuPont SARs will remain subject to the threshold, vesting,
exercisability and option-length terms and conditions to which the DuPont
Options and DuPont SARs were subject prior to cancellation. DuPont Options and
certain DuPont SARs that are not canceled in the Option Program generally will
terminate 12 months after DuPont's ownership of the Company decreases to less
than 50 percent. The Option Program will be conducted in accordance with such
procedures and at such time as is determined by DuPont's Compensation Committee
and the Company. See "Arrangements Between the Company and DuPont -- Employee
Matters Agreement."
Company Stock Options and Company SARs to be granted to the 17 senior
officers of the Company upon cancellation of DuPont Options and DuPont SARs are
to be granted under the Company's 1998 Stock and Performance Incentive Plan.
Company Stock Options and Company SARs to be granted to the remaining officers
and other employees of the Company upon cancellation of DuPont Options and
DuPont SARs are to be granted under the Company's 1998 Key Employee Stock
Performance Plan. As of July 31, 1998, the 17 senior officers of the Company
held an aggregate of 4,104,583 DuPont Options and 57,200 DuPont SARs eligible
for the Option Program, and the remaining officers and other employees of the
Company held an aggregate of 7,102,249 DuPont Options and 1,251,213 DuPont SARs
eligible for the Option Program. The Company currently expects that
approximately 24.4 million Company Stock Options and 2.1 million Company SARs
are to be issued upon cancellation of DuPont Options and DuPont SARs in the
Option Program. The actual number of Company Stock Options and Company SARs
issued will vary based on the number of DuPont Options and DuPont SARs
surrendered for cancellation. For a more detailed description of the Company
Stock Options and Company SARs to be issued in the Option Program, see "-- 1998
Stock and Performance Incentive Plan of the Company," "-- 1998 Key Employee
Stock Performance Plan," "-- Certain Provisions Applicable to the Plan and the
1998 Plan" and "-- Material Federal Income Tax Consequences of the Plan and the
1998 Plan."
MATERIAL UNITED STATES FEDERAL TAX CONSEQUENCES OF THE OPTION PROGRAM
The following is a discussion of United States federal income tax
consequences of the cancellation of DuPont Options and DuPont SARs and the
issuance upon such cancellation of Company Stock Options and Company SARs in
connection with the Option Program. This discussion does not address tax
considerations that may be relevant to certain persons in light of their
particular circumstances. This discussion is based upon the Code, existing,
temporary and proposed regulations promulgated thereunder and administrative and
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<PAGE> 92
judicial decisions, all of which are subject to change, possibly with
retroactive effect. In addition, this discussion does not address the effect of
any state, local or foreign tax laws. Each person contemplating participation in
the Option Program should consult his or her tax advisor with respect to the tax
consequences of such participation.
The issuance of Company Stock Options and Company SARs upon cancellation of
DuPont Options and DuPont SARs will not be a taxable event to the holders of
DuPont Options and DuPont SARs. The Company Stock Options received upon
cancellation of DuPont Options which are nonqualified stock options will be
nonqualified Company Stock Options. Generally, a modification of an incentive
stock option results in the loss of incentive stock option status of such
option. However, under certain circumstances set forth in the Code and
applicable regulations (including proposed regulations), an incentive stock
option may be modified without loss of the incentive stock option status. In
particular, the issuance of an option upon cancellation of another option by
reason of a certain type of a corporate transaction will not result in loss of
incentive stock option status. The Separation constitutes such a corporate
transaction and, accordingly, assuming the applicable requirements of the Code
are satisfied, the issuance of a Company Stock Option upon cancellation of a
DuPont Option by reason of the Separation will not result in loss of incentive
stock option status.
COMPENSATION OF EXECUTIVE OFFICERS
During fiscal 1997, the executive officers named in the table included
under this caption were employees of DuPont and participated in DuPont's
executive benefit plans, as indicated in the tables.
The following table sets forth the aggregate compensation paid to the
Company's chief executive officer and four other most highly compensated
executive officers (the "Named Officers") by DuPont or its subsidiaries during
fiscal 1997.
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------------- ------------------
OTHER SHARES
NAME AND ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS(2) COMPENSATION(3) OPTIONS GRANTED(4) COMPENSATION(5)
- ------------------ ---- -------- ---------- --------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Archie W. Dunham.......... 1997 $667,500 $1,450,000 $33,075 290,376 $39,950
President, Chief
Executive Officer and
Director
Gary W. Edwards........... 1997 431,320 725,000 24,044 133,200 25,715
Executive Vice
President, Refining,
Marketing, Supply and
Transportation
Robert E. McKee III....... 1997 374,400 718,000 16,612 126,700 22,247
Executive Vice
President, Exploration
Production
Robert W. Goldman......... 1997 236,700 292,000 1,513 38,600 13,958
Senior Vice President,
Finance, and Chief
Financial Officer
Rick A. Harrington........ 1997 229,500 325,000 4,703 59,802 13,598
Senior Vice President,
Legal, and General
Counsel
</TABLE>
- ---------------
(1) Columns required by the rules and regulations of the Securities and Exchange
Commission that contain no entries have been omitted.
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<PAGE> 93
(2) On average, approximately 25 percent of variable compensation (i.e., bonus)
was paid in DuPont common stock.
(3) Other Annual Compensation consists solely of the reimbursement for the
payment of taxes.
(4) Shares have been adjusted to reflect a 2-for-1 DuPont common stock split in
1997. 1997 includes shares underlying both "Bicentennial" options (larger
than normal grants to reflect the higher risk due to significant stock price
hurdles and forfeiture provisions) and for Messrs. Dunham and Harrington,
reload options totaling 3,376 and 902, respectively. The totals for Messrs.
Goldman and Harrington each include 200 options granted under the DuPont
Shares program. See Notes 1, 2 and 3 of the Option Grants Table and Note 1
of the Aggregated Option Exercises and Year-End Option Values Table for more
detail on the "Bicentennial" options, reload feature and DuPont Shares
program.
(5) Includes the Company's matching contributions made pursuant to the Company's
thrift plans, including the following amounts credited under the related
savings restoration plan in 1997: Mr. Dunham, $30,450; Mr. Edwards, $16,215;
Mr. McKee, $12,747; Mr. Goldman, $4,458 and Mr. Harrington, $4,098.
The following table sets forth information as of December 31, 1997
regarding DuPont Options granted to the Named Officers during fiscal 1997.
OPTION GRANTS TABLE
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK APPRECIATION FOR
INDIVIDUAL OPTION GRANTS IN 1997 OPTION TERM(5)
----------------------------------------------- ---------------------------
NUMBER OF PERCENT
SHARES OF TOTAL
UNDERLYING OPTIONS
OPTIONS GRANTED EXERCISE EXPIRATION
NAME GRANTED IN 1997 PRICE(4) DATE 5%(6) 10%(7)
- ---- ---------- -------- -------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Archie W. Dunham................ 287,000(1) 2.87% $52.50 1/28/07 $ 0 $12,018,125
1,688(2) 0.02% 59.22 1/29/01 17,355 36,345
1,688(2) 0.02% 59.22 1/23/00 11,447 24,107
Gary W. Edwards................. 133,200(1) 1.33% 52.50 1/28/07 0 5,577,750
Robert E. McKee III............. 126,700(1) 1.27% 52.50 1/28/07 0 5,305,563
Robert W. Goldman............... 38,400(1) 0.38% 52.50 1/28/07 0 1,608,000
200(3) * 52.50 1/28/07 6,650 16,750
Rick A. Harrington.............. 58,700(1) 0.59% 52.50 1/28/07 0 2,458,063
902(2) 0.01% 56.28 1/23/00 7,639 15,982
200(3) * 52.50 1/28/07 6,650 16,750
</TABLE>
- ---------------
(1) These DuPont Options (the "Bicentennial" Options) may not be exercised
earlier than 12 months from date of grant and have a term of ten years.
Subject to the preceding sentence, DuPont Options with respect to 50 percent
of the DuPont common stock subject thereto will become exercisable if the
DuPont common stock price reaches $75 per share and the balance will be
exercisable if the DuPont common stock reaches $90 per share, but the DuPont
Options will be forfeited if these stock price thresholds are not met within
five years of grant date. The $75 threshold was met on April 17, 1998.
(2) These DuPont Options are subject to reload options which were granted when a
previously granted option was exercised. These reload options have not
increased the combined number of shares and options held by the executive
prior to exercise. The reload feature was added in 1997 to accelerate stock
ownership by executives. The shares of DuPont common stock received upon
exercise of the original DuPont Options (not including shares withheld to
satisfy income tax obligations) may not be transferred for a period of five
years. Reload options are granted at fair market value of a share of DuPont
common stock on the date of exercise of the original option, have a term
equal to the remaining term of the original DuPont Options and are
exercisable six months from the date of grant.
(3) These DuPont Options were awarded under the DuPont Shares program. Under
this program, substantially all employees received a one-time grant to
acquire shares of DuPont common stock at the fair market value as of the
date of grant. These DuPont Options became exercisable when the price of
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<PAGE> 94
DuPont common stock reached $75 per share on April 17, 1998. Similarly,
these DuPont Options have a term of 10 years.
(4) The exercise price is the average of the high and low prices of DuPont
common stock as reported on the NYSE-Composite Transactions Tape on the date
of grant.
(5) Represents total appreciation over the exercise price at the assumed annual
appreciation rates of 5 percent and 10 percent compounded annually for the
term of the DuPont Options.
(6) Reflects forfeiture of all Bicentennial options granted on January 29, 1997,
because the $75 and $90 stock price thresholds would not be met within five
years of grant date based on the assumed rate of stock price appreciation.
Also see Note 1 above.
(7) Reflects forfeiture of 50 percent of the Bicentennial options granted on
January 29, 1997, because the $90 stock price threshold would not be met
within five years of grant date based on the assumed rate of stock price
appreciation. Also see Note 1 above.
* Represents less than 0.01 percent of the total options granted under the
DuPont Shares program.
The following table sets forth information regarding the exercise of DuPont
Options during the 1997 fiscal year by each of the Named Officers and the 1997
fiscal year end value of all unexercised DuPont Options held by each of the
Named Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
FISCAL YEAR END 1997 AT FISCAL YEAR END 1997(2)
SHARES --------------------------- ---------------------------
ACQUIRED ON VALUE
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Archie W. Dunham..... 10,648 $430,620 557,552 290,376 $17,407,434 $2,173,286
Gary W. Edwards...... 13,153 984,009 301,246 133,200 10,013,260 1,007,325
Robert E. McKee
III................ -- -- 233,048 126,700 7,428,204 958,169
Robert W. Goldman.... -- -- 73,906 38,600 2,361,524 291,913
Rick A. Harrington... 7,657 543,945 64,500 59,802 1,924,256 448,842
</TABLE>
- ---------------
(1) Represents the pre-tax gain, which is the difference between the market
value of the shares on the date of exercise of the DuPont Options and the
exercise price. The reload feature prohibits distribution of any net
after-tax gains, as described in Note 2 of the Option Grants Table. The
gains after taxes are converted to DuPont common stock that may not be sold
or transferred for at least five years. One hundred percent of the gains for
Mr. Dunham and 17 percent for Mr. Harrington resulted from the reload
feature.
(2) Represents the closing price for DuPont common stock on December 31, 1997 of
$60.0625 less the exercise price for all outstanding exercisable and
unexercisable DuPont Options for which the exercise price is less than such
closing price.
RETIREMENT BENEFITS
Retirement benefits for Company employees under the DuPont Pension and
Retirement Plan are based on an employee's years of service and average monthly
pay during the employee's three highest-paid years. "Average monthly pay" for
this purpose includes regular compensation and 100 percent of annual variable
compensation payments, but excludes other bonuses and compensation in excess of
limits imposed by the Internal Revenue Code of 1986, as amended (the "Code").
The Code limits the amount of annual benefits which may be payable from the
pension trust. Retirement benefits in excess of these limitations are paid from
the Company's general revenues under separate, nonfunded pension restoration
plans.
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<PAGE> 95
The table below illustrates the straight-life annuity amounts payable under
the DuPont Pension and Retirement Plan and retirement restoration plans to
Company employees retiring at age 65 in 1998. These amounts reflect an offset
based on Social Security benefits. The current years of service credited for
retirement benefits for the Named Officers are as follows: 32 years for A. W.
Dunham, 35 years for G. W. Edwards, 31 years for R. E. McKee, 33 years for R. W.
Goldman and 18 years for R. A. Harrington.
<TABLE>
<CAPTION>
ESTIMATED ANNUAL RETIREMENT
SALARY AND BENEFITS BASED ON SERVICE OF:
VARIABLE -------------------------------------------------
COMPENSATION 30 YEARS 35 YEARS 40 YEARS 45 YEARS
------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
$ 325,000.................................... $ 149,000 $ 174,000 $ 200,000 $ 226,000
900,000................................... 425,000 496,000 568,000 640,000
1,475,000................................... 701,000 818,000 936,000 1,054,000
2,050,000................................... 977,000 1,140,000 1,304,000 1,468,000
2,625,000................................... 1,253,000 1,462,000 1,672,000 1,882,000
</TABLE>
1998 STOCK AND PERFORMANCE INCENTIVE PLAN OF THE COMPANY
GENERAL
The Company has adopted the 1998 Stock and Performance Incentive Plan of
Conoco Inc. (the "Plan") to reward (i) key employees of the Company
("Employees"), (ii) directors of the Company who are not employees of the
Company ("Nonemployee Directors") and (iii) nonemployee consultants and other
independent contractors (collectively, "Independent Contractors") of the
Company. The primary objectives of the Plan are to attract and retain the
services of key Employees, Nonemployee Directors and Independent Contractors and
to further the interests of the Company and its stockholders by providing
incentives in the form of awards to key Employees, qualified Nonemployee
Directors and qualified Independent Contractors who can contribute materially to
the success and profitability of the Company. The following summary of certain
provisions of the Plan does not purport to be complete and is qualified in its
entirety by reference to the Plan, a copy of which is filed as an exhibit to the
Registration Statement of which this Prospectus is a part and is incorporated
herein by reference.
Awards to Employees ("Employee Awards") and awards to Independent
Contractors ("Independent Contractor Awards") generally are treated the same
under the Plan, and the discussion of Employee Awards herein applies, except as
noted, equally to Independent Contractor Awards. Employee Awards may be in the
form of (i) Company Stock Options, (ii) Company SARs, (iii) restricted or
unrestricted grants of Class A Common Stock or units denominated in Class A
Common Stock (collectively, "Stock Awards"), (iv) grants denominated in cash
("Cash Awards") and (v) grants denominated in cash, Class A Common Stock, units
denominated in Class A Common Stock or any other property, the vesting of which
grants are made subject to the attainment of one or more performance goals
("Performance Awards"). Awards to Nonemployee Directors under the Plan
("Director Awards" and, collectively with the Employee Awards and the
Independent Contractor Awards, the "Awards") will be in the form of grants of
Company Stock Options and Stock Awards.
The Plan is not qualified under Section 401(a) of the Code and is not
subject to the provisions of the Employee Retirement Income Security Act of
1974, as amended ("ERISA").
PARTICIPATION AND ELIGIBILITY
Key Employees eligible for Employee Awards under the Plan are employees
holding positions of responsibility with the Company and whose performance, in
the judgment of the Compensation Committee, can have a significant effect on the
success of the Company, as well as individuals who are expected to become
Employees within six months of the date of grant. Directors eligible for
Director Awards under the Plan are those who are not employees of the Company or
DuPont. Independent Contractors eligible for Awards under the Plan are those
providing, or who will provide, services to the Company. Employees who have
previously received DuPont Options and DuPont SARs may also participate through
the Option Program, as described above under "-- Treatment of Outstanding Stock
Options and Stock Appreciation Rights."
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SHARES SUBJECT TO THE PLAN
The Company has reserved the greater of (a) 20 million shares of Class A
Common Stock or (b) shares of Class A Common Stock equal to 3.3 percent of the
number of shares of Common Stock outstanding from time to time, for purposes of
the Plan. No more than 7 million shares of Class A Common Stock shall be
available for ISOs (defined below). No Awards shall be granted under the Plan
with respect to Class B Common Stock. The number of shares authorized to be
issued under the Plan is subject to adjustment as described under "-- Certain
Provisions Applicable to the Plan and the 1998 Plan -- Adjustments" below.
Shares subject to Awards that are forfeited or terminated, exchanged for Awards
that do not involve Class A Common Stock or expire unexercised, or are settled
in cash in lieu of Class A Common Stock, or otherwise such that the shares
covered thereby are not issued, again become available for Awards. Awards that
are issued upon cancellation of an award previously held by an Employee by
reason of the Employee's employment while the Company was wholly owned by
DuPont, as described above under "-- Treatment of Outstanding Stock Options and
Stock Appreciation Rights," shall not count against the limitations on Class A
Common Stock available for Awards.
TERMS, CONDITIONS AND LIMITATIONS OF AWARDS
Employee Awards
The Compensation Committee will determine the type or types of Employee
Awards made under the Plan and will designate the Employees who are to be the
recipients of such awards. An Employee Award shall be embodied in an agreement
(an "Award Agreement"), which will contain such terms, conditions and
limitations as determined by the Compensation Committee. Employee Awards may be
granted singly, in combination or in tandem. Employee Awards may also be made in
combination or in tandem with, in replacement of, or as alternatives to, grants
or rights under the Plan or any other employee plan of the Company or any of its
subsidiaries, including any acquired entity. An Employee Award may provide for
the grant or issuance of additional, replacement or alternative Employee Awards
upon the occurrence of specified events, including the exercise of the original
Employee Award. At the discretion of the Compensation Committee, an Employee may
be offered an election to substitute an Employee Award for another Employee
Award or Employee Awards of the same or different type. All or part of an
Employee Award may be subject to conditions established by the Compensation
Committee, which may include, but are not limited to, continuous service with
the Company, achievement of specific business objectives, increases in specified
indices, attainment of specified growth rates and other comparable measurements
of performance. Upon the termination of employment by an Employee, any
unexercised, deferred, unvested or unpaid Employee Awards will be treated as set
forth in the applicable Award Agreement.
The Compensation Committee may make an Award to an individual who it
expects to become an Employee of the Company within the next six months, with
such Award being subject to the individual actually becoming an Employee within
such time period and to such other terms and conditions as may be established by
the Compensation Committee.
Company Stock Options. A Company Stock Option granted pursuant to the Plan
may consist of either an incentive stock option ("ISO") that complies with the
requirements of Section 422 of the Code or a non-qualified stock option ("NQSO")
that does not comply with such requirements. Independent Contractor Awards may
not include ISOs. ISOs and NQSOs must have an exercise price per share that is
not less than the Fair Market Value (as defined in the Plan) of the Class A
Common Stock on the date of grant; provided, however, that "Fair Market Value"
in the case of any Award made in connection with the Offerings means the price
per share of Class A Common Stock as set forth in the cover page of this
Prospectus.
Subject to the limitations described under "-- Certain Provisions
Applicable to the Plan and the 1998 Plan -- Exercise of Company Stock Options"
below, the terms, conditions and limitations applicable to any Company Stock
Options, including the term of any Company Stock Options and the date or dates
upon which they become exercisable, will be determined by the Compensation
Committee.
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Company SARs. A Company SAR may be granted under the Plan to the holder of
a Company Stock Option with respect to all or a portion of the shares of Class A
Common Stock subject to such Company Stock Option or may be granted separately.
The terms, conditions and limitations applicable to any Company SARs, including
the term of any Company SARs and the date or dates upon which they become
exercisable, will be determined by the Compensation Committee.
Stock Awards. Stock Awards consist of restricted and non-restricted grants
of Class A Common Stock or units denominated in Class A Common Stock. The terms,
conditions and limitations applicable to any Stock Awards will be determined by
the Compensation Committee. Without limiting the foregoing, rights to dividends
or dividend equivalents may be extended to and made part of any Stock Award in
the discretion of the Compensation Committee. The Compensation Committee may
also establish rules and procedures for the crediting of interest or other
earnings on deferred cash payments and dividend equivalents for Stock Awards.
Cash Awards. Cash Awards consist of grants denominated in cash. The terms,
conditions and limitations applicable to any Cash Awards will be determined by
the Compensation Committee.
Performance Awards. Performance Awards consist of grants made to an
Employee subject to the attainment of one or more performance goals. A
Performance Award will be paid, vested or otherwise deliverable solely upon the
attainment of one or more pre-established, objective performance goals
established by the Compensation Committee prior to the earlier of (i) 90 days
after the commencement of the period of service to which the performance goals
relate and (ii) the lapse of 25 percent of the period of service, and in any
event while the outcome is substantially uncertain. A performance goal may be
based upon one or more business criteria that apply to the Employee, one or more
business units of the Company or the Company as a whole, and may include any of
the following: increased revenue, net income, stock price, market share,
earnings per share, return on equity, return on assets, decrease in costs,
shareholder value, net cash flow, total shareholder return, return on capital,
return on investors' capital, operating income, funds from operations, cash
flow, cash from operations, after-tax operating income, reserve addition,
proceeds from dispositions, production volumes, refinery runs, net cash flow
before financing activities, reserve replacement ratio, finding and development
costs, refinery utilizations and total market value. Prior to the payment of any
compensation based on the achievement of such performance goals, the
Compensation Committee must certify in writing that the applicable performance
goals and any of the material terms thereof were, in fact, satisfied. Subject to
the foregoing, the terms, conditions and limitations applicable to any
Performance Awards will be determined by the Compensation Committee.
Certain Limitations. The Plan contains certain limitations with respect to
Awards that may be made thereunder. In particular, the Plan provides that the
following limitations shall apply to any Employee Awards (but not to any
Independent Contractor Awards) made thereunder: (i) no participant may be
granted, during any calendar year, Employee Awards consisting of Company Stock
Options or Company SARs that are exercisable for or relate to more than 2.5
million shares of Class A Common Stock; (ii) no participant may be granted,
during any calendar year, Employee Awards consisting of Stock Awards covering or
relating to more than 150,000 shares of Class A Common Stock (the limitation set
forth in this clause (ii), together with the limitation set forth in clause (i)
above, being hereinafter collectively referred to as the "Stock-Based Awards
Limitations"); and (iii) no participant may be granted Employee Awards
consisting of cash or in any other form permitted under the Plan (other than
Employee Awards consisting of Company Stock Options or Company SARs or Stock
Awards) in respect of any calendar year having a value determined on the date of
grant in excess of $7.5 million.
Director Awards
For information concerning awards to be granted to Directors, see
"-- Election and Compensation of Directors."
CHANGE IN CONTROL
Award Agreements with respect to Awards granted under the Plan are expected
to provide that in the event of certain terminations of a participant's
employment following a "Change in Control" or "Potential
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<PAGE> 98
Change in Control" of the Company (as defined in the Award Agreement), Awards
held by such participant that were not previously vested or exercisable will
become fully vested and exercisable and generally remain exercisable for the
remainder of their term.
1998 KEY EMPLOYEE STOCK PERFORMANCE PLAN
GENERAL
The Company also has adopted the 1998 Key Employee Stock Performance Plan
of Conoco Inc. (the "1998 Plan") to attract and retain the services of Employees
and to further the interests of the Company and its stockholders by enhancing
the proprietary and personal interests of Employees in the success and
profitability of the Company. The following summary of certain provisions of the
1998 Plan does not purport to be complete and is qualified in its entirety by
reference to the 1998 Plan, a copy of which is filed as an exhibit to the
Registration Statement of which this Prospectus is a part and is incorporated
herein by reference.
Awards to Employees under the 1998 Plan may be in the form of Company Stock
Options and Company SARs. The 1998 Plan is not qualified under Section 401(a) of
the Code and is not subject to the provisions of ERISA.
PARTICIPATION AND ELIGIBILITY
All Employees are eligible for Awards under the 1998 Plan. Awards may also
be granted to individuals who are expected to become Employees within six months
of the date of grant. Employees are selected to participate in the 1998 Plan
through the grant of Awards by the Compensation Committee in its sole
discretion. Employees who have previously received DuPont Options and DuPont
SARs may also participate through the Option Program, as described above under
"-- Treatment of Outstanding Stock Options and Stock Appreciation Rights."
SHARES SUBJECT TO THE 1998 PLAN
The Company has reserved the greater of (a) 18 million shares of Class A
Common Stock or (b) shares of Class A Common Stock equal to 3.0 percent of the
number of shares of Common Stock outstanding from time to time, for purposes of
the 1998 Plan. No more than 6 million shares of Class A Common Stock shall be
available for ISOs. No Awards shall be granted under the 1998 Plan with respect
to Class B Common Stock. The number of shares authorized to be issued under the
1998 Plan is also subject to adjustment as described under "-- Certain
Provisions Applicable to the Plan and the 1998 Plan -- Adjustments" below.
Shares subject to Awards that are forfeited or terminated, exchanged for Awards
that do not involve Class A Common Stock or expire unexercised, or are settled
in cash in lieu of Class A Common Stock, or otherwise such that the shares
covered thereby are not issued, again become available for Awards. Awards that
are issued upon cancellation of an award previously held by an Employee by
reason of the Employee's employment while the Company was wholly owned by
DuPont, as described above under "-- Treatment of Outstanding Stock Options and
Stock Appreciation Rights," shall not count against the limitations on Class A
Common Stock available for Awards.
TERMS, CONDITIONS AND LIMITATIONS OF AWARDS
The Compensation Committee will determine the type or types of Awards made
under the 1998 Plan and will designate the Employees who are to be the
recipients of such awards. An Award shall be embodied in an Award Agreement,
which will contain such terms, conditions and limitations as determined by the
Compensation Committee. Awards may be granted singly, in combination or in
tandem. Awards may also be made in combination or in tandem with, in replacement
of, or as alternatives to, grants or rights under the 1998 Plan or any other
employee plan of the Company or any of its subsidiaries, including any acquired
entity. An Award may provide for the grant or issuance of additional,
replacement or alternative Awards upon the occurrence of specified events,
including the exercise of the original Award. At the discretion of the
Compensation Committee, an Employee may be offered an election to substitute an
Award for another Award or Awards of the same or different type. Upon the
termination of employment by an Employee, any
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<PAGE> 99
unexercised, deferred, unvested or unpaid Awards will be treated as set forth in
the applicable Award Agreement.
The Compensation Committee may make an Award to an individual who it
expects to become an Employee of the Company within the next six months, with
such Award being subject to the individual actually becoming an Employee within
such time period and to such other terms and conditions as may be established by
the Compensation Committee.
Company Stock Options. A Company Stock Option granted pursuant to the 1998
Plan may consist of either an ISO or a NQSO. ISOs and NQSOs must have an
exercise price per share that is not less than the Fair Market Value (as defined
in the 1998 Plan) of the Class A Common Stock on the date of grant. Subject to
the limitations described under "Certain Provisions Applicable to the Plan and
the 1998 Plan -- Exercise of Company Stock Options" below, the terms, conditions
and limitations applicable to any Company Stock Options, including the term of
any Company Stock Options and the date or dates upon which they become
exercisable, will be determined by the Compensation Committee.
Company SARs. A Company SAR may be granted under the 1998 Plan to the
holder of a Company Stock Option with respect to all or a portion of the shares
of Class A Common Stock subject to such Company Stock Option or may be granted
separately. The terms, conditions and limitations applicable to any Company
SARs, including the term of any Company SARs and the date or dates upon which
they become exercisable, will be determined by the Compensation Committee.
Award Limit. The 1998 Plan provides that no participant may be granted,
during any calendar year, Awards that are exercisable for more than 200,000
shares of Class A Common Stock (the "Award Limit").
CHANGE IN CONTROL
Award Agreements with respect to Awards granted under the 1998 Plan are
expected to provide that in the event of certain terminations of a participant's
employment following a "Change in Control" or "Potential Change in Control" of
the Company (as defined in the Award Agreement), Awards held by such participant
that were not previously vested or exercisable will become fully vested and
exercisable and generally remain exercisable for the remainder of their term.
CERTAIN PROVISIONS APPLICABLE TO THE PLAN AND THE 1998 PLAN
ADMINISTRATION
The Compensation Committee will administer the Plan and the 1998 Plan. The
Compensation Committee has full and exclusive power to administer the Plan and
the 1998 Plan and take all actions specifically contemplated thereby or
necessary or appropriate in connection with the administration thereof. Except
insofar as the Plan relates to Nonemployee Directors, the Compensation Committee
has the full and exclusive power to interpret the Plan and the 1998 Plan and to
adopt such rules, regulations and guidelines for carrying out the Plan and the
1998 Plan as the Compensation Committee may deem necessary or proper in keeping
with the objectives thereof. The Compensation Committee may, in its discretion,
extend or accelerate the exercisability of, accelerate the vesting of or
eliminate or make less restrictive any restrictions contained in any Employee
Award granted under the Plan or any Award granted under the 1998 Plan, waive any
restriction or other provision of the Plan (insofar as it relates to Employee
Awards) or the 1998 Plan or in any Employee Award granted under the Plan or
Award granted under the 1998 Plan or otherwise amend or modify any Employee
Award granted under the Plan or Award granted under the 1998 Plan in any manner
that is either (i) not adverse to the Employee holding such Award or (ii)
consented to by such Employee. The Compensation Committee may delegate to the
chief executive officer and other senior officers of the Company its duties
under the Plan or the 1998 Plan. The Compensation Committee also may engage or
authorize the engagement of third-party administrators to carry out
administrative functions under the Plan or the 1998 Plan. The Compensation
Committee may also correct any defect or supply any omission or reconcile any
inconsistency in the Plan or the 1998 Plan or in any Employee Award granted
under the Plan or Award granted under the 1998 Plan. Any decision of the
Compensation Committee in the interpretation and
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<PAGE> 100
administration of the Plan and the 1998 Plan shall lie within its sole and
absolute discretion and shall be final, conclusive and binding on all parties
concerned.
No member of the Compensation Committee or officer of the Company to whom
the Compensation Committee has delegated authority in accordance with the Plan
or the 1998 Plan will be held liable for anything done or omitted to be done by
him or her, by any member of the Compensation Committee or by any officer of the
Company in connection with the performance of any duties under such Plan, except
for his or her own willful misconduct or as expressly provided by statute.
EXERCISE OF COMPANY STOCK OPTIONS
The exercise price of any Company Stock Option must be paid in full at the
time the Company Stock Option is exercised in cash or, if permitted by the
Compensation Committee and elected by the participant, by means of tendering
Class A Common Stock or surrendering another Award (including restricted stock).
The Compensation Committee will determine acceptable methods for tendering Class
A Common Stock or other Awards by a participant to exercise a Company Stock
Option. Unless otherwise provided in the applicable Award Agreement, in the
event shares of restricted stock are tendered as consideration for the exercise
of a Company Stock Option granted under the Plan, a number of the shares issued
upon the exercise of such Company Stock Option, equal to the number of shares of
restricted stock used as consideration therefor, will be subject to the same
restrictions as the restricted stock so submitted as well as any other
restrictions that may be imposed by the Compensation Committee. The Compensation
Committee may adopt additional rules and procedures regarding the exercise of
Company Stock Options from time to time, provided that such rules and procedures
are not inconsistent with the provisions of this paragraph.
DEFERRAL OF AWARD PAYMENTS
With the approval of the Compensation Committee, payments in respect of
Awards may be deferred, either in the form of installments or a future lump sum
payment. Any deferred payment of an Award, whether elected by the participant or
specified by the Award Agreement or by the Compensation Committee, may be
forfeited if and to the extent that the Award Agreement so provides.
CASH-OUT OF AWARDS
At the discretion of the Compensation Committee, an Award that is a Company
Stock Option or Company SAR may be settled by a cash payment equal to the
difference between the Fair Market Value per share of Class A Common Stock on
the date of exercise and the exercise price of the Award, multiplied by the
number of shares with respect to which the Award is exercised.
AWARDS ISSUED UPON CANCELLATION OF DUPONT AWARDS
For a description of the issuance of Company Stock Options and Company SARs
upon cancellation of DuPont Stock Options and DuPont SARs pursuant to the Plan
and the 1998 Plan, see "-- Treatment of Outstanding Stock Options and Stock
Appreciation Rights."
ASSIGNMENT OF INTERESTS PROHIBITED
Unless otherwise determined by the Compensation Committee and provided in
the applicable Award Agreement, no Award or any other benefit under the Plan or
the 1998 Plan shall be assignable or otherwise transferable except by will or
the laws of descent and distribution or pursuant to a qualified domestic
relations order as defined by the Code or Title I of ERISA, or the rules
thereunder. The Compensation Committee may prescribe and include in applicable
Award Agreements other restrictions on transfer. Any attempted assignment of an
Award or any other benefit under the Plan or the 1998 Plan in violation thereof
will be null and void.
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<PAGE> 101
ADJUSTMENTS
In the event of any subdivision or consolidation of outstanding shares of
Class A Common Stock, declaration of a stock dividend payable in shares of Class
A Common Stock or other stock split, each of the Plan and the 1998 Plan provides
for the Compensation Committee to make appropriate, proportionate adjustments to
(i) the number of shares of Class A Common Stock reserved under such Plan, (ii)
the number of shares of Class A Common Stock covered by outstanding Awards,
(iii) the exercise or other price in respect of such Awards, (iv) the
appropriate Fair Market Value and other price determinations for such Awards and
(v) the Stock-Based Awards Limitations (with respect to the Plan) or the Award
Limit (with respect to the 1998 Plan). Furthermore, in the event of any other
recapitalization or capital reorganization of the Company, any consolidation or
merger of the Company with another corporation or entity, the adoption by the
Company of any plan of exchange affecting the Class A Common Stock or any
distribution to holders of Class A Common Stock of securities or property (other
than normal cash dividends or stock dividends), the Board will make appropriate
adjustments to the amounts or other items referred to in clauses (ii), (iii),
(iv) and (v) above to give effect to such transactions, but only to the extent
necessary to maintain the proportionate interest of the holders of the Awards
and to preserve, without increasing, the value thereof. In the event of a
corporate merger, consolidation, acquisition of property or stock, separation,
reorganization or liquidation, the Board may (x) issue or assume Awards by means
of substitution of new Awards, as appropriate, for previously issued Awards or
assume previously issued Awards as part of such adjustment or (y) cancel Awards
that are Company Stock Options or Company SARs and give the participants who are
the holders of such Awards notice and opportunity to exercise for 30 days prior
to such cancellation.
AMENDMENT, MODIFICATION AND TERMINATION
The Board may amend, modify, suspend or terminate the Plan or the 1998 Plan
for the purpose of addressing any changes in legal requirements or for any other
purpose permitted by law, except that (i) no amendment that would impair the
rights of any participant with respect to any outstanding Award may be made
without the consent of such participant and (ii) no amendment legally requiring
stockholder approval will be effective until such approval has been obtained.
RESTRICTIONS
Certificates evidencing shares of Class A Common Stock delivered pursuant
to the Plan or the 1998 Plan may be subject to stop transfer orders and other
restrictions as the Compensation Committee may deem advisable under the rules,
regulations and other requirements of the Commission, applicable securities
exchange or transaction reporting system, and any applicable federal or state
securities law. The Compensation Committee may cause a legend or legends to be
placed upon such certificates (if any) to make appropriate reference to such
restrictions.
TAX WITHHOLDING
The Company or its designated third-party administrator will have the right
to deduct applicable taxes from any Employee Award payment under the Plan or any
Award payment under the 1998 Plan and withhold, at the time of delivery (or
vesting, for purposes of the Plan) of cash or shares of Class A Common Stock
under such Plan, an appropriate amount of cash or number of shares of Class A
Common Stock, or combination thereof, for the payment of taxes. The Compensation
Committee may also permit withholding to be satisfied by the transfer to the
Company of shares of Class A Common Stock previously owned by the holder of such
Award for which withholding is required. The Compensation Committee may provide
for loans, on either a short-term or demand basis, from the Company to an
Employee or Independent Contractor to permit the payment of taxes required by
law.
UNFUNDED PLAN
Both the Plan and the 1998 Plan will be unfunded. Any bookkeeping accounts
that are established with respect to participants for purposes of the Plan or
the 1998 Plan will be used merely as a bookkeeping
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convenience. The Company is not required to segregate any assets for purposes of
the Plan or the 1998 Plan or awards thereunder, nor will either Plan be
construed as providing for such segregation, nor will the Company, the Board or
the Compensation Committee be deemed to be a trustee of any benefit granted
under either Plan. Any liability or obligation of the Company to any participant
under the Plan or the 1998 Plan will be based solely on any contractual
obligations that may be created by such Plan and any Award Agreement, and no
such liability or obligation of the Company will be deemed to be secured by any
pledge or other encumbrance on any property of the Company. Neither the Company,
the Board nor the Compensation Committee will be required to give any security
or bond for the performance of any obligation that may be created by the Plan or
the 1998 Plan.
FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN AND THE 1998 PLAN
The following is a discussion of material U.S. federal income tax
consequences to participants in the Plan and the 1998 Plan. This discussion is
based on statutory provisions, Treasury regulations thereunder, judicial
decisions and rulings of the Internal Revenue Service (the "IRS") in effect on
the date hereof. This discussion does not purport to be complete, and does not
cover, among other things, state, local or foreign tax treatment of
participation in the Plan or the 1998 Plan. Furthermore, differences in
participants' financial situations may cause federal, state and local tax
consequences of participation in the Plan or the 1998 Plan to vary. Therefore,
each participant is urged to consult his or her own accountant, legal counsel or
other financial advisor regarding individual tax consequences of participation
in the Plan or the 1998 Plan.
Nonqualified Stock Options; Stock Appreciation Rights; Incentive Stock
Options. Participants will not realize taxable income upon the grant of a NQSO
or Company SAR. Upon the exercise of a NQSO or Company SAR, the Employee or
Nonemployee Director will recognize ordinary income (subject, in the case of
Employees, to withholding by the Company) in an amount equal to the excess of
(i) the amount of cash and the Fair Market Value on the date of exercise of the
Class A Common Stock received over (ii) the exercise price (if any) paid
therefor. The Employee or Nonemployee Director will generally have a tax basis
in any shares of Class A Common Stock received pursuant to the exercise of a
Company SAR, or pursuant to the cash exercise of a NQSO, that equals the Fair
Market Value of such shares on the date of exercise. Generally, the Company will
be entitled to a deduction for U.S. federal income tax purposes that corresponds
as to timing and amount with the compensation income recognized by the
participant under the foregoing rules.
Employees will not have taxable income upon the grant of an ISO. Upon the
exercise of an ISO, the Employee will not have taxable income, although the
excess of the Fair Market Value of the shares of Class A Common Stock received
upon exercise of the ISO ("ISO Stock") over the exercise price will increase the
alternative minimum taxable income of the Employee, which may cause such
Employee to incur alternative minimum tax. The payment of any alternative
minimum tax attributable to the exercise of an ISO would be allowed as a credit
against the Employee's regular tax liability in a later year to the extent the
Employee's regular tax liability is in excess of the alternative minimum tax for
that year.
Upon the disposition of ISO Stock that has been held for the requisite
holding period (generally, at least two years from the date of grant and one
year from the date of exercise of the ISO), the Employee will generally
recognize capital gain (or loss) equal to the difference between the amount
received in the disposition and the exercise price paid by the Employee for the
ISO Stock. However, if an Employee disposes of ISO Stock that has not been held
for the requisite holding period (a "disqualifying disposition"), the Employee
will recognize ordinary income in the year of the disqualifying disposition to
the extent that the Fair Market Value of the ISO Stock at the time of exercise
of the ISO (or, if less, the amount realized in the case of an arm's-length
disqualifying disposition to an unrelated party) exceeds the exercise price paid
by the Employee for such ISO Stock. The Employee would also recognize capital
gain (or, depending on the holding period, additional ordinary income) to the
extent the amount realized in the disqualifying disposition exceeds the Fair
Market Value of the ISO Stock on the exercise date. If the exercise price paid
for the ISO Stock exceeds the amount realized in the disqualifying disposition
(in the case of an arm's-length disposition to an unrelated party), such excess
would ordinarily constitute a capital loss.
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The Company will generally not be entitled to any federal income tax
deduction upon the grant or exercise of an ISO, unless the Employee makes a
disqualifying disposition of the ISO Stock. If an Employee makes such a
disqualifying disposition, the Company will generally be entitled to a tax
deduction that corresponds as to timing and amount with the compensation income
recognized by the Employee under the rules described in the preceding paragraph.
Under current rulings, if a participant transfers previously held shares of
Class A Common Stock (other than ISO Stock that has not been held for the
requisite holding period) in satisfaction of part or all of the exercise price
of a NQSO or ISO, the participant will recognize income with respect to the
Class A Common Stock received in the manner described above, but no additional
gain will be recognized as a result of the transfer of such previously held
shares in satisfaction of the NQSO or ISO exercise price. Moreover, that number
of shares of Class A Common Stock received upon exercise which equals the number
of shares of previously held Class A Common Stock surrendered therefor in
satisfaction of the NQSO or ISO exercise price will have a tax basis that
equals, and a holding period that includes, the tax basis and holding period of
the previously held shares of Class A Common Stock surrendered in satisfaction
of the NQSO or ISO exercise price. Any additional shares of Class A Common Stock
received upon exercise will have a tax basis that equals the amount of cash (if
any) paid by the participant, plus, in the case of a NQSO, the amount of
ordinary income recognized by the participant with respect to the Class A Common
Stock received.
Cash Awards; Stock Unit Awards; Stock Awards. An Employee will recognize
ordinary compensation income upon receipt of cash pursuant to a Cash Award or
Performance Award or, if earlier, at the time such cash is otherwise made
available for the Employee to draw upon it. An Employee will not have taxable
income upon the grant of a Stock Award in the form of units denominated in Class
A Common Stock ("Stock Unit Award") but rather will generally recognize ordinary
compensation income at the time the Employee receives Class A Common Stock or
cash in satisfaction of such Stock Unit Award in an amount equal to the Fair
Market Value of the Class A Common Stock or cash received. In general, a
participant will recognize ordinary compensation income as a result of the
receipt of Class A Common Stock pursuant to a Stock Award or Performance Award
in an amount equal to the Fair Market Value of the Class A Common Stock when
such stock is received; provided, however, that if the stock is not transferable
and is subject to a substantial risk of forfeiture when received, the
participant will recognize ordinary compensation income in an amount equal to
the Fair Market Value of the Class A Common Stock when it first becomes
transferable or is no longer subject to a substantial risk of forfeiture, unless
the participant makes an election to be taxed on the Fair Market Value of the
Class A Common Stock when such stock is received.
An Employee will be subject to withholding for federal, and generally for
state and local, income taxes at the time the Employee recognizes income under
the rules described above with respect to Class A Common Stock or cash received
pursuant to a Cash Award, Performance Award, Stock Award or Stock Unit Award.
Dividends that are received by a participant prior to the time that the Class A
Common Stock is taxed to the participant under the rules described in the
preceding paragraph are taxed as additional compensation, not as dividend
income. The tax basis of a participant in the Class A Common Stock received will
equal the amount recognized by the Employee as compensation income under the
rules described in the preceding paragraph, and the Employee's holding period in
such shares will commence on the date income is so recognized.
Generally, the Company will be entitled to a deduction for U.S. federal
income tax purposes that corresponds as to timing and amount with the
compensation income recognized by the participant under the foregoing rules.
1998 GLOBAL PERFORMANCE SHARING PLAN
The Company has adopted the 1998 Global Performance Sharing Plan (the
"Global Plan"). The number of shares of Common Stock reserved for issuance under
the Global Plan is generally subject to equitable adjustment upon the occurrence
of any stock dividend, stock split, subdivision or consolidation. Pursuant to
the Global Plan, the Company may grant nonqualified Company Stock Options and
SARs.
The Global Plan will be administered by the Compensation Committee. The
Committee shall have full authority, subject to the provisions of the Global
Plan to, among other things, determine the terms and
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conditions of Company Stock Options and SARs and prescribe, amend and rescind
rules and regulations relating to the Global Plan.
Grants of Company Stock Options and SARs may be made under the Global Plan
to all employees of the Company and its present or future subsidiaries, provided
that (i) certain management employees who receive Company Stock Options or SARs
under the 1998 Stock and Performance Incentive Plan as of the time of the
Offerings will not be granted Company Stock Options or SARs under the Global
Plan as of such time and (ii) specified groups of employees may be excluded from
participation by the Company or particular subsidiaries. The exercise price per
share subject to a Company Stock Option or SAR may not be less than the fair
market value of a share of Class A Common Stock on the date of grant. Company
Stock Options and SARs will have a term of not more than ten years and will
become exercisable with respect to one-third of the shares of Common Stock
subject thereto on each of the first three anniversaries of the dates of grant.
In the event of certain terminations of a participant's employment
following a "Change in Control" or "Potential Change in Control" of the Company
(as defined in the Global Plan), Company Stock Options and SARs held by such
participant that were not previously vested or exercisable will become fully
vested and exercisable and generally remain exercisable for the remainder of
their term.
The Global Plan may, at any time and from time to time, be altered,
amended, suspended or terminated by the Board of Directors, in whole or in part,
except that (i) no amendment or alteration that would adversely affect the
rights of any participant under any Award previously granted to such participant
shall be made without the consent of such participant and (ii) no amendment or
alteration shall be effective prior to its approval by the stockholders of the
Company to the extent such approval is required by applicable law.
GRANTS AS OF THE OFFERINGS
The following table sets forth, with respect to (i) each Named Officer,
(ii) the nonemployee members of the Board of Directors as a group (the
"Nonemployee Director Group") and (iii) all other employees as a group ("All
Other Employees"), the outstanding grants held by such persons at the time of
the Offerings.
<TABLE>
<CAPTION>
COMPANY STOCK OPTIONS(1)
------------------------
<S> <C>
Archie W. Dunham(2)......................................... 1,304,300
Gary W. Edwards............................................. 435,200
Robert E. McKee III......................................... 435,200
Robert W. Goldman........................................... 123,400
Rick A. Harrington.......................................... 123,400
Nonemployee Director Group(3) (6 persons)................... 189,500
All Other Employees(4)...................................... 7,200,000
</TABLE>
- ---------------
(1) These Company Stock Options and Company SARs will become exercisable with
respect to one-third of the shares of Class A Common Stock subject thereto
on each of the first three anniversaries of the date of grant (other than
Mr. Dunham's, whose Company Stock Options will become exercisable with
respect to one-third of the shares subject thereto on each of the second,
third and fourth anniversaries of the date of grant).
(2) Mr. Dunham will also receive Company restricted stock units with an
aggregate value of $1.1 million, which units will vest on the third
anniversary of the date of grant.
(3) The members of the Nonemployee Director Group will also receive Company
restricted stock units with an aggregate value of $575,000, which units will
vest on the third anniversary of the date of grant.
(4) The number of Company Stock Options and Company SARs held by the All Other
Employees group has been estimated based on the approximately 12,200
employees in the All Other Employees group.
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DEFERRED COMPENSATION PLAN FOR NONEMPLOYEE DIRECTORS
The Company has adopted the Deferred Compensation Plan for Nonemployee
Directors (the "Deferred Compensation Plan"). The purpose of the Deferred
Compensation Plan is to provide nonemployee directors of the Company the
opportunity to defer a portion of their compensation and to provide greater
incentives for those directors to attain and maintain the highest standards of
performance, to further align the interests of such directors with those of the
stockholders generally and to reward such directors for outstanding performance.
The Deferred Compensation Plan will be administered by the Compensation
Committee. The Compensation Committee will supervise the administration and
enforcement of the Deferred Compensation Plan according to the terms and
provisions thereof and will have such powers as are necessary to accomplish the
purposes of the Deferred Compensation Plan.
Under the Deferred Compensation Plan, participants may voluntarily elect to
defer all or a portion of their annual fees and other fees (including restricted
stock units granted under the Plan). An election to defer must generally be made
prior to the commencement of the fiscal year in which it will be earned; once
made, the election is generally irrevocable for the first calendar year with
respect to which the election is made. The deferred amounts will be deemed to be
invested, pursuant to the election of the participant, in Class A Common Stock
or in an interest-bearing account.
Each deferral election will indicate the time (either on the date of
termination of service as a director or on the date that is five years following
such date) and form of payment for the amounts to be deferred. Distributions
will be made in cash or Class A Common Stock to the participant at the time
irrevocably selected on the deferral form, or, in the event of the participant's
death, to the participant's designated beneficiary. Upon a Change in Control of
the Company (as defined in the Deferred Compensation Plan), all deferred amounts
(including deferred restricted stock units) can be paid in full.
Each participant or beneficiary will be an unsecured general creditor with
respect to any payments due and owing to such participant pursuant to the
Deferred Compensation Plan.
The Board of Directors of the Company can amend or terminate the Deferred
Compensation Plan at any time, except that no amendment may be made that would
impair the rights of a participant with respect to amounts already deferred or
otherwise allocated to his account.
SHARES ISSUED PURSUANT TO AWARDS
It is currently expected that shares of Class A Common Stock issued upon
exercise of, or otherwise pursuant to, awards granted under the Company's
benefit plans, including the Plan, the 1998 Plan and the Global Plan, will be
comprised of shares previously purchased by the Company in the open market or of
authorized but previously unissued shares. The Company currently expects that it
will periodically purchase shares in the open market so that there will be no
significant increase in the number of issued and outstanding shares of Class A
Common Stock resulting from awards granted under the Company's benefit plans.
SEVERANCE ARRANGEMENTS
On May 10, 1998, the Company entered into a severance agreement (the
"Severance Agreement") with Archie W. Dunham. The Severance Agreement has an
initial term of three years, which term will be extended, if necessary, upon any
"Change in Control" or "Public Offering" of the Company (as each such term is
defined in the Severance Agreement) so that the Severance Agreement will expire
no earlier than 24 months after either such event. The Offerings described
herein will constitute a Public Offering for purposes of the Severance
Agreement. The Severance Agreement provides that if, during the term of the
Severance Agreement, Mr. Dunham's employment is terminated by the Company other
than for cause, or by reason of Mr. Dunham's death or disability, or if Mr.
Dunham terminates his employment for "Good Reason" (as defined in the Severance
Agreement), Mr. Dunham will be entitled to (i) a lump sum severance payment
equal to three times the sum of his base salary and previous year's bonus, (ii)
36 months of benefit continuation, (iii) a pro rata portion of the annual bonus
for which he is eligible in the year of termination and
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(iv) vesting of any unvested equity-based awards from the Company. Mr. Dunham
will also be entitled to terminate his employment and receive the foregoing
benefits if, prior to the second anniversary of the occurrence of the Public
Offering or after DuPont reduces its ownership to less than 50 percent, he is
not appointed as Chairman of the Board of the Company (unless his employment had
previously terminated by reason of death, disability or for cause). Mr. Dunham
will also be entitled to receive an additional payment (a "gross-up payment")
sufficient to compensate him for the amount of any excise tax imposed on
payments made under the Severance Agreement or otherwise pursuant to Section
4999 of the Code and for any taxes imposed on such additional payment.
The Company has established the Conoco Inc. Key Employee Severance Plan
(the "Key Employee Severance Plan"), which covers certain employees of the
Company, including Gary W. Edwards, Robert E. McKee III, Robert W. Goldman and
Rick A. Harrington. The Key Employee Severance Plan provides that if the
employment of a participant in the Key Employee Severance Plan is terminated (i)
within two years of a "Change in Control" of the Company or (ii) after a
"Potential Change in Control" of the Company but prior to a Change in Control
(whether or not a Change in Control ever occurs), in either case by the Company
other than for "Cause" or by the participant for "Good Reason" (as such terms
are defined in the Key Employee Severance Plan), the participant will be
entitled to (i) a lump sum severance payment equal to two or three times the sum
of his base salary and previous year's bonus, (ii) 24 or 36 months of benefits
continuation and (iii) a pro rata portion of the annual bonus for which he is
eligible in the year of termination and, if necessary, a gross-up payment
sufficient to compensate the participant for the amount of any excise tax
imposed on payments made under the Key Employee Severance Plan or otherwise
pursuant to Section 4999 of the Code and for any taxes imposed on such an
additional payment. The Key Employee Severance Plan has a three-year term
commencing on May 10, 1998, which term will be extended, if necessary, upon a
Change in Control so that it expires no earlier than 24 months after such an
event. Amounts payable under the Key Employee Severance Plan will be in lieu of
any payments or benefits which may be payable to the severed employee under any
other severance plan, policy or program of the Company.
The Company has also established both the (i) Conoco Inc. Key Employee
Temporary Severance Plan (the "Key Employee Temporary Severance Plan") and (ii)
the Conoco Inc. Temporary Severance Plan (the "Temporary Severance Plan"), each
of which covers certain employees of the Company, including the Named Officers.
Under the Key Employee Temporary Severance Plan (which expires in 2001), if the
employment of a participant is involuntarily terminated due to a reduction in
force or experiences defined adverse employment changes (including certain
relocation requirements and reductions in pay or position), the individual will
be entitled to one year's base salary and variable bonus. In the same
circumstances as is described under the Key Employee Temporary Severance Plan,
benefits payable under the Temporary Severance Plan are paid to a participant
upon termination of employment, except that benefits upon such a termination are
equal to two weeks' pay for each completed year of service, up to a maximum of
52 weeks' pay. Amounts payable under the Key Employee Temporary Severance Plan
are reduced by amounts payable under the Temporary Severance Plan.
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ARRANGEMENTS BETWEEN THE COMPANY AND DUPONT
In 1998 and prior years, there have been significant transactions between
the Company and DuPont involving services (such as natural gas and gas liquids
supply, cash management, other financial services, purchasing, legal, computer
and corporate activities). See Note 3 to the Notes to Combined Financial
Statements. For purposes of governing certain on-going relationships between the
Company and DuPont and to facilitate implementation of the Separation, the
Company and DuPont, or their respective subsidiaries, will enter into (or
continue in effect) various agreements and relationships, including those
described below. The agreements described below were negotiated in the context
of a parent-subsidiary relationship and therefore are not the result of
arm's-length negotiations between independent parties. There can be no
assurance, therefore, that such agreements, or the transactions provided for
therein, or any amendments thereof will be on terms at least as favorable to the
Company as could have been obtained from unaffiliated third parties.
Certain agreements summarized below are included as exhibits to the
Registration Statement of which this Prospectus is a part, and the following
summaries are qualified in their entirety by reference to such exhibits which
are herein incorporated by reference.
RESTRUCTURING, TRANSFER AND SEPARATION AGREEMENT
Prior to the Offerings, DuPont and the Company will enter into a
Restructuring, Transfer and Separation Agreement (the "Separation Agreement"),
which provides for, among other things, the principal transactions required to
effect the Separation and the Offerings, including the transfer to the Company
of oil and gas assets, the division between DuPont and the Company of certain
liabilities, and certain other agreements governing the relationship between
DuPont and the Company following the Separation and the Offerings.
To effect the Separation, (i) DuPont will transfer or cause its
subsidiaries to transfer assets related to the oil and gas business (including
its equity interests in certain companies) to the Company or to a subsidiary of
the Company and the Company or its subsidiaries will assume substantially all of
the liabilities of the oil and gas business, and (ii) the Company will transfer
or cause its subsidiaries to transfer assets unrelated to the oil and gas
business (including its equity interests in certain companies) to DuPont or a
subsidiary of DuPont and DuPont or its subsidiaries will assume substantially
all of the liabilities associated with such transferred businesses. The
Separation Agreement provides that assets that cannot legally be transferred
prior to the effective date of the Separation (the "Effective Date") will be
transferred as soon as is practical following receipt of all necessary consents
of third parties and regulatory approvals. All transfers between DuPont and the
Company and their respective subsidiaries will be on an "as is, where is" basis,
and without any representations or warranties. As a result, the Company and
DuPont, as the case may be, each have agreed to bear the economic and legal
risks that any conveyances of assets are insufficient to vest in such party good
and marketable title to such assets. The parties have also agreed that following
the Offerings, DuPont and its subsidiaries (excluding the Company and its
subsidiaries) on the one hand, and the Company and its subsidiaries on the other
hand, will transfer, in some instances without additional consideration, to the
other, all assets which, subsequent to the Effective Date, the parties determine
more properly belong in the other's business.
The Separation Agreement provides for assumptions and cross-indemnities
designed to place, as of the Effective Date with certain exceptions, sole
financial responsibility on the Company and its subsidiaries for all
liabilities, known or unknown, actual or contingent, associated with the
Company's current and historical businesses and operations (including those
conducted prior to and following DuPont's acquisition of the Company in 1981),
including the oil and gas business, the Company's former chemical business (with
limited exceptions), the Company's interest in the Pocahontas Gas Partnership,
and all of the assets transferred to the Company in connection with the
Separation, but excluding the Company's former coal business, and to place sole
financial responsibility for DuPont's other businesses with DuPont and its other
subsidiaries. Responsibility for environmental matters and claims relating to
businesses sold to Cain Chemical, including the operations at Matagorda and
Chocolate Bayou, Texas, will not be assumed by the Company, but will be retained
exclusively by DuPont. Each party has also agreed to assume and be responsible
for certain liabilities associated with activities and operations of the other
party and its subsidiaries to the extent performed for or on behalf of its
current or historical business. The parties have also agreed to bear
responsibility in proportion
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to the relative amounts of waste deposited by each party on any contaminated
off-site location. The Separation Agreement contains indemnification and
contribution provisions in connection with (i) the assumption or retention of
liabilities by the Company and DuPont, (ii) the conduct of the parties'
respective businesses subsequent to the Separation, (iii) misstatements or
omissions in the Registration Statement of which this Prospectus is a part with
respect to information provided by the other party and (iv) the use of the
other's trademarks, tradenames, logos or other identifiers.
The Separation Agreement contains certain provisions regarding corporate
governance of the Company, most of which depend on the level of DuPont's
ownership interest in the Company. The Separation Agreement provides that for so
long as DuPont beneficially owns shares representing at least 30 percent of the
voting power of all of the outstanding shares of capital stock of the Company
entitled to vote generally in the election of directors excluding any class or
series of capital stock entitled to vote only in the event of dividend
arrearages ("Voting Stock"), Conoco will not, without the prior consent of
DuPont, adopt any amendments to its certificate of incorporation or bylaws or
take any action to recommend to its stockholders certain actions which would,
among other things, limit the legal rights of, or deny any benefit to DuPont or
any of its subsidiaries as Conoco stockholders in a manner not applicable to
Conoco stockholders generally. The Separation Agreement provides that, for so
long as DuPont beneficially owns shares representing 50 percent or more of the
voting power of the outstanding Voting Stock, (i) DuPont will have the right to
designate for nomination by the Company's Board of Directors (or any nominating
committee thereof) a majority of the members of the Company's Board of Directors
and (ii) a majority of the members of the Audit and Compliance and Compensation
Committees of the Company's Board of Directors will be required to be directors
designated by DuPont. For so long as DuPont beneficially owns shares
representing less than 50 percent but more than 10 percent of the voting power
of outstanding Voting Stock, DuPont will have the right to designate for
nomination by the Company's Board of Directors (or any nominating committee
thereof) a number of directors proportionate to its voting power of the
outstanding Common Stock of the Company, and, so long as DuPont beneficially
owns greater than 10 percent of the voting power, all Committees of the Board of
Directors will be required to include at least one director designated by
DuPont. For so long as DuPont beneficially owns shares representing 20 percent
or more of the outstanding Voting Stock, the Company will be required to deliver
to DuPont certain financial information of the Company. In addition, as long as
DuPont owns 50 percent or more of the voting power of the outstanding Voting
Stock, the Company will not be permitted to make certain changes in its
accounting principles or practices without the consent of DuPont. The Separation
Agreement also generally provides that, if requested by the Company, DuPont,
under certain limited circumstances, and as long as DuPont determines that it
will not adversely affect DuPont's ability or timing in receiving a favorable
ruling from the Internal Revenue Service ("IRS") with respect to a tax-free
distribution under Section 355 of the Code of Conoco's Class B Common Stock held
by DuPont, will seek such ruling on the basis that it will amend the Certificate
of Incorporation of Conoco to include a provision for the automatic conversion
of all Class B Common Stock into Class A Common Stock under certain
circumstances.
The Separation Agreement provides that the Company will, subject to certain
exceptions, use the proceeds of the incurrence of any indebtedness or of the
issuance of any equity securities by the Company and any of its subsidiaries,
including the proceeds of the Offerings, to repay debt owed to DuPont, including
the $7.5 billion Note described below under the caption "-- Intercompany Notes."
Generally, all one-time costs, including fees and taxes, directly relating to
the Offerings, the Separation or any transaction subsequent to the Offerings
that results in a reduction in the number of shares of Voting Stock owned by
DuPont if DuPont's ownership prior to such transaction represents at least 50
percent of the voting power of all of the outstanding Voting Stock that are
incurred and paid between May 11, 1998 and 24 months following the date on which
DuPont's voting power falls below 50 percent of the voting power of all of the
outstanding Voting Stock, are to be paid or reimbursed by DuPont under the terms
of the Separation Agreement.
DuPont has agreed that following the application of the net proceeds of the
Offerings and the utilization by Conoco of a portion of its cash and cash
equivalents in connection with the matters discussed below under the caption
"-- Intercompany Notes," Conoco (excluding Petrozuata) will have an aggregate of
$225 million of cash and cash equivalents on hand and $70 million of additional
monetary assets held by the Company's
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captive insurance company and its subsidiaries at the end of the month in which
the Offerings occur. If, at the end of the month in which the Offerings occur,
Conoco does not have $225 million in cash and cash equivalents, DuPont will pay
to Conoco the amount required to increase Conoco's cash and cash equivalents to
$225 million, unless and to the extent DuPont determines in good faith that such
deficiency occurred by reason of Conoco not operating its business in the
ordinary course consistent with past practice. The Separation Agreement requires
that the Company use its best efforts to terminate, or have the Company or a
subsidiary of the Company substituted for DuPont, under all existing guarantees
by DuPont of obligations relating to the business of the Company, including
financial, performance and other guarantee obligations, and under letters of
credit for the account of DuPont issued on behalf of the Company's business.
Commencing on the earlier of (i) two years following closing of the Offerings or
(ii) the date that DuPont holds less than 50 percent of the voting power of the
outstanding Common Stock of the Company, the Company will pay DuPont a fee of
.20 percent per annum on the total amount of any outstanding guarantees and
letters of credit. As of the Effective Date, the amount of such guarantees is
agreed to be $1,610 million. The amount of guarantees for purposes of the fee
calculation may be increased or decreased in good faith judgment of the chief
financial officer or treasurer of DuPont to reflect changes in the financial
exposure of DuPont but may only be adjusted at such time as the amount of any
such adjustment exceeds $50 million.
INTERCOMPANY NOTES
On July 20, 1998, a wholly owned subsidiary of the Company issued a
promissory note (the "Note") to DuPont in the aggregate principal amount of $7.5
billion bearing interest at a rate of 6.0125 percent per annum. The Note has a
maturity date of January 2, 2000. The Note may be voluntarily prepaid without
penalty or premium. The Note also provides for mandatory prepayments in the
event cash proceeds are realized by the Company from the incurrence of
indebtedness or the issuance of equity securities by the Company or its
subsidiaries. The Note includes certain covenants and customary events of
default, including failure to pay interest when due, certain events of
bankruptcy of the Company and change of control. The consent of DuPont is also
required prior to the Company entering into certain transactions.
The Company will use the net proceeds of the Offerings and possibly a
portion of its cash and cash equivalents to repay a portion of amounts
outstanding under the Note including principal and accrued interest, such that
immediately following the Offerings, the aggregate principal amount owed by the
Company to DuPont pursuant to the Note will be $4,846 million. See "Use of
Proceeds." The Company will also use a portion of its cash and cash equivalents
to repay or purchase, or DuPont will contribute to the Company, all of the
remaining principal balance of the Intercompany Notes described in clauses (ii),
(iii) and (iv) of "Use of Proceeds" (provided that a portion of the notes
referred to in clauses (ii) and (iv) of "Use of Proceeds" may remain outstanding
in lieu of all or part of the promissory note described in the next sentence).
Pursuant to the Employee Matters Agreement and the Separation Agreement, the
Company will also owe DuPont an additional amount, estimated at $7 million,
which will be evidenced by a promissory note. See "-- Employee Matters
Agreement."
The Company and DuPont will enter into a Revolving Credit Agreement under
which DuPont will provide the Company with a revolving credit facility in
principal amount of up to $500 million. The term of DuPont's commitment under
this facility will begin upon satisfaction of certain conditions and continue
until the earlier of (i) October 11, 1999 or (ii)(a) the date on which DuPont's
direct or indirect voting power in the Company falls below 50 percent of the
outstanding voting power of the Company or (b) DuPont's election to terminate
its commitment as the result of an unremedied event of default. Loans under the
Revolving Credit Agreement will be subject to mandatory prepayment to the extent
the Company's cash and cash equivalents exceed $325 million or such higher
amount as the Company and DuPont may agree. Loans under this facility will bear
interest at a rate equal to 30-day LIBOR plus 0.20 percent per annum and may be
voluntarily prepaid without penalty or premium, but may not be prepaid prior to
the date which is five days following the end of the month in which the
Offerings occur.
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TAX SHARING AGREEMENT
The Company and certain of its subsidiaries have historically been included
in DuPont's consolidated group (the "Consolidated Group") for U.S. federal
income tax purposes as well as in certain consolidated, combined or unitary
groups which include DuPont and/or certain of its subsidiaries (a "Combined
Group") for state, local and foreign income tax purposes. Prior to the
Offerings, the Company and DuPont will enter into a tax sharing agreement (the
"Tax Sharing Agreement") in connection with the Offerings. Pursuant to the Tax
Sharing Agreement, the Company and DuPont generally will make payments between
them such that, with respect to tax returns for any taxable period in which the
Company or any of its subsidiaries is included in the Consolidated Group or any
Combined Group, the amount of taxes to be paid by the Company will be
determined, subject to certain adjustments, as if the Company and each of its
subsidiaries included in the Consolidated Group or Combined Group filed their
own consolidated, combined or unitary tax return. The Company and DuPont will
jointly prepare pro forma tax returns with respect to any tax return filed with
respect to the Consolidated Group or any Combined Group in order to determine
the amount of tax sharing payments under the Tax Sharing Agreement. The Company
generally will be responsible for any taxes with respect to tax returns that
include only the Company and its subsidiaries.
DuPont will be primarily responsible for preparing and filing any tax
return with respect to the Consolidated Group or any Combined Group. Pursuant to
the Tax Sharing Agreement, the Company will be responsible for preparing the
portion of any such tax return that relates exclusively to the Company or any of
its subsidiaries; provided, that the Company will be required to submit any such
portions to DuPont for DuPont's review and approval, which approval may not be
unreasonably withheld. The Company generally will be responsible for preparing
and filing any tax returns that include only the Company and its subsidiaries.
DuPont will be primarily responsible for controlling and contesting any
audit or other tax proceeding with respect to the Consolidated Group or any
Combined Group. Pursuant to the Tax Sharing Agreement, the Company will have the
right to control and contest any audit or tax proceeding that relates directly
to any tax item included on the portion of any tax return which the Company is
responsible for preparing; provided, that the entering into by the Company of
any settlement or agreement or any decision in connection with any judicial or
administrative tax proceeding will be subject to the review and approval of
DuPont, which approval may not be unreasonably withheld. Disputes arising
between the parties relating to matters covered by the Tax Sharing Agreement are
subject to resolution through specific dispute resolution provisions.
The Company has been included in the Consolidated Group for periods in
which DuPont beneficially owned at least 80 percent of the total voting power
and value of the outstanding stock of the Company. It is not expected that the
Company will be included in the Consolidated Group following the Offerings. Each
member of a consolidated group for U.S. federal income tax purposes is jointly
and severally liable for the federal income tax liability of each other member
of the consolidated group. Accordingly, although the Tax Sharing Agreement
allocates tax liabilities between the Company and DuPont, for any period in
which the Company was included in the Consolidated Group, the Company could be
liable in the event that any federal tax liability was incurred, but not
discharged, by any other member of the Consolidated Group.
DuPont and the Company have agreed to cooperate, and the Company has agreed
to take any and all actions reasonably requested by DuPont, in connection with
DuPont's obtaining of a ruling ("Ruling") from the Internal Revenue Service
regarding the tax-free nature of a split-off or spin-off of Conoco stock by
DuPont to DuPont stockholders. The Company generally will be responsible for,
among other things, any corporate taxes resulting from the failure of the
split-off or spin-off to qualify as a tax-free transaction to the extent such
taxes are attributable to, or result from, any action or failure to act by the
Company or certain transactions involving the Company following the split-off or
spin-off.
EMPLOYEE MATTERS AGREEMENT
Prior to the Offerings, DuPont and the Company will enter into an agreement
(the "Employee Matters Agreement"), which will set forth the understanding
between the parties with respect to current and former employees of DuPont and
the Company, including without limitation claims arising out of or relating to
any employee benefit or compensation plan, agreement, arrangement or program, as
well as collective bargaining
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agreements, accrued wages and workers' compensation, holiday, vacation and
disability benefits. Except as described below, the parties have agreed that, as
of the Effective Date (a) DuPont, or an appropriate DuPont subsidiary, will
assume and be solely responsible for all liabilities and obligations whatsoever
with respect to current and former employees of DuPont other than the
Transferred Business Employees (as defined below) and (b) the Company, or an
appropriate Company subsidiary, will assume and be solely responsible for all
liabilities and obligations whatsoever with respect to Transferred Business
Employees. "Transferred Business Employees" means (a) those persons who are
employed as officers or employees of the business transferred to Conoco pursuant
to the Separation Agreement (the "Transferred Business") immediately prior to or
effective as of the Effective Date and (b) all former officers and employees of
the Transferred Business who, immediately prior to the termination of their
employment, were employed in the Transferred Business. In the event that on the
Effective Date (or if such person is no longer employed as of the Effective
Date, then as of the last date of such person's employment) any person will be
(or was) employed in the Transferred Business, as well as in the business
retained by DuPont pursuant to the Separation Agreement, such person will be
considered a Transferred Employee if, but only if, on the Effective Date (or if
such person is no longer employed as of the Effective Date, then as of the last
date of such person's employment) such person's primary employment will be (or
was) in the Transferred Business. Notwithstanding the preceding, (a) with
respect to any claim of a Transferred Business Employee relating to a liability
or obligation arising under the DuPont Savings and Investment Plan or any DuPont
health benefit plan, which claim arose while such Transferred Business Employee
was a DuPont employee, DuPont (and the applicable DuPont plan) or the applicable
DuPont subsidiary (and the applicable DuPont subsidiary plan) will retain all
such liabilities and obligations of such Transferred Business Employee and (b)
with respect to any claim of a current or former DuPont employee (other than the
Transferred Business Employees) relating to a liability or obligation arising
under the Thrift Plan for Employees of Conoco Inc. or any Conoco health benefit
plan, which claim arose while such DuPont employee was a Company employee,
Conoco (and the applicable Conoco plan) or the applicable Conoco subsidiary (and
the applicable Conoco subsidiary plan) will assume and be solely responsible for
all such liabilities and obligations of such DuPont employee.
Following the Effective Date, the Transferred Business Employees who
participate in the DuPont Pension Plan will continue to participate in the
DuPont Pension Plan. Effective as of the date DuPont ceases to own securities
representing 80 percent or more of the voting power and ceases to own securities
representing 80 percent or more of the economic value of all outstanding shares
of Common Stock (the "Ownership Reduction Date"), the Company will establish its
own retirement plan (the "Company Retirement Plan"). Within six months following
the Ownership Reduction Date, so long as certain conditions are met, the trustee
of the DuPont Pension Plan will transfer (the date of such transfer, the
"Transfer Date") to the trustee of the Company Retirement Plan an amount
approximately equal to 90 percent of $820 million (plus or minus any investment
gains and losses and benefits payments made between the Effective Date and the
Transfer Date); within 90 days of the Transfer Date, the trustee of the DuPont
Pension Plan will transfer the remaining 10 percent, plus interest on such
remainder.
On or prior to January 1, 1999, the Company will establish a benefit
restoration plan relating to the Company Thrift Plan for the benefit of current
or former employees of the Company who participated in the DuPont Salary
Deferral and Savings Restoration Plan and will assume and be solely responsible
for the liabilities and obligations relating to current or former employees of
the Company who participated in the DuPont Salary Deferral and Savings
Restoration Plan.
Certain Company employees will have the option, subject to specific country
tax and legal requirements, effective as of the closing of the Offerings, to
participate in the Option Program, which involves the cancellation of all or
part of their DuPont Options or DuPont SARs, whether or not vested or
exercisable, and the issuance by the Company upon such cancellation of Company
Stock Options and Company SARs, as applicable. See "Management -- Treatment of
Outstanding Stock Options and Stock Appreciation Rights." Retired employees of
the Company who hold DuPont Options or DuPont SARs will not participate in the
Option Program. All DuPont Options and DuPont SARs held by retired employees,
together with all such Options and SARs held by employees who do not elect to
participate in the Option Program, will continue to be obligations solely of
DuPont. The Separation Agreement provides that the Company will issue a
promissory
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note to DuPont (or alternatively, a portion of the notes referred to in clauses
(ii) and (iv) of "Use of Proceeds" may remain outstanding in lieu of all or part
of such promissory note), the principal amount of which will include (i) an
assumed level of future appreciation of DuPont Options and DuPont SARs held by
Conoco employees who do not participate in the Option Program and (ii) an amount
calculated to result in an approximately equal sharing between the Company and
DuPont of the after-tax cost that would result from an assumed exercise of all
DuPont Options and DuPont SARs held by Conoco employees outstanding immediately
prior to the Offerings (including those to be cancelled upon issuance of Company
Stock Options and SARs), based on the appreciated value of the options at the
time of the Offerings. If the amount described in the previous sentence is
negative, DuPont is obligated to make a cash payment to the Company 30 days
following the consummation of the Offerings. It is currently expected that
DuPont will owe the Company approximately $3 million under this provision.
With respect to any pension plan maintained or sponsored by DuPont for the
benefit of foreign employees in which only Transferred Business Employees
participate, the Company shall assume or retain such plan, the assets thereof
and the sole liability relating to Transferred Business Employees under such
plan.
DuPont employees who transfer to and become employed by the Company, and
Company employees who transfer to and become employed by DuPont, in either case
on the United States payroll, prior to the Ownership Reduction Date shall be
transferred in accordance with the terms of the transfer guidelines in effect
immediately prior to the Effective Date. In consideration of the liabilities
assumed by DuPont under the employee transfer guidelines, the principal amount
of the promissory note referred to in the second preceding paragraph will
include an additional $10.4 million. If a single transfer of 100 or more
employees from DuPont to the Company occurs or if a single transfer of 100 or
more employees from the Company to DuPont occurs, in either case prior to the
Ownership Reduction Date, a supplemental cash payment will be made to DuPont or
the Company as applicable. The amount of the cash payment will be calculated in
accordance with the Employee Matters Agreement.
Following the Effective Date, the Company Thrift Plan will continue to
include DuPont common stock as an investment option until the Ownership
Reduction Date and then will continue to retain the DuPont common stock fund for
a period of no less than five years. New investments in DuPont common stock may
be discontinued by Conoco after the Ownership Reduction Date.
TRANSITIONAL SERVICES AGREEMENTS
Prior to the Offerings, DuPont and the Company will enter into certain
agreements (the "Transitional Services Agreements") pursuant to which DuPont or
its subsidiaries (other than the Company and its subsidiaries), on the one hand,
and the Company or its subsidiaries, on the other hand, will agree to continue
providing various services to each other, including material procurement,
financial and administrative services, consulting and research services, and
employee benefits administration. Each service provided pursuant to the
Transitional Services Agreements will be provided for a specified time period,
ranging from three to 24 months. However, either party and its subsidiaries may
terminate any or all services that they receive under the Transitional Services
Agreements at any time upon 45 days' prior written notice. During the term of
each such service, the parties and their subsidiaries are obligated to take all
steps necessary to establish the processes and systems to enable them to perform
the relevant services on a stand alone basis. The parties and their subsidiaries
will be obligated to pay fees established in the Transitional Services
Agreements based upon the type and amount of services rendered.
INFORMATION SYSTEMS AND TELECOMMUNICATION CARRIER TRANSITIONAL SERVICES
AGREEMENTS AND FACILITIES LEASE AGREEMENTS
DuPont and the Company will enter into a series of United States and
foreign service agreements ("SAs") which will provide for the cross-provision of
information system services and for the provision of telecommunication carrier
services by DuPont to the Company. DuPont and the Company will also enter into a
facilities lease agreement whereby the Company will grant leases to DuPont for
data center and office facilities at the Company's Houston, Texas and Ponca
City, Oklahoma sites. The term of the SAs will be two years for transitional
services. Longer terms, up to nine years, will be provided for telecommunication
services and the facility leases. Under the SAs, DuPont and third party
contractors, such as Computer Sciences
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Corporation and Andersen Consulting, will provide services to the Company in
accordance with the terms of the SAs, subject to the terms of the third party
agreements. The SAs will provide that services will be provided at DuPont's
cost, or, in the case of third party services, at the prices and in accordance
with the terms and conditions provided for in the third party agreements, and
subject to an administrative fee. The SAs will also include an obligation for
the Company to enter into a long-term services agreement with Computer Sciences
Corporation.
NATURAL GAS SUPPLY AGREEMENT
DuPont consumes approximately 350 million cubic feet per day of natural gas
at its various facilities in the United States. The acquisition of this supply
is currently handled by the Company. DuPont receives the natural gas at cost
plus a nominal management fee. In some limited cases, the Company's natural gas
production equity is used directly in a DuPont facility, but over 95 percent of
this supply has historically been purchased from third parties. Prior to the
Offerings, DuPont and the Company intend to enter into an agreement to continue
this supply management function for a minimum of one year. The associated
management fee will be reflective of market costs for similar supply services.
FEEDSTOCK FOR DUPONT'S SABINE RIVER WORKS PLANT
The Company owns and operates the Mont Belvieu Storage Facility, which is
currently supplying DuPont's Sabine River Works Plant (Ethylene Business Unit)
with its full ethane feedstock requirements, providing storage and throughput
services for both ethane and ethylene and operating DuPont-owned pipelines for
these products. The Company and DuPont have reached agreement for the provision
of ethane and ethylene storage and throughput services for the next 30 years.
Furthermore, under the terms of the agreement, the Company will operate certain
DuPont-owned pipelines for a period of 20 years. The Company will supply DuPont
with its partial requirements of ethane for a minimum of two years.
MOTOR CARRIER AGREEMENT
Prior to the Offerings, the Company and Sentinel Transportation Company, a
wholly owned subsidiary of DuPont, will enter into a motor carrier agreement
("Motor Carrier Agreement"), for the provision of transportation of commodities
within the United States and Canada. The term of the Motor Carrier Agreement
will be for a one year period. However, either party may terminate such
arrangement at any time upon 90 days' prior written notice.
REGISTRATION RIGHTS AGREEMENT
Prior to the Offerings, DuPont and the Company will enter into an agreement
(the "Registration Rights Agreement"), pursuant to which the Company will agree
to register on a "shelf" registration statement the sale of Common Stock owned
by DuPont. The Company will agree to keep the shelf registration effective for a
period of two years following the date that the shelf registration comes
effective. In addition, the Company will provide DuPont with three demand
registration rights and certain "piggy-back" registration rights, with respect
to securities owned by DuPont. Such sales may be effected pursuant to one or
more underwritten offerings or otherwise. The parties will agree to indemnify
each other and any underwriters on standard terms, including for liability under
federal securities laws.
PRINCIPAL STOCKHOLDER
As of the date of this Prospectus, the Company is indirectly wholly owned
by DuPont. After the completion of the Offerings, DuPont will indirectly own 100
percent of the Company's outstanding Class B Common Stock, representing 91.9
percent of the combined voting power of all classes of voting stock of the
Company. Under applicable provisions of the Delaware General Corporation Law and
the Company's Certificate of Incorporation, subject to class voting rights,
prior to the divestiture of its ownership interest in the Company, DuPont will
be able, acting alone, to elect the entire Board of Directors of the Company and
to approve any action requiring stockholder approval. The address of DuPont's
principal executive office is 1007 Market Street, Wilmington, Delaware 19898.
The Company is not aware of any person or group other than DuPont that will
beneficially own more than five percent of the outstanding shares of Common
Stock following the Offerings.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company will consist of (i) 3.0 billion
shares of Class A Common Stock, par value $.01 per share, and 1.6 billion shares
of Class B Common Stock, par value $.01 per share (the Class A Common Stock and
Class B Common Stock together, the "Common Stock"), and (ii) 250 million shares
of Preferred Stock, par value $.01 per share, none of which is outstanding as of
the date hereof. Of the 3.0 billion shares of Class A Common Stock, 191.5
million shares are being offered in the Offerings. Of the 1.6 billion shares of
Class B Common Stock, 436.5 million shares will be outstanding and held by
DuPont or one or more of its affiliates on the Closing Date. A description of
the material terms and provisions of the Company's Certificate of Incorporation
affecting the relative rights of the Class A Common Stock, the Class B Common
Stock and the Preferred Stock is set forth below. The following description of
the capital stock of the Company is intended as a summary only and is qualified
in its entirety by reference to the forms of the Company's Certificate of
Incorporation and By-laws filed with the Registration Statement of which this
Prospectus forms a part, and to Delaware corporate law.
COMMON STOCK
Voting Rights
The holders of Class A Common Stock and Class B Common Stock generally have
identical rights, except that holders of Class A Common Stock are entitled to
one vote per share while holders of Class B Common Stock are entitled to five
votes per share on all matters to be voted on by stockholders. Holders of shares
of Class A Common Stock and Class B Common Stock are not entitled to cumulate
their votes in the election of directors. Generally, all matters to be voted on
by stockholders must be approved by a majority of the votes entitled to be cast
by the holders of Class A Common Stock and Class B Common Stock present in
person or represented by proxy, voting together as a single class, subject to
any voting rights granted to holders of any Preferred Stock. Except as otherwise
provided by law or in the Certificate of Incorporation, and subject to any
voting rights granted to holders of any outstanding Preferred Stock, amendments
to the Certificate of Incorporation must be approved by a majority of the votes
entitled to be cast by the holders of Class A Common Stock and Class B Common
Stock, voting together as a single class. However, amendments of the Certificate
of Incorporation that would alter or change the powers, preferences or special
rights of the Class A Common Stock or the Class B Common Stock so as to affect
them adversely also must be approved by a majority of the votes entitled to be
cast by the holders of the shares affected by the amendment, voting as a
separate class, and holders of Class A Common Stock are not entitled to vote on
any alteration or change in the powers, preferences or special rights of the
Class B Common Stock that would not adversely affect the rights of holders of
Class A Common Stock. For purposes of the foregoing provisions, any provision
for the voluntary, mandatory and other conversion or exchange of the Class B
Common Stock into or for Class A Common Stock on a one-for-one basis shall be
deemed not to adversely affect the rights of the Class A Common Stock.
Notwithstanding the foregoing, any amendment to the Certificate of Incorporation
to increase the authorized shares of any class of capital stock of the Company
requires the approval only of a majority of the votes entitled to be cast by the
holders of Class A Common Stock and Class B Common Stock, voting together as a
single class.
Dividends
Holders of Class A Common Stock and Class B Common Stock will share equally
on a per share basis in any dividend declared by the Board of Directors, subject
to any preferential rights of any outstanding Preferred Stock. Dividends payable
in shares of Common Stock may be paid only as follows: (i) shares of Class A
Common Stock may be paid only to holders of Class A Common Stock, and shares of
Class B Common Stock may be paid only to holders of Class B Common Stock; and
(ii) the number of shares so paid will be equal on a per share basis with
respect to each outstanding share of Class A Common Stock and Class B Common
Stock.
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The Company may not reclassify, subdivide or combine shares of either class
of Common Stock without at the same time proportionally reclassifying,
subdividing or combining shares of the other class.
Conversion
Each share of Class B Common Stock is convertible while held by DuPont or
any of its subsidiaries (excluding the Company) at the option of the holder
thereof into one share of Class A Common Stock. Following any distribution of
Class B Common Stock to securityholders of DuPont in a transaction (including
any distribution in exchange for DuPont shares or securities) intended to
qualify as a tax-free distribution under Section 355 of the Code, or any
corresponding provision of any successor statute (a "Tax-Free Split-Off"),
shares of Class B Common Stock will no longer be convertible into shares of
Class A Common Stock.
Prior to a Tax-Free Split-Off, any shares of Class B Common Stock
transferred to a person other than DuPont or any of its affiliates (excluding
the Company) will automatically be converted into shares of Class A Common Stock
upon such transfer. Shares of Class B Common Stock transferred to stockholders
of DuPont in a Tax-Free Split-Off will not be converted into shares of Class A
Common Stock and, following a Tax-Free Split-Off, shares of Class B Common Stock
will be transferable as Class B Common Stock, subject to applicable laws.
All shares of Class B Common Stock will automatically be converted into
Class A Common Stock if a Tax-Free Split-Off has not occurred and the number of
outstanding shares of Class B Common Stock owned by DuPont (together with its
subsidiaries (excluding the Company)) falls below 50 percent of the aggregate
number of outstanding shares of Common Stock. This automatic conversion of Class
B Common Stock into Class A Common Stock will prevent DuPont from decreasing its
economic interest in the Company to less than 50 percent while still retaining
control of more than 80 percent of the Company's voting power. All conversions
will be effected on a share-for-share basis.
Other Rights
Unless approved by a majority of the votes entitled to be cast by the
holders of each class of Common Stock, voting separately as a class, in the
event of any reorganization or consolidation of the Company with one or more
corporations or a merger of the Company with another corporation in which shares
of Common Stock are converted into or exchangeable for shares of stock, other
securities or property (including cash), all holders of Common Stock, regardless
of class, will be entitled to receive the same kind and amount of shares of
stock and other securities and property (including cash).
On liquidation, dissolution or winding up of the Company, after payment in
full of the amounts required to be paid to holders of Preferred Stock, if any,
all holders of Common Stock, regardless of class, are entitled to receive the
same amount per share with respect to any distribution of assets to holders of
shares of Common Stock.
No shares of either class of Common Stock are subject to redemption or have
preemptive rights to purchase additional shares of Common Stock or other
securities of the Company.
Upon closing of the Offerings, all the outstanding shares of Class A Common
Stock and Class B Common Stock will be validly issued, fully paid and
nonassessable.
PREFERRED STOCK
The Preferred Stock is issuable from time to time in one or more series and
with such designations, preferences and other rights for each series as shall be
stated in the resolutions providing for the designation and issue of each such
series adopted by the Board of Directors of the Company. The Board of Directors
is authorized by the Certificate of Incorporation to determine, among other
things, the voting, dividend, redemption, conversion, exchange and liquidation
powers, rights and preferences and the limitations thereon pertaining to such
series. The Board of Directors, without stockholder approval, may issue
Preferred Stock with voting and other rights that could adversely affect the
voting power of the holders of the Common Stock and that could have certain
anti-takeover effects. The Company has no present plans to issue any shares of
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Preferred Stock. The ability of the Board of Directors to issue Preferred Stock
without stockholder approval could have the effect of delaying, deferring or
preventing a change in control of the Company or the removal of existing
management.
For purposes of the Rights Plan described below, the Board of Directors has
designated 1.0 million shares of Series A Junior Participating Preferred Stock,
par value $.01 per share (the "Junior Preferred Shares"). See "-- Anti-Takeover
Effects of Certain Certificate and By-law Provisions -- Rights Plan."
ANTI-TAKEOVER EFFECTS OF CERTAIN CERTIFICATE AND BY-LAW PROVISIONS
General
Certain provisions of the Certificate of Incorporation and By-laws
summarized below may be deemed to have an anti-takeover effect and may delay,
deter, or prevent a tender offer or takeover attempt that a stockholder might
consider to be in its best interest, including offers or attempts that might
result in a premium being paid over the market price for the shares held by
stockholders.
Board of Directors
The Certificate of Incorporation and By-laws provide that the Board of
Directors will be divided into three classes of directors, with the classes to
be nearly equal in number as possible. One class will be originally elected for
a term expiring at the annual meeting of stockholders to be held in 1999,
another will be originally elected for a term expiring at the annual meeting of
stockholders to be held in 2000 and another will be originally elected for a
term expiring at the annual meeting of stockholders to be held in 2001. Each
director is to hold office until his or her successor is duly elected and
qualified. Commencing with the 1999 annual meeting of stockholders, directors
elected to succeed directors whose terms then expire will be elected for a term
of office to expire at the third succeeding annual meeting of stockholders after
their election, with each director to hold office until such person's successor
is duly elected and qualified.
The Certificate of Incorporation and By-laws provide that the Board of
Directors shall initially consist of nine members. The Certificate of
Incorporation and By-laws further provide that the number of directors of the
Company shall be fixed from time to time exclusively by resolution adopted by
the affirmative vote of a majority of the entire Board of Directors, but shall
consist of not more than fifteen nor less than six directors. In addition, the
Certificate of Incorporation provides that any vacancies will be filled by the
affirmative vote of a majority of the remaining directors, even if less than a
quorum, or by a sole remaining director, or by stockholders if such vacancy was
caused by the action of stockholders (in which event such vacancy may not be
filled by the directors or a majority thereof).
The Certificate of Incorporation and the By-laws provide that, except as
provided below, directors may be removed, with or without cause, by the
affirmative vote of shares representing a majority of the votes entitled to be
cast by the then outstanding shares of Voting Stock; provided, however, that
during the period (i) beginning on the first date that DuPont (together with its
subsidiaries (excluding the Company)) ceases to beneficially own shares
representing 50 percent or more of the votes entitled to be cast by Voting Stock
(the "First Trigger Date") and (ii) ending on the first date that DuPont
(together with its subsidiaries (excluding the Company)) ceases to beneficially
own shares representing 30 percent or more of the votes entitled to be cast by
Voting Stock (the "Second Trigger Date"), directors may be removed, with or
without cause, only by the affirmative vote of shares representing not less than
66 2/3 percent of the votes entitled to be cast by Voting Stock. Notwithstanding
the foregoing, from and after the Second Trigger Date, directors of the Company
may only be removed for cause, such removal to be by the affirmative vote of
shares representing a majority of the votes entitled to be cast by Voting Stock.
Unless the Board of Directors has made a determination that removal is in the
best interests of the Company (in which case the following definition shall not
apply), "cause" for removal of a director shall be deemed to exist only if (i)
the director whose removal is proposed has been convicted, or when a director is
granted immunity to testify when another has been convicted, of a felony by a
court of competent jurisdiction and such conviction is no longer subject to
direct appeal; (ii) such director has been found by the affirmative vote of a
majority of the directors then in office at any regular or special meeting of
the Board of Directors called for that purpose or by a court of competent
jurisdiction to
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have been guilty of willful misconduct in the performance of his duties to the
Company in a matter of substantial importance to the Company; or (iii) such
director has been adjudicated by a court of competent jurisdiction to be
mentally incompetent, which mental incompetency directly affects his ability as
a director of the Company. Notwithstanding the foregoing, whenever holders of
outstanding shares of one or more series of Preferred Stock are entitled to
elect directors of the Company pursuant to the provisions applicable in the case
of arrearages in the payment of dividends or other defaults contained in the
resolution or resolutions of the Board of Directors providing for the
establishment of any such series, any such director of the Company so elected
may be removed in accordance with the provision of such resolution or
resolutions.
The By-laws provide that (i) prior to the First Trigger Date, a majority of
the directors on the Audit and Compliance Committee and the Compensation
Committee of the Board of Directors shall be directors designated by DuPont and
(ii) on and after the First Trigger Date, but so long as DuPont owns shares
representing 10 percent or more of the votes entitled to be cast by the Voting
Stock, each committee of the Board of Directors shall include at least one
director designated by DuPont.
Advance Notice Procedures
The By-laws provide for an advance notice procedure for the nomination,
other than by or at the direction of the Board of Directors, of candidates for
election as directors, as well as for other stockholder proposals to be
considered at annual meetings of stockholders. In general, notice of intent to
nominate a director or raise matters at such meetings will have to be received
in writing by the Company not less than 90 nor more than 120 days prior to the
anniversary of the previous year's annual meeting of stockholders, and must
contain certain information concerning the person to be nominated or the matters
to be brought before the meeting and concerning the stockholder submitting the
proposal. The Certificate of Incorporation and the By-laws provide that, so long
as DuPont owns shares representing 10 percent or more of the votes entitled to
be cast by the Voting Stock, DuPont is exempt from the foregoing advance notice
procedures for director nominations and shareholder proposals.
Special Meetings
The By-laws provide that, unless otherwise required by the Certificate of
Incorporation, special meetings of stockholders may be called only by certain
specified officers of the Company or by any officer at the request of the Board
of Directors or a committee thereof; special meetings cannot be called by
stockholders. The Certificate of Incorporation and the By-laws expressly deny
stockholders the right to call special meetings after the Second Trigger Date.
In addition, the Certificate of Incorporation and the By-laws provide that,
prior to the Second Trigger Date, any action required or permitted to be taken
by stockholders may be effected by written consent, but that after the Second
Trigger Date, any such action may be effected only at a duly called annual or
special meeting of stockholders and may not be effected by a written consent. No
business other than that stated in the notice of such meeting may be transacted
at any special meeting.
Fair Price Provision
The Certificate of Incorporation includes a "fair price" provision (the
"Fair Price Provision") which prohibits certain Business Combinations (as
defined below) with a Related Person (as defined below), unless (a) the holders
of both classes of Common Stock receive in the Business Combination the same
consideration as the other class and either (i) the same consideration in form
and amount per share as the highest consideration paid by the Related Person in
a tender or exchange offer in which the Related Person acquired at least 50
percent of either the outstanding stock of either the Class A Common Stock or
the outstanding Class B Common Stock and which was consummated not more than one
year prior to the Business Combination or the entering into of a definitive
agreement for the Business Combination or (ii) not less in amount (as to cash)
or fair market value (as to non-cash consideration) than the highest price paid
or agreed to be paid by the Related Person for shares of Class A Common Stock,
Class B Common Stock or Voting Stock in any transaction that either resulted in
the Related Person's beneficially owning 15 percent or more of the Class A
Common Stock, Class B Voting Stock or Voting Stock or was effected at a time
when the Related Person beneficially owned 15 percent or more of the Class A
Common Stock, the Class B Common Stock or
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Voting Stock, in either case occurring not more than one year prior to the
Business Combination, or (b) the transaction is approved by (i) a majority of
Continuing Directors (as defined below) or (ii) shares representing (x) not less
than 66 2/3 percent of the votes entitled to be cast by the Voting Stock, (y)
not less than 50.01 percent of the votes entitled to be cast by the Voting Stock
not beneficially owned by the Related Person, and (z) from and after the First
Trigger Date, a majority of the votes entitled to be cast by the holders of each
class of Common Stock (excluding all shares beneficially owned by any Related
Person), voting separately as a class; provided that, after the Second Trigger
Date, the required approval percentages in clauses (b)(ii) (x) and (y) increase
to 80 percent and 66 2/3 percent, respectively. Such approvals are also required
to amend the Fair Price Provisions. The Fair Price Provision will not be
applicable at such time as all shares of Class B Common Stock have been
converted into or exchanged for Class A Common Stock.
Under the Fair Price Provision, a "Related Person" is any person (other
than DuPont and its affiliates and associates) that beneficially owns 15 percent
or more of the Class A Common Stock, Class B Common Stock or the Voting Stock
outstanding or is an affiliate of the Company and at any time within the
preceding two-year period was the beneficial owner of 15 percent or more of the
Class A Common Stock, Class B Common Stock or the Voting Stock outstanding. The
relevant "Business Combinations" involving the Company covered by the Fair Price
Provision are (1) any merger or consolidation of the Company or any subsidiary
of the Company with or into a Related Person or an affiliate of a Related
Person, (2) any sale, lease, exchange, transfer or other disposition of all or
substantially all of the assets of the Company to a Related Person or an
affiliate of a Related Person, (3) certain reclassifications, recapitalizations
and other corporate actions requiring a stockholder vote that have the effect of
increasing by more than one percent the proportionate share of Class A Common
Stock, Class B Common Stock or Voting Stock beneficially owned by the Related
Person or an affiliate of a Related Person and (4) a dissolution of the Company
caused or proposed by a Related Person or an affiliate of a Related Person. A
"Continuing Director" is a director who is unaffiliated with the Related Person
and who was a director before the Related Person became a Related Person, and
any successor of a Continuing Director who is unaffiliated with a Related Person
and is recommended or nominated to succeed a Continuing Director by a majority
of the Continuing Directors.
Amendment
Amendments of a number of the foregoing provisions, including Certificate
of Incorporation and By-law provisions with respect to stockholder action by
written consent, stockholder right to call special meetings, advance notice
procedures (including DuPont's exemption therefrom), and board classification
and removal provisions, require approval by shares representing not less than
66 2/3 percent of the votes entitled to be cast by the Voting Stock, voting
together as a single class, and, after the Second Trigger Date, 80 percent of
such votes; provided that after the First Trigger Date, if there are any shares
of Class B Common Stock outstanding, approval by a majority of the votes
entitled to be cast by the holders of each class of Common Stock, voting
separately by class, is also required. The By-laws may also be amended by action
of the Board of Directors.
Rights Plan
The Board of Directors has adopted a Share Purchase Rights Plan (the
"Rights Plan"). Pursuant to the Rights Plan, the Board of Directors has caused
or will cause to be issued one preferred share purchase right for each
outstanding share of Class A Common Stock and Class B Common Stock (the "Class A
Rights" and "Class B Rights," respectively; together, the "Rights"). Each Class
A Right and each Class B Right entitles the registered holder thereof to
purchase from the Company one one-thousandth of a share of the Junior Preferred
Shares at a price of $88 (the "Purchase Price"), subject to adjustment. The
description and terms of the Rights are set forth in a rights agreement (the
"Rights Agreement") between the Company and First Chicago Trust Company of New
York (the "Rights Agent"). The description set forth below is intended as a
summary only and is qualified in this entirety by reference to the form of the
Rights Agreement, which will be filed as an exhibit to the Registration
Statement of which this Prospectus is a part. See "Available Information."
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<PAGE> 119
Until the earlier to occur of (i) 10 business days following a public
announcement that a person or group of affiliated or associated persons (an
"Acquiring Person") has acquired beneficial ownership of (A) 15 percent or more
of the outstanding Class A Common Stock, (B) 15 percent or more of the
outstanding Class B Common Stock or (C) any combination of Class A Common Stock
and Class B Common Stock representing 15 percent or more of the votes of all
shares entitled to vote in the election of directors or (ii) 10 business days
(or such later date as may be determined by action of the Board of Directors
prior to such time as any person becomes an Acquiring Person) following the
commencement of, or announcement of an intention to make, a tender offer or
exchange offer the consummation of which would result in beneficial ownership by
a person or group of shares meeting the requirements set forth in (A), (B) or
(C) above (the earlier of such dates being called the "Rights Distribution
Date"), the Rights will be evidenced by the certificates representing the Common
Stock.
The Rights Agreement provides that, until the Rights Distribution Date (or
earlier redemption or expiration of the Rights), the Rights will be transferred
with and only with the respective Class A Common Stock and Class B Common Stock.
Until the Rights Distribution Date (or earlier redemption or expiration of the
Rights), all shares of Common Stock which are issued will have associated Rights
and the Common Stock certificates will contain a notation incorporating the
Rights Agreement by reference. As soon as practicable following the Rights
Distribution Date, separate certificates evidencing the Class A Rights and Class
B Rights (the "Class A Rights Certificates" and "Class B Rights Certificates,"
respectively; together, the "Rights Certificates") will be mailed to holders of
record of the Class A Common Stock and the Class B Common Stock, respectively,
as of the close of business on the Rights Distribution Date and such separate
Right Certificates alone will evidence the Rights.
The Rights will not be exercisable until the Rights Distribution Date. The
Rights will expire on August 31, 2008 (the "Final Expiration Date"), unless the
Final Expiration Date is extended or unless the Rights are earlier redeemed by
the Company, in each case, as summarized below.
In the event that any person or group of affiliated or associated persons
becomes an Acquiring Person, proper provision shall be made so that each holder
of a Class A Right and Class B Right, other than Rights beneficially owned by
the Acquiring Person (which will thereafter be void), will thereafter have the
right to receive upon exercise that number of shares of Class A Common Stock and
Class B Common Stock, respectively, having a Current Market Price (as defined in
the Rights Agreement) of two times the exercise price of the Class A Right and
Class B Right, respectively. In the event that the Company is acquired in a
merger or other business combination transaction or 50 percent or more of its
consolidated assets or earning power are sold after a person or group of
affiliated or associated persons becomes an Acquiring Person, proper provision
will be made so that each holder of a Right will thereafter have the right to
receive, upon the exercise thereof at the then-current exercise price of the
Right, that number of shares of common stock of the acquiring company which at
the time of such transaction will have a Current Market Price of two times the
exercise price of the Right.
At any time until the tenth business day following the public announcement
that a person or group of affiliated or associated persons has become an
Acquiring Person (meeting the requirements (A)-(C) set forth in the second
paragraph of this summary of the Rights Plan), the Board of Directors may redeem
the Rights in whole, but not in part, at a price of $.01 per Right (the
"Redemption Price"). Immediately upon any redemption of the Rights, the right to
exercise the Rights will terminate and the only right of the holders of the
Rights will be to receive the Redemption Price.
The terms of the Rights may be amended by the Board of Directors without
the consent of the holders of the Rights prior to the Distribution Date. After
the Distribution Date, the provisions of the Rights Agreement may be amended by
the Board of Directors in order to cure any ambiguity, to make changes which do
not adversely affect the interests of holders of Rights, or to shorten or
lengthen any time period under the Rights Agreement; provided, however that no
amendment to lengthen a time period relating to when the Rights may be redeemed
may be made at such time as the Rights are not redeemable. In addition, all
amendments require the consent of DuPont, if DuPont holds 30 percent of voting
power of the outstanding shares of Common
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<PAGE> 120
Stock. In addition, no amendments to the definition of "Acquiring Person" can be
made at any time without DuPont's consent, if DuPont holds 10 percent of voting
power of the outstanding shares of Common Stock.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the right
to vote or to receive dividends.
The number of outstanding Rights and the number of one-thousandths of a
Junior Preferred Share issuable upon exercise of each Right will be subject to
adjustment in the event of a stock split of the Class A Common Stock and Class B
Common Stock or a stock dividend on the Class A Common Stock and Class B Common
Stock payable in Class A Common Stock and Class B Common Stock, respectively, or
subdivisions, consolidations or combinations of the Class A Common Stock and
Class B Common Stock occurring, in any such case, prior to the Rights
Distribution Date.
The Purchase Price payable, and the number of Junior Preferred Shares or
other securities or property issuable, upon exercise of the Rights will also be
subject to adjustment from time to time to prevent dilution (i) in the event of
a stock dividend on, or a subdivision, combination or reclassification of, the
Junior Preferred Shares, (ii) upon the grant to holders of the Junior Preferred
Shares of certain rights or warrants to subscribe for or purchase Junior
Preferred Shares at a price, or securities convertible into Junior Preferred
Shares with a conversion price, less than the then-current market price of the
Junior Preferred Shares or (iii) upon the distribution to holders of the Junior
Preferred Shares of evidences of indebtedness or assets (excluding regular
periodic cash dividends paid out of earnings or retained earnings or dividends
payable in Junior Preferred Shares) or of subscription rights or warrants (other
than those referred to above).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least one
percent in such Purchase Price. No fractional Junior Preferred Shares will be
issued (other than fractions which are integral multiples of one one-thousandth
of a Junior Preferred Share, which may, at the election of the Company, be
evidenced by depositary receipts) and in lieu thereof, an adjustment in cash
will be made based on the market price of the Junior Preferred Shares on the
last trading day prior to the date of exercise.
Junior Preferred Shares purchasable upon exercise of the Rights will not be
redeemable. Each Junior Preferred Share will be entitled to a minimum
preferential quarterly dividend payment of $.01 per share but will be entitled
to an aggregate dividend of 1,000 times the dividend declared per share of
Common Stock. In the event of liquidation, the holders of the Junior Preferred
Shares will be entitled to a minimum preferential liquidation payment of $1,000
per share but will be entitled to an aggregate payment of 1,000 times the
payment made per share of Class A Common Stock and Class B Common Stock. Each
Junior Preferred Share will have 1,000 votes voting together with the Class A
Common Stock and Class B Common Stock. Finally, in the event of any merger,
consolidation or other transaction in which shares of Class A Common Stock and
Class B Common Stock are exchanged, each Junior Preferred Share will be entitled
to receive 1,000 times the amount received per share of the Class A Common Stock
and the Class B Common Stock. These rights are protected by customary
anti-dilution provisions.
Due to the nature of the Junior Preferred Shares' dividend, liquidation and
voting rights, the value of the one one-thousandth interest in a Junior
Preferred Share purchasable upon exercise of each Right should approximate the
value of one share of Class A Common Stock and Class B Common Stock.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group of persons that attempts to acquire
the Company on terms not approved by the Board of Directors. The Rights should
not interfere with any merger or other business combination approved by the
Board of Directors prior to the time that a person or group has acquired
beneficial ownership of 15 percent or more of the Class A Common Stock, Class B
Common Stock or voting power of the outstanding shares of Common Stock since the
Rights may be redeemed by the Company at the Redemption Price until such time.
DuPont is excluded from the definition of "Acquiring Person" and therefore
its ownership cannot trigger the distribution of rights under the Rights Plan.
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CONTRACTUAL RELATIONS AMONG THE COMPANY, DUPONT AND CERTAIN RELATED ENTITIES
The Certificate of Incorporation provides that, if certain disclosure
conditions are satisfied and if fair as to the Company as of the time it is
authorized, approved or ratified by the Board of Directors, by a committee
thereof or by the stockholders, no contract, agreement, arrangement or
transaction between (a) the Company and DuPont, (b) the Company and one or more
of the directors or officers of the Company, DuPont or a Related Entity (as
defined below) or (c) the Company and any Related Entity will be void or
voidable solely because DuPont, any Related Entity or any one or more of the
officers or directors of the Company, DuPont or any Related Entity are parties
thereto (or solely because any such directors or officers are present at or
participate in the meeting of the Board of Directors or committee thereof that
authorizes the contract, agreement, arrangement or transaction or solely because
his or their votes are counted for such purpose), and DuPont, any Related Entity
and such directors and officers (a) will have fully satisfied and fulfilled
their fiduciary duties to the Company and its stockholders with respect thereto,
(b) will not be liable to the Company or its stockholders for any breach of
fiduciary duty by reason of the entering into, performance or consummation of
any such contract, agreement, arrangement or transaction, (c) will be deemed to
have acted in good faith and in a manner such persons reasonably believe to be
in and not opposed to the best interests of the Company and (d) will be deemed
not to have breached their duties of loyalty to the Company and its stockholders
and not to have derived an improper personal benefit therefrom. A "Related
Entity" is a corporation, partnership, association or other organization in
which one or more of the Company's directors have a financial interest.
DELAWARE BUSINESS COMBINATION STATUTE
Section 203 of the DGCL provides that, subject to certain exceptions
specified therein, an "interested stockholder" of a Delaware corporation shall
not engage in any "business combination," including in general mergers or
consolidations or acquisitions of additional shares of the corporation, with the
corporation for a three-year period following the time that such stockholder
becomes an interested stockholder unless (i) prior to such time, the board of
directors of the corporation approved either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder, (ii) upon consummation of the transaction which resulted in the
stockholder becoming an "interested stockholder," the interested stockholder
owned at least 85 percent of the voting stock of the corporation outstanding at
the time the transaction commenced (excluding certain shares), or (iii) on or
subsequent to such time, the business combination is approved by the board of
directors of the corporation and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at least
66 2/3 percent of the outstanding voting stock not owned by the interested
stockholder. Under Section 203, the restrictions described above also do not
apply to certain business combinations proposed by an interested stockholder
following the announcement or notification of one of certain extraordinary
transactions involving the corporation and a person who had not been an
interested stockholder during the previous three years or who became an
interested stockholder with the approval of a majority of the corporation's
directors, if such extraordinary transaction is approved or not opposed by a
majority of the directors who were directors prior to any person becoming an
interested stockholder during the previous three years or were recommended for
election or elected to succeed such directors by a majority of such directors.
Except as otherwise specified in Section 203, an "interested stockholder" is
defined to include (x) any person that is the owner of 15 percent or more of the
outstanding voting stock of the corporation, or is an affiliate or associate of
the corporation and was the owner of 15 percent or more of the outstanding
voting stock of the corporation at any time within three years immediately prior
to the date of determination and (y) the affiliates and associates of any such
person. DuPont and its affiliates, however, are excluded from the definition of
"interested stockholder" under the terms of Section 203. Under certain
circumstances, Section 203 makes it more difficult for a person who would be an
interested stockholder to effect various business combinations with a
corporation for a three-year period. The Company has not elected to be exempt
from the restrictions imposed under Section 203.
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LIMITATIONS ON DIRECTORS' LIABILITY
The Certificate of Incorporation provides that no director of the Company
shall be liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to the Company or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) in respect of certain unlawful dividend payments
or stock redemptions or repurchases as provided in Section 174 of the DGCL or
(iv) for any transaction from which the director derived an improper personal
benefit. The effect of these provisions will be to eliminate the rights of the
Company and its stockholders (through stockholders' derivative suits on behalf
of the Company) to recover monetary damages against a director for breach of
fiduciary duty as a director (including breaches resulting from grossly
negligent behavior), except in the situations described above. The Company's
By-laws provide for indemnification of directors and officers to the maximum
extent permitted by Delaware law. In addition, the Company expects to enter into
indemnification agreements with each of its directors providing for
indemnification of such directors to the fullest extent permitted by applicable
law.
LISTING
The Class A Common Stock has been approved for listing on the New York
Stock Exchange under the symbol "COC," subject to official notice of issuance.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Class A Common Stock is First
Chicago Trust Company of New York.
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<PAGE> 123
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offerings, the Company will have 191.5 million
shares of Class A Common Stock and 436.5 million shares of Class B Common Stock
outstanding, without taking into account any outstanding options or options
which may be granted following the closing of the Offerings. Of these shares,
the shares sold in the Offerings will be freely tradeable without restriction or
further registration under the Securities Act of 1933 (the "Securities Act"),
unless they are sold by persons deemed to be "affiliates" of the Company or
acting as "underwriters" as those terms are defined in Rule 144 under the
Securities Act. Shares purchased by affiliates of the Company may generally be
sold in compliance with the volume limitation, availability of public
information, manner of sale and notice of sale requirements of Rule 144.
The 436.5 million shares of Class B Common Stock that will continue to be
owned by DuPont will be "restricted" securities within the meaning of Rule 144
under the Securities Act and may not be sold in the absence of registration
under the Securities Act or unless an exemption from registration is available,
including the exemptions contained in Rule 144 and Rule 144A under the
Securities Act.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated),
including any person who may be deemed an "affiliate" of the Company, who has
beneficially owned restricted shares for at least one year would be entitled to
sell within any three-month period a number of restricted shares that does not
exceed the greater of one percent of the then outstanding shares of Common Stock
or the average weekly trading volume of the Common Stock on the NYSE during the
four calendar weeks immediately preceding such sale, provided that the seller
files a Form 144 with respect to such sale, and complies with certain
requirements concerning availability of public information and manner of sale.
In addition, under Rule 144(k), a person who is not an affiliate of the Company,
and who has not been an affiliate of the Company at any time during the 90 days
preceding any sale, would be entitled to sell restricted shares without regard
to the limitations described above, provided that the restricted shares have
been beneficially owned for at least two years. In addition, DuPont would be
permitted to sell its existing shares of stock to qualified institutional buyers
pursuant to the provisions of Rule 144A.
Each of the Company and DuPont, and certain senior officers of the Company,
has agreed not to sell or otherwise dispose of any shares of the Common Stock
held by them for 180 days after the date of this Prospectus without the prior
written consent of Morgan Stanley & Co. Incorporated, subject to certain
exceptions. See "Underwriters."
An aggregate of 40 million shares of Class A Common Stock are reserved for
issuance to directors, executives, consultants and employees of the Company
pursuant to the 1998 Stock and Performance Incentive Plan (the "Plan"), the 1998
Key Employee Stock Performance Plan (the "1998 Plan"), the Deferred Compensation
Plan for Non-employee Directors (the "Deferred Compensation Plan") and the 1998
Global Performance Sharing Plan (the "Global Plan"). The Company intends to file
registration statements on Form S-8 covering the issuance of shares of Class A
Common Stock pursuant to the Plan, the 1998 Plan, the Deferred Compensation Plan
and the Global Plan. Accordingly, shares issued pursuant to the Plan, the 1998
Plan, the Deferred Compensation Plan and the Global Plan will be freely
tradeable, subject to the restrictions on resale on affiliates by Rule 144.
DuPont has advised the Company that it intends to offer its remaining
Conoco shares in a tax-free split-off expected to be completed within 12 months
of the date hereof. See "Prospectus Summary -- Separation From DuPont." Prior to
the Offerings, there has been no market for the Class A Common Stock, and no
precise predictions can be made of the effect, if any, that market sales of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of the
Common Stock in the public market may have an adverse effect on the market price
thereof. See "Risk Factors -- Adverse Effect on Market Price Due to Shares
Eligible for Future Sale."
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MATERIAL UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS OF CLASS A COMMON STOCK
The following is a general summary of material United States federal income
and estate tax consequences of the purchase, ownership, and sale or other
taxable disposition of the Class A Common Stock by any person or entity other
than (a) a citizen or resident of the United States, (b) a corporation or other
entity taxable as a corporation created or organized in or under the laws of the
United States or of any political subdivision thereof and (c) a person or entity
otherwise subject to United States federal income taxation on income from
sources outside the United States (a "non-U.S. Holder"). This summary does not
address all tax considerations that may be relevant to non-U.S. Holders in light
of their particular circumstances or to certain non-U.S. Holders that may be
subject to special treatment under United States federal income or estate tax
laws. This summary is based upon the Code, existing, temporary and proposed
regulations promulgated thereunder and administrative and judicial decisions,
all of which are subject to change, possibly with retroactive effect. In
addition, this summary does not address the effect of any state, local or
foreign tax laws. Each prospective purchaser of Class A Common Stock should
consult its tax advisor with respect to the tax consequences of purchasing,
owning and disposing of the Class A Common Stock.
DIVIDENDS
Dividends paid to a non-U.S. Holder of Class A Common Stock generally will
be subject to a withholding of United States federal income tax at a 30 percent
rate (or such lower rate as may be specified by an applicable income tax treaty)
unless (i) the dividend is effectively connected with the conduct of a trade or
business of the non-U.S. Holder within the United States or (ii) if a tax treaty
applies, it is attributable to a United States permanent establishment of the
non-U.S. Holder, in which cases the dividend will be taxed at ordinary federal
income tax rates. If the non-U.S. Holder is a corporation, such effectively
connected income may also be subject to an additional "branch profits tax." A
non-U.S. Holder may be required to satisfy certain certification requirements in
order to claim treaty benefits or otherwise claim a reduction of, or exemption
from, the withholding described above.
SALE OR OTHER DISPOSITION OF CLASS A COMMON STOCK
A non-U.S. Holder generally will not be subject to United States federal
income tax in respect of any gain recognized on the sale or other taxable
disposition of Class A Common Stock unless (i) the gain is effectively connected
with the conduct of a trade or business of the non-U.S. Holder within the United
States, (ii) in the case of a non-U.S. Holder who is an individual and holds the
Class A Common Stock as a capital asset, the holder is present in the United
States for 183 or more days in the taxable year of the disposition and certain
other tests are met, (iii) the non-U.S. Holder is subject to tax pursuant to the
provisions of United States federal income tax law applicable to certain United
States expatriates or (iv) the Company is or has been during certain periods
preceding the disposition a "United States real property holding corporation"
for United States federal income tax purposes and certain other requirements are
met. The Company may be, or may subsequently become, a United States real
property holding corporation for United States federal income tax purposes
because of its ownership of substantial real property in the United States. If
the Company were to be treated as a United States real property holding
corporation at any time during the five-year period preceding the disposition by
a non-U.S. Holder of Class A Common Stock, then any such non-U.S. Holder who has
held, directly or indirectly, more than five percent of the Class A Common Stock
during such five-year period will be subject to United States federal income
taxation on any gain realized from the disposition of such stock, unless an
exemption is provided under an applicable treaty.
ESTATE TAX
Class A Common Stock owned or treated as owned by an individual non-U.S.
Holder at the time of death will be includible in the individual's gross estate
for United States federal estate tax purposes, unless an applicable treaty
provides otherwise, and may be subject to United States federal estate tax.
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BACKUP WITHHOLDING AND INFORMATION REPORTING
Dividends. United States backup withholding tax generally will not apply to
dividends paid on the Class A Common Stock that are subject to the 30 percent or
reduced treaty rate of U.S. withholding tax previously discussed. The Company
must report annually to the Internal Revenue Service and to each non-U.S. Holder
the amount of dividends paid to, and the tax withheld with respect to, such
holder, regardless of whether any tax was withheld. This information may also be
made available to the tax authorities in the non-U.S. Holder's country of
residence.
Sale or Other Disposition of Common Stock. Upon the sale or other taxable
disposition of Class A Common Stock by a non-U.S. Holder to or through a U.S.
office of a broker, the broker must backup withhold at a rate of 31 percent and
report the sale to the Internal Revenue Service, unless the holder certifies its
non-U.S. Holder status under penalties of perjury or otherwise establishes an
exemption. Upon the sale or other taxable disposition of Class A Common Stock by
a non-U.S. Holder to or through the foreign office of a United States broker, or
a foreign broker with a certain relationship to the United States, the broker
must report the sale to the Internal Revenue Service (but not backup withhold)
unless the broker has documentary evidence in its files that the seller is a
non-U.S. Holder and/or certain other conditions are met or the holder otherwise
establishes an exemption.
Backup withholding is not an additional tax. Amounts withheld under the
backup withholding rules generally are allowable as a refund or credit against a
non-U.S. Holder's U.S. federal income tax liability, if any, provided that the
required information is furnished to the Internal Revenue Service on a timely
basis.
The U.S. Treasury Department has issued regulations generally effective for
payments made after December 31, 1999 that will affect the procedures to be
followed by a non-U.S. Holder in establishing such holder's status as a non-U.S.
Holder for purposes of the withholding, backup withholding and information
reporting rules described herein. The regulations eliminate the general prior
legal presumption that dividends paid to an address in a foreign country are
paid to a resident of that country. In addition, the regulations impose certain
certification and documentation requirements on non-U.S. Holders claiming the
benefit of a reduced withholding rate with respect to dividends under a tax
treaty or otherwise claiming a reduction of, or exemption from, the withholding
obligation described above. To qualify for exemption from backup withholding and
information reporting under the regulations, a non-U.S. Holder may be required
to furnish a new certification of foreign status. Prospective investors should
consult their tax advisors concerning the effect of such regulations on an
investment in the Class A Common Stock.
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UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date of this Prospectus (the "Underwriting Agreement"), each
of the U.S. Underwriters named below for whom Morgan Stanley & Co. Incorporated,
Credit Suisse First Boston Corporation, Goldman, Sachs & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities Inc., Salomon Smith
Barney Inc., BT Alex. Brown Incorporated and Schroder & Co. Inc. are acting as
U.S. Representatives, and the International Underwriters named below for whom
Morgan Stanley & Co. International Limited, Credit Suisse First Boston (Europe)
Limited, Goldman Sachs International, Merrill Lynch International, J.P. Morgan
Securities Ltd., Salomon Brothers International Limited, BT Alex. Brown
International, a division of Bankers Trust International PLC and J. Henry
Schroder & Co. Limited are acting as International Representatives, have
severally agreed to purchase, and the Company has agreed to sell to them,
severally, the respective number of shares of Class A Common Stock set forth
opposite their respective names below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- -----------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated......................... 25,359,691
Credit Suisse First Boston Corporation.................... 25,359,691
Goldman, Sachs & Co. ..................................... 25,359,691
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................ 25,359,691
J.P. Morgan Securities Inc. .............................. 13,705,471
Salomon Smith Barney Inc. ................................ 13,705,471
BT Alex. Brown Incorporated............................... 7,043,039
Schroder & Co. Inc. ...................................... 7,043,039
ABN Amro Incorporated..................................... 1,250,000
Robert W. Baird & Co. Incorporated........................ 625,000
Bear, Stearns & Co. Inc. ................................. 1,250,000
Sanford C. Bernstein & Co., Inc. ......................... 625,000
Blaylock & Partners, L.P. ................................ 625,000
Chase Securities Inc. .................................... 1,250,000
Chatsworth Securities LLC................................. 625,000
CIBC Oppenheimer Corp. ................................... 1,250,000
Deutsche Bank Securities Inc. ............................ 1,250,000
Donaldson, Lufkin & Jenrette Securities Corporation....... 1,250,000
A.G. Edwards & Sons, Inc. ................................ 1,250,000
Fahnestock & Co. Inc. .................................... 625,000
Guzman & Company.......................................... 625,000
Howard, Weil, Labouisse, Friedrichs Incorporated.......... 1,250,000
ING Baring Furman Selz LLC................................ 1,250,000
Jefferies & Company, Inc. ................................ 625,000
Edward D. Jones & Co., L.P. .............................. 625,000
Legg Mason Wood Walker, Incorporated...................... 625,000
McDonald & Company Securities, Inc. ...................... 625,000
NationsBanc Montgomery Securities LLC..................... 1,250,000
Nesbitt Burns Securities Inc. ............................ 625,000
Neuberger & Berman, LLC................................... 625,000
Ormes Capital Markets, Inc. .............................. 625,000
PaineWebber Incorporated.................................. 1,250,000
Petrie Parkman & Co. ..................................... 1,250,000
Prudential Securities Incorporated........................ 1,250,000
Raymond James & Associates, Inc. ......................... 625,000
The Robinson-Humphrey Company, LLC........................ 625,000
Sanders Morris Mundy Inc. ................................ 625,000
Muriel Siebert & Co., Inc. ............................... 625,000
Starr Securities, Inc. ................................... 625,000
Warburg Dillon Read LLC................................... 1,250,000
Wheat First Securities, Inc. ............................. 625,000
-----------
Subtotal............................................. 172,310,784
-----------
</TABLE>
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<PAGE> 127
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- -----------
<S> <C>
International Underwriters:
Morgan Stanley & Co. International Limited................ 2,933,718
Credit Suisse First Boston (Europe) Limited............... 2,933,715
Goldman Sachs International............................... 2,933,715
Merrill Lynch International............................... 2,933,715
J.P. Morgan Securities Ltd. .............................. 1,498,108
Salomon Brothers International Limited ................... 1,498,108
BT Alex. Brown International, a division of Bankers Trust
International PLC...................................... 832,282
J. Henry Schroder & Co. Limited........................... 832,282
ABN AMRO Rothschild....................................... 250,000
Cazenove & Co. ........................................... 250,000
Credit Lyonnais Securities................................ 250,000
Daiwa Europe Limited...................................... 250,000
Deutsche Bank AG London................................... 250,000
HSBC Investment Bank Plc.................................. 250,000
Mediobanca-Banca di Credito Finanziario S.p.A ............ 250,000
UBS AG.................................................... 250,000
Westdeutsche Landesbank Girozentrale...................... 250,000
ING Bank N.V. ............................................ 250,000
Societe Generale.......................................... 250,000
Subtotal............................................. 19,145,643
-----------
Total............................................. 191,456,427
===========
</TABLE>
The U.S. Underwriters and the International Underwriters, and the U.S.
Representatives and the International Representatives, are collectively referred
to as the "Underwriters" and the "Representatives," respectively. The
Underwriting Agreement provides that the obligations of the several Underwriters
to pay for and accept delivery of the shares of Class A Common Stock offered
hereby are subject to the approval of certain legal matters by their counsel and
to certain other conditions. The Underwriters are obligated to take and pay for
all of the shares of Class A Common Stock offered hereby if any such shares are
taken.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented and agreed that, with certain exceptions: (i)
it is not purchasing any Shares (as defined below) for the account of anyone
other than a United States or Canadian Person (as defined below) and (ii) it has
not offered or sold, and will not offer or sell, directly or indirectly, any
Shares or distribute any prospectus relating to Shares outside the United States
or Canada or to anyone other than a United States or Canadian Person. Pursuant
to the Agreement between U.S. and International Underwriters, each International
Underwriter has represented and agreed that, with certain exceptions: (i) it is
not purchasing any Shares for the account of any United States or Canadian
Person, and (ii) it has not offered or sold, and will not offer or sell,
directly or indirectly, any Shares or distribute any prospectus relating to the
Shares in the United States or Canada or to any United States or Canadian
Person. With respect to any Underwriter that is a U.S. Underwriter and an
International Underwriter, the foregoing representation and agreements (i) made
by it in its capacity as a U.S. Underwriter apply only to it in its capacity as
a U.S. Underwriter and (ii) made by it in its capacity as an International
Underwriter apply only to it in its capacity as an International Underwriter.
The foregoing limitations do not apply to stabilization transactions or to
certain other transactions specified in the Agreement between the U.S. and
International Underwriters. As used herein, "United States or Canadian Person"
means any national or resident of the United States or Canada, or any
corporation, pension, profit-sharing, or other trust or other entity organized
under the laws of the United States or Canada or of any political subdivision
thereof (other than a branch located outside the United States and Canada of any
United States or Canadian Person) and includes any United States or Canadian
branch of a person who is otherwise not a United States or Canadian person. All
shares of Class A Common Stock to be purchased by the Underwriters are referred
to herein as the "Shares."
128
<PAGE> 128
Pursuant to the Agreement between U.S. and International Underwriters,
sales may be made between the U.S. Underwriters and International Underwriters
of any number of Shares as may be mutually agreed. The per share price of any
Shares so sold will be the public offering price set forth on the cover page
hereof, in United States dollars, less an amount not greater than the per share
amount of the concession to dealers set forth below.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented that it has not offered or sold, and has agreed
not to offer or sell, any Shares, directly or indirectly, in any province or
territory of Canada or to, or for the benefit of, any resident of any province
or territory of Canada in contravention of the securities laws thereof and has
represented that any offer or sale of Shares in Canada will be made only
pursuant to an exemption from the requirement to file a prospectus in the
province or territory of Canada in which such offer or sale is made. Each U.S.
Underwriter has further agreed to send to any dealer who purchases from it any
of the Shares a notice stating in substance that, by purchasing such Shares,
such dealer represents and agrees that it has not offered or sold, and will not
offer or sell, directly or indirectly, any of such Shares in any province or
territory of Canada or to, or for the benefit of, any resident of any province
or territory of Canada in contravention of the securities laws thereof and that
any offer or sale of Shares in Canada will be made only pursuant to an exemption
from the requirement to file a prospectus in the province or territory of Canada
in which such offer or sale is made, and that such dealer will deliver to any
other dealer to whom it sells any of such Shares a notice containing
substantially the same statement as is contained in this sentence.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has represented and agreed that (i) it has not offered
or sold and, prior to the date six months after the Closing Date for the sale of
the Shares to the International Underwriters, will not offer or sell, any Shares
to persons in the United Kingdom except to persons whose ordinary activities
involve them in acquiring, holding, managing, or disposing of investments (as
principal or agent) for the purposes of their businesses or otherwise in
circumstances that have not resulted and will not result in an offer to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995; (ii) it has complied and will comply with all
applicable provisions of the Financial Services Act 1986 with respect to
anything done by it in relation to the Shares in, from or otherwise involving
the United Kingdom; and (iii) it has only issued or passed on and will \only
issue or pass on in the United Kingdom any document received by it in connection
with the offering of the Shares to a person who is of a kind described in
Article 11(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1996, as amended, or is a person to whom such document may
otherwise be lawfully issued or passed on.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has further represented that it has not offered or
sold, and has agreed not to offer or sell, directly or indirectly, in Japan or
to or for the account of any resident thereof, any of the Shares acquired in
connection with the distribution contemplated hereby, except for offers or sales
to Japanese International Underwriters or dealers and except pursuant to any
exemption from the registration requirements of the Securities and Exchange Law
and otherwise in compliance with applicable provisions of Japanese law. Each
International Underwriter has further agreed to send to any dealer who purchases
from it any of the Shares a notice stating in substance that, by purchasing such
Shares, such dealer represents and agrees that it has not offered or sold, and
will not offer or sell, any of such Shares, directly or indirectly, in Japan or
to or for the account of any resident thereof except for offers or sales to
Japanese International Underwriters or dealers and except pursuant to any
exemption from the registration requirements of the Securities and Exchange Law
and otherwise in compliance with applicable provisions of Japanese law, and that
such dealer will send to any other dealer to whom it sells any of such Shares a
notice containing substantially the same statement as is contained in this
sentence.
The Underwriters initially propose to offer part of the Shares directly to
the public at the public offering price set forth on the cover page hereof and
part to certain dealers at a price that represents a concession not in excess of
$.5877 per share under the public offering price. Any Underwriter may allow, and
such dealers may reallow, a concession not in excess of $.1000 per share to
other Underwriters or to certain dealers. After the
129
<PAGE> 129
initial offering of the Shares, the offering price and other selling terms may
from time to time be varied by the Representatives.
The Underwriters have informed the Company that they do not intend for
sales to discretionary accounts to exceed five percent of the aggregate number
of shares of Class A Common Stock offered by them.
The Class A Common Stock has been approved for listing on the NYSE under
the trading symbol "COC," subject to official notice of issuance. In order to
meet the requirements for listing the Class A Common Stock on the New York Stock
Exchange, the Underwriters have undertaken to meet the New York Stock Exchange's
minimum distribution, issuance and aggregate market value requirements.
At the request of the Company, the Underwriters have reserved for sale, at
the initial offering price, up to approximately 3.3 million shares offered
hereby for directors, officers and employees of the Company and certain other
persons designated by the Board of Directors other than officers and employees
of the Company in the United Kingdom. In addition, a separate offering of
364,000 shares will be made to officers and other employees of the Company in
the United Kingdom. The number of shares of Class A Common Stock available for
sale to the general public will be reduced to the extent such non-U.K. persons
purchase such reserved shares. Any reserved shares which are not so purchased
and any shares not purchased in the separate offering to U.K. officers and
employees will be offered by the Underwriters to the general public on the same
basis as the other shares offered hereby. Any officer or other employee of the
Company in the United Kingdom purchasing shares will be required to agree not to
sell, assign, pledge or otherwise transfer such shares during the period ending
90 days after the date of this Prospectus.
The Company and DuPont have agreed that, without the prior written consent
of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, they will
not, during the period ending 180 days after the date of this Prospectus (the
"Lock-up Period"), (i) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer, lend or dispose of, directly
or indirectly, any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock or (ii) enter into any swap or
other arrangement that transfers to another, in whole or in part, any of the
economic consequences of ownership of the Common Stock whether any such
transaction described in clause (i) or (ii) above is settled by delivery of
Common Stock, or such other securities, in cash or otherwise. Certain senior
officers of the Company have agreed that, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the Underwriters, they will not,
during the period ending 180 days after the date of this Prospectus and subject
to certain exceptions, engage in a transaction described in clause (i) or (ii)
above. The restrictions described in this paragraph do not apply to (x) the sale
of Common Stock to the Underwriters, (y) the issuance by the Company of shares
of Common Stock upon the exercise of an option or warrant or the conversion or
issuance upon cancellation of a security outstanding on the date of this
Prospectus of which the Underwriters have been advised in writing, or (z)
transactions by any person other than the Company relating to shares of Common
Stock or other securities acquired in open market transactions after the
completion of the Offerings. The restrictions on the Company are subject to
exceptions for the issuance of Company Stock Options and Common Stock pursuant
to existing employee benefit plans.
In order to facilitate the Offerings, the Underwriters may engage in
transactions that stabilize, maintain, or otherwise affect the price of the
Class A Common Stock. Specifically, the Underwriters may over-allot in
connection with the Offerings, creating a short position in the Class A Common
Stock for their own account. In addition, to cover over-allotments or to
stabilize the price of the Class A Common Stock, the Underwriters may bid for,
and purchase, shares of Class A Common Stock in the open market. Finally, the
underwriting syndicate may reclaim selling concessions allowed to an Underwriter
or a dealer for distributing the Class A Common Stock in the Offerings, if the
syndicate repurchases previously distributed Class A Common Stock in
transactions to cover syndicate short positions, in stabilization transactions,
or otherwise. Any of these activities may stabilize or maintain the market price
of the Common Stock above independent market levels. The Underwriters are not
required to engage in these activities, and may end any of these activities at
any time.
130
<PAGE> 130
From time to time, the Underwriters and certain of their affiliates have
provided, and continue to provide, investment banking services and trading
services and general financing and banking services to DuPont and the Company,
for which they receive customary fees.
The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act.
PRICING OF THE OFFERINGS
Prior to the Offerings, there has been no public market for the Class A
Common Stock. The initial public offering price was determined by negotiations
between DuPont and the Company on the one hand and the U.S. Representatives on
the other hand. Among the factors considered in determining the initial public
offering price were the future prospects of the Company and its industry in
general, sales, earnings, and certain other financial operating information of
the Company in recent periods, and the price-earnings ratios, price-sales
ratios, market prices of securities and certain financial and operating
information of companies engaged in activities similar to those of the Company.
There can be no assurance that the price at which the Class A Common Stock will
sell in the public market after the Offerings will not be lower than the price
at which it is sold by the Underwriters.
131
<PAGE> 131
LEGAL MATTERS
The validity of the Class A Common Stock being offered hereby will be
passed upon for the Company by R.A. Harrington, Senior Vice President, Legal,
and General Counsel, and for the Company and DuPont by Skadden, Arps, Slate,
Meagher & Flom LLP, New York, New York. Certain legal matters will be passed on
for the Underwriters by Cravath, Swaine & Moore, New York, New York. Skadden,
Arps, Slate, Meagher & Flom LLP has in the past and continues to represent
DuPont in connection with various matters, including the Separation. Cravath,
Swaine & Moore has in the past and continues to represent DuPont in connection
with various matters not related to the Separation or the Offerings. Baker &
Botts, L.L.P., Houston, Texas, is representing the Company in connection with
certain aspects of the Separation.
EXPERTS
The combined financial statements as of December 31, 1996 and 1997, and for
each of the three years in the period ended December 31, 1997 included in this
Prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The pro forma combined statement of income for the year ended December 31,
1997 included in this Prospectus has been so included in reliance on the report
of PricewaterhouseCoopers LLP, independent accountants, given on the authority
of said firm as experts in performing examinations of pro forma financial
information in accordance with standards established by the American Institute
of Certified Public Accountants.
With respect to the unaudited historical combined financial information of
Conoco as of June 30, 1998 and for the six-month periods ended June 30, 1997 and
1998, the unaudited pro forma combined balance sheet as of June 30, 1998 and the
related unaudited pro forma combined statements of income for the six-month
periods ended June 30, 1997 and 1998, included in this Prospectus,
PricewaterhouseCoopers LLP reported that they have applied limited procedures in
accordance with professional standards for a review of such information.
However, their separate reports dated September 28, 1998 and October 21, 1998
appearing herein state that they did not audit and they do not express an
opinion on the unaudited historical interim combined financial information or
the unaudited pro forma combined financial information as of June 30, 1998 and
for the six-month periods ended June 30, 1997 and 1998. PricewaterhouseCoopers
LLP has not carried out any significant or additional audit tests beyond those
which would have been necessary if their reports had not been included.
Accordingly, the degree of reliance on their reports on such information should
be restricted in light of the limited nature of the review procedures applied.
PricewaterhouseCoopers LLP is not subject to the liability provisions of section
11 of the Securities Act for their reports on the unaudited historical interim
combined financial information and on the unaudited pro forma combined financial
information because those reports are not a "report" or a "part" of the
registration statement prepared or certified by PricewaterhouseCoopers LLP
within the meaning of sections 7 and 11 of the Securities Act.
The summary letter report of DeGolyer and MacNaughton, independent
petroleum engineering consultants, a copy of which appears as Annex A hereto,
has been included herein in reliance upon the authority of that firm as experts
in estimating proved oil and gas reserves.
132
<PAGE> 132
AVAILABLE INFORMATION
The Company has filed with the Commission a registration statement on Form
S-1, including all amendments and supplements thereto (the "Registration
Statement"), under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the securities offered hereby. This Prospectus, which
constitutes a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement, certain items of which are
contained in schedules and exhibits to the Registration Statement as permitted
by the rules and regulations of the Commission. Statements made in this
Prospectus as to the contents of any contract, agreement or other document
referred to are summaries of material terms of such contract, agreement or other
document and are not necessarily complete. With respect to each such contract,
agreement or other document filed as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference. Items of information omitted from this Prospectus but contained
in the Registration Statement may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of
the Commission located at Seven World Trade Center, 13th Floor, New York, New
York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of all or any portion of such material may also be
obtained from the Public Reference Section of the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. In addition,
such materials filed electronically by the Company with the Commission are
available at the Commission's World Wide Web site at http://www.sec.gov. The
Company's periodic reports, proxy statements and other information filed by the
Company with the Commission can also be inspected at the offices of The New York
Stock Exchange, Inc., 20 Broad Street, New York, NY 10005.
The Company intends to furnish to its stockholders annual reports
containing audited consolidated financial statements and quarterly reports for
the first three quarters of each fiscal year containing unaudited interim
financial information, in each case prepared in accordance with generally
accepted accounting principles.
133
<PAGE> 133
CONOCO
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Audited Combined Financial Statements
Report of Independent Accountants......................... F-2
Combined Statement of Income -- Years Ended December 31,
1995, 1996 and 1997.................................... F-3
Combined Balance Sheet -- at December 31, 1996 and 1997... F-4
Combined Statement of Cash Flows -- Years Ended December
31, 1995, 1996 and 1997................................ F-5
Combined Statement of Owner's Net Investment and
Accumulated Other Comprehensive Loss -- Years Ended
December 31, 1995, 1996 and 1997....................... F-6
Notes to Combined Financial Statements.................... F-7
Unaudited Financial Information
Supplemental Petroleum Data............................... F-31
Combined Quarterly Financial Data -- 1996 and 1997........ F-37
Unaudited Interim Combined Financial Statements
Independent Accountant's Report........................... F-38
Interim Combined Statement of Income -- Six Months Ended
June 30, 1997 and 1998................................. F-39
Interim Combined Balance Sheet -- at December 31, 1997 and
June 30, 1998.......................................... F-40
Interim Combined Statement of Cash Flows -- Six Months
Ended June 30, 1997 and 1998........................... F-41
Notes to Interim Combined Financial Statements............ F-42
</TABLE>
Certain supplementary financial statement schedules have been omitted
because the information required to be set forth therein is either not
applicable or is shown in the financial statements or notes thereto.
F-1
<PAGE> 134
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of E. I. du Pont de Nemours and Company
In our opinion, the accompanying combined balance sheets and the related
combined statements of income, of cash flows and of owner's net investment and
accumulated other comprehensive loss appearing on pages F-3 through F-30 of this
Registration Statement on Form S-1 present fairly, in all material respects, the
financial position of Conoco, the petroleum business of E. I. du Pont de Nemours
and Company, at December 31, 1996 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
July 24, 1998
F-2
<PAGE> 135
FINANCIAL STATEMENTS
CONOCO
COMBINED STATEMENT OF INCOME (NOTE 1)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1995 1996 1997
-------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE)
<S> <C> <C> <C>
Revenues
Sales and Other Operating Revenues*....................... $20,328 $24,230 $25,796
Other Income (Note 4)..................................... 190 186 467
------- ------- -------
Total Revenues.................................... 20,518 24,416 26,263
------- ------- -------
Costs and Expenses
Cost of Goods Sold and Other Operating Expenses........... 11,146 14,560 16,226
Selling, General and Administrative Expenses.............. 728 755 726
Exploration Expenses...................................... 331 404 457
Depreciation, Depletion and Amortization.................. 1,067 1,085 1,179
Taxes Other Than on Income* (Note 5)...................... 5,823 5,637 5,532
Interest and Debt Expense (Note 6)........................ 74 74 36
------- ------- -------
Total Costs and Expenses.......................... 19,169 22,515 24,156
------- ------- -------
Income Before Income Taxes.................................. 1,349 1,901 2,107
Provision for Income Taxes (Note 7)......................... 774 1,038 1,010
------- ------- -------
Net Income.................................................. $ 575 $ 863 $ 1,097
======= ======= =======
Unaudited Pro Forma Earnings Per Share (Note 2)
Basic..................................................... $ 1.75
Diluted................................................... $ 1.72
Unaudited Pro Forma Weighted Average Shares Outstanding
(Note 2)..................................................
Basic..................................................... 628
Diluted................................................... 637
- ---------------
*Includes petroleum excise taxes............................ $ 5,655 $ 5,461 $ 5,349
</TABLE>
See accompanying Notes to Combined Financial Statements
F-3
<PAGE> 136
FINANCIAL STATEMENTS
CONOCO
COMBINED BALANCE SHEET (NOTE 1)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1996 1997
------- --------
(IN MILLIONS)
<S> <C> <C>
Current Assets
Cash and Cash Equivalents................................. $ 846 $ 1,147
Marketable Securities..................................... 7 7
Accounts and Notes Receivable (Note 8).................... 1,494 1,497
Notes Receivable -- Related Parties (Note 3).............. 322 490
Inventories (Note 9)...................................... 806 830
Prepaid Expenses.......................................... 183 236
------- --------
Total Current Assets............................... 3,658 4,207
Property, Plant and Equipment (Note 10)..................... 19,981 21,229
Less: Accumulated Depreciation, Depletion and
Amortization.............................................. (9,899) (10,401)
------- --------
Net Property, Plant and Equipment........................... 10,082 10,828
------- --------
Investment in Affiliates (Note 11).......................... 703 1,085
Long-Term Notes Receivable -- Related Parties (Note 3)...... 9 450
Other Assets (Note 12)...................................... 774 492
------- --------
Total.............................................. $15,226 $ 17,062
======= ========
LIABILITIES AND OWNER'S NET INVESTMENT AND ACCUMULATED OTHER COMPREHENSIVE LOSS
Current Liabilities
Accounts Payable (Note 13)................................ $ 1,025 $ 1,090
Short-Term Borrowings -- Related Parties (Note 3)......... 176 644
Other Short-Term Borrowings and Capital Lease Obligations
(Note 14)............................................... 32 72
Income Taxes (Note 7)..................................... 453 545
Other Accrued Liabilities (Note 15)....................... 1,110 1,289
------- --------
Total Current Liabilities.......................... 2,796 3,640
Long-Term Borrowings -- Related Parties (Note 3)............ 2,287 1,450
Other Long-Term Borrowings and Capital Lease Obligations
(Note 16)................................................. 101 106
Deferred Income Taxes (Note 7).............................. 1,767 1,739
Other Liabilities and Deferred Credits (Note 17)............ 1,390 1,922
------- --------
Total Liabilities.................................. 8,341 8,857
------- --------
Commitments and Contingent Liabilities (Note 25)
Minority Interests (Note 18)................................ 306 309
Owner's Net Investment...................................... 6,636 8,087
Accumulated Other Comprehensive Loss (Note 19)
Minimum Pension Liability Adjustment...................... (18) (31)
Accumulated Foreign Currency Translation Adjustment....... (39) (160)
------- --------
Total Accumulated Other Comprehensive Loss......... (57) (191)
------- --------
Total Owner's Net Investment and Accumulated Other
Comprehensive Loss................................ 6,579 7,896
------- --------
Total.............................................. $15,226 $ 17,062
======= ========
</TABLE>
See accompanying Notes to Combined Financial Statements
F-4
<PAGE> 137
FINANCIAL STATEMENTS
CONOCO
COMBINED STATEMENT OF CASH FLOWS (NOTE 1)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1995 1996 1997
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Cash Provided by Operations
Net Income................................................ $ 575 $ 863 $ 1,097
Adjustments to Reconcile Net Income to Cash Provided by
Operations:
Depreciation, Depletion and Amortization............... 1,067 1,085 1,179
Dry Hole Costs and Impairment of Unproved Properties... 121 137 169
Deferred Income Taxes (Note 7)......................... 133 10 16
Income Applicable to Minority Interests................ 1 19 24
Other Noncash Charges and Credits -- Net............... 20 66 (271)
Decrease (Increase) in Operating Assets:
Accounts and Notes Receivable........................ (39) (280) 127
Inventories.......................................... 57 22 (79)
Other Operating Assets............................... 38 10 (96)
Increase (Decrease) in Operating Liabilities:
Accounts Payable and Other Operating Liabilities..... (3) 362 622
Accrued Interest and Income Taxes (Notes 6 and 7).... (46) 102 88
------- ------- -------
Cash Provided by Operations....................... 1,924 2,396 2,876
------- ------- -------
Investment Activities (Note 21)
Purchases of Property, Plant and Equipment................ (1,714) (1,616) (2,644)
Investments in Affiliates................................. (116) (326) (339)
Proceeds from Sales of Assets and Subsidiaries............ 244 328 565
Net Decrease (Increase) in Short-Term Financial
Instruments............................................ (91) (33) 381
------- ------- -------
Cash Used for Investment Activities............... (1,677) (1,647) (2,037)
------- ------- -------
Financing Activities
Short-Term Borrowings -- Receipts......................... 63 -- 24
-- Payments......................... (70) (90) (2)
Other Long-Term Borrowings -- Receipts.................... 25 38 33
-- Payments.................... (311) (1) (3)
Transactions with Related Parties:
Notes Receivable -- Receipts........................... 1,678 402 9
-- Payments........................... (203) (9) (617)
Borrowings -- Receipts................................. 885 706 413
-- Payments................................. (1,286) (520) (695)
Net Cash Contribution From (To) Owner.................. (1,094) (993) 360
Increase (Decrease) in Minority Interests (Note 18)....... -- 280 (21)
------- ------- -------
Cash Used for Financing Activities................ (313) (187) (499)
------- ------- -------
Effect of Exchange Rate Changes on Cash..................... 33 (2) (39)
------- ------- -------
Increase (Decrease) in Cash and Cash Equivalents............ (33) 560 301
Cash and Cash Equivalents at Beginning of Year.............. 319 286 846
------- ------- -------
Cash and Cash Equivalents at End of Year.................... $ 286 $ 846 $ 1,147
======= ======= =======
</TABLE>
See accompanying Notes to Combined Financial Statements
F-5
<PAGE> 138
FINANCIAL STATEMENTS
CONOCO
COMBINED STATEMENT OF OWNER'S NET INVESTMENT AND
ACCUMULATED OTHER COMPREHENSIVE LOSS (NOTES 1 AND 19)
<TABLE>
<CAPTION>
ACCUMULATED OTHER
OWNER'S NET COMPREHENSIVE COMPREHENSIVE
INVESTMENT INCOME INCOME (LOSS) TOTAL
----------- ------------- ----------------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Years Ended December 31, 1995, 1996 and 1997
Balance January 1, 1995................... $ 7,281 $ (6) $ 7,275
Comprehensive Income
Net Income.............................. 575 $ 575 575
Other Comprehensive Income (Loss):
Minimum Pension Liability
Adjustment......................... (2) (2) (2)
------
Comprehensive Income............ $ 573
======
Net Cash Contribution To Owner............ (1,094) (1,094)
------- ----- -------
Balance December 31, 1995................. 6,762 (8) 6,754
Comprehensive Income
Net Income.............................. 863 $ 863 863
Other Comprehensive Income (Loss):
Minimum Pension Liability
Adjustment......................... (10)
Foreign Currency Translation
Adjustment......................... (39)
------
Other Comprehensive Loss........... (49) (49) (49)
------
Comprehensive Income............ $ 814
======
Net Cash Contribution To Owner............ (993) (993)
Other Transfers From Owner................ 4 4
------- ----- -------
Balance December 31, 1996................. 6,636 (57) 6,579
Comprehensive Income
Net Income.............................. 1,097 $1,097 1,097
Other Comprehensive Income (Loss):
Minimum Pension Liability
Adjustment......................... (13)
Foreign Currency Translation
Adjustment......................... (121)
------
Other Comprehensive Loss........... (134) (134) (134)
------
Comprehensive Income............ $ 963
======
Net Cash Contribution From Owner.......... 360 360
Other Transfers To Owner.................. (6) (6)
------- ----- -------
Balance December 31, 1997................. $ 8,087 $(191) $ 7,896
======= ===== =======
</TABLE>
See accompanying Notes to Combined Financial Statements
F-6
<PAGE> 139
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
1. BASIS OF PRESENTATION
On May 11, 1998, E. I. du Pont de Nemours and Company ("DuPont") announced
its intention to offer in an initial public offering a portion of its interest
in the common stock of Conoco Inc., a wholly owned energy subsidiary. This
initial public offering is DuPont's first step in the planned divestiture of its
entire Petroleum business.
Throughout the period covered by the Combined Financial Statements,
operations were conducted by Conoco Inc., subsidiaries of Conoco Inc. and, in
some cases, subsidiaries of DuPont. These operations are collectively referred
to herein as the "Company" or "Conoco". Certain subsidiaries and, in some cases,
assets, liabilities, and related operations not currently owned by Conoco will
be transferred to Conoco.
Conoco is an integrated, global energy company with two principal business
segments. The Upstream segment includes the exploration for, development,
production and sale of crude oil, natural gas and natural gas liquids. The
Downstream segment includes the refining of crude oil and other feedstocks into
petroleum products, buying and selling crude oil and refined products, and
transporting, distributing and marketing petroleum products. Corporate and Other
activities include general corporate expenses, financing costs and other
nonoperating items, and results for electric power and related-party insurance
operations.
The accompanying Combined Financial Statements are presented on a carve-out
basis and include the historical operations of both entities owned by Conoco and
operations to be transferred to Conoco by DuPont. In this context, no direct
ownership relationship existed among all the various units comprising Conoco;
accordingly, DuPont and its subsidiaries' net investment in Conoco ("Owner's Net
Investment") is shown in lieu of Stockholder's Equity in the Combined Financial
Statements. The Combined Financial Statements included herein have been prepared
from DuPont's historical accounting records.
Certain international assets relating primarily to the business of DuPont
may be held by the Company or its subsidiaries at the closing of the Offerings
pending receipt of consents or other approval or satisfaction of other
applicable foreign requirements necessary for the transfer of such assets to
DuPont. In addition, certain international assets relating primarily to the
business of the Company may be held by DuPont or other of its subsidiaries at
the closing of the Offerings pending receipt of consents or approvals or
satisfaction of other applicable foreign requirements necessary for the transfer
of such assets to the Company. Additionally, there are certain subsidiaries of
DuPont which will not be owned by the Company as of the closing of the Offerings
and which DuPont will not thereafter be obligated to transfer to the Company.
DuPont and the Company intend to negotiate for the sale of such subsidiaries
within the six months following the closing of the Offerings at a purchase price
equal to their then fair market value. DuPont and the Company estimate that the
fair market value of such subsidiaries at July, 1998 is approximately $20
million and cannot predict at what price any such sale may occur. All of the
above subsidiaries, which are immaterial to total assets and results of
operations of the Company, have been included in the Combined Financial
Statements.
The Combined Statement of Income includes all revenues and costs directly
attributable to Conoco, including costs for facilities, functions and services
used by Conoco at shared sites and costs for certain functions and services
performed by centralized DuPont organizations and directly charged to Conoco
based on usage. In addition, services performed by Conoco on DuPont's behalf are
directly charged to DuPont. The results of operations also include allocations
of DuPont's general corporate expenses.
All charges and allocations of cost for facilities, functions and services
performed by DuPont organizations for Conoco have been deemed to have been paid
by Conoco to DuPont, in cash, in the period in which the cost was recorded in
the Combined Financial Statements. Allocations of current income taxes
receivable or payable are deemed to have been remitted, in cash, by or to DuPont
in the period the related income taxes were recorded.
All of the allocations and estimates in the Combined Financial Statements
are based on assumptions that management believes are reasonable under the
circumstances. However, these allocations and estimates are
F-7
<PAGE> 140
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
not necessarily indicative of the costs and expenses that would have resulted if
Conoco had been operated as a separate entity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Conoco observes the generally accepted accounting principles described
below.
BASIS OF COMBINATION
The accounts of wholly owned and majority-owned subsidiaries are included
in the Combined Financial Statements. The equity method is used to account for
investments in corporate entities, partnerships, and limited liability companies
in which the Company exerts significant influence, generally having a 20-50%
ownership interest. The Company's 50.1 percent non-controlling interest in
Petrozuata CA in Venezuela is accounted for using the equity method because the
minority shareholder, a subsidiary of the national oil company of the Republic
of Venezuela, has substantive participating rights, primarily related to
fundamental operating and management decisions, which preclude consolidation.
Undivided interests in oil and gas joint ventures and transportation assets are
combined on a pro rata basis. Other investments, excluding marketable
securities, are generally carried at cost.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses, and the disclosures of contingent assets and liabilities. Actual
results may differ from those estimates and assumptions.
CASH EQUIVALENTS
Cash equivalents represent investments with maturities of three months or
less from time of purchase. They are carried at cost plus accrued interest,
which approximates fair value.
INVENTORIES
Inventories are carried at the lower of cost or market. Cost is determined
under the last-in, first-out (LIFO) method for inventories of crude oil and
petroleum products. Cost for remaining inventories, principally materials and
supplies, is generally determined by the average cost method. Market is
determined on a regional basis and any lower of cost or market write-down is
recorded as a permanent adjustment to the cost of inventory.
PROPERTY, PLANT AND EQUIPMENT (PP&E)
PP&E is carried at cost. Depreciation of PP&E, other than oil and gas
properties, is generally computed on a straight-line basis over the estimated
economic lives of the facilities, which for major assets range from 14 to 25
years. When assets that are part of a composite group are retired, sold,
abandoned or otherwise disposed of, the cost, net of sales proceeds or salvage
value, is charged against accumulated depreciation, depletion and amortization.
Where depreciation is accumulated for specific assets, gains or losses on
disposal are included in period income.
Maintenance and repairs are charged to expense; replacements and
improvements are capitalized.
F-8
<PAGE> 141
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
OIL AND GAS PROPERTIES
The Company follows the successful efforts method of accounting, under
which the costs of property acquisitions, successful exploratory wells, all
development costs, and support equipment and facilities are capitalized. The
costs of producing properties are amortized at the field level on a
unit-of-production method.
Unproved properties which are individually significant are periodically
assessed for impairment, whereas the impairment of individually insignificant
properties is provided by amortizing the costs based on past experience and the
estimated holding period. Exploratory well costs are expensed in the period the
well is determined to be unsuccessful. All other exploration costs, including
geological and geophysical costs, production costs, and overhead costs are
expensed in the period incurred.
The estimated costs of dismantlement and removal of oil and gas related
facilities are recognized over the properties' productive lives using the
unit-of-production method.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets with recorded values that are not expected to be
recovered through future cash flows are written down to current fair value
through additional amortization or depreciation provisions. Fair value is
generally determined from estimated discounted future net cash flows.
ENVIRONMENTAL COSTS
Environmental expenditures are expensed or capitalized, as appropriate,
depending on their future economic benefit. Expenditures that relate to an
existing condition caused by past operations, and that do not have future
economic benefit, are expensed. Liabilities related to these future costs are
recorded on an undiscounted basis when environmental assessments and/or
remediation activities are probable and the costs can be reasonably estimated.
INCOME TAXES
As Conoco is included in the DuPont consolidated tax return, the provision
for income taxes has been determined using the loss benefit method of the asset
and liability approach of accounting for income taxes. Under the loss benefit
method, the current tax provision or benefit is allocated based on the amount
expected to be paid or received from the consolidated group and benefits of
losses and credit carryforwards are recorded when such benefits are expected to
be realized by members of the consolidated group. The provision for income taxes
represents income taxes paid or payable for the current year plus the change in
deferred taxes during the year. The pro forma effect on the Statement of Income
of reflecting the provision for income taxes on a separate return basis is not
material.
Deferred taxes result from differences between the financial and tax bases
of the Company's assets and liabilities and are adjusted for changes in tax
rates and tax laws when changes are enacted. Valuation allowances are recorded
to reduce deferred tax assets when it is more likely than not that a tax benefit
will not be realized by the consolidated group.
Provision has been made for income taxes on unremitted earnings of
subsidiaries and affiliates, except in cases in which earnings are deemed to be
permanently invested.
FOREIGN CURRENCY TRANSLATION
Through December 31, 1995, the Company had determined that the United
States dollar was the "functional currency" of its worldwide operations. For
subsidiaries where the United States dollar is the functional currency, all
foreign currency asset and liability amounts are remeasured into United States
dollars at end-of-period exchange rates, except for inventories, prepaid
expenses and property, plant and equipment,
F-9
<PAGE> 142
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
which are remeasured at historical rates. Foreign currency income and expenses
are remeasured at average exchange rates in effect during the year, except for
expenses related to balance sheet amounts which are remeasured at historical
exchange rates. Exchange gains and losses arising from remeasurement of foreign
currency-denominated monetary assets and liabilities are included in current
period income.
Effective January 1, 1996, local currency was adopted as the functional
currency for the Company's integrated Western European petroleum operations to
properly reflect changed circumstances in the primary economic environment in
which these subsidiaries operate. For subsidiaries whose functional currency is
the local currency, assets and liabilities denominated in local currency are
translated into United States dollars at end-of-period exchange rates, and the
resultant translation adjustment is disclosed in the Combined Balance Sheet.
Assets and liabilities denominated in other than the local currency are
remeasured into the local currency prior to translation into United States
dollars, and the resultant exchange gains or losses, together with their related
tax effects, are included in income in the period in which they occur. Income
and expenses are translated into United States dollars at average exchange rates
in effect during the period.
COMMODITY HEDGING AND TRADING ACTIVITIES
The Company enters into energy-related futures, forwards, swaps, and
options in various markets to balance its physical systems, to meet customer
needs, and to manage its exposure to price fluctuations on anticipated crude
oil, natural gas, refined product and electric power transactions.
Under the Company's policy, hedging includes only those transactions that
offset physical positions and reduce overall exposure to prevailing market price
risk. Trading is defined as any transaction that does not meet the definition of
hedging.
Gains and losses on hedging contracts are deferred and included in the
measurement of the related transaction. Changes in market values of trading
contracts are reflected in income in the period the change occurs.
In the event a derivative designated as a hedge is terminated prior to the
maturation of the hedged transaction, gains or losses realized at termination
are deferred and included in the measurement of the hedged transaction. If a
hedged transaction matures, is sold, extinguished or terminated prior to the
maturity of a derivative designated as a hedge of such transaction, gains or
losses associated with the derivative through the date the transaction matured
are included in the measurement of the hedged transaction and the derivative is
reclassified as for trading purposes. Derivatives designated as a hedge of an
anticipated transaction are reclassified as for trading purposes if the
anticipated transaction is no longer likely to occur.
In the Combined Statement of Cash Flows, the Company reports the cash flows
resulting from its hedging activities in the same category as the related item
that is being hedged.
EARNINGS PER SHARE
The Company's historical capital structure is not indicative of its
prospective structure since no direct ownership relationship existed among all
the various units comprising Conoco. Accordingly, historical earnings per share
has not been presented in the Combined Financial Statements.
Unaudited pro forma basic earnings per share includes the shares of both
the Class A and the Class B common shares deemed to be outstanding as of the
date of the Offerings. Unaudited pro forma diluted earnings per share includes
the dilutive effect of the 8.6 million shares of Conoco Common Stock issuable
upon exercise of Conoco stock options (see Note 20 to the Combined Financial
Statements), after applying the treasury stock method, which are expected to be
issued upon cancellation of outstanding DuPont stock options, using the
anticipated weighted-average exercise price of the outstanding options and the
initial public offering price. In accordance with SEC Staff Accounting Bulletin
No. 98, pro forma basic and
F-10
<PAGE> 143
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
diluted earnings per share have been presented for the most recent annual and
subsequent interim periods only.
RECENT ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income," and Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The accompanying financial
statements reflect application of the provisions of Statement No. 130. The
Company is required to adopt Statement No. 131 for the 1998 annual report and
disclose segment information on the same basis used internally for evaluating
segment performance and deciding how to allocate resources to segments. The
Company is currently assessing the effect of Statement No. 131; however, its
adoption will have no financial impact on the Company.
In February 1998, the Financial Accounting Standards Board issued Statement
No. 132, "Employers' Disclosure About Pension and Other Postretirement
Benefits," that revised disclosure requirements for pension and other
postretirement benefits. It does not affect the measurement of the expense of
the Company's pension and other postretirement benefits. The Company is required
to adopt this Statement for the 1998 annual report and is currently assessing
the effect of the new disclosure.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" which
requires that companies recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
The Company is required to adopt this Statement by the first quarter of 2000 and
is currently assessing the effect of the new standard.
Statement No. 133 provides, if certain conditions are met, that a
derivative may be specifically designated as (1) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an unrecognized
firm commitment (fair value hedge), (2) a hedge of the exposure to variable cash
flows of a forecasted transaction (cash flow hedge), or (3) a hedge of the
foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security or a
foreign-currency-denominated forecasted transaction (foreign currency hedge).
Under Statement No. 133, the accounting for changes in fair value of a
derivative depends on its intended use and designation. For a fair value hedge,
the gain or loss is recognized in earnings in the period of change together with
the offsetting loss or gain on the hedged item. For a cash flow hedge, the
effective portion of the derivative's gain or loss is initially reported as a
component of other comprehensive income and subsequently reclassified into
earnings when the forecasted transaction affects earnings. For a foreign
currency hedge, the gain or loss is reported in other comprehensive income as
part of the cumulative translation adjustment. For all other items not
designated as hedging instruments, the gain or loss is recognized in earnings in
the period of change.
3. RELATED PARTY TRANSACTIONS
The Combined Financial Statements include significant transactions with
DuPont involving services (such as cash management, other financial services,
purchasing, legal, computer and corporate aviation) and general corporate
expenses that were provided between Conoco and centralized DuPont organizations.
The costs of services have been directly charged or allocated between Conoco and
DuPont using methods management believes are reasonable. These methods include
negotiated usage rates, dedicated asset assignment, and proportionate corporate
formulas involving assets, revenues, and employees. Such charges and allocations
are not necessarily indicative of what would have been incurred if Conoco had
been a separate entity.
F-11
<PAGE> 144
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Amounts charged and allocated to Conoco for these services were $103, $101
and $125 for the years 1995, 1996 and 1997, respectively, and are principally
included in Selling, General and Administrative Expenses. Conoco provided DuPont
services such as computer, legal and purchasing, as well as certain technical
and plant operating services, which amounted to $66, $66 and $62 in 1995, 1996
and 1997, respectively. These charges to DuPont were treated as reductions of
Cost of Goods Sold and Other Operating Expenses and Selling, General and
Administrative Expenses.
Interest expense charged by DuPont was $154, $143 and $124 for the years
1995, 1996 and 1997, respectively, and reflects market-based rates. A portion of
this and other interest and debt expense was capitalized as cost associated with
major construction projects. Interest income from DuPont was $47, $57 and $11
for the same years and also reflects market-based rates.
Sales and Other Operating Revenues include sales of products from Conoco to
DuPont, principally natural gas and gas liquids to supply several DuPont plant
sites. These sales totaled $278, $413 and $420 for the years 1995, 1996 and
1997, respectively. Also included are revenues from insurance premiums charged
to DuPont for property and casualty coverage outside the United States. These
revenues totaled $20, $21 and $22 for the years 1995, 1996 and 1997,
respectively. Purchases of products from DuPont during these periods were not
material.
These intercompany arrangements between DuPont and Conoco will continue
after the Offerings under transition service agreements or other long-term
agreements. It is not anticipated that a change, if any, in these costs and
revenues would have a material effect on the Company's results of operations or
combined financial position.
Accounts and Notes Receivable include amounts due from DuPont of $110 and
$79 at December 31, 1996 and 1997, respectively, representing current month
balances of transactions between Conoco and DuPont, mainly product sales, net
interest on borrowings, and certain charges billed annually. Accounts Payable
include amounts due DuPont of $5 and $4 at December 31, 1996 and 1997,
respectively.
Amounts representing notes receivable or borrowings from DuPont, including
its subsidiary organizations, are identified for related parties and presented
separately in the Combined Balance Sheet. The current portion of Notes
Receivable represents the accumulation of a variety of cash transfers and
operating transactions with DuPont. These balances are generally interest
bearing and represent net amounts of cash transferred for funding and cash
management purposes and amounts charged between the companies for certain
product and service purchases and asset transfers. The long-term portion of
Notes Receivable and amounts shown for Short-Term and Long-Term Borrowings
represent borrowings between Conoco and DuPont with established due dates at
market-based interest rates, except for certain short-term non-interest bearing
borrowings due DuPont of $168 and $492 at December 31, 1996 and 1997,
respectively. At December 31, 1997, the long-term portion of borrowings from
related parties totaled $1,450 and reflected a weighted average interest rate of
6.6 percent with maturities of $633 in 1999, $430 in 2000, and $387 in 2001.
4. OTHER INCOME
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Interest income
Related parties (see Note 3).............................. $ 47 $ 57 $ 11
Other, net of miscellaneous interest expense.............. 71 67 66
---- ---- ----
118 124 77
Equity in earnings of affiliates (see Note 11).............. 22 (25) 40
Gain on sales of assets..................................... 63 84 314(1)
Exchange gain (loss)........................................ (44) (5) 27
Other -- net................................................ 31 8 9
---- ---- ----
$190 $186 $467
==== ==== ====
</TABLE>
- ---------------
(1) Includes benefit of $239 from gain on the sale of certain Upstream
North Sea properties.
F-12
<PAGE> 145
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
5. TAXES OTHER THAN ON INCOME
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Petroleum excise taxes
U.S. ..................................................... $1,060 $1,145 $1,201
Non-U.S. ................................................. 4,595 4,316 4,148
------ ------ ------
5,655 5,461 5,349
Payroll taxes............................................... 51 48 43
Property taxes.............................................. 63 55 63
Production and other taxes.................................. 54 73 77
------ ------ ------
$5,823 $5,637 $5,532
====== ====== ======
</TABLE>
6. INTEREST AND DEBT EXPENSE
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Interest and debt cost incurred
Related parties (see Note 3).............................. $154 $143 $124
Other..................................................... 15 6 6
---- ---- ----
169 149 130
Less: Interest and debt cost capitalized.................... 95 75 94
---- ---- ----
Interest and debt expense................................... $ 74 $ 74 $ 36
==== ==== ====
</TABLE>
Interest paid (net of amounts capitalized) was $80 in 1995, $77 in 1996 and
$33 in 1997.
7. PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
1995 1996 1997
---- ------ ------
<S> <C> <C> <C>
Current tax expense:
U.S. federal.............................................. $(45) $ 155 $ 64
U.S. state and local...................................... 1 8 5
Non-U.S. ................................................. 685 865 925
---- ------ ------
Total............................................. 641 1,028 994
---- ------ ------
Deferred tax expense:
U.S. federal.............................................. 112 (78) 80
U.S. state and local...................................... 3 -- 8
Non-U.S. ................................................. 18 88 (72)
---- ------ ------
Total............................................. 133 10 16
---- ------ ------
Provision for Income Taxes.................................. 774 1,038 1,010
Minimum Pension Liability(1)................................ (1) (5) (7)
---- ------ ------
Total Provision................................... $773 $1,033 $1,003
==== ====== ======
</TABLE>
- ---------------
(1) Represents deferred tax provision for minimum pension liability adjustment.
Total income taxes paid worldwide were $745 in 1995, $901 in 1996 and $935
in 1997.
F-13
<PAGE> 146
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
The significant components of deferred tax assets and liabilities at
December 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
----------------- ------------------
DEFERRED TAX ASSET LIABILITY ASSET LIABILITY
------------ ----- --------- ------ ---------
<S> <C> <C> <C> <C>
Property, plant and equipment....................... $108 $2,276 $ 182 $2,219
Employee benefits................................... 162 -- 166 --
Other accrued expenses.............................. 277 -- 273 --
Inventories......................................... -- 88 -- 102
Tax loss/tax credit carryforwards................... 408 -- 417 --
Other............................................... 26 52 27 169
---- ------ ------ ------
Total..................................... $981 $2,416 $1,065 $2,490
====== ======
Less: Valuation allowance........................... 414 392
---- ------
Net................................................. $567 $ 673
==== ======
</TABLE>
Valuation allowances, which reduce deferred tax assets to an amount that
will more likely than not be realized, have been increased by $12 and $52 during
the years 1995 and 1996, respectively. These changes, which are reflected in the
provision for income taxes, offset increases in deferred tax assets resulting
primarily from operating losses incurred in exploration and startup operations.
In 1997, the valuation allowance decreased $22, principally reflecting a $37
decrease related to deferred tax assets representing operating losses which the
Company determined will more likely than not be realized in future years. This
decrease was partially offset by an increase of $15 reflecting offsets to
operating losses.
Current deferred tax liabilities (included in the Combined Balance Sheet
caption "Income Taxes") were $107 and $122 at December 31, 1996 and 1997,
respectively.
Current deferred tax assets included in Prepaid Expenses were $25 and $7 at
December 31, 1996 and 1997, respectively. In addition, Other Assets includes
deferred tax assets of $37 at December 31, 1997.
An analysis of the Company's effective income tax rate follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Statutory U.S. federal income tax rate...................... 35.0% 35.0% 35.0%
Higher effective tax rate on non-U.S. operations............ 27.0 21.6 13.9
Alternative fuels credit.................................... (4.5) (3.4) (3.0)
Other -- net................................................ (.1) 1.4 2.0
---- ---- ----
Effective income tax rate................................... 57.4% 54.6% 47.9%
==== ==== ====
</TABLE>
Earnings before income taxes shown below are based on the location of the
corporate unit to which such earnings are attributable. However, since such
earnings are often subject to taxation in more than one country, the income tax
provision shown above as U.S. or non-U.S. does not correspond to the earnings
set forth below.
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
U.S........................................................ $ 417 $ 563 $ 740
Other regions.............................................. 932 1,338 1,367
------ ------ ------
$1,349 $1,901 $2,107
====== ====== ======
</TABLE>
At December 31, 1996 and 1997, respectively, unremitted earnings of
non-U.S. subsidiaries totaling $1,210 and $1,645 were deemed to be permanently
invested. No deferred tax liability has been recognized with regard to the
remittance of such earnings. It is not practicable to estimate the income tax
liability that might be incurred if such earnings were remitted to the United
States.
F-14
<PAGE> 147
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Under the tax laws of various jurisdictions in which the Company operates,
deductions or credits that cannot be fully utilized for tax purposes during the
current year may be carried forward, subject to statutory limitations, to reduce
taxable income or taxes payable in a future year. At December 31, 1997, the tax
effect of such carryforwards approximated $417. Of this amount, $127 has no
expiration date, $11 expires in 1998, $38 expires in 1999, $75 expires in
2000-2001 and $166 expires in 2002.
8. ACCOUNTS AND NOTES RECEIVABLE
<TABLE>
<CAPTION>
DECEMBER 31
---------------
1996 1997
------ ------
<S> <C> <C>
Trade....................................................... $1,062 $ 916
Related parties (see Note 3)................................ 110 79
Other....................................................... 322 502
------ ------
$1,494 $1,497
====== ======
</TABLE>
See Note 26 for a description of business segment markets and associated
concentrations of credit risk.
9. INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31
-----------
1996 1997
---- ----
<S> <C> <C>
Crude oil and petroleum products............................ $675 $675
Other merchandise........................................... 19 25
Materials and supplies...................................... 112 130
---- ----
$806 $830
==== ====
</TABLE>
The excess of current cost over book value of inventories valued under the
LIFO method was $337 and $152 at December 31, 1996 and 1997, respectively.
Inventories valued at LIFO represented 84 percent and 81 percent of combined
inventories, at December 31, 1996 and 1997, respectively.
During 1995, 1996 and 1997, certain LIFO inventory quantities were reduced
resulting in partial liquidation of the LIFO bases, with no material effect on
net income.
10. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------
GROSS NET
----------------- -----------------
1996 1997 1996 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Oil and Gas Properties
Unproved..................................... $ 913 $ 1,491 $ 756 $ 1,230
Proved....................................... 11,914 12,420 5,185 5,480
Other.......................................... 1,045 1,316 609 871
------- ------- ------- -------
Total Upstream............................ 13,872 15,227 6,550 7,581
Refining....................................... 3,831 3,803 2,203 1,952
Marketing & Distribution....................... 2,278 2,199 1,329 1,295
------- ------- ------- -------
Total Downstream.......................... 6,109 6,002 3,532 3,247
------- ------- ------- -------
$19,981 $21,229 $10,082 $10,828
======= ======= ======= =======
</TABLE>
Property, Plant and Equipment includes Downstream gross assets acquired
under capital leases of $41 at December 31, 1996 and 1997; related amounts
included in Accumulated Depreciation, Depletion and Amortization were $7 and $10
at December 31, 1996 and 1997, respectively.
F-15
<PAGE> 148
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
11. SUMMARIZED FINANCIAL INFORMATION FOR AFFILIATED COMPANIES
Summarized combined financial information for affiliated companies for
which Conoco uses the equity method of accounting (see Note 2, "Basis of
Combination") is shown below on a 100 percent basis. Dividends received from
equity affiliates were $42 in 1995, $85 in 1996 and $58 in 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
RESULTS OF OPERATIONS
Sales(1)................................................... $4,368 $6,622 $7,521
Earnings before income taxes............................... 380 305 556
Net income................................................. 228 140 345
Conoco's equity in earnings of affiliates (see Note 4)..... 22 (25) 40
</TABLE>
- ---------------
(1) Includes sales to Conoco of $262 in 1995, $359 in 1996 and $568 in 1997.
<TABLE>
<CAPTION>
DECEMBER 31
---------------
1996 1997
------ ------
<S> <C> <C>
FINANCIAL POSITION
Current assets.............................................. $1,503 $2,543
Non-current assets.......................................... 5,218 6,826
------ ------
Total assets...................................... $6,721 $9,369
------ ------
Short-term borrowings*...................................... $ 241 $ 550
Other current liabilities................................... 929 1,308
Long-term borrowings*....................................... 3,097 4,364
Other long-term liabilities................................. 646 645
------ ------
Total liabilities................................. $4,913 $6,867
------ ------
Conoco's investment in affiliates (includes advances)....... $ 703 $1,085
====== ======
</TABLE>
- ---------------
* Conoco's pro rata interest in total borrowings was $935 in 1996 and $1,586 in
1997, of which $453 in 1996 and $826 in 1997 were guaranteed by the Company.
These amounts are included in the guarantees disclosed in Note 25.
At December 31, 1997, Conoco's equity in undistributed earnings of its
affiliated companies was $79.
12. OTHER ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
------------
1996 1997
---- ----
<S> <C> <C>
Prepaid pension cost (see Note 23).......................... $ 79 $ 71
Long-term notes receivables................................. 26 74
Other securities and investments............................ 482 100
Other....................................................... 187 247
---- ----
$774 $492
==== ====
</TABLE>
Other securities and investments include $478 and $97 at December 31, 1996
and 1997, respectively, representing marketable securities classified as
available for sale and reported at fair value. The remainder represents numerous
small investments which are reported at cost.
F-16
<PAGE> 149
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
13. ACCOUNTS PAYABLE
<TABLE>
<CAPTION>
DECEMBER 31
----------------
1996 1997
------ ------
<S> <C> <C>
Trade....................................................... $ 804 $ 969
Payables to banks........................................... 216 117
Related parties (see Note 3)................................ 5 4
------ ------
$1,025 $1,090
====== ======
</TABLE>
Payables to banks represent checks issued on certain disbursement accounts
but not presented to the banks for payment.
14. OTHER SHORT-TERM BORROWINGS AND CAPITAL LEASE OBLIGATIONS
<TABLE>
<CAPTION>
DECEMBER 31
------------
1996 1997
---- ----
<S> <C> <C>
Industrial development bonds................................ $24 $24
Bank borrowings (foreign currency).......................... -- 21
Long-term borrowings payable within one year................ 4 25
Capital lease obligations................................... 4 2
--- ---
$32 $72
=== ===
</TABLE>
The Company has uncommitted short-term bank credit lines of approximately
$55 and $42 at December 31, 1996 and 1997, respectively. These lines are
denominated in various foreign currencies to support general operating needs in
their respective countries. No advances were outstanding under these lines at
these respective dates.
The weighted average interest rate on other short-term borrowings
outstanding at December 31, 1996 and 1997 was 3.8 percent and 3.7 percent,
respectively.
15. OTHER ACCRUED LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31
----------------
1996 1997
------ ------
<S> <C> <C>
Taxes other than on income.................................. $ 309 $ 376
Operating expenses.......................................... 334 343
Payroll and other employee-related costs.................... 133 135
Accrued postretirement benefits cost (see Note 22).......... 16 24
Other....................................................... 318 411
------ ------
$1,110 $1,289
====== ======
</TABLE>
F-17
<PAGE> 150
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
16. OTHER LONG-TERM BORROWINGS AND CAPITAL LEASE OBLIGATIONS
<TABLE>
<CAPTION>
DECEMBER 31
------------
1996 1997
---- ----
<S> <C> <C>
5.75% notes due 2026........................................ $ 16 $ 16
6.50% notes due 2008........................................ 7 7
Other loans (various currencies) due 1998-2007*............. 21 30
Capitalization obligations to affiliates due 1998-1999...... 22 20
Capital lease obligations................................... 35 33
---- ----
$101 $106
==== ====
</TABLE>
- ---------------
* Average interest rates were 6.0 percent and 7.3 percent at December 31, 1996
and 1997, respectively.
Maturities of long-term borrowings, together with sinking fund requirements
for years ending after December 31, 1998 are $24, $4, $4, and $4 for the years
1999, 2000, 2001 and 2002, respectively.
17. OTHER LIABILITIES AND DEFERRED CREDITS
<TABLE>
<CAPTION>
DECEMBER 31
----------------
1996 1997
------ ------
<S> <C> <C>
Deferred gas revenue*....................................... $ -- $ 379
Accrued postretirement benefits cost (see Note 22).......... 327 318
Abandonment costs........................................... 317 310
Accrued pension liability (see Note 23)..................... 165 230
Environmental remediation costs (see Note 25)............... 140 132
Other....................................................... 441 553
------ ------
$1,390 $1,922
====== ======
</TABLE>
- ---------------
* Includes $303 received from a contract for future sales of natural gas to
Centrica, a United Kingdom gas marketing company.
18. MINORITY INTERESTS
In 1996, certain upstream subsidiaries contributed assets with an aggregate
fair value of $613 to Conoco Oil & Gas Associates L.P. (COGA) for a general
partnership interest of 67 percent. The remaining 33 percent was purchased by
Vanguard Energy Investors L.P. (Vanguard) as a limited partner. The net result
of this transaction was to increase minority interests by $297.
Vanguard is entitled to a cumulative annual priority return on its
investment and participation in residual earnings at rates established in the
partnership agreement. The priority return rate, currently 6.52 percent, is
negotiated every four years commencing in 1999. In the event the parties are
unable to agree on a new return rate, the partnership would be liquidated with
resultant cash outflows not expected to be materially different from the
recorded amount of minority interest. Vanguard's share of COGA's earnings was
$18 or 17 percent in 1996 and $22 or 18 percent in 1997.
F-18
<PAGE> 151
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
19. OTHER COMPREHENSIVE INCOME
Changes in related components of other comprehensive income (loss) are
reported net of associated income tax effects as summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------------------------------------------------------------
1995 1996 1997
------------------------------- ------------------------------- -------------------------------
PRETAX INCOME TAX AFTER-TAX PRETAX INCOME TAX AFTER-TAX PRETAX INCOME TAX AFTER-TAX
------ ---------- --------- ------ ---------- --------- ------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Minimum Pension Liability
Adjustment.............. $(3) $(1) $(2) $(15) $(5) $(10) $ (20) $(7) $ (13)
Foreign Currency
Translation
Adjustment*............. (39) -- (39) (121) -- (121)
--- --- --- ---- --- ---- ----- --- -----
Other Comprehensive Income
(Loss).................. $(3) $(1) $(2) $(54) $(5) $(49) $(141) $(7) $(134)
=== === === ==== === ==== ===== === =====
</TABLE>
- ---------------
* Effective January 1, 1996, local currency was adopted as the functional
currency for the Company's integrated Western European petroleum operations to
properly reflect changed circumstances in their primary economic environment.
20. COMPENSATION PLANS
Employees of Conoco participate in stock-based compensation plans that are
administered through DuPont and involve options to acquire DuPont common stock.
Accordingly, option and expense information presented herein represents the
Company's portion of the overall plans.
Subject to completion of the Offerings, the Company and DuPont expect to
give certain current employees of the Company the option, subject to specific
country tax and legal requirements, to participate in a program involving the
cancellation of all or part of their options to purchase DuPont common stock or
SARs with respect to DuPont common stock and the issuance by the Company upon
such cancellation of comparable options to acquire Class A Common Stock, or SARs
with respect to Class A Common Stock. Participation in the program will be
deemed a change in the terms of certain awards granted to Conoco employees. As a
result, the Company will incur a non-cash charge to compensation expense, in the
quarter the Offerings are completed, of approximately $192 after-tax depending
on the number of outstanding Conoco employee options to purchase DuPont common
stock canceled.
From time to time, the DuPont Board of Directors has approved the adoption
of a worldwide Corporate Sharing Program. Under these programs, a majority of
the Company's employees received a one-time grant to acquire shares of DuPont
common stock at the fair market value at the date of grant. Option terms are
"fixed" and generally are exercisable one year after date of grant and expire 10
years from date of grant. There are no additional shares that may be subject to
option under existing programs.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations in accounting for its stock option
plans. Accordingly, no compensation expense has been recognized for fixed
options.
Stock option awards under the DuPont Stock Performance Plan may be granted
to key employees of the Company and may be "fixed" and/or "variable". The
purchase price of shares subject to option is the market price of DuPont stock
at the date of grant. In January 1997, a reload feature was added to the Stock
Performance Plan to accelerate stock ownership by more effectively using stock
options. Participants are eligible for reload options through February 13, 1999
upon the exercise of stock options with the condition that shares received from
the exercise of the original option may not be sold for at least five years.
Reloads are granted at the market price on the reload grant date and have a term
equal to the remaining term of the
F-19
<PAGE> 152
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
original option. The number of new options granted under a reload option is
equal to the number of shares required to satisfy the total exercise price of
the original option.
Generally, fixed options are fully exercisable from one to three years
after date of grant and expire 10 years from date of grant. Beginning in 1998,
shares otherwise receivable from the exercise of nonqualified options can be
deferred as stock units for a designated future delivery.
During 1997 variable stock option grants were made to certain senior
management. These options are subject to forfeiture if, within five years from
the date of grant, the market price of DuPont common stock does not achieve a
price of $75 per share for 50 percent of the options and $90 per share for the
remaining 50 percent. At December 31, 1997, none of the outstanding variable
options were exercisable.
For all related DuPont plans, the maximum number of shares that may be
subject to option for any consecutive five-year period is 72 million shares.
Subject to this limit, additional shares that may have been made subject to
options for the years 1995, 1996 and 1997 were 56,770,460, 59,078,926 and
56,842,462, respectively.
Awards for 1997 under the DuPont Stock Performance Plan (granted to key
employees in 1998) consisted of 1,185,276 fixed options to acquire DuPont common
stock at the fair market value ($59.50 per share) on the date of grant. These
options vest over a three-year period and, except for the last six months of the
ten-year option term, are exercisable when the market price of DuPont common
stock exceeds the option grant price by 20 percent.
The following table summarizes activity for fixed and variable options for
the last three years:
<TABLE>
<CAPTION>
FIXED VARIABLE
--------------------- ---------------------
NUMBER WEIGHTED- NUMBER WEIGHTED-
OF AVERAGE OF AVERAGE
SHARES PRICE SHARES PRICE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
January 1, 1995........................... 4,980,083 $20.80 --
Granted................................... 3,556,392 $28.26 -- --
Exercised................................. 614,269 $18.56 -- --
Forfeited................................. 110,659 $28.08 -- --
--------- ------ --------- ------
December 31, 1995......................... 7,811,547 $24.27 -- --
Granted................................... 1,140,780 $39.20 -- --
Exercised................................. 1,781,277 $23.33 -- --
Forfeited................................. 95,330 $26.38 -- --
--------- ------ --------- ------
December 31, 1996......................... 7,075,720 $26.88 -- --
Granted................................... 2,761,416 $52.90 1,259,600 $52.50
Exercised................................. 730,383 $23.97 -- --
Forfeited................................. 116,325 $50.44 -- --
--------- ------ --------- ------
December 31, 1997......................... 8,990,428 $35.14 1,259,600 $52.50
</TABLE>
Fixed options exercisable at the end of the last three years and the
weighted-average fair value of fixed options granted are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Options exercisable at year-end:
Number of shares............................... 4,377,657 5,934,940 6,229,012
Weighted-average price......................... $ 21.14 $ 24.51 $ 27.26
Weighted-average fair value of options granted
during the year................................ $ 5.92 $ 9.01 $ 12.84
</TABLE>
F-20
<PAGE> 153
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
The weighted-average fair value of variable options granted during 1997 was
$13.03 per share.
The fair value of options is calculated using the Black-Scholes option
pricing model. Assumptions used were as follows:
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- ----------------
FIXED FIXED FIXED VARIABLE
----- ----- ----- --------
<S> <C> <C> <C> <C>
Dividend yield......................................... 3.4% 2.6% 2.2% 2.2%
Volatility............................................. 20.6% 21.0% 18.6% 18.6%
Risk-free interest rate................................ 7.6% 5.4% 6.4% 6.4%
Expected life (years).................................. 4.5 6.0 5.6 5.7
</TABLE>
The following table summarizes information concerning currently outstanding
and exercisable fixed options. For total variable options outstanding at
December 31, 1997, the weighted-average remaining contractual life was 9.1
years.
<TABLE>
<CAPTION>
EXERCISE EXERCISE EXERCISE
PRICE PRICE PRICE
DECEMBER 31, 1997 $13.17-$19.63 $22.63-$33.88 $35.00-$55.50
----------------- ------------- ------------- -------------
<S> <C> <C> <C>
Options outstanding............................ 1,140,519 3,977,927 3,871,982
Weighted-average remaining contractual life
(years)...................................... 2.6 6.2 8.9
Weighted-average price......................... $ 18.37 $ 26.49 $ 48.38
Options exercisable............................ 1,140,519 3,977,927 1,110,566
Weighted-average price......................... $ 18.37 $ 26.49 $ 39.19
</TABLE>
As reported on the New York Stock Exchange, the market price range of
DuPont common stock for the year 1997 was $46 3/8 to $69 3/4 per share and the
closing price on December 31, 1997 was $60 1/16 per share.
Under the Conoco Unit Option Plan, key salaried employees in certain grade
levels who show early evidence of ability to assume significant responsibility
and leadership are offered stock appreciation rights. Annual grants under the
plan are granted to approximately 20 percent of eligible employees who are
awarded appreciation rights on theoretical DuPont stock valued at approximately
40 percent of the employee's annual base pay. These unit options, exercisable
only in cash, have a ten-year life with twenty percent vesting each of the first
five years. At December 31, 1996 and 1997, unit options outstanding were 954,374
and 908,532, respectively. At these same dates, related liability provisions
totaled $18 and $27, respectively. The maximum number of unit options allowed to
be outstanding under the plan is 6,150,000.
Compensation expense recognized in income for stock-based employee
compensation awards was $8, $13 and $26 for 1995, 1996 and 1997, respectively.
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation", was issued in 1995. The Company has elected not to
adopt the optional recognition provisions of SFAS No. 123. If the Company had
adopted these recognition provisions, net income would have been reduced by $13,
$6 and $28 for 1995, 1996 and 1997, respectively.
Awards under the Variable Compensation Plan may be granted in stock and/or
cash to employees who have contributed most in a general way to the Company's
success, consideration being given to ability to succeed to more important
managerial responsibility. Overall amounts are dependent on financial
performance of DuPont and Conoco and other factors, and are subject to maximum
limits as defined by the plan. Amounts charged against earnings in anticipation
of awards to be made later were $24 in 1995, $38 in 1996 and $38 in 1997. Awards
made for plan years 1995, 1996 and 1997 were $26, $38 and $45, respectively. In
accordance with the terms of the Variable Compensation Plan and similar plans of
subsidiaries, 154,918 shares of common stock are awaiting delivery from awards
for 1997 and prior years.
F-21
<PAGE> 154
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Awards under the separate Conoco Challenge Program may be granted in cash
to employees not covered by the Variable Compensation Plan. This plan provides
awards based on meeting financial goals and upholding Conoco's core values.
Overall amounts are dependent on Company earnings and cash provided by
operations and are subject to maximum limits as defined by the plan. Amounts
charged against earnings in anticipation of awards to be made later were $12 in
1995, $47 in 1996 and $49 in 1997. Awards made for plan years 1995, 1996 and
1997 were $20, $47 and $47, respectively.
21. INVESTMENT ACTIVITIES
Purchases of property, plant and equipment in 1997 include $929 for
upstream natural gas properties in South Texas (see Supplemental Petroleum
Data).
Proceeds from sales of assets in 1997 includes $272 from the sale of
certain upstream North Sea properties.
22. OTHER POSTRETIREMENT BENEFITS
Conoco and certain subsidiaries provide medical and life insurance benefits
to retirees and survivors. The associated plans, principally health, are
unfunded, and approved claims are paid from Company funds. Under the terms of
these plans, the Company reserves the right to change, modify or discontinue the
plans.
Net postretirement benefits cost includes the following components:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Service cost................................................ $ 5 $ 7 $ 6
Interest cost............................................... 18 16 18
Amortization of net gains and prior service credit.......... (7) (5) (5)
--- --- ---
Net postretirement benefits cost............................ $16 $18 $19
</TABLE>
The following provides a reconciliation of the accumulated postretirement
benefit obligation for these plans to the liabilities reflected in the Combined
Balance Sheet (see Notes 15 and 17):
<TABLE>
<CAPTION>
DECEMBER 31
-------------
1996 1997
----- -----
<S> <C> <C>
Accumulated postretirement benefit obligation for:
Retirees and survivors.................................... $(152) $(194)
Fully eligible employees.................................. (5) (6)
Other employees........................................... (85) (101)
----- -----
(242) (301)
Unrecognized net loss (gain)................................ (41) 14
Unrecognized prior service credit........................... (60) (55)
----- -----
Accrued postretirement benefits cost........................ $(343) $(342)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
-----------
1996 1997
---- ----
<S> <C> <C>
FINANCIAL ASSUMPTIONS
Discount rate............................................... 7.75% 7.00%
Long-term rate of compensation increase..................... 5.00% 5.00%
Health care escalation rate................................. 4.50% 4.50%
</TABLE>
F-22
<PAGE> 155
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Conoco has communicated to plan participants that any increase in the
annual health care escalation rate above 4.5 percent will be borne by the
participants and, therefore, result in no increase to the accumulated
postretirement benefit obligation or the other postretirement benefits cost.
23. PENSIONS
The Company participates in the DuPont U.S. defined benefit plan which
covers substantially all U.S. employees and has separate defined benefit plans
covering certain U.S. and non-U.S. employees. The benefits for these plans are
based primarily on years of service and employees' pay near retirement. The
Company's funding policy is consistent with the funding requirements of federal
law and regulations.
With respect to the DuPont U.S. defined benefit pension plan, the Company
and DuPont agreed upon an amount of approximately $820 at the date of the
Offerings that will eventually be transferred to a separate trust for the
Company's pension plan. This amount, adjusted for benefit payments and
investment return from the date of the Offerings, will be transferred to the
Company within six months following the date which DuPont owns neither 80
percent of the voting power nor 80 percent of the economic value of the Common
Stock, assuming certain conditions are satisfied. The Company allocated the
pension obligations based on the Company's individual employees covered and
allocated the unrecognized prior service cost and unrecognized net gain in
proportion to the Company's projected benefit obligation to the total projected
benefit obligation of the DuPont plan. The projected benefit obligation
approximates $644 and $723 at December 31, 1996 and 1997, respectively, and the
prepaid pension asset is $79 and $71 at December 31, 1996 and 1997,
respectively. The net pension cost components disclosed in the table below
include the net periodic pension cost based on the allocations described above.
Pension coverage for employees of the Company's non-U.S. subsidiaries is
provided, to the extent deemed appropriate, through separate plans. Obligations
under such plans are systematically provided for by depositing funds with
trustees, under insurance policies or by book reserves.
Net pension cost/(credit) for defined benefit plans includes the following
components:
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Service cost -- benefits earned during the
period..................................... $ 51 $ 55 $ 60
Interest cost on projected benefit
obligation................................. 71 76 88
Return on assets
Actual (gain).............................. $(196) $(134) $(192)
Deferred gain.............................. 122 (74) 43 (91) 94 (98)
----- ----- -----
Amortization of net gains and prior service
cost....................................... (4) (3) 3
---- ---- ----
Net pension cost............................. $ 44 $ 37 $ 53
==== ==== ====
</TABLE>
F-23
<PAGE> 156
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
The funded status of these plans (excluding the DuPont United States
defined benefit plan) was as follows:
<TABLE>
<CAPTION>
ACCUMULATED BENEFIT
EXCEEDING ASSETS
DECEMBER 31
--------------------
1996 1997
------- -------
<S> <C> <C>
Actuarial present value of:
Vested benefit obligation................................. $(485) $(616)
----- -----
Accumulated benefit obligation............................ $(489) $(616)
===== =====
Projected benefit obligation.............................. $(533) $(682)
Plan assets at fair value................................... 323 386
----- -----
Excess of assets over projected benefit obligation.......... (210) (296)
Unrecognized net (gain) loss*............................... 29 109
Unrecognized prior service cost............................. 129 121
Additional minimum liability................................ (113) (164)
----- -----
Accrued pension liability (see Note 17)..................... $(165) $(230)
===== =====
- ---------------
* Includes the unamortized balance of unrecognized net
(gain) at January 1, 1985, the initial application date of
Statement of Financial Accounting Standards No. 87,
"Employers' Accounting for Pensions"...................... $ (19) $ (17)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
--------------
UNITED STATES PLAN ASSUMPTIONS 1996 1997
------------------------------ ---- ----
<S> <C> <C>
Discount rate............................................... 7.75% 7.00%
Long-term rate of compensation increase..................... 5.00% 5.00%
Long-term rate of return on plan assets..................... 9.00% 9.00%
</TABLE>
For non-U.S. plans, similar economic assumptions were used. At December 31,
1997, U.S. plan assets consisted principally of common stocks, including 151,611
shares of DuPont.
24. FINANCIAL INSTRUMENTS AND OTHER RISK MANAGEMENT ACTIVITIES
Conoco operates in the worldwide crude oil, refined product, natural gas,
natural gas liquids and electric power markets and is exposed to fluctuations in
hydrocarbon prices, foreign currency rates, and interest rates that can affect
the revenues and cost of operating, investing and financing. Conoco's management
has used and intends to use financial and commodity-based derivative contracts
to reduce the risk in overall earnings and cash flow when the benefits provided
are anticipated to more than offset the risk management costs involved.
The Company has established a Financial Risk Management Policy Framework
that provides guidelines for entering into contractual arrangements
(derivatives) to manage the Company's commodity price, foreign currency rate,
and interest rate risks. The Conoco Risk Management Committee has ongoing
responsibility for the content of this policy and has principal oversight
responsibility to ensure the Company is in compliance with the policy and that
procedures and controls are in place for the use of commodity, foreign currency
and interest rate instruments. These procedures clearly establish derivative
control and valuation processes, routine monitoring and reporting requirements,
and counterparty credit approval procedures. Additionally, the Company's
internal audit group conducts routine reviews of these risk management
activities to assess the adequacy of internal controls. The audit results are
reviewed by the Conoco Risk Management Committee and by line management.
The counterparties to these contractual arrangements are limited to major
financial institutions and other established companies in the petroleum
industry. Although the Company is exposed to credit loss in the event of
nonperformance by these counterparties, this exposure is managed through credit
approvals, limits and
F-24
<PAGE> 157
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
monitoring procedures and limits to the period over which unpaid balances are
allowed to accumulate. The Company has not experienced nonperformance by
counterparties to these contracts and no material loss would be expected from
any such nonperformance.
COMMODITY PRICE RISK
The Company enters into energy-related futures, forwards, swaps and options
in various markets to balance its physical systems, to meet customer needs and
to manage its exposure to price fluctuations on anticipated crude oil, natural
gas, refined product and electric power transactions.
These instruments provide a natural extension of the underlying cash market
and are used to physically acquire a portion of supply requirements as well as
to manage pricing of near-term physical requirements. The commodity futures
market has underlying principles of increased liquidity and longer trading
periods than the cash market and is one method of managing price risk in the
energy business.
From time to time, management may use derivatives to establish longer-term
positions to hedge the price risk for the Company's equity crude oil and natural
gas production as well as refinery margins.
Under the Company's policy, hedging includes only those transactions that
offset physical positions and reduce overall Company exposure to prevailing
market price risk. Trading is defined as any transaction that does not meet the
definition of hedging. After-tax gain/loss from risk trading has not been
material.
FOREIGN CURRENCY RISK
Conoco has foreign currency exchange rate risk resulting from operations in
over 40 countries around the world. Effective January 1, 1996, the Company
determined that the local currency should be the functional currency for its
integrated Western European petroleum operations. At this time, the Company does
not intend to comprehensively hedge its exposure to currency rate changes,
although it may choose to selectively hedge exposures to foreign currency rate
risk resulting from transactions in currencies that are not the functional
currency. Examples include firm commitments for capital projects, certain local
currency tax payments and cash returns from net investments in foreign
affiliates to be remitted within the coming year.
At December 31, 1997, the Company had open forward exchange contracts
designated as a hedge of firm foreign currency commitments. The notional amount
of these contracts was $50 and the estimated fair value was $38. The Company had
no open forward exchange contracts at December 31, 1996.
INTEREST RATE RISK
Prior to this planned offering, the Company had no material interest rate
risk to manage. Subsequent to this offering, however, the Company would intend
to manage any resultant significant interest rate exposure by using a
combination of financial derivative instruments as part of a program to manage
the fixed and floating interest rate mix of the total debt portfolio and related
overall cost of borrowing.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying values of most financial instruments are based on historical
costs. The carrying values of marketable securities, receivables, payables and
short-term obligations approximate their fair value because of their short
maturity. Long-term receivables from and long-term borrowings due to related
parties approximate fair value because associated interest rates are market
based. Excluding amounts due related parties, the estimated fair value of other
long-term borrowings outstanding at December 31, 1996 and 1997 of $101 and $106,
respectively, was $103 and $108, respectively. These estimates were based on
quoted market prices for the same or similar issues, or the current rates
offered to the Company for issues with the same remaining maturities.
F-25
<PAGE> 158
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
SUMMARY OF OUTSTANDING DERIVATIVE FINANCIAL INSTRUMENTS
Set forth below is a summary of the fair values, carrying amounts and
notional values of outstanding commodity financial instruments at December 31,
1996 and 1997.
Notional amounts represent the face amount of the contractual arrangements
and are not a measure of market or credit exposure. The fair value of swaps and
other over-the-counter instruments are estimated based on quoted market prices
of comparable contracts and approximate the gain or (loss) that would have been
realized if the contracts had been closed out at balance sheet date. Carrying
amounts represent the receivable (payable) recorded in the Combined Balance
Sheet.
<TABLE>
<CAPTION>
FAIR CARRYING NOTIONAL
COMMODITY DERIVATIVES VALUE AMOUNT VALUE
--------------------- ----- -------- --------
<S> <C> <C> <C>
December 31, 1996:
Hedging................................................... $ 2 $ 5 $ 273
Trading................................................... 1 -- 291
December 31, 1997:
Hedging................................................... $10 $12 $1,037
Trading................................................... (2) (1) 1,089
</TABLE>
Estimated fair values for hedging instruments only represent the value of
the hedge component of the transactions and, thus, are not indicative of the
fair value of the Company's overall hedged position.
25. COMMITMENTS AND CONTINGENT LIABILITIES
The Company uses various leased facilities and equipment in its operations.
Future minimum lease payments under noncancelable operating leases are $178,
$156, $119, $106 and $97 for the years 1998, 1999, 2000, 2001 and 2002,
respectively, and $582 for subsequent years, and are not reduced by
noncancelable minimum sublease rentals due in the future in the amount of $120.
Rental expense under operating leases was $124 in 1995, $118 in 1996 and $132 in
1997.
The Company has various purchase commitments for materials, supplies and
items of permanent investment incident to the ordinary conduct of business. In
the aggregate, such commitments are not at prices in excess of current market.
In addition, at December 31, 1997, the Company has obligations to purchase, over
periods up to twenty-one years, natural gas at prices that were in excess of
year-end 1997 market prices. No material annual loss is expected from these
long-term commitments.
The Company is subject to various lawsuits and claims involving a variety
of matters including, along with other oil companies, actions challenging oil
and gas royalty, severance tax payments and other payments, including claims
based on posted prices, and claims for damages resulting from leaking
underground storage tanks. In general, the effect on future financial results is
not subject to reasonable estimation because considerable uncertainty exists.
The Company believes the ultimate liabilities resulting from such lawsuits and
claims may be material to results of operations in the period in which they are
recognized but will not materially affect the combined financial position of the
Company. In addition to the litigation settlements referenced in Note 26, during
the second quarter of 1998 the Company recorded non-recurring after-tax charges
of $28 for anticipated costs to resolve various litigation.
The Company is also subject to contingencies pursuant to environmental laws
and regulations that in the future may require the Company to take further
action to correct the effects on the environment of prior disposal practices or
releases of petroleum substances by the Company or other parties. The Company
has accrued for certain environmental remediation activities consistent with the
policy set forth in Note 2. At December 31, 1996 and 1997, such accrual amounted
to $152 and $144, respectively, and, in management's opinion, was appropriate
based on existing facts and circumstances. Under adverse changes in
circumstances,
F-26
<PAGE> 159
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
potential liability may exceed amounts accrued. In the event future monitoring
and remediation expenditures are in excess of amounts accrued, they may be
significant to results of operations in the period recognized but management
does not anticipate they will have a material adverse effect on the combined
financial position of the Company.
The Company has indirectly guaranteed various debt obligations under
agreements with certain affiliated and other companies to provide specified
minimum revenues from shipments or purchases of products. These indirect
guarantees totaled $19 at December 31, 1996 and 1997. The Company, along with
certain European DuPont subsidiaries, also participates in a multiparty account
banking agreement, which provides for the indirect guarantee of bank account
overdrafts of certain European DuPont subsidiaries. Management believes the
exposure under this agreement is not material and expects to terminate the
agreement prior to completion of the Offerings. In addition, the Company or
DuPont, on behalf of the Company, had directly guaranteed obligations of certain
affiliated companies and others. These guarantees totaled $663 and $1,131 at
December 31, 1996 and 1997, respectively. The increase during 1997 is primarily
related to financing associated with the Petrozuata heavy oil venture in
Venezuela. No material loss is anticipated by reason of such agreements and
guarantees.
The Company's operations, particularly oil and gas exploration and
production, can be affected by changing economic, regulatory and political
environments in the various countries, including the United States, in which it
operates. In certain locations, host governments have imposed restrictions,
controls and taxes, and in others, political conditions have existed that may
threaten the safety of employees and the Company's continued presence in those
countries. Internal unrest or strained relations between a host government and
the Company or other governments may affect the Company's operations. Those
developments have, at times, significantly affected the Company's operations and
related results and are carefully considered by management when evaluating the
level of current and future activity in such countries.
Areas in which the Company has significant operations include the United
States, the United Kingdom, Norway, Germany, Venezuela, the United Arab
Emirates, Indonesia, Russia, Canada, the Czech Republic, Malaysia and Nigeria.
26. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
The Company has two principal business segments. The Upstream segment
explores for, develops, produces and markets crude oil and natural gas, and
processes natural gas to recover and market higher-value liquids. The Downstream
segment refines, markets, transports and trades crude oil and petroleum
products. Corporate and Other includes general corporate expenses, financing
costs and other nonoperating items, and results for electric power and
related-party insurance operations. The Company sells its products worldwide;
however, about 55 percent and 41 percent of sales are made in the United States
and Europe, respectively. Major products include crude oil, natural gas and
refined products that are sold primarily in the energy and transportation
markets. The Company's sales are not materially dependent on a single customer
or small group
F-27
<PAGE> 160
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
of customers. Transfers between segments and geographic areas are on the basis
of estimated market values. Corporate assets include cash and cash equivalents.
<TABLE>
<CAPTION>
CORPORATE
SEGMENT INFORMATION UPSTREAM DOWNSTREAM AND OTHER COMBINED
------------------- -------- ---------- --------- --------
<S> <C> <C> <C> <C>
1995
Sales and Other Operating Revenues(1)(2)............ $3,270 $17,038 $ 20 $20,328
Transfers Between Segments.......................... 910 92 -- --
------ ------- ------ -------
Total Revenues............................ $4,180 $17,130 $ 20 $20,328
====== ======= ====== =======
Operating Profit.................................... $1,121 $ 319 $ (110) $ 1,330
Equity in Earnings of Affiliates.................... (5) 27 -- 22
Corporate Nonoperating Items:
Interest and Debt Expense......................... (74) (74)
Interest Income (net of misc. interest expense)... 118 118
Other............................................. (47) (47)
Provision for Income Taxes.......................... (624) (113) (37) (774)
------ ------- ------ -------
Net Income (Loss)(3).............................. $ 492 $ 233 $ (150) $ 575
====== ======= ====== =======
Assets at December 31:
Identifiable Assets............................... $7,059 $ 5,242 $1,473 $13,774
Investment in Affiliates.......................... 171 284 -- 455
------ ------- ------ -------
Total..................................... $7,230 $ 5,526 $1,473 $14,229
====== ======= ====== =======
Depreciation, Depletion and Amortization(4)......... $ 812 $ 286 $ -- $ 1,098
Capital Expenditures and Investments(5)............. $1,224 $ 613 $ -- $ 1,837
1996
Sales and Other Operating Revenues(1)(2)............ $4,726 $19,425 $ 79 $24,230
Transfers Between Segments.......................... 1,159 122 -- --
------ ------- ------ -------
Total Revenues............................ $5,885 $19,547 $ 79 $24,230
====== ======= ====== =======
Operating Profit.................................... $1,559 $ 446 $ (118) $ 1,887
Equity in Earnings of Affiliates.................... (30) 5 -- (25)
Corporate Nonoperating Items:
Interest and Debt Expense......................... (74) (74)
Interest Income (net of misc. interest expense)... 124 124
Other............................................. (11) (11)
Provision for Income Taxes.......................... (848) (162) (28) (1,038)
------ ------- ------ -------
Net Income (Loss)(6).............................. $ 681 $ 289 $ (107) $ 863
====== ======= ====== =======
Assets at December 31:
Identifiable Assets............................... $7,486 $ 5,360 $1,677 $14,523
Investment in Affiliates.......................... 234 469 -- 703
------ ------- ------ -------
Total..................................... $7,720 $ 5,829 $1,677 $15,226
====== ======= ====== =======
Depreciation, Depletion and Amortization(4)......... $ 822 $ 293 $ -- $ 1,115
Capital Expenditures and Investments(5)............. $1,264 $ 680 $ -- $ 1,944
</TABLE>
F-28
<PAGE> 161
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
<TABLE>
<CAPTION>
CORPORATE
SEGMENT INFORMATION UPSTREAM DOWNSTREAM AND OTHER COMBINED
------------------- -------- ---------- --------- --------
<S> <C> <C> <C> <C>
1997
Sales and Other Operating Revenues(1)(2)............ $5,254 $20,033 $ 509 $25,796
Transfers Between Segments.......................... 1,221 108 -- --
------ ------- ------ -------
Total Revenues............................ $6,475 $20,141 $ 509 $25,796
====== ======= ====== =======
Operating Profit.................................... $1,663 $ 472 $ (132) $ 2,003
Equity in Earnings of Affiliates.................... 11 29 -- 40
Corporate Nonoperating Items:
Interest and Debt Expense......................... (36) (36)
Interest Income (net of misc. interest expense)... 77 77
Other............................................. 23 23
Provision for Income Taxes.......................... (790) (194) (26) (1,010)
------ ------- ------ -------
Net Income (Loss)(7).............................. $ 884 $ 307 $ (94) $ 1,097
====== ======= ====== =======
Assets at December 31:
Identifiable Assets............................... $8,538 $ 5,247 $2,192 $15,977
Investment in Affiliates.......................... 411 651 23 1,085
------ ------- ------ -------
Total..................................... $8,949 $ 5,898 $2,215 $17,062
====== ======= ====== =======
Depreciation, Depletion and Amortization(4)......... $ 892 $ 333 $ -- $ 1,225
Capital Expenditures and Investments(5)............. $2,533 $ 558 $ 23 $ 3,114
</TABLE>
- ---------------
(1) Sales exceeding 10 percent of combined sales and other operating revenues:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Refined products........................................ $14,444 $15,953 $15,829
Crude oil............................................... 3,062 4,286 4,879
Natural gas............................................. 1,494 2,378 2,971
</TABLE>
(2) Includes sales of purchased products substantially at cost:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Buy/sell supply transactions settled in cash:
Crude oil................................................ $1,845 $2,820 $3,566
Refined products......................................... 454 729 683
Natural gas resales........................................ 192 560 773
Electric power resales..................................... -- 58 487
</TABLE>
(3) Includes $45 charge ($39 Upstream/$6 Downstream) for write-down of certain
North American and European assets associated with the adoption of new
accounting standards involving the impairment of long-lived assets (SFAS No.
121).
(4) Includes impairment of unproved properties.
(5) Includes investments in affiliates.
(6) Includes charges of $63 for write-down of investment in an Upstream European
natural gas marketing joint venture and $22 ($11 Upstream/$11 Downstream),
principally for employee separation costs in the United States;
substantially offset by Downstream benefits of $44 related to environmental
insurance recoveries and $19 from sale of Ireland operations, and by
Upstream gain of $16 from sale of U.S. producing properties.
(7) Includes combined gain of $240 from sale of Upstream properties in the North
Sea and the United States, and $30 benefit ($19 Upstream/$11 Downstream)
from reduction in foreign tax rate; partly offset
F-29
<PAGE> 162
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
by Upstream charges of $112 for impairment of nonrevenue producing
properties, and Downstream charges of $55 for write-down of an office
building held for sale and $23 for litigation settlements.
<TABLE>
<CAPTION>
UNITED OTHER CORPORATE/
GEOGRAPHIC INFORMATION STATES EUROPE REGIONS NONOPERATING COMBINED
---------------------- ------- ------- ------- ------------ --------
<S> <C> <C> <C> <C> <C>
1995
Sales and Other Operating Revenues....... $10,094 $ 9,490 $ 744 $ -- $20,328
Transfers Between Geographical Areas..... 2 1 120 -- --
------- ------- ------ ------ -------
Total.......................... $10,096 $ 9,491 $ 864 $ -- $20,328
======= ======= ====== ====== =======
Net Income............................... $ 335 $ 309 $ 12 $ (81) $ 575
Assets at December 31:
Identifiable Assets.................... $ 5,405 $ 6,285 $ 611 $1,473 $13,774
Investment in Affiliates............... 213 166 76 -- 455
------- ------- ------ ------ -------
Total.......................... $ 5,618 $ 6,451 $ 687 $1,473 $14,229
======= ======= ====== ====== =======
1996
Sales and Other Operating Revenues....... $13,386 $10,049 $ 795 $ -- $24,230
Transfers Between Geographical Areas..... 1 -- 151 -- --
------- ------- ------ ------ -------
Total.......................... $13,387 $10,049 $ 946 $ -- $24,230
======= ======= ====== ====== =======
Net Income............................... $ 447 $ 427 $ 22 $ (33) $ 863
Assets at December 31:
Identifiable Assets.................... $ 5,398 $ 6,692 $ 756 $1,677 $14,523
Investment in Affiliates............... 259 241 203 -- 703
------- ------- ------ ------ -------
Total.......................... $ 5,657 $ 6,933 $ 959 $1,677 $15,226
======= ======= ====== ====== =======
1997
Sales and Other Operating Revenues....... $15,229 $ 9,585 $ 982 $ -- $25,796
Transfers Between Geographical Areas..... 5 -- 191 -- --
------- ------- ------ ------ -------
Total.......................... $15,234 $ 9,585 $1,173 $ -- $25,796
======= ======= ====== ====== =======
Net Income............................... $ 612 $ 647 $ (150)(1) $ (12) $ 1,097
Assets at December 31:
Identifiable Assets.................... $ 6,269 $ 6,757 $ 759 $2,192 $15,977
Investment in Affiliates............... 381 276 428 -- 1,085
------- ------- ------ ------ -------
Total.......................... $ 6,650 $ 7,033 $1,187 $2,192 $17,062
======= ======= ====== ====== =======
</TABLE>
- ---------------
(1) Includes charges of $112 for impairment of nonrevenue producing properties.
27. OTHER FINANCIAL INFORMATION
Research and development expenses were $36, $41 and $44 for the years 1995,
1996 and 1997, respectively.
Maintenance and repair expenses were $356, $337 and $372 for the years
1995, 1996 and 1997, respectively.
28. SUBSEQUENT EVENTS
In July 1998, a dividend of $7,500 was paid by the Company in the form of a
promissory note to all shareholders of record as of July 20, 1998. The
promissory note is due January 2, 2000 and bears interest at an annual interest
rate of 6.0125 percent.
F-30
<PAGE> 163
SUPPLEMENTAL PETROLEUM DATA
(UNAUDITED)
(DOLLARS IN MILLIONS)
OIL AND GAS PRODUCING ACTIVITIES
Supplemental Petroleum Data disclosures are presented in accordance with
the provisions of Statement of Financial Accounting Standards No. 69,
"Disclosures About Oil and Gas Producing Activities."
Accordingly, volumes of reserves and production exclude royalty interests
of others, and royalty payments are reflected as reductions in revenues.
RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES
<TABLE>
<CAPTION>
TOTAL WORLDWIDE UNITED STATES EUROPE OTHER REGIONS
------------------------ --------------------- ----------------------- ---------------------
1995 1996 1997 1995 1996 1997 1995 1996 1997 1995 1996 1997
------ ------ ------ ----- ----- ----- ----- ------ ------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
COMBINED COMPANIES
Revenues:
Sales to unaffiliated
customers............... $1,863 $2,479 $2,603 $ 443 $ 621 $ 787 $ 817 $1,204 $1,181 $ 603 $ 654 $ 635
Transfers to other company
operations.............. 862 927 849 386 363 272 477 566 577 (1) (2) --
Exploration, including dry
hole costs................ (275) (374) (412) (80) (131) (101) (134) (156) (131) (61) (87) (180)
Production.................. (727) (755) (854) (287) (297) (320) (347) (372) (409) (93) (86) (125)
Depreciation, depletion,
amortization and valuation
provisions................ (727) (800) (872) (290) (302) (279) (362) (443) (419) (75) (55) (174)(1)
Other(2).................... 82 69 321 48 48 106 31 (1) 215 3 22 --
Income Taxes................ (626) (912) (847) (24) (47) (109) (242) (436) (393) (360) (429) (345)
------ ------ ------ ----- ----- ----- ----- ------ ------ ----- ----- -----
Results of operations..... 452 634 788 196 255 356 240 362 621 16 17 (189)
------ ------ ------ ----- ----- ----- ----- ------ ------ ----- ----- -----
EQUITY AFFILIATES
Results of operations....... 12 32 30 -- 7 7 12 25 29 -- -- (6)
------ ------ ------ ----- ----- ----- ----- ------ ------ ----- ----- -----
Total............... $ 464 $ 666 $ 818 $ 196 $ 262 $ 363 $ 252 $ 387 $ 650 $ 16 $ 17 $(195)
====== ====== ====== ===== ===== ===== ===== ====== ====== ===== ===== =====
</TABLE>
- ---------------
(1) Includes charges of $112 for impairment of nonrevenue producing properties.
(2) Includes gain/(loss) on disposal of fixed assets and other miscellaneous
revenues and expenses.
F-31
<PAGE> 164
SUPPLEMENTAL PETROLEUM DATA
(UNAUDITED)
(DOLLARS IN MILLIONS)
COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION, EXPLORATION AND DEVELOPMENT
ACTIVITIES (1)
<TABLE>
<CAPTION>
TOTAL WORLDWIDE UNITED STATES EUROPE OTHER REGIONS
------------------------ -------------------- ------------------ ------------------
1995 1996 1997 1995 1996 1997 1995 1996 1997 1995 1996 1997
------ ------ ------ ---- ---- ------ ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
COMBINED COMPANIES
Property acquisitions
Proved(2)........................... $ 96 $ 21 $ 152 $ 95 $ 14 $ 148 $ -- $ -- $ -- $ 1 $ 7 $ 4
Unproved............................ 58 42 831 29 41 723(3) 1 -- 95 28 1 13
Exploration........................... 358 445 450 128 144 107 159 169 135 71 132 208
Development........................... 745 828 921 242 203 289 463 543 568 40 82 64
------ ------ ------ ---- ---- ------ ---- ---- ---- ---- ---- ----
Total combined companies...... 1,257 1,336 2,354 494 402 1,267 623 712 798 140 222 289
------ ------ ------ ---- ---- ------ ---- ---- ---- ---- ---- ----
EQUITY AFFILIATES
Development........................... 14 19 263 4 5 12 10 14 2 -- -- 249(4)
------ ------ ------ ---- ---- ------ ---- ---- ---- ---- ---- ----
Total equity affiliates....... 14 19 263 4 5 12 10 14 2 -- -- 249
------ ------ ------ ---- ---- ------ ---- ---- ---- ---- ---- ----
Total......................... $1,271 $1,355 $2,617 $498 $407 $1,279 $633 $726 $800 $140 $222 $538
====== ====== ====== ==== ==== ====== ==== ==== ==== ==== ==== ====
</TABLE>
- ---------------
(1) These data comprise all costs incurred in the activities shown, whether
capitalized or charged to expense at the time they were incurred.
(2) Does not include properties acquired through property exchanges.
(3) Includes acquisition costs associated with gas reserves acquired in the
South Texas Lobo trend.
(4) Includes Conoco's equity share of the Petrozuata heavy oil venture in
Venezuela.
CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING ACTIVITIES
<TABLE>
<CAPTION>
TOTAL WORLDWIDE UNITED STATES EUROPE
--------------------------- ------------------------ ------------------------
DECEMBER 31 1995 1996 1997 1995 1996 1997 1995 1996 1997
----------- ------- ------- ------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
COMBINED COMPANIES
Gross costs:
Proved properties....... $11,023 $11,914 $12,420 $4,440 $4,255 $4,676 $5,220 $6,268 $6,276
Unproved properties..... 883 913 1,491 251 262 774(1) 439 444 432
Accumulated depreciation,
depletion, amortization
and valuation
allowances:
Proved properties....... 6,290 6,729 6,940 2,822 2,739 2,836 2,425 2,947 3,001
Unproved properties..... 156 157 261 76 77 71 7 7 7
------- ------- ------- ------ ------ ------ ------ ------ ------
Total net costs of
combined
companies....... 5,460 5,941 6,710 1,793 1,701 2,543 3,227 3,758 3,700
------- ------- ------- ------ ------ ------ ------ ------ ------
EQUITY AFFILIATES
Net costs of equity
affiliates:
Proved properties....... 197 199 441 34 37 45 163 162 147
------- ------- ------- ------ ------ ------ ------ ------ ------
Total............. $ 5,657 $ 6,140 $ 7,151 $1,827 $1,738 $2,588 $3,390 $3,920 $3,847
======= ======= ======= ====== ====== ====== ====== ====== ======
<CAPTION>
OTHER REGIONS
------------------------
DECEMBER 31 1995 1996 1997
----------- ------ ------ ------
<S> <C> <C> <C>
COMBINED COMPANIES
Gross costs:
Proved properties....... $1,363 $1,391 $1,468
Unproved properties..... 193 207 285
Accumulated depreciation,
depletion, amortization
and valuation
allowances:
Proved properties....... 1,043 1,043 1,103
Unproved properties..... 73 73 183
------ ------ ------
Total net costs of
combined
companies....... 440 482 467
------ ------ ------
EQUITY AFFILIATES
Net costs of equity
affiliates:
Proved properties....... -- -- 249(2)
------ ------ ------
Total............. $ 440 $ 482 $ 716
====== ====== ======
</TABLE>
- ---------------
(1) Includes acquisition costs associated with gas reserves acquired in the
South Texas Lobo trend.
(2) Includes Conoco's equity share of the Petrozuata heavy oil venture in
Venezuela.
F-32
<PAGE> 165
SUPPLEMENTAL PETROLEUM DATA
(UNAUDITED)
(IN MILLIONS OF BARRELS)
ESTIMATED PROVED RESERVES OF OIL (1)
<TABLE>
<CAPTION>
TOTAL WORLDWIDE UNITED STATES EUROPE OTHER REGIONS
------------------- ------------------ ------------------ ------------------
1995 1996 1997 1995 1996 1997 1995 1996 1997 1995 1996 1997
---- ---- ----- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PROVED DEVELOPED AND UNDEVELOPED RESERVES
OF COMBINED COMPANIES
Beginning of year......................... 953 933 926 336 294 299 394 408 413 223 231 214
Revisions and other changes............... (1) 55 54 (8) 11 3 (9) 36 43 16 8 8
Extensions and discoveries................ 122 75 62 25 31 12 72 35 44 25 9 6
Improved recovery......................... 4 4 3 1 4 3 3 -- -- -- -- --
Purchase of reserves(2)................... 5 (1) 5 3 (1) 4 -- -- 1 2 -- --
Sale of reserves(3)....................... (33) (12) (27) (33) (10) (11) -- -- (16) -- (2) --
Production................................ (117) (128) (130) (30) (30) (33) (52) (66) (64) (35) (32) (33)
---- ---- ----- --- --- --- --- --- --- --- --- ---
End of year(4)............................ 933 926 893 294 299 277 408 413 421 231 214 195
---- ---- ----- --- --- --- --- --- --- --- --- ---
PROVED DEVELOPED AND UNDEVELOPED RESERVES
OF EQUITY AFFILIATES
Beginning of year......................... 35 44 47 -- -- -- 35 44 47 -- -- --
Revisions and other changes............... 5 8 10 -- -- -- 5 8 10 -- -- --
Extensions and discoveries................ 8 -- 680 -- -- -- 8 -- -- -- -- 680(5)
Production................................ (4) (5) (6) -- -- -- (4) (5) (6) -- -- --
---- ---- ----- --- --- --- --- --- --- --- --- ---
End of year............................... 44 47 731 -- -- -- 44 47 51 -- -- 680
---- ---- ----- --- --- --- --- --- --- --- --- ---
Total............................. 977 973 1,624 294 299 277 452 460 472 231 214 875
---- ---- ----- --- --- --- --- --- --- --- --- ---
PROVED DEVELOPED RESERVES OF COMBINED
COMPANIES
Beginning of year......................... 706 684 630 324 265 258 171 217 185 211 202 187
End of year............................... 684 630 600 265 258 242 217 185 174 202 187 184
PROVED DEVELOPED RESERVES OF EQUITY
AFFILIATES
Beginning of year......................... 28 32 39 -- -- -- 28 32 39 -- -- --
End of year............................... 32 39 43 -- -- -- 32 39 43 -- -- --
</TABLE>
- ---------------
(1) Oil reserves comprise crude oil and condensate and natural gas liquids
expected to be removed for the Company's account from its natural gas
deliveries. Proved Developed Reserves and Proved Undeveloped Reserves are
calculated according to the definitions set forth in Rule 4-10 of Regulation
S-X of the Commission.
(2) Includes reserves acquired through property exchanges.
(3) Includes reserves disposed of through property exchanges.
(4) Includes reserves of 89 and 87 at year-end 1996 and 1997 attributable to
Conoco Oil & Gas Associates L.P. in which there is a minority interest with
an approximate 17 and 18 percent revenue share at year-end 1996 and 1997,
respectively. See Note 18.
(5) Includes Conoco's equity share of the Petrozuata heavy oil venture in
Venezuela.
F-33
<PAGE> 166
SUPPLEMENTAL PETROLEUM DATA
(UNAUDITED)
(IN BILLION CUBIC FEET)
ESTIMATED PROVED RESERVES OF GAS(1)
<TABLE>
<CAPTION>
TOTAL WORLDWIDE UNITED STATES EUROPE OTHER REGIONS
--------------------- --------------------- --------------------- ---------------------
1995 1996 1997 1995 1996 1997 1995 1996 1997 1995 1996 1997
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PROVED DEVELOPED AND
UNDEVELOPED RESERVES OF
COMBINED COMPANIES
Beginning of year............. 4,330 4,709 5,063 1,749 1,891 1,822 2,431 2,649 3,068 150 169 173
Revisions and other changes... 292 41 134 95 79 -- 195 (39) 97 2 1 37
Extensions and discoveries.... 400 780 518 225 176 453 147 574 59 28 30 6
Improved recovery............. 1 -- 1 1 -- 1 -- -- -- -- -- --
Purchase of reserves(2)....... 167 41 270 167 3 264(3) -- 36 -- -- 2 6
Sale of reserves(4)........... (78) (71) (62) (78) (57) (46) -- -- (7) -- (14) (9)
Production.................... (403) (437) (433) (268) (270) (259) (124) (152) (157) (11) (15) (17)
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
End of year(5)................ 4,709 5,063 5,491 1,891 1,822 2,235 2,649 3,068 3,060 169 173 196
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
PROVED DEVELOPED AND
UNDEVELOPED RESERVES OF
EQUITY AFFILIATES
Beginning of year............. 344 339 333 344 339 333 -- -- -- -- -- --
Revisions and other changes... -- -- (6) -- -- (6) -- -- -- -- -- --
Extensions and discoveries.... -- -- 49 -- -- 49 -- -- -- -- -- --
Purchase of reserves.......... -- -- -- -- -- -- -- -- -- -- -- --
Sale of reserves.............. -- -- -- -- -- -- -- -- -- -- -- --
Production.................... (5) (6) (6) (5) (6) (6) -- -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
End of year................... 339 333 370 339 333 370 -- -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total................. 5,048 5,396 5,861 2,230 2,155 2,605 2,649 3,068 3,060 169 173 196
===== ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
PROVED DEVELOPED RESERVES OF
COMBINED COMPANIES
Beginning of year............. 2,496 2,933 2,843 1,687 1,733 1,672 683 1,071 1,041 126 129 130
End of year................... 2,933 2,843 3,061 1,733 1,672 1,801 1,071 1,041 1,091 129 130 169
PROVED DEVELOPED RESERVES OF
EQUITY AFFILIATES...........
Beginning of year............. 45 40 36 45 40 36 -- -- -- -- -- --
End of year................... 40 36 40 40 36 40 -- -- -- -- -- --
</TABLE>
- ---------------
(1) Oil reserves comprise crude oil and condensate and natural gas liquids
expected to be removed for the Company's account from its natural gas
deliveries. Proved Developed Reserves and Proved Undeveloped Reserves are
calculated according to the definitions set forth in Rule 4-10 of Regulation
S-X of the Commission.
(2) Includes reserves acquired through property exchanges.
(3) Includes reserves acquired in the South Texas Lobo trend.
(4) Includes reserves disposed of through property exchanges.
(5) Includes reserves of 104 and 115 at year-end 1996 and 1997, respectively,
attributable to Conoco Oil & Associates L.P. in which there is a minority
interest with an approximate 17 percent and 18 percent revenue share at
year-end 1996 and 1997, respectively. See Note 18.
F-34
<PAGE> 167
SUPPLEMENTAL PETROLEUM DATA
(UNAUDITED)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS RESERVES
The information on the following page has been prepared in accordance with
Statement of Financial Accounting Standards No. 69, which requires the
standardized measure of discounted future net cash flows to be based on year-end
sales prices, costs and statutory income tax rates and a 10 percent annual
discount rate. Specifically, the per-barrel oil sales prices used to calculate
the December 31, 1997, data averaged $15.34 for the United States, $16.11 for
Europe and $14.92 for Other Regions, and the gas prices per thousand cubic feet
averaged approximately $2.07 for the United States, $2.75 for Europe and $1.52
for Other Regions. Because prices used in the calculation are as of December 31,
the standardized measure could vary significantly from year to year based on
market conditions at that specific date.
The projections should not be viewed as realistic estimates of future cash
flows nor should the "standardized measure" be interpreted as representing
current value to the Company. Material revisions to estimates of proved reserves
may occur in the future, development and production of the reserves may not
occur in the periods assumed, actual prices realized are expected to vary
significantly from those used and actual costs may also vary. The Company's
investment and operating decisions are not based on the information presented on
the following page, but on a wide range of reserve estimates that includes
probable as well as proved reserves, and on different price and cost assumptions
from those reflected in this information.
Beyond the above considerations, the "standardized measure" is also not
directly comparable with asset balances appearing elsewhere in the financial
statements because any such comparison would require reconciling adjustments,
including reduction of the asset balances for related deferred income taxes.
F-35
<PAGE> 168
SUPPLEMENTAL PETROLEUM DATA
(UNAUDITED)
(DOLLARS IN MILLIONS)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS RESERVES
<TABLE>
<CAPTION>
TOTAL WORLDWIDE UNITED STATES EUROPE
---------------------------- --------------------------- ---------------------------
1995 1996 1997 1995 1996 1997 1995 1996 1997
------- -------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
COMBINED COMPANIES
Future cash flows:
Revenues............. $26,766 $ 34,366 $26,666 $ 7,631 $10,044 $ 8,355 $14,995 $19,364 $15,119
Production costs..... (9,152) (10,406) (9,251) (3,038) (3,085) (2,997) (5,154) (6,378) (5,387)
Development costs.... (1,583) (1,669) (1,586) (218) (283) (446) (1,234) (1,294) (1,094)
Income tax expense... (7,404) (10,364) (6,822) (1,169) (2,041) (1,175) (3,758) (5,179) (3,921)
------- -------- ------- ------- ------- ------- ------- ------- -------
Future net cash
flows................ 8,627 11,927 9,007 3,206 4,635 3,737 4,849 6,513 4,717
Discounted to present
value at a 10% annual
rate................. (3,469) (4,638) (3,384) (1,456) (2,088) (1,552) (1,813) (2,317) (1,679)
------- -------- ------- ------- ------- ------- ------- ------- -------
Total*......... 5,158 7,289 5,623 1,750 2,547 2,185 3,036 4,196 3,038
------- -------- ------- ------- ------- ------- ------- ------- -------
EQUITY AFFILIATES
Future cash flows:
Revenues............. 1,401 1,971 8,520 647 968 893 754 1,003 651
Production costs..... (617) (597) (2,640) (246) (242) (267) (371) (355) (315)
Development costs.... (237) (180) (1,300) (205) (157) (174) (32) (23) (30)
Income tax expense... (209) (496) (1,090) (51) (193) (161) (158) (303) (170)
------- -------- ------- ------- ------- ------- ------- ------- -------
Future net cash
flows................ 338 698 3,490 145 376 291 193 322 136
Discounted to present
value at a 10% annual
rate................. (187) (398) (2,886) (116) (277) (226) (71) (121) (44)
------- -------- ------- ------- ------- ------- ------- ------- -------
Total.......... 151 300 604 29 99 65 122 201 92
------- -------- ------- ------- ------- ------- ------- ------- -------
Total.......... $ 5,309 $ 7,589 $ 6,227 $ 1,779 $ 2,646 $ 2,250 $ 3,158 $ 4,397 $ 3,130
======= ======== ======= ======= ======= ======= ======= ======= =======
<CAPTION>
OTHER REGIONS
---------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
COMBINED COMPANIES
Future cash flows:
Revenues............. $ 4,140 $ 4,958 $ 3,192
Production costs..... (960) (943) (867)
Development costs.... (131) (92) (46)
Income tax expense... (2,477) (3,144) (1,726)
------- ------- -------
Future net cash
flows................ 572 779 553
Discounted to present
value at a 10% annual
rate................. (200) (233) (153)
------- ------- -------
Total*......... 372 546 400
------- ------- -------
EQUITY AFFILIATES
Future cash flows:
Revenues............. -- -- 6,976
Production costs..... -- -- (2,058)
Development costs.... -- -- (1,096)
Income tax expense... -- -- (759)
------- ------- -------
Future net cash
flows................ -- -- 3,063
Discounted to present
value at a 10% annual
rate................. -- -- (2,616)
------- ------- -------
Total.......... -- -- 447
------- ------- -------
Total.......... $ 372 $ 546 $ 847
======= ======= =======
</TABLE>
- ---------------
* Includes $686 and $372 at year-end 1996 and 1997, respectively, attributable
to Conoco Oil & Gas Associates L.P. in which there is a minority interest with
an approximate 17 and 18 percent revenue share at year-end 1996 and 1997,
respectively. See Note 18.
SUMMARY OF CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
RELATING TO PROVED OIL AND GAS RESERVES
<TABLE>
<CAPTION>
COMBINED COMPANIES EQUITY AFFILIATES
--------------------------- -----------------------
1995 1996 1997 1995 1996 1997
------- ------- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1............................ $ 4,275 $ 5,158 $ 7,289 $ 145 $ 151 $ 300
Sales and transfers of oil and gas produced, net
of production costs........................... (1,998) (2,647) (2,583) (42) (73) (56)
Development costs incurred during the period.... 745 828 921 14 20 218
Net changes in prices and in development and
production costs.............................. 675 2,525 (4,974) 81 119 (1,242)
Extensions, discoveries and improved recovery,
less related costs............................ 1,219 1,630 818 -- 4 1,181
Revisions of previous quantity estimates........ 375 553 439 68 83 37
Purchases (sales) of reserves in place -- net... (62) (54) 36 -- -- --
Accretion of discount........................... 753 931 1,312 13 25 55
Net change in income taxes...................... (897) (1,676) 2,285 (108) (152) 16
Other........................................... 73 41 80 (20) 123 95
------- ------- ------- ----- ----- -------
Balance at December 31.......................... $ 5,158 $ 7,289 $ 5,623 $ 151 $ 300 $ 604
======= ======= ======= ===== ===== =======
</TABLE>
F-36
<PAGE> 169
COMBINED QUARTERLY FINANCIAL DATA
(UNAUDITED)
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1996
Sales and Other Operating Revenues(1)............. $5,474 $5,994 $5,999 $6,763
Cost of Goods Sold and Other Expenses(2).......... 5,091 5,548 5,509 6,293
Interest & Debt Expense........................... 22 18 16 18
Net Income........................................ 207(3) 188(4) 267(5) 201
1997
Sales and Other Operating Revenues(1)............. $6,560 $5,915 $6,671 $6,650
Cost of Goods Sold and Other Expenses(2).......... 5,898 5,501 6,269 6,452
Interest & Debt Expense........................... 15 9 7 5
Net Income........................................ 341 246(6) 289(7) 221(8)
Pro Forma Earnings Per Share(9)
Basic........................................... $ 0.56 $ 0.41 $ 0.48 $ 0.36
Diluted......................................... $ 0.56 $ 0.40 $ 0.47 $ 0.36
Pro Forma Weighted Average Shares Outstanding(9)
Basic........................................... 606 606 606 606
Diluted......................................... 611 611 611 611
</TABLE>
- ---------------
(1) Excludes other income of $64, $10, $74 and $38 in each of the quarters in
1996 and $55, $70, $28 and $314 in each of the quarters in 1997.
(2) Excludes provision for income taxes.
(3) Includes gain of $16 from sale of U.S. producing properties.
(4) Includes a net charge of $41 reflecting: a charge of $63 for write-down of
investment in a European natural gas marketing joint venture; a charge of
$22 principally for employee separation costs; and a benefit of $44 related
to environmental insurance recoveries.
(5) Includes gain of $19 from sale of Ireland marketing operations.
(6) Includes gain of $24 from sale of U.S. producing properties.
(7) Includes net benefit of $37 reflecting: gain of $30 from sale of North Sea
properties; benefit of $30 from foreign tax rate change; and charge of $23
for litigation settlements.
(8) Includes a net benefit of $19 reflecting: a gain of $186 from the sale of
North Sea and U.S. Upstream properties; a charge of $112 for impairment of
nonrevenue producing properties; and a charge of $55 for write-down of an
office building held for sale.
(9) See Note 2 to the Combined Financial Statements.
F-37
<PAGE> 170
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors and Shareholders
of E. I. du Pont de Nemours and Company
We have reviewed the accompanying combined balance sheet of Conoco as of
June 30, 1998, and the related combined statements of income and of cash flows
for the six-month periods ended June 30, 1998 and 1997. This financial
information is the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying combined interim financial information for it
to be in conformity with generally accepted accounting principles.
We previously audited in accordance with generally accepted auditing
standards the combined balance sheet as of December 31, 1997 and the related
combined statements of income, of cash flows, and of owner's net investment and
accumulated other comprehensive loss for the year then ended, and in our report
dated July 24, 1998 presented on page F-2 of this Registration Statement we
expressed an unqualified opinion on those combined financial statements. In our
opinion, the information set forth in the accompanying combined balance sheet
information as of December 31, 1997 is fairly stated in all material respects in
relation to the combined balance sheet from which it has been derived.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
September 28, 1998
F-38
<PAGE> 171
INTERIM COMBINED FINANCIAL STATEMENTS
CONOCO
COMBINED STATEMENT OF INCOME (NOTES 1 AND 2)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
-------------------
1997 1998
------- -------
(IN MILLIONS,
EXCEPT PER SHARE)
<S> <C> <C>
Revenues
Sales and Other Operating Revenues*....................... $12,475 $11,348
Other Income.............................................. 125 138
------- -------
Total Revenues.................................... 12,600 11,486
------- -------
Costs and Expenses
Cost of Goods Sold and Other Operating Expenses........... 7,667 6,754
Selling, General and Administrative Expenses.............. 355 370
Exploration Expenses...................................... 192 176
Depreciation, Depletion and Amortization.................. 516 505
Taxes Other Than on Income*............................... 2,669 2,896
Interest and Debt Expense................................. 24 1
------- -------
Total Costs and Expenses.......................... 11,423 10,702
------- -------
Income Before Income Taxes.................................. 1,177 784
Provision for Income Taxes.................................. 590 254
------- -------
Net Income (Note 3)......................................... $ 587 $ 530
======= =======
Pro Forma Earnings Per Share(Note 4)........................
Basic..................................................... $ 0.93 $ 0.84
Diluted................................................... $ 0.92 $ 0.83
Pro Forma Weighted Average Shares Outstanding(Note 4).......
Basic..................................................... 628 628
Diluted................................................... 637 637
- ---------------
* Includes petroleum excise taxes........................... $ 2,577 $ 2,806
</TABLE>
See accompanying Notes to Interim Combined Financial Statements
F-39
<PAGE> 172
INTERIM COMBINED FINANCIAL STATEMENTS
CONOCO
COMBINED BALANCE SHEET (NOTES 1 AND 2)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, 1998
DECEMBER 31, --------------------------
1997 HISTORICAL PRO FORMA (5)
------------ ---------- -------------
(IN MILLIONS)
<S> <C> <C> <C>
Current Assets
Cash and Cash Equivalents............................. $ 1,147 $ 829 $ 123
Marketable Securities................................. 7 7 7
Accounts and Notes Receivable......................... 1,497 1,252 1,252
Notes Receivable -- Related Parties................... 490 465 377
Inventories (Note 6).................................. 830 981 981
Prepaid Expenses...................................... 236 305 305
-------- -------- --------
Total Current Assets.......................... 4,207 3,839 3,045
Property, Plant and Equipment........................... 21,229 21,569 21,569
Less: Accumulated Depreciation, Depletion and
Amortization.......................................... (10,401) (10,521) (10,521)
-------- -------- --------
Net Property, Plant and Equipment....................... 10,828 11,048 11,048
-------- -------- --------
Investment in Affiliates................................ 1,085 1,141 1,141
Long-Term Notes Receivable -- Related Parties........... 450 612 --
Other Assets............................................ 492 524 461
-------- -------- --------
Total......................................... $ 17,062 $ 17,164 $ 15,695
======== ======== ========
LIABILITIES AND OWNER'S NET INVESTMENT AND ACCUMULATED OTHER COMPREHENSIVE LOSS
Current Liabilities
Accounts Payable...................................... $ 1,090 $ 1,129 $ 1,129
Short-Term Borrowings -- Related Parties.............. 644 1,087 272
Other Short-Term Borrowings and Capital Lease
Obligations........................................ 72 51 51
Income Taxes.......................................... 545 253 253
Other Accrued Liabilities............................. 1,289 1,043 1,043
-------- -------- --------
Total Current Liabilities..................... 3,640 3,563 2,748
Long-Term Borrowings -- Related Parties................. 1,450 1,181 1,002
Long-Term Borrowings -- Other Related Party (Note 5).... -- -- 7,500
Other Long-Term Borrowings and Capital Lease
Obligations........................................... 106 103 103
Deferred Income Taxes................................... 1,739 1,861 1,837
Other Liabilities and Deferred Credits.................. 1,922 1,925 1,925
-------- -------- --------
Total Liabilities............................. 8,857 8,633 15,115
-------- -------- --------
Commitments and Contingent Liabilities (Note 8)
Minority Interests...................................... 309 308 308
Owner's Net Investment.................................. 8,087 8,441 490
Accumulated Other Comprehensive Loss (Note 7)........... (191) (218) (218)
-------- -------- --------
Total Owner's Net Investment and Accumulated
Other Comprehensive Loss.................... 7,896 8,223 272
-------- -------- --------
Total......................................... $ 17,062 $ 17,164 $ 15,695
======== ======== ========
</TABLE>
See accompanying Notes to Interim Combined Financial Statements
F-40
<PAGE> 173
INTERIM COMBINED FINANCIAL STATEMENTS
CONOCO
COMBINED STATEMENT OF CASH FLOWS (NOTES 1 AND 2)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
------------------
1997 1998
------- ------
(IN MILLIONS)
<S> <C> <C>
Cash Provided by Operations
Net Income................................................ $ 587 $ 530
Adjustments to Reconcile Net Income to Cash Provided by
Operations:
Depreciation, Depletion and Amortization............... 516 505
Dry Hole Costs and Impairment of Unproved Properties... 67 68
Deferred Income Taxes.................................. 113 107
Income Applicable to Minority Interests................ 13 11
Other Noncash Charges and Credits -- Net............... (77) (55)
Decrease (Increase) in Operating Assets:
Accounts and Notes Receivable........................ 191 85
Inventories.......................................... (189) (153)
Other Operating Assets............................... (120) (90)
Increase (Decrease) in Operating Liabilities:
Accounts Payable and Other Operating Liabilities..... (121) (191)
Accrued Interest and Income Taxes.................... (125) (269)
------- ------
Cash Provided by Operations....................... 855 548
------- ------
Investment Activities
Purchases of Property, Plant and Equipment................ (1,611) (941)
Investments in Affiliates................................. (204) (109)
Proceeds from Sales of Assets............................. 134 348
Net Decrease (Increase) in Short-Term Financial
Instruments............................................ (32) (16)
------- ------
Cash Used for Investment Activities............... (1,713) (718)
------- ------
Financing Activities
Short-Term Borrowings -- Receipts........................ -- --
-- Payments.................... (1) (19)
Other Long-Term Borrowings -- Receipts.................... -- --
-- Payments............... (1) (2)
Transactions with Related Parties:
Notes Receivable -- Receipts........................... 322 25
-- Payments......................... (44) (162)
Borrowings -- Receipts................................. 670 260
-- Payments................................ (327) (62)
Net Cash Contribution From (To) Owner.................. 335 (177)
Increase (Decrease) in Minority Interests................. (11) (12)
------- ------
Cash Provided by (Used for) Financing
Activities....................................... 943 (149)
------- ------
Effect of Exchange Rate Changes on Cash..................... (42) 1
------- ------
Increase (Decrease) in Cash and Cash Equivalents............ $ 43 $ (318)
Cash and Cash Equivalents at Beginning of Year.............. 846 1,147
------- ------
Cash and Cash Equivalents at June 30........................ $ 889 $ 829
======= ======
</TABLE>
See accompanying Notes to Interim Combined Financial Statements
F-41
<PAGE> 174
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN MILLIONS)
1. BASIS OF PRESENTATION
On May 11, 1998, E. I. du Pont de Nemours and Company ("DuPont") announced
its intention to offer in an initial public offering a portion of its interest
in the common stock of Conoco Inc., a wholly owned energy subsidiary. This
initial public offering is DuPont's first step in the planned divestiture of its
entire petroleum business.
Throughout the period covered by the Combined Financial Statements,
operations were conducted by Conoco Inc., subsidiaries of Conoco Inc. and, in
some cases, subsidiaries of DuPont. These operations are collectively referred
to herein as the Company or "Conoco". Certain subsidiaries and, in some cases,
assets, liabilities, and related operations not currently owned by Conoco will
be transferred to Conoco. The accompanying Combined Financial Statements are
presented on a carve-out basis and include the historical operations of entities
owned by Conoco and operations to be transferred to Conoco by DuPont. In this
context, no direct ownership relationship existed among all the various units
comprising Conoco; accordingly, DuPont and its subsidiaries' net investment in
Conoco ("Owner's Net Investment") is shown in lieu of Stockholder's Equity in
the Combined Financial Statements. The Combined Financial Statements included
herein have been prepared from DuPont's historical accounting records.
These Combined Interim Financial Statements are unaudited, but reflect all
adjustments that, in the opinion of management, are necessary to provide a fair
presentation of the financial position, results of operations and cash flows for
the dates and periods covered. All such adjustments are of a normal recurring
nature. Interim period results are not necessarily indicative of results of
operations or cash flows for a full-year period. These interim statements should
be read in conjunction with the Audited Combined Financial Statements for the
years ended December 31, 1995, 1996 and 1997 presented herein.
2. RELATED PARTY TRANSACTIONS
The Combined Financial Statements include significant transactions with
DuPont involving services (such as cash management, other financial services,
purchasing, legal, computer and corporate aviation) that were provided between
Conoco and centralized DuPont organizations. The costs of services have been
directly charged or allocated between Conoco and DuPont using methods management
believes are reasonable. Such charges and allocations are not necessarily
indicative of what would have been incurred if Conoco had been a separate
entity. Amounts charged and allocated to Conoco for these services were $63 and
$72 for the first six months of 1997 and 1998, respectively, and are principally
included in Selling, General and Administrative Expenses. Conoco provided DuPont
services such as computer, legal and purchasing, as well as certain technical
and plant operating services, which amounted to $31 and $25 in first six months
of 1997 and 1998, respectively. These charges to DuPont were treated as
reductions of Cost of Goods Sold and Other Operating Expenses and Selling,
General and Administrative Expenses.
Interest expense charged by DuPont was $65 and $55 for the first six months
of 1997 and 1998, respectively, and reflects market-based rates. A portion of
historical related party interest cost and other interest expense of $44 and $57
was capitalized as cost associated with major construction projects in the first
six months of 1997 and 1998, respectively. Interest income from DuPont was $6
and $33 for the same periods and also reflects market-based rates.
Sales and Other Operating Revenues include sales of products from Conoco to
DuPont, principally natural gas and gas liquids to supply several DuPont plant
sites. These sales totaled $231 and $209 for the first six months of 1997 and
1998, respectively. Also included are revenues from insurance premiums charged
DuPont for property and casualty coverage outside the United States. These
revenues totaled $11 and $10 for the first six months of 1997 and 1998,
respectively. Purchases of products from DuPont during these periods were not
material.
F-42
<PAGE> 175
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS)
These intercompany arrangements between DuPont and Conoco will continue
after the Offerings under transition service agreements or other long-term
agreements. It is not anticipated that a change, if any, in these costs and
revenues would have a material effect on the Company's results of operations or
combined financial position.
Accounts and Notes Receivable include amounts due from DuPont of $79 and
$34 at December 31, 1997, and June 30, 1998, respectively, representing current
month balances of transactions between Conoco and DuPont, mainly product sales
and net interest on borrowings. Accounts Payable include amounts due DuPont of
$4 and $40 at December 31, 1997, and June 30, 1998, respectively.
Amounts representing notes receivable or borrowings from DuPont, including
its subsidiary organizations, are identified for related parties and presented
separately in the Combined Balance Sheet. The current portion of Notes
Receivable represents the accumulation of a variety of cash transfers and
operating transactions with DuPont. These balances are generally
interest-bearing and represent net amounts of cash transferred for funding and
cash management purposes and amounts charged between the companies for certain
product and service purchases and asset transfers. The long-term portion of
Notes Receivable and amounts shown for Short-Term and Long-Term Borrowings
represent borrowings between Conoco and DuPont with established due dates at
market-based interest rates, except for certain short-term non-interest bearing
borrowings due DuPont of $492 at December 31, 1997, and June 30, 1998.
3. SPECIAL ITEMS
Net income for the first six months of 1997 included a gain of $24 from the
sale of certain Upstream North Sea properties. Net income for the first six
months of 1998 included a gain of $23 from the sale of certain Upstream North
Sea properties and a $31 tax benefit from the sale of an international Upstream
subsidiary, partly offset by a $28 charge for U.S. Downstream litigation.
4. EARNINGS PER SHARE
The Company's historical capital structure is not indicative of its
prospective structure since no direct ownership relationship existed among all
the various units comprising Conoco. Accordingly, historical earnings per share
has not been presented in the interim Combined Financial Statements.
Unaudited pro forma basic earnings per share includes the shares of both
the Class A and Class B common shares deemed to be outstanding as of the date of
the Offerings. Unaudited pro forma diluted earnings per share includes the
dilutive effect of the 8.6 million shares of Conoco Common Stock issuable upon
exercise of Conoco stock options (see Note 20 to the Combined Financial
Statements), after applying the treasury stock method, which are expected to be
issued upon cancellation of outstanding DuPont stock options, using the
anticipated weighted-average exercise price of the outstanding options and the
initial public offering price. In accordance with SEC Staff Accounting Bulletin
No. 98, pro forma basic and diluted earnings per share have been presented for
the most recent annual and subsequent interim periods only.
5. INTERIM PRO FORMA COMBINED BALANCE SHEET
The unaudited pro forma column on the accompanying combined balance sheet
reflects the application of pro forma adjustments to the historical amounts as
of June 30, 1998. In July 1998, a dividend of $7,500 was declared and paid by
the Company in the form of a promissory note to all shareholders of record as of
July 20, 1998. The promissory note is due January 2, 2000 and bears interest at
an annual interest rate of 6.0125 percent. On September 28, 1998, the Company
declared a dividend of a receivable from DuPont evidenced by a promissory note
in the amount of $700 million. Prior to or concurrent with the Offerings, DuPont
and Conoco will enter into a Restructuring, Transfer and Separation Agreement
and certain other agreements with respect to employee benefit arrangements,
information management, the provision of interim services,
F-43
<PAGE> 176
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS)
financing arrangements, tax sharing, environmental liabilities and various
commercial arrangements. These agreements generally provide for restructuring
and settlement of certain intercompany loans, purchase or transfer of certain
subsidiaries, and other arrangements to be undertaken in connection with the
Separation and the Offerings.
The unaudited pro forma column reflects the dividends and adjustments, as
provided for in the Separation Agreement, for (a) the settlement of intercompany
loans, (b) the purchase of certain subsidiaries from DuPont and the refund of
prepaid insurance premiums to DuPont in the amount of $267, and (c) the effect
of the separate return income tax method reflecting a reduction in Deferred
Income Taxes ($24) resulting from the transfer of international production
subsidiaries from the original tax jurisdiction to another tax jurisdiction.
6. INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ --------
<S> <C> <C>
Crude oil and petroleum products............................ $675 $821
Other merchandise........................................... 25 24
Materials and supplies...................................... 130 136
---- ----
$830 $981
==== ====
</TABLE>
7. OTHER COMPREHENSIVE INCOME
The following sets forth the Company's comprehensive income for the periods
shown:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
----------------------------
1997 1998
------------- ------------
<S> <C> <C>
Net Income.................................................. $ 587 $530
Other Comprehensive Income (Loss):
Foreign Currency Translation Adjustment................... (113) (27)
Minimum Pension Liability Adjustment...................... -- --
------ ----
Comprehensive Income........................................ $ 474 $503
====== ====
</TABLE>
8. COMMITMENTS AND CONTINGENT LIABILITIES
The Company has various purchase commitments for materials, supplies and
items of permanent investment incident to the ordinary conduct of business. In
the aggregate, such commitments are not at prices in excess of current market.
In addition, at June 30, 1998, the Company has obligations to purchase, over
periods up to twenty years, natural gas at prices that were in excess of current
market prices. No material annual loss is expected from these long-term
commitments.
The Company is subject to various lawsuits and claims involving a variety
of matters including, along with other oil companies, actions challenging oil
and gas royalty and severance tax payments based on posted prices, and claims
for damages resulting from leaking underground storage tanks. In general, the
effect on future financial results is not subject to reasonable estimation
because considerable uncertainty exists. The Company believes the ultimate
liabilities resulting from such lawsuits and claims may be material to results
of operations in the period in which they are recognized but will not materially
affect the combined financial position of the Company. In the six months of
1998, the Company recorded non-recurring after-tax charges of $28 for
anticipated costs to resolve various litigation.
F-44
<PAGE> 177
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS)
The Company is also subject to contingencies pursuant to environmental laws
and regulations that in the future may require the Company to take further
action to correct the effects on the environment of prior disposal practices or
releases of petroleum substances by the Company or other parties. The Company
has accrued for certain environmental remediation activities consistent with the
policy set forth in Note 2 to the Combined Financial Statements. At June 30,
1998, such accrual amounted to $140 and, in management's opinion, was
appropriate based on existing facts and circumstances. Under adverse changes in
circumstances, potential liability may exceed amounts accrued. In the event
future monitoring and remediation expenditures are in excess of amounts accrued,
they may be significant to results of operations in the period recognized but
management does not anticipate they will have a material adverse effect on the
combined financial position of the Company.
The Company has indirectly guaranteed various debt obligations under
agreements with certain affiliates and other companies to provide specified
minimum revenues from shipments or purchases of products. At June 30, 1998,
these indirect guarantees totaled $19, and the Company or DuPont, on behalf of
the Company, had directly guaranteed $1,168 of the obligations of certain
affiliated companies and others. The Company, along with certain European DuPont
subsidiaries, also participates in a multiparty account banking agreement, which
provides for the indirect guarantee of bank account overdrafts of certain
European DuPont subsidiaries. Management believes the exposure under this
agreement is not material and expects to terminate the agreement prior to
completion of the Offerings. No material loss is anticipated by reason of such
agreements and guarantees.
F-45
<PAGE> 178
ANNEX A
DEGOLYER AND MACNAUGHTON
ONE ENERGY SQUARE
DALLAS, TEXAS 75206
September 23, 1998
Conoco Inc.
600 North Dairy Ashford
Houston, Texas 77001-6651
Gentlemen:
Pursuant to your request, we have prepared estimates of the proved oil,
condensate, natural gas liquids, and natural gas reserves, as of December 31,
1997, of certain properties in Canada, Nigeria, Norway, Russia, the United
Kingdom, the United States, and Venezuela owned by Conoco Inc. (Conoco). The
properties consist of working interests located in Alberta, Canada, in the
offshore waters of Nigeria, Norway, and the United Kingdom, in northern European
Russia, in Colorado, New Mexico, Virginia, Texas and in the offshore waters of
Louisiana of the United States, and in the Orinoco Heavy Oil Belt of Venezuela.
The estimates are discussed in detail in our "Report as of December 31, 1997 on
Proved Reserves of Certain Properties owned by Conoco Inc.," (the Report). We
also have reviewed Conoco's estimates of the reserves, as of December 31, 1997,
of the same properties included in the Report.
Proved reserves estimated by us and referred to herein have, in our
opinion, been prepared in accordance with Rule 4-10(a)(2) of Regulation S-X of
the Securities and Exchange Commission of the United States.
Conoco represents that its estimates of the proved reserves, as of December
31, 1997, net to its leasehold interests in the properties included in the
Report are as follows, expressed in millions of barrels (MMbbl) or billions of
cubic feet (Bcf):
<TABLE>
<CAPTION>
OIL, CONDENSATE, AND
NATURAL GAS LIQUIDS NATURAL GAS NET EQUIVALENT
(MMBBL) (BCF) (MMBBL)
- -------------------- ----------- --------------
<S> <C> <C>
1,260 4,523 2,014
</TABLE>
Note: Net-equivalent million barrels is based on 6,000 cubic
feet of gas being equivalent to 1 barrel of oil,
condensate, or natural gas liquids.
Conoco has advised us, and we have assumed, that its estimates of proved
oil, condensate, natural gas liquids, and natural gas reserves are in accordance
with the rules and regulations of the Securities and Exchange Commission.
A-1
<PAGE> 179
DEGOLYER AND MACNAUGHTON
Our estimates of the proved reserves, as of December 31, 1997, of the
properties included in the Report are as follows, expressed in millions of
barrels (MMbbl) or billions of cubic feet (Bcf):
<TABLE>
<CAPTION>
OIL, CONDENSATE, AND
NATURAL GAS LIQUIDS NATURAL GAS NET EQUIVALENT
(MMBBL) (BCF) (MMBBL)
- -------------------- ----------- --------------
<S> <C> <C>
1,255 4,498 2,005
</TABLE>
Note: Net-equivalent million barrels is based on 6,000 cubic
feet of gas being equivalent to 1 barrel of oil,
condensate, or natural gas liquids.
In comparing the detailed reserves estimates prepared by us and those
prepared by Conoco for the properties involved, we have found differences, both
positive and negative, in reserves estimates for individual properties. These
differences appear to be compensating to a great extent when considering the
reserves of Conoco in the properties included in the Report, resulting in
overall differences not being substantial. It is our opinion that the reserves
estimates prepared by Conoco on the properties reviewed by us and referred to
above, when compared on the basis of net equivalent million barrels of oil, do
not differ materially from those prepared by us.
Submitted,
/s/ DeGOLYER and MacNAUGHTON
DeGOLYER and MacNAUGHTON
[SEAL]
/s/ W.G. McGILVRAY, P.E.
W.G. McGilvray, P.E.
Executive Vice President
DeGolyer and MacNaughton
A-2
<PAGE> 180
CONOCO LOGO
<PAGE> 181
Filed Pursuant to Rule 424(b)(4)
Registration Nos. 333-60119; 333-65969; 333-65969
PROSPECTUS
[CONOCO LOGO]
191,456,427 Shares
Conoco Inc.
CLASS A COMMON STOCK
------------------------
Of the 191,456,427 shares of the Class A Common Stock of Conoco Inc. (the
"Company" or "Conoco") being offered, 172,310,784 shares are being offered
initially in the United States and Canada by the U.S. Underwriters (the "U.S.
Offering") and 19,145,643 shares are being offered initially outside the United
States and Canada by the International Underwriters (the "International
Offering" and, together with the U.S. Offering, the "Offerings"). Each share of
Class A Common Stock will have attached one Preferred Share Purchase Right (a
"Right") which will initially trade together with the share. All of the shares
of Class A Common Stock offered hereby are being sold by the Company. The price
to public and the underwriting discount per share will be identical for both
Offerings. Prior to these Offerings, there has been no public market for the
Class A Common Stock. See "Underwriters" for a discussion of the factors
considered in determining the initial public offering price.
The Company has two classes of authorized common stock consisting of Class A
Common Stock offered hereby and Class B Common Stock (collectively, the "Common
Stock"). See "Description of Capital Stock." Holders of Class A Common Stock are
entitled to one vote per share and holders of Class B Common Stock are entitled
to five votes per share on each matter submitted to a vote of stockholders.
Prior to the Offerings, E. I. du Pont de Nemours and Company ("DuPont")
indirectly owned 100 percent of the outstanding shares of the Company's Common
Stock, and immediately after completion of the Offerings, DuPont, through its
ownership of 100 percent of the outstanding Class B Common Stock, will
indirectly own 69.5 percent of the Company's Common Stock representing 91.9
percent of the combined voting power of all classes of voting stock of the
Company. Accordingly, DuPont will continue to control the Company. DuPont has
advised the Company that DuPont intends to offer its remaining Conoco shares in
a tax-free split-off expected to be completed within 12 months of the date
hereof. See "Prospectus Summary -- Separation From DuPont," "Arrangements
between the Company and DuPont" and "Principal Stockholder."
------------------------
The Class A Common Stock has been approved for listing on the New York Stock
Exchange ("NYSE") under the trading symbol "COC," subject to official notice of
issuance.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 16 FOR INFORMATION CONCERNING CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
PRICE $23 A SHARE
------------------------
<TABLE>
<S> <C> <C> <C>
UNDERWRITING
PRICE TO DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
----------------- -------------------- -----------------
Per Share................................................... $23.0000 $.9177 $22.0823
Total....................................................... $4,403,497,821 $175,699,563 $4,227,798,258
</TABLE>
- ---------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriters."
(2) Does not reflect expenses of the Offerings (estimated to be $20 million)
as these expenses will be paid by DuPont. See "Arrangements Between the
Company and DuPont -- Restructuring, Transfer and Separation Agreement."
------------------------
The Class A Common Stock is offered, subject to prior sale, when, as, and if
accepted by the Underwriters named herein and, subject to approval of certain
legal matters by Cravath, Swaine & Moore, counsel for the Underwriters, and to
certain other conditions. It is expected that delivery of the Class A Common
Stock will be made on or about October 27, 1998 at the offices of Morgan Stanley
& Co. Incorporated, New York, New York, against payment therefor in immediately
available funds.
------------------------
MORGAN STANLEY DEAN WITTER
CREDIT SUISSE FIRST BOSTON
GOLDMAN SACHS INTERNATIONAL
MERRILL LYNCH INTERNATIONAL
J.P. MORGAN SECURITIES LTD. SALOMON SMITH BARNEY INTERNATIONAL
BT ALEX. BROWN INTERNATIONAL SCHRODERS
October 21, 1998
<PAGE> 182
NO DEALER, SALESPERSON OR ANY OTHER PERSON IS AUTHORIZED IN CONNECTION WITH
ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION
NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE CLASS A COMMON STOCK
AND THE RIGHTS OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY TO ANY PERSON IN
ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREBY WILL UNDER ANY
CIRCUMSTANCES IMPLY THAT THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT
AS OF ANY DATE SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------------------
UNTIL NOVEMBER 15, 1998 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERINGS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
In addition to the Offerings, this Prospectus also relates to the offering
to Conoco employees of options to purchase Class A Common Stock and stock
appreciation rights with respect to Class A Common Stock upon surrender by such
employees of their options to purchase common stock of DuPont and of stock
appreciation rights with respect to DuPont common stock. See
"Management -- Treatment of Outstanding Stock Options and Stock Appreciation
Rights."
------------------------
For investors outside the United States: No action has been or will be
taken in any jurisdiction by the Company or by any Underwriter that would permit
a public offering of the Class A Common Stock or possession or distribution of
this Prospectus in any jurisdiction where action for that purpose is required,
other than in the United States. Persons into whose possession this Prospectus
comes are required by the Company and the Underwriters to inform themselves
about and to observe any restrictions as to the offering of the Class A Common
Stock and the distribution of this Prospectus.
References to "dollars" and "$" in this Prospectus are to United States
dollars.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 5
Risk Factors.......................... 16
Use of Proceeds....................... 21
Dividend Policy....................... 22
Capitalization........................ 23
Selected Historical and Pro Forma
Financial Information............... 24
Pro Forma Combined Financial
Statements.......................... 27
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 37
Business.............................. 57
Management............................ 86
Arrangements between the Company and
DuPont.............................. 108
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Principal Stockholder................. 114
Description of Capital Stock.......... 115
Shares Eligible for Future Sale....... 124
Material United States Federal Tax
Considerations for Non-U.S. Holders
of Class A Common Stock............. 125
Underwriters.......................... 127
Legal Matters......................... 132
Experts............................... 132
Available Information................. 133
Index to Combined Financial
Statements.......................... F-1
Annex A -- Report of DeGolyer and
MacNaughton......................... A-1
</TABLE>
3
<PAGE> 183
CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON
STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT THE CLASS A COMMON STOCK IN
CONNECTION WITH THE OFFERINGS, AND MAY BID FOR AND PURCHASE THE SHARES OF CLASS
A COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITERS."
DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION
This Prospectus contains forward-looking statements relating to the
Company's operations that are based on management's current expectations,
estimates and projections about the Company and the petroleum industry. Words
such as "expects," "intends," "plans," "projects," "believes," "estimates" and
similar expressions are used to identify such forward-looking statements. These
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions that are difficult to predict. Further, certain
forward-looking statements are based upon assumptions as to future events that
may not prove to be accurate. Therefore, actual outcomes and results may differ
materially from what is expressed or forecast in such forward-looking
statements.
Factors that could cause actual results to differ materially include, but
are not limited to, crude oil and natural gas prices; refining and marketing
margins; potential failure to achieve expected production from existing and
future oil and gas development projects; lack of exploration success; potential
disruption or interruption of the Company's production facilities due to
accidents or political events; international monetary conditions and exchange
controls; potential liability for remedial actions under existing or future
environmental regulations; and potential liability resulting from pending or
future litigation. In addition, such statements could be affected by general
domestic and international economic and political conditions. See "Risk
Factors."
ORGANIZATION OF THE COMPANY
Since 1981, business operations of the Company have been conducted by
various entities owned directly or indirectly by DuPont. Prior to the Offerings,
these operations will have been substantially reorganized and, as of the
Offerings, certain entities and, in some cases, assets, liabilities, and related
operations will be transferred between the Company and DuPont. See "Arrangements
Between the Company and DuPont." Unless the context otherwise indicates,
references in this Prospectus to "Conoco" or the "Company" are references to
Conoco Inc. (formerly Conoco Energy Company), its wholly owned and majority
owned subsidiaries (collectively, the "Combined Subsidiaries"), and its
ownership interest in equity affiliates (corporate entities, partnerships,
limited liability companies and other ventures in which Conoco exerts
significant influence by virtue of its ownership interest, typically between 20
and 50 percent). Unless the context otherwise indicates, references in this
Prospectus to "DuPont" are references to E. I. du Pont de Nemours and Company
and its consolidated subsidiaries. Financial information included herein is
presented in accordance with Generally Accepted Accounting Principles and
accounts for the Company's interests in equity affiliates using the equity
method of accounting. References in this Prospectus to "Common Stock" are to the
Class A Common Stock and Class B Common Stock of the Company. See "Description
of Capital Stock."
4
<PAGE> 184
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information and financial statements and
related notes appearing elsewhere in this Prospectus. Unless otherwise
indicated, the information contained in this Prospectus gives effect to the
transactions described below under "-- Separation from DuPont."
THE COMPANY
Conoco is a major, integrated, international energy company operating in 40
countries worldwide. The Company was founded in 1875 and acquired by DuPont in
1981 and is involved in both the "Upstream" and "Downstream" segments of the
petroleum business. Upstream activities include exploring for, and developing,
producing and selling crude oil, natural gas and natural gas liquids. Downstream
activities include refining crude oil and other feedstocks into petroleum
products, buying and selling crude oil and refined products and transporting,
distributing and marketing petroleum products. As of December 31, 1997, Conoco
had proved worldwide reserves of 2.6 billion barrels of oil equivalent ("BOE"),
38 percent of which were natural gas. Conoco owns or has equity interests in
nine refineries worldwide, with a total crude oil and condensate processing
capacity of approximately 799,000 barrels per day (including the new Melaka
refinery in Malaysia, which Conoco expects will be completed in the fourth
quarter of 1998). The Company also has a marketing network of approximately
7,900 outlets in the United States, Europe and Asia. Based on public filings,
for the year ended December 31, 1997, Conoco ranked eighth in the worldwide
production of petroleum liquids by U.S.-based companies, eleventh in the
production of natural gas and eighth in refining throughput. Over that same
period, Conoco reported net income of $1,097 million on total revenues of $26.3
billion.
UPSTREAM
Conoco has ownership interests in producing properties in the United
States, Canada, the United Kingdom, Norway, Venezuela, Indonesia, the United
Arab Emirates, Russia and Nigeria. For the year ended December 31, 1997, North
America and Western Europe represented 29 percent and 36 percent, respectively,
of total reserves and 45 percent and 38 percent, respectively, of total
production. Conoco's interest in proved reserves from the Petrozuata joint
venture in Venezuela represented 26 percent of the Company's total reserves as
of December 31, 1997.
In 1997, the Company's production averaged 654,000 BOE per day, consisting
of 453,000 barrels of petroleum liquids (including natural gas liquids from gas
plant ownership) and 1.2 billion cubic feet of natural gas per day. Based on
1997 annual production of 209 million BOE (excluding natural gas liquids from
gas plant ownership), the Company had a reserve life of 12.4 years as of
December 31, 1997. Over the last five years, Conoco has replaced an average of
190 percent of the crude oil and natural gas it has produced each year. In
addition, Conoco has concentrated on improving its Upstream portfolio by
lowering costs, consolidating operations, rationalizing assets and refocusing
its exploration efforts. Over the past five years, Conoco has sold hundreds of
small, marginal interests, reducing the number of fields in which it owns an
interest from approximately 700 in 1990 to 136 as of June 30, 1998, while
maintaining production essentially constant on a BOE basis. At the same time,
Conoco has increased its profitability on a BOE basis.
As Conoco has reduced its marginal interests, it has increased its share of
larger, longer-lived and more profitable projects. The Company believes these
projects will contribute to 1999 production and significantly increase Conoco's
production rates over current levels in future years. In North America, these
projects include development of the Lobo trend in South Texas and the Ursa field
in the Gulf of Mexico. In 1997, the Company substantially increased its holdings
in the Lobo trend in South Texas through the acquisition of approximately $0.9
billion of natural gas properties and transportation assets (the "Lobo
Acquisition"). Since June 30, 1997, gross natural gas production from Conoco's
Lobo trend assets has increased from approximately 450 million cubic feet per
day to approximately 700 million cubic feet per day at June 30, 1998. The
Company expects to spend $1 billion between 1997 and 2002 to develop its leases
in the Lobo trend. Conoco also has a 16 percent interest in the Shell-operated
Ursa field ("Ursa"), one of the largest discoveries to date
5
<PAGE> 185
in the deepwater Gulf of Mexico. The Company expects first production from Ursa
in mid-1999 and that peak gross production from Ursa will be 150,000 barrels of
petroleum liquids and 400 million cubic feet of natural gas per day. Conoco also
has significant producing properties in the San Juan Basin in New Mexico, the
Permian Basin in West Texas, the foothills east of the Canadian Rocky Mountains
and the Central Appalachian Basin in Virginia. The Company also ranks as the
fourth largest natural gas liquids ("NGLs") producer in the United States with
ownership interests in 25 plants located in Colorado, Louisiana, New Mexico,
Oklahoma and Texas.
Conoco has a significant portfolio of producing properties, discoveries and
near-term development projects in the United Kingdom and Norway. Conoco has a 42
percent ownership interest in the Britannia field ("Britannia"), one of the
largest natural gas fields in the United Kingdom sector of the North Sea, which
Conoco operates jointly with Chevron. First production from Britannia occurred
in August 1998 and the Company estimates that the field will have a production
life of 30 years. The Company believes that Britannia has the potential to
produce between 650 and 740 million cubic feet of natural gas per day (gross).
Conoco also has an 18.125 percent interest in the Heidrun field in Norway, where
production began in 1995 and is currently averaging 205,000 barrels of petroleum
liquids per day (gross). Conoco was the operator for the construction and
installation of the Heidrun tension leg platform. In addition to Conoco's
interests in Britannia and Heidrun, Conoco also has interests in a number of
other offshore fields including the Miller, Statfjord, Alba, MacCulloch, Banff,
Viking, Vulcan and Murdoch fields and the Clair discovery in the United Kingdom
and the Statfjord and Troll fields in Norway. Clair, which is operated by
British Petroleum, is one of the largest undeveloped oil discoveries in Western
Europe. Conoco operates the MacCulloch and Banff fields, both of which will
employ innovative floating production, storage and offtake ("FPSO") technology.
Conoco is also the sixth largest oil producer in Norway.
In Venezuela, Conoco holds a 50.1 percent non-controlling equity interest
in Petrozuata C.A. ("Petrozuata"), a joint venture with PDVSA Petroleo y Gas
S.A., a subsidiary of Petroleos de Venezuela ("PDVSA"), the national oil company
of the Republic of Venezuela. Petrozuata, the first venture of its kind in
Venezuela, will upgrade extra heavy crude oil into a lighter, partially
processed refinery feedstock similar to crude oil ("Synthetic Crude") and
by-products using the Company's proprietary delayed coking technology. The
Petrozuata joint venture agreement has a 35-year term and Conoco's equity
interest in proved reserves from Petrozuata is 680 million barrels of oil,
representing 26 percent of the Company's total reserves at December 31, 1997.
Petrozuata began producing extra heavy crude oil in August 1998, and the Company
expects Petrozuata to have production of 120,000 barrels per day (gross) by the
time the project's upgrading facility becomes operational.
Conoco is also working to expand its existing operations in the Asia
Pacific and Russia/Caspian Sea regions into additional major business areas. In
Asia Pacific, Conoco is the operator under a production sharing contract
relating to Block B of the Indonesian sector of the Natuna Sea, which the
Company believes may contain in excess of one trillion cubic feet of natural gas
(Conoco's interest in the Block B production sharing contract is 40 percent).
The Company is one of several companies party to an agreement with Pertamina,
the Indonesian state oil company, pursuant to which Conoco and other companies
in the region intend to jointly market natural gas from Natuna to companies in
Singapore, assuming satisfaction of certain conditions. In Russia, Conoco has
signed a memorandum of understanding with OAO Lukoil ("Lukoil"), the Russian
Federation's largest oil company, to jointly study the development of petroleum
reserves in the 1.2 million acre block known as the Northern Territories in the
Timan-Pechora region in Northern Russia, which includes the large undeveloped
Yuzhno Khilchuyu oilfield. Such a development would complement the Company's
producing Polar Lights joint venture, the first joint venture between Russia and
a Western oil company to develop a major new oil field.
Since 1996, Conoco has pursued and continues to implement an exploration
strategy focused on acquiring large acreage positions in areas that are
relatively under-explored. The purpose of these acreage acquisitions has been to
establish Conoco at an early stage in areas that have the potential for large
discoveries. Conoco has acquired significant acreage in the deepwater Gulf of
Mexico, the Atlantic Margin of the North Sea, the La Luna trend in Northern
South America and the Caribbean, and selected basins in the Asia Pacific region.
6
<PAGE> 186
Conoco has applied 3D seismic and other technologies to evaluate its acreage,
and has recently begun drilling programs to test the potential of this acreage.
Conoco is the seventh largest leaseholder in the deepwater Gulf of Mexico, with
interests in 271 leases in over 1,000 feet of water. Conoco has a 100 percent
interest in 130 of these leases and jointly owns 76 of the remaining leases on a
50/50 basis with Shell. In late 1998, Conoco intends to commence a five-year,
$400 million deepwater drilling program in the Gulf of Mexico with one of two
highly sophisticated drillships being constructed for joint ventures between
Conoco and R&B Falcon Corporation.
For the year ended December 31, 1997, Upstream reported earnings of $884
million on sales and other operating revenues of $5.3 billion. Capital
investments, including the Lobo Acquisition, were $2.5 billion in 1997 and are
expected to be $1.8 billion in 1998, with the largest expenditures being made in
the continued development of the Lobo trend, Britannia, Petrozuata and Ursa.
DOWNSTREAM
The Company's Downstream activities are predominately located in North
America and Europe, with additional operations being developed in the Asia
Pacific region. The Company operates four wholly owned refineries in the United
States and one in the United Kingdom. It also has equity interests in one
refinery in Germany, two refineries in the Czech Republic and the Melaka
refinery, which is nearing completion in Malaysia. Total refined product sales
were approximately one million barrels per day in 1997. Marketing activities
include selling gasoline, diesel fuels and motor oils under the "Conoco", "Jet",
"Seca" and other brand names through approximately 4,900 outlets in the United
States, 2,900 outlets in Europe and 100 outlets in Asia. Approximately 23
percent of these outlets are Company-owned.
Conoco has significantly improved its competitive position by increasing
asset utilization and reducing overhead and operating costs. The Company
instituted major efficiency enhancing projects at its principal refineries in
both the U.S. and Europe. The Company's Humber refinery in the United Kingdom
and the Company's joint venture OMW refinery in Germany (in which the Company
owned a 25 percent interest) were ranked in the top quartile of Western European
refineries in 1996 (in the net margin, return on investment, processing
efficiency and volumetric expansion categories) by Solomon Associates, an
independent benchmarking company. This ranking was based on both financial and
operating performance. This competitive position was further improved through
synergies gained by formation of the MiRO joint venture (an 18.75 percent
Company interest), which combined the OMW refinery with a neighboring Esso
refinery.
Downstream's principal strengths include the processing of heavy, high
sulfur and acidic crudes, upgrading bottom-of-the-barrel feedstocks via coking
technology, running low-cost, high-volume retail marketing operations and
developing specialty products. Approximately 50 percent of the Company's
worldwide refining capacity is designed to process heavy, high sulfur crude.
This allows the Company to purchase cheaper grades of crude oil with high levels
of sulfur and to process them into high grade petroleum products. Recent
investments designed to capitalize on these strengths include Excel Paralubes, a
50/50 joint venture between the Company and Pennzoil Company ("Pennzoil"), which
recently completed construction of a $500 million lube oil hydrocracker at the
Company's Lake Charles, Louisiana, refinery that produces hydrocracked base oil.
The Company made $235 million in improvements in the Lake Charles refinery to
facilitate this project. The Company also recently upgraded its refinery in the
United Kingdom to process acidic North Sea crude oils. Recent expansion projects
include the Company's new joint venture refinery in Melaka, Malaysia (in which
the Company has a 40 percent interest) which will have a gross refining capacity
of 100,000 barrels per day. Startup of the Melaka refinery was initiated in
August 1998 with the commissioning of the crude unit. A staggered startup of the
other units in the refinery will occur between August and November 1998. By
developing and applying its coking technology to nearly all of its refineries,
the Company has become a world leader in the petroleum coke market and the
manufacture of specialty cokes for use in the steel and aluminum industries. The
Company has also established a marketing presence in Central and Eastern Europe,
and Southeast Asia, where it is a leading operator of low-cost, high-volume
retail stations.
7
<PAGE> 187
For the year ended December 31, 1997, Downstream reported earnings of $307
million on sales and other operating revenues of $20.0 billion. Downstream
capital investments were $558 million in 1997. The Company expects to make
capital investments of approximately $600 million in 1998, primarily relating to
the completion of the Melaka refinery, expansion of European and Asian retail
operations and the upgrading of its U.S. and European refineries, including
initial work at Lake Charles to facilitate the processing of Petrozuata
Synthetic Crude.
BUSINESS STRATEGY
Conoco intends to pursue a growth-oriented business strategy by: (a)
exploiting growth opportunities where Conoco has existing major areas of
operation, (b) creating at least two new major business areas in Northern South
America and the Caribbean, and the Asia Pacific, Middle East or Russia/Caspian
Sea regions and (c) continuing to improve the profitability, efficiency and
effectiveness of its existing operations. Specifically, the Company intends to:
- Manage its portfolio to increase the proportion of Upstream assets
relative to Downstream assets and the proportion of large-scale,
long-lived, early-life cycle assets relative to mature assets.
- Achieve significant near-term production growth through the
implementation of large-scale projects such as Petrozuata, Britannia,
Lobo and Ursa.
- Seek opportunities created by worldwide privatizations and the opening of
new markets previously closed to private investment.
- Apply its strengths in carbon upgrading, project management, deepwater
technology, natural gas processing, seismic processing and
interpretation, and the ability to present integrated Upstream/
Downstream solutions to host governments and other institutions in new
and emerging markets.
- Pursue exploration activities that have significant value creation
potential by concentrating on areas that are under-explored.
- Capitalize on the Company's ability to convert low-cost, heavy, high
sulfur and acidic crude oils into high-value light oil products.
- Continuously rationalize its asset base, contain costs, optimize its
investment portfolio, and improve operating reliability.
In all of its activities, the Company will strive to act in accordance with its
core values: operating safely, protecting the environment, acting ethically and
valuing all people.
RISK FACTORS
Prospective investors should consider carefully the matters set forth under
the caption "Risk Factors," as well as the other information set forth in this
Prospectus, including the uncertainty of supply and demand in the crude oil,
natural gas and refined products markets, the volatility of crude oil, natural
gas and refined product prices, the possibility of sustained depressed prices,
the Company's need to replace its crude oil and natural gas reserves depleted
through production, the uncertainty of the Company's estimates of its proved
reserves, control of the Company by DuPont prior to the divestiture of its
ownership interest in the Company, changes in the Company's ongoing relationship
with DuPont, competition, drilling risks, operating hazards, potential
disruption or interruption of the Company's production or refining facilities
due to political events, international monetary conditions and exchange
controls, the potential adverse effects of disparate voting rights of two
classes of Common Stock, the impact of environmental and other governmental
regulation, certain anti-takeover provisions in the Company's Certificate of
Incorporation and By-laws, the absence of a prior public market for the Class A
Common Stock, and the presence of a significant number of shares of Common Stock
which are eligible for future sale by DuPont. One or more of such matters could
negatively impact the Company's ability to implement successfully its business
strategy as described above.
8
<PAGE> 188
THE OFFERINGS
Class A Common Stock
Offered:
U.S. Offering............ 172,310,784 shares
International Offering... 19,145,643 shares
Total................. 191,456,427 shares
Common Stock to be
outstanding after the
Offerings(1):
Class A Common Stock..... 191,456,427 shares
Class B Common Stock..... 436,543,573 shares
Total................. 628,000,000 shares
Use of Proceeds............ The net proceeds of approximately $4,228 million to
be received by the Company from the Offerings will
be used to repay outstanding indebtedness owed to
DuPont. See "Use of Proceeds."
Dividend Policy............ The Company currently intends to pay quarterly cash
dividends of $.19 per share on the Class A Common
Stock and Class B Common Stock, subject to
financial results and declaration by the Board of
Directors. The Company expects to pay an initial
dividend in March 1999 representing a pro rata
dividend for the period from the date of the
Offerings to December 31, 1998. There can be no
assurance, however, that this dividend or any
future dividends will be declared or paid. See
"Dividend Policy."
Voting Rights:
Class A Common Stock..... 1 vote per share
Class B Common Stock..... 5 votes per share
Other Common Stock
Provisions................. Apart from the different voting rights described
above, the holders of Class A Common Stock and
Class B Common Stock generally have identical
rights, except that the holders of Class A Common
Stock are not eligible to vote on any alteration of
the powers, preferences or special rights of the
Class B Common Stock that would not adversely
affect the Class A Common Stock. See "Description
of Capital Stock."
Proposed NYSE symbol....... "COC"
Rights..................... One Right will be attached to each share of Class A
Common Stock sold in the Offerings. See
"Description of Capital Stock -- Anti-Takeover
Effects of Certain Certificate and By-Law
Provisions -- Rights Plan."
- ---------------
(1) Does not include shares of Class A Common Stock that will be issuable in
connection with Common Stock-based employee benefit awards awarded at the
time of the Offerings (not all of which will be immediately exercisable),
and other Common Stock-based employee benefit awards that will be issued
upon cancellation of DuPont stock-based employee benefit awards. See
"Management -- Compensation of Executive Officers" and "-- Treatment of
Outstanding Stock Options and Stock Appreciation Rights."
9
<PAGE> 189
SEPARATION FROM DUPONT
Since 1981, the Company's business operations have been conducted by
various entities owned directly or indirectly by DuPont. In May 1998, DuPont and
the Company announced their intention to create a separate company composed of
the oil and gas businesses and operations that will comprise the Company after
the Offerings, and the associated assets and liabilities of such businesses and
operations (the "Separation"). The Company believes that the Separation will be
substantially completed, including the transfer of substantially all of such
assets and liabilities, by the date of the Offerings. DuPont has announced that
it intends to divest its remaining ownership interest in Conoco within 12 months
of the date hereof through a "split-off" (an offering to DuPont shareholders of
the opportunity to exchange shares of DuPont common stock for Class B Common
Stock of Conoco). The split-off will be subject to (i) certain legal conditions,
including the receipt of a favorable tax ruling from the Internal Revenue
Service as to the tax-free nature of the split-off, and (ii) the absence of any
material change in market conditions or other unanticipated circumstances that
cause the Board of Directors of DuPont to conclude that such transaction was not
in the best interests of the shareholders of DuPont.
The Separation is intended to establish the Company as a stand-alone entity
with objectives separate from those of DuPont. DuPont and the Company believe
that the Separation will (a) create a structure which will enable the Company to
have better access to capital markets, (b) permit the Company to adopt a more
aggressive investment program in new and capital-intensive oil and gas projects,
(c) facilitate future partnerships, combinations and other arrangements with
other entities in the oil and gas business, (d) allow the Company to offer
incentives to its employees that are more closely linked to the Company's
performance and (e) facilitate comparisons with other major, international
integrated energy companies.
After completion of the Offerings, DuPont will own 100 percent of the
outstanding Class B Common Stock, which will represent 91.9 percent of the
combined voting power of all classes of voting stock of the Company. See
"Principal Stockholder." Until such time as DuPont holds less than 50 percent of
the voting power of outstanding common stock of the Company, DuPont will be able
to control the vote on all matters submitted to stockholders, including the
election of directors and the approval of extraordinary corporate transactions.
See "Risk Factors -- Control by DuPont; Potential Conflicts of Interest."
Historically, the Company and its business operations have derived tangible
and intangible benefits from being owned by DuPont. The Company and DuPont have
entered into certain ancillary agreements which govern various interim and
ongoing relationships between the two companies, including agreements with
respect to employee benefit arrangements, information management, the provision
of interim services, financing arrangements, tax sharing, environmental
liabilities and various commercial arrangements, such as the supply of natural
gas by the Company to DuPont. While these agreements will continue to benefit
the Company, the Company is only entitled to the ongoing assistance of DuPont
for a limited time and it may not enjoy benefits from its relationship with
DuPont beyond the term of the agreements. These agreements were in most cases
developed in connection with the Separation and were not the result of
arm's-length negotiations between independent parties. See "Risk
Factors -- Limited Operating History; Limited Relevance of Historical Financial
Information" and "Arrangements Between the Company and DuPont."
In July 1998, a dividend of $7.5 billion was paid by the Company to DuPont
in the form of a promissory note. The promissory note is due January 2, 2000 and
bears interest at an annual interest rate of 6.0125 percent. The Company will
use the net proceeds of the Offerings and its cash and cash equivalents in
excess of $225 million (excluding $70 million of additional monetary assets held
by the Company's captive insurance company and its subsidiaries) at the end of
the month in which the Offerings occur to repay or purchase debt owed to DuPont.
On September 28, 1998, the Company declared a dividend of a receivable from
DuPont evidenced by a promissory note in the amount of $700 million.
DuPont has historically guaranteed certain obligations and liabilities of
the Company and its subsidiaries and affiliates. Certain of these guarantees
will remain in place after the Separation pursuant to their terms. The Company
will indemnify DuPont for any liabilities DuPont may incur pursuant to these
guarantees.
10
<PAGE> 190
Certain international assets relating primarily to the business of DuPont
may be held by the Company or its subsidiaries at the closing of the Offerings
pending receipt of consents or other approval or satisfaction of other
applicable foreign requirements necessary for the transfer of such assets to
DuPont. In addition, certain international assets relating primarily to the
business of the Company may be held by DuPont or other of its subsidiaries at
the closing of the Offerings pending receipt of consents or approvals or
satisfaction of other applicable foreign requirements necessary for the transfer
of such assets to the Company. The financial and other information included
herein assumes the consummation of all such transactions. Additionally, such
information reflects the inclusion of certain subsidiaries of DuPont which will
not be owned by the Company as of the closing of the Offerings and which DuPont
will not thereafter be obligated to transfer to the Company. DuPont and the
Company intend to negotiate for the sale of such subsidiaries within the six
months following the Offerings at a purchase price equal to their then fair
market value. DuPont and the Company estimate that the fair market value of such
subsidiaries at August 1998 was approximately $20 million and cannot predict at
what price any such sale may occur. All of the above subsidiaries, which are
immaterial to total assets and results of operations of the Company, have been
included in the Combined Financial Statements.
Following the Offerings, certain pension assets will be held in trust with
the DuPont Pension and Retirement Plan. As of the date on which DuPont ceases to
own securities representing 80 percent or more of the voting power and
representing 80 percent or more of the economic value of all of the outstanding
shares of Common Stock, the Company will adopt a qualified defined benefit
retirement plan. In this event, the trust associated with the Company plan will
receive, assuming satisfaction of certain conditions, a transfer of assets and
liabilities on behalf of the Company's current and former employees from the
DuPont Pension and Retirement Plan. Other employee benefit trusts established by
the Company will continue following the Separation.
The Separation Agreement (as defined in "Arrangements Between the Company
and DuPont") provides that the Company will, subject to certain exceptions,
apply the net proceeds of any additional indebtedness or the issuance of equity
securities by the Company, including the net proceeds of the Offerings, to repay
debt owed to DuPont.
Generally, all one-time costs, including fees and taxes, directly relating
to the Offerings or the Separation are to be paid by DuPont under the terms of
the Separation Agreement.
11
<PAGE> 191
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table sets forth summary combined historical and pro forma
financial data of the Company as of the dates and for the periods indicated. The
statement of income data for each of the years in the three-year period ended
December 31, 1997, and the historical balance sheet data as of December 31, 1996
and 1997, have been derived from the Combined Financial Statements audited by
PricewaterhouseCoopers LLP, independent accountants. The statement of income
data for the years ended December 31, 1993 and 1994, and the six months ended
June 30, 1997 and 1998, and the historical balance sheet data as of December 31,
1993, 1994, 1995, and June 30, 1998 are based on the accounting records of
DuPont which, in the opinion of the Company's management, include all
adjustments necessary for the fair presentation of the financial position at
such dates and the results of operations for such respective interim periods.
The results for the six months ended June 30, 1998, are not necessarily
indicative of results to be expected for the full fiscal year or any interim
period. The financial information included herein may not necessarily reflect
the results of operations, financial position and cash flows of the Company in
the future or what the results of operations, financial position and cash flows
would have been had the Company been a separate, stand-alone entity during the
periods presented.
The pro forma financial data have been derived from the Pro Forma Combined
Financial Statements which were prepared by the Company to illustrate the
estimated effects of the Offerings and related transactions described in the
Notes to the Pro Forma Combined Financial Statements as if the Offerings and
related transactions had occurred as of the beginning of the periods presented,
for purposes of the pro forma combined statements of income and as of June 30,
1998, for purposes of the pro forma combined balance sheet. In addition, the Pro
Forma Combined Financial Statements do not purport to represent what the results
of operations or financial position of the Company would actually have been if
the Offerings and related transactions had in fact occurred on such dates or to
project the results of operations or financial position of the Company for any
future period or date. The following data should be read in conjunction with,
and are qualified by reference to, the Combined Financial Statements, the
Interim Combined Financial Statements, the Pro Forma Combined Financial
Statements, and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus.
POST-OFFERINGS CHARGE
Subject to completion of the Offerings, the Company and DuPont expect to
give certain current employees of the Company the option, subject to specific
country tax and legal requirements, to participate in a program (the "Option
Program") involving the cancellation of all or part of their options to purchase
DuPont common stock or appreciation rights ("SARs") with respect to DuPont
common stock and the issuance by the Company upon such cancellation of
comparable options to acquire Class A Common Stock or SARs with respect to Class
A Common Stock. Participation in the Option Program will be deemed a change in
the terms of certain awards granted to Conoco employees. As a result, the
Company will incur a non-cash charge to compensation expense, in the quarter the
Offerings are completed, of approximately $192 million after-tax depending on
the number of outstanding Conoco employee options to purchase DuPont common
stock canceled. Since the cancellation and issuance would be a one-time event
occurring after the Offerings, the charge is not reflected in the Pro Forma
financial information included in this Prospectus. See "Management -- Treatment
of Outstanding Stock Options and Stock Appreciation Rights."
12
<PAGE> 192
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
AS ADJUSTED AS ADJUSTED FOR
SIX MONTHS ENDED FOR THE YEAR THE SIX MONTHS
YEAR ENDED DECEMBER 31, JUNE 30, ENDED ENDED
----------------------------------------------- ----------------- DECEMBER 31, JUNE 30,
1993 1994 1995 1996 1997 1997 1998 1997 1998
------- ------- ------- ------- ------- ------- ------- ------------ ---------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Total Revenues(1).......... $19,687 $19,433 $20,518 $24,416 $26,263 $12,600 $11,486 $26,179 $11,433
Cost of Goods Sold and
Other Operating
Expenses................. 11,349 10,640 11,146 14,560 16,226 7,667 6,754 16,226 6,754
Selling, General and
Administrative
Expenses................. 651 679 728 755 726 355 370 726 370
Exploration Expenses....... 361 357 331 404 457 192 176 457 176
Depreciation, Depletion and
Amortization............. 1,428 1,244 1,067 1,085 1,179 516 505 1,179 505
Taxes Other Than on
Income(1)................ 4,652 5,477 5,823 5,637 5,532 2,669 2,896 5,532 2,896
Interest and Debt
Expense.................. 67 63 74 74 36 24 1 204 92
------- ------- ------- ------- ------- ------- ------- ------- -------
Income Before Income
Taxes.................... 1,179 973 1,349 1,901 2,107 1,177 784 1,855 640
Provision for Income
Taxes.................... 424 551 774 1,038 1,010 590 254 928 218
------- ------- ------- ------- ------- ------- ------- ------- -------
Net Income(2)...... $ 755 $ 422 $ 575 $ 863 $ 1,097 $ 587 $ 530 $ 927 $ 422
======= ======= ======= ======= ======= ======= ======= ======= =======
Segment Net Income:
Upstream................... $ 481 $ 498 $ 492 $ 681 $ 884 $ 454 $ 359
Downstream................. 324 241 233 289 307 181 181
Corporate and Other(2)..... (50) (317) (150) (107) (94) (48) (10)
------- ------- ------- ------- ------- ------- -------
$ 755 $ 422 $ 575 $ 863 $ 1,097 $ 587 $ 530
======= ======= ======= ======= ======= ======= =======
Pro Forma Earnings Per
Share:
Basic.................... $ 1.75 $ 0.93 $ 0.84 $ 1.48 $ 0.67
Diluted.................. $ 1.72 $ 0.92 $ 0.83 $ 1.46 $ 0.66
Pro Forma Weighted Average
Shares Outstanding:
Basic.................... 628 628 628 628 628
Diluted.................. 637 637 637 637 637
OTHER DATA:
Cash Provided by
Operations............... $ 2,132 $ 2,143 $ 1,924 $ 2,396 $ 2,876 $ 855 $ 548
Capital Expenditures and
Investments.............. 1,743 1,665 1,837 1,944 3,114 1,815 1,050
</TABLE>
- ---------------
(1) Includes petroleum excise taxes of $4,478, $5,291, $5,655, $5,461 and $5,349
for 1993 through 1997 and $2,577 and $2,806 for the first six months of 1997
and 1998, respectively.
(2) Includes after-tax exchange gains (losses) of $60, $(143), $(40), $(7), and
$21 for 1993 through 1997 and $5 for both the first six months of 1997 and
1998, and $(25) for the pro forma as adjusted for 1997 and $(8) for the pro
forma as adjusted for the first six months of 1998.
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, AS ADJUSTED
----------------------------------------------- JUNE 30, JUNE 30,
1993 1994 1995 1996 1997 1998 1998
------- ------- ------- ------- ------- -------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and Cash Equivalents.............................. $ 271 $ 319 $ 286 $ 846 $ 1,147 $ 829 $ 225
Working Capital........................................ 1,893 1,790 999 862 567 276 869
Net Property, Plant and Equipment...................... 9,473 9,522 9,758 10,082 10,828 11,048 11,048
Total Assets........................................... 14,809 15,271 14,229 15,226 17,062 17,164 15,995
Long-Term Borrowings -- Related Parties................ 2,102 2,279 2,141 2,287 1,450 1,181 --
Long-Term Borrowings -- Other Related Party............ -- -- -- -- -- -- 4,853
Other Long-Term Borrowings and Capital Lease
Obligations.......................................... 304 342 65 101 106 103 103
Owner's Net Investment and Accumulated Other
Comprehensive Loss/Stockholders' Equity.............. 7,462 7,274 6,754 6,579 7,896 8,223 4,493
</TABLE>
13
<PAGE> 193
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Proved Reserves at December 31(1):
Oil (MMbbls)(2)...................... 983 988 977 973 1,624
Natural Gas (Bcf).................... 3,971 4,674 5,048 5,396 5,861
Total Proved Reserves (MMBOE)(3)..... 1,645 1,767 1,818 1,872 2,601
International Proved Reserves (% of
Total)............................... 58% 61% 63% 65% 73%
Reserve Replacement Ratio(1)........... 89% 157% 127% 126% 448%
Reserve Life (years)(1)(4)............. 7.7 8.2 9.3 8.9 12.4
Finding and Development Costs per
BOE(1)(3)(5)......................... $ 6.79 $ 6.24 $ 5.39 $ 4.84 $ 3.63
Average Daily Production(1):
Oil (Mbbls/day)(2)................... 434 436 424 454 453
Natural Gas (MMcf/day)............... 1,301 1,327 1,126 1,211 1,203
Total Production (MBOE/day)(3)....... 651 657 612 656 654
Average Production Costs per
BOE(3)(6)............................ $ 3.97 $ 3.59 $ 3.92 $ 3.84 $ 4.21
Refinery Capacity at December 31
(Mbbls/day)(1)(7).................... 595 602 621 743 754
Refinery Utilization(7)................ 95% 99% 97% 83% 91%
Total Refinery Inputs
(Mbbls/day)(1)(8).................... 674 697 721 732 780
Sales of Refined Products
(Mbbls/day)(1)....................... 876 931 983 998 1,048
Retail Marketing Outlets at December
31(9):
United States ....................... 5,008 5,196 5,125 4,976 4,903
International........................ 2,454 2,438 2,390 2,874 2,971
</TABLE>
- ---------------
(1) Includes the Company's share of equity affiliates.
(2) Includes crude oil, condensate, and NGLs expected to be removed for the
Company's account from its natural gas production. Average Daily Production
also includes NGLs acquired through gas plant ownership of 67, 69, 78, 80,
and 79 Mbbls/day for 1993 through 1997, respectively.
(3) 6,000 cubic feet of natural gas = one barrel-of-oil-equivalent (BOE).
(4) Total Proved Reserves at December 31 divided by annual production for the
year ended December 31, excluding NGLs from gas plant ownership.
(5) Finding and development costs per BOE represent a trailing five-year average
for each year displayed.
(6) Excludes equity affiliates and processed NGLs.
(7) Based on capacity to process crude oil and condensate (excludes other
feedstocks).
(8) Includes crude oil, condensate and other feedstocks.
(9) Represents outlets owned by the Company and others that sell the Company's
refined products.
RECENT RESULTS
The Company's third quarter results have been negatively affected by market
conditions that continue to affect the petroleum industry in general. The
Company's worldwide net realized prices in the third quarter of 1998 for crude
oil and natural gas were $12.29 per barrel and $2.08 per thousand cubic feet,
respectively, compared to $12.45 per barrel and $2.15 per thousand cubic feet,
respectively, in the second quarter of 1998. Prices for crude oil and natural
gas were $17.96 per barrel and $2.17 per thousand cubic feet, respectively, in
the third quarter of 1997. Oil production in the third quarter of 1998 was
292,000 barrels per day compared to production of 314,000 barrels per day in the
second quarter of 1998 and production of 325,000 barrels per day in the third
quarter of 1997. Natural gas production for the third quarter of 1998 was 1,374
million cubic feet per day compared to 1,318 million cubic feet per day in the
second quarter of 1998 and 1,205 million cubic feet per day in the third quarter
of 1997. The increase in natural gas production in the third quarter of 1998 as
compared to the second quarter of 1998 and the third quarter of 1997 was due to
higher production from the Company's South Texas operations. Refining margins
per barrel for Downstream activities in the third quarter of 1998 were slightly
higher than margins in the second quarter of 1998 but lower than margins for the
third quarter of 1997.
Based on the cumulative effect of these factors, the Company's Upstream and
Downstream segment earnings before material non-recurring items for the third
quarter of 1998 were $223 million compared to $200 million of such earnings for
the second quarter of 1998 and $252 million of such earnings for the third
quarter of 1997. Due to higher interest and debt expense associated with the
$7.5 billion promissory note owed to DuPont, combined net income for the third
quarter of 1998 was $183 million compared to $214 million in the second quarter
of 1998 and $289 million in the third quarter of 1997. The Company intends to
repay or purchase a portion of the outstanding indebtedness owed to DuPont with
the estimated net proceeds from the Offerings of approximately $4,228 million.
See "Use of Proceeds."
14
<PAGE> 194
SUMMARY RESERVE DATA
The following table sets forth summary information as of the dates
indicated with respect to the estimated proved reserves of oil and natural gas
of the Company at year-end for 1996 and 1997. Unless otherwise noted, all
information in this Prospectus relating to oil and natural gas reserves is based
upon estimates prepared by the Company and reflects the Company's net interest
after royalties. At the request of the Company, DeGolyer and MacNaughton,
independent petroleum engineering consultants, carried out an independent
evaluation of the reserves of selected properties representing approximately 80
percent in present value of the Company's reserves at December 31, 1997. The
results obtained by DeGolyer and MacNaughton with respect to reserves at
December 31, 1997 do not show significant differences from those reported by the
Company. DeGolyer and MacNaughton has delivered to the Company a summary letter
report describing its procedures and conclusions, a copy of which appears as
Annex A hereto. See "Risk Factors -- Uncertainty of Estimates of Proved
Reserves" and "Business -- Upstream -- Oil and Natural Gas Reserves."
<TABLE>
<CAPTION>
PROVED RESERVES
AT DECEMBER 31,
---------------- % INCREASE
1996 1997 (DECREASE)
------ ------ ----------
(NET AFTER ROYALTY BASIS)(1)
<S> <C> <C> <C>
United States:
Oil (MMbbls)(2)........................................... 299 277 (7)
Natural Gas (Bcf)......................................... 2,155 2,605 21
----- -----
Total proved reserves (MMBOE)(3).......................... 658 711 8
International:
Oil (MMbbls)(2)........................................... 674 1,347 100
Natural Gas (Bcf)......................................... 3,241 3,256 --
----- -----
Total proved reserves (MMBOE)(3).......................... 1,214 1,890 56
Worldwide:
Total proved reserves (MMBOE)(3).......................... 1,872 2,601 39
===== =====
</TABLE>
- ---------------
(1) Includes the Company's share of equity affiliate reserves.
(2) Reserves comprise crude oil, condensate and NGLs expected to be removed for
the Company's account from its natural gas production.
(3) 6,000 cubic feet of natural gas = one barrel-of-oil-equivalent (BOE).
15
<PAGE> 195
RISK FACTORS
In evaluating the Company and its business, prospective investors should
consider carefully the following risk factors in addition to the other
information contained herein. This Prospectus contains forward-looking
statements that involve risks and uncertainties. Actual results may differ
materially from those expressed or implied by such forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in the following risk factors.
VOLATILITY OF OIL AND GAS PRICES; RECENT SUBSTANTIAL PRICE DECLINE
The Company's profitability will be determined in large part by the
difference between the prices received for the natural gas, natural gas liquids,
crude oil and refined products produced by the Company and the costs of finding,
developing, producing, refining and marketing these resources. Prices for crude
oil, natural gas, and refined products are subject to wide fluctuation in
response to changes in global and regional supply over which the Company has no
control, including political developments and the ability of the Organization of
Petroleum Exporting Countries ("OPEC") and other producing nations to set and
maintain production levels and prices. Prices for crude oil, natural gas and
refined products are also affected by changes in demand for these products,
which may result from global events beyond the Company's control, as well as
supply and demand in industrial markets, such as the steel and aluminum markets.
Reduced Asian demand, as a result of the recent economic downturn in Asia, has
negatively affected crude oil and product prices elsewhere, including in the
Company's core markets. Even relatively modest declines in crude oil and natural
gas prices and refined product margins may adversely affect the Company's
financial condition, liquidity, and results of operations. A substantial decline
in crude oil prices occurred in late 1997 and is continuing in 1998. Recently,
West Texas Intermediate crude oil prices fell to 12-year lows as measured in
absolute dollars (and 25-year lows as measured in inflation-adjusted dollars),
closing at $11.58 a barrel on June 15, 1998. Lower oil and natural gas prices
may reduce the amount of oil and natural gas the Company can produce
economically, and existing contracts that the Company has entered into may
become uneconomical as a result of changing prices. From time to time, the
Company may attempt to mitigate the effect of price fluctuations by hedging
specific exposures, although there can be no assurance that these efforts will
be successful. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
RISKS OF GLOBAL OPERATIONS
Local political and economic factors in international markets over which
the Company has no control may have a material adverse effect on the Company's
financial condition and results of operations. Approximately 41 percent of the
Company's sales in 1997 were derived from markets outside the United States. The
Company conducts exploration and production operations in 18 countries including
the United States, Canada, the United Kingdom, Norway, Venezuela, the United
Arab Emirates, Indonesia, Russia and Nigeria. The Company has interests in
refineries located in the United Kingdom, Germany, the Czech Republic and
Malaysia, and conducts marketing and crude oil supply operations in foreign
countries, primarily in Europe and Southeast Asia. Risks associated with
operations in international markets also include changes in foreign governmental
policies, and other political, economic or diplomatic developments which are not
within the control of the Company, including changes in crude oil, natural gas
or refined product pricing policies, taxation policies, changing political
conditions and international monetary fluctuations. Recent turmoil in regions
such as Russia and Southeast Asia has subjected the Company's operations there
to increased risk of political and economic instability, the risks of war,
embargoes and expropriation and nationalization with or without compensation,
confiscatory taxation, renegotiation or nullification of existing concessions
and contracts, and increased risks of fluctuating currency values, hard currency
shortages and currency controls. Civil unrest and changes in government are also
potential hazards.
The profitability of the Company's operations (both domestic and
international) is similarly exposed to risks due to actions of the United States
government through tax and other legislation, executive order and commercial
restrictions. Various agencies of the United States and other governments have
from time to time imposed restrictions on the Company's ability to operate in or
gain attractive opportunities in various
16
<PAGE> 196
countries. Actions by both the United States and host governments have affected
operations significantly in the past and will continue to do so in the future.
The Company is also exposed to fluctuations in foreign currency exchange
rates. The Company does not intend to comprehensively hedge its exposure to
currency rate changes, although it may choose to selectively hedge certain
working capital balances, firm commitments, cash returns from affiliates and/or
tax payments. There can be no assurance that these efforts will be successful.
CONTROL BY DUPONT; POTENTIAL CONFLICTS OF INTEREST
After completion of the Offerings, DuPont will own 69.5 percent of the
Company's outstanding Common Stock and approximately 91.9 percent of the
combined voting power of all classes of voting stock of the Company. After the
Offerings, and prior to the divestiture of its ownership interest in the
Company, DuPont through its ability to elect the Board of Directors of the
Company, will be in a position to continue to control all matters affecting the
Company, including the composition of the Board of Directors and, through it,
any determination with respect to the direction and policies of the Company,
acquisition or disposition of assets, future issuances of Common Stock or other
securities of the Company, the Company's incurrence of debt, and any dividend
payable on the Common Stock. See "Principal Stockholder."
Conflicts of interest may arise between the Company and DuPont in a number
of areas relating to their past and ongoing relationships including the nature,
quality and pricing of services rendered by the Company to DuPont or by DuPont
to the Company, potential competitive business activities, shared marketing
functions, tax and employee benefit matters, indemnity agreements, sales or
distributions by DuPont of all or any portion of its ownership interest in the
Company, or DuPont's ability to control the management and affairs of the
Company. The Company's Chairman of the Board, Edgar S. Woolard, Jr., its
President and Chief Executive Officer, Archie W. Dunham, and its director
nominee, William K. Reilly, currently serve, and will continue to serve after
the closing of the Offerings, as directors of DuPont. Gary M. Pfeiffer, a
director of the Company, is also an officer of DuPont. For purposes of governing
their on-going relationship, the Company and DuPont have or will enter into
various agreements involving the provision of services such as natural gas and
gas liquids supply, cash management and other financial services, purchasing,
legal, and computer services. It is the policy of Conoco and DuPont that such
services will generally be provided on terms and conditions comparable to those
granted to an unaffiliated third party for similar services. However, because
these agreements were negotiated in the context of a parent-subsidiary
relationship, there can be no assurance that these agreements, or the
transactions provided for therein, will be effected on terms at least as
favorable to the Company as could have been obtained from unaffiliated third
parties. There can be no assurance that DuPont and the Company will be able to
resolve any potential conflict or that, if resolved, the Company would not
receive more favorable resolution if it were dealing with an unaffiliated party.
See "Prospectus Summary -- Separation from DuPont" and "Arrangements Between the
Company and DuPont."
RISK OF REFINANCING DEBT OWED TO DUPONT
Upon the occurrence of the intended split-off, mandatory prepayment
provisions will be triggered in the promissory notes (including the $7.5 billion
note, the revolving credit agreement and the Employee Benefit Note) representing
the debt owed by the Company to DuPont (the aggregate principal amount of which
immediately after the Offerings is expected to be $4,853 million). As a result,
the Company anticipates that it will be required to refinance debt owed to
DuPont within 12 months of the date hereof. There can be no assurance that the
Company will be able to refinance this debt on terms as favorable as those
existing with respect to the debt owed to DuPont.
UNCERTAINTY OF ESTIMATES OF PROVED RESERVES
There are numerous uncertainties inherent in estimating quantities of
proved oil and natural gas reserves. The reserve data set forth in this
Prospectus represent estimates only. Reservoir engineering is an inherently
subjective and inexact process of estimating underground accumulations of oil
and natural gas that cannot be measured in an exact manner. Estimates of
economically recoverable oil and natural gas reserves and future
17
<PAGE> 197
net cash flows are based on a number of variable factors and assumptions (some
or all of which may prove to be incorrect over time) related to reserve
performance that require evaluation by engineers interpreting the available
geologic, engineering and economic data, as well as price and other economic
factors, many of which may be beyond the control of the Company. The reliability
of these estimates depends on the quality and quantity of technical and economic
data, the production performance of the reservoirs and extensive engineering
judgment. Results of drilling, testing and production after the date of the
estimates may require substantial upward or downward revisions. Adverse changes
in economic conditions may render it uneconomical to produce certain reserves.
Actual production, revenues and expenditures with respect to the Company's
reserves will likely vary from estimates, and such variances may be material.
See "Business -- Upstream -- Oil and Natural Gas Reserves."
HIGHLY COMPETITIVE MARKET
Each of the segments in which the Company operates is highly competitive.
The Company's competitors include major integrated petroleum companies, state
oil companies controlled by foreign governments, independent oil, natural gas,
pipeline, refining and marketing companies and alternative fuel producers, many
of which have larger financial and other resources than the Company.
Upstream competes with numerous companies in the industry to find and
obtain new sources of supply, and to produce oil and gas in a cost-effective and
efficient manner. The Company also actively competes for reserve acquisitions,
exploration leases, licenses and concessions and skilled industry personnel.
Downstream competitive factors include product improvement and new product
development through research and technology, and efficient manufacturing and
distribution systems. In the marketing phase of the business, competitive
factors include site location, name recognition, customer loyalty, ease of
access, store management, product selection, pricing, hours of operation, store
safety, cleanliness, product promotions, product quality, customer programs,
customer service and marketing.
RESERVE REPLACEMENT; DRILLING RISKS
The Company's ability to achieve its growth objectives is highly dependent
upon its level of success in finding, acquiring or gaining access to additional
reserves. In general, the volume of production from oil and natural gas
properties declines as reserves are depleted, with the rate of decline depending
on reservoir characteristics. Except to the extent the Company conducts
successful exploration and development activities or acquires properties
containing proved reserves, or both, the proved reserves of the Company will
decline as reserves are produced. The Company's exploration and development
activities expose it to inherent risks of drilling, including the risk that no
economically productive natural gas or oil reservoirs will be encountered. The
costs of drilling, completing and operating wells are often uncertain and
numerous factors beyond the Company's control may cause drilling operations to
be curtailed, delayed or cancelled. The Company's future drilling, exploration
and acquisition activities may not be successful and, if unsuccessful, such
failure would have an adverse effect on the Company's future results of
operations and financial condition.
OPERATING HAZARDS
The Company's operations are subject to certain operating hazards such as
well blowouts, collapsed wells, explosions, uncontrolled flows of oil, natural
gas or well fluids, fires, formations with abnormal pressures, pipeline ruptures
or spills, refinery explosions, surface or marine transportation incidents,
pollution, releases of toxic gas and other environmental hazards and risks. In
addition, the Company conducts significant operations offshore, which are
subject to additional hazards of marine operations, such as capsizing, collision
and damage or loss from severe weather. All such hazards could result in loss of
human life, significant property and equipment damage, environmental pollution,
impairment of operations and substantial losses to the Company. Such hazards
have adversely affected the Company in the past, and litigation arising from a
catastrophic occurrence in the future at one of the Company's locations may
result in the Company being named as a defendant in lawsuits asserting
potentially large claims. In addition, the Company is exposed to risks inherent
in any business such as equipment failures, accidents, theft, strikes, protests
and sabotage that could disrupt or
18
<PAGE> 198
interrupt operations. In accordance with customary industry practices, the
Company maintains insurance against some, but not all, such risks and losses.
See "Business -- Operating Hazards and Insurance."
ENVIRONMENTAL RISKS
The Company incurs, and expects to continue to incur, substantial capital
and operating costs to comply with various federal, state, local and foreign
laws and regulations covering the discharge of material into the environment or
otherwise relating to clean-up or protection of the environment, including costs
to remediate certain contamination at various owned and previously owned
facilities, as well as third-party sites where the Company's products or wastes
have been handled or disposed. These regulatory requirements continue to
increase in both number and complexity and affect the Company's operations with
respect to, among other things: the discharge of pollutants into the
environment; the handling, use, storage, transportation, disposal and clean-up
of hazardous materials and hazardous and non-hazardous wastes; and the
dismantlement, abandonment, and restoration of oil and gas properties and
Company facilities at the end of their useful lives. The costs to comply with
complex environmental laws and regulations, as well as internal voluntary
programs, are significant. Estimated pre-tax environmental expenses charged to
current operations totaled about $136 million, before insurance recoveries, in
1997, as compared to approximately $162 million in 1996 and $129 million in
1995. These expenses include remediation accruals, operating maintenance and
depreciation costs for solid waste, air and water pollution control facilities
and the costs of certain other environmental activities. Capital expenditures
for environmental control facilities totaled approximately $50 million in 1997,
as compared to approximately $78 million in 1996 and $68 million in 1995. The
Company estimates that capital expenditures for pollution control facilities
will total approximately $51 million in 1998, and approximately $52 million in
1999. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Environmental Expenditures." There can be no assurance
that costs to comply with such requirements will not materially increase in the
future. In addition, the U.S. Environmental Protection Agency (the "EPA") and
other rulemaking bodies have from time to time changed minimum product
specifications in such a manner as to require the Company to make major
investments or incur significant additional operating expenses. Developments
such as the adoption of new laws and regulations, the imposition of more onerous
requirements in permits, increasingly strict enforcement of existing laws and
regulations or the discovery of previously unknown contamination may require
future expenditures to modify operations, install pollution control equipment,
perform site clean-ups or curtail Conoco's operations. There can be no assurance
that such future expenditures or curtailments will not have a material adverse
effect on the Company. See "Business -- Environmental Regulation," "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Environmental Expenditures" and Note 25 to the Combined Financial
Statements.
GOVERNMENT REGULATION
The Company's operations are subject to extensive government regulations
which are subject to change from time to time in response to economic or
political conditions. Matters subject to regulation include discharge permits
for drilling operations, reports concerning operations, the spacing of wells,
unitization and pooling of properties, gasoline formulation and taxation. From
time to time, regulatory agencies have imposed price controls and limitations on
production by restricting the rate of flow of oil and natural gas wells below
actual production capacity in order to conserve supplies of oil and natural gas.
Because legal requirements are frequently changed and subject to interpretation,
the Company is unable to predict the ultimate cost of compliance with these
requirements or their effect on operations.
RISK OF YEAR 2000 NONCOMPLIANCE
Many existing computer programs were designed and developed without
considering the upcoming change in the century, which could lead to the failure
of computer applications or create erroneous results by or at the year 2000.
This issue is referred to as the "Year 2000 Issue." The Year 2000 Issue is a
broad business issue, whose impact extends beyond traditional computer hardware
and software to possible failure of automated plant systems and instrumentation,
as well as to business third parties. Also, there can be no guarantee that third
parties of business importance to Conoco will successfully reprogram or replace,
and test,
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<PAGE> 199
all of their own computer hardware, software and process control systems to
ensure such systems are Year 2000 compliant. Failure by the Company, third
parties of business importance to the Company and/or other constituents such as
governments to become Year 2000 compliant on a timely basis could have a
material adverse effect on the Company's financial position and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Year 2000."
ADVERSE EFFECT ON VALUE AND LIQUIDITY OF CLASS A COMMON STOCK FROM DISPARATE
VOTING RIGHTS OF CLASS A COMMON STOCK AND CLASS B COMMON STOCK
The differential in the voting rights of the Class A Common Stock and Class
B Common Stock both prior to and following the intended split-off could
adversely affect the value of the Class A Common Stock to the extent that
investors or any potential future purchaser of the Company's Common Stock
ascribes value to the superior voting rights of the Class B Common Stock. The
existence of two separate classes of Common Stock could result in less liquidity
for either class of Common Stock than if there were only one class of Common
Stock. The holders of Class A Common Stock and Class B Common Stock generally
have identical rights except that (i) holders of Class A Common Stock are
entitled to one vote per share while holders of Class B Common Stock are
entitled to five votes per share on all matters to be voted on by stockholders
and (ii) holders of Class A Common Stock are not eligible to vote on any
alteration of the powers, preferences, or special rights of the Class B Common
Stock that would not adversely affect the holders of Class A Common Stock.
Holders of Class A Common Stock and Class B Common Stock are entitled to class
votes on amendments to the Certificate of Incorporation of the Company (the
"Certificate of Incorporation") that would alter or adversely affect the powers,
preferences or special rights of the shares of their respective class. See
"Prospectus Summary -- Separation From DuPont" and "Description of Capital
Stock."
LIMITED OPERATING HISTORY; LIMITED RELEVANCE OF HISTORICAL FINANCIAL INFORMATION
Since 1981, the Company's business operations have been conducted by
various entities owned directly or indirectly by DuPont, and the Company has had
no independent operating history. Following the Offerings, the Company will be
required to supplement its financial, administrative and other resources to
provide services necessary to operate successfully as an independent public
company. In addition, the financial information included herein may not
necessarily reflect the results of operations, financial position and cash flows
of the Company in the future or what the results of operations, financial
position and cash flows would have been had the Company been a separate,
stand-alone entity during the periods presented. The financial information
included herein does not reflect many significant changes that will occur in the
capital structure, funding and operations of the Company as a result of the
Separation and the Offerings. See "Arrangements Between the Company and DuPont,"
"Pro Forma Combined Financial Statements" including the discussion of the
assumptions reflected therein, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- General."
CERTAIN ANTI-TAKEOVER PROVISIONS
The Certificate of Incorporation, the By-laws of the Company (the
"By-laws"), the Rights and applicable provisions of the Delaware General
Corporation Law (the "DGCL") contain various provisions that may inhibit the
acquisition of control of the Company without the approval of the Company's
Board of Directors. Certain provisions of the Certificate of Incorporation and
the By-laws, among other things, classify the Company's Board of Directors into
three classes, each of which (after an initial transition period) will serve for
staggered three-year periods. The Company's Board of Directors has the authority
to issue shares of Preferred Stock in one or more series and to fix the rights
and preferences of the shares of any such series without stockholder approval.
Any series of Preferred Stock will be senior to the Common Stock with respect to
dividends, liquidation rights and, possibly, voting. The ability to issue
Preferred Stock could have the effect of discouraging unsolicited acquisition
proposals. In addition, the Board of Directors has adopted a Rights Plan
providing for the issuance of Rights, which would cause substantial dilution to
a person or group that attempts to acquire the Company on terms not approved in
advance by the Company's Board of Directors. With certain exceptions, Section
203 of the DGCL imposes certain restrictions on mergers and other business
20
<PAGE> 200
combinations between the Company and any holder of 15 percent or more of the
Common Stock. In addition, certain provisions of the Certificate of
Incorporation and By-laws (i) require advance notice for actions to be taken at
annual meetings and director nominations, (ii) require mergers and certain other
extraordinary corporate transactions in certain circumstances to meet certain
fair price criteria and (iii) depending on DuPont's level of ownership, restrict
the ability to remove directors without cause or for stockholders to take action
by written consent or call special meetings of stockholders. See "Description of
Capital Stock -- Anti-Takeover Effects of Certain Certificate and By-Law
Provisions."
ABSENCE OF PRIOR PUBLIC MARKET FOR CLASS A COMMON STOCK; POSSIBLE VOLATILITY OF
STOCK PRICE; NO ASSURANCE OF DIVIDENDS
Prior to the Offerings, there has been no public market for the Class A
Common Stock. Although the Class A Common Stock has been approved for listing on
the NYSE, subject to official notice of issuance, there can be no assurance that
an active trading market will develop or continue upon completion of the
Offerings, or that purchasers of the Class A Common Stock will be able to resell
their Class A Common Stock at prices equal to or greater than the initial public
offering price. The initial public offering price of the Class A Common Stock
has been determined by negotiations among DuPont, the Company and the
representatives of the Underwriters and may not be indicative of either the
actual value of the Company or the market price of the Class A Common Stock
after the Offerings. The price at which the Class A Common Stock will trade in
the public market after the Offering may be less than the initial public
offering price. In addition, the market price of the Class A Common Stock could
be subject to significant fluctuations in response to a number of factors,
including variations in quarterly and yearly operating results, changes in crude
oil and natural gas prices, the success of the Company's business strategy,
competition, changes in government policies affecting the Company and market
conditions for energy or petroleum stocks in general. Moreover, stock markets
have recently experienced significant price and volume fluctuations unrelated or
disproportionate to the operating performance of affected companies.
The determination of the amount of cash dividends, if any, to be declared
and paid will depend upon declaration by the Company's Board of Directors and
upon the Company's financial condition, results of operations, cash flow, the
level of its capital and exploration expenditures, its future business prospects
and such other matters that the Company's Board of Directors deems relevant.
There can be no assurance that any dividends will be declared or paid. See
"Dividend Policy."
ADVERSE EFFECT ON MARKET PRICE DUE TO SHARES ELIGIBLE FOR FUTURE SALE
Sales, or the real or perceived possibility of sales, of a significant
number of shares of Common Stock in the public market following the Offerings
could adversely affect prevailing market prices for the Class A Common Stock.
Upon completion of the Offerings, DuPont will hold 100 percent of the
outstanding Class B Common Stock, representing 91.9 percent of the combined
voting power of all classes of voting stock of the Company. Following the
expiration of the 180 day lock-up period with respect to the Offerings, DuPont
may sell such shares subject to the requirements of the Securities Act. DuPont
has indicated its intention to divest its remaining ownership interest in the
Company in a tax-free split-off to be completed within 12 months of the date
hereof. See "Prospectus Summary -- Separation From DuPont." DuPont will have
rights to require the Company to register Common Stock held by DuPont for sale
in public offerings. See "Arrangements Between the Company and
DuPont -- Registration Rights Agreement." No predictions can be made as to the
effect, if any, that market sales of such shares, or the availability of such
shares for future sale, will have on the market price of the Class A Common
Stock. See "Shares Eligible for Future Sale" and "Underwriters."
USE OF PROCEEDS
The net proceeds from the sale of the Class A Common Stock offered hereby,
after deducting the underwriting discounts and commissions payable by the
Company, are approximately $4,228 million. The Company will use the net proceeds
of the Offerings, plus a portion of its cash and cash equivalents, to repay or
purchase a portion of the indebtedness owed by certain subsidiaries of the
Company to DuPont under certain intercompany notes (the "Intercompany Notes").
The Intercompany Notes will consist of (i) a promissory
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<PAGE> 201
note in the principal amount of $7.5 billion, due January 2, 2000, and bearing
interest at a rate of 6.0125 percent per annum, (ii) a promissory note in the
principal amount of approximately $827 million, due January 2, 2000, and bearing
interest at a rate equal to the six-month LIBOR plus 0.375 percent per annum (or
5.965 percent per annum in the current period), (iii) several Norwegian Kroner
denominated promissory notes with an aggregate principal amount of approximately
$447 million after conversion to U.S. dollars at June 30, 1998, having various
maturity dates (ranging from October 1998 to January 2000 and having a remaining
weighted average maturity of 11 months as of June 30, 1998), and bearing
interest at a rate equal to the six-month NIBOR plus 0.375 percent per annum (or
5.565 percent per annum in the current period) and (iv) a promissory note
(which, depending on the balance on October 31, 1998 of net borrowings from
DuPont, at the completion of the Offerings is expected to be, and will be capped
at, $240 million in principal amount), due on demand, and bearing an interest
rate during any calendar month based on the interest rate on DuPont's commercial
paper during the preceding month (or 5.65% in October 1998).
The net proceeds of the Offerings will be applied, first, to pay accrued
interest on the $7.5 billion promissory note and then to pay principal on such
promissory note to the extent necessary to reduce the principal amount to $4.846
billion; second, to purchase the Kroner denominated notes described in clause
(iii) of the preceding paragraph and pay accrued interest thereon; third, to
repay, in whole or in part, the $827 million note referred to in clause (ii) of
the preceding paragraph and pay accrued interest thereon; and fourth, to repay,
in whole or in part, the note referred to in clause (iv) of the preceding
paragraph. To the extent the net proceeds of the Offerings, together with the
Company's cash and cash equivalents in excess of $225 million (excluding $70
million of additional monetary assets held by the Company's captive insurance
company and its subsidiaries and excluding any cash and cash equivalents held by
Petrozuata) at the end of the month following completion of the Offerings, are
insufficient to repay or purchase in full the notes referred to in clauses (ii),
(iii) and (iv) of the preceding paragraph, the holders of such notes will
contribute the remaining balance of the notes to the Company (provided that a
portion of the notes referred to in clauses (ii) and (iv) of the preceding
paragraph may remain outstanding in lieu of all or part of the promissory note
in the principal amount of approximately $7 million described in "Arrangements
Between the Company and DuPont -- Intercompany Notes.") The $7.5 billion
promissory note was incurred in payment of a dividend in July 1998. The
promissory note with a principal amount of approximately $827 million was
incurred to finance the purchase by the Company of certain loans made by DuPont
to the Company. The purchased loans, as well as the several promissory notes
with an aggregate principal amount of approximately $447 million, were incurred
to finance certain capital expenditures, acquisitions and working capital. The
promissory note referred to in clause (iv) of the preceding paragraph was
incurred to finance working capital needs of the Company.
Following the application of the net proceeds from the Offerings and the
utilization of a portion of the Company's cash and cash equivalents in
connection with the matters discussed in "Arrangements Between the Company and
DuPont -- Intercompany Notes," the Company (excluding Petrozuata) will have
approximately $225 million in cash and cash equivalents (excluding $70 million
of additional monetary assets held by the Company's captive insurance company
and its subsidiaries) at the end of the month in which the Offerings occur.
DIVIDEND POLICY
The Company currently intends to pay to its stockholders a dividend of $.19
per quarter ($.76 annually) per share of Class A Common Stock and Class B Common
Stock. The first dividend is expected to be paid in March 1999, representing a
pro rata dividend for the period from the date of the Offerings to December 31,
1998. There can be no assurance, however, that this dividend, or any future
dividend, will be declared or paid.
The determination of the amount of cash dividends (including the initial
quarterly dividend referred to above), if any, to be declared and paid will
depend upon declaration by the Company's Board of Directors and upon the
Company's financial condition, results of operations, cash flow, the level of
its capital and exploration expenditures, its future business prospects and such
other matters that the Company's Board of Directors deems relevant.
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<PAGE> 202
CAPITALIZATION
The following table sets forth the combined capitalization of the Company
as of June 30, 1998, pro forma to reflect the transactions related to the
Separation as of June 30, 1998, and pro forma as adjusted to reflect the
Offerings as of June 30, 1998 and the application of the estimated net proceeds
as described herein under "Use of Proceeds."
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
---------------------------------------
PRO FORMA, AS
ACTUAL PRO FORMA(1) ADJUSTED(1)
------- ------------- -------------
(IN MILLIONS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Short-term borrowings -- related parties(2)............. $ 1,087 $ 272 $ --
Other short-term borrowings and capital lease
obligations(2)........................................ 51 51 51
Long-term borrowings -- related parties(2).............. $ 1,181 $1,002 $ --
Long-term borrowings -- other related party(2).......... -- 7,500 4,853
Other long-term borrowings and capital lease
obligations(2)........................................ 103 103 103
Owner's Net Investment:
Class A Common Stock, $0.01 par value; 3.0 billion
shares authorized; 191.5 million shares issued and
outstanding for pro forma, as adjusted(3).......... -- -- 2
Class B Common Stock, $0.01 par value; 1.6 billion
shares authorized; 436.5 million shares issued and
outstanding for pro forma, as adjusted............. -- -- 4
Additional paid-in capital............................ -- -- 4,222
Owner's net investment and accumulated other
comprehensive loss/stockholders' equity............ 8,223 272 265
------- ------ ------
Total capitalization.......................... $10,645 $9,200 $9,500
======= ====== ======
</TABLE>
- ---------------
(1) See "Pro Forma Combined Financial Statements."
(2) For a description of the Company's borrowings, see Notes 3, 14, 16 and 28 to
the Combined Financial Statements.
(3) Excludes shares of Class A Common Stock issuable upon exercise of options
granted under the Company's employee compensation plans. See "Management."
23
<PAGE> 203
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following table sets forth selected combined historical and pro forma
financial data of the Company as of the dates and for the periods indicated. The
statement of income data for each of the years in the three-year period ended
December 31, 1997 and the historical balance sheet data as of December 31, 1996
and 1997 have been derived from the Combined Financial Statements audited by
PricewaterhouseCoopers LLP, independent accountants. The statement of income
data for the years ended December 31, 1993 and 1994 and the six months ended
June 30, 1997 and 1998 and the historical balance sheet data as of December 31,
1993, 1994, 1995 and June 30, 1998 are based on the accounting records of DuPont
which, in the opinion of the Company's management, include all adjustments
necessary for the fair presentation of the financial position at such dates and
the results of operations for such respective interim periods. The results for
the six months ended June 30, 1998, are not necessarily indicative of results to
be expected for the full fiscal year or any interim period. The financial
information included herein may not necessarily reflect the results of
operations, financial position and cash flows of the Company in the future or
what the results of operations, financial position and cash flows would have
been had the Company been a separate, stand-alone entity during the periods
presented.
The pro forma financial data have been derived from the Pro Forma Combined
Financial Statements, which were prepared by the Company to illustrate the
estimated effects of the Offerings, the Separation and related transactions
described in the Notes to the Pro Forma Combined Financial Statements as if the
Offerings, the Separation and related transactions had occurred as of the
beginning of the periods presented, for purposes of the pro forma combined
statements of income and as of June 30, 1998 for purposes of the pro forma
combined balance sheet. In addition, the Pro Forma Combined Financial Statements
do not purport to represent what the results of operations or financial position
of the Company would actually have been if the Offerings, the Separation and
related transactions had in fact occurred on such dates or to project the
results of operations or financial position of the Company for any future period
or date. The following data should be read in conjunction with, and are
qualified by reference to, the Combined Financial Statements, the Interim
Combined Financial Statements, the Pro Forma Combined Financial Statements, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
POST-OFFERINGS CHARGE
Subject to completion of the Offerings, the Company and DuPont expect to
give certain current employees of the Company the option, subject to specific
country tax and legal requirements, to participate in the Option Program, which
involves the cancellation of all or part of their options to purchase DuPont
common stock or SARs with respect to DuPont common stock and the issuance by the
Company upon such cancellation of comparable options to acquire Class A Common
Stock or SARs with respect to Class A Common Stock. Participation in the Option
Program will be deemed a change in the terms of certain awards granted to Conoco
employees. As a result, the Company will incur a non-cash charge to compensation
expense, in the quarter the Offerings are completed, of approximately $192
million after-tax depending on the number of outstanding Conoco employee options
to purchase DuPont common stock canceled. Since the cancellation and issuance
would be a one-time event occurring after the Offerings, the charge is not
reflected in the Pro Forma financial information included in this Prospectus.
See "Management -- Treatment of Outstanding Stock Options and Stock Appreciation
Rights."
24
<PAGE> 204
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
AS ADJUSTED AS ADJUSTED FOR
SIX MONTHS ENDED FOR THE YEAR THE SIX MONTHS
YEAR ENDED DECEMBER 31, JUNE 30, ENDED ENDED
----------------------------------------------- ----------------- DECEMBER 31, JUNE 30,
1993 1994 1995 1996 1997 1997 1998 1997 1998
------- ------- ------- ------- ------- ------- ------- ------------ ---------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Total Revenues(1).......... $19,687 $19,433 $20,518 $24,416 $26,263 $12,600 $11,486 $26,179 $11,433
Cost of Goods Sold and
Other Operating
Expenses................. 11,349 10,640 11,146 14,560 16,226 7,667 6,754 16,226 6,754
Selling, General and
Administrative
Expenses................. 651 679 728 755 726 355 370 726 370
Exploration Expenses....... 361 357 331 404 457 192 176 457 176
Depreciation, Depletion and
Amortization............. 1,428 1,244 1,067 1,085 1,179 516 505 1,179 505
Taxes Other Than on
Income(1)................ 4,652 5,477 5,823 5,637 5,532 2,669 2,896 5,532 2,896
Interest and Debt
Expense.................. 67 63 74 74 36 24 1 204 92
------- ------- ------- ------- ------- ------- ------- ------- -------
Income Before Income
Taxes.................... 1,179 973 1,349 1,901 2,107 1,177 784 1,855 640
Provision for Income
Taxes.................... 424 551 774 1,038 1,010 590 254 928 218
------- ------- ------- ------- ------- ------- ------- ------- -------
Net Income(2)...... $ 755 $ 422 $ 575 $ 863 $ 1,097 $ 587 $ 530 $ 927 $ 422
======= ======= ======= ======= ======= ======= ======= ======= =======
Segment Net Income:
Upstream................... $ 481 $ 498 $ 492 $ 681 $ 884 $ 454 $ 359
Downstream................. 324 241 233 289 307 181 181
Corporate and Other(2)..... (50) (317) (150) (107) (94) (48) (10)
------- ------- ------- ------- ------- ------- -------
$ 755 $ 422 $ 575 $ 863 $ 1,097 $ 587 $ 530
======= ======= ======= ======= ======= ======= =======
Pro Forma Earnings Per
Share:
Basic.................... $ 1.75 $ 0.93 $ 0.84 $ 1.48 $ 0.67
Diluted.................. $ 1.72 $ 0.92 $ 0.83 $ 1.46 $ 0.66
Pro Forma Weighted Average
Shares Outstanding:
Basic.................... 628 628 628 628 628
Diluted.................. 637 637 637 637 637
OTHER DATA:
Cash Provided by
Operations............... 2,132 2,143 1,924 2,396 2,876 855 548
Capital Expenditures and
Investments.............. 1,743 1,665 1,837 1,944 3,114 1,815 1,050
</TABLE>
- ---------------
(1) Includes petroleum excise taxes of $4,478, $5,291, $5,655, $5,461 and $5,349
for 1993 through 1997 and $2,577 and $2,806 for the first six months of 1997
and 1998, respectively.
(2) Includes after-tax exchange gains (losses) of $60, $(143), $(40), $(7), and
$21 for 1993 through 1997 and $5 for both the first six months of 1997 and
1998, and $(25) for the pro forma as adjusted for 1997 and $(8) for the pro
forma as adjusted for the first six months of 1998.
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, AS ADJUSTED
------------------------------------------ JUNE 30, JUNE 30,
1993 1994 1995 1996 1997 1998 1998
------ ------ ------ ------ ------ -------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and Cash Equivalents............................. $ 271 $ 319 $ 286 $ 846 $1,147 $ 829 $ 225
Working Capital....................................... 1,893 1,790 999 862 567 276 869
Net Property, Plant and Equipment..................... 9,473 9,522 9,758 10,082 10,828 11,048 11,048
Total Assets.......................................... 14,809 15,271 14,229 15,226 17,062 17,164 15,995
Long-Term Borrowings -- Related Parties............... 2,102 2,279 2,141 2,287 1,450 1,181 --
Long-Term Borrowings -- Other Related Party........... -- -- -- -- -- -- 4,853
Other Long-Term Borrowings and Capital Lease
Obligations......................................... 304 342 65 101 106 103 103
Owner's Net Investment and Accumulated Other
Comprehensive Loss/Stockholders' Equity............. 7,462 7,274 6,754 6,579 7,896 8,223 4,493
</TABLE>
25
<PAGE> 205
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Proved Reserves at December
31(1):
Oil (MMbbls)(2)............. 983 988 977 973 1,624
Natural Gas (Bcf)........... 3,971 4,674 5,048 5,396 5,861
Total Proved Reserves
(MMBOE)(3)................ 1,645 1,767 1,818 1,872 2,601
International Proved Reserves
(% of Total)................ 58% 61% 63% 65% 73%
Reserve Replacement Ratio
(1)......................... 89% 157% 127% 126% 448%
Reserve Life (years)(1)(4).... 7.7 8.2 9.3 8.9 12.4
Finding and Development Costs
per BOE (1)(3)(5)........... $ 6.79 $ 6.24 $ 5.39 $ 4.84 $ 3.63
Average Daily Production(1):
Oil (Mbbls/day)(2).......... 434 436 424 454 453
Natural Gas (MMcf/day)...... 1,301 1,327 1,126 1,211 1,203
Total Production
(MBOE/day)(3)............. 651 657 612 656 654
Average Production Costs per
BOE(3)(6)................... $ 3.97 $ 3.59 $ 3.92 $ 3.84 $ 4.21
Refinery Capacity at December
31 (Mbbls/day)(1)(7)........ 595 602 621 743 754
Refinery Utilization(7)....... 95% 99% 97% 83% 91%
Total Refinery Inputs
(Mbbls/day)(1)(8)........... 674 697 721 732 780
Sales of Refined Products
(Mbbls/day)(1).............. 876 931 983 998 1,048
Retail Marketing Outlets at
December 31(9):
United States .............. 5,008 5,196 5,125 4,976 4,903
International............... 2,454 2,438 2,390 2,874 2,971
</TABLE>
- ---------------
(1) Includes the Company's share of equity affiliates.
(2) Includes crude oil, condensate, and NGLs expected to be removed for the
Company's account from its natural gas production. Average Daily Production
also includes NGLs acquired through gas plant ownership of 67, 69, 78, 80,
and 79 Mbbls/day for 1993 through 1997, respectively.
(3) 6,000 cubic feet of natural gas = one barrel-of-oil-equivalent (BOE).
(4) Total Proved Reserves at December 31 divided by annual production for the
year ended December 31 (excluding NGLs from gas plant ownership).
(5) Finding and development costs per BOE represent a trailing five-year average
for each year displayed.
(6) Excludes equity affiliates and processed NGLs.
(7) Based on capacity to process crude oil and condensate (excludes other
feedstocks).
(8) Includes crude oil, condensate and other feedstocks.
(9) Represents outlets owned by the Company and others that sell the Company's
refined products.
26
<PAGE> 206
PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited Pro Forma Combined Financial Statements of the
Company for the year ended December 31, 1997, the six months ended June 30, 1997
and 1998, and as of June 30, 1998, were prepared by the Company to illustrate
the estimated effects of the Offerings, the Separation and related transactions
described in the Notes hereto as if they had occurred as of the beginning of the
period presented, for purposes of the pro forma combined statements of income,
and as of June 30, 1998, for purposes of the pro forma combined balance sheet.
Management believes that the assumptions used provide a reasonable basis for
presenting the significant effects directly attributable to the Offerings, the
Separation and related transactions. The Pro Forma Combined Financial Statements
do not purport to represent what the results of operations or financial position
of the Company would actually have been if the Offerings, the Separation and
related transactions had in fact occurred on such dates or to project the
results of operations or financial position of the Company for any future period
or date. These statements should be read in connection with, and are qualified
by reference to, the Combined Financial Statements, the Interim Combined
Financial Statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," included elsewhere in this Prospectus.
27
<PAGE> 207
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
E. I. DU PONT DE NEMOURS AND COMPANY
We have examined the pro forma and offering adjustments reflecting the
offering, separation and related transactions described in Note 1 and the
application of those adjustments to the historic amounts in the accompanying pro
forma combined statement of income of Conoco, the petroleum business of E. I. du
Pont de Nemours and Company, for the year ended December 31, 1997. The historic
combined statement of income for the year ended December 31, 1997 is derived
from the historical combined statement of income for the year ended December 31,
1997 of Conoco, which was audited by us, appearing elsewhere herein. Such pro
forma and offering adjustments are based upon management's assumptions as
described in Notes 1 and 2. Our examination was made in accordance with
standards established by the American Institute of Certified Public Accountants
and, accordingly, included such procedures as we considered necessary in the
circumstances.
The objective of this pro forma financial information is to show what the
significant effects on the historical financial information might have been had
the offering, separation and related transactions occurred at an earlier date.
However, the pro forma combined statement of income is not necessarily
indicative of the results of operations that would have been attained had the
above-mentioned offering, separation and related transactions actually occurred
earlier.
In our opinion, management's assumptions provide a reasonable basis for
presenting the significant effects directly attributable to the above-mentioned
offering, separation and related transactions described in Notes 1 and 2, the
related pro forma and offering adjustments give appropriate effect to those
assumptions, and the pro forma as adjusted column reflects the proper
application of those adjustments to the historic combined statement of income
amounts in the pro forma combined statement of income for the year ended
December 31, 1997.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
October 21, 1998
28
<PAGE> 208
REVIEW REPORT OF INDEPENDENT ACCOUNTANTS ON
PRO FORMA COMBINED FINANCIAL INFORMATION
To the Board of Directors and Shareholders of
E. I. du Pont de Nemours and Company
We have reviewed the pro forma and offering adjustments reflecting the
offering, separation and related transactions described in Note 1 and the
application of those adjustments to the historic amounts in the accompanying pro
forma combined balance sheet of Conoco, the petroleum business of E. I. du Pont
de Nemours and Company, as of June 30, 1998, and the pro forma combined
statements of income for the six-month periods ended June 30, 1997 and 1998. The
historic combined balance sheet as of June 30, 1998 and the historic combined
statements of income for the six-month periods ended June 30, 1997 and 1998 are
derived from the historical unaudited interim combined financial statements of
Conoco, which were reviewed by us, appearing elsewhere herein. Such pro forma
and offering adjustments are based on management's assumptions as described in
Notes 1 and 2. Our review was conducted in accordance with standards established
by the American Institute of Certified Public Accountants.
A review is substantially less in scope than an examination, the objective
of which is the expression of an opinion on management's assumptions, the pro
forma adjustments and the application of those adjustments to historical
financial information. Accordingly, we do not express such an opinion.
The objective of this pro forma financial information is to show what the
significant effects on the historical information might have been had the
offering, separation and related transactions occurred at an earlier date.
However, the pro forma combined financial statements are not necessarily
indicative of the results of operations or related effects on financial position
that would have been attained had the above-mentioned offering, separation and
related transactions actually occurred earlier.
Based on our review, nothing came to our attention that caused us to
believe that management's assumptions do not provide a reasonable basis for
presenting the significant effects directly attributable to the above-mentioned
offering, separation and related transactions described in Notes 1 and 2, that
the related pro forma and offering adjustments do not give appropriate effect to
those assumptions, or that the pro forma as adjusted column does not reflect the
proper application of those adjustments to the historic financial statement
amounts in the pro forma combined balance sheet as of June 30, 1998, and the pro
forma combined statements of income for the six-month periods ended June 30,
1997 and 1998.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
October 21, 1998
29
<PAGE> 209
PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA OFFERING PRO FORMA
HISTORIC ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
-------- ----------- --------- ----------- -----------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Total Revenues.......................... $26,263 $ (11)(a) $26,241 $ (62)(n) $26,179
(11)(b)
Cost of Goods Sold and Other Operating
Expenses.............................. 16,226 -- 16,226 -- 16,226
Selling, General and Administrative
Expenses.............................. 726 -- 726 -- 726
Exploration Expenses.................... 457 -- 457 -- 457
Depreciation, Depletion and
Amortization.......................... 1,179 -- 1,179 -- 1,179
Taxes Other Than on Income.............. 5,532 -- 5,532 -- 5,532
Interest and Debt Expense............... 36 404(a) 440 (236)(o) 204
------- ----- ------- -------- -------
Income Before Income Taxes.............. 2,107 (426) 1,681 174 1,855
Provision for Income Taxes.............. 1,010 (123)(c) 887 41(o) 928
------- ----- ------- -------- -------
Net Income.................... $ 1,097 $(303) $ 794 $ 133 $ 927
======= ===== ======= ======== =======
Pro Forma Earnings Per Share:
Basic................................. $ 1.48
Diluted............................... $ 1.46
Pro Forma Weighted Average Shares
Outstanding:
Basic................................. 628
Diluted............................... 637
</TABLE>
See Notes to Pro Forma Combined Financial Statements
30
<PAGE> 210
PRO FORMA COMBINED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA OFFERING PRO FORMA
HISTORIC ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
-------- ----------- --------- ----------- -----------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Total Revenues.............................. $12,600 $ (6)(a) $12,585 $ (60)(n) $12,525
(9)(b)
Cost of Goods Sold and Other Operating
Expenses.................................. 7,667 -- 7,667 -- 7,667
Selling, General and Administrative
Expenses.................................. 355 -- 355 -- 355
Exploration Expenses........................ 192 -- 192 -- 192
Depreciation, Depletion and Amortization.... 516 -- 516 -- 516
Taxes Other Than on Income.................. 2,669 -- 2,669 -- 2,669
Interest and Debt Expense................... 24 199(a) 223 (118)(o) 105
------- ----- ------- ----- -------
Income Before Income Taxes.................. 1,177 (214) 963 58 1,021
Provision for Income Taxes.................. 590 (62)(c) 528 11(o) 539
------- ----- ------- ----- -------
Net Income........................ $ 587 $(152) $ 435 $ 47 $ 482
======= ===== ======= ===== =======
Pro Forma Earnings Per Share:
Basic..................................... $ 0.77
Diluted................................... $ 0.76
Pro Forma Weighted Average Shares
Outstanding:
Basic..................................... 628
Diluted................................... 637
</TABLE>
PRO FORMA COMBINED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA OFFERING PRO FORMA
HISTORIC ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
-------- ----------- --------- ----------- -----------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Total Revenues.............................. $11,486 $ (33)(a) $11,453 $ (20)(n) $11,433
Cost of Goods Sold and Other Operating
Expenses.................................. 6,754 -- 6,754 -- 6,754
Selling, General and Administrative
Expenses.................................. 370 -- 370 -- 370
Exploration Expenses........................ 176 -- 176 -- 176
Depreciation, Depletion and Amortization.... 505 -- 505 -- 505
Taxes Other Than on Income.................. 2,896 -- 2,896 -- 2,896
Interest and Debt Expense................... 1 209(a) 210 (118)(o) 92
------- ----- ------- ----- -------
Income Before Income Taxes.................. 784 (242) 542 98 640
Provision for Income Taxes.................. 254 (58)(c) 196 22(o) 218
------- ----- ------- ----- -------
Net Income........................ $ 530 $(184) $ 346 $ 76 $ 422
======= ===== ======= ===== =======
Pro Forma Earnings Per Share:
Basic..................................... $ 0.67
Diluted................................... $ 0.66
Pro Forma Weighted Average Shares
Outstanding:
Basic..................................... 628
Diluted................................... 637
</TABLE>
See Notes to Pro Forma Combined Financial Statements
31
<PAGE> 211
PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1998
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA OFFERING AS
HISTORIC ADJUSTMENTS PRO FORMA ADJUSTMENTS ADJUSTED
-------- ----------- --------- ----------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Cash and Cash Equivalents.................... $ 829 $ (439)(d) $ 123 $ 4,228(i) $ 225
(267)(e) (3,928)(j)
377(l)
(575)(m)
Restricted Cash.............................. 575(m) 575
Marketable Securities........................ 7 -- 7 -- 7
Accounts and Notes Receivable................ 1,252 -- 1,252 -- 1,252
Notes Receivable -- Related Parties.......... 465 612(d) 377 (377)(l) --
(700)(h)
Inventories.................................. 981 981 -- 981
Prepaid Expenses............................. 305 -- 305 -- 305
------- ------- ------- ------- -------
Total Current Assets................ 3,839 (794) 3,045 300 3,345
Net Property, Plant and Equipment............ 11,048 -- 11,048 -- 11,048
Investment in Affiliates..................... 1,141 -- 1,141 -- 1,141
Long-Term Notes Receivable -- Related
Parties.................................... 612 (612)(d) -- -- --
Other Assets................................. 524 (63)(d) 461 -- 461
------- ------- ------- ------- -------
Total Assets........................ $17,164 $(1,469) $15,695 $ 300 $15,995
======= ======= ======= ======= =======
LIABILITIES AND OWNER'S NET INVESTMENT
Accounts Payable............................. $ 1,129 $ -- $ 1,129 $ -- $ 1,129
Short-Term Borrowings -- Related Parties..... 1,087 (815)(d) 272 (272)(j) --
Other Short-Term Borrowings and Capital Lease
Obligations................................ 51 -- 51 -- 51
Income Taxes................................. 253 -- 253 -- 253
Other Accrued Liabilities.................... 1,043 -- 1,043 -- 1,043
------- ------- ------- ------- -------
Total Current Liabilities........... 3,563 (815) 2,748 (272) 2,476
------- ------- ------- ------- -------
Long-Term Borrowings -- Related Parties...... 1,181 (179)(d) 1,002 (1,002)(j) --
Long-Term Borrowings -- Other Related
Party...................................... -- 7,500(g) 7,500 (2,654)(j) 4,853
7(k)
Other Long-Term Borrowings and Capital Lease
Obligations................................ 103 -- 103 -- 103
Deferred Income Taxes........................ 1,861 (24)(f) 1,837 -- 1,837
Other Liabilities and Deferred Credits....... 1,925 -- 1,925 -- 1,925
------- ------- ------- ------- -------
Total Liabilities................... 8,633 6,482 15,115 (3,921) 11,194
------- ------- ------- ------- -------
Minority Interests........................... 308 -- 308 -- 308
Owner's Net Investment and Accumulated Other
Comprehensive Loss/Stockholders' Equity.... 8,223 (7,500)(g) 272 4,228(i) 4,493
(267)(e) (7)(k)
24(f)
492(d)
(700)(h)
------- ------- ------- ------- -------
Total Liabilities and Owner's Net
Investment/Stockholders' Equity... $17,164 $(1,469) $15,695 $ 300 $15,995
======= ======= ======= ======= =======
</TABLE>
See Notes to Pro Forma Combined Financial Statements
32
<PAGE> 212
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
(1) BASIS OF PRESENTATION
The unaudited pro forma combined statements of income of the Company for
the year ended December 31, 1997, and the six months ended June 30, 1997 and
1998, and the unaudited pro forma combined balance sheet as of June 30, 1998
(collectively "the Pro Forma Combined Financial Statements") have been prepared
from the Combined Financial Statements and Interim Combined Financial Statements
presented elsewhere in this Prospectus. The Pro Forma Combined Financial
Statements are based on numerous assumptions and include the adjustments
explained in Note 2 below. The unaudited pro forma combined statements of income
have been prepared as if the Offerings, Separation and related transactions
described in the following paragraph had occurred as of the beginning of the
period presented. The unaudited pro forma combined balance sheet has been
prepared as if the Offerings, Separation and related transactions described in
the following paragraph had occurred as of June 30, 1998.
In July 1998, a dividend of $7,500 was declared and paid in the form of a
promissory note by the Company to all shareholders of record as of July 20,
1998. On September 28, 1998, the Company declared a dividend of a receivable
from DuPont evidenced by a promissory note in the amount of $700 million. Prior
to or concurrently with the consummation of the Offerings the following
transactions will have occurred as provided for in the Separation Agreement: (a)
to structure the Company on a stand-alone basis, certain subsidiaries and assets
and liabilities will be transferred between DuPont and Conoco; (b) intercompany
loans in existence prior to the Offerings will be settled to the extent
specified; (c) the Company will deliver a promissory note to DuPont as
settlement for DuPont stock options held by Conoco employees and other employee
benefits related liabilities; (d) the Company will use the net proceeds of the
Offerings to repay a portion of the Long-Term Borrowings -- Other Related Party;
and (e) DuPont and Conoco will enter into certain agreements with respect to
employee benefit arrangements, information management, the provision of interim
services, financing arrangements, tax sharing, environmental liabilities and
various commercial arrangements. The transactions described above, excluding the
Offerings, are referred to herein collectively as the "Transactions." See
"Arrangements between the Company and DuPont."
The Pro Forma Combined Financial Statements do not purport to represent
what the results of operations or financial position of the Company would
actually have been if the Offerings and Transactions had in fact occurred on
such dates or to project the results of operations or financial position of the
Company for any future date or period. These statements should be read in
conjunction with, and are qualified by reference to, the Combined Financial
Statements, the Interim Combined Financial Statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus.
The pro forma adjustments are based upon currently available information
and contain certain estimates and assumptions. Should DuPont's ownership
interest fall below 50 percent, pro forma Selling, General and Administrative
expenses and guarantee and letter of credit fees would increase by approximately
$15 to $20 on a full year basis. In addition, certain changes are scheduled to
be made in services historically provided to DuPont by the Company. These
changes primarily include ceasing to provide insurance coverage to DuPont which
historically has been provided through a Company-owned captive insurance company
and entering into new contractual commitments related to fees charged by Conoco
for services provided to DuPont such as research and development and securing
supplies of natural gas for various DuPont facilities. The effect of these
scheduled changes are not expected to be material to the Company's results of
operations and are not reflected in the Pro Forma Combined Financial Statements.
Certain international assets relating primarily to the business of DuPont
may be held by the Company or its subsidiaries at the closing of the Offerings
pending receipt of consents or other approval or satisfaction of other
applicable foreign requirements necessary for the transfer of such assets to
DuPont. In addition, certain international assets relating primarily to the
business of the Company may be held by DuPont or other of its subsidiaries at
the closing of the Offerings pending receipt of consents or approvals or
satisfaction of other
33
<PAGE> 213
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS)
applicable foreign requirements necessary for the transfer of such assets to the
Company. The financial and other information included herein assumes the
consummation of all such transactions. Additionally, such information reflects
the inclusion of certain subsidiaries of DuPont which will not be owned by the
Company as of the closing of the Offerings, and which DuPont will not thereafter
be obligated to transfer to the Company. DuPont and the Company intend to
negotiate for the sale of such subsidiaries within the six months following the
Offerings at a purchase price equal to their then fair market value. DuPont and
the Company estimate that the fair market value of such subsidiaries at August
1998 was approximately $20 and cannot predict at what price any such sale may
occur. All of the above subsidiaries, which are immaterial to total assets and
results of operations of the Company, have been included in the Combined
Financial Statements.
Subject to completion of the Offerings, the Company and DuPont expect to
give certain current employees of the Company the option, subject to specific
country tax and legal requirements, to participate in the Option Program, which
involves the cancellation of all or part of their options to purchase DuPont
common stock or SARs with respect to DuPont common stock and the issuance by the
Company upon such cancellation of comparable Class A Common Stock options, or
SARs with respect to Class A Common Stock. Participation in the Option Program
will be deemed a change in the terms of certain awards granted to Conoco
employees. As a result, the Company will incur a non-cash charge to compensation
expense, in the quarter the Offerings are completed, of approximately $192
after-tax, depending on the number of outstanding Conoco employee options to
purchase DuPont common stock canceled. Since the cancellation and issuance would
be a one-time event occurring after the Offerings, the charge is not reflected
in the Pro Forma Combined Financial Statements. See "Management -- Treatment of
Outstanding Stock Options and Stock Appreciation Rights."
The Company estimates that approximately 81 percent of all outstanding
DuPont stock options and SARs held by Conoco employees will be voluntarily
canceled in the Option Program. See "Prospectus Summary -- Separation From
DuPont."
Management believes the estimates and assumptions provide a reasonable
basis for presenting the significant effects of the Offerings and Transactions
as contemplated in the Separation Agreement, and that the pro forma adjustments
give appropriate effect to these estimates and assumptions and are properly
applied in the Pro Forma Combined Financial Statements.
(2) PRO FORMA ADJUSTMENTS
Unaudited Pro Forma Combined Statements of Income
(a) Reflects a decrease in interest income due to settlement of Notes
Receivable -- Related Parties and incremental interest expense resulting from
the Company's new debt structure. The incremental interest expense was
calculated by multiplying the Long-Term Borrowings -- Related Parties ($1,002),
and Short-Term Borrowings -- Related Parties ($272) and the new Long-Term
Borrowings -- Other Related Party ($7,500) by an annual interest rate of 6.0125
percent on those borrowings and subtracting the historical related party
interest cost of $124 for 1997, and $65 and $55 for the six months ended June
30, 1997 and 1998, respectively. The historical related party interest cost is
net of capitalized interest of $94, $44 and $57, for these periods,
respectively.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 JUNE 30, 1997 JUNE 30, 1998
----------------- ------------- -------------
<S> <C> <C> <C>
Decrease to Interest Income................... (11) (6) (33)
Increase to Interest and Debt Expense......... 404 199 209
</TABLE>
(b) Reflects the impact of changes in currency exchange rates on certain
intercompany loans denominated in foreign currencies purchased by the Company
from DuPont as part of the restructuring and settlement of notes prior to the
Offerings provided for in the Separation Agreement. These loans are to
34
<PAGE> 214
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
Western European petroleum operations for which the local currency has been
designated as the functional currency.
(c) Reflects the impact of the Pro Forma Adjustments (primarily increased
interest expense resulting from the Company's new debt structure) and a separate
return income tax calculation method on the Provision for Income Taxes. The
historic tax provision was calculated on a loss benefit method (See Note 2 to
the Combined Financial Statements). In accordance with SEC Staff Accounting
Bulletin No. 55, the Pro Forma Provision for Income Taxes is calculated using a
separate return method. The Pro Forma Combined Statements of Income for the year
ended December 31, 1997 and for the six months ended June 30, 1997 and June 30,
1998 reflect a reduction in the Pro Forma Provision for Income Taxes of
approximately $8, $0 and $0, respectively, due to the change to the separate
return method of presentation. The reduction in Pro Forma Provision for Income
Taxes is primarily attributable to the utilization of additional foreign tax
credits against the provision for U.S. taxes, offset by a reduction in tax
benefits resulting from the transfer of international exploration subsidiaries
from the original tax jurisdiction to another tax jurisdiction. See also
"Arrangements Between the Company and DuPont -- Tax Sharing Agreement" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Tax Matters."
Unaudited Pro Forma Combined Balance Sheet as of June 30, 1998
(d) Reflects the settlement, and transactions necessary for settlement, of
intercompany notes in existence prior to the Offerings as provided for in the
Separation Agreement.
(e) The Company will use a portion of its cash ($247) to acquire certain
subsidiaries from DuPont and to refund prepaid insurance premiums to DuPont.
Additionally, an estimated $20 will be available to acquire certain other assets
from DuPont subsequent to the Offerings if such transactions take place. As
these assets are held under common control, they are accounted for at their
historical book value. As a result, their acquisition or potential future
acquisition at estimated fair value has been reflected as a charge to Owner's
Net Investment. Any deferred tax assets related to these acquisitions or
potential future acquisitions have been fully reserved.
(f) The pro forma separate return tax calculation reflects a reduction in
deferred tax liabilities of $24 principally resulting from the transfer of
international production subsidiaries from the original tax jurisdiction to
another tax jurisdiction.
(g) Reflects that in July 1998, a dividend of $7,500 was declared and paid
by the Company in the form of a promissory note, to all shareholders of record
as of July 20, 1998. The Promissory Note is due January 2, 2000 and bears
interest at an annual interest rate of 6.0125 percent.
(h) Reflects a dividend in September 1998 by the Company to DuPont of $700
of the balance in Notes Receivable -- Related Parties.
Offering Adjustments
(i) Represents the receipt by Conoco of $4,228 in proceeds from the
Offerings (consisting of the sale of 191.5 million shares at $23 per share, net
of underwriting discounts of $176).
(j) Represents the use of net proceeds to repay the indebtedness to DuPont
as described in "Use of Proceeds."
(k) The Separation Agreement provides that a subsidiary of the Company will
issue a promissory note to DuPont in an amount equal to the sum of: (i) an
agreed level of future appreciation of DuPont stock options or SARs held by
active Conoco employees who do not participate in the Option Program; (ii) an
amount calculated to result in an approximately equal sharing between the
Company and DuPont of the after-tax cost
35
<PAGE> 215
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS)
that would result from an assumed exercise of all DuPont stock options and SARs
held by active Conoco employees outstanding immediately prior to the Offerings
(including those to be cancelled upon issuance of Company stock options and
SARs), based on the appreciated value of the options at the time of the
Offerings; and (iii) $10.4 in consideration for other employee benefits related
liabilities assumed by DuPont for employees transferring between the two
companies. This note will be non-interest bearing with a due date of January 2,
2000 and have a principal amount determined in accordance with the Separation
Agreement. Alternatively, a portion of the Long-Term Borrowings -- Related
Parties, determined pursuant to the Separation Agreement, may remain outstanding
in lieu of all or part of this note. Assuming an estimate of the value at the
date of the Offerings and that 81 percent of all outstanding DuPont stock
options and SARs are voluntarily cancelled in the Option Program, the principal
amount is projected to be $7. If the principal amount determined in accordance
with the Separation Agreement is negative, DuPont will instead make a
corresponding cash payment to the Company.
(l) Reflects the collection of the remaining balance in Notes
Receivable -- Related Parties.
(m) Represents a reclassification for restricted cash related to the excess
of net proceeds of $575 to be used to repay borrowings due DuPont incurred
subsequent to June 30, 1998. As provided in the Separation Agreement, the
Company will have cash and cash equivalents of $225 and Long-Term
Borrowings -- Other Related Party, excluding the amount discussed in (k), of
$4,846.
(n) Reflects the impact of changes in currency exchange rates on certain
intercompany loans denominated in foreign currencies purchased by the Company
from DuPont after the Offerings. These loans are to Western European petroleum
operations for which the local currency has been designated as the functional
currency.
(o) Represents the reduction of interest expense and the associated
increase in income taxes resulting from the payment to DuPont of the borrowings
described in (j) and the tax impact of the adjustment described in (n) above.
(3) EARNINGS PER SHARE
Unaudited pro forma basic earnings per share includes both the Class A and
the Class B common shares deemed to be outstanding as of the date of the
Offerings. Pro forma diluted earnings per share includes the dilutive effect of
the 8.6 million shares of Class A Common Stock issuable upon exercise of Company
stock options, after applying the treasury stock method, which are expected to
be issued in the Option Program upon cancellation of outstanding DuPont stock
options, using the anticipated weighted-average exercise price of the
outstanding options and the price per share of the Offerings. In accordance with
SEC Staff Accounting Bulletin No. 98, pro forma basic and diluted earnings per
share have been presented for the most recent annual and subsequent interim
periods only.
36
<PAGE> 216
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following section contains forward-looking statements including,
without limitation, statements relating to the Company's plans, strategies,
objectives, expectations, intentions and resources. See "Disclosure Regarding
Forward-Looking Information" and "Risk Factors." The Company does not undertake
to update, revise or correct any of the forward-looking information.
The discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with the Combined Financial
Statements of the Company, the unaudited Supplemental Information to the
Combined Financial Statements, the unaudited Interim Combined Financial
Statements of the Company and the notes to each of these appearing elsewhere in
this Prospectus.
Since 1981, the Company's business operations have been conducted by
various entities, owned directly or indirectly, by DuPont. In conjunction with
the Offerings, certain businesses are being realigned so these operations can be
conducted as wholly owned subsidiaries of Conoco. The Combined Financial
Statements are presented on a "carve out" basis and include the historical
operations of the entities owned by Conoco and operations to be transferred to
Conoco by DuPont. In this context, no direct ownership relationship existed
among all the various units comprising Conoco; accordingly, DuPont and its
subsidiaries' net investment in Conoco ("Owner's Net Investment") is shown in
lieu of Stockholders' Equity in the Combined Financial Statements. The Combined
Financial Statements included herein have been prepared from DuPont's historical
accounting records.
The Combined Statement of Income includes all revenues and costs directly
attributable to Conoco, including costs for facilities, functions and services
used by Conoco at shared sites and costs for certain functions and services
performed by centralized DuPont organizations and directly charged to Conoco
based on usage. In addition, services performed by Conoco on DuPont's behalf are
reflected in the accompanying Combined Financial Statements. The results of
operations also include allocations of (i) costs for administrative functions
and services performed on behalf of Conoco by centralized staff groups within
DuPont and (ii) DuPont's general corporate expenses.
All charges and allocations of costs for facilities, functions and services
performed by DuPont organizations for Conoco have been deemed to have been paid
by Conoco to DuPont, in cash, in the period in which the costs were recorded in
the Combined Financial Statements. Allocations of current income taxes
receivable or payable are deemed to have been remitted, in cash, by or to DuPont
in the period the related income taxes were recorded.
All of the allocations and estimates in the Combined Financial Statements
are based on assumptions management believes are reasonable under the
circumstances. However, these allocations and estimates are not necessarily
indicative of the costs and expenses that would have resulted if Conoco had
operated as a separate entity.
Business operations are grouped into three segments: Upstream, Downstream
and Corporate and Other. The Upstream segment explores for, develops, produces
and sells crude oil, natural gas and natural gas liquids. The Downstream segment
refines crude oil and other feedstocks into petroleum products, buys and sells
crude oil and refined products, and transports, distributes and markets
petroleum products. Corporate and Other includes general corporate expenses,
financing costs and other non-operating items and results for electric power and
related-party insurance operations.
The Company considers portfolio optimization to be an ongoing business
strategy and continuously seeks to rationalize its investment portfolio in order
to maximize profitability. Over the past five years the Company has generated
proceeds of approximately $1,750 million, averaging about $350 million a year
through the disposal of marginal and nonstrategic producing properties, by
upgrading and redirecting its exploration portfolio and by increasing its
ownership in larger scale properties. As a result, the Company has maintained
production essentially constant on a BOE basis while undergoing this
rationalization. The Company's policy is
37
<PAGE> 217
to report material gains and losses from individual asset sales as non-recurring
items when reporting Combined Net Income.
The Company's revenue and profitability are largely determined by the
difference between prices received for crude oil, natural gas, natural gas
liquids and refined products produced and the costs of finding, developing, and
producing those resources. The Company conducts its activities through wholly
and majority owned subsidiaries and, increasingly, through equity affiliates.
This trend of conducting business in the petroleum industry through equity
affiliates is expected to increase in the future as the Company attempts to
minimize either the capital or political risks associated with new large scale,
high impact projects. In addition, the Company conducts its Upstream and
Downstream activities in 40 countries worldwide and is subject to various tax
rates, some significantly higher than U.S. rates, which can result in
variability in revenues and profitability. Other potential sources of
variability in the Company's revenues are crude oil and refined product buy/sell
contracts and natural gas and electric power resale activities.
Buy/sell contracts are the marketing of crude oil or refined products,
which are produced or refined by other companies and purchased by the Company
for resale. The vast majority of crude oil buy/sell contracts are geared at
repositioning purchased crude oil for supplying the Company's refineries and
optimizing its transportation assets. The Company also engages in some buy/sell
crude oil contracts in pursuit of trading profit opportunities. Each side of the
contract, i.e., the buy side and the sell side, is accounted for and settled
independently of the other. Although differentials (reflecting differences in
quality or location) between the sales revenue and the cost are relatively
immaterial, the gross amounts reported for both revenue and cost are material.
A substantial decline in crude oil prices began in late 1997 and is
continuing in 1998, with crude oil prices currently at their lowest level in
over a decade. These lower prices had a significant negative impact on the
Company's results in the first half of 1998 and are expected to continue to
negatively impact 1998 financial results.
Subject to completion of the Offerings, the Company and DuPont expect to
give certain current employees of the Company the option, subject to specific
country tax and legal requirements, to participate in the Option Program, which
involves the cancellation of all or part of their options to purchase DuPont
common stock or SARs with respect to DuPont common stock and the issuance by the
Company upon such cancellation of comparable options to acquire Class A Common
Stock or SARs with respect to Class A Common Stock. Participation in the Option
Program will be deemed a change in the terms of certain awards granted to Conoco
employees. As a result, the Company will incur a non-cash charge to compensation
expense in the quarter the Offerings are completed of approximately $192 million
after-tax depending on the number of outstanding Conoco employee options to
purchase DuPont common stock or SARs canceled. Since the cancellation and
issuance would be a one-time event, occurring after the Offerings, the charge is
not reflected in the Pro Forma financial information included in this
Prospectus. See "Management -- Treatment of Outstanding Stock Options and Stock
Appreciation Rights."
38
<PAGE> 218
RESULTS OF OPERATIONS
COMBINED RESULTS
A summary of the Company's Sales and Other Operating Revenues and Combined
Net Income, by business segment, is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- -----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
SALES AND OTHER OPERATING REVENUES
Upstream..................................... $ 3,270 $ 4,726 $ 5,254 $ 2,679 $ 2,475
Downstream................................... 17,038 19,425 20,033 9,649 8,534
Corporate and Other.......................... 20 79 509 147 339
------- ------- ------- ------- -------
Total Sales and Other Operating
Revenues.............................. $20,328 $24,230 $25,796 $12,475 $11,348
======= ======= ======= ======= =======
COMBINED NET INCOME
Upstream
United States.............................. $ 258 $ 314 $ 445 $ 241 $ 144
International.............................. 234 367 439 213 215
------- ------- ------- ------- -------
Total Upstream.......................... $ 492 $ 681 $ 884 $ 454 $ 359
Downstream
United States.............................. $ 112 $ 172 $ 216 $ 130 $ 86
International.............................. 121 117 91 51 95
------- ------- ------- ------- -------
Total Downstream........................ $ 233 $ 289 $ 307 $ 181 $ 181
Corporate and Other.......................... (150) (107) (94) (48) (10)
------- ------- ------- ------- -------
Combined Net Income..................... $ 575 $ 863 $ 1,097 $ 587 $ 530
======= ======= ======= ======= =======
</TABLE>
SPECIAL ITEMS
Combined net income includes the following material non-recurring items
("Special Items") on an after-tax basis:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------- --------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Asset sales.................................. $ -- $ 35 $240 $ 24 $54
Property impairments......................... (45) (63) (167) -- --
Tax rate changes............................. -- -- 30 -- --
Environmental insurance litigation
recoveries................................. -- 44 -- -- --
Employee separation costs.................... -- (22) -- -- --
Other........................................ -- -- (23) -- (28)
---- ---- ---- ---- ---
Total Special Items..................... $(45) $ (6) $ 80 $ 24 $26
==== ==== ==== ==== ===
</TABLE>
First half 1998 Special Items reflect a $23 million gain on the sale of
North Sea producing and non-producing properties and a $31 million gain from the
sale of an international subsidiary versus a $24 million gain from the sale of
US producing properties in the first half of 1997. Other losses in the first
half of 1998 reflect anticipated costs of $28 million to resolve various
litigation claims.
Special Items in 1997 include $240 million in gains from asset sales
consisting of $191 million associated with both producing and non-producing
properties in the North Sea and $49 million in the United States. Such asset
sales are part of the Company's rationalization program, designed to improve
profitability by
39
<PAGE> 219
disposing of marginal properties and concentrating operations on core
properties. A U.K. tax rate change also provided a $30 million benefit in 1997.
Largely offsetting these benefits were property impairments of $167 million,
with $55 million attributable to the write-down of an office building held for
sale in Europe and $112 million reflecting the impairment of certain
international non-revenue producing properties. Other losses of $23 million
include litigation settlements.
Special Items in 1996 include $35 million in gains from asset sales
consisting of $19 million associated with the sale of the Company's retail
marketing business in Ireland and $16 million from the sale of producing and
non-producing properties in the United States. Environmental insurance
litigation recoveries also resulted in a $44 million benefit. Offsetting these
benefits was a $63 million impairment associated with a write-down of an
investment in a European gas marketing joint venture and employee separation
costs of $22 million.
Special Items in 1995 reflect $45 million in property impairments
associated with implementation of Statement of Financial Accounting Standards
No. 121 -- "Accounting for Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed of."
Combined net income before Special Items ("Earnings Before Special Items")
was $504 million in the first half of 1998, $1,017 million in 1997, $869 million
in 1996 and $620 million in 1995.
First Half 1998 versus First Half 1997
The Company had first half combined net income of $530 million in 1998,
down 10 percent from $587 million in the first half of 1997. The Company had
Earnings Before Special Items of $504 million in the first half of 1998, down 10
percent from $563 million in the first half of 1997. Lower Earnings Before
Special Items primarily reflects lower net realizable crude oil and natural gas
prices. The effect of lower crude oil and natural gas prices was partly offset
by higher natural gas volumes, increased oil production in countries with lower
effective tax rates, lower exploration expenses, improved international
Downstream margins and the favorable resolution of certain tax issues.
Sales and Other Operating Revenues for the first half of 1998 were $11.3
billion, down nine percent from the first half of 1997, primarily due to a
decrease in worldwide crude oil and natural gas prices and lower refined product
volumes and prices. Crude oil and refined product buy/sell and natural gas and
electric power resale activities in the first half of 1998 totaled $2.4 billion,
down three percent compared to $2.5 billion in the first half of 1997.
Cost of Goods Sold and Other Operating Expenses for the first half of 1998
totaled $6.8 billion, a decrease of $0.9 billion, or 12 percent, compared to
$7.7 billion in the first half of 1997, primarily due to lower crude oil,
natural gas and refined product prices and slightly lower crude oil and refined
product volumes offset partly by higher natural gas production.
Selling, General and Administrative Expenses for the first half of 1998
totaled $370 million, an increase of $15 million, or four percent, compared to
$355 million in the first half of 1997, primarily due to higher costs in
international Downstream marketing operations resulting from retail marketing
expansion activities in countries with better growth potential over the
long-term.
Exploration Expenses for the first half of 1998 totaled $176 million, a
decline of $16 million, or eight percent, compared to $192 million in the first
half of 1997, due to lower amortization of non-producing leasehold properties in
the United States and lower exploration overhead and operating expenses
resulting from seismic surveys conducted in 1997 in the Gulf of Paria located
between Venezuela and Trinidad and the Merida Andes foothills in Venezuela,
offset by higher international dry hole costs.
Depreciation, Depletion and Amortization for the first half of 1998 totaled
$505 million, or two percent lower, compared to $516 million in the first half
of 1997.
Provision for Income Taxes for the first half of 1998 totaled $254 million,
down 57 percent compared to $590 million for the first half of 1997. This
reflects an effective tax rate of approximately 32 percent in the first half of
1998 compared to 50 percent in the first half of 1997 due to increased oil
production in countries with lower effective tax rates and the favorable
resolution of certain tax issues.
40
<PAGE> 220
1997 versus 1996
Combined net income for 1997 of $1,097 million was up 27 percent from $863
million the prior year. The Company had Earnings Before Special Items of $1,017
million in 1997, up 17 percent from $869 million in 1996. The increase was
attributable to improved U.S. natural gas prices and higher international
natural gas volumes in addition to stronger worldwide Downstream product margins
and increased worldwide refinery production.
Sales and Other Operating Revenues of $25.8 billion in 1997 were up six
percent compared to $24.2 billion in the prior year, as higher Downstream
product prices and volumes, increased international natural gas volumes and
stronger domestic natural gas prices more than compensated for lower crude oil
prices. Crude oil and refined product buy/sell and natural gas and electric
power resale activities in 1997 totaled $5.5 billion, up 32 percent compared to
$4.2 billion in 1996.
Cost of Goods Sold and Other Operating Expenses in 1997 totaled $16.2
billion, up 11 percent compared to $14.6 billion in 1996, due to higher refined
product volumes and crude oil and refined product buy/sell contract activity and
natural gas and electric power resale activities.
Selling, General and Administrative Expenses in 1997 totaled $726 million,
a decrease of $29 million, or four percent, compared to $755 million in 1996,
primarily due to one-time costs in 1996 for retail expansion activities in the
U.S.
Exploration Expenses in 1997 totaled $457 million, an increase of $53
million, or 13 percent, compared to $404 million in 1996, due to higher
international exploration overhead and operating costs primarily from seismic
surveys conducted in the Gulf of Paria located between Venezuela and Trinidad
and in the Merida Andes foothills in Venezuela, higher international dry hole
costs and an adjustment of certain non-producing U.S. leasehold properties.
Depreciation, Depletion and Amortization in 1997 totaled $1,179 million, an
increase of $94 million, or nine percent, compared to $1,085 million in 1996 due
to higher depreciation resulting from a write down of an office building held
for sale in the U.K. and an impairment of certain international non-revenue
producing properties partially offset by lower depreciation in U.S. Downstream
operations.
Provision for Income Taxes totaled $1,010 million in 1997, down three
percent compared to $1,038 million in 1996. The lower provision reflects an
effective tax rate of approximately 48 percent in 1997 compared to 55 percent in
1996. The decrease in the effective tax rate was primarily due to a lower
proportion of earnings from operations in countries with higher effective tax
rates.
1996 versus 1995
Combined net income for 1996 of $863 million was up 50 percent from $575
million in 1995. The Company had Earnings Before Special Items of $869 million
in 1996, up 40 percent from $620 million in 1995. The improvement was due to
higher crude oil and natural gas prices, higher international crude oil and
natural gas volumes, and higher refining margins. Partly offsetting these
benefits were startup costs related to the Humber refinery's new vacuum unit in
the United Kingdom.
Sales and Other Operating Revenues of $24.2 billion in 1996 were up 19
percent compared with $20.3 billion in 1995, principally resulting from higher
worldwide crude oil and natural gas prices and higher international crude oil
and natural gas volumes, partly offset by lower industry-wide marketing prices.
Crude oil and refined product buy/sell contracts and natural gas and electric
power resale activities in 1996 totaled $4.2 billion, up 67 percent compared to
$2.5 billion in 1995.
Cost of Goods Sold and Other Operating Expenses in 1996 totaled $14.6
billion, an increase of $3.5 billion or 31 percent, compared to $11.1 billion in
1995 due to higher crude oil and natural gas prices and higher volumes for crude
oil, natural gas and refined products, higher purchased refined product costs
and increased activity from crude oil and refined products buy/sales and natural
gas resales.
41
<PAGE> 221
Selling, General and Administrative Expenses in 1996 totaled $755 million,
an increase of $27 million, or four percent, compared to $728 million in 1995,
primarily due to one-time costs for retail marketing expansion activities in the
U.S.
Exploration Expenses in 1996 totaled $404 million, an increase of $73
million, or 22 percent, compared to 1995 of $331 million, primarily due to
higher exploration overhead and operating costs in the United States and Norway
and higher U.S. and international dry hole costs.
Depreciation, Depletion and Amortization in 1996 totaled $1,085 million, an
increase of $18 million, or 2 percent, compared to $1,067 in 1995, primarily due
to higher depreciation from Eastern European retail marketing expansion
activities and impairments of certain international non-revenue producing
properties offset partially by lower depreciation in U.S. Downstream operations.
Provision for Income Taxes totaled $1,038 in 1996, up 34 percent compared
to $774 million in 1995. This reflects a relatively constant effective tax rate
of approximately 55 percent in 1996 compared to 57 percent in 1995.
UPSTREAM SEGMENT RESULTS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------ -----------
1995 1996 1997 1997 1998
------ ------ ------ ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Combined Net Income............................... $492 $681 $884 $454 $359
Special Items..................................... 39 58 (147) (24) (54)
---- ---- ---- ---- ----
Earnings Before Special Items..................... $531 $739 $737 $430 $305
==== ==== ==== ==== ====
</TABLE>
First Half 1998 versus First Half 1997
Upstream combined net income was $359 million in the first half of 1998,
down 21 percent from $454 million in the first half of 1997. Upstream Earnings
Before Special Items was $305 million in the first half of 1998, down 29 percent
from $430 million in the first half of 1997.
The Company's worldwide net realized crude oil price was $13.01 per barrel
for the first half of 1998, down $6.17 per barrel, or 32 percent, from $19.18
per barrel in the first half of 1997. Excess supply caused by weak Asian demand,
higher crude oil production from OPEC producing countries and warmer winter
weather caused the sharp drop in crude oil prices. Worldwide natural gas prices
averaged $2.37 per thousand cubic feet (mcf) for the first half, compared with
$2.62 per mcf in the same period in 1997 because of warmer winter weather. Lower
worldwide natural gas prices were primarily driven by lower natural gas prices
outside the United States. Worldwide crude oil and condensate production in the
first half of 1998 was 317,000 barrels per day versus 319,000 barrels per day in
the first half of 1997. Worldwide natural gas production in the first half of
1998 was up eight percent to 1,307 million cubic feet per day from 1,210 million
cubic feet per day in the first half of 1997.
U.S. Upstream Earnings Before Special Items totaled $144 million in the
first half of 1998, down 34 percent from $217 million in the comparable period
of 1997. Lower U.S. Upstream Earnings Before Special Items was due to lower
crude oil and natural gas prices and lower crude oil volumes due to asset
dispositions and crude oil production declines. These factors more than offset
benefits from increased natural gas production and lower exploration expenses.
Natural gas volumes were up 16 percent as increased production from the holdings
in the South Texas Lobo trend acquired in 1997 more than offset the decline in
natural gas production elsewhere.
Outside the United States, Upstream Earnings Before Special Items was $161
million, down 24 percent, from $213 million in the comparable period in 1997,
primarily due to lower crude oil and natural gas prices offset by higher natural
gas volumes, lower exploration expenses, and the favorable resolution of certain
tax issues. Despite slightly lower crude oil volumes resulting from the sale of
the Company's interest in the mature
42
<PAGE> 222
Ula and Gyda fields in Norway, earnings benefited from higher production from
countries with relatively lower tax rates (primarily the United Kingdom and
Nigeria).
1997 versus 1996
Upstream combined net income was $884 million in 1997, up 30 percent,
compared to $681 million in 1996. Upstream Earnings Before Special Items totaled
$737 million in 1997, essentially unchanged from the previous year.
Worldwide natural gas prices were up 14 percent to $2.51 per mcf in 1997
from $2.21 per mcf in 1996 resulting primarily from higher U.S. industry demand.
Worldwide net realized crude oil prices were $18.58 per barrel, down $1.53 per
barrel, or eight percent, from $20.11 per barrel in 1996. Crude oil prices
declined despite higher crude oil demand and strong crude oil production growth,
which included initial exports of Iraqi crude oil. Worldwide crude oil and
condensate production averaged 337,000 barrels per day for the year, up slightly
versus 1996. Worldwide natural gas deliveries in 1997 of 1,203 million cubic
feet per day were essentially unchanged from 1,211 million cubic feet per day in
1996 as higher international natural gas volumes were offset by lower domestic
natural gas volumes.
U.S. Upstream Earnings Before Special Items totaled $396 million, up 30
percent from $305 million in 1996, due to higher gas prices which more than
offset lower crude oil prices. U.S. production costs per BOE were $4.23, up
$0.12 per BOE or 3 percent, compared to $4.11 per BOE in 1996, due to higher
production taxes.
Outside the United States, Earnings Before Special Items was $341 million,
down 21 percent from $434 million in 1996 due to lower crude oil prices, partly
offset by increased crude oil and natural gas volumes associated with the first
year of oil production from Nigeria and increased production from the Heidrun
and Troll fields in Norway and the Canadian Foothills. International production
costs per BOE were $4.19 per BOE, up $0.51 per BOE, or 14 percent, compared to
$3.68 per BOE in 1996, resulting from FPSO lease costs on new fields in the
United Kingdom and costs incurred on development projects that have not yet
begun production.
1996 versus 1995
Upstream combined net income was $681 million in 1996, up 38 percent,
compared with $492 million in 1995. Upstream Earnings Before Special Items
totaled $739 million in 1996, up 39 percent from $531 million in 1995.
The Company's worldwide net realized crude oil price averaged $20.11 per
barrel for 1996, up 22 percent from $16.52 per barrel in 1995. Higher crude oil
prices were the result of colder weather, stronger worldwide economic growth and
tight inventories. Worldwide natural gas prices averaged $2.21 per mcf in 1996,
compared to $1.86 per mcf in 1995 resulting from stronger worldwide demand.
Worldwide crude oil and condensate production was 336,000 barrels per day for
1996 compared to 317,000 barrels per day in 1995. Worldwide natural gas
deliveries were 1,211 million cubic feet per day in 1996 compared to 1995
deliveries of 1,126 million cubic feet per day due to higher international
natural gas volumes, offset partly by lower U.S. natural gas volumes.
U.S. Upstream Earnings Before Special Items totaled $305 million, up $40
million, or 15 percent, versus the prior year due to higher crude oil and
natural gas prices. U.S. production costs per BOE were $4.11 per BOE, up $0.33
per BOE, or 9 percent, compared to $3.78 per BOE in 1995, due to higher
production taxes.
Outside the United States, Earnings Before Special Items was $434 million,
up $168 million, or 63 percent, versus $266 million earned in 1995, due to
higher crude oil and natural gas prices and higher international natural gas
volumes. International natural gas volumes increased 23 percent due to
production increases in the United Kingdom and the Canadian Foothills.
International production costs per BOE were $3.68 per BOE, down $0.34 per BOE,
or 8 percent, compared to $4.02 per BOE in 1995, due to higher crude production
from the Heidrun field in Norway.
43
<PAGE> 223
DOWNSTREAM SEGMENT RESULTS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------ -----------
1995 1996 1997 1997 1998
------ ------ ------ ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Combined Net Income............................... $233 $289 $307 $181 $181
Special Items..................................... 6 (52) 67 -- 28
---- ---- ---- ---- ----
Earnings Before Special Items..................... $239 $237 $374 $181 $209
==== ==== ==== ==== ====
</TABLE>
First Half 1998 versus First Half 1997
Downstream combined net income was $181 million in the first half of 1998
and the first half of 1997. Downstream Earnings Before Special Items totaled
$209 million in the first half of 1998, up 15 percent from $181 million in the
first half of 1997, due to higher European refined product margins.
U.S. Downstream Earnings Before Special Items was $114 million in the first
half of 1998, down $16 million, or 12 percent from $130 million in the first
half of 1997, due to lower marketing margins and lower refined product sales
volumes.
International Downstream Earnings Before Special Items was $95 million in
the first half of 1998, up 86 percent, from $51 million in the comparable period
in 1997, reflecting higher refinery runs from less downtime from scheduled
maintenance at the Humber refinery and improved refining and marketing margins
offset by slightly lower refined product sales volumes. In the United Kingdom, a
continued strengthening of retail marketing prices resulted in higher marketing
margins.
1997 versus 1996
Downstream combined net income was $307 million, up six percent from $289
million in 1996. Downstream Earnings Before Special Items increased 58 percent
to $374 million in 1997, compared with $237 million in the prior year. Worldwide
refined product sales volumes were 1,048,000 barrels per day in 1997, up five
percent versus 1996.
In the United States, Downstream Earnings Before Special Items was $239
million versus $136 million in 1996, an increase of 76 percent. The improvement
was attributable to strong refining margins, reduced operating costs and higher
refined product volumes from the new Lake Charles, Louisiana, hydrocracker
expansion project.
International Downstream Earnings Before Special Items was $135 million, up
34 percent from $101 million in the comparable period in 1996, primarily due to
higher European refining margins and increased refinery production from the
Humber refinery's new vacuum unit in the U.K.
The Company's refineries ran at 91 percent capacity in 1997, 10 percent
higher than 1996. The increase was primarily due to less downtime incurred in
1997, compared to 1996 when major expansions were taking place at the Lake
Charles and Humber refineries.
1996 versus 1995
Downstream combined net income was $289 million, up 24 percent from $233
million in 1995. Downstream Earnings Before Special Items of $237 million in
1996 was essentially unchanged from $239 million in 1995, as improved refining
margins were offset by higher marketing product costs. Worldwide refined product
sales volumes were 998,000 barrels per day in 1996, up from 983,000 barrels per
day in 1997.
In the United States, Downstream Earnings Before Special Items was $136
million in 1996 compared with $122 million in 1995, an increase of 11 percent,
reflecting gradually improving retail margins despite higher marketing product
costs and startup costs relating to the new hydrocracker unit at the Lake
Charles refinery.
44
<PAGE> 224
International Downstream Earnings Before Special Items was $101 million,
down 14 percent versus $117 million in 1995, attributable to startup and other
costs relating to the Humber refinery's new vacuum unit in the United Kingdom.
The Company's refineries ran at 83 percent of capacity in 1996, down 14
percent from 1995 due to more downtime incurred in 1996 relating to the major
expansions at the Lake Charles and Humber refineries.
CORPORATE AND OTHER SEGMENT RESULTS
Corporate and Other combined net income includes:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------ ---------------
1995 1996 1997 1997 1998
------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net Interest Income (Expense).................. $ 5 $ 28 $ 35 $ 10 $ 39
Exchange Gains (Losses)........................ (40) (7) 21 5 5
Other Corporate Expenses(1).................... (115) (128) (150) (63) (54)
----- ----- ----- ---- ----
Combined Net Income............................ $(150) $(107) $ (94) $(48) $(10)
===== ===== ===== ==== ====
</TABLE>
- ---------------
(1) Includes general corporate expenses, other non-operating items and results
for electric power and related-party insurance operations.
First Half 1998 versus First Half 1997
Corporate and Other results for the first half of 1998 were a loss of $10
million, an improvement of $38 million versus the comparable period in 1997,
primarily reflecting an improvement in Net Interest Income (Expense) due to
lower average related-party borrowings in the first half of 1998 versus 1997.
On July 20, 1998, a dividend of $7,500 million was declared and paid by the
Company in the form of a promissory note to shareholders of record as of July
20, 1998. The resulting increase in debt will substantially increase the amount
of interest expense incurred by the Company in the third and fourth quarters of
1998. See "Pro Forma Combined Financial Statements."
1997 versus 1996
Corporate and Other reported a loss of $94 million in 1997, an improvement
of $13 million from 1996 results. Net Interest Income (Expense) in 1997 was
improved by $7 million versus 1996, primarily due to increased after-tax
capitalized interest on major Upstream development projects. The Company
incurred an after-tax exchange gain of $21 million in 1997 compared with a loss
of $7 million in 1996, primarily reflecting the impact of Norwegian Kroner and
British Pound exchange rate movements on U.S. dollar-denominated working capital
balances. Other Corporate Expenses were $22 million higher in 1997 versus 1996
due to additional costs associated with the Company's emerging electric power
business and other miscellaneous items.
1996 versus 1995
Corporate and Other reported a loss of $107 million in 1996, an improvement
of $43 million over 1995. Net Interest Income (Expense) in 1996 improved $23
million versus 1995, primarily reflecting increased after-tax capitalized
interest on major Upstream development projects. The Company incurred an
after-tax exchange loss of $7 million in 1996, compared with a loss of $40
million in 1995, primarily attributable to the January 1, 1996 change in
reporting to reflect the local currency as the functional currency for the
Company's integrated Western European operations. (See Note 2 to the Combined
Financial Statements).
45
<PAGE> 225
LIQUIDITY AND CAPITAL RESOURCES
CASH PROVIDED BY OPERATIONS
Cash provided by operations in the first half of 1998 decreased $307
million to $548 million versus $855 million in the first half of 1997. Cash
provided by operations before changes in operating assets and liabilities
decreased $53 million compared to the first half of 1997, primarily due to lower
net realized crude oil and natural gas prices partially offset by higher natural
gas volumes and improved international Downstream margins. Negative changes to
net operating assets and liabilities of $254 million were due to higher tax
payments attributable to 1997 asset sales, a decrease in accounts payable
largely offset by a decrease in accounts receivable due to lower crude oil
prices and the timing of payments on other operating liabilities.
Cash provided by operations increased $480 million to $2,876 million during
1997, a 20 percent increase over $2,396 million in 1996, as cash provided by
operations before changes in operating assets and liabilities improved $34
million compared to 1996. Positive changes to net operating assets and
liabilities of $446 million were principally due to the $303 million received
from a contract for future sales of natural gas to Centrica, a United Kingdom
gas marketing company.
Cash provided by operations increased $472 million to $2,396 million during
1996, a 25 percent increase over $1,924 million in 1995. The improvement from
1995 reflects a $263 million increase in 1996 cash provided by operations before
changes in operating assets and liabilities, primarily due to higher crude oil
and natural gas prices, higher international crude oil and natural gas volumes
and higher refinery margins. Positive changes to net operating assets and
liabilities of $209 million were primarily due to timing of payments on
operating liabilities and tax payments.
CAPITAL EXPENDITURES AND INVESTMENTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------ -----------------
1995 1996 1997 1997 1998
------ ------ ------ ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Upstream.................................. $1,224 $1,264 $2,533 $1,611 $ 804
Downstream................................ 613 680 558 196 241
Corporate and Other....................... -- -- 23 8 5
------ ------ ------ ------ ------
$1,837 $1,944 $3,114 $1,815 $1,050
====== ====== ====== ====== ======
United States............................. $ 760 $ 618 $1,761 $1,187 $ 469
International............................. 1,077 1,326 1,353 628 581
------ ------ ------ ------ ------
$1,837 $1,944 $3,114 $1,815 $1,050
====== ====== ====== ====== ======
</TABLE>
The Company's capital expenditure program promotes the Company's
growth-oriented business strategy by continuing to invest in existing core areas
where efficiencies and profitability can be enhanced and by targeting funds into
new high potential areas where long-term growth opportunities can be realized.
Total capital investments, including investments in affiliates and
acquisitions, were $3.1 billion in 1997, a 60 percent increase over 1996. This
increase primarily reflects the $0.9 billion spent in connection with the Lobo
Acquisition. Capital investments in 1996 and 1995 were $1.9 and $1.8 billion,
respectively. The six percent increase in 1996 from 1995 is primarily
attributable to increased investment in Upstream operations in Europe and, in
particular, development of the Britannia gas field. Exploration capital
investments were approximately $0.2 billion each year in 1997, 1996 and 1995.
The Company expects to make capital investments of $2.4 billion during
1998, up approximately 14 percent versus 1997 capital investments excluding the
Lobo Acquisition. Approximately 60 percent of 1998 capital investments are
targeted outside the United States. Approximately 70 percent of 1998 capital
investments are allocated to Upstream, with a majority of this devoted to
development projects in South Texas, deepwater Gulf of Mexico, Venezuela, the
U.K. and Norway. Approximately $0.2 billion will also be devoted to exploratory
drilling. Downstream capital investments are targeted at completion of the
Melaka
46
<PAGE> 226
refinery, expansion of retail marketing operations, particularly in Europe, and
upgrades and maintenance of existing facilities. The Company has also earmarked
approximately $50 million for its emerging electric power business. The
Company's capital investment program may be adjusted as business conditions
warrant. See also "Business."
Upstream
Upstream capital investments totaled $2.5 billion in 1997, an increase of
100 percent over 1996, primarily reflecting the $0.9 billion Lobo Acquisition.
The Lobo Acquisition added significant reserves and 1,150 miles of natural gas
gathering and transportation pipeline, providing direct access to major Texas
intrastate and interstate pipelines. As a result, the Company is the largest
natural gas producer in the area, and one of the three largest natural gas
producers in Texas. Upstream capital investments were $1.3 billion and $1.2
billion in 1996 and 1995, respectively.
-- United States
During 1997, the Company spent $1.5 billion on capital projects in the
United States. Besides the $0.9 billion Lobo Acquisition and exploratory
drilling, expenditures focused on development of the partner-operated Ursa field
in deepwater Gulf of Mexico, construction of two deepwater drillships,
acquisition of additional reserves and exploratory acreage in the San Juan Basin
and expansion of onshore natural gas operations. The Ursa field development,
operated by Shell, represents the Company's most important current development
project in the Gulf of Mexico. The project involves installing a new generation
tension leg platform in approximately 3,800 feet of water. First production is
scheduled for 1999. The construction of the two deepwater drillships is pivotal
in achieving the Company's growth plans in the Gulf of Mexico. The Company has
increased its deepwater holdings in the Gulf of Mexico, and exploration within
these holdings will be carried out by the two highly sophisticated deepwater
drillships. The first of these two vessels is expected to be in service in late
1998.
In 1996, U.S. capital investments were $0.4 billion, with expenditures
focused on continuing operations and development. Capital investments were $0.5
billion in 1995 and included the acquisition of two South Texas gas fields from
Enron Oil & Gas Company. These two gas fields were located near existing Company
assets and offered considerable potential development.
-- International
International capital investments totaled nearly $1.0 billion in 1997, up
16 percent from 1996. The Company continued to develop the Britannia gas field
in the U.K. North Sea. The Britannia gas field is one of the largest natural gas
fields in the U.K. North Sea, and the Company's proved reserves in the field
include 1.1 trillion cubic feet of natural gas and 52 million barrels of
petroleum liquids at December 31, 1997. First production from Britannia occurred
in August 1998. Britannia development is an example of the Company's strategy to
increase production and reserves through large, long-lived projects. Other
significant capital investments were made for exploratory drilling and
development projects such as the Petrozuata joint venture in Venezuela, the
Ukpokiti field offshore Nigeria, the Visund field in the Norwegian North Sea, a
methanol plant in Norway and the Boulton gas field in the U.K. North Sea.
In 1996, international capital investments were $0.9 billion, up 14 percent
compared to $0.8 billion in 1995. The 1996 increase reflects expenditures to
develop the Britannia field and $67 million to fund the Company's share of
losses incurred by a European gas marketing joint venture. These increases were
partially offset by reduced capital expenditures due to the Heidrun field in
Norway coming on stream in late 1995.
Downstream
Downstream capital investments totaled $558 million in 1997, a decrease of
18 percent versus 1996, primarily reflecting completion of the acidic crude
vacuum unit at the Company's Humber refinery in the U.K. as well as the
acquisition of an equity interest in two refineries in the Czech Republic during
1996. Downstream capital investments were $680 and $613 million in 1996 and
1995, respectively. The 11 percent
47
<PAGE> 227
increase in 1996 versus 1995 reflects increased expenditures for construction of
the Melaka refinery and acquisition of equity interests in two Czech refineries,
somewhat offset by decreased expenditures on the Lake Charles refinery's
hydrocracker expansion project, and construction of retail marketing outlets in
Thailand during 1995.
-- United States
During 1997, the Company spent $227 million on Downstream capital projects
in the United States, up four percent from 1996, with the majority of these
funds being used to support continuing operations and optimization of retail
marketing operations. The Company also invested funds for an equity interest in
Penreco, a joint venture with Pennzoil that will produce and market highly
refined specialty petroleum products.
Capital investments in 1996 totaled $218 million, down 26 percent from
1995. The most significant investments related to the completion of the 45,000
barrel per day expansion of the Lake Charles refinery's sour crude oil
processing capability to support the Excel Paralubes lube oil hydrocracker,
another joint venture with Pennzoil. The lube oil hydrocracker converts low
quality, high sulphur crude oil into base oil of extremely high purity and
enhances the value of the Company's finished lubricants business by producing
improved motor oils, transmission fluids and industrial lubes blended from
hydrocracked base oils.
Investments in 1995 totaled $293 million and included costs for the
construction of a plant to produce LiquidPower(TM), the acquisition of 61 retail
marketing outlets, and initial costs associated with the Lake Charles refinery
expansion. The manufacturing plant for LiquidPower(TM) allowed the Company to
meet growing demand for this product. LiquidPower(TM) is a flow improver, which
allows operators of crude oil and product pipelines to maintain throughput
levels with fewer electric pump stations, thereby significantly lowering
operating costs.
-- International
During 1997, the Company spent $331 million on Downstream international
capital investments, down 28 percent from 1996, due to expenditures in 1996
relating to costs for the acidic crude vacuum unit at the Company's Humber
refinery. The installation of the vacuum unit at the Humber refinery allowed the
refinery to process acidic crude oil, including equity crude oil from the
Heidrun field. The vacuum unit incorporated special metallurgy and the Company
believes that Humber is the only refinery in Europe capable of processing
unblended acidic crude. Expenditures in 1997 focused on strengthening the
Company's retail marketing position in core markets such as Germany, Austria and
the Nordic countries, expanding in targeted retail growth markets in Central and
Eastern Europe, Spain, Turkey and the Asia Pacific region, and continuing the
construction of the Melaka refinery, which is expected to begin operations in
the second half of 1998. The Company believes that the Melaka refinery, 40
percent owned by the Company, will provide a source of product to support the
Company's expanding marketing activities in the Asia Pacific region.
Capital investments in 1996 totaled $462 million, up 44 percent from 1995
and included costs for the acidic crude vacuum unit at the Company's Humber
refinery, construction expenditures related to the Melaka refinery, acquisition
of equity interests in two Czech refineries, and expansion of retail marketing
operations, particularly in Eastern Europe. The acquisition of the equity
interests in the two Czech refineries supported the expansion of the Company's
retail marketing operations in the emerging markets in Eastern Europe, including
the Czech Republic, Poland, Hungary and Slovakia.
In 1995, the Company made capital investments of $320 million including
investments in the Humber and Melaka refinery projects, an acquisition of a 28.9
percent equity interest in a Turkish distribution and marketing company, and the
opening of retail marketing outlets in Thailand. The acquisition of the equity
interest in the Turkish distribution and marketing company enabled the Company
to increase its market share in Turkey's emerging motor fuels market.
48
<PAGE> 228
Corporate and Other
Capital investments in 1997 were $23 million, most of which represents the
Company's investment in electric power generation projects in international
equity affiliates. Because of deregulation within this industry, the Company
expects to continue to pursue projects which leverage the economic advantages of
the Company's energy production activities and the demand for energy in DuPont
or third party manufacturing operations.
There were no capital investments in Corporate and Other during 1996 and
1995.
FINANCING
The Company's ability to maintain and grow its operating income and cash
flow is dependent upon continued capital spending. The Company believes its
future cash flow from operations and its borrowing capacity should be sufficient
to fund its dividends, if any, debt service, capital expenditures, and working
capital requirements.
Cash flow in 1996 includes a $269 million benefit from the formation of a
partnership, Conoco Oil and Gas Associates, L.P. ("COGA"), in which the Company
has a general partnership interest of 67 percent. The remaining 33 percent is
owned by Vanguard Energy Investors L.P. ("Vanguard"), of which the Company owns
10 percent. In 1996, certain of the Company's subsidiaries contributed assets
with an aggregate fair value of $613 million to COGA for a general partnership
interest. Cash of $300 million was contributed by Vanguard as limited partner
and under the terms of the partnership agreement, COGA can require an additional
cash contribution of up to $200 million from Vanguard prior to December 31,
1998. The net result of this transaction was to increase minority interest by
$297 million.
Vanguard is entitled to a cumulative annual priority return on its
investment and participation in residual earnings at rates established in the
partnership agreement. The priority return rate, currently 6.5 percent, is
negotiated every four years commencing in 1999. If at that time Vanguard and the
Company are unable to agree on a priority return for the subsequent four-year
period, then the partnership would be dissolved, with COGA being required to
liquidate the partnership and distribute cash and properties to the partners
based on their individual interests. The estimated impact of such an event is a
cash outflow not materially different from the recorded amount of minority
interest. See Note 18 to the Combined Financial Statements.
Prior to the Separation, the businesses transferred to the Company were
funded through DuPont. Apart from limited recourse project financings related to
various joint ventures, equipment lease facilities and financing of certain
refinery equipment and other smaller financings, the Company has had limited
indebtedness to third parties. After the Offerings, the Company's operations
will be funded through related party debt with DuPont. The Company and DuPont
will enter into a Revolving Credit Agreement under which DuPont will provide the
Company with a revolving credit facility in principal amount of up to $500
million. The term of DuPont's commitment under this facility will begin upon
satisfaction of certain conditions and continue until the earlier of (i) October
11, 1999 or (ii)(a) the date on which DuPont's direct or indirect voting power
in the Company falls below 50 percent of the outstanding voting power of the
Company or (b) DuPont's election to terminate its commitment as the result of an
unremedied event of default. Loans under the Revolving Credit Agreement will be
subject to mandatory prepayment to the extent the Company's cash and cash
equivalents exceed $325 million or such higher amount as the Company and DuPont
may agree. Loans under this facility will bear interest at a rate equal to
30-day LIBOR plus 0.20 percent per annum and may be voluntarily prepaid without
penalty or premium. The Company intends to refinance related party debt with a
combination of commercial paper, bank debt and public debt. See "Arrangements
Between the Company and DuPont and "Risk Factors -- Risk of Refinancing Debt
Owed to DuPont."
49
<PAGE> 229
RECENT RESULTS
The Company's third quarter results have been negatively affected by market
conditions that continue to affect the petroleum industry in general. The
Company's worldwide net realized prices in the third quarter of 1998 for crude
oil and natural gas were $12.29 per barrel and $2.08 per thousand cubic feet,
respectively, compared to $12.45 per barrel and $2.15 per thousand cubic feet,
respectively, in the second quarter of 1998. Prices for crude oil and natural
gas were $17.96 per barrel and $2.17 per thousand cubic feet, respectively, in
the third quarter of 1997. Oil production in the third quarter of 1998 was
292,000 barrels per day compared to production of 314,000 barrels per day in the
second quarter of 1998 and production of 325,000 barrels per day in the third
quarter of 1997. Natural gas production for the third quarter of 1998 was 1,374
million cubic feet per day compared to 1,318 million cubic feet per day in the
second quarter of 1998 and 1,205 million cubic feet per day in the third quarter
of 1997. The increase in natural gas production in the third quarter of 1998 as
compared to the second quarter of 1998 and the third quarter of 1997 was due to
higher production from the Company's South Texas operations. Refining margins
per barrel for Downstream activities in the third quarter of 1998 were slightly
higher than margins in the second quarter of 1998 but lower than margins for the
third quarter of 1997.
Based on the cumulative effect of these factors, the Company's Upstream and
Downstream segment earnings before material non-recurring items for the third
quarter of 1998 were $223 million compared to $200 million of such earnings for
the second quarter of 1998 and $252 million of such earnings for the third
quarter of 1997. Due to higher interest and debt expense associated with the
$7.5 billion promissory note owed to DuPont, combined net income for the third
quarter of 1998 was $183 million compared to $214 million in the second quarter
of 1998 and $289 million in the third quarter of 1997. The Company intends to
repay or purchase a portion of the outstanding indebtedness owed to DuPont with
the estimated net proceeds from the Offerings of approximately $4,228 million.
See "Use of Proceeds."
MARKET RISKS
The Company operates in the worldwide crude oil, refined product, natural
gas and natural gas liquids markets and is exposed to fluctuations in interest
rates, foreign currency exchange rates and hydrocarbon prices that can affect
the revenues and cost of operating, investing and financing. The Company's
management has and intends to use financial and commodity based derivative
contracts to reduce the risk in the Company's overall earnings and cash flow
when the benefits of avoiding disruption of the Company's value creation process
(primarily long-term exploration and capital investment programs) are
anticipated to more than offset the risk management costs involved.
The Company has established a Financial Risk Management Policy Framework
that provides guidelines for entering into contractual arrangements
(derivatives) to manage the Company's commodity price, foreign currency exchange
rate, and interest rate risks. The Conoco Risk Management Committee has ongoing
responsibility for the content of this policy and has principal oversight
responsibility for compliance with the policy framework by ensuring proper
procedures and controls are in place. These procedures establish derivative
control and valuation processes, routine monitoring and reporting requirements
and counterparty credit approval procedures. Additionally, the Company's
internal audit group conducts routine reviews of these risk management
activities to assess the adequacy of internal controls and the audit results are
reviewed by the Conoco Risk Management Committee and by operating management.
The counterparties to these contractual arrangements are limited to major
financial institutions and other major companies in the petroleum business.
Although the Company is exposed to credit loss in the event of nonperformance by
these counterparties, this exposure is managed through credit approvals, limits
and monitoring procedures, and limits to the period over which unpaid balances
are allowed to accumulate. The Company has not experienced nonperformance by
counterparties to these contracts, and no material loss would be expected from
any such individual nonperformance.
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<PAGE> 230
COMMODITY PRICE RISK
The Company enters into energy-related futures, forwards, swaps and options
in various markets to balance its physical systems to meet customer needs and to
manage its exposure to price fluctuations on anticipated crude oil, natural gas,
refined product and electric power transactions. These instruments provide a
natural extension of the underlying cash market and are used to physically
acquire a portion of supply requirements and to manage pricing of near term
physical requirements. The commodity futures market has underlying principles of
increased liquidity and longer trading periods than the cash market and is one
method of managing price risk in the petroleum business.
From time to time, management may use derivatives to establish longer-term
positions to hedge the price risk for the Company's equity crude oil and natural
gas production as well as refinery margins.
Under the Company's policy, hedging includes only those transactions that
offset physical positions and reduce overall company exposure to prevailing
market price risk. Trading is defined as any transaction that does not meet the
definition of a hedge. After-tax gain/loss from risk trading has not been
material.
The fair value gain (loss) of outstanding derivative commodity instruments
and the change in fair value that would be expected from a 10 percent adverse
price change are shown in the table below:
<TABLE>
<CAPTION>
CHANGE
IN FAIR
VALUE FROM
10%
ADVERSE
PRICE
AT DECEMBER 31, 1997 FAIR VALUE CHANGE
-------------------- ---------- ----------
($ IN MILLIONS)
<S> <C> <C>
Crude Oil and Refined Products:
Hedging................................................... (3) (8)
Trading................................................... (6) (18)
Combined.................................................. (9) (26)
Natural Gas -- Hedging...................................... 8 (9)
Electric Power Trading...................................... -- --
</TABLE>
<TABLE>
<CAPTION>
CHANGE
IN FAIR
VALUE FROM
10%
ADVERSE
PRICE
AT JUNE 30, 1998 FAIR VALUE CHANGE
---------------- ---------- ----------
($ IN MILLIONS)
<S> <C> <C>
Crude Oil and Refined Products:
Hedging................................................... (7) (3)
Trading................................................... (11) (5)
Combined.................................................. (18) (8)
Natural Gas -- Hedging...................................... 10 (13)
Electric Power Trading...................................... -- --
</TABLE>
The fair values of the futures contracts are based on quoted market prices
obtained from the New York Mercantile Exchange or the International Petroleum
Exchange of London. The fair values of swaps and other over-the-counter
instruments are estimated based on quoted market prices of comparable contracts
and approximate the gain or loss that would have been realized if the contracts
had been closed out at year end.
All hedge positions offset physical positions exposed to the cash market;
none of these offsetting physical positions are included in the above table.
Price-risk sensitivities were calculated by assuming an across-the-board 10
percent adverse change in prices regardless of term or historical relationships
between the contractual price of the instrument and the underlying commodity
price. In the event of an actual 10 percent change in prompt month crude or
natural gas
51
<PAGE> 231
prices, the fair value of the Company's derivative portfolio would typically
change less than that shown in the table due to lower volatility in out-month
prices.
Additional details regarding accounting policy for these financial
instruments are set forth in Note 2 to the Combined Financial Statements.
FOREIGN CURRENCY EXCHANGE RATE RISK
The Company's operations in 40 countries expose it to foreign currency
exchange rate risk. The Company does not intend to comprehensively hedge its
exposure to currency rate changes, although it may choose to selectively hedge
certain working capital balances, firm commitments, cash returns from
subsidiaries and affiliates and/or tax payments. There can be no assurance these
efforts will be successful. Historically, the Company has selectively hedged
firm commitments. At July 31, 1998, the Company had no open foreign currency
hedged positions. Cash balances are maintained in U.S. dollars and foreign
currency denominations principally including U.K. Pounds, Deutsch Marks,
Norwegian Kroner and Swedish Kroner. The effect of foreign currency exchange
rate changes on cash increased cash balances $33 million in 1995, and decreased
cash balances $2 million in 1996 and $39 million in 1997. The Company has
experienced negative foreign currency impacts from currency revaluations in
Southeast Asia, but these losses have not been material.
INTEREST RATE RISK
Due to limited third party borrowings, the Company had no material interest
rate risk associated with the debt used to finance its operations. Certain major
capital investments were financed using project finance. The Company managed the
interest rate risk of these transactions, when appropriate, with a combination
of financial derivative instruments to balance the fixed and floating interest
rates. Subsequent to the Offerings, the Company intends to manage its interest
rate exposure using a combination of financial derivative instruments as part of
its program to manage the fixed and floating interest rate mix of the total
debt.
ENVIRONMENTAL EXPENDITURES
The costs to comply with complex environmental laws and regulations, as
well as internal voluntary programs, are significant and will continue to be so
in the foreseeable future. For example, the Company anticipates substantial
expenditures will be necessary to comply with Maximum Achievable Control
Technology ("MACT") standards to be promulgated by EPA under the Clean Air Act,
and specifications for motor fuels designed to reduce emissions of certain
pollutants from vehicles using such fuels. See "Business -- Environmental
Regulation -- Air Emissions." These costs may increase in the future, but are
not expected to have a material adverse effect on the Company's financial
condition, results of operations or liquidity.
Estimated pre-tax environmental expenses charged to current operations
totaled about $136 million, before insurance recoveries, in 1997 as compared to
approximately $162 million in 1996 and $129 million in 1995. These expenses
include the remediation accruals discussed below, operating maintenance and
depreciation costs for solid waste, air and water pollution control facilities
and the costs of certain other environmental activities. The largest of these
expenses resulted from the operation of wastewater treatment facilities and
solid waste management facilities and facilities for the control and abatement
of air emissions. Approximately 70 percent of total annual environmental
expenses resulted from the operations of the Company's business in the United
States.
Capital expenditures for environmental control facilities totaled
approximately $50 million in 1997, as compared to approximately $78 million in
1996 and $68 million in 1995. The Company estimates that capital expenditures
for pollution control facilities will total approximately $51 million in 1998
and approximately $52 million in 1999.
REMEDIATION EXPENDITURES
The Resource Conservation and Recovery Act ("RCRA") extensively regulates
the treatment, storage and disposal of hazardous waste and requires a permit to
conduct such activities. RCRA requires permitted
52
<PAGE> 232
facilities to undertake an assessment of environmental conditions at the
facility. If conditions warrant, the Company may be required to remediate
contamination caused by prior operations. In contrast to the Comprehensive
Environmental Response, Compensation, and Liability Act, as amended ("CERCLA"),
often referred to as "Superfund," the cost of corrective action activities under
the RCRA corrective action program is typically borne solely by the Company. The
Company anticipates significant ongoing expenditures for RCRA remediation
activities may be required over the next decade although annual expenditures for
the near term are not expected to vary significantly from the range of such
expenditures over the past few years. The Company's expenditures associated with
RCRA and similar remediation activities conducted voluntarily or pursuant to
state law were approximately $31 million in 1997, $34 million in 1996 and $32
million in 1995. In the long term, expenditures are subject to considerable
uncertainty and may fluctuate significantly.
The Company from time to time receives requests for information or notices
of potential liability from EPA and state environmental agencies alleging that
the Company is a potentially responsible party ("PRP") under CERCLA or an
equivalent state statute. The Company on occasion also has been made a party to
cost recovery litigation by those agencies or by private parties. These
requests, notices and lawsuits assert potential liability for remediation costs
at various sites that typically are not Company owned but allegedly contain
wastes attributable to the Company's past operations. As of December 31, 1997,
the Company had been notified of potential liability under CERCLA or state law
at about 15 sites around the United States, with active remediation under way at
seven of those sites. The Company received notice of potential liability at four
new sites during 1997 compared with one similar notice in 1996 and one in 1995.
The Company's expenditures associated with CERCLA and similar state remediation
activities were not significant in 1997, 1996 and 1995.
For most Superfund sites, the Company's potential liability will be
significantly less than the total site remediation costs because the percentage
of waste attributable to the Company versus that attributable to all other PRPs
is relatively low. Other PRPs at sites where the Company is a party typically
have had the financial strength to meet their obligations and, where they have
not, or where PRPs could not be located, the Company's own share of liability
has not materially increased. There are relatively few sites where the Company
is a major participant, and neither the cost to the Company of remediation at
those sites, nor at all CERCLA sites in the aggregate, is expected to have a
material adverse effect on the competitive or financial condition of the
Company.
Cash expenditures not charged against income for previously accrued
remediation activities under CERCLA, RCRA and similar state and foreign laws
were $19 million in 1997, $19 million in 1996 and $16 million in 1995. Although
future remediation expenditures in excess of current reserves are possible, the
effect of any such excess on future financial results is not subject to
reasonable estimation because of the considerable uncertainty regarding the cost
and timing of expenditures. See "Business -- Environmental Regulation" and "Risk
Factors -- Environmental Risks."
REMEDIATION ACCRUALS
The Company accrues for remediation activities when it is probable a
liability has been incurred and reasonable estimates of the liability can be
made. These accrued liabilities exclude claims against the Company's insurers or
other third parties and are not discounted. Many of these liabilities result
from CERCLA, RCRA and similar state laws that require the Company to undertake
certain investigative and remedial activities at sites where the Company
conducts or once conducted operations or at sites where Company-generated waste
was disposed. The accrual also includes a number of sites identified by the
Company that may require environmental remediation, but which are not currently
the subject of CERCLA, RCRA or state enforcement activities. Over the next
decade, the Company may incur significant costs under both CERCLA and RCRA.
Considerable uncertainty exists with respect to these costs and under adverse
changes in circumstances, potential liability may exceed amounts accrued as of
December 31, 1997.
Remediation activities vary substantially in duration and cost from site to
site depending on the mix of unique site characteristics, evolving remediation
technologies, diverse regulatory agencies and enforcement policies and the
presence or absence of potentially liable third parties. Therefore, it is
difficult to develop reasonable estimates of future site remediation costs. At
December 31, 1997, the Company's balance sheet
53
<PAGE> 233
included an accrued liability of $144 million as compared to $152 million and
$137 million at year-end 1996 and 1995, respectively. Approximately 84 percent
of the Company's environmental reserve at December 31, 1997 was attributable to
RCRA and similar remediation liabilities (excluding voluntary remediations) and
16 percent to CERCLA liabilities. During 1997, remediation accruals of $13
million, offset by $54 million in insurance proceeds, resulted in a credit to
pre-tax income of $41 million, compared to credits of $70 million and $13
million in 1996 and 1995, respectively, also resulting from insurance
recoveries. No significant additional recoveries are expected.
TAX MATTERS
As a result of the Separation and the Offerings, and possible subsequent
transactions, the Company likely will not be able to combine the results of its
operations with those of DuPont in reporting income for U.S. federal, state, and
non-U.S. income tax purposes. The Company believes this will not have a material
adverse effect on the Company's earnings. At the time the Company is no longer
included in DuPont's consolidated U.S. federal income tax return (which is
expected to occur immediately following the Offerings), it may become exposed to
having its U.S. tax liability computed under the U.S. federal alternative
minimum tax. Such a computation could have a material adverse effect on the
year-to-year timing of the Company's cash flow.
As of December 31, 1997, the Company had deferred tax assets in the amount
of $1,065 million. Of this amount, $417 million related to tax benefits from
operating losses incurred in start-up operations, including exploration and U.S.
foreign tax credit carryforwards. These benefits were substantially offset by a
valuation reserve. The Company believes it is more likely than not the balance
of the deferred tax assets will be realized in future years.
YEAR 2000
Historically, certain computerized systems have had two digits rather than
four digits to define the applicable year, which could result in recognizing a
date using "00" as the year 1900 rather than the year 2000. This could result in
major failures or miscalculations and is generally referred to as the "Year 2000
issue."
The Company recognizes that the impact of the Year 2000 issue extends
beyond traditional computer hardware and software to automated plant systems and
instrumentation, as well as to third parties. The Year 2000 issue is being
addressed within the Company by its individual business units, and progress is
reported periodically to management.
The Company has committed resources to conduct risk assessments and to take
corrective action, where required, within each of the following areas:
information technology, plant systems and external parties. Information
technology includes telecommunications as well as traditional computer software
and hardware in the mainframe, midrange and desktop environments. Plant systems
include all automation and embedded chips used in plant operations. External
parties include any third party with whom the Company interacts.
In the information technology area, inventory and assessment audits in the
mainframe and midrange environments are expected to be completed by the third
quarter of 1998 with corrective action scheduled for completion by the fourth
quarter of 1998, except for business application software which is expected to
be completed by the fourth quarter of 1999. Inventory and assessment audits of
telecommunications are expected to be completed by the third quarter of 1998,
with corrective action expected to be completed by the second quarter of 1999.
Finally, inventory and assessment audits in the desktop environment are expected
to be completed by third quarter of 1998, with corrective action expected to be
completed by third quarter of 1999.
In the plant systems area, 75 percent of the Company's business units have
completed their inventory and assessment audits; the remaining units are
expected to complete this work by fourth quarter 1998. The Company is relying on
vendor testing and certification with validation through limited internal
testing and/or industry test results. Downtime for normally scheduled plant
maintenance will be used to conduct testing, with corrective action expected to
be completed by second quarter of 1999.
54
<PAGE> 234
With respect to external parties, 65 percent of the Company's business
units have completed their inventory audit of critical external parties. The
remaining business units are expected to have completed this work by the fourth
quarter of 1998. Risk assessment is expected to be completed by the fourth
quarter of 1998, and monitoring of risk in this area will continue into 1999, as
many external parties will not have completed their work.
The total cost of Year 2000 activities is not expected to be material to
the Company's operations, liquidity or capital resources. Costs are being
managed within each business unit. The total estimated cost for the Company's
Year 2000 work is $47 million. 1997 costs were $5 million, and 1998 costs
through June 1998 were $9 million. Costs exclude expenditures for replacement
systems, which were previously scheduled.
Failure to address a Year 2000 issue could result in business disruption
that could materially affect the Company's operations, liquidity or capital
resources. The Company has contingency plans to address other issues such as oil
tanker spills and plant explosions. Typically these contingency plans address
the results of single events while the scope of Year 2000 issues may cause
multiple concurrent events for a longer duration. Development of contingency
plans for multiple concurrent events is expected to be completed by the first
quarter of 1999.
There is still uncertainty around the scope of the Year 2000 issue. At this
time the Company cannot quantify the potential impact of these failures. The
Company's Year 2000 program and contingency plans are being developed to address
issues within the Company's control. The program minimizes, but does not
eliminate, the issues of external parties.
EUROPEAN MONETARY UNION
Within Europe, the European Economic and Monetary Union (the "EMU") will
introduce a new currency, the Euro, on January 1, 1999. The new currency is in
response to the EMU's policy of economic convergence to harmonize trade policy,
eliminate business costs associated with currency exchange and to promote the
free flow of capital, goods and services.
On January 1, 1999, the participating countries are scheduled to adopt the
Euro as their local currency, initially available for currency trading on
currency exchanges and noncash (banking) transactions. The existing local
currencies, or legacy currencies, will remain legal tender through January 1,
2002. Beginning on January 1, 2002, Euro-denominated bills and coins will be
issued for cash transactions. For a period of six months from this date, both
legacy currencies and the Euro will be legal tender. On or before July 1, 2002,
the participating countries will withdraw all legacy currency and use
exclusively the Euro.
The Company has recognized the introduction of the Euro as a significant
event with potential implications for existing operations. Currently,
participating countries in the EMU where the Company operates include Austria,
Belgium, Finland, Germany and Spain. The Company expects nonparticipating
European Union countries, such as Great Britain, to eventually join the EMU.
The Company has committed resources to conduct risk assessments and to take
corrective actions, where required, to ensure the Company is prepared for the
introduction of the Euro. The Company has undertaken a review of the Euro
implementation and has concentrated on areas such as operations, finance,
treasury, legal, information management, procurement and others, both in
participating and nonparticipating European Union countries where the Company
operates. Also, a review of existing legacy accounting and business systems and
other business assets have been reviewed for Euro compliance, including
assessing any risks from third parties. Progress regarding Euro implementation
is reported periodically to management.
Because of the staggered introduction of the Euro regarding noncash and
cash transactions, the Company has developed its plans to address first its
accounting and business systems and second, its business assets. The Company
expects to be Euro compliant within its accounting and business systems by the
end of 1999 and compliant within its other business assets prior to the
introduction of the Euro bills and coins. Compliance in participating and
nonparticipating countries will be achieved primarily through upgraded systems,
which were previously planned to be upgraded. Remaining systems will be modified
to achieve compliance. The Company does not currently expect to experience any
significant operational disruptions or to incur any significant costs,
55
<PAGE> 235
including any currency risk, which could materially affect the Company's
liquidity or capital resources. The Company is preparing plans to address issues
within the transitional period when both legacy and Euro currencies may be
tendered.
Because of the competitive business environment within the petroleum
industry, the Company does not anticipate any long-term competitive implications
or the need to materially change its mode of conducting business as a result of
increased price transparency.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income," and Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information." Both Statements are
effective for fiscal years beginning after December 15, 1997, and are
disclosure-oriented statements. The Company adopted Statement No. 130 in the
first quarter of 1998 and the accompanying financial statements reflect
application of the provisions of this statement.
The Company is required to adopt Statement No. 131 for its 1998 annual
report and disclose segment information on the same basis used internally for
evaluating segment performance and deciding how to allocate resources to
segments. The Company is currently assessing the effect of the new disclosure;
however, the Company believes adoption of Statement No. 131 will have no
financial impact on the Company.
In February 1998, the Financial Accounting Standards Board issued Statement
No. 132, "Employers' Disclosure About Pension and Other Postretirement Benefits"
which revised disclosure requirements for pension and other postretirement
benefits. It does not affect the measurement of the expense of the Company's
pension and other postretirement benefits. The Company is required to adopt this
Statement for the 1998 Annual Report and is currently assessing the effect of
the new disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" which
requires that companies recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
The Company is required to adopt this Statement by the first quarter of 2000 and
is currently assessing the effect of the new standard.
Statement No. 133 provides, if certain conditions are met, that a
derivative may be specifically designated as (1) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an unrecognized
firm commitment (fair value hedge), (2) a hedge of the exposure to variable cash
flows of a forecasted transaction (cash flow hedge) or (3) a hedge of the
foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security or a
foreign-currency-denominated forecasted transaction (foreign currency hedge).
Under Statement No. 133, the accounting for changes in fair value of a
derivative depends on its intended use and designation. For a fair value hedge,
the gain or loss is recognized in earnings in the period of change together with
the offsetting loss or gain on the hedged item. For a cash flow hedge, the
effective portion of the derivative's gain or loss is initially reported as a
component of other comprehensive income and subsequently reclassified into
earnings when the forecasted transaction affects earnings. For a foreign
currency hedge, the gain or loss is reported in other comprehensive income as
part of the cumulative translation adjustment. For all other items not
designated as hedging instruments, the gain or loss is recognized in earnings in
the period of change.
56
<PAGE> 236
BUSINESS
GENERAL
Conoco, a major, integrated, international energy company, is involved in
both the Upstream and Downstream segments of the petroleum business. Upstream
activities include exploring for, and developing, producing and selling, crude
oil, natural gas and natural gas liquids. Downstream activities include refining
crude oil and other feedstocks into petroleum products, buying and selling crude
oil and refined products and transporting, distributing and marketing petroleum
products. The Company operates in 40 countries worldwide.
As of December 31, 1997, Conoco had proved worldwide reserves of 2.6
billion BOE, 38 percent of which were natural gas. Based on 1997 annual
production of 209 million BOE (excluding natural gas liquids from gas plant
ownership), the Company had a reserve life of 12.4 years as of December 31,
1997. Over the last five years, Conoco has replaced an average of 190 percent of
the oil and gas it has produced each year. Conoco owns or has equity interests
in nine refineries worldwide, with a total crude and condensate processing
capacity of approximately 799,000 barrels per day (including the new Melaka
refinery in Malaysia, which Conoco expects will be completed in the fourth
quarter of 1998). The Company has a marketing network of approximately 7,900
outlets in the United States, Europe and Asia. Based on public filings, for the
year ended December 31, 1997, Conoco ranked eighth in the worldwide production
of petroleum liquids by U.S.-based companies, eleventh in the production of
natural gas, and eighth in refining throughput. For that same period, Conoco
reported net income of $1,097 million on total revenues of $26.3 billion.
COMPANY HISTORY
The Company was founded in 1875 in Ogden, Utah, as the Continental Oil and
Transportation Company. In 1885, it was reincorporated with a new name,
Continental Oil Company, as part of the nationwide Standard Oil Trust. In its
early years, its principal operations were marketing oil and petroleum related
products, primarily in the Rocky Mountain area and in California. In 1913, two
years after the U.S. Supreme Court dissolved the Standard Oil Trust, the Company
was again independently incorporated. From 1913 to 1929, the Company evolved
into a fully integrated oil company, with operations in most states west of the
Mississippi River.
By 1929, Conoco had approximately 1,800 producing wells and had become one
of the largest retailers of gasoline in the Rocky Mountain area. In that year it
merged with the Marland Oil Company, an oil and gas company with wells and
marketing operations from Oklahoma to Maryland. After World War II, the Company
was an early participant in Gulf of Mexico exploration and production activities
and moved aggressively overseas with Upstream assets in many parts of the world
and Downstream assets in Western Europe. In 1981, Conoco was acquired by DuPont.
UPSTREAM
SUMMARY
Conoco is currently exploring for, developing or producing crude oil,
natural gas and/or natural gas liquids in 18 countries around the world. In
1997, production averaged 654,000 BOE per day, consisting of 453,000 barrels of
petroleum liquids (including natural gas liquids from gas plant ownership) and
1.2 billion cubic feet of natural gas per day. The bulk of this production came
from fields located in the United States, the United Kingdom and Norway, with
the remaining production coming from operations in Canada, the United Arab
Emirates, Indonesia, Nigeria and Russia.
In 1997, Conoco replaced nearly 450 percent of the oil and natural gas it
produced, adding 938 million BOE to the Company's worldwide proved reserves,
while producing 209 million BOE (excluding natural gas liquids from gas plant
ownership), for a net addition of 729 million BOE. A large part of the reserve
increase reflected the recording of 680 million barrels of proved oil reserves
for the Company's interest in Petrozuata. Excluding the recording of the
Petrozuata reserves, Conoco replaced approximately 123 percent of its 1997
57
<PAGE> 237
production. On December 31, 1997, the Company had proved reserves of 2.6 billion
BOE, consisting of 1,624 million barrels of petroleum liquids and 5,861 billion
cubic feet of natural gas, representing an increase of 58 percent on a BOE basis
since December 31, 1993.
In recent years, Conoco has significantly increased capital expenditures
through participation in several large scale development projects. Conoco's
capital investment in Upstream activities in 1997 was $2.5 billion, including
approximately $0.9 billion for the Lobo Acquisition and $171 million for the
continued development of Britannia. The Company expects to make Upstream capital
investments in 1998 of approximately $1.8 billion, the largest of which will be
made in continued development of the Lobo trend, Britannia, Ursa and Petrozuata.
The Company believes that all of these projects will contribute to Conoco's 1999
production and significantly increase Conoco's production rates over current
levels in future years.
The majority of Conoco's exploration and production assets are located in
North America (United States and Canada) and Western Europe (United Kingdom and
Norway). The producing properties in these areas generate cash to fund growth
opportunities around the world. Outside of North America and Western Europe,
Conoco's investment activities are focused on areas that have the potential to
become major business areas in the future, such as Northern South America and
the Caribbean, and the Asia Pacific, Middle East and Russia/Caspian Sea regions.
Conoco is exploring for oil and/or natural gas in 16 countries. Since 1996,
Conoco has pursued and continues to implement an exploration strategy focused on
acquiring large acreage positions in areas that are relatively under-explored.
The purpose of these acreage acquisitions has been to establish Conoco at an
early stage in areas that have the potential for large discoveries. Since 1996,
Conoco has acquired significant acreage positions in the deepwater Gulf of
Mexico, the Atlantic Margin of Northwest Europe, Northern South America and the
Caribbean, and selected basins in the Asia Pacific region. Conoco has applied 3D
seismic and other technologies to evaluate this acreage, and has recently begun
drilling programs to test the potential of this acreage.
The following table sets forth certain information regarding the Company's
producing properties.
<TABLE>
<CAPTION>
PROVED RESERVES
AS OF 1997
DECEMBER 31, 1997 PRODUCTION
REGION NATURE OF INTEREST (MMBOE)(1) (MBOE PER DAY)(1)
------ ------------------ ----------------- ------------------
<S> <C> <C> <C>
NORTH AMERICA
Lobo................................ lease 113 38
Gulf of Mexico (including Ursa)..... lease 89 36
San Juan Basin...................... lease 167 51
Permian Basin....................... lease 152 33
Canadian Foothills.................. lease 10 2
Central Appalachian Basin........... partnership 62 3
Other............................... 160 58
----- ---
Total North America:........ 753 221
WESTERN EUROPE
Britannia........................... license 237 --
Heidrun............................. license 150 43
Statfjord........................... license 108 68
Troll............................... license 125 8
Other............................... 311 129
----- ---
Total Western Europe........ 931 248
NORTHERN SOUTH AMERICA AND THE
CARIBBEAN
Petrozuata.......................... equity company 680 --
OTHER................................. 237 106
----- ---
Total................................. 2,601 575
===== ===
</TABLE>
- ---------------
(1) Includes crude oil, condensate, and NGLs expected to be removed for the
Company's account from its natural gas production. Average daily production
excludes NGLs of 79 Mbbls per day acquired through gas plant ownership.
58
<PAGE> 238
NORTH AMERICA
Production operations in North America are principally located in the Lobo
trend in South Texas, the Gulf of Mexico, the San Juan Basin in New Mexico, the
Permian Basin in West Texas, the foothills east of the Canadian Rockies and the
Central Appalachian Basin in Virginia. In 1997, North American operations
contributed approximately 24 percent of the Company's worldwide petroleum
liquids production and 64 percent of its worldwide natural gas production.
Proved North American reserves as of December 31, 1997, were 753 million BOE,
consisting of 286 million barrels of petroleum liquids and 2,801 billion cubic
feet of natural gas.
In recent years, Conoco has consolidated its exploration and production
operations in North America in order to increase profitability. Conoco sold
hundreds of smaller, less efficient properties, while acquiring an increased
interest in the Company's largest producing areas such as the San Juan Basin and
the Lobo trend. As a result, Conoco has reduced the number of fields in its
portfolio from approximately 700 in 1990 to 136 as of June 30, 1998, while
maintaining production essentially constant on a BOE basis. The Company has also
focused its exploration activities by reducing the number of exploration plays
being pursued in North America from over 30 in 1995 to less than 10 as of June
30, 1998. Exploration activity in North America is concentrated in the deepwater
Gulf of Mexico, the Permian Basin in West Texas, the San Juan Basin in New
Mexico and the foothills of the Canadian Rockies.
Over the near term, the Company's objectives are to maintain existing
production from current North American assets, while increasing production from
new wells in the Lobo trend and the deepwater Gulf of Mexico, widening its
exploration activities in the foothills of the Canadian Rockies and focusing on
its natural gas processing capabilities.
Lobo Trend in South Texas
Conoco is the largest natural gas producer in the Lobo trend, and a leading
producer, marketer and transporter of natural gas in South Texas. Conoco has 20
years of operating and drilling experience in the Lobo trend and currently holds
approximately 450,000 acres in the area under oil and gas leases. In 1997, in
accordance with its strategy to rapidly increase production through
participation in large development projects, the Company substantially increased
its holdings in South Texas as the result of the Lobo Acquisition. Assets
acquired by Conoco in this transaction included approximately 215,000 acres of
leases, 800 wells and 1,150 miles of natural gas gathering and transportation
pipeline, providing direct access to major Texas intrastate and interstate
pipeline systems. As a result of the Lobo Acquisition, Conoco is currently the
third largest natural gas producer in Texas.
Conoco's average working interest in its leases in the Lobo trend is 92
percent. A large number of the producing wells acquired in the Lobo Acquisition
were acquired subject to volumetric production payments. The holders of these
production payments are entitled to a specific volume of production from these
wells (averaging approximately 91 million cubic feet per day in 1998) until the
last of the production payments terminate in 2002.
With most of the Company's expanded Lobo holdings still undeveloped, the
Company has significantly increased drilling activity and, as of June 30, 1998,
had 14 rigs working continuously in the region. This development activity has
resulted in an increase in gross natural gas production in the region from
approximately 450 million cubic feet per day as of June 30, 1997 to
approximately 700 million cubic feet per day as of June 30, 1998. The Company
anticipates spending $1 billion between 1997 and 2002 to further develop its
leases in the Lobo trend. The Company's 1998 Lobo trend development program
includes the acquisition of new 3D seismic data and the drilling of over 200
wells.
Lobo Pipeline Company, a wholly owned subsidiary of the Company, owns a
1,150 mile intrastate natural gas pipeline system in South Texas (the "Lobo
Pipeline") and expects to implement an expansion plan designed to provide
transportation for the Company's gas production and that of third party
producers, laying 100 miles of pipeline per year for the next five years. During
the first two years, most of the pipeline added will be high-pressure trunklines
to support regional development.
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<PAGE> 239
Gulf of Mexico
Conoco's current portfolio of producing properties in the Gulf of Mexico
includes approximately 10 fields operated by the Company and 16 operated by
other companies. The properties are in various stages of development, ranging
from properties that are fully developed to ones with considerable additional
development potential. The Company also holds interests in various offshore
platforms, pipelines and other infrastructure.
Conoco currently has 11 leases in production or under development in the
deepwater Gulf of Mexico. The Company's most important current development
project in the Gulf of Mexico is the Ursa field development. Ursa, operated by
Shell, is one of the largest discoveries to date in the deepwater Gulf of
Mexico. The Company holds a 16 percent interest in the field, along with Shell
(45 percent), British Petroleum (23 percent) and Exxon (16 percent). The Company
expects the Ursa tension leg platform to be installed by early 1999 in
approximately 3,800 feet of water, with first production scheduled for mid-1999.
The Company projects that peak gross production from the Ursa field will reach
150,000 barrels of petroleum liquids and 400 million cubic feet of gas per day.
Conoco's most important exploration program in North America is in the
deepwater Gulf of Mexico. Conoco is the seventh largest deepwater leaseholder in
the Gulf, with interests in 271 leases. Conoco has a 100 percent interest in 130
of these leases, and jointly owns 76 of the remaining leases on a 50-50 basis
with Shell. Since 1996, Conoco has acquired 3D seismic data over large portions
of the deepwater Gulf of Mexico to identify acreage to lease and to select
prospects for drilling. Seismic interpretation is now underway on many leases
and preparations for a multi-well drilling program are being made.
Conoco will carry out its deepwater Gulf of Mexico drilling program in
large part with one of two highly sophisticated deepwater drillships that are
being constructed for joint ventures between Conoco and R&B Falcon Corporation.
The Company expects the first of these vessels to be in service in late 1998,
when the Company expects to begin a five-year, $400 million drilling program in
the Gulf of Mexico. These drillships, which will be capable of drilling wells in
water depths of up to 10,000 feet, provide Conoco with the ability to explore in
areas that were previously inaccessible.
Other U.S. Producing Properties
Outside of South Texas and the Gulf of Mexico, Conoco's largest producing
properties in North America are located in the San Juan Basin of New Mexico, the
Permian Basin in West Texas and the Central Appalachian Basin in Virginia.
Conoco also has producing properties in the Williston Basin and the Hugoton
complex in the Oklahoma/Texas panhandle.
Conoco has a significant acreage position in the San Juan Basin. Conoco's
average daily net production from the San Juan Basin in 1997 was approximately
13,600 barrels of petroleum liquids and 227 million cubic feet of natural gas.
Conoco will continue to consider potential acquisitions in this basin to take
advantage of synergies resulting from its large asset base and gas plant in the
area.
Conoco has an interest in 29 fields in the Permian Basin, which is one of
the largest producing areas in North America. In the Permian Basin, the
Company's average daily net production in 1997 was approximately 25,800 barrels
of petroleum liquids and approximately 43 million cubic feet of gas. The Company
believes the use of 3D seismic technology, horizontal wells and other innovative
extraction technologies will allow Conoco to extend the productive life of many
of the mature fields in the Permian Basin.
Pocahontas Gas Partnership ("Pocahontas") is a 50/50 partnership between
the Company and DuPont's 50 percent-owned equity affiliate, Consolidation Coal
Company. Pocahontas produces and gathers coal bed methane ("CBM") prior to and
during coal mining operations in Virginia. The Company expects Pocahontas to
produce and gather approximately 38 million cubic feet per day of CBM from the
existing active mining area in 1998. The Company recently approved a major
expansion of the Pocahontas project to develop CBM outside of the existing
mining area. In the project, Pocahontas plans to drill approximately 800 wells
over 70,000 acres.
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<PAGE> 240
Canadian Foothills
Conoco has had significant exploration success in the 1990s in the
foothills east of the Canadian Rockies. In this area, Conoco has an interest in
202,000 net acres, much of which has yet to be developed. As part of the
Canadian foothills development, Conoco participated in the construction of a gas
processing plant in 1997. In addition to the discoveries in the foothills trend,
Conoco has a significant interest in the Peco Gas Field, located just east of
the foothills. Conoco also owns 100 percent of the Peco gas processing plant,
which processes gas from both the Peco Field and the Lovett River Field, another
one of Conoco's discoveries in the area.
NATURAL GAS AND GAS PRODUCTS
The Company ranked as the fourth largest producer of NGLs in the United
States in 1997. In the United States, the Company owns interests in 25 natural
gas processing plants located in Colorado, Louisiana, New Mexico, Oklahoma and
Texas as well as approximately 10,000 miles of gathering lines. Seventeen of the
plants are operated by the Company.
The Company gathers natural gas, extracts the liquids and sells the
remaining residual gas. Most of the Company's raw gas liquids are supplied to
its processing operations, which further separate them into NGL products that
are used as feedstocks for gasoline and chemicals production. The Company
provides service to more than 800 natural gas producers and sells approximately
500 million cubic feet per day of residue gas to approximately 120 customers.
The Company's share of total NGLs resulting from processing activities at
the 25 plants in which the Company owns an interest averaged 65,900 barrels per
day in 1997. In 1997, approximately 30,000 barrels per day of additional NGLs
were attributable to processing of the Company's natural gas liquids in
third-party-operated plants. In addition, the Company's 50 percent-owned equity
affiliate, C&L Processors Partnership, has five natural gas processing plants in
Oklahoma and Texas. The Company's pro rata share of C&L's NGL production was
approximately 7,500 barrels per day in 1997.
The Company's other natural gas and gas products facilities in the United
States include the Lobo Pipeline, an 800-mile intrastate natural gas pipeline
system in Louisiana, natural gas and NGL pipelines in several other states,
three underground NGL storage facilities, a natural gas liquids fractionating
plant in Gallup, New Mexico with capacity of 19,000 barrels per day, and a 22.5
percent equity interest in Gulf Coast Fractionators, which owns a natural gas
liquids fractionating plant in Mt. Belvieu, Texas with capacity of 104,000
barrels per day.
WESTERN EUROPE
Conoco has a significant portfolio of producing properties in the United
Kingdom and Norway. Proved Western Europe reserves, as of December 31, 1997,
were 931 million BOE, consisting of 421 million barrels of petroleum liquids and
3,060 billion cubic feet of natural gas. In 1997, operations in Western Europe
contributed 46 percent of the Company's worldwide petroleum liquids production
and 36 percent of its natural gas production.
Britannia Field
Conoco has a 42 percent interest in the Britannia field, which is one of
the largest natural gas fields in the United Kingdom sector of the North Sea.
Britannia is a centerpiece of the Company's strategy to increase production and
reserves through large, long-lived projects. First production from Britannia
occurred in August 1998 and the Company estimates that the field will have a
production life of approximately 30 years. The Company's proved reserves at
Britannia include 1.1 trillion cubic feet of natural gas and 52 million barrels
of petroleum liquids at December 31, 1997. The Company believes Britannia has
the potential to produce between 650 and 740 million cubic feet of gas per day
(gross). Conoco and Chevron, the two largest interest holders in the field,
jointly operate Britannia.
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Southern North Sea Producing Properties
Conoco has various equity interests in 12 producing gas fields in the
Southern North Sea, a major gas producing area on the United Kingdom continental
shelf. These fields mostly feed into the Conoco-operated Theddlethorpe gas
processing facility through three Conoco-operated pipeline systems (Viking,
LOGGS and CMS). In 1997, Conoco's net production from the Southern North Sea was
108 billion cubic feet of natural gas.
Conoco believes there are additional development opportunities in the
Southern North Sea. One example is the Viking Phoenix project in which Conoco is
targeting the development of additional reserves using existing infrastructure
and new drilling and completion technology. The Company expects first production
from this development, for which Conoco's proved reserves were 174 billion cubic
feet of gas as of December 31, 1997, to occur by the end of 1998.
Other United Kingdom Properties and Discoveries
Conoco also has interests in the Miller (30 percent), Alba (12 percent),
Statfjord (4.8 percent in the United Kingdom/10.3 percent in the Norwegian
sector), MacCulloch (40 percent), and Banff (32 percent) fields, and the Clair
discovery (21 percent). Conoco operates the MacCulloch and Banff fields, both of
which will employ innovative floating production, storage and offtake
technology. British Petroleum operates the Miller field and the Clair discovery,
which is one of the largest undeveloped oil discoveries in Western Europe.
Interconnector Pipeline and Gas Sales
The Interconnector pipeline, which connects the United Kingdom and Belgium,
will facilitate marketing throughout Europe of the natural gas the Company
produces in the United Kingdom. The pipeline was installed in 1997, and is
expected to commence operation in October 1998. The Company has a 10 percent
interest in the $700 million project.
Norwegian Producing Fields
Conoco is the sixth largest oil producer in Norway. The Company has an
ownership interest in three of the largest fields in the country, Heidrun,
Statfjord and Troll. Conoco also has an interest in the Oseberg South (7.7
percent), Visund (9.1 percent), Jotun (3.75 percent), and Huldra (23.3 percent)
discoveries, which are in development, as well as the PL 203 (20 percent)
discovery.
Production from the Heidrun field began in 1995 and is currently averaging
205,000 barrels of petroleum liquids per day (gross). Conoco's share of the
proved reserves in the field, based on its 18.125 percent equity interest, is
123 million barrels of petroleum liquids and 164 billion cubic feet of natural
gas. Conoco was the operator for the construction and installation of Heidrun's
tension leg platform. Upon first production, Statoil assumed operatorship in
accordance with a pre-agreed arrangement. Associated gas from the Heidrun Field
serves as feedstock for a methanol plant that became operational in Norway in
1997. The plant, in which the Company holds an 18.125 percent interest, is
operated by Statoil.
Proved reserves from the Statfjord field have increased substantially over
the last five years as field performance has exceeded projections. Conoco, which
holds 10.3 and 4.8 percent interests in the Norwegian and United Kingdom sectors
of the field, respectively, had net proved reserves of 84 million barrels of
petroleum liquids and 142 billion cubic feet of natural gas in the field as of
December 31, 1997 (total for Norway and the United Kingdom). Conoco is
supporting work by Statoil, the operator of Statfjord, to determine ways to slow
the natural decline of the field, and increase reserves. The Company also owns a
1.66 percent interest in the Troll gas field, operated by Statoil, and has net
proved reserves in the field of 634 billion cubic feet of natural gas and 20
million barrels of petroleum liquids.
Exploration -- The Atlantic Margin
Exploration activity in Western Europe is focused on the deepwater Atlantic
Margin fairway, which runs from the Voring Basin off the coast of Norway to the
Porcupine Basin off of the west coast of Ireland. Along
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<PAGE> 242
the Atlantic Margin, Conoco has significant acreage positions in the Voring
Basin, the West of Shetlands and North Rockall Trough areas in the United
Kingdom and the Porcupine Basin. In 1997, the British government awarded Conoco
and three partners exploration licenses for two highly sought after deepwater
blocks, Blocks 204/14 and 204/15, in the West of Shetlands area. These blocks
are adjacent to a discovery in British Petroleum-operated Block 204/19. Conoco,
as operator of Blocks 204/14 and 204/15, has drilled and is evaluating one well
to test the potential of this acreage and expects to drill a second well in
1998.
NORTHERN SOUTH AMERICA AND THE CARIBBEAN
Petrozuata
Petrozuata is a key component of Conoco's strategy to increase production
and reserves through implementation of long-lived, large development projects
and to utilize its proprietary coking technology in other areas of its business.
Petrozuata is a joint venture between the Company, which holds a 50.1 percent
non-controlling equity interest (subject to an option held by the Venezuelan
investment entity SOFIP to purchase one percent of the joint venture from Conoco
that expires May 31, 1999), and PDVSA Petroleo y Gas S.A., a subsidiary of
PDVSA, which holds the remaining interest. Petrozuata, the first venture of its
kind in Venezuela, is developing an integrated operation to produce extra heavy
crude oil from known reserves in the Zuata region of the Orinoco Belt, transport
it to the Jose industrial complex on the north coast of Venezuela and upgrade it
into Synthetic Crude, with associated by-products of liquified petroleum gas,
sulfur, petroleum coke and heavy gas oil. Conoco's recorded proved reserves
relating to its interest in this project as of December 31, 1997 were 680
million barrels of oil. Drilling began in 1997 and currently approximately 50
horizontal wells are in various stages of development, with another 37 wells
planned by year-end 1999. The joint venture agreement has a 35-year term and
requires approval of both Conoco and PDVSA Petroleo y Gas S.A. for major
Petrozuata decisions.
The upgrading facility, which will employ the Company's proprietary delayed
coking technology, is currently under construction. The upgrader will be located
at Jose and is projected to become operational in 2000. Diluted extra-heavy
crude oil will be transported via a 36-inch pipeline from the field to the Jose
industrial complex. An adjacent 20-inch pipeline will return naphtha from the
upgrader to the field for use as a diluent. Petrozuata has also begun
construction of field processing and support facilities and marine facilities
for shipping Synthetic Crude and by-products.
Petrozuata began producing extra heavy crude oil in August 1998, and the
Company expects that Petrozuata's production will rise to 120,000 barrels
(gross) daily by the time the project's upgrading facility becomes operational.
Prior to completion of the upgrader, the extra heavy crude will be blended with
lighter oils and sold on world markets. Following completion of the upgrader,
the Synthetic Crude produced by Petrozuata will either be used as a feedstock
for the Company's Lake Charles refinery and a refinery operated by PDVSA, or
will be sold to third parties. The Company has entered into an agreement to
purchase up to 104,000 barrels per day of the Petrozuata Synthetic Crude for a
formula price over the term of the joint venture if Petrozuata is unable to sell
the production to third parties for higher prices. All Synthetic Crude sales
will be denominated in United States dollars. By-products produced by the
upgrader (principally coke and sulfur) will be sold to a variety of domestic and
foreign purchasers. The loading facilities at Jose will transfer Synthetic Crude
and some of the by-products to ocean tankers for export. Synthetic Crude sales
are expected to comprise more than 90 percent of the project's revenues.
The La Luna Trend
Exploration activity in Northern South America and the Caribbean is focused
on a geologic trend known as La Luna. In Venezuela, the Company conducted
seismic surveys in 1997 on the shallow water Gulf of Paria West block, located
between Venezuela and Trinidad, and on the Guanare block in the Merida Andes
foothills. The Company expects to begin drilling of prospects on these blocks in
1998. Conoco currently holds a 50 percent working interest in both the Gulf of
Paria West block, which it operates, and the Guanare block, which is operated by
Elf (in each case subject to dilution to 32.5 percent at the option of a PDVSA
affiliate).
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In northwestern Colombia, seismic surveys have been completed in
partnership with Texaco on three tracts that Conoco acquired through a 50
percent farm-in. In 1998, Texaco has drilled two wells on the acreage (one
non-commercial discovery and one dry hole) and plans one additional well before
year-end. In addition, Conoco and Texaco recently acquired a fourth tract in a
joint bid.
In 1997, Conoco signed a production sharing contract for Blocks 4a and 4b,
two large, prospective blocks off Trinidad's east coast. A 3D seismic survey was
acquired over the acreage in 1997, and the Company expects to commence drilling
in late 1998 or early 1999. Conoco is operator of both blocks and has a 50
percent working interest, as does Texaco.
Seeking additional attractive opportunities in the La Luna Trend, Conoco
has conducted a two-year study of the hydrocarbon potential of the entire
offshore Barbados area. Encouraged by the study, Conoco has entered into a
commitment to acquire seismic data over 50 percent of the original study area
and has the option to enter a drilling program to test the potential of this
largely unexplored area.
Phoenix Park
The Company holds a 39 percent interest in Phoenix Park Gas Processors
Limited ("Phoenix Park"), a joint venture with the National Gas Company of
Trinidad and Tobago Limited, that processes and markets gas products in
Trinidad. Phoenix Park owns a gas processing plant, a fractionator producing
propane, mixed butane and natural gasoline, storage tanks and a liquefied
petroleum gas marine loading dock. These facilities produce over 13,000 barrels
per day (gross) of NGLs. Phoenix Park is currently implementing a significant
expansion of its facilities.
ASIA PACIFIC
The Company has a 30-year operating history in Indonesia. The focus of
Conoco's effort in the Asia Pacific region is the Company's operations in the
Indonesian sector of the Natuna Sea. In this area, Conoco is the operator of the
Block B and North West Natuna production sharing contracts ("PSCs").
West Natuna Gas Project
Conoco, as operator of the South Natuna Sea Block B PSC, along with the
other participants in Block B and the interest holders in the Block A and Kakap
PSCs, have formed the "West Natuna Group", with the aim of jointly marketing gas
from the West Natuna Area. In April 1997, Pertamina, the Indonesian state-owned
oil and gas company, entered into an agreement with a consortium (led by
Sembawang in Singapore) (the "Singapore Group") pursuant to which the parties
intend to negotiate natural gas purchase and sale agreements for the sale by
Pertamina of natural gas from specified fields in the PSCs operated by the West
Natuna Group (the "West Natuna Gas Project"). Pertamina and the Singapore Group
have now finalized (but not executed) a gas sales agreement. The current term of
the proposed purchase agreement provides for gas deliveries to begin by
mid-2001. The gas would be used for industrial purposes, primarily in power
generation and petrochemical plants, in Singapore.
For the project to proceed certain conditions must be satisfied, including
the completion of the design of a 463 kilometer 28-inch submarine pipeline to
transport the gas from the West Natuna Sea fields to Singapore, completion of
the tariff and offtake arrangements relating to the pipeline, agreement between
the West Natuna Group and Pertamina to gas supply and allocation terms, the
arrangement by the Singapore parties of offtake agreements for the gas, and the
extension of each of the PSCs. The Company has no control over the satisfaction
of these conditions, and there is no assurance that the conditions will be
satisfied or waived by the date required.
Assuming satisfaction of the above stated conditions and successful
negotiation of natural gas agreements among Pertamina and the Singapore Group,
up to one trillion cubic feet of natural gas could be supplied from gas fields
in Block B to the Singapore Group under the letter agreement Pertamina has
signed. First gas deliveries could begin by mid-2001, and the Company believes
Block B's share of production could reach 140 million cubic feet of gas daily.
Until all conditions necessary for project approval are met, no proved reserves
will be attributed to Conoco's interest in the West Natuna Gas Project.
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Belida and Sembilang Fields, Indonesia
Conoco holds a 40 percent interest in and serves as operator of the Belida
and Sembilang oil fields in the Block B PSC. An ongoing infill drilling program
in the Belida Field maintained gross production in the range of 90,000 barrels
per day in 1997.
RUSSIA/CASPIAN SEA
The Company holds a 50 percent direct (plus a 4.7 percent indirect
interest) ownership interest in Polar Lights Company ("Polar Lights"), a Russian
limited liability company established in January 1992. Polar Lights, the first
Russian-Western joint venture to develop a major new oil field, was established
to develop the Ardalin oil field discovered in 1988 by the Russian state
enterprise GP Arkhangelskgeologia. Ardalin is located in the Arctic tundra some
1,000 miles northeast of Moscow. As of December 31, 1997, Conoco's share of
proved reserves is 43 million barrels of petroleum liquids, with an additional
eight million barrels of net proved reserves at the adjacent oil fields -- Kolva
and Dusushev. Polar Lights started producing oil in August 1994 and gross
production has increased from an average 21,000 barrels per day in 1994 to
37,000 barrels per day as of June 30, 1998. Oil is transported through the
existing Russian pipeline system and is then exported or sold on the domestic
market.
In March 1998, Conoco signed a memorandum of understanding with OAO Lukoil
("Lukoil"), Russia's largest oil company, to jointly study the development of
petroleum reserves in the 1.2-million-acre block known as the Northern
Territories in the Timan-Pechora region in Northern Russia, which includes the
large undeveloped Yuzhno Khilchuyu oil field. The memorandum of understanding
followed Lukoil's purchase in December 1997 of the controlling interest in OAO
Arkhangelskgeoldobycha (successor to GP Arkhangelskgeologia), the Company's
original partner in the Northern Territories.
In July 1998, the Company acquired a 15.667 percent interest in OAO
Arkhangelskgeoldobycha for approximately $33 million. OAO Arkhangelskgeoldobycha
owns a 30 percent interest in Polar Lights.
Conoco is also one of several foreign participants with Gazprom, the major
Russian gas company, in a project to assess the feasibility of developing
infrastructure and establishing a market for the extensive gas reserves believed
to be contained in the remote Shtokmanskoye field located in the Barents Sea.
WEST AFRICA
In 1997, Conoco, in partnership with Express Petroleum and Gas Company Ltd.
of Nigeria ("Express"), announced the production of first oil from the shallow
water Ukpokiti field, located offshore in the western Niger delta. Conoco
currently has a 90 percent revenue interest in the field. Total production from
the field is currently 20,000 barrels per day of oil, and Conoco's net proved
reserves as of December 31, 1997 were 13.2 million barrels of oil. Express
operates Ukpokiti with the Company providing technical and operational
assistance in the field's development. Field development included three remote
caisson-type structures, five wells, and the conversion of the Conoco VLCC
tanker "Independence" into a floating production and storage offtake vessel.
With a 1.7 million-barrel storage capacity, the vessel also serves as an export
terminal.
In addition to the Company's interest in the Ukpokiti field, Conoco has a
47.5 percent working interest in the deepwater OPL 220 license off the coast of
Nigeria, which is operated by Conoco and encompasses 600,000 acres. The Company
has acquired a 3D seismic survey and drilled two wells on this license. The
first well, which was drilled in 1997, found only gas and was noncommercial. The
second well was drilled in 1998 and encountered both oil and gas-filled sands.
Conoco and its partner Exxon are currently evaluating results from this second
well so that a decision can be made as to the future work program for the block.
MIDDLE EAST
In Dubai, United Arab Emirates, Conoco has operated four fields since their
discovery between 1966 and 1973. Currently the Company is using horizontal
drilling techniques and advanced reservoir drainage technology to enhance the
efficiency of the offshore production operations and improve recovery rates.
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OIL AND NATURAL GAS RESERVES
The Company's estimated proved reserves at December 31, 1997 were 2.6
billion BOE (consisting of 1,624 million barrels of oil and 5,861 billion cubic
feet of natural gas), up 39 percent from December 31, 1996. This increase
largely reflects reserves associated with the Company's equity interest in
Petrozuata.
Oil and gas proved reserves cannot be measured precisely. Reserve estimates
are based on many factors related to reservoir performance which require
evaluation by engineers interpreting the available data, as well as price and
other economic factors. The reliability of these estimates at any point in time
depends on both the quality and quantity of the technical and economic data, the
production performance of the reservoirs as well as extensive engineering
judgment. Consequently, reserve estimates are subject to revision as additional
data become available during the producing life of a reservoir. When a
commercial reservoir is discovered, proved reserves are initially determined
based on limited data from the first well or wells. Subsequent data may better
define the extent of the reservoir and additional production performance, well
tests and engineering studies will likely improve the reliability of the reserve
estimate. See "Risk Factors -- Uncertainty of Estimates of Proved Reserves."
At the request of the Company, DeGolyer and MacNaughton, independent
petroleum engineering consultants, has carried out an independent evaluation of
selected properties representing approximately 80 percent of the Company's
proved reserves based on present value at December 31, 1997. The results
obtained by DeGolyer and MacNaughton with respect to reserves at December 31,
1997 do not show significant differences from those reported by the Company.
DeGolyer and MacNaughton has delivered to the Company its summary letter report
describing its procedures and conclusions, a copy of which appears as Annex A
hereto. No major discovery or other favorable or adverse event has occurred
since December 31, 1997 that would cause a significant change in the estimated
proved reserves as of that date.
The following table sets forth by region the Company's proved oil reserves
at year-end for the past five years:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ------
(MILLIONS OF BARRELS)
<S> <C> <C> <C> <C> <C>
PROVED OIL RESERVES(1)
COMBINED COMPANIES
United States.............................................. 344 336 294 299 277
Europe..................................................... 390 394 408 413 421
Other regions.............................................. 230 223 231 214 195
--- --- --- --- ------
Worldwide........................................ 964 953 933 926 893
SHARE OF EQUITY AFFILIATE RESERVES
Europe..................................................... 19 35 44 47 51
Other regions(2)........................................... -- -- -- -- 680
--- --- --- --- ------
Total oil reserves............................... 983 988 977 973 1,624
=== === === === ======
</TABLE>
- ---------------
(1) Oil reserves comprise crude oil, condensate and NGLs expected to be removed
for the Company's account from its natural gas production.
(2) Represents the Company's equity share of the Petrozuata venture in
Venezuela.
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The following table sets forth the Company's natural gas reserves at
year-end for the past five years by region:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1993 1994 1995 1996 1997
----- ----- ----- ----- -----
(BILLIONS OF CUBIC FEET)
<S> <C> <C> <C> <C> <C>
PROVED NATURAL GAS RESERVES
COMBINED COMPANIES
United States.......................................... 1,802 1,749 1,891 1,822 2,235
Europe................................................. 1,752 2,431 2,649 3,068 3,060
Other regions.......................................... 126 150 169 173 196
----- ----- ----- ----- -----
Worldwide.................................... 3,680 4,330 4,709 5,063 5,491
SHARE OF EQUITY AFFILIATE RESERVES
United States.......................................... 291 344 339 333 370
----- ----- ----- ----- -----
Total natural gas reserves................... 3,971 4,674 5,048 5,396 5,861
===== ===== ===== ===== =====
</TABLE>
PRODUCTION DATA
The Company's oil and natural gas production averaged 654,000 BOE per day
in 1997, compared with 656,000 BOE per day in 1996. As a percentage of total
production, natural gas production was 31 percent in 1997 and 1996.
The table below shows the Company's interests in average daily oil
production and natural gas production for the past three years. Oil production
comprises crude oil and condensate produced for the Company's account, plus its
share of NGLs removed from natural gas production from owned leases and NGLs
acquired through gas plant ownership. Natural gas production represents the
Company's share of production from leases in which the Company has an ownership
interest.
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- -----
(THOUSANDS OF BARRELS
PER DAY)
<S> <C> <C> <C>
AVERAGE DAILY OIL PRODUCTION
COMBINED COMPANIES
Crude Oil, Condensate, and Natural Gas Liquids from
Owned Reserves:
United States........................................ 93 91 90
Europe............................................... 143 182 176
Other Regions........................................ 98 88 92
----- ----- -----
Subtotal.......................................... 334 361 358
Natural Gas Liquids from Gas Plant Ownership:
United States........................................ 65 67 66
----- ----- -----
Total Production.................................. 399 428 424
SHARE OF EQUITY AFFILIATES
Crude Oil, Condensate, and Natural Gas Liquids from
Owned Reserves........................................ 12 13 16
Natural Gas Liquids from Gas Plant Ownership........... 13 13 13
----- ----- -----
Total Production Equity Affiliates................ 25 26 29
----- ----- -----
Total Oil Production Per Day...................... 424 454 453
===== ===== =====
</TABLE>
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<PAGE> 247
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
(MILLIONS OF CUBIC FEET
PER DAY)
<S> <C> <C> <C>
AVERAGE DAILY NATURAL GAS PRODUCTION
COMBINED COMPANIES
Natural Gas from Owned Reserves:
United States........................................ 740 738 709
Europe............................................... 341 416 432
Other Regions........................................ 31 41 46
----- ----- -----
Total Deliveries.................................. 1,112 1,195 1,187
SHARE OF EQUITY AFFILIATES
Natural Gas from Owned Reserves:
United States........................................ 14 16 16
----- ----- -----
Total Natural Gas Production Per Day.............. 1,126 1,211 1,203
===== ===== =====
</TABLE>
See pages F-33 and F-34 for the annual production volumes of oil (crude
oil, condensate and natural gas liquids) and natural gas from proved reserves.
Proved oil production volumes exclude natural gas liquids from plant ownership.
PRODUCTION COST DATA
The following table sets forth the Company's average production costs per
BOE produced, average sales prices per barrel of crude oil and condensate sold
and average sales prices per MCF of natural gas sold, for the three-year period
ended December 31, 1997.
<TABLE>
<CAPTION>
TOTAL UNITED OTHER
WORLDWIDE STATES EUROPE REGIONS
--------- ------ ------ -------
(UNITED STATES DOLLARS)(1)
<S> <C> <C> <C> <C>
For the year ended December 31, 1997
Average production costs per barrel of oil equivalent
of petroleum produced(2)............................ $ 4.21 $ 4.23 $ 4.51 $ 3.40
Average sales prices of produced petroleum(3)
Per barrel of crude oil and condensate sold......... 18.58 17.93 18.93 18.35
Per MCF of natural gas sold......................... 2.51 2.34 3.25 1.41
For the year ended December 31, 1996
Average production costs per barrel of oil equivalent
of petroleum produced(2)............................ 3.84 4.11 4.13 2.50
Average sales prices of produced petroleum(3) Per
barrel of crude oil and condensate sold............. 20.11 18.68 20.94 19.47
Per MCF of natural gas sold......................... 2.21 1.90 2.92 1.24
For the year ended December 31, 1995
Average production costs per barrel of oil equivalent
of petroleum produced(2)............................ 3.92 3.78 4.82 2.49
Average sales prices of produced petroleum(3) Per
barrel of crude oil and condensate sold............. 16.52 15.53 16.95 16.56
Per MCF of natural gas sold......................... 1.86 1.44 2.96 1.13
</TABLE>
- ---------------
(1) Excludes the Company's share of equity affiliates.
(2) Average production costs per barrel of equivalent liquids, with natural gas
converted to liquids at a ratio of 6,000 cubic feet of gas to one barrel of
liquid.
(3) Excludes proceeds from sales of interest in oil and gas properties.
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<PAGE> 248
DRILLING AND PRODUCTIVE WELLS
The following table sets forth the Company's drilling wells and productive
wells by region as of December 31, 1997.
<TABLE>
<CAPTION>
TOTAL UNITED OTHER
WORLDWIDE STATES EUROPE REGIONS
--------- ------ ------ -------
(NUMBER OF WELLS)
<S> <C> <C> <C> <C> <C>
Number of wells drilling(1)(3)
Gross.................................................... 33 15 13 5
Net...................................................... 14 9 3 2
Number of productive wells(2)(3)
Oil
wells -- gross....................................... 7,761 7,173 278 310
-- net......................................... 2,657 2,523 26 108
Gas wells -- gross....................................... 8,749 8,486 169 94
-- net......................................... 4,210 4,089 33 88
</TABLE>
- ---------------
(1) Includes wells being completed.
(2) Approximately 80 gross (27 net) oil wells and 757 gross (271 net) gas wells,
all in the United States, have multiple completions.
(3) Excludes the Company's share of equity affiliates.
DRILLING ACTIVITY
The following table sets forth the Company's net exploratory and
development wells drilled by region for the three-year period ended December 31,
1997.
<TABLE>
<CAPTION>
TOTAL UNITED OTHER
WORLDWIDE STATES EUROPE REGIONS
--------- ------ ------ -------
(NUMBER OF NET WELLS COMPLETED)
<S> <C> <C> <C> <C> <C>
For the year ended December 31, 1997(1)
Exploratory -- productive............................... 7.1 3.7 1.6 1.8
-- dry...................................... 18.4 11.7 4.9 1.8
Development -- productive............................... 142.6 126.9 5.4 10.3
-- dry...................................... 10.2 7.2 0.0 3.0
For the year ended December 31, 1996(1)
Exploratory -- productive............................... 42.8 1.6 2.0 39.2
-- dry...................................... 20.5 10.3 4.0 6.2
Development -- productive............................... 89.9 73.1 6.1 10.7
-- dry...................................... 17.3 13.5 0.3 3.5
For the year ended December 31, 1995(1)
Exploratory -- productive............................... 34.2 12.8 1.4 20.0
-- dry...................................... 38.2 22.1 4.9 11.2
Development -- productive............................... 109.5 94.3 8.0 7.2
-- dry...................................... 13.7 10.7 0.0 3.0
</TABLE>
- ---------------
(1) Excludes the Company's share of equity affiliates.
69
<PAGE> 249
DEVELOPED AND UNDEVELOPED PETROLEUM ACREAGE
The following table sets forth the Company's developed and undeveloped
petroleum acreage by region as of December 31, 1997.
<TABLE>
<CAPTION>
TOTAL UNITED OTHER
WORLDWIDE STATES EUROPE REGIONS
--------- ------ ------ -------
(THOUSANDS OF ACRES)
<S> <C> <C> <C> <C>
Developed acreage(1)
Gross.................................................. 7,555 2,663 1,129 3,763
Net.................................................... 3,341 1,559 317 1,465
Undeveloped acreage(1)
Gross.................................................. 108,803 2,749 4,984 101,070
Net.................................................... 80,017 2,103 1,648 76,266
</TABLE>
- ---------------
(1) Excludes the Company's share of equity affiliates.
The Company is not required to file, and has not filed on a recurring
basis, estimates of its total proved net oil and gas reserves with any U.S. or
non-U.S. governmental regulatory authority or agency other than the Department
of Energy (the "DOE") and the Securities and Exchange Commission (the
"Commission"). The estimates furnished to the DOE have been consistent with
those furnished to the Commission. They are not necessarily directly comparable,
however, due to special DOE reporting requirements such as requirements to
report in some instances on a gross, net or total operator basis, and
requirements to report in terms of smaller units. In no instance have the
estimates for the DOE differed by more than five percent from the corresponding
estimates reflected in total reserves reported to the Commission.
DOWNSTREAM
SUMMARY
Downstream operations encompass refining crude oil and other feedstocks
into petroleum products, buying and selling crude oil and refined products and
transporting, distributing and marketing petroleum products. Downstream
operations are organized regionally with operations in North America, Europe and
the Asia Pacific region. North American and European operations provided 60
percent and 46 percent, respectively, of total Downstream earnings in 1997,
partially offset by a small loss resulting from start-up activities in Asia
Pacific. Downstream's objective is to continue to provide an appropriate return
on investment by improving the competitiveness of the core business, while
providing free cash flow to fund growth in new Downstream businesses, as well as
elsewhere within the Company.
Conoco has made capital investments in Downstream activities averaging
approximately $617 million per year for the last three years. 1998 capital
investments in Downstream activities are also expected to be approximately $600
million.
Downstream's strengths are in processing heavy, high sulfur and acidic
crudes, upgrading bottom-of-the-barrel feedstocks via coking technology, running
low-cost, high-volume retail marketing operations and developing specialty
products. Approximately 50 percent of the Company's worldwide refining capacity
is designed to process heavy, high sulfur crude. The Humber refinery in the
United Kingdom can process about 44 percent acidic crudes in its crude slate.
The Company has applied its coking technology to nearly all of its refining
operations throughout the world. This has enabled the Company to become a world
leader in producing petroleum coke products, such as high-value graphite and
anode coke, which are used in the production of electrodes for the steel and
aluminum industries. Conoco has also licensed its fuel coking technology around
the world, which has in turn created other business development opportunities.
The Company produces and markets a full range of refined petroleum
products, including gasolines, diesel fuels, heating oils, aviation fuels, heavy
fuel oils, asphalts, lubricants, petroleum coke products and petrochemical
feedstocks. The Company owns and operates, or is a partner in the operation of,
nine refineries worldwide with a total crude and condensate capacity of 799,000
barrels per calendar day (including the new
70
<PAGE> 250
Melaka refinery, which Conoco expects will be completed in the fourth quarter of
1998). Upon completion of Melaka, refining capacity will be distributed 62
percent in the United States, 33 percent in Europe and five percent in the Asia
Pacific region. Capacity has risen by over 175,000 barrels per day, or 29
percent, since year end 1995 as a result of the expansion of the Lake Charles
refinery, the upgrade of the Humber refinery, and the acquisition of its
interest in two refineries in the Czech Republic. In the United States, the
Company primarily markets through low-cost wholesale operations. The Company has
a growing marketing presence in Europe and Asia Pacific, where it is a leader in
operating low-cost, high-volume retail stations. In the first half of 1998,
refined product sales averaged 984,000 barrels per day, distributed 67 percent,
32 percent and 1 percent in the United States, Europe and the Asia Pacific
region, respectively.
NORTH AMERICA
Conoco's four U.S. refineries are fully integrated, high conversion
facilities, with design capacity to process over 50 percent high sulfur crude
oils, much of which is also heavy crude. A principal factor affecting the
profitability of the Company's North American operations is the price of refined
products in relation to the cost of crude oils and other feedstocks processed.
Because the Company is able to process a relatively large portion of heavy, high
sulfur crude oil, the cost advantage of these crude oils (such as those from
Mexico, Venezuela and Canada) over lighter, low sulfur crude oils (such as West
Texas Intermediate) is particularly significant. Over half of Conoco's U.S.
refining capacity is located in inland markets and therefore benefits from the
price differential for products produced and sold inland versus those produced
and sold on the Gulf Coast.
Integration of refining, transportation and marketing, and continuous
improvement initiatives, have resulted in increased profitability from
improvements in refinery reliability, utilization, product yield, and energy
usage. Since 1993, the Company has increased refining input at its four U.S.
refineries by 20 percent, while lowering average operating expenses by
approximately $1.70 per barrel of refinery input. The Company has improved
market share through geographic concentration of markets.
The Company intends to limit ongoing capital investments in Downstream
North America to a level that is less than half of Downstream North America's
operating cash flow for ongoing capital expenditures, excluding large,
non-discretionary, regulatory-driven projects and selected growth projects.
Capital expenditures for North America were approximately $227 million in 1997
and are expected to decline to approximately $170 million in 1998, reflecting
the completion of major projects. The Company is positioned to make the
necessary clean fuels investments at its refineries over the next five years in
support of changing motor fuel specifications. The Company also plans to make
investments at the Lake Charles refinery to facilitate processing of Petrozuata
Synthetic Crude.
Refining
The Company operates four wholly owned refineries in the United States. The
following tables outline the rated crude and condensate distillation capacity as
of December 31 for each of the past five years, and the average daily crude,
condensate and other inputs for each of the past five years.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(THOUSANDS OF BARRELS PER DAY)
<S> <C> <C> <C> <C> <C> <C>
REFINERY CRUDE AND CONDENSATE CAPACITY
Lake Charles, Louisiana................................... 175 182 191 226 226
Ponca City, Oklahoma...................................... 140 140 150 155 155 (1)
Denver, Colorado.......................................... 58 58 58 58 58
Billings, Montana......................................... 49 49 49 52 52
--- --- --- --- ---
Total........................................... 422 429 448 491 491
=== === === === ===
</TABLE>
- ---------------
(1) Subsequent to December 31, 1997, capacity has been upgraded to 160,000
barrels per day.
71
<PAGE> 251
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(THOUSANDS OF BARRELS PER DAY)
<S> <C> <C> <C> <C> <C>
REFINERY INPUTS(1)
Lake Charles, Louisiana
Crude and condensate(2)................................ 165 183 179 177 211
Other feedstocks....................................... 21 24 23 21 23
Ponca City, Oklahoma
Crude and condensate(2)................................ 135 144 151 150 161
Other feedstocks....................................... 3 2 5 2 2
Denver, Colorado
Crude and condensate(2)................................ 46 47 49 49 53
Other feedstocks....................................... 0 0 0 0 0
Billings, Montana
Crude and condensate(2)................................ 45 48 45 51 51
Other feedstocks....................................... 4 3 3 3 3
Total crude and condensate........................ 391 422 424 426 476
Total other feedstocks............................ 28 30 31 26 27
</TABLE>
- ---------------
(1) This table includes feedstocks in addition to crude and condensate on which
rated capacity is based.
(2) This table includes actual crude and condensate runs, which may exceed rated
capacity.
The Company's U.S. consolidated refined product yields by volume in 1997
were 46 percent motor gasoline, 40 percent middle distillates, including jet and
diesel fuel, 4 percent residual fuel oil and asphalt and 10 percent other
products, including petroleum coke, lubricants and liquefied petroleum gases.
Lake Charles Refinery and Related Facilities
The Company's Lake Charles refinery, located in Westlake, Louisiana, has a
crude capacity of 226,000 barrels per day and processes both heavy, high sulfur
crude oil and low sulfur crude oil. The refinery's Gulf Coast location provides
access to numerous cost-effective domestic and international crude oil sources.
The crude design capacity is approximately 56,000 barrels per day of local,
domestically supplied low sulfur crudes, with the remaining 170,000 barrels per
day being heavy, high sulfur crudes. While the types and origins of these lower
priced, heavy, high sulfur crudes can vary, the majority consists of Venezuelan
and Mexican crudes delivered via tanker. The Lake Charles refinery products can
be delivered by truck, rail or into major common carrier products pipelines
partially owned by the Company which serve the Eastern and Mid-continent United
States. In addition, refinery products can be sold into export markets through
the refinery's marine terminal.
The ability to refine both low-sulfur and heavy high sulfur crudes at the
Lake Charles refinery provides a competitive advantage to the Company by
enabling the refinery to produce from relatively low-cost feedstocks a full
range of products including LPG, gasolines, jet fuel, diesel fuel, petroleum
coke, lube oils and other specialty products. The refinery facilities include
fluid catalytic cracking, delayed coking and hydrodesulfurization units which
enable it to maximize the upgrade from the heavier crudes. A crude unit
expansion and a new catalytic reformer were completed in conjunction with the
Excel Paralubes project to take advantage of synergies generated between the two
facilities. The Company is making investments in the Lake Charles refinery so
that, in the future, it will be able to process Petrozuata Synthetic Crude.
Integration of fuels and specialty products plays an important role in
maximizing product value at the refinery. Intermediates produced from low-sulfur
crude processing allow the refinery to supply the heaviest, highest boiling
range material in the crude to the Cit-Con lube plant (owned by a 35
percent-owned equity affiliate of Conoco) for base oils, finished lubes and wax
production. Other intermediates are exchanged with a neighboring chemical plant
complex for further processing.
72
<PAGE> 252
The refinery supplies high sulfur gas oil to Excel Paralubes (a 50/50 joint
venture between the Company and Pennzoil) which owns a hydrocracked lubricating
base oil facility. Excel Paralubes's state-of-the-art lube oil facility produces
nearly 17,000 barrels per day of high quality hydrocracked base oils,
representing approximately 10 percent of U.S. lubricating base oil production.
Hydrocracked base oils are second in quality only to synthetic base oils, but
are produced at a much lower cost. The refinery produces other specialty
intermediates for making solvents to supply the recently formed Penreco joint
venture company (also a joint venture with Pennzoil). Penreco manufactures and
markets highly refined specialty petroleum products for global markets.
The Lake Charles facilities also include a specialty coker and calciner
that manufacture the more highly valued graphite and anode petroleum cokes for
the steel and aluminum industries, and provide a substantial increase in light
oils production by converting the heaviest part of the heavy high sulfur crude
barrel into diesel fuel and gasoline. In addition, green petroleum coke is
supplied to a nearby coke calcining venture.
Ponca City Refinery
The Company's refinery located in Ponca City, Oklahoma, recently increased
its crude capacity to 160,000 barrels per day of light, high sulfur and light,
low sulfur crudes. Both foreign and domestic crudes are delivered by pipeline
from offshore, Oklahoma, Kansas, and North and West Texas fields. Finished
products are shipped by truck, rail and Company-owned and common carrier
pipelines to markets throughout the Mid-continent region.
The Ponca City refinery is a fully integrated, high-conversion facility
that produces a full range of products, including LPG, gasoline, jet fuel,
diesel and anode and fuel grade petroleum cokes. The refinery's facilities
include fluid catalytic cracking, delayed coking and hydrodesulfurization units
which enable it to produce high ratios of gasoline and diesel fuel from crude
oil.
Denver Refinery
The Company's Denver refinery, located in Commerce City, Colorado, has a
crude capacity of 58,000 barrels per day, processing a mixture of Canadian
heavy, high sulfur crudes, and domestic heavy, high sulfur crude oils and low
sulfur crude oils. Almost all crude oil processed at the refinery is transported
via pipeline. Products are delivered predominantly through a local truck loading
terminal to the east side of the Rockies but also by rail and pipelines to other
Colorado markets. The refined gasoline products from the Denver refinery help
supply the Company's marketing operations in the Rocky Mountain states.
The Denver refinery is a fully integrated refinery that produces a full
range of products including gasolines, jet fuels, diesel and asphalt. The
refinery's upgrading units enable it to process a crude slate containing nearly
50 percent heavy, high sulfur crude. The Company has a processing agreement with
a refinery located in Cheyenne, Wyoming, that has coking capabilities from which
the refinery receives intermediate feedstocks for processing into finished
products. The Denver refinery also supplies KC Asphalt (a 50/50 joint venture
between the Company and Koch Industries) with high quality asphalt products.
Both of these ventures enable the Company to turn relatively low value
intermediates into higher margin products.
Billings Refinery
The Company's Billings, Montana refinery has a crude capacity of 52,000
barrels per day, processing a mixture of over 80 percent Canadian heavy, high
sulfur crude plus domestic high sulfur and low sulfur crude oils all delivered
by pipeline. Products from the refinery are delivered via Company-owned
pipelines, rail, and trucks, supplying the Company's extensive branded marketing
in Eastern Washington and the Northern Rocky Mountain states. The refinery's
proximity to its primary source of crude and its ability to refine both low
sulfur and heavy-sulfur crudes provide the Company with significant competitive
advantages.
The Billings refinery is a fully integrated refinery that produces a full
range of products including gasolines, jet fuels, diesel and fuel grade
petroleum coke. The Billings refinery has a very high conversion rate and the
capability to process less expensive, very heavy high sulfur crudes. A delayed
coker converts heavy,
73
<PAGE> 253
high sulfur resid into higher value light oils. A gas oil hydrotreating unit and
hydrogen plant improve the light oil production yields and remove the additional
sulfur contained in these heavy, high sulfur crudes.
Marketing
In the United States, the Company markets gasoline, utilizing the Conoco
brand, in 33 states (20 of which represent primary markets), in the Southeast,
Mid-continent and Rocky Mountain regions. Market growth continues to be targeted
to those areas where the Company can obtain a strong market share and
geographical areas that leverage supply from the U.S. refineries and
distribution systems in which the Company has an ownership position. Increasing
operating market share has resulted in particularly strong brand recognition in
the Rocky Mountain and Mid-continent markets.
Conoco branded gasoline is sold through approximately 4,900 branded
stations in the United States, 84 percent through retail outlets owned by
independent wholesale marketers and 16 percent through 295 Company-owned stores
at year end 1997. The Company markets gasoline primarily through the wholesale
channel in the United States because it requires a lower capital investment than
retail but still provides a secure, branded outlet for the Company's products.
The Company also operates retail stations to establish brand standards and image
as well as to better understand the independent distributors in order to provide
programs and services to them and to the consumer. Building on this knowledge,
the Company has recently introduced "breakplace(R)," a new concept in
convenience store design. This new format, involving the complete redesign of an
outlet's exterior and interior, is designed to increase the frequency and
transaction size of customer visits by catering to the needs of the "convenience
connoisseur." There were 21 breakplace(R) locations as of May 31, 1998, and the
Company is licensing the trademark to marketers. Many more stores in the network
have adopted comprehensive offerings patterned after the format, thereby
supporting wholesale marketing and elevating the Company's brand perception to
the consumer.
At year-end 1997, CFJ Properties, a 50/50 joint venture between the Company
and Flying J, owned and operated 78 truck travel plazas that carry both the
Conoco and Flying J brands and provide a secure outlet for the Company's diesel
production. In addition, bulk sales of all refined petroleum products are made
to commercial, industrial and spot market customers.
Transportation
Conoco has approximately 6,500 miles of crude and product mainline
pipelines in the United States, including those partially owned and/or operated
by affiliates. The Company also owns and operates 37 finished product terminals,
six liquified petroleum gas terminals, one crude terminal and one coke-exporting
facility. The Company's crude pipeline interests and terminals provide integral
logistical links between crude sources and refineries to lower crude costs. The
product pipelines serve as secure links between refineries and key products
markets. In 1997, the Company had a 87 percent utilization rate in its pipelines
and a 68 percent utilization in its crude/product terminals. The Company has
historically had one of the highest pipeline utilization rates in industry
benchmarking studies. The Company's U.S. pipeline system transported an average
of 914,000 barrels per day in 1997. The Company's equity share of shipments on
affiliate pipelines was an additional 363,000 barrels per day.
The Company currently operates a fleet of seven crude oil tankers,
principally of Liberian registry, including five double hulled tankers. By the
end of 1998, the Company plans to operate a 100 percent double-hulled tanker
fleet in United States waters. Four vessels are used to provide secure
transportation to the Lake Charles refinery, two others are in use in the Asia
Pacific market and another is on lease to a third party for use as a shuttle
tanker for the Heidrun field in the North Sea, in which Conoco has an interest.
An eighth vessel is being used as a floating production storage and offtake
vessel off the coast of Nigeria. Two additional double-hulled tankers are
currently under construction and will be joining the fleet in the Gulf of Mexico
in 1999.
74
<PAGE> 254
EUROPE
The Company's European refining and marketing activities include operations
in 17 countries, primarily in the United Kingdom and Germany. These two markets
accounted for 92 percent of the Company's European Downstream after-tax earnings
in 1997. The Company also has marketing operations in Austria, Belgium, Denmark,
Finland, France, Luxembourg, Norway, Sweden, and Switzerland. More recently it
has entered the faster growing markets of the Czech Republic, Hungary, Poland,
Slovakia, Spain and Turkey. The marketing operations in Central and Eastern
Europe and Turkey are complemented by a minority interest in two refineries in
the Czech Republic.
The Company's European Downstream strategy has been to operate low cost,
high volume retail outlets in selected key markets where the Company has a
competitive advantage, pursue opportunities in growth regions, and maintain its
Humber refinery and the MiRO joint venture refinery, in the United Kingdom and
Germany, respectively, as top performers in Europe. The Company plans to
redirect cash generated in its mature European businesses to other parts of
Upstream and Downstream operations and to the identified European growth
markets.
The Company has invested an average of $232 million per year over the past
five years in its Downstream European operations and expects to invest a similar
amount in 1998. The Company continues to implement relatively low-cost projects
in its refining operations designed to increase production and yields, while
reducing feedstock costs and operating expenses. The Company plans to continue
to direct capital expenditures for marketing operations, which are expected to
be approximately 50 percent of the European Downstream total capital
expenditures, toward construction of new stations in growth markets, primarily
in Central and Eastern Europe, but also in its areas of competitive strength in
Germany, Austria and the Nordic countries.
The Company's European Downstream profitability is affected by several
factors. As with all refining operations, the difference between the market
price of refined products and the cost of crude oil is the major factor. The
Company has strengths in its European refineries because it is able to process
lower cost crudes or upgrade other feedstocks into high value finished products.
In addition, since the United Kingdom refinery also processes fuel oil as a
feedstock, the price difference between low sulfur fuel oil and finished
products is important to earnings. European operations also include significant
retail marketing volumes and therefore earnings are driven by retail margins,
fuel and convenience product sales and operating expenses in the various
countries where the Company operates.
Refining
The Company's principal European refining operations are located in the
United Kingdom, Germany, and the Czech Republic. Since early 1996, the expansion
of the Company's Humber refinery in the United Kingdom, the formation of the
MiRO joint venture through consolidation with a neighboring German refinery and
the purchase of a share in a joint venture owning two Czech Republic refineries
have increased the Company's European crude refining capacity by approximately
52 percent (90,000 barrels per day). The Company has continuously upgraded its
refineries in Europe since the early 1990s and the configuration and output of
its refineries are two of the Company's primary sources of competitive
advantage. In 1996, the United Kingdom and German refineries ranked in the first
quartile of Western European refineries for financial and operating performance
(in the net margin, return on investment, processing efficiency and volumetric
expansion categories) as ranked by Solomon Associates, an independent
benchmarking company.
The Company has undertaken a major capital investment program totaling $449
million from 1993 through 1997 to process lower cost feedstocks and increase
conversion capacity, product quality and energy efficiency at the Humber
refinery. The Company plans to make approximately $46 million in capital
expenditures at the refinery in 1998 in order to continue to improve reliability
and efficiency. The Company is also participating in upgrading projects at its
joint venture owned refineries in Germany and the Czech Republic. In addition,
the Company intends to continue to invest to ensure that its European refineries
are capable of manufacturing products meeting European clean fuels
specifications.
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<PAGE> 255
The following tables outline the rated crude and condensate distillation
capacity as of December 31 for each of the past five years and the annual
average daily crude and condensate and other inputs for each of the past five
years.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(THOUSANDS OF BARRELS PER DAY)
<S> <C> <C> <C> <C> <C>
REFINERY CRUDE AND CONDENSATE CAPACITY
Humber Refinery, United Kingdom .......................... 130 130 130 180 180
MiRO Refinery, Germany(1)................................. 43 43 43 43 54
Czech Republic(2)......................................... -- -- -- 29 29
--- --- --- --- ---
Total(3).......................................... 173 173 173 252 263
=== === === === ===
</TABLE>
- ---------------
(1) The 1997 figure represents the Company's 18.75 percent interest in the MiRO
refinery complex at Karlsruhe, Germany. For the years 1996 and earlier,
Conoco's interest was 25 percent of the OMW refinery.
(2) Represents the Company's 16.33 percent interest in two Czech Republic
refineries.
(3) Does not include the Company's indirect 1.2 percent interest in a 95,000
barrel per day refinery in Mersin, Turkey acquired as a result of the
Company's marketing joint venture in Turkey.
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(THOUSANDS OF BARRELS PER DAY)
<S> <C> <C> <C> <C> <C>
REFINERY INPUTS(1)
Humber, United Kingdom(3)
Crude and condensate(2)................................ 131 125 133 121 137
Other feedstocks....................................... 62 59 74 76 56
MiRO, Germany(4)
Crude and condensate(2)................................ 46 46 46 47 51
Other feedstocks....................................... 16 15 13 13 11
Czech Republic(5)
Crude and condensate(2)................................ -- -- -- 22 21
Other feedstocks....................................... -- -- -- 1 1
Total crude and condensate(6)..................... 177 171 179 190 209
Total other feedstocks............................ 78 74 87 90 68
</TABLE>
- ---------------
(1) This table includes feedstocks in addition to crude and condensate on which
rated capacity is based.
(2) This table includes actual crude and condensate runs, which may exceed rated
capacity.
(3) The tie-in of a major expansion project and a major refinery maintenance
turnaround significantly affected the Humber Refinery's utilization in 1996
and 1997, respectively.
(4) The 1997 figure represents the Company's 18.75 percent interest in the MiRO
refinery complex at Karlsruhe, Germany. For the year 1996 and earlier years,
Conoco's interest was 25 percent of the OMW refinery.
(5) Represents the Company's 16.33 percent interest in two refineries in the
Czech Republic.
(6) Does not include the Company's 1.2 percent interest in a 95,000 barrel per
day refinery in Mersin, Turkey.
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<PAGE> 256
The yield of the Company's European refineries by product and country for
the year ended December 31, 1997, was as follows:
<TABLE>
<CAPTION>
UNITED CZECH
KINGDOM(1) GERMANY(2) REPUBLIC(3)
---------- ---------- -----------
<S> <C> <C> <C>
PERCENT OF TOTAL YIELD
Motor gasoline.................................... 38 43 22
Middle distillate................................. 41 38 35
Residual fuel oil and asphalt..................... 9 13 21
Other(1).......................................... 12 6 22
</TABLE>
- ---------------
(1) Other products primarily include petroleum coke, lubricants and liquefied
petroleum gases.
United Kingdom Refinery
The Company's wholly owned Humber refinery is located in North
Lincolnshire, England, and has a crude and condensate capacity of 180,000
barrels per day. Crude processed at the refinery is exclusively low-sulfur, and
is supplied primarily from the North Sea and includes lower cost, acidic crudes.
The refinery also processes up to 60,000 barrels per day of other intermediate
feedstocks, mostly vacuum gasoils and resid, which many other European
refineries are not able to process. The refinery's location on the east coast of
England provides for cost-effective North Sea crude imports and product exports
to European and world markets. The Humber refinery, one of the most
sophisticated refineries in Europe, is a full conversion refinery that produces
a full slate of light products and minimal fuel oil. The Company recently
increased crude capacity at the refinery and added a vacuum unit which allows
the refinery to process up to 80,000 barrels per day of the less expensive,
acidic North Sea crudes. The refinery also has two coking units with associated
calcining plants, which upgrade the heavy "bottoms" and imported feedstocks into
light oil products and high value graphite and anode petroleum cokes.
Approximately 50 percent of the light oils produced in the refinery are marketed
in the United Kingdom while the other products are sent to the rest of Europe
and the United States. This gives the refinery the flexibility to take full
advantage of inland and global export market opportunities.
Germany Refinery
The Mineraloel Raffinerie Oberrhein GmbH ("MiRO") refinery in Karlsruhe,
Germany, is a joint venture refinery with a crude and condensate capacity of
288,000 barrels per day. The MiRO joint venture arose from the combination in
1996, of the existing OMW refinery, in which the Company had a 25 percent share,
with an adjacent Esso refinery. The Company has an 18.75 percent interest in
MiRO and the Company's capacity share is 54,000 barrels per day. The other
owners of MiRO are DEA Mineraloel AG, Esso AG and Ruhr Oel GmbH (a 50/50 joint
venture between Veba and PDVSA). Approximately 55 percent of the refinery's
crude feedstock is low cost, high sulfur crude. The MiRO refinery complex is a
full upgrading refinery producing gasoline, middle distillates, residual fuel
oil and other products. The refinery has a high capacity to convert lower cost
feedstocks into high value products primarily with a fluid catalytic cracker and
delayed coker. The coker produces both fuel grade and specialty calcined cokes.
The creation of the MiRO joint venture has improved the refinery's
competitiveness and was driven by the synergy that existed between the two
facilities. Integrated operations have yielded improved product slates, which
better match local demand, and increased processing efficiency, while retaining
operational flexibility for the partners. The refinery processes crude and
feedstock supplied by each of the partners in proportion to their respective
ownership interests. Streamlining the two operations has allowed the Company to
eliminate less efficient processing units in both refineries, resulting in lower
operating costs.
Czech Republic Refineries
In late 1995, the Company, through participation in the newly formed Czech
Refining Company ("CRC"), acquired an interest in two refineries in the Czech
Republic. The other owners of CRC are
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Unipetrol A.S., AgipPetroli, and Shell Overseas Investment B.V. The refinery at
Litvinov has a crude and condensate capacity of 109,800 barrels per day, and the
Kralupy refinery has a crude and condensate capacity of 67,500 barrels per day.
The Company's effective 16.33 percent ownership share of the combined capacity
is 29,000 barrels per day. Both refineries process mostly high sulfur crude,
with a large portion being Russian export blend delivered by pipeline at an
advantageous cost. The refineries have an alternative crude supply via a
pipeline from the Mediterranean.
The Company expects that completion of a visbreaker project at the Litvinov
refinery scheduled for the year 2000 will increase conversion rates and
significantly reduce fuel oil production. The Kralupy refinery is currently a
hydroskimming facility, but CRC is currently planning investment in major
conversion facilities, to reduce fuel oil production and increase light oil
yields. The two Czech refineries are operated as a single entity with
intermediate streams moving between the two facilities. CRC markets finished
products both inland and abroad. The Company intends to use its share of the
light oil production to support an expanding retail marketing network in Central
and Eastern Europe.
Marketing
The Company has marketing operations in 17 European countries. The
Company's European marketing strategy is to sell primarily through owned, leased
or joint venture retail sites using a low cost, high volume, low price strategy.
The Company intends to expand into identified growing markets, while
concurrently strengthening its market share in core markets such as Germany,
Austria and the Nordic countries. The Company is standardizing its European
retail operations in order to capture cost savings and prepare for a more
integrated Europe. The Company is continuing to reduce its cost structure for
marketing activities while also optimizing the growing income in the non-fuels
sector. The Company also markets aviation fuels, liquid petroleum gases, heating
oils, transportation fuels and marine bunkers to commercial accounts and into
the bulk or spot market.
The Company uses the "Jet" brand name to market its retail products in its
wholly owned operations in Austria, Czech Republic, Denmark, Finland, Germany,
Hungary, Norway, Poland, Slovakia, Sweden and the United Kingdom. In Belgium and
Luxembourg, it markets under the "Seca" brand. Stations throughout Europe also
display the "Conoco" brand. In addition, various joint ventures in which the
Company has an equity interest market products in Spain, Switzerland and Turkey
under the "Jet", "OK Co-op" and "Tabas" or "Turkpetrol" brand names,
respectively.
As of December 31, 1997, the Company had 1,968 branded marketing outlets in
its wholly owned European operations, of which 1,386 were Company-owned. Through
its joint venture operations in Turkey, Spain and Switzerland, the Company also
has an interest in another 928 retail sites. The largest branded site networks
are in Germany and the United Kingdom, which account for 63 percent of the total
net branded units. In Germany and Austria, where the Company has its biggest
network, 25 outlets were added during 1997. In the Nordic countries, the Company
has expanded from its base of unmanned sites in Sweden and Denmark into Norway
and Finland with 22 new stations in the last two years, bringing the total to
244 stations in the region. In response to weak fuel margins in the United
Kingdom over the past several years, the Company has restructured its operations
there, reducing the number of stations and focusing on locations where the
Company has a competitive advantage. The Company is continuing to reduce its
unit breakeven cost structure in the United Kingdom and is simultaneously
investing to take advantage of the growing income in the non-fuels sector.
The Company has been expanding in targeted growth markets in Central and
Eastern Europe (Czech Republic, Poland, Hungary and Slovakia) and has added 30
stations in the last year for a total of 101 stations at December 31, 1997. The
Company expects to continue this expansion in order to capture the demand growth
and rising margins expected in these inland markets. This marketing expansion
allows the Company to obtain further integration with products produced at the
Czech refineries. Similarly, the Company has invested in the growing markets of
Spain and Turkey where at the end of 1997 it had an interest, through its joint
ventures, in 80 and 766 sites, respectively. The joint venture marketing
operation in Turkey also provides the Company with a strategic position and
opportunity for Upstream ventures in this region.
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ASIA PACIFIC
The Company is looking to the Asia Pacific region for much of its long-term
Downstream growth. Despite the recent economic downturn, the Company expects the
Asian market, in the long term, to grow faster than comparable markets. The
Company intends to establish at least 100,000 barrels per day of equity refining
capacity in the region long-term and expand its marketing operations to
integrate with the refining supply to capitalize on market deregulation and long
term regional demand growth.
The refinery in Melaka, Malaysia, has been built by a joint venture 40
percent owned by the Company (with partners Statoil and the Malaysian state oil
company, Petronas) and will have a crude capacity of 100,000 barrels per day.
Startup of the Melaka refinery was initiated in August 1998 with the
commissioning of the crude unit. Initial crude unit operation will be followed
shortly thereafter by the start-up of the reformer, hydrocracker and coker
units. The joint venture has a five-year tax holiday commencing with initial
operation. The feedstocks for the refinery will consist of up to approximately
70 percent high sulfur crude and 30 percent sweet crude.
This refinery will capitalize on the Company's proprietary coking
technology to upgrade low-cost feedstocks to higher-margin products. Initial
refinery units, in addition to the fuels delayed coker, include a crude and
vacuum distillation unit, a vacuum gas oil hydrocracker, naphtha and diesel
hydrotreater, catalytic reformer, and an isomerization unit. The refinery will
produce a full range of refined petroleum products to help meet the demand for
motor fuels and specialty products in the Asia Pacific region although the
process at Melaka is designed to maximize diesel production in concert with
industry demand in the region.
The Company intends to use its share of refined products from the refinery
to continue growing its retail marketing operations in Thailand, Malaysia and
throughout the Asia Pacific region. The balance of the Company's share of
production will be sold primarily in the spot market. The Company has its
regional crude and product supply and disposition operations centrally located
in Singapore.
The Company began marketing motor fuels in Thailand in 1993. Using a
high-volume/low-price strategy and marketing concepts and strategies that were
new to Thailand, the Company has already established a significant presence in
the Thai retail market. The Company is building more than 20 new Jet branded
retail outlets this year and by the end of 1998 expects to have almost 100
stores in operation. The Company plans to continue building new retail outlets
at a comparable pace until it has 200 stores in the country.
The Company has launched a retail marketing joint venture in Malaysia with
Sime Darby Bhd., a company that has a major presence in the business sector.
Capitalizing on the cost benefits of direct supply, the benefits of being the
first licensees since 1969 to establish retail marketing in Malaysia, and the
currently depressed prices of premium Malaysian real estate, the Company will
initially target major markets within 125 miles of the Melaka refinery. The
Company plans to have six stores operating by the first quarter of 1999.
SPECIALTY PRODUCTS
The Company sells a variety of high value lubricants and specialty products
to commercial, industrial and wholesale accounts worldwide, including lubes
(such as automotive and industrial lubricants and waxes), petroleum coke,
solvents and pipeline flow improvers. The Company's experience has been that
specialty products are attractive because their premium prices generate higher
margins and their markets are generally less cyclical than commodity markets.
The Company began marketing the HYDROCLEAR(TM) brand of lubricants with the
start-up of the Excel Paralubes plant in 1997. The HYDROCLEAR(TM) lubricants
were designed to compete with synthetics for a range of applications with
difficult operating conditions, along with the added value of non-toxicity.
Through its Penreco joint venture company, the Company also produces specialty
petroleum products for global markets.
The Company's technical expertise in carbon upgrading positions it as a
leader in the manufacture and marketing of specialty coke and coke products. The
Company manufactures high quality graphite coke at its Lake Charles and Humber
refineries for use in the global steel industry. It also globally markets anode
and
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fuel coke produced at its Lake Charles, Ponca City, Billings and Humber
refineries. In addition, the Company participates in the Asia Pacific coke
market by providing technical and marketing expertise to its PetroCokes joint
venture with Sumitomo and Japan Energy.
The Company is a leader in the worldwide market for pipeline flow
improvers. Conoco's "LiquidPower(TM)" product is a flow improver for increasing
petroleum pipeline capacity by reducing friction loss. The Company also uses
"LiquidPower(TM)" in its own pipeline systems.
POWER
Conoco Global Power was founded in 1995 to leverage the economic advantages
of the Company's energy production activities and DuPont's demand for energy in
its manufacturing operations.
The Company has entered into a joint venture agreement to build a natural
gas fired cogeneration plant near Corpus Christi, Texas. Construction has begun
on the plant, which will be located adjacent to chemical complexes owned by
DuPont and OxyChem, Occidental Petroleum Corporation's chemicals division, the
Company's partner in this joint venture. OxyChem will operate the plant under a
long-term contract and will purchase a majority of the plant's electricity and
steam production. The plant is designed to produce 440 megawatts of power and
1.1 million pounds per hour of process steam. The plant will be a qualifying
facility under the Public Utility Regulatory Policies Act and expects to sell
excess electricity in the Texas power markets. Commercial operation of the plant
is expected by January 2000.
The Company and DuPont are evaluating a proposed cogeneration facility to
be located at DuPont's Orange, Texas chemical complex. The proposed facility
would be owned by a joint venture between Conoco and a yet to be selected
partner. The facility would provide a portion of the chemical complex's electric
and process steam requirements with much of the electric output being sold as
merchant power. DuPont would be the contract operator of the facility under a
long term operating agreement. A decision by DuPont on the proposal is
anticipated in the fourth quarter of 1998.
CORE VALUES
The Company is committed to four core values: operating safely, protecting
the environment, acting ethically and valuing all people. Conoco is a recognized
industry leader in both concern for the health and safety of its employees and
protecting the environment. In 1997, the Company achieved the lowest recordable
injury rate in its history. This performance earned it the lowest injury rate
among all major petroleum companies reporting to the American Petroleum
Institute, an achievement matched in ten out of the last 15 years.
Conoco is also an innovator both at recycling materials and at operating in
environmentally sensitive areas. In the United Kingdom, for example, the Company
successfully recycled over 99 percent of the Viking gas platforms, which it
redeployed from the North Sea. It has also operated in the Aransas National
Wildlife Refuge in South Texas for almost 60 years. In 1990, the Company took a
major step toward oil spill prevention with the decision to build only
double-hulled tankers -- a decision taken before law mandated such technology.
By the year 2000, the Company intends to have a U.S. fleet consisting entirely
of double-hulled vessels.
In order to maintain the highest ethical standards, the Company established
clear guidelines on business ethics which every employee agrees to follow. The
Company has established annual President's Awards for safety, environmental
protection and valuing all people performance. Valuing people includes seeking
diversity in the workforce, nationalizing a significant portion of its workforce
in each country where it operates as soon as practicable, responding to employee
ideas and concerns, treating everyone with dignity and respect, sharing the
financial success of the Company with substantially all employees through the
"Conoco Challenge" program, and helping employees contribute fully in achieving
business goals. The Company believes that these
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core values result in a motivated workforce with values and goals firmly aligned
with the strategic aims of the business.
These core values provide guidance to employees in working to meet the
expectations of customers, partners and host governments, and in respecting the
communities in which the Company does business.
ENVIRONMENTAL REGULATION
Together with other companies in the industries in which it operates, the
Company's operations are subject to numerous federal, state, local, European
Union and other foreign environmental laws and regulations concerning its oil
and gas operations, products and other activities, including legislation that
implements international conventions or protocols. In particular, these laws and
regulations require the acquisition of permits, restrict the type, quantities,
and concentration of various substances that can be released into the
environment, limit or prohibit activities on certain lands lying within
wilderness, wetlands and other protected areas, regulate the generation,
handling, storage, transportation, disposal and treatment of waste materials and
impose criminal or civil liabilities for pollution resulting from oil, natural
gas and petrochemical operations.
Governmental approvals and permits are currently, and may in the future be,
required in connection with the Company's operations. The duration and success
of obtaining such approvals are contingent upon many variables, many of which
are not within the Company's control. To the extent such approvals are required
and not obtained, operations may be delayed or curtailed, or the Company may be
prohibited from proceeding with planned exploration or operation of facilities.
Environmental laws and regulations are expected to have an increasing
impact on the Company's operations in most of the countries in which it
operates, although it is impossible to predict accurately the effect of future
developments in such laws and regulations on the Company's future earnings and
operations. Some risk of environmental costs and liabilities is inherent in
particular operations and products of the Company, as it is with other companies
engaged in similar businesses, and there can be no assurance that material costs
and liabilities will not be incurred. However, the Company does not currently
expect any material adverse effect upon its results of operations or financial
position as a result of compliance with such laws and regulations.
Protection and concern for the environment is one of the Company's core
values. The Company is an innovator both at recycling materials and operating
responsibly in environmentally sensitive areas. The Company operates oil and gas
production facilities, petroleum refineries, natural gas processing plants and
distribution facilities throughout the world. These facilities are subject to
various federal, state, local and foreign environmental laws and regulations. It
is Conoco's policy to fully meet or exceed legal and regulatory requirements
wherever it operates. To meet future environmental obligations, the Company is
engaged in a continuing program to develop effective measures to protect the
environment. This program includes research into reducing sulfur levels in heavy
fuel oils and diesel fuel, reducing benzene content in gasoline, reducing vapor
emissions at service stations, developing more effective methods of containing
and recovering offshore oil spills, improving the quality of emissions and
effluents from the Company's refineries and other facilities, developing and
installing monitoring systems at the Company's facilities and developing
environmental impact assessments before commencing major projects. For a
discussion of the Company's operating expenses and capital expenditures with
respect to environmental protection, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Environmental Matters."
Although future environmental obligations are not expected to have a material
adverse effect on the results of operations or financial condition of the
Company, there can be no assurance that future developments, such as
increasingly stringent environmental laws or enforcement thereof, will not cause
the Company to incur substantial environmental liabilities or costs.
AIR EMISSIONS
The operations of the Company are subject to regulations controlling
emissions of air pollutants. The primary legislation affecting the Company's
U.S. air emissions is the Federal Clean Air Act and its 1990
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Amendments (the "CAA"). Among other things, the CAA requires all major sources
of air emissions to obtain operating permits; the CAA also revised the
definition of "major source" such that additional equipment involved in oil and
gas production may now be covered by the permitting requirements. Although the
precise requirements of the CAA are not yet known, the Company may incur
substantial capital, operating and maintenance costs to comply with such
requirements.
The CAA requires EPA to promulgate regulations imposing Maximum Achievable
Control Technology ("MACT") standards to reduce emissions of certain air
pollutants from industrial facilities, such as Conoco's refineries,
transportation terminals and certain crude oil production operations. EPA has
promulgated MACT standards that are applicable to some of Conoco's operations,
and the Company's costs to comply with them have not been material. However,
MACT standards applicable to many of Conoco's other operations have yet to be
promulgated. Consequently, while it is not yet possible to predict accurately
the total actual expenditures that Conoco may incur to comply with these
standards, the Company anticipates that these costs may be substantial.
In June 1997, EPA revised the National Ambient Air Quality Standards
("NAAQS") for ozone and particulate matter, which will ultimately require more
stringent controls on stationary sources and cleaner-burning fuels in certain
parts of the United States. The financial impacts of these revisions cannot
reasonably be estimated until individual states adopt regulations to implement
the revised NAAQS, although Conoco believes that such impacts could be
substantial.
Under the CAA, EPA has promulgated a number of regulatory standards that
mandate a variety of specifications for motor fuels designed to reduce emissions
of certain air pollutants from vehicles burning such fuels. These regulated
fuels include gasoline and diesel fuels produced and marketed by Conoco. In
addition, many other countries in which Conoco produces or markets motor fuels
similarly regulate the composition of such products. The Company has already
incurred the costs of complying with such requirements that are currently in
effect. The European Parliament and European Union governments recently agreed
to enact legislation that, among other things, requires phased reductions of
sulfur and aromatics content in gasoline and diesel fuel and of benzene in
gasoline. While it is not yet possible to predict accurately the total actual
expenditures that Conoco may incur to comply with these requirements, the
Company anticipates that these costs may be substantial. EPA also continues to
consider further regulation of motor fuels composition specifications. Although
it is not yet possible to predict the precise composition specifications that
may be imposed by EPA in the future, and therefore, it is not yet possible to
predict accurately the total actual expenditures that may be incurred by Conoco
to produce motor fuels meeting future specifications, such expenditures could be
substantial.
In 1997, an international conference on global warming concluded an
agreement, known as the Kyoto Protocol, which called for reductions of certain
emissions that contribute to increases in atmospheric greenhouse gas
concentrations. The combustion of fossil fuels, such as crude oil, results in
emissions of the type sought to be reduced by the Kyoto Protocol. The treaty
codifying the Kyoto Protocol has not been ratified by the United States, but may
be in the future. In addition, other countries where Conoco has interests, or
may have interests in the future, have made commitments to the Kyoto Protocol
and are in various stages of formulating applicable regulations. Although it is
not yet possible to estimate accurately the total actual expenditures that may
be incurred by Conoco as a result of the Kyoto Protocol, such expenditures could
be substantial.
HAZARDOUS SUBSTANCES AND WASTE DISPOSAL
The Company currently owns or leases numerous properties that have been
used for many years for hardminerals production or natural gas and crude oil
production. Although the Company has utilized operating and disposal practices
that were standard in the industry at the time, hydrocarbons or other wastes may
have been disposed of or released on or under the properties owned or leased by
the Company. In addition, some of these properties have been operated by third
parties over whom the Company had no control. CERCLA and comparable state
statutes impose strict, joint and several liability on owners and operators of
sites and on persons who disposed of or arranged for the disposal of "hazardous
substances" found
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at such sites. RCRA and comparable state statutes govern the management and
disposal of wastes. Although CERCLA currently excludes petroleum from cleanup
liability, many state laws affecting the Company's operations impose clean-up
liability regarding petroleum and petroleum related products. In addition,
although RCRA currently classifies certain exploration and production wastes as
"nonhazardous," such wastes could be reclassified as hazardous wastes thereby
making such wastes subject to more stringent handling and disposal requirements.
If such a change in legislation were to be enacted, it could have a significant
impact on the Company's operating costs, as well as the gas and oil industry in
general. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Environmental Matters."
OIL SPILLS
Under the Federal Oil Pollution Act of 1990, as amended ("OPA"), (i) owners
and operators of onshore facilities and pipelines, (ii) lessees or permittees of
an area in which an offshore facility is located and (iii) owners and operators
of tank vessels ("Responsible Parties") are strictly liable on a joint and
several basis for removal costs and damages that result from a discharge of oil
into the navigable waters of the United States. These damages include, for
example, natural resource damages, real and personal property damages and
economic losses. OPA limits the strict liability of Responsible Parties for
removal costs and damages that result from a discharge of oil to $350 million in
the case of onshore facilities, $75 million plus removal costs in the case of
offshore facilities, and in the case of tank vessels, an amount based on gross
tonnage of the vessel. However, these limits do not apply if the discharge was
caused by gross negligence or wilful misconduct, or by the violation of an
applicable Federal safety, construction or operating regulation by the
Responsible Party, its agent or subcontractor or in certain other circumstances.
In addition, with respect to certain offshore facilities, OPA requires
evidence of financial responsibility in an amount of up to $150 million. Tank
vessels must provide such evidence in an amount based on the gross tonnage of
the vessel. OPA also requires offshore facilities, certain onshore facilities
and tank vessels to prepare spill response plans, which the Company has done,
for responding to a "worst case discharge" of oil. Failure to comply with these
requirements or failure to cooperate during a spill event may subject a
Responsible Party to civil or criminal enforcement actions and penalties.
OFFSHORE PRODUCTION
Offshore oil and gas operations in U.S. waters are subject to regulations
of the United States Department of the Interior which currently impose strict
liability upon the lessee under a Federal lease for the cost of clean-up of
pollution resulting from the lessee's operations, and such lessee could be
subject to possible liability for pollution damages. In the event of a serious
incident of pollution, the Department of the Interior may require a lessee under
Federal leases to suspend or cease operations in the affected areas. See
"-- Litigation and Other Contingencies."
SOURCES OF SUPPLY
During 1997, the Company supplemented its own crude oil production to meet
its refining requirements by the purchase of crude oil from both domestic and
international sources. Approximately 56 percent of the crude oil processed in
the Company's U.S. refineries in 1997 came from U.S. sources. The remainder of
crude processed came principally from Venezuela, Mexico and Canada. During 1997,
the Company's Humber refinery in the United Kingdom processed principally North
Sea crude oils. In the joint venture MiRO refinery, the Company processed
primarily Mediterranean crude oils in 1997. The Company's joint venture CRC
refineries in the Czech Republic process primarily Russian crudes.
To assure availability, the Company maintains multiple sources for most raw
materials, supplies, services and equipment, with no one company supplying a
substantial portion of the Company's needs. The Company also routinely leases or
charters equipment, such as drilling rigs, offshore supply boats, seismic boats,
pipeline laying equipment, derrick barges, and cranes. Availability of supply
and/or cost of such equipment has been a factor in the past, and could have a
detrimental impact on the Company in the future.
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RESEARCH AND DEVELOPMENT
The objectives of the Company's research and development programs are to
discover new products, processes and business opportunities in relevant fields,
and to improve existing products and processes. Research and development also
focuses on improving efficiency, safety and environmental protection. Worldwide
expenditures for research and development amounted to approximately $44 million
in 1997, $41 million in 1996 and $36 million in 1995. Approximately $46 million
is budgeted for research and development activities in 1998.
The capabilities of the Company's research and development group have been
augmented by its access to DuPont's corporate science and engineering resources.
Certain elements of DuPont's material science expertise and analytical
capabilities are relevant to the Company's oil and gas research and development
work. Following the Separation, the Company will continue to have access to
DuPont's corporate science and engineering expertise pursuant to transitional
agreements.
PATENTS AND TRADEMARKS
The Company owns and is licensed under various patents, which expire from
time to time, covering many products, processes and product uses. No individual
patent is of material importance to the Company's business as a whole. During
1997, the Company was granted seven U.S. and 26 non-U.S. patents. The Company
also has individual trademarks and brands for its products and services which
are registered in various countries throughout the world. None of these
trademarks and brands is considered material other than the "Conoco" and "Jet"
brands.
OPERATING HAZARDS AND INSURANCE
The Company's operations are subject to certain operating hazards such as
well blowouts, collapsed wells, explosions, uncontrolled flows of oil, natural
gas or well fluids, fires, formations with abnormal pressures, pipeline ruptures
or spills, refinery explosions, surface or marine transportation incidents,
pollution, releases of toxic gas and other environmental hazards and risks. In
accordance with customary industry practices, the Company maintains insurance
against some, but not all, such risks and losses. Given the Company's risk
profile and in accordance with the practices of a number of major, integrated,
international energy companies, Conoco does not carry business interruption
insurance. The Company's decision not to carry business interruption insurance
is based on several factors, including its spread of risk over five wholly owned
refineries (with some resultant ability to replace product during periods of
business interruption), a favorable loss history and loss prevention and safety
programs. The Company has elected to retain the risk where management believes
the cost of insurance, although available, is excessive relative to the risks
presented. In addition, pollution and environmental risks are generally not
fully insurable. See "Risk Factors -- Operating Hazards."
LITIGATION AND OTHER CONTINGENCIES
One proceeding instituted by governmental authorities is pending against
Conoco for alleged violations of RCRA with the potential for monetary sanctions
in excess of $100,000. Although regulatory authorities have requested a civil
penalty of $169,000 with respect to this proceeding, Conoco expects that the
matter will ultimately be resolved for a substantially smaller penalty.
On March 6, 1996, the Department of Justice filed a complaint in the United
States District Court for the District of Montana against Yellowstone Pipeline
Company ("YPL") and the Conoco Pipe Line Company as a part owner and operator of
YPL. The complaint alleges discharges of oil from a YPL pipeline in January 1993
and seeks civil penalties of up to $25,000 per day for each violation or up to
$1,000 for each barrel of oil discharged. Since the duration of the discharge is
in dispute, the penalty calculation is uncertain although it is expected to
exceed $100,000. The parties are attempting to negotiate a resolution of the
matter, including a supplemental environmental project that would constitute a
substantial part of a settlement with the government.
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Conoco has been assessed a monetary penalty in the amount of $298,000 by
the New Mexico Environmental Department, Air Quality Bureau. The demand was made
on June 18, 1998. New Mexico alleges that Conoco failed to obtain a permit under
the CAA and violated certain permit conditions in the existing permits. Conoco
assets affected are the Maljamar Gas Plant and the MCA field. Conoco expects to
obtain settlement by payment of a lesser monetary penalty and performance of a
supplemental environmental project.
On August 19, 1998, the EPA, Region VI issued an administrative complaint
against Conoco. This administrative complaint alleges noncompliance with
provisions of the general National Pollutant Discharge Elimination System permit
for the western portion of the outer continental shelf of the Gulf of Mexico.
The administrative complaint assesses a civil penalty of $137,500.
The Company is a defendant in a number of lawsuits and is involved in
governmental proceedings arising in the ordinary course of business, including
personal injury claims, environmental claims and leaking underground storage
tank claims and, along with other oil companies, actions challenging oil and gas
royalty, severance tax, and other payments, including claims based on posted
prices. The Company believes ultimate liabilities resulting from such lawsuits
and claims may be material to results of operations in the period in which they
are recognized, but will not materially affect the combined financial position
of the Company.
PROPERTIES
The Company owns its corporate headquarters, consisting of 16 three-story
buildings on a 62-acre site in Houston, Texas. The Company owns and leases
petroleum properties and operates production processing, refining, marketing,
power-generating, and research and development facilities worldwide. In
addition, the Company operates sales offices, regional purchasing offices,
distribution centers, and various other specialized service locations throughout
the world.
EMPLOYEES
The Company had approximately 16,400 employees as of June 30, 1998.
Approximately 1,400 employees at the Company's U.S. refineries are represented
by the Oil, Chemical and Atomic Workers International Union under separate
bargaining agreements for each refinery. These agreements cover wages, certain
benefit matters, grievance procedures and various employment conditions, and the
Company believes they are typical of the refining industry in the U.S. The
Company believes that its relations with its employees are good.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is information concerning the current executive officers
and current and prospective directors of the Company. Each director holds office
until his successor is duly elected and qualified or until his resignation or
removal if earlier. See "Description of Capital Stock -- Anti-Takover Effects of
Certain Certificate and By-Law Provisions -- Board of Directors."
<TABLE>
<CAPTION>
NAME AGE(2) POSITION WITH THE COMPANY
---- ------ -------------------------
<S> <C> <C>
Edgar S. Woolard, Jr.............. 64 Chairman of the Board of Directors
Archie W. Dunham.................. 59 President, Chief Executive Officer and Director
Ruth R. Harkin(1)................. 53 Director
Frank A. McPherson(1)............. 65 Director
Gary M. Pfeiffer.................. 48 Director
William K. Reilly(1).............. 58 Director
William R. Rhodes(1).............. 62 Director
Franklin A. Thomas(1)............. 64 Director
Gary W. Edwards................... 56 Executive Vice President, Refining, Marketing, Supply
and Transportation
Robert E. McKee III............... 52 Executive Vice President, Exploration Production
Robert W. Goldman................. 56 Senior Vice President, Finance, and Chief Financial
Officer
Rick A. Harrington................ 53 Senior Vice President, Legal, and General Counsel
</TABLE>
- ---------------
(1) Expected to be elected as a Director at the Company's first regular board
meeting following the Offerings.
(2) As of July 31, 1998.
Edgar S. Woolard, Jr. retired as Chairman of the Board of Directors of
DuPont on October 29, 1997, having served since 1989. He was named Chairman of
the Board of Conoco in July 1998. He remains a director of DuPont. Since he
joined DuPont in 1957, he occupied many technical and managerial positions at
various locations across the United States. From 1987 to 1989, Mr. Woolard
served as President and Chief Operating Officer of DuPont, and from 1989 to
1995, as Chairman and Chief Executive Officer. Mr. Woolard is a director of
Citigroup Inc. and Apple Computer, Inc. and a member of The Business Council,
the Board of Trustees of Winterthur Museum, the Christiana Care Corporation, the
Protestant Episcopal Theological Seminary in Virginia and the North Carolina
Textile Foundation. He is also a member of the National Academy of Engineering
and the Bretton Woods Committee.
Archie W. Dunham has been President and Chief Executive Officer of the
Company since 1996. He joined the Company in 1966 and subsequently held a number
of commercial and managerial positions within the Company and DuPont. He
currently serves on both companies' boards of directors. Mr. Dunham is also a
member of the Louisiana-Pacific Corporation Board of Directors and has been
elected a director of Phelps Dodge Corporation effective November 4, 1998. Mr.
Dunham is a former Executive Vice President, Exploration Production and
Executive Vice President, Refining, Marketing, Supply and Transportation for the
Company. He was also a Senior Vice President, Polymers and Senior Vice
President, Chemicals and Pigments for DuPont. He is a director of the American
Petroleum Institute, the National Petroleum Council, the U.S.-Russia Business
Council, the Greater Houston Partnership and Chairman of the United States
Energy Association. Mr. Dunham is a member of the Board of Visitors and the
Energy Center Board of Directors at the University of Oklahoma. He also serves
on the board of trustees of the Memorial Hermann Healthcare System in Houston,
the Houston Grand Opera, the Houston Symphony, the George Bush Presidential
Library and the Smithsonian Institution.
Ruth R. Harkin is Senior Vice President, International Affairs and
Government Relations of United Technologies Corporation ("UTC") and Chair of
United Technologies International, UTC's international representation arm.
Previously, Mrs. Harkin was the president and chief executive officer of the
Overseas Private Investment Corporation (OPIC) in the Clinton administration
from 1993 to 1997. Mrs. Harkin was
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<PAGE> 266
elected as a prosecutor in the office of the County Attorney of Story County,
Iowa in 1973. She also served as Deputy General Counsel at the U.S. Department
of Agriculture and was Of Counsel at the law firm of Akin, Gump, Strauss, Hauer
& Feld. Mrs. Harkin is a member of the Board of Visitors of the College of
Business Administration, University of Iowa. She also sits on the Boards of the
Center for National Policy and the National Association of Manufacturers, and is
a Trustee of the Eurasia Foundation.
Frank A. McPherson retired as Chairman and Chief Executive Officer of
Kerr-McGee Corporation on February 1, 1997. He joined Kerr-McGee in 1957 and
held many technical, operational and managerial positions including President
from 1980 to 1983. He is a past director of the Federal Reserve Bank of Kansas
City and the Oklahoma State University foundation Board of Trustees. Mr.
McPherson serves on the boards of directors of Kimberly-Clark Corp., Bank of
Oklahoma, Tri-Continental Corporation, Seligman Quality Fund, Inc., Seligman
Select Municipal Fund, Inc., and the Seligman Group of Mutual Funds. He is also
a member of the boards of the American Petroleum Institute, Boys and Girls Clubs
of America, Baptist Medical Center, Oklahoma Chapter of Nature Conservancy,
Oklahoma City Chamber of Commerce, Oklahoma City Public School Foundation,
Oklahoma Medical Research Foundation and Oklahoma Foundation for Excellence in
Education.
Gary M. Pfeiffer has been Senior Vice President, Finance and Chief
Financial Officer of DuPont since 1997. Previously from 1994 to 1997, Mr.
Pfeiffer was Vice President and General Manager of DuPont Nylon, North America,
with responsibility for all of DuPont's nylon fiber and intermediate business in
North America. He has also served as Global Business Director, Nylon
Intermediates for DuPont Chemicals, from 1992 to 1994, and as Director - Finance
for DuPont Chemicals and Specialties Manufacturing, from 1991 to 1992. Since he
joined DuPont in 1974, Mr. Pfeiffer has held a number of technical and
managerial positions in the United States and overseas. He is also on the board
of the Hagley Museum and Library.
William K. Reilly is currently a member of the Board of Directors of DuPont
and is President and Chief Executive Officer of Aqua International Partners, an
investment group which finances water improvements in developing countries.
Formerly, Mr. Reilly was a visiting professor at the Institute of International
Studies at Stanford University and served as Administrator of the U.S.
Environmental Protection Agency from February 1989 to January 1993. Mr. Reilly
was president of the Conservation Foundation from 1973 to 1989 and, after its
affiliation with World Wildlife Fund in 1985, served as President of both
groups. He also serves on the boards of Royal Caribbean International and
Evergreen Holdings. He is Chairman of the Board of the American Farmland Trust
and serves on the boards of National Geographic Society, World Wildlife Fund and
Yale University. Mr. Reilly also serves as a member of the board of the Presidio
Trust of San Francisco.
William R. Rhodes is a Vice Chairman of Citicorp and its principal
subsidiary, Citibank. Mr. Rhodes is Vice Chairman of the Institute of
International Finance; a Director of the Private Export Funding Corporation; a
trustee and member of the Executive Council of the Council of the Americas; an
Executive Committee member of the Bretton Woods Committee and the U.S.-Russia
Business Council; and a founding member of the U.S. National Advisory Council to
the International Management Center. Other board memberships include The Group
of Thirty; the Americas Society; The African-American Institute; CHIPCo; and the
U.S.-Egypt Presidents' Council. He is also a member of the Council on Foreign
Relations, the Foreign Policy Association, and The Bankers Roundtable. Mr.
Rhodes is a past Chairman of the U.S. Advisory Committee of the Export-Import
Bank of the United States; past Chairman of the U.S. section of the
Venezuela-U.S. Business Council; past President of the Venezuela-American
Chamber of Commerce; and past President of the Bankers Association for Foreign
Trade. He is a Governor and Trustee of the New York and Presbyterian Hospital
and a Director of the New York City Partnership and Chamber of Commerce. He
serves as a trustee of Brown University and Chairman of the Board of Trustees of
the Northfield Mount Hermon School.
Franklin A. Thomas has been a consultant to the TFF Study Group, a
non-profit initiative assisting development in southern Africa, since April
1996. Mr. Thomas was President and Chief Executive Officer of The Ford
Foundation from 1979 to 1996. He also serves as a director of the Aluminum
Company of America, Citigroup Inc. and its subsidiary, Citibank, N.A., Cummins
Engine Company, Inc., Lucent Technologies, Inc. and PepsiCo, Inc.
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<PAGE> 267
Gary W. Edwards has been Executive Vice President of the Company since
1991, with responsibility for worldwide refining, marketing, supply and
transportation. He is currently a Senior Vice President of DuPont. He joined the
Company in 1963, working at various locations throughout the United States and
in the United Kingdom, and was formerly the Company's Vice President, Refining
Marketing Europe; Vice President Refining, Marketing and Transportation; and
Vice President North American Marketing. Mr. Edwards has held a number of
managerial positions in Conoco Pipeline, Transportation, Natural Gas and Gas
Products, Logistics and Marketing. He is a Director of the American Petroleum
Institute and a previous director and Vice President of the European Petroleum
Industry Association in Brussels, Belgium. Mr. Edwards is Chairman of the Kansas
State University Engineering advisory council and a member of the Yellowstone
Park foundation advisory committee. He is a board member of Theatre Under the
Stars, Junior Achievement, Inc. (National) as well as Junior Achievement of
Southeast Texas, Target Hunger, Private Sector Initiative, and the Houston Music
Hall Foundation.
Robert E. McKee III has been an Executive Vice President for the Company
since 1992, with responsibility for worldwide exploration and production. He is
currently a Senior Vice President of DuPont. He was formerly the Company's
Executive Vice President for Corporate Strategy and Development, Senior Vice
President for Administration, Vice President of North American Refining and
Marketing and Vice President, Chairman and Managing Director of Conoco (UK)
Limited. Since he joined Conoco in 1968, Mr. McKee has worked at various
locations and held numerous managerial, operating, administrative and technology
positions both in the United States and overseas. He currently serves on the
board of directors of Consolidation Coal Company, a subsidiary of DuPont, and
the American Petroleum Institute. In addition, he is Chairman of the Southern
Regional Advisory Board of the Institute of International Education and a member
of the advisory committee of the University of Texas Engineering Department. Mr.
McKee also serves on the board of directors of the Houston Museum of Natural
Science and as Chairman of the President's Council of the Colorado School of
Mines.
Robert W. Goldman has been Senior Vice President, Finance, and Chief
Financial Officer of the Company since 1998 and was its Vice President, Finance
from 1991 to 1998. Mr. Goldman began his career with DuPont in 1965 and
subsequently held many technical and managerial positions within the finance,
tax and treasury functions. He is the former Vice President - Finance of DuPont
(Mexico), Vice President, Remington Arms Company and served as Director and
Comptroller of several operating departments of DuPont in Wilmington, Delaware.
Mr. Goldman transferred to the Company in 1988 as Vice President and Controller.
He is co-chairman of the Company's Risk Management Committee and is a member of
the American Petroleum Institute, a former chairman of its Accounting Committee
and currently serves on its Executive Committee of the General Committee on
Finance. He is also a member of the Financial Executives Institute and the
Executive Committee of the Board of Directors of the Alley Theatre in Houston,
Texas.
Rick A. Harrington has been Senior Vice President, Legal, and General
Counsel of the Company since 1998 and was Vice President and General Counsel of
the Company and Vice President and Assistant General Counsel of DuPont from 1994
to 1998. He joined DuPont in 1979 as a Senior Attorney, and subsequently held
the positions of Managing Counsel, Special Litigation, and Vice President and
General Counsel of Consolidation Coal Company, a subsidiary of DuPont. Prior to
joining DuPont, he was a partner in the firm of Arent, Fox, Kintner, Plotkin and
Kahn in Washington, D.C. where he specialized in antitrust litigation. Mr.
Harrington is a member of the bar of the District of Columbia, the District of
Columbia Court of Appeals and the Fifth Circuit Court of Appeals. He is a member
of the American Petroleum Institute General Committee on Law, the American
Corporate Counsel Association International Legal Affairs Committee, and the
University of Kansas School of Business Dean's Board.
Effective as of the closing of the Offerings, Messrs. Dunham, McKee,
Edwards and Harrington will resign as officers of DuPont.
ELECTION AND COMPENSATION OF DIRECTORS
The By-laws provide for a Board of Directors of not less than six nor more
than 15 directors, with the current number set at nine (eight of which have been
named as of the date hereof). Each member of the
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<PAGE> 268
Board of Directors holds office until the expiration of his or her term and
until his or her successor is elected and qualified. Vacancies on the Board of
Directors may be filled by the majority vote of directors then in office or by a
sole remaining director, or by stockholder vote if such vacancy was caused by
action taken by stockholders. DuPont elected the current members of the Board of
Directors on July 24, 1998. Edgar S. Woolard, Jr., Gary M. Pfeiffer, William K.
Reilly, William R. Rhodes and Franklin A. Thomas are nominees of DuPont under
the terms of the Separation Agreement. See "Arrangements Between the Company and
DuPont."
Directors who are officers of the Company or employees of DuPont will
receive no additional compensation for serving on the Board of Directors. At the
time of the Offerings, nonemployee members of the Board of Directors (including
those persons who have agreed to become nonemployee directors in connection with
the Offerings) will receive a special grant of an option to purchase Class A
Common Stock (each, a "Company Stock Option") with a present value of $30,000
and a grant of Company restricted stock units with respect to Class A Common
Stock with an aggregate value of $95,000. Future nonemployee Directors, upon
election to the Board, will receive a grant of Company restricted stock units
with respect to Class A Common Stock with an aggregate value equal to $95,000.
On an annual basis, nonemployee Directors will receive a fee of $30,000, and,
following the annual meeting, a grant of Company restricted stock units with
respect to Class A Common Stock with an aggregate value of $20,000 and Company
Stock Options with a present value of $30,000. Company Stock Options and Company
restricted stock units will be awarded pursuant to the terms of the 1998 Stock
and Performance Incentive Plan of the Company (described below). The present
value of Company Stock Options will be determined using a generally accepted
stock option valuation methodology. Annual fees may be, and awards of restricted
stock units will be, deferred pursuant to the terms of the Deferred Compensation
Plan for Nonemployee Directors (described below).
Board members will also be eligible to participate in a Charitable Gift
Plan, which provides that, upon a Director's death, the Company will make a
donation in an amount equal to $200,000 per year for five years to the
tax-exempt educational institutions or charitable organizations recommended by
such director and approved by the Company. Each director will be fully vested in
the Charitable Gift Plan upon completion of one year of service as director. The
Company may fund the Charitable Gift Plan through, among other vehicles, the
purchase of life insurance policies on the lives of the directors, of which
policies the Company would be the beneficiary and which policies the Company
would own. Employee directors may elect to participate in the plan provided they
bear their allocable cost of the plan. Directors derive no personal financial or
tax benefit from the Charitable Gift Plan, since the charitable, tax-deductible
donations and insurance proceeds, if any, accrue solely to the benefit of the
Company.
Board members who serve as Chairman of a standing Board committee will
receive a supplement of $5,000 annually. No additional fees will be paid for
serving on Board committees. No additional fees will be paid for attending Board
or committee meetings.
In lieu of the compensation payable to nonemployee directors described
above (other than participation in the Charitable Gift Plan), Edgar S. Woolard,
Jr., Chairman of the Board, will receive an annual fee of $300,000 and equity
grants with a present value of $700,000. The annual fee will commence at the
closing of the Offerings. An initial grant of Company restricted stock units
with a value of $100,000 and nonqualified Company Stock Options with a present
value of $1,300,000 will be made at the closing of the Offerings and will cover
a two-year period. Company restricted stock units and Company Stock Options will
be granted pursuant to the terms of the 1998 Stock and Performance Incentive
Plan and will have provisions consistent with those of the other nonemployee
directors.
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT AND COMPLIANCE COMMITTEE
The Audit and Compliance Committee has oversight responsibility for
Conoco's internal control structure, financial reporting, and legal compliance
program, including strategic oversight of corporate safety, health and
environmental policy and direction. The Audit and Compliance Committee selects
an independent accounting firm, subject to shareholder ratification, to audit
the financial statements of the Company. The
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<PAGE> 269
Audit and Compliance Committee also requests the Company's subsidiaries to
engage independent accountants, as deemed appropriate by the Audit and
Compliance Committee, to audit their respective financial statements. The Audit
and Compliance Committee ensures there is a corporate system in place to provide
timely and accurate information to senior management and the Board concerning
the Company's compliance with the law. The Audit and Compliance Committee meets
to consider matters raised by its members, internal legal staff, management,
internal auditing staff, and the independent accountants. It reports to the
Board of Directors a summary of its findings and recommendations. Members of the
Audit and Compliance Committee are independent from the Company's management and
free from any relationship that, in the opinion of the Board of Directors, would
interfere with the exercise of independent judgement. The Audit and Compliance
Committee will initially consist of Frank A. McPherson, Ruth R. Harkin, Gary M.
Pfeiffer and William R. Rhodes. Mr. McPherson will serve as chairman of the
Audit and Compliance Committee.
COMPENSATION COMMITTEE
The Compensation Committee is responsible for establishing certain
compensation policies consistent with corporate objectives and stockholder
interests. The Compensation Committee has responsibility for approving and/or
recommending to the Board levels of compensation for the President and Chief
Executive Officer, as well as stock options, performance awards and other stock
or cash-based awards for employee directors and executive officers. The
Compensation Committee also administers certain grants under the Company's
stock-based and other global performance-based compensation plans and adopts
and/or recommends to the full Board new plans or changes in compensation
programs. No member of the Compensation Committee may be an employee or officer
of the Company or any of its subsidiaries. The Compensation Committee will
initially consist of Franklin A. Thomas, William K. Reilly and Edgar S. Woolard,
Jr. Mr. Thomas will serve as chairman of the Compensation Committee.
Prior to the Offerings, the executive officers named in the Summary
Compensation Table below were participants in the executive compensation
programs of DuPont. The compensation committee of DuPont was responsible for the
review of those programs, and for grants awarded under those programs.
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
No present officer, director or director nominee currently owns any shares
of Conoco's Common Stock, all of which are currently owned by DuPont. The
following table sets forth the number of shares of DuPont common stock
beneficially owned on September 15, 1998, by each of the Company's directors,
director nominees, the executive officers named in the Summary Compensation
Table below and all directors, director nominees and executive officers of the
Company as a group. Except as otherwise noted, the individual director, director
nominee or executive officer or their family members had sole voting and
investment power with respect to such securities.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
NAME OWNED(1)(2)(3)(4)
---- -----------------
<S> <C>
Edgar S. Woolard, Jr....................................... 1,495,881(5)
Archie W. Dunham........................................... 834,541(6)
Frank A. McPherson......................................... 1,000(7)
Gary M. Pfeiffer........................................... 42,772(8)
William K. Reilly.......................................... 7,765
Gary W. Edwards............................................ 440,592(9)
Robert E. McKee III........................................ 372,264(10)
Robert W. Goldman.......................................... 102,246(11)
Rick A. Harrington......................................... 80,805(12)
Directors and Executive Officers as a Group (12 persons)... 3,377,866
</TABLE>
- ---------------
(1) No individual director, director nominee or named executive officer
beneficially owns 1 percent or more of the DuPont common stock, nor do the
directors and executive officers as a group.
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<PAGE> 270
(2) Mrs. Harkin, Mr. Rhodes and Mr. Thomas do not beneficially own any shares.
(3) Includes beneficial ownership of the following number of shares of DuPont
common stock which may be acquired within 60 days of September 15,
pursuant to stock options awarded under employee compensation plans of
DuPont: Mr. Woolard -- 1,101,240; Mr. Dunham -- 704,428; Mr.
Pfeiffer -- 31,126; Mr. Edwards -- 367,846; Mr. McKee -- 281,690; Mr.
Goldman -- 84,900; and Mr. Harrington -- 71,660. Messrs. Dunham, Edwards,
McKee, Goldman and Harrington have agreed to the cancellation of 100
percent of these options in the Option Program and the issuance upon such
cancellation of Company Stock Options, as described below under
"-- Treatment of Outstanding Stock Options and Stock Appreciation
Rights -- Option Program."
(4) The persons named in this table have sole voting power and investment
power with respect to all shares of DuPont common stock shown as
beneficially owned by them, subject to community property laws where
applicable and the information contained in this table and these notes.
(5) Includes (i) 20,000 shares owned by Mr. Woolard's spouse to which Mr.
Woolard disclaims beneficial ownership, (ii) 18,000 shares owned by The
Woolard Family Foundation, and (iii) 13,698 shares owned by family trusts
under which voting and investment power is shared by Mr. Woolard's
daughters.
(6) Includes (i) 91,880 shares held in Dunham Management Trust, a revocable
grantor trust, (ii) 6,243 shares held in deferred compensation and (iii)
13,000 shares owned by the Dunham Charitable Foundation.
(7) The 1,000 shares listed above are owned by Mr. McPherson and his spouse
jointly.
(8) Includes 1,807 shares held in deferred compensation.
(9) Includes 6,800 shares owned by the Edwards Charitable Foundation.
(10) Includes (i) 1,300 shares owned by a minor child of Mr. McKee, (ii) 298
shares owned by another child of Mr. McKee, (iii) 453 shares owned by a
minor grandchild of Mr. McKee, (iv) 453 owned by another minor grandchild
of Mr. McKee, and (v) 29,509 owned by the McKee Family Trust.
(11) Includes (i) 1,650 shares owned by Mr. Goldman's spouse, and (ii) 350
shares owned by a minor child of Mr. Goldman.
(12) Includes 50 shares owned by a child of Mr. Harrington.
Company Stock Options and other stock-based awards may be granted to
directors, officers and other key employees of the Company in the future under
the 1998 Stock and Performance Incentive Plan of the Company. See "-- Election
and Compensation of Directors."
TREATMENT OF OUTSTANDING STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
OPTION PROGRAM
Each individual who (i) is actively employed by the Company as of the date
of the closing of the Offerings (the "Effective Date"), (ii) either (a) was an
employee of the Company more than 20 days prior to the Effective Date or (b) was
designated as an individual who would become an employee of the Company and such
designation occurred more than 20 days prior to the Effective Date and (iii)
holds, as of the closing of the Offerings, options to purchase DuPont common
stock (each such option, a "DuPont Option") or appreciation rights with respect
to DuPont common stock (each such right, a "DuPont SAR") will have the option,
subject to specific country tax and legal requirements, effective as of the
closing of the Offerings, to surrender for cancellation in the Option Program
each such DuPont Option or DuPont SAR, whether or not vested or exercisable, and
upon such cancellation, the Company will issue to such employee a Company Stock
Option or an appreciation right with respect to Class A Common Stock (a "Company
SAR"), as applicable. In general, Company Stock Options that qualify as
incentive stock options, as defined in the Code ("Incentive Stock Options"), are
to be issued upon cancellation of DuPont Options that qualify as Incentive Stock
Options, and Company nonqualified stock options are to be issued upon
cancellation of DuPont nonqualified stock options. The number of shares subject
to each Company Stock Option and each Company SAR issued in the Option Program,
and the exercise price per share of each such Company Stock Option and Company
SAR, will be determined in the manner described below that will reflect, in the
aggregate, the difference
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between the exercise price of the DuPont Options and the fair market value per
share of DuPont common stock and, in the case of DuPont SARs, the appreciated
value of such SARs.
The exercise price applicable to each Company Stock Option and Company SAR
issued upon cancellation of DuPont Options and DuPont SARs (the "Company
Exercise Price") will be the price (rounded to the nearest fourth decimal)
obtained by dividing (i) the exercise price of the applicable DuPont Option or
DuPont SAR (the "DuPont Exercise Price") by (ii) the ratio (the "Option Ratio")
of (a) the average price (the "DuPont Share Price") of DuPont common stock over
the five trading days ending on the date the initial offering price to the
public of a share of Class A Common Stock in the Offerings is determined
(calculated as the average of the mean of the high and low prices of DuPont
common stock on each of these five days as reported on the NYSE) to (b) the
offering price to the public of the Class A Common Stock set forth on the cover
page of this Prospectus (the "IPO Price"). The DuPont Share Price is $62.9656.
Each such Company Stock Option will entitle the holder to purchase, and each
such Company SAR will relate to, the whole number of shares of Class A Common
Stock (rounded up to the nearest whole share, in the case of a nonqualified
stock option, and rounded down to the nearest whole share, in the case of an
Incentive Stock Option) obtained by multiplying the number of shares of DuPont
common stock underlying the applicable DuPont Option or DuPont SAR by the Option
Ratio. In the case of any DuPont Option that qualifies as an Incentive Stock
Option, the formula set forth above will be adjusted, if necessary, to comply
with the Code.
Mr. Dunham and the other executive officers named in the Summary
Compensation Table below have agreed to the cancellation in the Option Program
of 100 percent of their DuPont Options and DuPont SARs and the issuance upon
such cancellation of Company Stock Options and Company SARs.
All Company Stock Options and Company SARs issued upon cancellation of
DuPont Options and DuPont SARs will remain subject to the threshold, vesting,
exercisability and option-length terms and conditions to which the DuPont
Options and DuPont SARs were subject prior to cancellation. DuPont Options and
certain DuPont SARs that are not canceled in the Option Program generally will
terminate 12 months after DuPont's ownership of the Company decreases to less
than 50 percent. The Option Program will be conducted in accordance with such
procedures and at such time as is determined by DuPont's Compensation Committee
and the Company. See "Arrangements Between the Company and DuPont -- Employee
Matters Agreement."
Company Stock Options and Company SARs to be granted to the 17 senior
officers of the Company upon cancellation of DuPont Options and DuPont SARs are
to be granted under the Company's 1998 Stock and Performance Incentive Plan.
Company Stock Options and Company SARs to be granted to the remaining officers
and other employees of the Company upon cancellation of DuPont Options and
DuPont SARs are to be granted under the Company's 1998 Key Employee Stock
Performance Plan. As of July 31, 1998, the 17 senior officers of the Company
held an aggregate of 4,104,583 DuPont Options and 57,200 DuPont SARs eligible
for the Option Program, and the remaining officers and other employees of the
Company held an aggregate of 7,102,249 DuPont Options and 1,251,213 DuPont SARs
eligible for the Option Program. The Company currently expects that
approximately 24.4 million Company Stock Options and 2.1 million Company SARs
are to be issued upon cancellation of DuPont Options and DuPont SARs in the
Option Program. The actual number of Company Stock Options and Company SARs
issued will vary based on the number of DuPont Options and DuPont SARs
surrendered for cancellation. For a more detailed description of the Company
Stock Options and Company SARs to be issued in the Option Program, see "-- 1998
Stock and Performance Incentive Plan of the Company," "-- 1998 Key Employee
Stock Performance Plan," "-- Certain Provisions Applicable to the Plan and the
1998 Plan" and "-- Material Federal Income Tax Consequences of the Plan and the
1998 Plan."
MATERIAL UNITED STATES FEDERAL TAX CONSEQUENCES OF THE OPTION PROGRAM
The following is a discussion of United States federal income tax
consequences of the cancellation of DuPont Options and DuPont SARs and the
issuance upon such cancellation of Company Stock Options and Company SARs in
connection with the Option Program. This discussion does not address tax
considerations that may be relevant to certain persons in light of their
particular circumstances. This discussion is based upon the Code, existing,
temporary and proposed regulations promulgated thereunder and administrative and
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judicial decisions, all of which are subject to change, possibly with
retroactive effect. In addition, this discussion does not address the effect of
any state, local or foreign tax laws. Each person contemplating participation in
the Option Program should consult his or her tax advisor with respect to the tax
consequences of such participation.
The issuance of Company Stock Options and Company SARs upon cancellation of
DuPont Options and DuPont SARs will not be a taxable event to the holders of
DuPont Options and DuPont SARs. The Company Stock Options received upon
cancellation of DuPont Options which are nonqualified stock options will be
nonqualified Company Stock Options. Generally, a modification of an incentive
stock option results in the loss of incentive stock option status of such
option. However, under certain circumstances set forth in the Code and
applicable regulations (including proposed regulations), an incentive stock
option may be modified without loss of the incentive stock option status. In
particular, the issuance of an option upon cancellation of another option by
reason of a certain type of a corporate transaction will not result in loss of
incentive stock option status. The Separation constitutes such a corporate
transaction and, accordingly, assuming the applicable requirements of the Code
are satisfied, the issuance of a Company Stock Option upon cancellation of a
DuPont Option by reason of the Separation will not result in loss of incentive
stock option status.
COMPENSATION OF EXECUTIVE OFFICERS
During fiscal 1997, the executive officers named in the table included
under this caption were employees of DuPont and participated in DuPont's
executive benefit plans, as indicated in the tables.
The following table sets forth the aggregate compensation paid to the
Company's chief executive officer and four other most highly compensated
executive officers (the "Named Officers") by DuPont or its subsidiaries during
fiscal 1997.
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------------- ------------------
OTHER SHARES
NAME AND ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS(2) COMPENSATION(3) OPTIONS GRANTED(4) COMPENSATION(5)
- ------------------ ---- -------- ---------- --------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Archie W. Dunham.......... 1997 $667,500 $1,450,000 $33,075 290,376 $39,950
President, Chief
Executive Officer and
Director
Gary W. Edwards........... 1997 431,320 725,000 24,044 133,200 25,715
Executive Vice
President, Refining,
Marketing, Supply and
Transportation
Robert E. McKee III....... 1997 374,400 718,000 16,612 126,700 22,247
Executive Vice
President, Exploration
Production
Robert W. Goldman......... 1997 236,700 292,000 1,513 38,600 13,958
Senior Vice President,
Finance, and Chief
Financial Officer
Rick A. Harrington........ 1997 229,500 325,000 4,703 59,802 13,598
Senior Vice President,
Legal, and General
Counsel
</TABLE>
- ---------------
(1) Columns required by the rules and regulations of the Securities and Exchange
Commission that contain no entries have been omitted.
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(2) On average, approximately 25 percent of variable compensation (i.e., bonus)
was paid in DuPont common stock.
(3) Other Annual Compensation consists solely of the reimbursement for the
payment of taxes.
(4) Shares have been adjusted to reflect a 2-for-1 DuPont common stock split in
1997. 1997 includes shares underlying both "Bicentennial" options (larger
than normal grants to reflect the higher risk due to significant stock price
hurdles and forfeiture provisions) and for Messrs. Dunham and Harrington,
reload options totaling 3,376 and 902, respectively. The totals for Messrs.
Goldman and Harrington each include 200 options granted under the DuPont
Shares program. See Notes 1, 2 and 3 of the Option Grants Table and Note 1
of the Aggregated Option Exercises and Year-End Option Values Table for more
detail on the "Bicentennial" options, reload feature and DuPont Shares
program.
(5) Includes the Company's matching contributions made pursuant to the Company's
thrift plans, including the following amounts credited under the related
savings restoration plan in 1997: Mr. Dunham, $30,450; Mr. Edwards, $16,215;
Mr. McKee, $12,747; Mr. Goldman, $4,458 and Mr. Harrington, $4,098.
The following table sets forth information as of December 31, 1997
regarding DuPont Options granted to the Named Officers during fiscal 1997.
OPTION GRANTS TABLE
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK APPRECIATION FOR
INDIVIDUAL OPTION GRANTS IN 1997 OPTION TERM(5)
----------------------------------------------- ---------------------------
NUMBER OF PERCENT
SHARES OF TOTAL
UNDERLYING OPTIONS
OPTIONS GRANTED EXERCISE EXPIRATION
NAME GRANTED IN 1997 PRICE(4) DATE 5%(6) 10%(7)
- ---- ---------- -------- -------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Archie W. Dunham................ 287,000(1) 2.87% $52.50 1/28/07 $ 0 $12,018,125
1,688(2) 0.02% 59.22 1/29/01 17,355 36,345
1,688(2) 0.02% 59.22 1/23/00 11,447 24,107
Gary W. Edwards................. 133,200(1) 1.33% 52.50 1/28/07 0 5,577,750
Robert E. McKee III............. 126,700(1) 1.27% 52.50 1/28/07 0 5,305,563
Robert W. Goldman............... 38,400(1) 0.38% 52.50 1/28/07 0 1,608,000
200(3) * 52.50 1/28/07 6,650 16,750
Rick A. Harrington.............. 58,700(1) 0.59% 52.50 1/28/07 0 2,458,063
902(2) 0.01% 56.28 1/23/00 7,639 15,982
200(3) * 52.50 1/28/07 6,650 16,750
</TABLE>
- ---------------
(1) These DuPont Options (the "Bicentennial" Options) may not be exercised
earlier than 12 months from date of grant and have a term of ten years.
Subject to the preceding sentence, DuPont Options with respect to 50 percent
of the DuPont common stock subject thereto will become exercisable if the
DuPont common stock price reaches $75 per share and the balance will be
exercisable if the DuPont common stock reaches $90 per share, but the DuPont
Options will be forfeited if these stock price thresholds are not met within
five years of grant date. The $75 threshold was met on April 17, 1998.
(2) These DuPont Options are subject to reload options which were granted when a
previously granted option was exercised. These reload options have not
increased the combined number of shares and options held by the executive
prior to exercise. The reload feature was added in 1997 to accelerate stock
ownership by executives. The shares of DuPont common stock received upon
exercise of the original DuPont Options (not including shares withheld to
satisfy income tax obligations) may not be transferred for a period of five
years. Reload options are granted at fair market value of a share of DuPont
common stock on the date of exercise of the original option, have a term
equal to the remaining term of the original DuPont Options and are
exercisable six months from the date of grant.
(3) These DuPont Options were awarded under the DuPont Shares program. Under
this program, substantially all employees received a one-time grant to
acquire shares of DuPont common stock at the fair market value as of the
date of grant. These DuPont Options became exercisable when the price of
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<PAGE> 274
DuPont common stock reached $75 per share on April 17, 1998. Similarly,
these DuPont Options have a term of 10 years.
(4) The exercise price is the average of the high and low prices of DuPont
common stock as reported on the NYSE-Composite Transactions Tape on the date
of grant.
(5) Represents total appreciation over the exercise price at the assumed annual
appreciation rates of 5 percent and 10 percent compounded annually for the
term of the DuPont Options.
(6) Reflects forfeiture of all Bicentennial options granted on January 29, 1997,
because the $75 and $90 stock price thresholds would not be met within five
years of grant date based on the assumed rate of stock price appreciation.
Also see Note 1 above.
(7) Reflects forfeiture of 50 percent of the Bicentennial options granted on
January 29, 1997, because the $90 stock price threshold would not be met
within five years of grant date based on the assumed rate of stock price
appreciation. Also see Note 1 above.
* Represents less than 0.01 percent of the total options granted under the
DuPont Shares program.
The following table sets forth information regarding the exercise of DuPont
Options during the 1997 fiscal year by each of the Named Officers and the 1997
fiscal year end value of all unexercised DuPont Options held by each of the
Named Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
FISCAL YEAR END 1997 AT FISCAL YEAR END 1997(2)
SHARES --------------------------- ---------------------------
ACQUIRED ON VALUE
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Archie W. Dunham..... 10,648 $430,620 557,552 290,376 $17,407,434 $2,173,286
Gary W. Edwards...... 13,153 984,009 301,246 133,200 10,013,260 1,007,325
Robert E. McKee
III................ -- -- 233,048 126,700 7,428,204 958,169
Robert W. Goldman.... -- -- 73,906 38,600 2,361,524 291,913
Rick A. Harrington... 7,657 543,945 64,500 59,802 1,924,256 448,842
</TABLE>
- ---------------
(1) Represents the pre-tax gain, which is the difference between the market
value of the shares on the date of exercise of the DuPont Options and the
exercise price. The reload feature prohibits distribution of any net
after-tax gains, as described in Note 2 of the Option Grants Table. The
gains after taxes are converted to DuPont common stock that may not be sold
or transferred for at least five years. One hundred percent of the gains for
Mr. Dunham and 17 percent for Mr. Harrington resulted from the reload
feature.
(2) Represents the closing price for DuPont common stock on December 31, 1997 of
$60.0625 less the exercise price for all outstanding exercisable and
unexercisable DuPont Options for which the exercise price is less than such
closing price.
RETIREMENT BENEFITS
Retirement benefits for Company employees under the DuPont Pension and
Retirement Plan are based on an employee's years of service and average monthly
pay during the employee's three highest-paid years. "Average monthly pay" for
this purpose includes regular compensation and 100 percent of annual variable
compensation payments, but excludes other bonuses and compensation in excess of
limits imposed by the Internal Revenue Code of 1986, as amended (the "Code").
The Code limits the amount of annual benefits which may be payable from the
pension trust. Retirement benefits in excess of these limitations are paid from
the Company's general revenues under separate, nonfunded pension restoration
plans.
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<PAGE> 275
The table below illustrates the straight-life annuity amounts payable under
the DuPont Pension and Retirement Plan and retirement restoration plans to
Company employees retiring at age 65 in 1998. These amounts reflect an offset
based on Social Security benefits. The current years of service credited for
retirement benefits for the Named Officers are as follows: 32 years for A. W.
Dunham, 35 years for G. W. Edwards, 31 years for R. E. McKee, 33 years for R. W.
Goldman and 18 years for R. A. Harrington.
<TABLE>
<CAPTION>
ESTIMATED ANNUAL RETIREMENT
SALARY AND BENEFITS BASED ON SERVICE OF:
VARIABLE -------------------------------------------------
COMPENSATION 30 YEARS 35 YEARS 40 YEARS 45 YEARS
------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
$ 325,000.................................... $ 149,000 $ 174,000 $ 200,000 $ 226,000
900,000................................... 425,000 496,000 568,000 640,000
1,475,000................................... 701,000 818,000 936,000 1,054,000
2,050,000................................... 977,000 1,140,000 1,304,000 1,468,000
2,625,000................................... 1,253,000 1,462,000 1,672,000 1,882,000
</TABLE>
1998 STOCK AND PERFORMANCE INCENTIVE PLAN OF THE COMPANY
GENERAL
The Company has adopted the 1998 Stock and Performance Incentive Plan of
Conoco Inc. (the "Plan") to reward (i) key employees of the Company
("Employees"), (ii) directors of the Company who are not employees of the
Company ("Nonemployee Directors") and (iii) nonemployee consultants and other
independent contractors (collectively, "Independent Contractors") of the
Company. The primary objectives of the Plan are to attract and retain the
services of key Employees, Nonemployee Directors and Independent Contractors and
to further the interests of the Company and its stockholders by providing
incentives in the form of awards to key Employees, qualified Nonemployee
Directors and qualified Independent Contractors who can contribute materially to
the success and profitability of the Company. The following summary of certain
provisions of the Plan does not purport to be complete and is qualified in its
entirety by reference to the Plan, a copy of which is filed as an exhibit to the
Registration Statement of which this Prospectus is a part and is incorporated
herein by reference.
Awards to Employees ("Employee Awards") and awards to Independent
Contractors ("Independent Contractor Awards") generally are treated the same
under the Plan, and the discussion of Employee Awards herein applies, except as
noted, equally to Independent Contractor Awards. Employee Awards may be in the
form of (i) Company Stock Options, (ii) Company SARs, (iii) restricted or
unrestricted grants of Class A Common Stock or units denominated in Class A
Common Stock (collectively, "Stock Awards"), (iv) grants denominated in cash
("Cash Awards") and (v) grants denominated in cash, Class A Common Stock, units
denominated in Class A Common Stock or any other property, the vesting of which
grants are made subject to the attainment of one or more performance goals
("Performance Awards"). Awards to Nonemployee Directors under the Plan
("Director Awards" and, collectively with the Employee Awards and the
Independent Contractor Awards, the "Awards") will be in the form of grants of
Company Stock Options and Stock Awards.
The Plan is not qualified under Section 401(a) of the Code and is not
subject to the provisions of the Employee Retirement Income Security Act of
1974, as amended ("ERISA").
PARTICIPATION AND ELIGIBILITY
Key Employees eligible for Employee Awards under the Plan are employees
holding positions of responsibility with the Company and whose performance, in
the judgment of the Compensation Committee, can have a significant effect on the
success of the Company, as well as individuals who are expected to become
Employees within six months of the date of grant. Directors eligible for
Director Awards under the Plan are those who are not employees of the Company or
DuPont. Independent Contractors eligible for Awards under the Plan are those
providing, or who will provide, services to the Company. Employees who have
previously received DuPont Options and DuPont SARs may also participate through
the Option Program, as described above under "-- Treatment of Outstanding Stock
Options and Stock Appreciation Rights."
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<PAGE> 276
SHARES SUBJECT TO THE PLAN
The Company has reserved the greater of (a) 20 million shares of Class A
Common Stock or (b) shares of Class A Common Stock equal to 3.3 percent of the
number of shares of Common Stock outstanding from time to time, for purposes of
the Plan. No more than 7 million shares of Class A Common Stock shall be
available for ISOs (defined below). No Awards shall be granted under the Plan
with respect to Class B Common Stock. The number of shares authorized to be
issued under the Plan is subject to adjustment as described under "-- Certain
Provisions Applicable to the Plan and the 1998 Plan -- Adjustments" below.
Shares subject to Awards that are forfeited or terminated, exchanged for Awards
that do not involve Class A Common Stock or expire unexercised, or are settled
in cash in lieu of Class A Common Stock, or otherwise such that the shares
covered thereby are not issued, again become available for Awards. Awards that
are issued upon cancellation of an award previously held by an Employee by
reason of the Employee's employment while the Company was wholly owned by
DuPont, as described above under "-- Treatment of Outstanding Stock Options and
Stock Appreciation Rights," shall not count against the limitations on Class A
Common Stock available for Awards.
TERMS, CONDITIONS AND LIMITATIONS OF AWARDS
Employee Awards
The Compensation Committee will determine the type or types of Employee
Awards made under the Plan and will designate the Employees who are to be the
recipients of such awards. An Employee Award shall be embodied in an agreement
(an "Award Agreement"), which will contain such terms, conditions and
limitations as determined by the Compensation Committee. Employee Awards may be
granted singly, in combination or in tandem. Employee Awards may also be made in
combination or in tandem with, in replacement of, or as alternatives to, grants
or rights under the Plan or any other employee plan of the Company or any of its
subsidiaries, including any acquired entity. An Employee Award may provide for
the grant or issuance of additional, replacement or alternative Employee Awards
upon the occurrence of specified events, including the exercise of the original
Employee Award. At the discretion of the Compensation Committee, an Employee may
be offered an election to substitute an Employee Award for another Employee
Award or Employee Awards of the same or different type. All or part of an
Employee Award may be subject to conditions established by the Compensation
Committee, which may include, but are not limited to, continuous service with
the Company, achievement of specific business objectives, increases in specified
indices, attainment of specified growth rates and other comparable measurements
of performance. Upon the termination of employment by an Employee, any
unexercised, deferred, unvested or unpaid Employee Awards will be treated as set
forth in the applicable Award Agreement.
The Compensation Committee may make an Award to an individual who it
expects to become an Employee of the Company within the next six months, with
such Award being subject to the individual actually becoming an Employee within
such time period and to such other terms and conditions as may be established by
the Compensation Committee.
Company Stock Options. A Company Stock Option granted pursuant to the Plan
may consist of either an incentive stock option ("ISO") that complies with the
requirements of Section 422 of the Code or a non-qualified stock option ("NQSO")
that does not comply with such requirements. Independent Contractor Awards may
not include ISOs. ISOs and NQSOs must have an exercise price per share that is
not less than the Fair Market Value (as defined in the Plan) of the Class A
Common Stock on the date of grant; provided, however, that "Fair Market Value"
in the case of any Award made in connection with the Offerings means the price
per share of Class A Common Stock as set forth in the cover page of this
Prospectus.
Subject to the limitations described under "-- Certain Provisions
Applicable to the Plan and the 1998 Plan -- Exercise of Company Stock Options"
below, the terms, conditions and limitations applicable to any Company Stock
Options, including the term of any Company Stock Options and the date or dates
upon which they become exercisable, will be determined by the Compensation
Committee.
97
<PAGE> 277
Company SARs. A Company SAR may be granted under the Plan to the holder of
a Company Stock Option with respect to all or a portion of the shares of Class A
Common Stock subject to such Company Stock Option or may be granted separately.
The terms, conditions and limitations applicable to any Company SARs, including
the term of any Company SARs and the date or dates upon which they become
exercisable, will be determined by the Compensation Committee.
Stock Awards. Stock Awards consist of restricted and non-restricted grants
of Class A Common Stock or units denominated in Class A Common Stock. The terms,
conditions and limitations applicable to any Stock Awards will be determined by
the Compensation Committee. Without limiting the foregoing, rights to dividends
or dividend equivalents may be extended to and made part of any Stock Award in
the discretion of the Compensation Committee. The Compensation Committee may
also establish rules and procedures for the crediting of interest or other
earnings on deferred cash payments and dividend equivalents for Stock Awards.
Cash Awards. Cash Awards consist of grants denominated in cash. The terms,
conditions and limitations applicable to any Cash Awards will be determined by
the Compensation Committee.
Performance Awards. Performance Awards consist of grants made to an
Employee subject to the attainment of one or more performance goals. A
Performance Award will be paid, vested or otherwise deliverable solely upon the
attainment of one or more pre-established, objective performance goals
established by the Compensation Committee prior to the earlier of (i) 90 days
after the commencement of the period of service to which the performance goals
relate and (ii) the lapse of 25 percent of the period of service, and in any
event while the outcome is substantially uncertain. A performance goal may be
based upon one or more business criteria that apply to the Employee, one or more
business units of the Company or the Company as a whole, and may include any of
the following: increased revenue, net income, stock price, market share,
earnings per share, return on equity, return on assets, decrease in costs,
shareholder value, net cash flow, total shareholder return, return on capital,
return on investors' capital, operating income, funds from operations, cash
flow, cash from operations, after-tax operating income, reserve addition,
proceeds from dispositions, production volumes, refinery runs, net cash flow
before financing activities, reserve replacement ratio, finding and development
costs, refinery utilizations and total market value. Prior to the payment of any
compensation based on the achievement of such performance goals, the
Compensation Committee must certify in writing that the applicable performance
goals and any of the material terms thereof were, in fact, satisfied. Subject to
the foregoing, the terms, conditions and limitations applicable to any
Performance Awards will be determined by the Compensation Committee.
Certain Limitations. The Plan contains certain limitations with respect to
Awards that may be made thereunder. In particular, the Plan provides that the
following limitations shall apply to any Employee Awards (but not to any
Independent Contractor Awards) made thereunder: (i) no participant may be
granted, during any calendar year, Employee Awards consisting of Company Stock
Options or Company SARs that are exercisable for or relate to more than 2.5
million shares of Class A Common Stock; (ii) no participant may be granted,
during any calendar year, Employee Awards consisting of Stock Awards covering or
relating to more than 150,000 shares of Class A Common Stock (the limitation set
forth in this clause (ii), together with the limitation set forth in clause (i)
above, being hereinafter collectively referred to as the "Stock-Based Awards
Limitations"); and (iii) no participant may be granted Employee Awards
consisting of cash or in any other form permitted under the Plan (other than
Employee Awards consisting of Company Stock Options or Company SARs or Stock
Awards) in respect of any calendar year having a value determined on the date of
grant in excess of $7.5 million.
Director Awards
For information concerning awards to be granted to Directors, see
"-- Election and Compensation of Directors."
CHANGE IN CONTROL
Award Agreements with respect to Awards granted under the Plan are expected
to provide that in the event of certain terminations of a participant's
employment following a "Change in Control" or "Potential
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<PAGE> 278
Change in Control" of the Company (as defined in the Award Agreement), Awards
held by such participant that were not previously vested or exercisable will
become fully vested and exercisable and generally remain exercisable for the
remainder of their term.
1998 KEY EMPLOYEE STOCK PERFORMANCE PLAN
GENERAL
The Company also has adopted the 1998 Key Employee Stock Performance Plan
of Conoco Inc. (the "1998 Plan") to attract and retain the services of Employees
and to further the interests of the Company and its stockholders by enhancing
the proprietary and personal interests of Employees in the success and
profitability of the Company. The following summary of certain provisions of the
1998 Plan does not purport to be complete and is qualified in its entirety by
reference to the 1998 Plan, a copy of which is filed as an exhibit to the
Registration Statement of which this Prospectus is a part and is incorporated
herein by reference.
Awards to Employees under the 1998 Plan may be in the form of Company Stock
Options and Company SARs. The 1998 Plan is not qualified under Section 401(a) of
the Code and is not subject to the provisions of ERISA.
PARTICIPATION AND ELIGIBILITY
All Employees are eligible for Awards under the 1998 Plan. Awards may also
be granted to individuals who are expected to become Employees within six months
of the date of grant. Employees are selected to participate in the 1998 Plan
through the grant of Awards by the Compensation Committee in its sole
discretion. Employees who have previously received DuPont Options and DuPont
SARs may also participate through the Option Program, as described above under
"-- Treatment of Outstanding Stock Options and Stock Appreciation Rights."
SHARES SUBJECT TO THE 1998 PLAN
The Company has reserved the greater of (a) 18 million shares of Class A
Common Stock or (b) shares of Class A Common Stock equal to 3.0 percent of the
number of shares of Common Stock outstanding from time to time, for purposes of
the 1998 Plan. No more than 6 million shares of Class A Common Stock shall be
available for ISOs. No Awards shall be granted under the 1998 Plan with respect
to Class B Common Stock. The number of shares authorized to be issued under the
1998 Plan is also subject to adjustment as described under "-- Certain
Provisions Applicable to the Plan and the 1998 Plan -- Adjustments" below.
Shares subject to Awards that are forfeited or terminated, exchanged for Awards
that do not involve Class A Common Stock or expire unexercised, or are settled
in cash in lieu of Class A Common Stock, or otherwise such that the shares
covered thereby are not issued, again become available for Awards. Awards that
are issued upon cancellation of an award previously held by an Employee by
reason of the Employee's employment while the Company was wholly owned by
DuPont, as described above under "-- Treatment of Outstanding Stock Options and
Stock Appreciation Rights," shall not count against the limitations on Class A
Common Stock available for Awards.
TERMS, CONDITIONS AND LIMITATIONS OF AWARDS
The Compensation Committee will determine the type or types of Awards made
under the 1998 Plan and will designate the Employees who are to be the
recipients of such awards. An Award shall be embodied in an Award Agreement,
which will contain such terms, conditions and limitations as determined by the
Compensation Committee. Awards may be granted singly, in combination or in
tandem. Awards may also be made in combination or in tandem with, in replacement
of, or as alternatives to, grants or rights under the 1998 Plan or any other
employee plan of the Company or any of its subsidiaries, including any acquired
entity. An Award may provide for the grant or issuance of additional,
replacement or alternative Awards upon the occurrence of specified events,
including the exercise of the original Award. At the discretion of the
Compensation Committee, an Employee may be offered an election to substitute an
Award for another Award or Awards of the same or different type. Upon the
termination of employment by an Employee, any
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<PAGE> 279
unexercised, deferred, unvested or unpaid Awards will be treated as set forth in
the applicable Award Agreement.
The Compensation Committee may make an Award to an individual who it
expects to become an Employee of the Company within the next six months, with
such Award being subject to the individual actually becoming an Employee within
such time period and to such other terms and conditions as may be established by
the Compensation Committee.
Company Stock Options. A Company Stock Option granted pursuant to the 1998
Plan may consist of either an ISO or a NQSO. ISOs and NQSOs must have an
exercise price per share that is not less than the Fair Market Value (as defined
in the 1998 Plan) of the Class A Common Stock on the date of grant. Subject to
the limitations described under "Certain Provisions Applicable to the Plan and
the 1998 Plan -- Exercise of Company Stock Options" below, the terms, conditions
and limitations applicable to any Company Stock Options, including the term of
any Company Stock Options and the date or dates upon which they become
exercisable, will be determined by the Compensation Committee.
Company SARs. A Company SAR may be granted under the 1998 Plan to the
holder of a Company Stock Option with respect to all or a portion of the shares
of Class A Common Stock subject to such Company Stock Option or may be granted
separately. The terms, conditions and limitations applicable to any Company
SARs, including the term of any Company SARs and the date or dates upon which
they become exercisable, will be determined by the Compensation Committee.
Award Limit. The 1998 Plan provides that no participant may be granted,
during any calendar year, Awards that are exercisable for more than 200,000
shares of Class A Common Stock (the "Award Limit").
CHANGE IN CONTROL
Award Agreements with respect to Awards granted under the 1998 Plan are
expected to provide that in the event of certain terminations of a participant's
employment following a "Change in Control" or "Potential Change in Control" of
the Company (as defined in the Award Agreement), Awards held by such participant
that were not previously vested or exercisable will become fully vested and
exercisable and generally remain exercisable for the remainder of their term.
CERTAIN PROVISIONS APPLICABLE TO THE PLAN AND THE 1998 PLAN
ADMINISTRATION
The Compensation Committee will administer the Plan and the 1998 Plan. The
Compensation Committee has full and exclusive power to administer the Plan and
the 1998 Plan and take all actions specifically contemplated thereby or
necessary or appropriate in connection with the administration thereof. Except
insofar as the Plan relates to Nonemployee Directors, the Compensation Committee
has the full and exclusive power to interpret the Plan and the 1998 Plan and to
adopt such rules, regulations and guidelines for carrying out the Plan and the
1998 Plan as the Compensation Committee may deem necessary or proper in keeping
with the objectives thereof. The Compensation Committee may, in its discretion,
extend or accelerate the exercisability of, accelerate the vesting of or
eliminate or make less restrictive any restrictions contained in any Employee
Award granted under the Plan or any Award granted under the 1998 Plan, waive any
restriction or other provision of the Plan (insofar as it relates to Employee
Awards) or the 1998 Plan or in any Employee Award granted under the Plan or
Award granted under the 1998 Plan or otherwise amend or modify any Employee
Award granted under the Plan or Award granted under the 1998 Plan in any manner
that is either (i) not adverse to the Employee holding such Award or (ii)
consented to by such Employee. The Compensation Committee may delegate to the
chief executive officer and other senior officers of the Company its duties
under the Plan or the 1998 Plan. The Compensation Committee also may engage or
authorize the engagement of third-party administrators to carry out
administrative functions under the Plan or the 1998 Plan. The Compensation
Committee may also correct any defect or supply any omission or reconcile any
inconsistency in the Plan or the 1998 Plan or in any Employee Award granted
under the Plan or Award granted under the 1998 Plan. Any decision of the
Compensation Committee in the interpretation and
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<PAGE> 280
administration of the Plan and the 1998 Plan shall lie within its sole and
absolute discretion and shall be final, conclusive and binding on all parties
concerned.
No member of the Compensation Committee or officer of the Company to whom
the Compensation Committee has delegated authority in accordance with the Plan
or the 1998 Plan will be held liable for anything done or omitted to be done by
him or her, by any member of the Compensation Committee or by any officer of the
Company in connection with the performance of any duties under such Plan, except
for his or her own willful misconduct or as expressly provided by statute.
EXERCISE OF COMPANY STOCK OPTIONS
The exercise price of any Company Stock Option must be paid in full at the
time the Company Stock Option is exercised in cash or, if permitted by the
Compensation Committee and elected by the participant, by means of tendering
Class A Common Stock or surrendering another Award (including restricted stock).
The Compensation Committee will determine acceptable methods for tendering Class
A Common Stock or other Awards by a participant to exercise a Company Stock
Option. Unless otherwise provided in the applicable Award Agreement, in the
event shares of restricted stock are tendered as consideration for the exercise
of a Company Stock Option granted under the Plan, a number of the shares issued
upon the exercise of such Company Stock Option, equal to the number of shares of
restricted stock used as consideration therefor, will be subject to the same
restrictions as the restricted stock so submitted as well as any other
restrictions that may be imposed by the Compensation Committee. The Compensation
Committee may adopt additional rules and procedures regarding the exercise of
Company Stock Options from time to time, provided that such rules and procedures
are not inconsistent with the provisions of this paragraph.
DEFERRAL OF AWARD PAYMENTS
With the approval of the Compensation Committee, payments in respect of
Awards may be deferred, either in the form of installments or a future lump sum
payment. Any deferred payment of an Award, whether elected by the participant or
specified by the Award Agreement or by the Compensation Committee, may be
forfeited if and to the extent that the Award Agreement so provides.
CASH-OUT OF AWARDS
At the discretion of the Compensation Committee, an Award that is a Company
Stock Option or Company SAR may be settled by a cash payment equal to the
difference between the Fair Market Value per share of Class A Common Stock on
the date of exercise and the exercise price of the Award, multiplied by the
number of shares with respect to which the Award is exercised.
AWARDS ISSUED UPON CANCELLATION OF DUPONT AWARDS
For a description of the issuance of Company Stock Options and Company SARs
upon cancellation of DuPont Stock Options and DuPont SARs pursuant to the Plan
and the 1998 Plan, see "-- Treatment of Outstanding Stock Options and Stock
Appreciation Rights."
ASSIGNMENT OF INTERESTS PROHIBITED
Unless otherwise determined by the Compensation Committee and provided in
the applicable Award Agreement, no Award or any other benefit under the Plan or
the 1998 Plan shall be assignable or otherwise transferable except by will or
the laws of descent and distribution or pursuant to a qualified domestic
relations order as defined by the Code or Title I of ERISA, or the rules
thereunder. The Compensation Committee may prescribe and include in applicable
Award Agreements other restrictions on transfer. Any attempted assignment of an
Award or any other benefit under the Plan or the 1998 Plan in violation thereof
will be null and void.
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ADJUSTMENTS
In the event of any subdivision or consolidation of outstanding shares of
Class A Common Stock, declaration of a stock dividend payable in shares of Class
A Common Stock or other stock split, each of the Plan and the 1998 Plan provides
for the Compensation Committee to make appropriate, proportionate adjustments to
(i) the number of shares of Class A Common Stock reserved under such Plan, (ii)
the number of shares of Class A Common Stock covered by outstanding Awards,
(iii) the exercise or other price in respect of such Awards, (iv) the
appropriate Fair Market Value and other price determinations for such Awards and
(v) the Stock-Based Awards Limitations (with respect to the Plan) or the Award
Limit (with respect to the 1998 Plan). Furthermore, in the event of any other
recapitalization or capital reorganization of the Company, any consolidation or
merger of the Company with another corporation or entity, the adoption by the
Company of any plan of exchange affecting the Class A Common Stock or any
distribution to holders of Class A Common Stock of securities or property (other
than normal cash dividends or stock dividends), the Board will make appropriate
adjustments to the amounts or other items referred to in clauses (ii), (iii),
(iv) and (v) above to give effect to such transactions, but only to the extent
necessary to maintain the proportionate interest of the holders of the Awards
and to preserve, without increasing, the value thereof. In the event of a
corporate merger, consolidation, acquisition of property or stock, separation,
reorganization or liquidation, the Board may (x) issue or assume Awards by means
of substitution of new Awards, as appropriate, for previously issued Awards or
assume previously issued Awards as part of such adjustment or (y) cancel Awards
that are Company Stock Options or Company SARs and give the participants who are
the holders of such Awards notice and opportunity to exercise for 30 days prior
to such cancellation.
AMENDMENT, MODIFICATION AND TERMINATION
The Board may amend, modify, suspend or terminate the Plan or the 1998 Plan
for the purpose of addressing any changes in legal requirements or for any other
purpose permitted by law, except that (i) no amendment that would impair the
rights of any participant with respect to any outstanding Award may be made
without the consent of such participant and (ii) no amendment legally requiring
stockholder approval will be effective until such approval has been obtained.
RESTRICTIONS
Certificates evidencing shares of Class A Common Stock delivered pursuant
to the Plan or the 1998 Plan may be subject to stop transfer orders and other
restrictions as the Compensation Committee may deem advisable under the rules,
regulations and other requirements of the Commission, applicable securities
exchange or transaction reporting system, and any applicable federal or state
securities law. The Compensation Committee may cause a legend or legends to be
placed upon such certificates (if any) to make appropriate reference to such
restrictions.
TAX WITHHOLDING
The Company or its designated third-party administrator will have the right
to deduct applicable taxes from any Employee Award payment under the Plan or any
Award payment under the 1998 Plan and withhold, at the time of delivery (or
vesting, for purposes of the Plan) of cash or shares of Class A Common Stock
under such Plan, an appropriate amount of cash or number of shares of Class A
Common Stock, or combination thereof, for the payment of taxes. The Compensation
Committee may also permit withholding to be satisfied by the transfer to the
Company of shares of Class A Common Stock previously owned by the holder of such
Award for which withholding is required. The Compensation Committee may provide
for loans, on either a short-term or demand basis, from the Company to an
Employee or Independent Contractor to permit the payment of taxes required by
law.
UNFUNDED PLAN
Both the Plan and the 1998 Plan will be unfunded. Any bookkeeping accounts
that are established with respect to participants for purposes of the Plan or
the 1998 Plan will be used merely as a bookkeeping
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convenience. The Company is not required to segregate any assets for purposes of
the Plan or the 1998 Plan or awards thereunder, nor will either Plan be
construed as providing for such segregation, nor will the Company, the Board or
the Compensation Committee be deemed to be a trustee of any benefit granted
under either Plan. Any liability or obligation of the Company to any participant
under the Plan or the 1998 Plan will be based solely on any contractual
obligations that may be created by such Plan and any Award Agreement, and no
such liability or obligation of the Company will be deemed to be secured by any
pledge or other encumbrance on any property of the Company. Neither the Company,
the Board nor the Compensation Committee will be required to give any security
or bond for the performance of any obligation that may be created by the Plan or
the 1998 Plan.
FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN AND THE 1998 PLAN
The following is a discussion of material U.S. federal income tax
consequences to participants in the Plan and the 1998 Plan. This discussion is
based on statutory provisions, Treasury regulations thereunder, judicial
decisions and rulings of the Internal Revenue Service (the "IRS") in effect on
the date hereof. This discussion does not purport to be complete, and does not
cover, among other things, state, local or foreign tax treatment of
participation in the Plan or the 1998 Plan. Furthermore, differences in
participants' financial situations may cause federal, state and local tax
consequences of participation in the Plan or the 1998 Plan to vary. Therefore,
each participant is urged to consult his or her own accountant, legal counsel or
other financial advisor regarding individual tax consequences of participation
in the Plan or the 1998 Plan.
Nonqualified Stock Options; Stock Appreciation Rights; Incentive Stock
Options. Participants will not realize taxable income upon the grant of a NQSO
or Company SAR. Upon the exercise of a NQSO or Company SAR, the Employee or
Nonemployee Director will recognize ordinary income (subject, in the case of
Employees, to withholding by the Company) in an amount equal to the excess of
(i) the amount of cash and the Fair Market Value on the date of exercise of the
Class A Common Stock received over (ii) the exercise price (if any) paid
therefor. The Employee or Nonemployee Director will generally have a tax basis
in any shares of Class A Common Stock received pursuant to the exercise of a
Company SAR, or pursuant to the cash exercise of a NQSO, that equals the Fair
Market Value of such shares on the date of exercise. Generally, the Company will
be entitled to a deduction for U.S. federal income tax purposes that corresponds
as to timing and amount with the compensation income recognized by the
participant under the foregoing rules.
Employees will not have taxable income upon the grant of an ISO. Upon the
exercise of an ISO, the Employee will not have taxable income, although the
excess of the Fair Market Value of the shares of Class A Common Stock received
upon exercise of the ISO ("ISO Stock") over the exercise price will increase the
alternative minimum taxable income of the Employee, which may cause such
Employee to incur alternative minimum tax. The payment of any alternative
minimum tax attributable to the exercise of an ISO would be allowed as a credit
against the Employee's regular tax liability in a later year to the extent the
Employee's regular tax liability is in excess of the alternative minimum tax for
that year.
Upon the disposition of ISO Stock that has been held for the requisite
holding period (generally, at least two years from the date of grant and one
year from the date of exercise of the ISO), the Employee will generally
recognize capital gain (or loss) equal to the difference between the amount
received in the disposition and the exercise price paid by the Employee for the
ISO Stock. However, if an Employee disposes of ISO Stock that has not been held
for the requisite holding period (a "disqualifying disposition"), the Employee
will recognize ordinary income in the year of the disqualifying disposition to
the extent that the Fair Market Value of the ISO Stock at the time of exercise
of the ISO (or, if less, the amount realized in the case of an arm's-length
disqualifying disposition to an unrelated party) exceeds the exercise price paid
by the Employee for such ISO Stock. The Employee would also recognize capital
gain (or, depending on the holding period, additional ordinary income) to the
extent the amount realized in the disqualifying disposition exceeds the Fair
Market Value of the ISO Stock on the exercise date. If the exercise price paid
for the ISO Stock exceeds the amount realized in the disqualifying disposition
(in the case of an arm's-length disposition to an unrelated party), such excess
would ordinarily constitute a capital loss.
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The Company will generally not be entitled to any federal income tax
deduction upon the grant or exercise of an ISO, unless the Employee makes a
disqualifying disposition of the ISO Stock. If an Employee makes such a
disqualifying disposition, the Company will generally be entitled to a tax
deduction that corresponds as to timing and amount with the compensation income
recognized by the Employee under the rules described in the preceding paragraph.
Under current rulings, if a participant transfers previously held shares of
Class A Common Stock (other than ISO Stock that has not been held for the
requisite holding period) in satisfaction of part or all of the exercise price
of a NQSO or ISO, the participant will recognize income with respect to the
Class A Common Stock received in the manner described above, but no additional
gain will be recognized as a result of the transfer of such previously held
shares in satisfaction of the NQSO or ISO exercise price. Moreover, that number
of shares of Class A Common Stock received upon exercise which equals the number
of shares of previously held Class A Common Stock surrendered therefor in
satisfaction of the NQSO or ISO exercise price will have a tax basis that
equals, and a holding period that includes, the tax basis and holding period of
the previously held shares of Class A Common Stock surrendered in satisfaction
of the NQSO or ISO exercise price. Any additional shares of Class A Common Stock
received upon exercise will have a tax basis that equals the amount of cash (if
any) paid by the participant, plus, in the case of a NQSO, the amount of
ordinary income recognized by the participant with respect to the Class A Common
Stock received.
Cash Awards; Stock Unit Awards; Stock Awards. An Employee will recognize
ordinary compensation income upon receipt of cash pursuant to a Cash Award or
Performance Award or, if earlier, at the time such cash is otherwise made
available for the Employee to draw upon it. An Employee will not have taxable
income upon the grant of a Stock Award in the form of units denominated in Class
A Common Stock ("Stock Unit Award") but rather will generally recognize ordinary
compensation income at the time the Employee receives Class A Common Stock or
cash in satisfaction of such Stock Unit Award in an amount equal to the Fair
Market Value of the Class A Common Stock or cash received. In general, a
participant will recognize ordinary compensation income as a result of the
receipt of Class A Common Stock pursuant to a Stock Award or Performance Award
in an amount equal to the Fair Market Value of the Class A Common Stock when
such stock is received; provided, however, that if the stock is not transferable
and is subject to a substantial risk of forfeiture when received, the
participant will recognize ordinary compensation income in an amount equal to
the Fair Market Value of the Class A Common Stock when it first becomes
transferable or is no longer subject to a substantial risk of forfeiture, unless
the participant makes an election to be taxed on the Fair Market Value of the
Class A Common Stock when such stock is received.
An Employee will be subject to withholding for federal, and generally for
state and local, income taxes at the time the Employee recognizes income under
the rules described above with respect to Class A Common Stock or cash received
pursuant to a Cash Award, Performance Award, Stock Award or Stock Unit Award.
Dividends that are received by a participant prior to the time that the Class A
Common Stock is taxed to the participant under the rules described in the
preceding paragraph are taxed as additional compensation, not as dividend
income. The tax basis of a participant in the Class A Common Stock received will
equal the amount recognized by the Employee as compensation income under the
rules described in the preceding paragraph, and the Employee's holding period in
such shares will commence on the date income is so recognized.
Generally, the Company will be entitled to a deduction for U.S. federal
income tax purposes that corresponds as to timing and amount with the
compensation income recognized by the participant under the foregoing rules.
1998 GLOBAL PERFORMANCE SHARING PLAN
The Company has adopted the 1998 Global Performance Sharing Plan (the
"Global Plan"). The number of shares of Common Stock reserved for issuance under
the Global Plan is generally subject to equitable adjustment upon the occurrence
of any stock dividend, stock split, subdivision or consolidation. Pursuant to
the Global Plan, the Company may grant nonqualified Company Stock Options and
SARs.
The Global Plan will be administered by the Compensation Committee. The
Committee shall have full authority, subject to the provisions of the Global
Plan to, among other things, determine the terms and
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conditions of Company Stock Options and SARs and prescribe, amend and rescind
rules and regulations relating to the Global Plan.
Grants of Company Stock Options and SARs may be made under the Global Plan
to all employees of the Company and its present or future subsidiaries, provided
that (i) certain management employees who receive Company Stock Options or SARs
under the 1998 Stock and Performance Incentive Plan as of the time of the
Offerings will not be granted Company Stock Options or SARs under the Global
Plan as of such time and (ii) specified groups of employees may be excluded from
participation by the Company or particular subsidiaries. The exercise price per
share subject to a Company Stock Option or SAR may not be less than the fair
market value of a share of Class A Common Stock on the date of grant. Company
Stock Options and SARs will have a term of not more than ten years and will
become exercisable with respect to one-third of the shares of Common Stock
subject thereto on each of the first three anniversaries of the dates of grant.
In the event of certain terminations of a participant's employment
following a "Change in Control" or "Potential Change in Control" of the Company
(as defined in the Global Plan), Company Stock Options and SARs held by such
participant that were not previously vested or exercisable will become fully
vested and exercisable and generally remain exercisable for the remainder of
their term.
The Global Plan may, at any time and from time to time, be altered,
amended, suspended or terminated by the Board of Directors, in whole or in part,
except that (i) no amendment or alteration that would adversely affect the
rights of any participant under any Award previously granted to such participant
shall be made without the consent of such participant and (ii) no amendment or
alteration shall be effective prior to its approval by the stockholders of the
Company to the extent such approval is required by applicable law.
GRANTS AS OF THE OFFERINGS
The following table sets forth, with respect to (i) each Named Officer,
(ii) the nonemployee members of the Board of Directors as a group (the
"Nonemployee Director Group") and (iii) all other employees as a group ("All
Other Employees"), the outstanding grants held by such persons at the time of
the Offerings.
<TABLE>
<CAPTION>
COMPANY STOCK OPTIONS(1)
------------------------
<S> <C>
Archie W. Dunham(2)......................................... 1,304,300
Gary W. Edwards............................................. 435,200
Robert E. McKee III......................................... 435,200
Robert W. Goldman........................................... 123,400
Rick A. Harrington.......................................... 123,400
Nonemployee Director Group(3) (6 persons)................... 189,500
All Other Employees(4)...................................... 7,200,000
</TABLE>
- ---------------
(1) These Company Stock Options and Company SARs will become exercisable with
respect to one-third of the shares of Class A Common Stock subject thereto
on each of the first three anniversaries of the date of grant (other than
Mr. Dunham's, whose Company Stock Options will become exercisable with
respect to one-third of the shares subject thereto on each of the second,
third and fourth anniversaries of the date of grant).
(2) Mr. Dunham will also receive Company restricted stock units with an
aggregate value of $1.1 million, which units will vest on the third
anniversary of the date of grant.
(3) The members of the Nonemployee Director Group will also receive Company
restricted stock units with an aggregate value of $575,000, which units will
vest on the third anniversary of the date of grant.
(4) The number of Company Stock Options and Company SARs held by the All Other
Employees group has been estimated based on the approximately 12,200
employees in the All Other Employees group.
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DEFERRED COMPENSATION PLAN FOR NONEMPLOYEE DIRECTORS
The Company has adopted the Deferred Compensation Plan for Nonemployee
Directors (the "Deferred Compensation Plan"). The purpose of the Deferred
Compensation Plan is to provide nonemployee directors of the Company the
opportunity to defer a portion of their compensation and to provide greater
incentives for those directors to attain and maintain the highest standards of
performance, to further align the interests of such directors with those of the
stockholders generally and to reward such directors for outstanding performance.
The Deferred Compensation Plan will be administered by the Compensation
Committee. The Compensation Committee will supervise the administration and
enforcement of the Deferred Compensation Plan according to the terms and
provisions thereof and will have such powers as are necessary to accomplish the
purposes of the Deferred Compensation Plan.
Under the Deferred Compensation Plan, participants may voluntarily elect to
defer all or a portion of their annual fees and other fees (including restricted
stock units granted under the Plan). An election to defer must generally be made
prior to the commencement of the fiscal year in which it will be earned; once
made, the election is generally irrevocable for the first calendar year with
respect to which the election is made. The deferred amounts will be deemed to be
invested, pursuant to the election of the participant, in Class A Common Stock
or in an interest-bearing account.
Each deferral election will indicate the time (either on the date of
termination of service as a director or on the date that is five years following
such date) and form of payment for the amounts to be deferred. Distributions
will be made in cash or Class A Common Stock to the participant at the time
irrevocably selected on the deferral form, or, in the event of the participant's
death, to the participant's designated beneficiary. Upon a Change in Control of
the Company (as defined in the Deferred Compensation Plan), all deferred amounts
(including deferred restricted stock units) can be paid in full.
Each participant or beneficiary will be an unsecured general creditor with
respect to any payments due and owing to such participant pursuant to the
Deferred Compensation Plan.
The Board of Directors of the Company can amend or terminate the Deferred
Compensation Plan at any time, except that no amendment may be made that would
impair the rights of a participant with respect to amounts already deferred or
otherwise allocated to his account.
SHARES ISSUED PURSUANT TO AWARDS
It is currently expected that shares of Class A Common Stock issued upon
exercise of, or otherwise pursuant to, awards granted under the Company's
benefit plans, including the Plan, the 1998 Plan and the Global Plan, will be
comprised of shares previously purchased by the Company in the open market or of
authorized but previously unissued shares. The Company currently expects that it
will periodically purchase shares in the open market so that there will be no
significant increase in the number of issued and outstanding shares of Class A
Common Stock resulting from awards granted under the Company's benefit plans.
SEVERANCE ARRANGEMENTS
On May 10, 1998, the Company entered into a severance agreement (the
"Severance Agreement") with Archie W. Dunham. The Severance Agreement has an
initial term of three years, which term will be extended, if necessary, upon any
"Change in Control" or "Public Offering" of the Company (as each such term is
defined in the Severance Agreement) so that the Severance Agreement will expire
no earlier than 24 months after either such event. The Offerings described
herein will constitute a Public Offering for purposes of the Severance
Agreement. The Severance Agreement provides that if, during the term of the
Severance Agreement, Mr. Dunham's employment is terminated by the Company other
than for cause, or by reason of Mr. Dunham's death or disability, or if Mr.
Dunham terminates his employment for "Good Reason" (as defined in the Severance
Agreement), Mr. Dunham will be entitled to (i) a lump sum severance payment
equal to three times the sum of his base salary and previous year's bonus, (ii)
36 months of benefit continuation, (iii) a pro rata portion of the annual bonus
for which he is eligible in the year of termination and
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(iv) vesting of any unvested equity-based awards from the Company. Mr. Dunham
will also be entitled to terminate his employment and receive the foregoing
benefits if, prior to the second anniversary of the occurrence of the Public
Offering or after DuPont reduces its ownership to less than 50 percent, he is
not appointed as Chairman of the Board of the Company (unless his employment had
previously terminated by reason of death, disability or for cause). Mr. Dunham
will also be entitled to receive an additional payment (a "gross-up payment")
sufficient to compensate him for the amount of any excise tax imposed on
payments made under the Severance Agreement or otherwise pursuant to Section
4999 of the Code and for any taxes imposed on such additional payment.
The Company has established the Conoco Inc. Key Employee Severance Plan
(the "Key Employee Severance Plan"), which covers certain employees of the
Company, including Gary W. Edwards, Robert E. McKee III, Robert W. Goldman and
Rick A. Harrington. The Key Employee Severance Plan provides that if the
employment of a participant in the Key Employee Severance Plan is terminated (i)
within two years of a "Change in Control" of the Company or (ii) after a
"Potential Change in Control" of the Company but prior to a Change in Control
(whether or not a Change in Control ever occurs), in either case by the Company
other than for "Cause" or by the participant for "Good Reason" (as such terms
are defined in the Key Employee Severance Plan), the participant will be
entitled to (i) a lump sum severance payment equal to two or three times the sum
of his base salary and previous year's bonus, (ii) 24 or 36 months of benefits
continuation and (iii) a pro rata portion of the annual bonus for which he is
eligible in the year of termination and, if necessary, a gross-up payment
sufficient to compensate the participant for the amount of any excise tax
imposed on payments made under the Key Employee Severance Plan or otherwise
pursuant to Section 4999 of the Code and for any taxes imposed on such an
additional payment. The Key Employee Severance Plan has a three-year term
commencing on May 10, 1998, which term will be extended, if necessary, upon a
Change in Control so that it expires no earlier than 24 months after such an
event. Amounts payable under the Key Employee Severance Plan will be in lieu of
any payments or benefits which may be payable to the severed employee under any
other severance plan, policy or program of the Company.
The Company has also established both the (i) Conoco Inc. Key Employee
Temporary Severance Plan (the "Key Employee Temporary Severance Plan") and (ii)
the Conoco Inc. Temporary Severance Plan (the "Temporary Severance Plan"), each
of which covers certain employees of the Company, including the Named Officers.
Under the Key Employee Temporary Severance Plan (which expires in 2001), if the
employment of a participant is involuntarily terminated due to a reduction in
force or experiences defined adverse employment changes (including certain
relocation requirements and reductions in pay or position), the individual will
be entitled to one year's base salary and variable bonus. In the same
circumstances as is described under the Key Employee Temporary Severance Plan,
benefits payable under the Temporary Severance Plan are paid to a participant
upon termination of employment, except that benefits upon such a termination are
equal to two weeks' pay for each completed year of service, up to a maximum of
52 weeks' pay. Amounts payable under the Key Employee Temporary Severance Plan
are reduced by amounts payable under the Temporary Severance Plan.
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ARRANGEMENTS BETWEEN THE COMPANY AND DUPONT
In 1998 and prior years, there have been significant transactions between
the Company and DuPont involving services (such as natural gas and gas liquids
supply, cash management, other financial services, purchasing, legal, computer
and corporate activities). See Note 3 to the Notes to Combined Financial
Statements. For purposes of governing certain on-going relationships between the
Company and DuPont and to facilitate implementation of the Separation, the
Company and DuPont, or their respective subsidiaries, will enter into (or
continue in effect) various agreements and relationships, including those
described below. The agreements described below were negotiated in the context
of a parent-subsidiary relationship and therefore are not the result of
arm's-length negotiations between independent parties. There can be no
assurance, therefore, that such agreements, or the transactions provided for
therein, or any amendments thereof will be on terms at least as favorable to the
Company as could have been obtained from unaffiliated third parties.
Certain agreements summarized below are included as exhibits to the
Registration Statement of which this Prospectus is a part, and the following
summaries are qualified in their entirety by reference to such exhibits which
are herein incorporated by reference.
RESTRUCTURING, TRANSFER AND SEPARATION AGREEMENT
Prior to the Offerings, DuPont and the Company will enter into a
Restructuring, Transfer and Separation Agreement (the "Separation Agreement"),
which provides for, among other things, the principal transactions required to
effect the Separation and the Offerings, including the transfer to the Company
of oil and gas assets, the division between DuPont and the Company of certain
liabilities, and certain other agreements governing the relationship between
DuPont and the Company following the Separation and the Offerings.
To effect the Separation, (i) DuPont will transfer or cause its
subsidiaries to transfer assets related to the oil and gas business (including
its equity interests in certain companies) to the Company or to a subsidiary of
the Company and the Company or its subsidiaries will assume substantially all of
the liabilities of the oil and gas business, and (ii) the Company will transfer
or cause its subsidiaries to transfer assets unrelated to the oil and gas
business (including its equity interests in certain companies) to DuPont or a
subsidiary of DuPont and DuPont or its subsidiaries will assume substantially
all of the liabilities associated with such transferred businesses. The
Separation Agreement provides that assets that cannot legally be transferred
prior to the effective date of the Separation (the "Effective Date") will be
transferred as soon as is practical following receipt of all necessary consents
of third parties and regulatory approvals. All transfers between DuPont and the
Company and their respective subsidiaries will be on an "as is, where is" basis,
and without any representations or warranties. As a result, the Company and
DuPont, as the case may be, each have agreed to bear the economic and legal
risks that any conveyances of assets are insufficient to vest in such party good
and marketable title to such assets. The parties have also agreed that following
the Offerings, DuPont and its subsidiaries (excluding the Company and its
subsidiaries) on the one hand, and the Company and its subsidiaries on the other
hand, will transfer, in some instances without additional consideration, to the
other, all assets which, subsequent to the Effective Date, the parties determine
more properly belong in the other's business.
The Separation Agreement provides for assumptions and cross-indemnities
designed to place, as of the Effective Date with certain exceptions, sole
financial responsibility on the Company and its subsidiaries for all
liabilities, known or unknown, actual or contingent, associated with the
Company's current and historical businesses and operations (including those
conducted prior to and following DuPont's acquisition of the Company in 1981),
including the oil and gas business, the Company's former chemical business (with
limited exceptions), the Company's interest in the Pocahontas Gas Partnership,
and all of the assets transferred to the Company in connection with the
Separation, but excluding the Company's former coal business, and to place sole
financial responsibility for DuPont's other businesses with DuPont and its other
subsidiaries. Responsibility for environmental matters and claims relating to
businesses sold to Cain Chemical, including the operations at Matagorda and
Chocolate Bayou, Texas, will not be assumed by the Company, but will be retained
exclusively by DuPont. Each party has also agreed to assume and be responsible
for certain liabilities associated with activities and operations of the other
party and its subsidiaries to the extent performed for or on behalf of its
current or historical business. The parties have also agreed to bear
responsibility in proportion
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to the relative amounts of waste deposited by each party on any contaminated
off-site location. The Separation Agreement contains indemnification and
contribution provisions in connection with (i) the assumption or retention of
liabilities by the Company and DuPont, (ii) the conduct of the parties'
respective businesses subsequent to the Separation, (iii) misstatements or
omissions in the Registration Statement of which this Prospectus is a part with
respect to information provided by the other party and (iv) the use of the
other's trademarks, tradenames, logos or other identifiers.
The Separation Agreement contains certain provisions regarding corporate
governance of the Company, most of which depend on the level of DuPont's
ownership interest in the Company. The Separation Agreement provides that for so
long as DuPont beneficially owns shares representing at least 30 percent of the
voting power of all of the outstanding shares of capital stock of the Company
entitled to vote generally in the election of directors excluding any class or
series of capital stock entitled to vote only in the event of dividend
arrearages ("Voting Stock"), Conoco will not, without the prior consent of
DuPont, adopt any amendments to its certificate of incorporation or bylaws or
take any action to recommend to its stockholders certain actions which would,
among other things, limit the legal rights of, or deny any benefit to DuPont or
any of its subsidiaries as Conoco stockholders in a manner not applicable to
Conoco stockholders generally. The Separation Agreement provides that, for so
long as DuPont beneficially owns shares representing 50 percent or more of the
voting power of the outstanding Voting Stock, (i) DuPont will have the right to
designate for nomination by the Company's Board of Directors (or any nominating
committee thereof) a majority of the members of the Company's Board of Directors
and (ii) a majority of the members of the Audit and Compliance and Compensation
Committees of the Company's Board of Directors will be required to be directors
designated by DuPont. For so long as DuPont beneficially owns shares
representing less than 50 percent but more than 10 percent of the voting power
of outstanding Voting Stock, DuPont will have the right to designate for
nomination by the Company's Board of Directors (or any nominating committee
thereof) a number of directors proportionate to its voting power of the
outstanding Common Stock of the Company, and, so long as DuPont beneficially
owns greater than 10 percent of the voting power, all Committees of the Board of
Directors will be required to include at least one director designated by
DuPont. For so long as DuPont beneficially owns shares representing 20 percent
or more of the outstanding Voting Stock, the Company will be required to deliver
to DuPont certain financial information of the Company. In addition, as long as
DuPont owns 50 percent or more of the voting power of the outstanding Voting
Stock, the Company will not be permitted to make certain changes in its
accounting principles or practices without the consent of DuPont. The Separation
Agreement also generally provides that, if requested by the Company, DuPont,
under certain limited circumstances, and as long as DuPont determines that it
will not adversely affect DuPont's ability or timing in receiving a favorable
ruling from the Internal Revenue Service ("IRS") with respect to a tax-free
distribution under Section 355 of the Code of Conoco's Class B Common Stock held
by DuPont, will seek such ruling on the basis that it will amend the Certificate
of Incorporation of Conoco to include a provision for the automatic conversion
of all Class B Common Stock into Class A Common Stock under certain
circumstances.
The Separation Agreement provides that the Company will, subject to certain
exceptions, use the proceeds of the incurrence of any indebtedness or of the
issuance of any equity securities by the Company and any of its subsidiaries,
including the proceeds of the Offerings, to repay debt owed to DuPont, including
the $7.5 billion Note described below under the caption "-- Intercompany Notes."
Generally, all one-time costs, including fees and taxes, directly relating to
the Offerings, the Separation or any transaction subsequent to the Offerings
that results in a reduction in the number of shares of Voting Stock owned by
DuPont if DuPont's ownership prior to such transaction represents at least 50
percent of the voting power of all of the outstanding Voting Stock that are
incurred and paid between May 11, 1998 and 24 months following the date on which
DuPont's voting power falls below 50 percent of the voting power of all of the
outstanding Voting Stock, are to be paid or reimbursed by DuPont under the terms
of the Separation Agreement.
DuPont has agreed that following the application of the net proceeds of the
Offerings and the utilization by Conoco of a portion of its cash and cash
equivalents in connection with the matters discussed below under the caption
"-- Intercompany Notes," Conoco (excluding Petrozuata) will have an aggregate of
$225 million of cash and cash equivalents on hand and $70 million of additional
monetary assets held by the Company's
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captive insurance company and its subsidiaries at the end of the month in which
the Offerings occur. If, at the end of the month in which the Offerings occur,
Conoco does not have $225 million in cash and cash equivalents, DuPont will pay
to Conoco the amount required to increase Conoco's cash and cash equivalents to
$225 million, unless and to the extent DuPont determines in good faith that such
deficiency occurred by reason of Conoco not operating its business in the
ordinary course consistent with past practice. The Separation Agreement requires
that the Company use its best efforts to terminate, or have the Company or a
subsidiary of the Company substituted for DuPont, under all existing guarantees
by DuPont of obligations relating to the business of the Company, including
financial, performance and other guarantee obligations, and under letters of
credit for the account of DuPont issued on behalf of the Company's business.
Commencing on the earlier of (i) two years following closing of the Offerings or
(ii) the date that DuPont holds less than 50 percent of the voting power of the
outstanding Common Stock of the Company, the Company will pay DuPont a fee of
.20 percent per annum on the total amount of any outstanding guarantees and
letters of credit. As of the Effective Date, the amount of such guarantees is
agreed to be $1,610 million. The amount of guarantees for purposes of the fee
calculation may be increased or decreased in good faith judgment of the chief
financial officer or treasurer of DuPont to reflect changes in the financial
exposure of DuPont but may only be adjusted at such time as the amount of any
such adjustment exceeds $50 million.
INTERCOMPANY NOTES
On July 20, 1998, a wholly owned subsidiary of the Company issued a
promissory note (the "Note") to DuPont in the aggregate principal amount of $7.5
billion bearing interest at a rate of 6.0125 percent per annum. The Note has a
maturity date of January 2, 2000. The Note may be voluntarily prepaid without
penalty or premium. The Note also provides for mandatory prepayments in the
event cash proceeds are realized by the Company from the incurrence of
indebtedness or the issuance of equity securities by the Company or its
subsidiaries. The Note includes certain covenants and customary events of
default, including failure to pay interest when due, certain events of
bankruptcy of the Company and change of control. The consent of DuPont is also
required prior to the Company entering into certain transactions.
The Company will use the net proceeds of the Offerings and possibly a
portion of its cash and cash equivalents to repay a portion of amounts
outstanding under the Note including principal and accrued interest, such that
immediately following the Offerings, the aggregate principal amount owed by the
Company to DuPont pursuant to the Note will be $4,846 million. See "Use of
Proceeds." The Company will also use a portion of its cash and cash equivalents
to repay or purchase, or DuPont will contribute to the Company, all of the
remaining principal balance of the Intercompany Notes described in clauses (ii),
(iii) and (iv) of "Use of Proceeds" (provided that a portion of the notes
referred to in clauses (ii) and (iv) of "Use of Proceeds" may remain outstanding
in lieu of all or part of the promissory note described in the next sentence).
Pursuant to the Employee Matters Agreement and the Separation Agreement, the
Company will also owe DuPont an additional amount, estimated at $7 million,
which will be evidenced by a promissory note. See "-- Employee Matters
Agreement."
The Company and DuPont will enter into a Revolving Credit Agreement under
which DuPont will provide the Company with a revolving credit facility in
principal amount of up to $500 million. The term of DuPont's commitment under
this facility will begin upon satisfaction of certain conditions and continue
until the earlier of (i) October 11, 1999 or (ii)(a) the date on which DuPont's
direct or indirect voting power in the Company falls below 50 percent of the
outstanding voting power of the Company or (b) DuPont's election to terminate
its commitment as the result of an unremedied event of default. Loans under the
Revolving Credit Agreement will be subject to mandatory prepayment to the extent
the Company's cash and cash equivalents exceed $325 million or such higher
amount as the Company and DuPont may agree. Loans under this facility will bear
interest at a rate equal to 30-day LIBOR plus 0.20 percent per annum and may be
voluntarily prepaid without penalty or premium, but may not be prepaid prior to
the date which is five days following the end of the month in which the
Offerings occur.
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TAX SHARING AGREEMENT
The Company and certain of its subsidiaries have historically been included
in DuPont's consolidated group (the "Consolidated Group") for U.S. federal
income tax purposes as well as in certain consolidated, combined or unitary
groups which include DuPont and/or certain of its subsidiaries (a "Combined
Group") for state, local and foreign income tax purposes. Prior to the
Offerings, the Company and DuPont will enter into a tax sharing agreement (the
"Tax Sharing Agreement") in connection with the Offerings. Pursuant to the Tax
Sharing Agreement, the Company and DuPont generally will make payments between
them such that, with respect to tax returns for any taxable period in which the
Company or any of its subsidiaries is included in the Consolidated Group or any
Combined Group, the amount of taxes to be paid by the Company will be
determined, subject to certain adjustments, as if the Company and each of its
subsidiaries included in the Consolidated Group or Combined Group filed their
own consolidated, combined or unitary tax return. The Company and DuPont will
jointly prepare pro forma tax returns with respect to any tax return filed with
respect to the Consolidated Group or any Combined Group in order to determine
the amount of tax sharing payments under the Tax Sharing Agreement. The Company
generally will be responsible for any taxes with respect to tax returns that
include only the Company and its subsidiaries.
DuPont will be primarily responsible for preparing and filing any tax
return with respect to the Consolidated Group or any Combined Group. Pursuant to
the Tax Sharing Agreement, the Company will be responsible for preparing the
portion of any such tax return that relates exclusively to the Company or any of
its subsidiaries; provided, that the Company will be required to submit any such
portions to DuPont for DuPont's review and approval, which approval may not be
unreasonably withheld. The Company generally will be responsible for preparing
and filing any tax returns that include only the Company and its subsidiaries.
DuPont will be primarily responsible for controlling and contesting any
audit or other tax proceeding with respect to the Consolidated Group or any
Combined Group. Pursuant to the Tax Sharing Agreement, the Company will have the
right to control and contest any audit or tax proceeding that relates directly
to any tax item included on the portion of any tax return which the Company is
responsible for preparing; provided, that the entering into by the Company of
any settlement or agreement or any decision in connection with any judicial or
administrative tax proceeding will be subject to the review and approval of
DuPont, which approval may not be unreasonably withheld. Disputes arising
between the parties relating to matters covered by the Tax Sharing Agreement are
subject to resolution through specific dispute resolution provisions.
The Company has been included in the Consolidated Group for periods in
which DuPont beneficially owned at least 80 percent of the total voting power
and value of the outstanding stock of the Company. It is not expected that the
Company will be included in the Consolidated Group following the Offerings. Each
member of a consolidated group for U.S. federal income tax purposes is jointly
and severally liable for the federal income tax liability of each other member
of the consolidated group. Accordingly, although the Tax Sharing Agreement
allocates tax liabilities between the Company and DuPont, for any period in
which the Company was included in the Consolidated Group, the Company could be
liable in the event that any federal tax liability was incurred, but not
discharged, by any other member of the Consolidated Group.
DuPont and the Company have agreed to cooperate, and the Company has agreed
to take any and all actions reasonably requested by DuPont, in connection with
DuPont's obtaining of a ruling ("Ruling") from the Internal Revenue Service
regarding the tax-free nature of a split-off or spin-off of Conoco stock by
DuPont to DuPont stockholders. The Company generally will be responsible for,
among other things, any corporate taxes resulting from the failure of the
split-off or spin-off to qualify as a tax-free transaction to the extent such
taxes are attributable to, or result from, any action or failure to act by the
Company or certain transactions involving the Company following the split-off or
spin-off.
EMPLOYEE MATTERS AGREEMENT
Prior to the Offerings, DuPont and the Company will enter into an agreement
(the "Employee Matters Agreement"), which will set forth the understanding
between the parties with respect to current and former employees of DuPont and
the Company, including without limitation claims arising out of or relating to
any employee benefit or compensation plan, agreement, arrangement or program, as
well as collective bargaining
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agreements, accrued wages and workers' compensation, holiday, vacation and
disability benefits. Except as described below, the parties have agreed that, as
of the Effective Date (a) DuPont, or an appropriate DuPont subsidiary, will
assume and be solely responsible for all liabilities and obligations whatsoever
with respect to current and former employees of DuPont other than the
Transferred Business Employees (as defined below) and (b) the Company, or an
appropriate Company subsidiary, will assume and be solely responsible for all
liabilities and obligations whatsoever with respect to Transferred Business
Employees. "Transferred Business Employees" means (a) those persons who are
employed as officers or employees of the business transferred to Conoco pursuant
to the Separation Agreement (the "Transferred Business") immediately prior to or
effective as of the Effective Date and (b) all former officers and employees of
the Transferred Business who, immediately prior to the termination of their
employment, were employed in the Transferred Business. In the event that on the
Effective Date (or if such person is no longer employed as of the Effective
Date, then as of the last date of such person's employment) any person will be
(or was) employed in the Transferred Business, as well as in the business
retained by DuPont pursuant to the Separation Agreement, such person will be
considered a Transferred Employee if, but only if, on the Effective Date (or if
such person is no longer employed as of the Effective Date, then as of the last
date of such person's employment) such person's primary employment will be (or
was) in the Transferred Business. Notwithstanding the preceding, (a) with
respect to any claim of a Transferred Business Employee relating to a liability
or obligation arising under the DuPont Savings and Investment Plan or any DuPont
health benefit plan, which claim arose while such Transferred Business Employee
was a DuPont employee, DuPont (and the applicable DuPont plan) or the applicable
DuPont subsidiary (and the applicable DuPont subsidiary plan) will retain all
such liabilities and obligations of such Transferred Business Employee and (b)
with respect to any claim of a current or former DuPont employee (other than the
Transferred Business Employees) relating to a liability or obligation arising
under the Thrift Plan for Employees of Conoco Inc. or any Conoco health benefit
plan, which claim arose while such DuPont employee was a Company employee,
Conoco (and the applicable Conoco plan) or the applicable Conoco subsidiary (and
the applicable Conoco subsidiary plan) will assume and be solely responsible for
all such liabilities and obligations of such DuPont employee.
Following the Effective Date, the Transferred Business Employees who
participate in the DuPont Pension Plan will continue to participate in the
DuPont Pension Plan. Effective as of the date DuPont ceases to own securities
representing 80 percent or more of the voting power and ceases to own securities
representing 80 percent or more of the economic value of all outstanding shares
of Common Stock (the "Ownership Reduction Date"), the Company will establish its
own retirement plan (the "Company Retirement Plan"). Within six months following
the Ownership Reduction Date, so long as certain conditions are met, the trustee
of the DuPont Pension Plan will transfer (the date of such transfer, the
"Transfer Date") to the trustee of the Company Retirement Plan an amount
approximately equal to 90 percent of $820 million (plus or minus any investment
gains and losses and benefits payments made between the Effective Date and the
Transfer Date); within 90 days of the Transfer Date, the trustee of the DuPont
Pension Plan will transfer the remaining 10 percent, plus interest on such
remainder.
On or prior to January 1, 1999, the Company will establish a benefit
restoration plan relating to the Company Thrift Plan for the benefit of current
or former employees of the Company who participated in the DuPont Salary
Deferral and Savings Restoration Plan and will assume and be solely responsible
for the liabilities and obligations relating to current or former employees of
the Company who participated in the DuPont Salary Deferral and Savings
Restoration Plan.
Certain Company employees will have the option, subject to specific country
tax and legal requirements, effective as of the closing of the Offerings, to
participate in the Option Program, which involves the cancellation of all or
part of their DuPont Options or DuPont SARs, whether or not vested or
exercisable, and the issuance by the Company upon such cancellation of Company
Stock Options and Company SARs, as applicable. See "Management -- Treatment of
Outstanding Stock Options and Stock Appreciation Rights." Retired employees of
the Company who hold DuPont Options or DuPont SARs will not participate in the
Option Program. All DuPont Options and DuPont SARs held by retired employees,
together with all such Options and SARs held by employees who do not elect to
participate in the Option Program, will continue to be obligations solely of
DuPont. The Separation Agreement provides that the Company will issue a
promissory
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note to DuPont (or alternatively, a portion of the notes referred to in clauses
(ii) and (iv) of "Use of Proceeds" may remain outstanding in lieu of all or part
of such promissory note), the principal amount of which will include (i) an
assumed level of future appreciation of DuPont Options and DuPont SARs held by
Conoco employees who do not participate in the Option Program and (ii) an amount
calculated to result in an approximately equal sharing between the Company and
DuPont of the after-tax cost that would result from an assumed exercise of all
DuPont Options and DuPont SARs held by Conoco employees outstanding immediately
prior to the Offerings (including those to be cancelled upon issuance of Company
Stock Options and SARs), based on the appreciated value of the options at the
time of the Offerings. If the amount described in the previous sentence is
negative, DuPont is obligated to make a cash payment to the Company 30 days
following the consummation of the Offerings. It is currently expected that
DuPont will owe the Company approximately $3 million under this provision.
With respect to any pension plan maintained or sponsored by DuPont for the
benefit of foreign employees in which only Transferred Business Employees
participate, the Company shall assume or retain such plan, the assets thereof
and the sole liability relating to Transferred Business Employees under such
plan.
DuPont employees who transfer to and become employed by the Company, and
Company employees who transfer to and become employed by DuPont, in either case
on the United States payroll, prior to the Ownership Reduction Date shall be
transferred in accordance with the terms of the transfer guidelines in effect
immediately prior to the Effective Date. In consideration of the liabilities
assumed by DuPont under the employee transfer guidelines, the principal amount
of the promissory note referred to in the second preceding paragraph will
include an additional $10.4 million. If a single transfer of 100 or more
employees from DuPont to the Company occurs or if a single transfer of 100 or
more employees from the Company to DuPont occurs, in either case prior to the
Ownership Reduction Date, a supplemental cash payment will be made to DuPont or
the Company as applicable. The amount of the cash payment will be calculated in
accordance with the Employee Matters Agreement.
Following the Effective Date, the Company Thrift Plan will continue to
include DuPont common stock as an investment option until the Ownership
Reduction Date and then will continue to retain the DuPont common stock fund for
a period of no less than five years. New investments in DuPont common stock may
be discontinued by Conoco after the Ownership Reduction Date.
TRANSITIONAL SERVICES AGREEMENTS
Prior to the Offerings, DuPont and the Company will enter into certain
agreements (the "Transitional Services Agreements") pursuant to which DuPont or
its subsidiaries (other than the Company and its subsidiaries), on the one hand,
and the Company or its subsidiaries, on the other hand, will agree to continue
providing various services to each other, including material procurement,
financial and administrative services, consulting and research services, and
employee benefits administration. Each service provided pursuant to the
Transitional Services Agreements will be provided for a specified time period,
ranging from three to 24 months. However, either party and its subsidiaries may
terminate any or all services that they receive under the Transitional Services
Agreements at any time upon 45 days' prior written notice. During the term of
each such service, the parties and their subsidiaries are obligated to take all
steps necessary to establish the processes and systems to enable them to perform
the relevant services on a stand alone basis. The parties and their subsidiaries
will be obligated to pay fees established in the Transitional Services
Agreements based upon the type and amount of services rendered.
INFORMATION SYSTEMS AND TELECOMMUNICATION CARRIER TRANSITIONAL SERVICES
AGREEMENTS AND FACILITIES LEASE AGREEMENTS
DuPont and the Company will enter into a series of United States and
foreign service agreements ("SAs") which will provide for the cross-provision of
information system services and for the provision of telecommunication carrier
services by DuPont to the Company. DuPont and the Company will also enter into a
facilities lease agreement whereby the Company will grant leases to DuPont for
data center and office facilities at the Company's Houston, Texas and Ponca
City, Oklahoma sites. The term of the SAs will be two years for transitional
services. Longer terms, up to nine years, will be provided for telecommunication
services and the facility leases. Under the SAs, DuPont and third party
contractors, such as Computer Sciences
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Corporation and Andersen Consulting, will provide services to the Company in
accordance with the terms of the SAs, subject to the terms of the third party
agreements. The SAs will provide that services will be provided at DuPont's
cost, or, in the case of third party services, at the prices and in accordance
with the terms and conditions provided for in the third party agreements, and
subject to an administrative fee. The SAs will also include an obligation for
the Company to enter into a long-term services agreement with Computer Sciences
Corporation.
NATURAL GAS SUPPLY AGREEMENT
DuPont consumes approximately 350 million cubic feet per day of natural gas
at its various facilities in the United States. The acquisition of this supply
is currently handled by the Company. DuPont receives the natural gas at cost
plus a nominal management fee. In some limited cases, the Company's natural gas
production equity is used directly in a DuPont facility, but over 95 percent of
this supply has historically been purchased from third parties. Prior to the
Offerings, DuPont and the Company intend to enter into an agreement to continue
this supply management function for a minimum of one year. The associated
management fee will be reflective of market costs for similar supply services.
FEEDSTOCK FOR DUPONT'S SABINE RIVER WORKS PLANT
The Company owns and operates the Mont Belvieu Storage Facility, which is
currently supplying DuPont's Sabine River Works Plant (Ethylene Business Unit)
with its full ethane feedstock requirements, providing storage and throughput
services for both ethane and ethylene and operating DuPont-owned pipelines for
these products. The Company and DuPont have reached agreement for the provision
of ethane and ethylene storage and throughput services for the next 30 years.
Furthermore, under the terms of the agreement, the Company will operate certain
DuPont-owned pipelines for a period of 20 years. The Company will supply DuPont
with its partial requirements of ethane for a minimum of two years.
MOTOR CARRIER AGREEMENT
Prior to the Offerings, the Company and Sentinel Transportation Company, a
wholly owned subsidiary of DuPont, will enter into a motor carrier agreement
("Motor Carrier Agreement"), for the provision of transportation of commodities
within the United States and Canada. The term of the Motor Carrier Agreement
will be for a one year period. However, either party may terminate such
arrangement at any time upon 90 days' prior written notice.
REGISTRATION RIGHTS AGREEMENT
Prior to the Offerings, DuPont and the Company will enter into an agreement
(the "Registration Rights Agreement"), pursuant to which the Company will agree
to register on a "shelf" registration statement the sale of Common Stock owned
by DuPont. The Company will agree to keep the shelf registration effective for a
period of two years following the date that the shelf registration comes
effective. In addition, the Company will provide DuPont with three demand
registration rights and certain "piggy-back" registration rights, with respect
to securities owned by DuPont. Such sales may be effected pursuant to one or
more underwritten offerings or otherwise. The parties will agree to indemnify
each other and any underwriters on standard terms, including for liability under
federal securities laws.
PRINCIPAL STOCKHOLDER
As of the date of this Prospectus, the Company is indirectly wholly owned
by DuPont. After the completion of the Offerings, DuPont will indirectly own 100
percent of the Company's outstanding Class B Common Stock, representing 91.9
percent of the combined voting power of all classes of voting stock of the
Company. Under applicable provisions of the Delaware General Corporation Law and
the Company's Certificate of Incorporation, subject to class voting rights,
prior to the divestiture of its ownership interest in the Company, DuPont will
be able, acting alone, to elect the entire Board of Directors of the Company and
to approve any action requiring stockholder approval. The address of DuPont's
principal executive office is 1007 Market Street, Wilmington, Delaware 19898.
The Company is not aware of any person or group other than DuPont that will
beneficially own more than five percent of the outstanding shares of Common
Stock following the Offerings.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company will consist of (i) 3.0 billion
shares of Class A Common Stock, par value $.01 per share, and 1.6 billion shares
of Class B Common Stock, par value $.01 per share (the Class A Common Stock and
Class B Common Stock together, the "Common Stock"), and (ii) 250 million shares
of Preferred Stock, par value $.01 per share, none of which is outstanding as of
the date hereof. Of the 3.0 billion shares of Class A Common Stock, 191.5
million shares are being offered in the Offerings. Of the 1.6 billion shares of
Class B Common Stock, 436.5 million shares will be outstanding and held by
DuPont or one or more of its affiliates on the Closing Date. A description of
the material terms and provisions of the Company's Certificate of Incorporation
affecting the relative rights of the Class A Common Stock, the Class B Common
Stock and the Preferred Stock is set forth below. The following description of
the capital stock of the Company is intended as a summary only and is qualified
in its entirety by reference to the forms of the Company's Certificate of
Incorporation and By-laws filed with the Registration Statement of which this
Prospectus forms a part, and to Delaware corporate law.
COMMON STOCK
Voting Rights
The holders of Class A Common Stock and Class B Common Stock generally have
identical rights, except that holders of Class A Common Stock are entitled to
one vote per share while holders of Class B Common Stock are entitled to five
votes per share on all matters to be voted on by stockholders. Holders of shares
of Class A Common Stock and Class B Common Stock are not entitled to cumulate
their votes in the election of directors. Generally, all matters to be voted on
by stockholders must be approved by a majority of the votes entitled to be cast
by the holders of Class A Common Stock and Class B Common Stock present in
person or represented by proxy, voting together as a single class, subject to
any voting rights granted to holders of any Preferred Stock. Except as otherwise
provided by law or in the Certificate of Incorporation, and subject to any
voting rights granted to holders of any outstanding Preferred Stock, amendments
to the Certificate of Incorporation must be approved by a majority of the votes
entitled to be cast by the holders of Class A Common Stock and Class B Common
Stock, voting together as a single class. However, amendments of the Certificate
of Incorporation that would alter or change the powers, preferences or special
rights of the Class A Common Stock or the Class B Common Stock so as to affect
them adversely also must be approved by a majority of the votes entitled to be
cast by the holders of the shares affected by the amendment, voting as a
separate class, and holders of Class A Common Stock are not entitled to vote on
any alteration or change in the powers, preferences or special rights of the
Class B Common Stock that would not adversely affect the rights of holders of
Class A Common Stock. For purposes of the foregoing provisions, any provision
for the voluntary, mandatory and other conversion or exchange of the Class B
Common Stock into or for Class A Common Stock on a one-for-one basis shall be
deemed not to adversely affect the rights of the Class A Common Stock.
Notwithstanding the foregoing, any amendment to the Certificate of Incorporation
to increase the authorized shares of any class of capital stock of the Company
requires the approval only of a majority of the votes entitled to be cast by the
holders of Class A Common Stock and Class B Common Stock, voting together as a
single class.
Dividends
Holders of Class A Common Stock and Class B Common Stock will share equally
on a per share basis in any dividend declared by the Board of Directors, subject
to any preferential rights of any outstanding Preferred Stock. Dividends payable
in shares of Common Stock may be paid only as follows: (i) shares of Class A
Common Stock may be paid only to holders of Class A Common Stock, and shares of
Class B Common Stock may be paid only to holders of Class B Common Stock; and
(ii) the number of shares so paid will be equal on a per share basis with
respect to each outstanding share of Class A Common Stock and Class B Common
Stock.
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The Company may not reclassify, subdivide or combine shares of either class
of Common Stock without at the same time proportionally reclassifying,
subdividing or combining shares of the other class.
Conversion
Each share of Class B Common Stock is convertible while held by DuPont or
any of its subsidiaries (excluding the Company) at the option of the holder
thereof into one share of Class A Common Stock. Following any distribution of
Class B Common Stock to securityholders of DuPont in a transaction (including
any distribution in exchange for DuPont shares or securities) intended to
qualify as a tax-free distribution under Section 355 of the Code, or any
corresponding provision of any successor statute (a "Tax-Free Split-Off"),
shares of Class B Common Stock will no longer be convertible into shares of
Class A Common Stock.
Prior to a Tax-Free Split-Off, any shares of Class B Common Stock
transferred to a person other than DuPont or any of its affiliates (excluding
the Company) will automatically be converted into shares of Class A Common Stock
upon such transfer. Shares of Class B Common Stock transferred to stockholders
of DuPont in a Tax-Free Split-Off will not be converted into shares of Class A
Common Stock and, following a Tax-Free Split-Off, shares of Class B Common Stock
will be transferable as Class B Common Stock, subject to applicable laws.
All shares of Class B Common Stock will automatically be converted into
Class A Common Stock if a Tax-Free Split-Off has not occurred and the number of
outstanding shares of Class B Common Stock owned by DuPont (together with its
subsidiaries (excluding the Company)) falls below 50 percent of the aggregate
number of outstanding shares of Common Stock. This automatic conversion of Class
B Common Stock into Class A Common Stock will prevent DuPont from decreasing its
economic interest in the Company to less than 50 percent while still retaining
control of more than 80 percent of the Company's voting power. All conversions
will be effected on a share-for-share basis.
Other Rights
Unless approved by a majority of the votes entitled to be cast by the
holders of each class of Common Stock, voting separately as a class, in the
event of any reorganization or consolidation of the Company with one or more
corporations or a merger of the Company with another corporation in which shares
of Common Stock are converted into or exchangeable for shares of stock, other
securities or property (including cash), all holders of Common Stock, regardless
of class, will be entitled to receive the same kind and amount of shares of
stock and other securities and property (including cash).
On liquidation, dissolution or winding up of the Company, after payment in
full of the amounts required to be paid to holders of Preferred Stock, if any,
all holders of Common Stock, regardless of class, are entitled to receive the
same amount per share with respect to any distribution of assets to holders of
shares of Common Stock.
No shares of either class of Common Stock are subject to redemption or have
preemptive rights to purchase additional shares of Common Stock or other
securities of the Company.
Upon closing of the Offerings, all the outstanding shares of Class A Common
Stock and Class B Common Stock will be validly issued, fully paid and
nonassessable.
PREFERRED STOCK
The Preferred Stock is issuable from time to time in one or more series and
with such designations, preferences and other rights for each series as shall be
stated in the resolutions providing for the designation and issue of each such
series adopted by the Board of Directors of the Company. The Board of Directors
is authorized by the Certificate of Incorporation to determine, among other
things, the voting, dividend, redemption, conversion, exchange and liquidation
powers, rights and preferences and the limitations thereon pertaining to such
series. The Board of Directors, without stockholder approval, may issue
Preferred Stock with voting and other rights that could adversely affect the
voting power of the holders of the Common Stock and that could have certain
anti-takeover effects. The Company has no present plans to issue any shares of
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Preferred Stock. The ability of the Board of Directors to issue Preferred Stock
without stockholder approval could have the effect of delaying, deferring or
preventing a change in control of the Company or the removal of existing
management.
For purposes of the Rights Plan described below, the Board of Directors has
designated 1.0 million shares of Series A Junior Participating Preferred Stock,
par value $.01 per share (the "Junior Preferred Shares"). See "-- Anti-Takeover
Effects of Certain Certificate and By-law Provisions -- Rights Plan."
ANTI-TAKEOVER EFFECTS OF CERTAIN CERTIFICATE AND BY-LAW PROVISIONS
General
Certain provisions of the Certificate of Incorporation and By-laws
summarized below may be deemed to have an anti-takeover effect and may delay,
deter, or prevent a tender offer or takeover attempt that a stockholder might
consider to be in its best interest, including offers or attempts that might
result in a premium being paid over the market price for the shares held by
stockholders.
Board of Directors
The Certificate of Incorporation and By-laws provide that the Board of
Directors will be divided into three classes of directors, with the classes to
be nearly equal in number as possible. One class will be originally elected for
a term expiring at the annual meeting of stockholders to be held in 1999,
another will be originally elected for a term expiring at the annual meeting of
stockholders to be held in 2000 and another will be originally elected for a
term expiring at the annual meeting of stockholders to be held in 2001. Each
director is to hold office until his or her successor is duly elected and
qualified. Commencing with the 1999 annual meeting of stockholders, directors
elected to succeed directors whose terms then expire will be elected for a term
of office to expire at the third succeeding annual meeting of stockholders after
their election, with each director to hold office until such person's successor
is duly elected and qualified.
The Certificate of Incorporation and By-laws provide that the Board of
Directors shall initially consist of nine members. The Certificate of
Incorporation and By-laws further provide that the number of directors of the
Company shall be fixed from time to time exclusively by resolution adopted by
the affirmative vote of a majority of the entire Board of Directors, but shall
consist of not more than fifteen nor less than six directors. In addition, the
Certificate of Incorporation provides that any vacancies will be filled by the
affirmative vote of a majority of the remaining directors, even if less than a
quorum, or by a sole remaining director, or by stockholders if such vacancy was
caused by the action of stockholders (in which event such vacancy may not be
filled by the directors or a majority thereof).
The Certificate of Incorporation and the By-laws provide that, except as
provided below, directors may be removed, with or without cause, by the
affirmative vote of shares representing a majority of the votes entitled to be
cast by the then outstanding shares of Voting Stock; provided, however, that
during the period (i) beginning on the first date that DuPont (together with its
subsidiaries (excluding the Company)) ceases to beneficially own shares
representing 50 percent or more of the votes entitled to be cast by Voting Stock
(the "First Trigger Date") and (ii) ending on the first date that DuPont
(together with its subsidiaries (excluding the Company)) ceases to beneficially
own shares representing 30 percent or more of the votes entitled to be cast by
Voting Stock (the "Second Trigger Date"), directors may be removed, with or
without cause, only by the affirmative vote of shares representing not less than
66 2/3 percent of the votes entitled to be cast by Voting Stock. Notwithstanding
the foregoing, from and after the Second Trigger Date, directors of the Company
may only be removed for cause, such removal to be by the affirmative vote of
shares representing a majority of the votes entitled to be cast by Voting Stock.
Unless the Board of Directors has made a determination that removal is in the
best interests of the Company (in which case the following definition shall not
apply), "cause" for removal of a director shall be deemed to exist only if (i)
the director whose removal is proposed has been convicted, or when a director is
granted immunity to testify when another has been convicted, of a felony by a
court of competent jurisdiction and such conviction is no longer subject to
direct appeal; (ii) such director has been found by the affirmative vote of a
majority of the directors then in office at any regular or special meeting of
the Board of Directors called for that purpose or by a court of competent
jurisdiction to
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have been guilty of willful misconduct in the performance of his duties to the
Company in a matter of substantial importance to the Company; or (iii) such
director has been adjudicated by a court of competent jurisdiction to be
mentally incompetent, which mental incompetency directly affects his ability as
a director of the Company. Notwithstanding the foregoing, whenever holders of
outstanding shares of one or more series of Preferred Stock are entitled to
elect directors of the Company pursuant to the provisions applicable in the case
of arrearages in the payment of dividends or other defaults contained in the
resolution or resolutions of the Board of Directors providing for the
establishment of any such series, any such director of the Company so elected
may be removed in accordance with the provision of such resolution or
resolutions.
The By-laws provide that (i) prior to the First Trigger Date, a majority of
the directors on the Audit and Compliance Committee and the Compensation
Committee of the Board of Directors shall be directors designated by DuPont and
(ii) on and after the First Trigger Date, but so long as DuPont owns shares
representing 10 percent or more of the votes entitled to be cast by the Voting
Stock, each committee of the Board of Directors shall include at least one
director designated by DuPont.
Advance Notice Procedures
The By-laws provide for an advance notice procedure for the nomination,
other than by or at the direction of the Board of Directors, of candidates for
election as directors, as well as for other stockholder proposals to be
considered at annual meetings of stockholders. In general, notice of intent to
nominate a director or raise matters at such meetings will have to be received
in writing by the Company not less than 90 nor more than 120 days prior to the
anniversary of the previous year's annual meeting of stockholders, and must
contain certain information concerning the person to be nominated or the matters
to be brought before the meeting and concerning the stockholder submitting the
proposal. The Certificate of Incorporation and the By-laws provide that, so long
as DuPont owns shares representing 10 percent or more of the votes entitled to
be cast by the Voting Stock, DuPont is exempt from the foregoing advance notice
procedures for director nominations and shareholder proposals.
Special Meetings
The By-laws provide that, unless otherwise required by the Certificate of
Incorporation, special meetings of stockholders may be called only by certain
specified officers of the Company or by any officer at the request of the Board
of Directors or a committee thereof; special meetings cannot be called by
stockholders. The Certificate of Incorporation and the By-laws expressly deny
stockholders the right to call special meetings after the Second Trigger Date.
In addition, the Certificate of Incorporation and the By-laws provide that,
prior to the Second Trigger Date, any action required or permitted to be taken
by stockholders may be effected by written consent, but that after the Second
Trigger Date, any such action may be effected only at a duly called annual or
special meeting of stockholders and may not be effected by a written consent. No
business other than that stated in the notice of such meeting may be transacted
at any special meeting.
Fair Price Provision
The Certificate of Incorporation includes a "fair price" provision (the
"Fair Price Provision") which prohibits certain Business Combinations (as
defined below) with a Related Person (as defined below), unless (a) the holders
of both classes of Common Stock receive in the Business Combination the same
consideration as the other class and either (i) the same consideration in form
and amount per share as the highest consideration paid by the Related Person in
a tender or exchange offer in which the Related Person acquired at least 50
percent of either the outstanding stock of either the Class A Common Stock or
the outstanding Class B Common Stock and which was consummated not more than one
year prior to the Business Combination or the entering into of a definitive
agreement for the Business Combination or (ii) not less in amount (as to cash)
or fair market value (as to non-cash consideration) than the highest price paid
or agreed to be paid by the Related Person for shares of Class A Common Stock,
Class B Common Stock or Voting Stock in any transaction that either resulted in
the Related Person's beneficially owning 15 percent or more of the Class A
Common Stock, Class B Voting Stock or Voting Stock or was effected at a time
when the Related Person beneficially owned 15 percent or more of the Class A
Common Stock, the Class B Common Stock or
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Voting Stock, in either case occurring not more than one year prior to the
Business Combination, or (b) the transaction is approved by (i) a majority of
Continuing Directors (as defined below) or (ii) shares representing (x) not less
than 66 2/3 percent of the votes entitled to be cast by the Voting Stock, (y)
not less than 50.01 percent of the votes entitled to be cast by the Voting Stock
not beneficially owned by the Related Person, and (z) from and after the First
Trigger Date, a majority of the votes entitled to be cast by the holders of each
class of Common Stock (excluding all shares beneficially owned by any Related
Person), voting separately as a class; provided that, after the Second Trigger
Date, the required approval percentages in clauses (b)(ii) (x) and (y) increase
to 80 percent and 66 2/3 percent, respectively. Such approvals are also required
to amend the Fair Price Provisions. The Fair Price Provision will not be
applicable at such time as all shares of Class B Common Stock have been
converted into or exchanged for Class A Common Stock.
Under the Fair Price Provision, a "Related Person" is any person (other
than DuPont and its affiliates and associates) that beneficially owns 15 percent
or more of the Class A Common Stock, Class B Common Stock or the Voting Stock
outstanding or is an affiliate of the Company and at any time within the
preceding two-year period was the beneficial owner of 15 percent or more of the
Class A Common Stock, Class B Common Stock or the Voting Stock outstanding. The
relevant "Business Combinations" involving the Company covered by the Fair Price
Provision are (1) any merger or consolidation of the Company or any subsidiary
of the Company with or into a Related Person or an affiliate of a Related
Person, (2) any sale, lease, exchange, transfer or other disposition of all or
substantially all of the assets of the Company to a Related Person or an
affiliate of a Related Person, (3) certain reclassifications, recapitalizations
and other corporate actions requiring a stockholder vote that have the effect of
increasing by more than one percent the proportionate share of Class A Common
Stock, Class B Common Stock or Voting Stock beneficially owned by the Related
Person or an affiliate of a Related Person and (4) a dissolution of the Company
caused or proposed by a Related Person or an affiliate of a Related Person. A
"Continuing Director" is a director who is unaffiliated with the Related Person
and who was a director before the Related Person became a Related Person, and
any successor of a Continuing Director who is unaffiliated with a Related Person
and is recommended or nominated to succeed a Continuing Director by a majority
of the Continuing Directors.
Amendment
Amendments of a number of the foregoing provisions, including Certificate
of Incorporation and By-law provisions with respect to stockholder action by
written consent, stockholder right to call special meetings, advance notice
procedures (including DuPont's exemption therefrom), and board classification
and removal provisions, require approval by shares representing not less than
66 2/3 percent of the votes entitled to be cast by the Voting Stock, voting
together as a single class, and, after the Second Trigger Date, 80 percent of
such votes; provided that after the First Trigger Date, if there are any shares
of Class B Common Stock outstanding, approval by a majority of the votes
entitled to be cast by the holders of each class of Common Stock, voting
separately by class, is also required. The By-laws may also be amended by action
of the Board of Directors.
Rights Plan
The Board of Directors has adopted a Share Purchase Rights Plan (the
"Rights Plan"). Pursuant to the Rights Plan, the Board of Directors has caused
or will cause to be issued one preferred share purchase right for each
outstanding share of Class A Common Stock and Class B Common Stock (the "Class A
Rights" and "Class B Rights," respectively; together, the "Rights"). Each Class
A Right and each Class B Right entitles the registered holder thereof to
purchase from the Company one one-thousandth of a share of the Junior Preferred
Shares at a price of $88 (the "Purchase Price"), subject to adjustment. The
description and terms of the Rights are set forth in a rights agreement (the
"Rights Agreement") between the Company and First Chicago Trust Company of New
York (the "Rights Agent"). The description set forth below is intended as a
summary only and is qualified in this entirety by reference to the form of the
Rights Agreement, which will be filed as an exhibit to the Registration
Statement of which this Prospectus is a part. See "Available Information."
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Until the earlier to occur of (i) 10 business days following a public
announcement that a person or group of affiliated or associated persons (an
"Acquiring Person") has acquired beneficial ownership of (A) 15 percent or more
of the outstanding Class A Common Stock, (B) 15 percent or more of the
outstanding Class B Common Stock or (C) any combination of Class A Common Stock
and Class B Common Stock representing 15 percent or more of the votes of all
shares entitled to vote in the election of directors or (ii) 10 business days
(or such later date as may be determined by action of the Board of Directors
prior to such time as any person becomes an Acquiring Person) following the
commencement of, or announcement of an intention to make, a tender offer or
exchange offer the consummation of which would result in beneficial ownership by
a person or group of shares meeting the requirements set forth in (A), (B) or
(C) above (the earlier of such dates being called the "Rights Distribution
Date"), the Rights will be evidenced by the certificates representing the Common
Stock.
The Rights Agreement provides that, until the Rights Distribution Date (or
earlier redemption or expiration of the Rights), the Rights will be transferred
with and only with the respective Class A Common Stock and Class B Common Stock.
Until the Rights Distribution Date (or earlier redemption or expiration of the
Rights), all shares of Common Stock which are issued will have associated Rights
and the Common Stock certificates will contain a notation incorporating the
Rights Agreement by reference. As soon as practicable following the Rights
Distribution Date, separate certificates evidencing the Class A Rights and Class
B Rights (the "Class A Rights Certificates" and "Class B Rights Certificates,"
respectively; together, the "Rights Certificates") will be mailed to holders of
record of the Class A Common Stock and the Class B Common Stock, respectively,
as of the close of business on the Rights Distribution Date and such separate
Right Certificates alone will evidence the Rights.
The Rights will not be exercisable until the Rights Distribution Date. The
Rights will expire on August 31, 2008 (the "Final Expiration Date"), unless the
Final Expiration Date is extended or unless the Rights are earlier redeemed by
the Company, in each case, as summarized below.
In the event that any person or group of affiliated or associated persons
becomes an Acquiring Person, proper provision shall be made so that each holder
of a Class A Right and Class B Right, other than Rights beneficially owned by
the Acquiring Person (which will thereafter be void), will thereafter have the
right to receive upon exercise that number of shares of Class A Common Stock and
Class B Common Stock, respectively, having a Current Market Price (as defined in
the Rights Agreement) of two times the exercise price of the Class A Right and
Class B Right, respectively. In the event that the Company is acquired in a
merger or other business combination transaction or 50 percent or more of its
consolidated assets or earning power are sold after a person or group of
affiliated or associated persons becomes an Acquiring Person, proper provision
will be made so that each holder of a Right will thereafter have the right to
receive, upon the exercise thereof at the then-current exercise price of the
Right, that number of shares of common stock of the acquiring company which at
the time of such transaction will have a Current Market Price of two times the
exercise price of the Right.
At any time until the tenth business day following the public announcement
that a person or group of affiliated or associated persons has become an
Acquiring Person (meeting the requirements (A)-(C) set forth in the second
paragraph of this summary of the Rights Plan), the Board of Directors may redeem
the Rights in whole, but not in part, at a price of $.01 per Right (the
"Redemption Price"). Immediately upon any redemption of the Rights, the right to
exercise the Rights will terminate and the only right of the holders of the
Rights will be to receive the Redemption Price.
The terms of the Rights may be amended by the Board of Directors without
the consent of the holders of the Rights prior to the Distribution Date. After
the Distribution Date, the provisions of the Rights Agreement may be amended by
the Board of Directors in order to cure any ambiguity, to make changes which do
not adversely affect the interests of holders of Rights, or to shorten or
lengthen any time period under the Rights Agreement; provided, however that no
amendment to lengthen a time period relating to when the Rights may be redeemed
may be made at such time as the Rights are not redeemable. In addition, all
amendments require the consent of DuPont, if DuPont holds 30 percent of voting
power of the outstanding shares of Common
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Stock. In addition, no amendments to the definition of "Acquiring Person" can be
made at any time without DuPont's consent, if DuPont holds 10 percent of voting
power of the outstanding shares of Common Stock.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the right
to vote or to receive dividends.
The number of outstanding Rights and the number of one-thousandths of a
Junior Preferred Share issuable upon exercise of each Right will be subject to
adjustment in the event of a stock split of the Class A Common Stock and Class B
Common Stock or a stock dividend on the Class A Common Stock and Class B Common
Stock payable in Class A Common Stock and Class B Common Stock, respectively, or
subdivisions, consolidations or combinations of the Class A Common Stock and
Class B Common Stock occurring, in any such case, prior to the Rights
Distribution Date.
The Purchase Price payable, and the number of Junior Preferred Shares or
other securities or property issuable, upon exercise of the Rights will also be
subject to adjustment from time to time to prevent dilution (i) in the event of
a stock dividend on, or a subdivision, combination or reclassification of, the
Junior Preferred Shares, (ii) upon the grant to holders of the Junior Preferred
Shares of certain rights or warrants to subscribe for or purchase Junior
Preferred Shares at a price, or securities convertible into Junior Preferred
Shares with a conversion price, less than the then-current market price of the
Junior Preferred Shares or (iii) upon the distribution to holders of the Junior
Preferred Shares of evidences of indebtedness or assets (excluding regular
periodic cash dividends paid out of earnings or retained earnings or dividends
payable in Junior Preferred Shares) or of subscription rights or warrants (other
than those referred to above).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least one
percent in such Purchase Price. No fractional Junior Preferred Shares will be
issued (other than fractions which are integral multiples of one one-thousandth
of a Junior Preferred Share, which may, at the election of the Company, be
evidenced by depositary receipts) and in lieu thereof, an adjustment in cash
will be made based on the market price of the Junior Preferred Shares on the
last trading day prior to the date of exercise.
Junior Preferred Shares purchasable upon exercise of the Rights will not be
redeemable. Each Junior Preferred Share will be entitled to a minimum
preferential quarterly dividend payment of $.01 per share but will be entitled
to an aggregate dividend of 1,000 times the dividend declared per share of
Common Stock. In the event of liquidation, the holders of the Junior Preferred
Shares will be entitled to a minimum preferential liquidation payment of $1,000
per share but will be entitled to an aggregate payment of 1,000 times the
payment made per share of Class A Common Stock and Class B Common Stock. Each
Junior Preferred Share will have 1,000 votes voting together with the Class A
Common Stock and Class B Common Stock. Finally, in the event of any merger,
consolidation or other transaction in which shares of Class A Common Stock and
Class B Common Stock are exchanged, each Junior Preferred Share will be entitled
to receive 1,000 times the amount received per share of the Class A Common Stock
and the Class B Common Stock. These rights are protected by customary
anti-dilution provisions.
Due to the nature of the Junior Preferred Shares' dividend, liquidation and
voting rights, the value of the one one-thousandth interest in a Junior
Preferred Share purchasable upon exercise of each Right should approximate the
value of one share of Class A Common Stock and Class B Common Stock.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group of persons that attempts to acquire
the Company on terms not approved by the Board of Directors. The Rights should
not interfere with any merger or other business combination approved by the
Board of Directors prior to the time that a person or group has acquired
beneficial ownership of 15 percent or more of the Class A Common Stock, Class B
Common Stock or voting power of the outstanding shares of Common Stock since the
Rights may be redeemed by the Company at the Redemption Price until such time.
DuPont is excluded from the definition of "Acquiring Person" and therefore
its ownership cannot trigger the distribution of rights under the Rights Plan.
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CONTRACTUAL RELATIONS AMONG THE COMPANY, DUPONT AND CERTAIN RELATED ENTITIES
The Certificate of Incorporation provides that, if certain disclosure
conditions are satisfied and if fair as to the Company as of the time it is
authorized, approved or ratified by the Board of Directors, by a committee
thereof or by the stockholders, no contract, agreement, arrangement or
transaction between (a) the Company and DuPont, (b) the Company and one or more
of the directors or officers of the Company, DuPont or a Related Entity (as
defined below) or (c) the Company and any Related Entity will be void or
voidable solely because DuPont, any Related Entity or any one or more of the
officers or directors of the Company, DuPont or any Related Entity are parties
thereto (or solely because any such directors or officers are present at or
participate in the meeting of the Board of Directors or committee thereof that
authorizes the contract, agreement, arrangement or transaction or solely because
his or their votes are counted for such purpose), and DuPont, any Related Entity
and such directors and officers (a) will have fully satisfied and fulfilled
their fiduciary duties to the Company and its stockholders with respect thereto,
(b) will not be liable to the Company or its stockholders for any breach of
fiduciary duty by reason of the entering into, performance or consummation of
any such contract, agreement, arrangement or transaction, (c) will be deemed to
have acted in good faith and in a manner such persons reasonably believe to be
in and not opposed to the best interests of the Company and (d) will be deemed
not to have breached their duties of loyalty to the Company and its stockholders
and not to have derived an improper personal benefit therefrom. A "Related
Entity" is a corporation, partnership, association or other organization in
which one or more of the Company's directors have a financial interest.
DELAWARE BUSINESS COMBINATION STATUTE
Section 203 of the DGCL provides that, subject to certain exceptions
specified therein, an "interested stockholder" of a Delaware corporation shall
not engage in any "business combination," including in general mergers or
consolidations or acquisitions of additional shares of the corporation, with the
corporation for a three-year period following the time that such stockholder
becomes an interested stockholder unless (i) prior to such time, the board of
directors of the corporation approved either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder, (ii) upon consummation of the transaction which resulted in the
stockholder becoming an "interested stockholder," the interested stockholder
owned at least 85 percent of the voting stock of the corporation outstanding at
the time the transaction commenced (excluding certain shares), or (iii) on or
subsequent to such time, the business combination is approved by the board of
directors of the corporation and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at least
66 2/3 percent of the outstanding voting stock not owned by the interested
stockholder. Under Section 203, the restrictions described above also do not
apply to certain business combinations proposed by an interested stockholder
following the announcement or notification of one of certain extraordinary
transactions involving the corporation and a person who had not been an
interested stockholder during the previous three years or who became an
interested stockholder with the approval of a majority of the corporation's
directors, if such extraordinary transaction is approved or not opposed by a
majority of the directors who were directors prior to any person becoming an
interested stockholder during the previous three years or were recommended for
election or elected to succeed such directors by a majority of such directors.
Except as otherwise specified in Section 203, an "interested stockholder" is
defined to include (x) any person that is the owner of 15 percent or more of the
outstanding voting stock of the corporation, or is an affiliate or associate of
the corporation and was the owner of 15 percent or more of the outstanding
voting stock of the corporation at any time within three years immediately prior
to the date of determination and (y) the affiliates and associates of any such
person. DuPont and its affiliates, however, are excluded from the definition of
"interested stockholder" under the terms of Section 203. Under certain
circumstances, Section 203 makes it more difficult for a person who would be an
interested stockholder to effect various business combinations with a
corporation for a three-year period. The Company has not elected to be exempt
from the restrictions imposed under Section 203.
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LIMITATIONS ON DIRECTORS' LIABILITY
The Certificate of Incorporation provides that no director of the Company
shall be liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to the Company or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) in respect of certain unlawful dividend payments
or stock redemptions or repurchases as provided in Section 174 of the DGCL or
(iv) for any transaction from which the director derived an improper personal
benefit. The effect of these provisions will be to eliminate the rights of the
Company and its stockholders (through stockholders' derivative suits on behalf
of the Company) to recover monetary damages against a director for breach of
fiduciary duty as a director (including breaches resulting from grossly
negligent behavior), except in the situations described above. The Company's
By-laws provide for indemnification of directors and officers to the maximum
extent permitted by Delaware law. In addition, the Company expects to enter into
indemnification agreements with each of its directors providing for
indemnification of such directors to the fullest extent permitted by applicable
law.
LISTING
The Class A Common Stock has been approved for listing on the New York
Stock Exchange under the symbol "COC," subject to official notice of issuance.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Class A Common Stock is First
Chicago Trust Company of New York.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offerings, the Company will have 191.5 million
shares of Class A Common Stock and 436.5 million shares of Class B Common Stock
outstanding, without taking into account any outstanding options or options
which may be granted following the closing of the Offerings. Of these shares,
the shares sold in the Offerings will be freely tradeable without restriction or
further registration under the Securities Act of 1933 (the "Securities Act"),
unless they are sold by persons deemed to be "affiliates" of the Company or
acting as "underwriters" as those terms are defined in Rule 144 under the
Securities Act. Shares purchased by affiliates of the Company may generally be
sold in compliance with the volume limitation, availability of public
information, manner of sale and notice of sale requirements of Rule 144.
The 436.5 million shares of Class B Common Stock that will continue to be
owned by DuPont will be "restricted" securities within the meaning of Rule 144
under the Securities Act and may not be sold in the absence of registration
under the Securities Act or unless an exemption from registration is available,
including the exemptions contained in Rule 144 and Rule 144A under the
Securities Act.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated),
including any person who may be deemed an "affiliate" of the Company, who has
beneficially owned restricted shares for at least one year would be entitled to
sell within any three-month period a number of restricted shares that does not
exceed the greater of one percent of the then outstanding shares of Common Stock
or the average weekly trading volume of the Common Stock on the NYSE during the
four calendar weeks immediately preceding such sale, provided that the seller
files a Form 144 with respect to such sale, and complies with certain
requirements concerning availability of public information and manner of sale.
In addition, under Rule 144(k), a person who is not an affiliate of the Company,
and who has not been an affiliate of the Company at any time during the 90 days
preceding any sale, would be entitled to sell restricted shares without regard
to the limitations described above, provided that the restricted shares have
been beneficially owned for at least two years. In addition, DuPont would be
permitted to sell its existing shares of stock to qualified institutional buyers
pursuant to the provisions of Rule 144A.
Each of the Company and DuPont, and certain senior officers of the Company,
has agreed not to sell or otherwise dispose of any shares of the Common Stock
held by them for 180 days after the date of this Prospectus without the prior
written consent of Morgan Stanley & Co. Incorporated, subject to certain
exceptions. See "Underwriters."
An aggregate of 40 million shares of Class A Common Stock are reserved for
issuance to directors, executives, consultants and employees of the Company
pursuant to the 1998 Stock and Performance Incentive Plan (the "Plan"), the 1998
Key Employee Stock Performance Plan (the "1998 Plan"), the Deferred Compensation
Plan for Non-employee Directors (the "Deferred Compensation Plan") and the 1998
Global Performance Sharing Plan (the "Global Plan"). The Company intends to file
registration statements on Form S-8 covering the issuance of shares of Class A
Common Stock pursuant to the Plan, the 1998 Plan, the Deferred Compensation Plan
and the Global Plan. Accordingly, shares issued pursuant to the Plan, the 1998
Plan, the Deferred Compensation Plan and the Global Plan will be freely
tradeable, subject to the restrictions on resale on affiliates by Rule 144.
DuPont has advised the Company that it intends to offer its remaining
Conoco shares in a tax-free split-off expected to be completed within 12 months
of the date hereof. See "Prospectus Summary -- Separation From DuPont." Prior to
the Offerings, there has been no market for the Class A Common Stock, and no
precise predictions can be made of the effect, if any, that market sales of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of the
Common Stock in the public market may have an adverse effect on the market price
thereof. See "Risk Factors -- Adverse Effect on Market Price Due to Shares
Eligible for Future Sale."
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MATERIAL UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS OF CLASS A COMMON STOCK
The following is a general summary of material United States federal income
and estate tax consequences of the purchase, ownership, and sale or other
taxable disposition of the Class A Common Stock by any person or entity other
than (a) a citizen or resident of the United States, (b) a corporation or other
entity taxable as a corporation created or organized in or under the laws of the
United States or of any political subdivision thereof and (c) a person or entity
otherwise subject to United States federal income taxation on income from
sources outside the United States (a "non-U.S. Holder"). This summary does not
address all tax considerations that may be relevant to non-U.S. Holders in light
of their particular circumstances or to certain non-U.S. Holders that may be
subject to special treatment under United States federal income or estate tax
laws. This summary is based upon the Code, existing, temporary and proposed
regulations promulgated thereunder and administrative and judicial decisions,
all of which are subject to change, possibly with retroactive effect. In
addition, this summary does not address the effect of any state, local or
foreign tax laws. Each prospective purchaser of Class A Common Stock should
consult its tax advisor with respect to the tax consequences of purchasing,
owning and disposing of the Class A Common Stock.
DIVIDENDS
Dividends paid to a non-U.S. Holder of Class A Common Stock generally will
be subject to a withholding of United States federal income tax at a 30 percent
rate (or such lower rate as may be specified by an applicable income tax treaty)
unless (i) the dividend is effectively connected with the conduct of a trade or
business of the non-U.S. Holder within the United States or (ii) if a tax treaty
applies, it is attributable to a United States permanent establishment of the
non-U.S. Holder, in which cases the dividend will be taxed at ordinary federal
income tax rates. If the non-U.S. Holder is a corporation, such effectively
connected income may also be subject to an additional "branch profits tax." A
non-U.S. Holder may be required to satisfy certain certification requirements in
order to claim treaty benefits or otherwise claim a reduction of, or exemption
from, the withholding described above.
SALE OR OTHER DISPOSITION OF CLASS A COMMON STOCK
A non-U.S. Holder generally will not be subject to United States federal
income tax in respect of any gain recognized on the sale or other taxable
disposition of Class A Common Stock unless (i) the gain is effectively connected
with the conduct of a trade or business of the non-U.S. Holder within the United
States, (ii) in the case of a non-U.S. Holder who is an individual and holds the
Class A Common Stock as a capital asset, the holder is present in the United
States for 183 or more days in the taxable year of the disposition and certain
other tests are met, (iii) the non-U.S. Holder is subject to tax pursuant to the
provisions of United States federal income tax law applicable to certain United
States expatriates or (iv) the Company is or has been during certain periods
preceding the disposition a "United States real property holding corporation"
for United States federal income tax purposes and certain other requirements are
met. The Company may be, or may subsequently become, a United States real
property holding corporation for United States federal income tax purposes
because of its ownership of substantial real property in the United States. If
the Company were to be treated as a United States real property holding
corporation at any time during the five-year period preceding the disposition by
a non-U.S. Holder of Class A Common Stock, then any such non-U.S. Holder who has
held, directly or indirectly, more than five percent of the Class A Common Stock
during such five-year period will be subject to United States federal income
taxation on any gain realized from the disposition of such stock, unless an
exemption is provided under an applicable treaty.
ESTATE TAX
Class A Common Stock owned or treated as owned by an individual non-U.S.
Holder at the time of death will be includible in the individual's gross estate
for United States federal estate tax purposes, unless an applicable treaty
provides otherwise, and may be subject to United States federal estate tax.
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<PAGE> 305
BACKUP WITHHOLDING AND INFORMATION REPORTING
Dividends. United States backup withholding tax generally will not apply to
dividends paid on the Class A Common Stock that are subject to the 30 percent or
reduced treaty rate of U.S. withholding tax previously discussed. The Company
must report annually to the Internal Revenue Service and to each non-U.S. Holder
the amount of dividends paid to, and the tax withheld with respect to, such
holder, regardless of whether any tax was withheld. This information may also be
made available to the tax authorities in the non-U.S. Holder's country of
residence.
Sale or Other Disposition of Common Stock. Upon the sale or other taxable
disposition of Class A Common Stock by a non-U.S. Holder to or through a U.S.
office of a broker, the broker must backup withhold at a rate of 31 percent and
report the sale to the Internal Revenue Service, unless the holder certifies its
non-U.S. Holder status under penalties of perjury or otherwise establishes an
exemption. Upon the sale or other taxable disposition of Class A Common Stock by
a non-U.S. Holder to or through the foreign office of a United States broker, or
a foreign broker with a certain relationship to the United States, the broker
must report the sale to the Internal Revenue Service (but not backup withhold)
unless the broker has documentary evidence in its files that the seller is a
non-U.S. Holder and/or certain other conditions are met or the holder otherwise
establishes an exemption.
Backup withholding is not an additional tax. Amounts withheld under the
backup withholding rules generally are allowable as a refund or credit against a
non-U.S. Holder's U.S. federal income tax liability, if any, provided that the
required information is furnished to the Internal Revenue Service on a timely
basis.
The U.S. Treasury Department has issued regulations generally effective for
payments made after December 31, 1999 that will affect the procedures to be
followed by a non-U.S. Holder in establishing such holder's status as a non-U.S.
Holder for purposes of the withholding, backup withholding and information
reporting rules described herein. The regulations eliminate the general prior
legal presumption that dividends paid to an address in a foreign country are
paid to a resident of that country. In addition, the regulations impose certain
certification and documentation requirements on non-U.S. Holders claiming the
benefit of a reduced withholding rate with respect to dividends under a tax
treaty or otherwise claiming a reduction of, or exemption from, the withholding
obligation described above. To qualify for exemption from backup withholding and
information reporting under the regulations, a non-U.S. Holder may be required
to furnish a new certification of foreign status. Prospective investors should
consult their tax advisors concerning the effect of such regulations on an
investment in the Class A Common Stock.
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<PAGE> 306
UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date of this Prospectus (the "Underwriting Agreement"), each
of the U.S. Underwriters named below for whom Morgan Stanley & Co. Incorporated,
Credit Suisse First Boston Corporation, Goldman, Sachs & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities Inc., Salomon Smith
Barney Inc., BT Alex. Brown Incorporated and Schroder & Co. Inc. are acting as
U.S. Representatives, and the International Underwriters named below for whom
Morgan Stanley & Co. International Limited, Credit Suisse First Boston (Europe)
Limited, Goldman Sachs International, Merrill Lynch International, J.P. Morgan
Securities Ltd., Salomon Brothers International Limited, BT Alex. Brown
International, a division of Bankers Trust International PLC and J. Henry
Schroder & Co. Limited are acting as International Representatives, have
severally agreed to purchase, and the Company has agreed to sell to them,
severally, the respective number of shares of Class A Common Stock set forth
opposite their respective names below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- -----------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated......................... 25,359,691
Credit Suisse First Boston Corporation.................... 25,359,691
Goldman, Sachs & Co. ..................................... 25,359,691
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................ 25,359,691
J.P. Morgan Securities Inc. .............................. 13,705,471
Salomon Smith Barney Inc. ................................ 13,705,471
BT Alex. Brown Incorporated............................... 7,043,039
Schroder & Co. Inc. ...................................... 7,043,039
ABN Amro Incorporated..................................... 1,250,000
Robert W. Baird & Co. Incorporated........................ 625,000
Bear, Stearns & Co. Inc. ................................. 1,250,000
Sanford C. Bernstein & Co., Inc. ......................... 625,000
Blaylock & Partners, L.P. ................................ 625,000
Chase Securities Inc. .................................... 1,250,000
Chatsworth Securities LLC................................. 625,000
CIBC Oppenheimer Corp. ................................... 1,250,000
Deutsche Bank Securities Inc. ............................ 1,250,000
Donaldson, Lufkin & Jenrette Securities Corporation....... 1,250,000
A.G. Edwards & Sons, Inc. ................................ 1,250,000
Fahnestock & Co. Inc. .................................... 625,000
Guzman & Company.......................................... 625,000
Howard, Weil, Labouisse, Friedrichs Incorporated.......... 1,250,000
ING Baring Furman Selz LLC................................ 1,250,000
Jefferies & Company, Inc. ................................ 625,000
Edward D. Jones & Co., L.P. .............................. 625,000
Legg Mason Wood Walker, Incorporated...................... 625,000
McDonald & Company Securities, Inc. ...................... 625,000
NationsBanc Montgomery Securities LLC..................... 1,250,000
Nesbitt Burns Securities Inc. ............................ 625,000
Neuberger & Berman, LLC................................... 625,000
Ormes Capital Markets, Inc. .............................. 625,000
PaineWebber Incorporated.................................. 1,250,000
Petrie Parkman & Co. ..................................... 1,250,000
Prudential Securities Incorporated........................ 1,250,000
Raymond James & Associates, Inc. ......................... 625,000
The Robinson-Humphrey Company, LLC........................ 625,000
Sanders Morris Mundy Inc. ................................ 625,000
Muriel Siebert & Co., Inc. ............................... 625,000
Starr Securities, Inc. ................................... 625,000
Warburg Dillon Read LLC................................... 1,250,000
Wheat First Securities, Inc. ............................. 625,000
-----------
Subtotal............................................. 172,310,784
-----------
</TABLE>
127
<PAGE> 307
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- -----------
<S> <C>
International Underwriters:
Morgan Stanley & Co. International Limited................ 2,933,718
Credit Suisse First Boston (Europe) Limited............... 2,933,715
Goldman Sachs International............................... 2,933,715
Merrill Lynch International............................... 2,933,715
J.P. Morgan Securities Ltd. .............................. 1,498,108
Salomon Brothers International Limited ................... 1,498,108
BT Alex. Brown International, a division of Bankers Trust
International PLC...................................... 832,282
J. Henry Schroder & Co. Limited........................... 832,282
ABN AMRO Rothschild....................................... 250,000
Cazenove & Co. ........................................... 250,000
Credit Lyonnais Securities................................ 250,000
Daiwa Europe Limited...................................... 250,000
Deutsche Bank AG London................................... 250,000
HSBC Investment Bank Plc.................................. 250,000
Mediobanca-Banca di Credito Finanziario S.p.A ............ 250,000
UBS AG.................................................... 250,000
Westdeutsche Landesbank Girozentrale...................... 250,000
ING Bank N.V. ............................................ 250,000
Societe Generale.......................................... 250,000
Subtotal............................................. 19,145,643
-----------
Total............................................. 191,456,427
===========
</TABLE>
The U.S. Underwriters and the International Underwriters, and the U.S.
Representatives and the International Representatives, are collectively referred
to as the "Underwriters" and the "Representatives," respectively. The
Underwriting Agreement provides that the obligations of the several Underwriters
to pay for and accept delivery of the shares of Class A Common Stock offered
hereby are subject to the approval of certain legal matters by their counsel and
to certain other conditions. The Underwriters are obligated to take and pay for
all of the shares of Class A Common Stock offered hereby if any such shares are
taken.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented and agreed that, with certain exceptions: (i)
it is not purchasing any Shares (as defined below) for the account of anyone
other than a United States or Canadian Person (as defined below) and (ii) it has
not offered or sold, and will not offer or sell, directly or indirectly, any
Shares or distribute any prospectus relating to Shares outside the United States
or Canada or to anyone other than a United States or Canadian Person. Pursuant
to the Agreement between U.S. and International Underwriters, each International
Underwriter has represented and agreed that, with certain exceptions: (i) it is
not purchasing any Shares for the account of any United States or Canadian
Person, and (ii) it has not offered or sold, and will not offer or sell,
directly or indirectly, any Shares or distribute any prospectus relating to the
Shares in the United States or Canada or to any United States or Canadian
Person. With respect to any Underwriter that is a U.S. Underwriter and an
International Underwriter, the foregoing representation and agreements (i) made
by it in its capacity as a U.S. Underwriter apply only to it in its capacity as
a U.S. Underwriter and (ii) made by it in its capacity as an International
Underwriter apply only to it in its capacity as an International Underwriter.
The foregoing limitations do not apply to stabilization transactions or to
certain other transactions specified in the Agreement between the U.S. and
International Underwriters. As used herein, "United States or Canadian Person"
means any national or resident of the United States or Canada, or any
corporation, pension, profit-sharing, or other trust or other entity organized
under the laws of the United States or Canada or of any political subdivision
thereof (other than a branch located outside the United States and Canada of any
United States or Canadian Person) and includes any United States or Canadian
branch of a person who is otherwise not a United States or Canadian person. All
shares of Class A Common Stock to be purchased by the Underwriters are referred
to herein as the "Shares."
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<PAGE> 308
Pursuant to the Agreement between U.S. and International Underwriters,
sales may be made between the U.S. Underwriters and International Underwriters
of any number of Shares as may be mutually agreed. The per share price of any
Shares so sold will be the public offering price set forth on the cover page
hereof, in United States dollars, less an amount not greater than the per share
amount of the concession to dealers set forth below.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented that it has not offered or sold, and has agreed
not to offer or sell, any Shares, directly or indirectly, in any province or
territory of Canada or to, or for the benefit of, any resident of any province
or territory of Canada in contravention of the securities laws thereof and has
represented that any offer or sale of Shares in Canada will be made only
pursuant to an exemption from the requirement to file a prospectus in the
province or territory of Canada in which such offer or sale is made. Each U.S.
Underwriter has further agreed to send to any dealer who purchases from it any
of the Shares a notice stating in substance that, by purchasing such Shares,
such dealer represents and agrees that it has not offered or sold, and will not
offer or sell, directly or indirectly, any of such Shares in any province or
territory of Canada or to, or for the benefit of, any resident of any province
or territory of Canada in contravention of the securities laws thereof and that
any offer or sale of Shares in Canada will be made only pursuant to an exemption
from the requirement to file a prospectus in the province or territory of Canada
in which such offer or sale is made, and that such dealer will deliver to any
other dealer to whom it sells any of such Shares a notice containing
substantially the same statement as is contained in this sentence.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has represented and agreed that (i) it has not offered
or sold and, prior to the date six months after the Closing Date for the sale of
the Shares to the International Underwriters, will not offer or sell, any Shares
to persons in the United Kingdom except to persons whose ordinary activities
involve them in acquiring, holding, managing, or disposing of investments (as
principal or agent) for the purposes of their businesses or otherwise in
circumstances that have not resulted and will not result in an offer to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995; (ii) it has complied and will comply with all
applicable provisions of the Financial Services Act 1986 with respect to
anything done by it in relation to the Shares in, from or otherwise involving
the United Kingdom; and (iii) it has only issued or passed on and will \only
issue or pass on in the United Kingdom any document received by it in connection
with the offering of the Shares to a person who is of a kind described in
Article 11(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1996, as amended, or is a person to whom such document may
otherwise be lawfully issued or passed on.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has further represented that it has not offered or
sold, and has agreed not to offer or sell, directly or indirectly, in Japan or
to or for the account of any resident thereof, any of the Shares acquired in
connection with the distribution contemplated hereby, except for offers or sales
to Japanese International Underwriters or dealers and except pursuant to any
exemption from the registration requirements of the Securities and Exchange Law
and otherwise in compliance with applicable provisions of Japanese law. Each
International Underwriter has further agreed to send to any dealer who purchases
from it any of the Shares a notice stating in substance that, by purchasing such
Shares, such dealer represents and agrees that it has not offered or sold, and
will not offer or sell, any of such Shares, directly or indirectly, in Japan or
to or for the account of any resident thereof except for offers or sales to
Japanese International Underwriters or dealers and except pursuant to any
exemption from the registration requirements of the Securities and Exchange Law
and otherwise in compliance with applicable provisions of Japanese law, and that
such dealer will send to any other dealer to whom it sells any of such Shares a
notice containing substantially the same statement as is contained in this
sentence.
The Underwriters initially propose to offer part of the Shares directly to
the public at the public offering price set forth on the cover page hereof and
part to certain dealers at a price that represents a concession not in excess of
$.5877 per share under the public offering price. Any Underwriter may allow, and
such dealers may reallow, a concession not in excess of $.1000 per share to
other Underwriters or to certain dealers. After the
129
<PAGE> 309
initial offering of the Shares, the offering price and other selling terms may
from time to time be varied by the Representatives.
The Underwriters have informed the Company that they do not intend for
sales to discretionary accounts to exceed five percent of the aggregate number
of shares of Class A Common Stock offered by them.
The Class A Common Stock has been approved for listing on the NYSE under
the trading symbol "COC," subject to official notice of issuance. In order to
meet the requirements for listing the Class A Common Stock on the New York Stock
Exchange, the Underwriters have undertaken to meet the New York Stock Exchange's
minimum distribution, issuance and aggregate market value requirements.
At the request of the Company, the Underwriters have reserved for sale, at
the initial offering price, up to approximately 3.3 million shares offered
hereby for directors, officers and employees of the Company and certain other
persons designated by the Board of Directors other than officers and employees
of the Company in the United Kingdom. In addition, a separate offering of
364,000 shares will be made to officers and other employees of the Company in
the United Kingdom. The number of shares of Class A Common Stock available for
sale to the general public will be reduced to the extent such non-U.K. persons
purchase such reserved shares. Any reserved shares which are not so purchased
and any shares not purchased in the separate offering to U.K. officers and
employees will be offered by the Underwriters to the general public on the same
basis as the other shares offered hereby. Any officer or other employee of the
Company in the United Kingdom purchasing shares will be required to agree not to
sell, assign, pledge or otherwise transfer such shares during the period ending
90 days after the date of this Prospectus.
The Company and DuPont have agreed that, without the prior written consent
of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, they will
not, during the period ending 180 days after the date of this Prospectus (the
"Lock-up Period"), (i) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer, lend or dispose of, directly
or indirectly, any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock or (ii) enter into any swap or
other arrangement that transfers to another, in whole or in part, any of the
economic consequences of ownership of the Common Stock whether any such
transaction described in clause (i) or (ii) above is settled by delivery of
Common Stock, or such other securities, in cash or otherwise. Certain senior
officers of the Company have agreed that, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the Underwriters, they will not,
during the period ending 180 days after the date of this Prospectus and subject
to certain exceptions, engage in a transaction described in clause (i) or (ii)
above. The restrictions described in this paragraph do not apply to (x) the sale
of Common Stock to the Underwriters, (y) the issuance by the Company of shares
of Common Stock upon the exercise of an option or warrant or the conversion or
issuance upon cancellation of a security outstanding on the date of this
Prospectus of which the Underwriters have been advised in writing, or (z)
transactions by any person other than the Company relating to shares of Common
Stock or other securities acquired in open market transactions after the
completion of the Offerings. The restrictions on the Company are subject to
exceptions for the issuance of Company Stock Options and Common Stock pursuant
to existing employee benefit plans.
In order to facilitate the Offerings, the Underwriters may engage in
transactions that stabilize, maintain, or otherwise affect the price of the
Class A Common Stock. Specifically, the Underwriters may over-allot in
connection with the Offerings, creating a short position in the Class A Common
Stock for their own account. In addition, to cover over-allotments or to
stabilize the price of the Class A Common Stock, the Underwriters may bid for,
and purchase, shares of Class A Common Stock in the open market. Finally, the
underwriting syndicate may reclaim selling concessions allowed to an Underwriter
or a dealer for distributing the Class A Common Stock in the Offerings, if the
syndicate repurchases previously distributed Class A Common Stock in
transactions to cover syndicate short positions, in stabilization transactions,
or otherwise. Any of these activities may stabilize or maintain the market price
of the Common Stock above independent market levels. The Underwriters are not
required to engage in these activities, and may end any of these activities at
any time.
130
<PAGE> 310
From time to time, the Underwriters and certain of their affiliates have
provided, and continue to provide, investment banking services and trading
services and general financing and banking services to DuPont and the Company,
for which they receive customary fees.
The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act.
PRICING OF THE OFFERINGS
Prior to the Offerings, there has been no public market for the Class A
Common Stock. The initial public offering price was determined by negotiations
between DuPont and the Company on the one hand and the U.S. Representatives on
the other hand. Among the factors considered in determining the initial public
offering price were the future prospects of the Company and its industry in
general, sales, earnings, and certain other financial operating information of
the Company in recent periods, and the price-earnings ratios, price-sales
ratios, market prices of securities and certain financial and operating
information of companies engaged in activities similar to those of the Company.
There can be no assurance that the price at which the Class A Common Stock will
sell in the public market after the Offerings will not be lower than the price
at which it is sold by the Underwriters.
131
<PAGE> 311
LEGAL MATTERS
The validity of the Class A Common Stock being offered hereby will be
passed upon for the Company by R.A. Harrington, Senior Vice President, Legal,
and General Counsel, and for the Company and DuPont by Skadden, Arps, Slate,
Meagher & Flom LLP, New York, New York. Certain legal matters will be passed on
for the Underwriters by Cravath, Swaine & Moore, New York, New York. Skadden,
Arps, Slate, Meagher & Flom LLP has in the past and continues to represent
DuPont in connection with various matters, including the Separation. Cravath,
Swaine & Moore has in the past and continues to represent DuPont in connection
with various matters not related to the Separation or the Offerings. Baker &
Botts, L.L.P., Houston, Texas, is representing the Company in connection with
certain aspects of the Separation.
EXPERTS
The combined financial statements as of December 31, 1996 and 1997, and for
each of the three years in the period ended December 31, 1997 included in this
Prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The pro forma combined statement of income for the year ended December 31,
1997 included in this Prospectus has been so included in reliance on the report
of PricewaterhouseCoopers LLP, independent accountants, given on the authority
of said firm as experts in performing examinations of pro forma financial
information in accordance with standards established by the American Institute
of Certified Public Accountants.
With respect to the unaudited historical combined financial information of
Conoco as of June 30, 1998 and for the six-month periods ended June 30, 1997 and
1998, the unaudited pro forma combined balance sheet as of June 30, 1998 and the
related unaudited pro forma combined statements of income for the six-month
periods ended June 30, 1997 and 1998, included in this Prospectus,
PricewaterhouseCoopers LLP reported that they have applied limited procedures in
accordance with professional standards for a review of such information.
However, their separate reports dated September 28, 1998 and October 21, 1998
appearing herein state that they did not audit and they do not express an
opinion on the unaudited historical interim combined financial information or
the unaudited pro forma combined financial information as of June 30, 1998 and
for the six-month periods ended June 30, 1997 and 1998. PricewaterhouseCoopers
LLP has not carried out any significant or additional audit tests beyond those
which would have been necessary if their reports had not been included.
Accordingly, the degree of reliance on their reports on such information should
be restricted in light of the limited nature of the review procedures applied.
PricewaterhouseCoopers LLP is not subject to the liability provisions of section
11 of the Securities Act for their reports on the unaudited historical interim
combined financial information and on the unaudited pro forma combined financial
information because those reports are not a "report" or a "part" of the
registration statement prepared or certified by PricewaterhouseCoopers LLP
within the meaning of sections 7 and 11 of the Securities Act.
The summary letter report of DeGolyer and MacNaughton, independent
petroleum engineering consultants, a copy of which appears as Annex A hereto,
has been included herein in reliance upon the authority of that firm as experts
in estimating proved oil and gas reserves.
132
<PAGE> 312
AVAILABLE INFORMATION
The Company has filed with the Commission a registration statement on Form
S-1, including all amendments and supplements thereto (the "Registration
Statement"), under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the securities offered hereby. This Prospectus, which
constitutes a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement, certain items of which are
contained in schedules and exhibits to the Registration Statement as permitted
by the rules and regulations of the Commission. Statements made in this
Prospectus as to the contents of any contract, agreement or other document
referred to are summaries of material terms of such contract, agreement or other
document and are not necessarily complete. With respect to each such contract,
agreement or other document filed as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference. Items of information omitted from this Prospectus but contained
in the Registration Statement may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of
the Commission located at Seven World Trade Center, 13th Floor, New York, New
York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of all or any portion of such material may also be
obtained from the Public Reference Section of the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. In addition,
such materials filed electronically by the Company with the Commission are
available at the Commission's World Wide Web site at http://www.sec.gov. The
Company's periodic reports, proxy statements and other information filed by the
Company with the Commission can also be inspected at the offices of The New York
Stock Exchange, Inc., 20 Broad Street, New York, NY 10005.
The Company intends to furnish to its stockholders annual reports
containing audited consolidated financial statements and quarterly reports for
the first three quarters of each fiscal year containing unaudited interim
financial information, in each case prepared in accordance with generally
accepted accounting principles.
133
<PAGE> 313
CONOCO
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Audited Combined Financial Statements
Report of Independent Accountants......................... F-2
Combined Statement of Income -- Years Ended December 31,
1995, 1996 and 1997.................................... F-3
Combined Balance Sheet -- at December 31, 1996 and 1997... F-4
Combined Statement of Cash Flows -- Years Ended December
31, 1995, 1996 and 1997................................ F-5
Combined Statement of Owner's Net Investment and
Accumulated Other Comprehensive Loss -- Years Ended
December 31, 1995, 1996 and 1997....................... F-6
Notes to Combined Financial Statements.................... F-7
Unaudited Financial Information
Supplemental Petroleum Data............................... F-31
Combined Quarterly Financial Data -- 1996 and 1997........ F-37
Unaudited Interim Combined Financial Statements
Independent Accountant's Report........................... F-38
Interim Combined Statement of Income -- Six Months Ended
June 30, 1997 and 1998................................. F-39
Interim Combined Balance Sheet -- at December 31, 1997 and
June 30, 1998.......................................... F-40
Interim Combined Statement of Cash Flows -- Six Months
Ended June 30, 1997 and 1998........................... F-41
Notes to Interim Combined Financial Statements............ F-42
</TABLE>
Certain supplementary financial statement schedules have been omitted
because the information required to be set forth therein is either not
applicable or is shown in the financial statements or notes thereto.
F-1
<PAGE> 314
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of E. I. du Pont de Nemours and Company
In our opinion, the accompanying combined balance sheets and the related
combined statements of income, of cash flows and of owner's net investment and
accumulated other comprehensive loss appearing on pages F-3 through F-30 of this
Registration Statement on Form S-1 present fairly, in all material respects, the
financial position of Conoco, the petroleum business of E. I. du Pont de Nemours
and Company, at December 31, 1996 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
July 24, 1998
F-2
<PAGE> 315
FINANCIAL STATEMENTS
CONOCO
COMBINED STATEMENT OF INCOME (NOTE 1)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1995 1996 1997
-------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE)
<S> <C> <C> <C>
Revenues
Sales and Other Operating Revenues*....................... $20,328 $24,230 $25,796
Other Income (Note 4)..................................... 190 186 467
------- ------- -------
Total Revenues.................................... 20,518 24,416 26,263
------- ------- -------
Costs and Expenses
Cost of Goods Sold and Other Operating Expenses........... 11,146 14,560 16,226
Selling, General and Administrative Expenses.............. 728 755 726
Exploration Expenses...................................... 331 404 457
Depreciation, Depletion and Amortization.................. 1,067 1,085 1,179
Taxes Other Than on Income* (Note 5)...................... 5,823 5,637 5,532
Interest and Debt Expense (Note 6)........................ 74 74 36
------- ------- -------
Total Costs and Expenses.......................... 19,169 22,515 24,156
------- ------- -------
Income Before Income Taxes.................................. 1,349 1,901 2,107
Provision for Income Taxes (Note 7)......................... 774 1,038 1,010
------- ------- -------
Net Income.................................................. $ 575 $ 863 $ 1,097
======= ======= =======
Unaudited Pro Forma Earnings Per Share (Note 2)
Basic..................................................... $ 1.75
Diluted................................................... $ 1.72
Unaudited Pro Forma Weighted Average Shares Outstanding
(Note 2)..................................................
Basic..................................................... 628
Diluted................................................... 637
- ---------------
*Includes petroleum excise taxes............................ $ 5,655 $ 5,461 $ 5,349
</TABLE>
See accompanying Notes to Combined Financial Statements
F-3
<PAGE> 316
FINANCIAL STATEMENTS
CONOCO
COMBINED BALANCE SHEET (NOTE 1)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1996 1997
------- --------
(IN MILLIONS)
<S> <C> <C>
Current Assets
Cash and Cash Equivalents................................. $ 846 $ 1,147
Marketable Securities..................................... 7 7
Accounts and Notes Receivable (Note 8).................... 1,494 1,497
Notes Receivable -- Related Parties (Note 3).............. 322 490
Inventories (Note 9)...................................... 806 830
Prepaid Expenses.......................................... 183 236
------- --------
Total Current Assets............................... 3,658 4,207
Property, Plant and Equipment (Note 10)..................... 19,981 21,229
Less: Accumulated Depreciation, Depletion and
Amortization.............................................. (9,899) (10,401)
------- --------
Net Property, Plant and Equipment........................... 10,082 10,828
------- --------
Investment in Affiliates (Note 11).......................... 703 1,085
Long-Term Notes Receivable -- Related Parties (Note 3)...... 9 450
Other Assets (Note 12)...................................... 774 492
------- --------
Total.............................................. $15,226 $ 17,062
======= ========
LIABILITIES AND OWNER'S NET INVESTMENT AND ACCUMULATED OTHER COMPREHENSIVE LOSS
Current Liabilities
Accounts Payable (Note 13)................................ $ 1,025 $ 1,090
Short-Term Borrowings -- Related Parties (Note 3)......... 176 644
Other Short-Term Borrowings and Capital Lease Obligations
(Note 14)............................................... 32 72
Income Taxes (Note 7)..................................... 453 545
Other Accrued Liabilities (Note 15)....................... 1,110 1,289
------- --------
Total Current Liabilities.......................... 2,796 3,640
Long-Term Borrowings -- Related Parties (Note 3)............ 2,287 1,450
Other Long-Term Borrowings and Capital Lease Obligations
(Note 16)................................................. 101 106
Deferred Income Taxes (Note 7).............................. 1,767 1,739
Other Liabilities and Deferred Credits (Note 17)............ 1,390 1,922
------- --------
Total Liabilities.................................. 8,341 8,857
------- --------
Commitments and Contingent Liabilities (Note 25)
Minority Interests (Note 18)................................ 306 309
Owner's Net Investment...................................... 6,636 8,087
Accumulated Other Comprehensive Loss (Note 19)
Minimum Pension Liability Adjustment...................... (18) (31)
Accumulated Foreign Currency Translation Adjustment....... (39) (160)
------- --------
Total Accumulated Other Comprehensive Loss......... (57) (191)
------- --------
Total Owner's Net Investment and Accumulated Other
Comprehensive Loss................................ 6,579 7,896
------- --------
Total.............................................. $15,226 $ 17,062
======= ========
</TABLE>
See accompanying Notes to Combined Financial Statements
F-4
<PAGE> 317
FINANCIAL STATEMENTS
CONOCO
COMBINED STATEMENT OF CASH FLOWS (NOTE 1)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1995 1996 1997
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Cash Provided by Operations
Net Income................................................ $ 575 $ 863 $ 1,097
Adjustments to Reconcile Net Income to Cash Provided by
Operations:
Depreciation, Depletion and Amortization............... 1,067 1,085 1,179
Dry Hole Costs and Impairment of Unproved Properties... 121 137 169
Deferred Income Taxes (Note 7)......................... 133 10 16
Income Applicable to Minority Interests................ 1 19 24
Other Noncash Charges and Credits -- Net............... 20 66 (271)
Decrease (Increase) in Operating Assets:
Accounts and Notes Receivable........................ (39) (280) 127
Inventories.......................................... 57 22 (79)
Other Operating Assets............................... 38 10 (96)
Increase (Decrease) in Operating Liabilities:
Accounts Payable and Other Operating Liabilities..... (3) 362 622
Accrued Interest and Income Taxes (Notes 6 and 7).... (46) 102 88
------- ------- -------
Cash Provided by Operations....................... 1,924 2,396 2,876
------- ------- -------
Investment Activities (Note 21)
Purchases of Property, Plant and Equipment................ (1,714) (1,616) (2,644)
Investments in Affiliates................................. (116) (326) (339)
Proceeds from Sales of Assets and Subsidiaries............ 244 328 565
Net Decrease (Increase) in Short-Term Financial
Instruments............................................ (91) (33) 381
------- ------- -------
Cash Used for Investment Activities............... (1,677) (1,647) (2,037)
------- ------- -------
Financing Activities
Short-Term Borrowings -- Receipts......................... 63 -- 24
-- Payments......................... (70) (90) (2)
Other Long-Term Borrowings -- Receipts.................... 25 38 33
-- Payments.................... (311) (1) (3)
Transactions with Related Parties:
Notes Receivable -- Receipts........................... 1,678 402 9
-- Payments........................... (203) (9) (617)
Borrowings -- Receipts................................. 885 706 413
-- Payments................................. (1,286) (520) (695)
Net Cash Contribution From (To) Owner.................. (1,094) (993) 360
Increase (Decrease) in Minority Interests (Note 18)....... -- 280 (21)
------- ------- -------
Cash Used for Financing Activities................ (313) (187) (499)
------- ------- -------
Effect of Exchange Rate Changes on Cash..................... 33 (2) (39)
------- ------- -------
Increase (Decrease) in Cash and Cash Equivalents............ (33) 560 301
Cash and Cash Equivalents at Beginning of Year.............. 319 286 846
------- ------- -------
Cash and Cash Equivalents at End of Year.................... $ 286 $ 846 $ 1,147
======= ======= =======
</TABLE>
See accompanying Notes to Combined Financial Statements
F-5
<PAGE> 318
FINANCIAL STATEMENTS
CONOCO
COMBINED STATEMENT OF OWNER'S NET INVESTMENT AND
ACCUMULATED OTHER COMPREHENSIVE LOSS (NOTES 1 AND 19)
<TABLE>
<CAPTION>
ACCUMULATED OTHER
OWNER'S NET COMPREHENSIVE COMPREHENSIVE
INVESTMENT INCOME INCOME (LOSS) TOTAL
----------- ------------- ----------------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Years Ended December 31, 1995, 1996 and 1997
Balance January 1, 1995................... $ 7,281 $ (6) $ 7,275
Comprehensive Income
Net Income.............................. 575 $ 575 575
Other Comprehensive Income (Loss):
Minimum Pension Liability
Adjustment......................... (2) (2) (2)
------
Comprehensive Income............ $ 573
======
Net Cash Contribution To Owner............ (1,094) (1,094)
------- ----- -------
Balance December 31, 1995................. 6,762 (8) 6,754
Comprehensive Income
Net Income.............................. 863 $ 863 863
Other Comprehensive Income (Loss):
Minimum Pension Liability
Adjustment......................... (10)
Foreign Currency Translation
Adjustment......................... (39)
------
Other Comprehensive Loss........... (49) (49) (49)
------
Comprehensive Income............ $ 814
======
Net Cash Contribution To Owner............ (993) (993)
Other Transfers From Owner................ 4 4
------- ----- -------
Balance December 31, 1996................. 6,636 (57) 6,579
Comprehensive Income
Net Income.............................. 1,097 $1,097 1,097
Other Comprehensive Income (Loss):
Minimum Pension Liability
Adjustment......................... (13)
Foreign Currency Translation
Adjustment......................... (121)
------
Other Comprehensive Loss........... (134) (134) (134)
------
Comprehensive Income............ $ 963
======
Net Cash Contribution From Owner.......... 360 360
Other Transfers To Owner.................. (6) (6)
------- ----- -------
Balance December 31, 1997................. $ 8,087 $(191) $ 7,896
======= ===== =======
</TABLE>
See accompanying Notes to Combined Financial Statements
F-6
<PAGE> 319
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
1. BASIS OF PRESENTATION
On May 11, 1998, E. I. du Pont de Nemours and Company ("DuPont") announced
its intention to offer in an initial public offering a portion of its interest
in the common stock of Conoco Inc., a wholly owned energy subsidiary. This
initial public offering is DuPont's first step in the planned divestiture of its
entire Petroleum business.
Throughout the period covered by the Combined Financial Statements,
operations were conducted by Conoco Inc., subsidiaries of Conoco Inc. and, in
some cases, subsidiaries of DuPont. These operations are collectively referred
to herein as the "Company" or "Conoco". Certain subsidiaries and, in some cases,
assets, liabilities, and related operations not currently owned by Conoco will
be transferred to Conoco.
Conoco is an integrated, global energy company with two principal business
segments. The Upstream segment includes the exploration for, development,
production and sale of crude oil, natural gas and natural gas liquids. The
Downstream segment includes the refining of crude oil and other feedstocks into
petroleum products, buying and selling crude oil and refined products, and
transporting, distributing and marketing petroleum products. Corporate and Other
activities include general corporate expenses, financing costs and other
nonoperating items, and results for electric power and related-party insurance
operations.
The accompanying Combined Financial Statements are presented on a carve-out
basis and include the historical operations of both entities owned by Conoco and
operations to be transferred to Conoco by DuPont. In this context, no direct
ownership relationship existed among all the various units comprising Conoco;
accordingly, DuPont and its subsidiaries' net investment in Conoco ("Owner's Net
Investment") is shown in lieu of Stockholder's Equity in the Combined Financial
Statements. The Combined Financial Statements included herein have been prepared
from DuPont's historical accounting records.
Certain international assets relating primarily to the business of DuPont
may be held by the Company or its subsidiaries at the closing of the Offerings
pending receipt of consents or other approval or satisfaction of other
applicable foreign requirements necessary for the transfer of such assets to
DuPont. In addition, certain international assets relating primarily to the
business of the Company may be held by DuPont or other of its subsidiaries at
the closing of the Offerings pending receipt of consents or approvals or
satisfaction of other applicable foreign requirements necessary for the transfer
of such assets to the Company. Additionally, there are certain subsidiaries of
DuPont which will not be owned by the Company as of the closing of the Offerings
and which DuPont will not thereafter be obligated to transfer to the Company.
DuPont and the Company intend to negotiate for the sale of such subsidiaries
within the six months following the closing of the Offerings at a purchase price
equal to their then fair market value. DuPont and the Company estimate that the
fair market value of such subsidiaries at July, 1998 is approximately $20
million and cannot predict at what price any such sale may occur. All of the
above subsidiaries, which are immaterial to total assets and results of
operations of the Company, have been included in the Combined Financial
Statements.
The Combined Statement of Income includes all revenues and costs directly
attributable to Conoco, including costs for facilities, functions and services
used by Conoco at shared sites and costs for certain functions and services
performed by centralized DuPont organizations and directly charged to Conoco
based on usage. In addition, services performed by Conoco on DuPont's behalf are
directly charged to DuPont. The results of operations also include allocations
of DuPont's general corporate expenses.
All charges and allocations of cost for facilities, functions and services
performed by DuPont organizations for Conoco have been deemed to have been paid
by Conoco to DuPont, in cash, in the period in which the cost was recorded in
the Combined Financial Statements. Allocations of current income taxes
receivable or payable are deemed to have been remitted, in cash, by or to DuPont
in the period the related income taxes were recorded.
All of the allocations and estimates in the Combined Financial Statements
are based on assumptions that management believes are reasonable under the
circumstances. However, these allocations and estimates are
F-7
<PAGE> 320
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
not necessarily indicative of the costs and expenses that would have resulted if
Conoco had been operated as a separate entity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Conoco observes the generally accepted accounting principles described
below.
BASIS OF COMBINATION
The accounts of wholly owned and majority-owned subsidiaries are included
in the Combined Financial Statements. The equity method is used to account for
investments in corporate entities, partnerships, and limited liability companies
in which the Company exerts significant influence, generally having a 20-50%
ownership interest. The Company's 50.1 percent non-controlling interest in
Petrozuata CA in Venezuela is accounted for using the equity method because the
minority shareholder, a subsidiary of the national oil company of the Republic
of Venezuela, has substantive participating rights, primarily related to
fundamental operating and management decisions, which preclude consolidation.
Undivided interests in oil and gas joint ventures and transportation assets are
combined on a pro rata basis. Other investments, excluding marketable
securities, are generally carried at cost.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses, and the disclosures of contingent assets and liabilities. Actual
results may differ from those estimates and assumptions.
CASH EQUIVALENTS
Cash equivalents represent investments with maturities of three months or
less from time of purchase. They are carried at cost plus accrued interest,
which approximates fair value.
INVENTORIES
Inventories are carried at the lower of cost or market. Cost is determined
under the last-in, first-out (LIFO) method for inventories of crude oil and
petroleum products. Cost for remaining inventories, principally materials and
supplies, is generally determined by the average cost method. Market is
determined on a regional basis and any lower of cost or market write-down is
recorded as a permanent adjustment to the cost of inventory.
PROPERTY, PLANT AND EQUIPMENT (PP&E)
PP&E is carried at cost. Depreciation of PP&E, other than oil and gas
properties, is generally computed on a straight-line basis over the estimated
economic lives of the facilities, which for major assets range from 14 to 25
years. When assets that are part of a composite group are retired, sold,
abandoned or otherwise disposed of, the cost, net of sales proceeds or salvage
value, is charged against accumulated depreciation, depletion and amortization.
Where depreciation is accumulated for specific assets, gains or losses on
disposal are included in period income.
Maintenance and repairs are charged to expense; replacements and
improvements are capitalized.
F-8
<PAGE> 321
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
OIL AND GAS PROPERTIES
The Company follows the successful efforts method of accounting, under
which the costs of property acquisitions, successful exploratory wells, all
development costs, and support equipment and facilities are capitalized. The
costs of producing properties are amortized at the field level on a
unit-of-production method.
Unproved properties which are individually significant are periodically
assessed for impairment, whereas the impairment of individually insignificant
properties is provided by amortizing the costs based on past experience and the
estimated holding period. Exploratory well costs are expensed in the period the
well is determined to be unsuccessful. All other exploration costs, including
geological and geophysical costs, production costs, and overhead costs are
expensed in the period incurred.
The estimated costs of dismantlement and removal of oil and gas related
facilities are recognized over the properties' productive lives using the
unit-of-production method.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets with recorded values that are not expected to be
recovered through future cash flows are written down to current fair value
through additional amortization or depreciation provisions. Fair value is
generally determined from estimated discounted future net cash flows.
ENVIRONMENTAL COSTS
Environmental expenditures are expensed or capitalized, as appropriate,
depending on their future economic benefit. Expenditures that relate to an
existing condition caused by past operations, and that do not have future
economic benefit, are expensed. Liabilities related to these future costs are
recorded on an undiscounted basis when environmental assessments and/or
remediation activities are probable and the costs can be reasonably estimated.
INCOME TAXES
As Conoco is included in the DuPont consolidated tax return, the provision
for income taxes has been determined using the loss benefit method of the asset
and liability approach of accounting for income taxes. Under the loss benefit
method, the current tax provision or benefit is allocated based on the amount
expected to be paid or received from the consolidated group and benefits of
losses and credit carryforwards are recorded when such benefits are expected to
be realized by members of the consolidated group. The provision for income taxes
represents income taxes paid or payable for the current year plus the change in
deferred taxes during the year. The pro forma effect on the Statement of Income
of reflecting the provision for income taxes on a separate return basis is not
material.
Deferred taxes result from differences between the financial and tax bases
of the Company's assets and liabilities and are adjusted for changes in tax
rates and tax laws when changes are enacted. Valuation allowances are recorded
to reduce deferred tax assets when it is more likely than not that a tax benefit
will not be realized by the consolidated group.
Provision has been made for income taxes on unremitted earnings of
subsidiaries and affiliates, except in cases in which earnings are deemed to be
permanently invested.
FOREIGN CURRENCY TRANSLATION
Through December 31, 1995, the Company had determined that the United
States dollar was the "functional currency" of its worldwide operations. For
subsidiaries where the United States dollar is the functional currency, all
foreign currency asset and liability amounts are remeasured into United States
dollars at end-of-period exchange rates, except for inventories, prepaid
expenses and property, plant and equipment,
F-9
<PAGE> 322
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
which are remeasured at historical rates. Foreign currency income and expenses
are remeasured at average exchange rates in effect during the year, except for
expenses related to balance sheet amounts which are remeasured at historical
exchange rates. Exchange gains and losses arising from remeasurement of foreign
currency-denominated monetary assets and liabilities are included in current
period income.
Effective January 1, 1996, local currency was adopted as the functional
currency for the Company's integrated Western European petroleum operations to
properly reflect changed circumstances in the primary economic environment in
which these subsidiaries operate. For subsidiaries whose functional currency is
the local currency, assets and liabilities denominated in local currency are
translated into United States dollars at end-of-period exchange rates, and the
resultant translation adjustment is disclosed in the Combined Balance Sheet.
Assets and liabilities denominated in other than the local currency are
remeasured into the local currency prior to translation into United States
dollars, and the resultant exchange gains or losses, together with their related
tax effects, are included in income in the period in which they occur. Income
and expenses are translated into United States dollars at average exchange rates
in effect during the period.
COMMODITY HEDGING AND TRADING ACTIVITIES
The Company enters into energy-related futures, forwards, swaps, and
options in various markets to balance its physical systems, to meet customer
needs, and to manage its exposure to price fluctuations on anticipated crude
oil, natural gas, refined product and electric power transactions.
Under the Company's policy, hedging includes only those transactions that
offset physical positions and reduce overall exposure to prevailing market price
risk. Trading is defined as any transaction that does not meet the definition of
hedging.
Gains and losses on hedging contracts are deferred and included in the
measurement of the related transaction. Changes in market values of trading
contracts are reflected in income in the period the change occurs.
In the event a derivative designated as a hedge is terminated prior to the
maturation of the hedged transaction, gains or losses realized at termination
are deferred and included in the measurement of the hedged transaction. If a
hedged transaction matures, is sold, extinguished or terminated prior to the
maturity of a derivative designated as a hedge of such transaction, gains or
losses associated with the derivative through the date the transaction matured
are included in the measurement of the hedged transaction and the derivative is
reclassified as for trading purposes. Derivatives designated as a hedge of an
anticipated transaction are reclassified as for trading purposes if the
anticipated transaction is no longer likely to occur.
In the Combined Statement of Cash Flows, the Company reports the cash flows
resulting from its hedging activities in the same category as the related item
that is being hedged.
EARNINGS PER SHARE
The Company's historical capital structure is not indicative of its
prospective structure since no direct ownership relationship existed among all
the various units comprising Conoco. Accordingly, historical earnings per share
has not been presented in the Combined Financial Statements.
Unaudited pro forma basic earnings per share includes the shares of both
the Class A and the Class B common shares deemed to be outstanding as of the
date of the Offerings. Unaudited pro forma diluted earnings per share includes
the dilutive effect of the 8.6 million shares of Conoco Common Stock issuable
upon exercise of Conoco stock options (see Note 20 to the Combined Financial
Statements), after applying the treasury stock method, which are expected to be
issued upon cancellation of outstanding DuPont stock options, using the
anticipated weighted-average exercise price of the outstanding options and the
initial public offering price. In accordance with SEC Staff Accounting Bulletin
No. 98, pro forma basic and
F-10
<PAGE> 323
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
diluted earnings per share have been presented for the most recent annual and
subsequent interim periods only.
RECENT ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income," and Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The accompanying financial
statements reflect application of the provisions of Statement No. 130. The
Company is required to adopt Statement No. 131 for the 1998 annual report and
disclose segment information on the same basis used internally for evaluating
segment performance and deciding how to allocate resources to segments. The
Company is currently assessing the effect of Statement No. 131; however, its
adoption will have no financial impact on the Company.
In February 1998, the Financial Accounting Standards Board issued Statement
No. 132, "Employers' Disclosure About Pension and Other Postretirement
Benefits," that revised disclosure requirements for pension and other
postretirement benefits. It does not affect the measurement of the expense of
the Company's pension and other postretirement benefits. The Company is required
to adopt this Statement for the 1998 annual report and is currently assessing
the effect of the new disclosure.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" which
requires that companies recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
The Company is required to adopt this Statement by the first quarter of 2000 and
is currently assessing the effect of the new standard.
Statement No. 133 provides, if certain conditions are met, that a
derivative may be specifically designated as (1) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an unrecognized
firm commitment (fair value hedge), (2) a hedge of the exposure to variable cash
flows of a forecasted transaction (cash flow hedge), or (3) a hedge of the
foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security or a
foreign-currency-denominated forecasted transaction (foreign currency hedge).
Under Statement No. 133, the accounting for changes in fair value of a
derivative depends on its intended use and designation. For a fair value hedge,
the gain or loss is recognized in earnings in the period of change together with
the offsetting loss or gain on the hedged item. For a cash flow hedge, the
effective portion of the derivative's gain or loss is initially reported as a
component of other comprehensive income and subsequently reclassified into
earnings when the forecasted transaction affects earnings. For a foreign
currency hedge, the gain or loss is reported in other comprehensive income as
part of the cumulative translation adjustment. For all other items not
designated as hedging instruments, the gain or loss is recognized in earnings in
the period of change.
3. RELATED PARTY TRANSACTIONS
The Combined Financial Statements include significant transactions with
DuPont involving services (such as cash management, other financial services,
purchasing, legal, computer and corporate aviation) and general corporate
expenses that were provided between Conoco and centralized DuPont organizations.
The costs of services have been directly charged or allocated between Conoco and
DuPont using methods management believes are reasonable. These methods include
negotiated usage rates, dedicated asset assignment, and proportionate corporate
formulas involving assets, revenues, and employees. Such charges and allocations
are not necessarily indicative of what would have been incurred if Conoco had
been a separate entity.
F-11
<PAGE> 324
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Amounts charged and allocated to Conoco for these services were $103, $101
and $125 for the years 1995, 1996 and 1997, respectively, and are principally
included in Selling, General and Administrative Expenses. Conoco provided DuPont
services such as computer, legal and purchasing, as well as certain technical
and plant operating services, which amounted to $66, $66 and $62 in 1995, 1996
and 1997, respectively. These charges to DuPont were treated as reductions of
Cost of Goods Sold and Other Operating Expenses and Selling, General and
Administrative Expenses.
Interest expense charged by DuPont was $154, $143 and $124 for the years
1995, 1996 and 1997, respectively, and reflects market-based rates. A portion of
this and other interest and debt expense was capitalized as cost associated with
major construction projects. Interest income from DuPont was $47, $57 and $11
for the same years and also reflects market-based rates.
Sales and Other Operating Revenues include sales of products from Conoco to
DuPont, principally natural gas and gas liquids to supply several DuPont plant
sites. These sales totaled $278, $413 and $420 for the years 1995, 1996 and
1997, respectively. Also included are revenues from insurance premiums charged
to DuPont for property and casualty coverage outside the United States. These
revenues totaled $20, $21 and $22 for the years 1995, 1996 and 1997,
respectively. Purchases of products from DuPont during these periods were not
material.
These intercompany arrangements between DuPont and Conoco will continue
after the Offerings under transition service agreements or other long-term
agreements. It is not anticipated that a change, if any, in these costs and
revenues would have a material effect on the Company's results of operations or
combined financial position.
Accounts and Notes Receivable include amounts due from DuPont of $110 and
$79 at December 31, 1996 and 1997, respectively, representing current month
balances of transactions between Conoco and DuPont, mainly product sales, net
interest on borrowings, and certain charges billed annually. Accounts Payable
include amounts due DuPont of $5 and $4 at December 31, 1996 and 1997,
respectively.
Amounts representing notes receivable or borrowings from DuPont, including
its subsidiary organizations, are identified for related parties and presented
separately in the Combined Balance Sheet. The current portion of Notes
Receivable represents the accumulation of a variety of cash transfers and
operating transactions with DuPont. These balances are generally interest
bearing and represent net amounts of cash transferred for funding and cash
management purposes and amounts charged between the companies for certain
product and service purchases and asset transfers. The long-term portion of
Notes Receivable and amounts shown for Short-Term and Long-Term Borrowings
represent borrowings between Conoco and DuPont with established due dates at
market-based interest rates, except for certain short-term non-interest bearing
borrowings due DuPont of $168 and $492 at December 31, 1996 and 1997,
respectively. At December 31, 1997, the long-term portion of borrowings from
related parties totaled $1,450 and reflected a weighted average interest rate of
6.6 percent with maturities of $633 in 1999, $430 in 2000, and $387 in 2001.
4. OTHER INCOME
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Interest income
Related parties (see Note 3).............................. $ 47 $ 57 $ 11
Other, net of miscellaneous interest expense.............. 71 67 66
---- ---- ----
118 124 77
Equity in earnings of affiliates (see Note 11).............. 22 (25) 40
Gain on sales of assets..................................... 63 84 314(1)
Exchange gain (loss)........................................ (44) (5) 27
Other -- net................................................ 31 8 9
---- ---- ----
$190 $186 $467
==== ==== ====
</TABLE>
- ---------------
(1) Includes benefit of $239 from gain on the sale of certain Upstream
North Sea properties.
F-12
<PAGE> 325
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
5. TAXES OTHER THAN ON INCOME
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Petroleum excise taxes
U.S. ..................................................... $1,060 $1,145 $1,201
Non-U.S. ................................................. 4,595 4,316 4,148
------ ------ ------
5,655 5,461 5,349
Payroll taxes............................................... 51 48 43
Property taxes.............................................. 63 55 63
Production and other taxes.................................. 54 73 77
------ ------ ------
$5,823 $5,637 $5,532
====== ====== ======
</TABLE>
6. INTEREST AND DEBT EXPENSE
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Interest and debt cost incurred
Related parties (see Note 3).............................. $154 $143 $124
Other..................................................... 15 6 6
---- ---- ----
169 149 130
Less: Interest and debt cost capitalized.................... 95 75 94
---- ---- ----
Interest and debt expense................................... $ 74 $ 74 $ 36
==== ==== ====
</TABLE>
Interest paid (net of amounts capitalized) was $80 in 1995, $77 in 1996 and
$33 in 1997.
7. PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
1995 1996 1997
---- ------ ------
<S> <C> <C> <C>
Current tax expense:
U.S. federal.............................................. $(45) $ 155 $ 64
U.S. state and local...................................... 1 8 5
Non-U.S. ................................................. 685 865 925
---- ------ ------
Total............................................. 641 1,028 994
---- ------ ------
Deferred tax expense:
U.S. federal.............................................. 112 (78) 80
U.S. state and local...................................... 3 -- 8
Non-U.S. ................................................. 18 88 (72)
---- ------ ------
Total............................................. 133 10 16
---- ------ ------
Provision for Income Taxes.................................. 774 1,038 1,010
Minimum Pension Liability(1)................................ (1) (5) (7)
---- ------ ------
Total Provision................................... $773 $1,033 $1,003
==== ====== ======
</TABLE>
- ---------------
(1) Represents deferred tax provision for minimum pension liability adjustment.
Total income taxes paid worldwide were $745 in 1995, $901 in 1996 and $935
in 1997.
F-13
<PAGE> 326
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
The significant components of deferred tax assets and liabilities at
December 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
----------------- ------------------
DEFERRED TAX ASSET LIABILITY ASSET LIABILITY
------------ ----- --------- ------ ---------
<S> <C> <C> <C> <C>
Property, plant and equipment....................... $108 $2,276 $ 182 $2,219
Employee benefits................................... 162 -- 166 --
Other accrued expenses.............................. 277 -- 273 --
Inventories......................................... -- 88 -- 102
Tax loss/tax credit carryforwards................... 408 -- 417 --
Other............................................... 26 52 27 169
---- ------ ------ ------
Total..................................... $981 $2,416 $1,065 $2,490
====== ======
Less: Valuation allowance........................... 414 392
---- ------
Net................................................. $567 $ 673
==== ======
</TABLE>
Valuation allowances, which reduce deferred tax assets to an amount that
will more likely than not be realized, have been increased by $12 and $52 during
the years 1995 and 1996, respectively. These changes, which are reflected in the
provision for income taxes, offset increases in deferred tax assets resulting
primarily from operating losses incurred in exploration and startup operations.
In 1997, the valuation allowance decreased $22, principally reflecting a $37
decrease related to deferred tax assets representing operating losses which the
Company determined will more likely than not be realized in future years. This
decrease was partially offset by an increase of $15 reflecting offsets to
operating losses.
Current deferred tax liabilities (included in the Combined Balance Sheet
caption "Income Taxes") were $107 and $122 at December 31, 1996 and 1997,
respectively.
Current deferred tax assets included in Prepaid Expenses were $25 and $7 at
December 31, 1996 and 1997, respectively. In addition, Other Assets includes
deferred tax assets of $37 at December 31, 1997.
An analysis of the Company's effective income tax rate follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Statutory U.S. federal income tax rate...................... 35.0% 35.0% 35.0%
Higher effective tax rate on non-U.S. operations............ 27.0 21.6 13.9
Alternative fuels credit.................................... (4.5) (3.4) (3.0)
Other -- net................................................ (.1) 1.4 2.0
---- ---- ----
Effective income tax rate................................... 57.4% 54.6% 47.9%
==== ==== ====
</TABLE>
Earnings before income taxes shown below are based on the location of the
corporate unit to which such earnings are attributable. However, since such
earnings are often subject to taxation in more than one country, the income tax
provision shown above as U.S. or non-U.S. does not correspond to the earnings
set forth below.
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
U.S........................................................ $ 417 $ 563 $ 740
Other regions.............................................. 932 1,338 1,367
------ ------ ------
$1,349 $1,901 $2,107
====== ====== ======
</TABLE>
At December 31, 1996 and 1997, respectively, unremitted earnings of
non-U.S. subsidiaries totaling $1,210 and $1,645 were deemed to be permanently
invested. No deferred tax liability has been recognized with regard to the
remittance of such earnings. It is not practicable to estimate the income tax
liability that might be incurred if such earnings were remitted to the United
States.
F-14
<PAGE> 327
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Under the tax laws of various jurisdictions in which the Company operates,
deductions or credits that cannot be fully utilized for tax purposes during the
current year may be carried forward, subject to statutory limitations, to reduce
taxable income or taxes payable in a future year. At December 31, 1997, the tax
effect of such carryforwards approximated $417. Of this amount, $127 has no
expiration date, $11 expires in 1998, $38 expires in 1999, $75 expires in
2000-2001 and $166 expires in 2002.
8. ACCOUNTS AND NOTES RECEIVABLE
<TABLE>
<CAPTION>
DECEMBER 31
---------------
1996 1997
------ ------
<S> <C> <C>
Trade....................................................... $1,062 $ 916
Related parties (see Note 3)................................ 110 79
Other....................................................... 322 502
------ ------
$1,494 $1,497
====== ======
</TABLE>
See Note 26 for a description of business segment markets and associated
concentrations of credit risk.
9. INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31
-----------
1996 1997
---- ----
<S> <C> <C>
Crude oil and petroleum products............................ $675 $675
Other merchandise........................................... 19 25
Materials and supplies...................................... 112 130
---- ----
$806 $830
==== ====
</TABLE>
The excess of current cost over book value of inventories valued under the
LIFO method was $337 and $152 at December 31, 1996 and 1997, respectively.
Inventories valued at LIFO represented 84 percent and 81 percent of combined
inventories, at December 31, 1996 and 1997, respectively.
During 1995, 1996 and 1997, certain LIFO inventory quantities were reduced
resulting in partial liquidation of the LIFO bases, with no material effect on
net income.
10. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------
GROSS NET
----------------- -----------------
1996 1997 1996 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Oil and Gas Properties
Unproved..................................... $ 913 $ 1,491 $ 756 $ 1,230
Proved....................................... 11,914 12,420 5,185 5,480
Other.......................................... 1,045 1,316 609 871
------- ------- ------- -------
Total Upstream............................ 13,872 15,227 6,550 7,581
Refining....................................... 3,831 3,803 2,203 1,952
Marketing & Distribution....................... 2,278 2,199 1,329 1,295
------- ------- ------- -------
Total Downstream.......................... 6,109 6,002 3,532 3,247
------- ------- ------- -------
$19,981 $21,229 $10,082 $10,828
======= ======= ======= =======
</TABLE>
Property, Plant and Equipment includes Downstream gross assets acquired
under capital leases of $41 at December 31, 1996 and 1997; related amounts
included in Accumulated Depreciation, Depletion and Amortization were $7 and $10
at December 31, 1996 and 1997, respectively.
F-15
<PAGE> 328
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
11. SUMMARIZED FINANCIAL INFORMATION FOR AFFILIATED COMPANIES
Summarized combined financial information for affiliated companies for
which Conoco uses the equity method of accounting (see Note 2, "Basis of
Combination") is shown below on a 100 percent basis. Dividends received from
equity affiliates were $42 in 1995, $85 in 1996 and $58 in 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
RESULTS OF OPERATIONS
Sales(1)................................................... $4,368 $6,622 $7,521
Earnings before income taxes............................... 380 305 556
Net income................................................. 228 140 345
Conoco's equity in earnings of affiliates (see Note 4)..... 22 (25) 40
</TABLE>
- ---------------
(1) Includes sales to Conoco of $262 in 1995, $359 in 1996 and $568 in 1997.
<TABLE>
<CAPTION>
DECEMBER 31
---------------
1996 1997
------ ------
<S> <C> <C>
FINANCIAL POSITION
Current assets.............................................. $1,503 $2,543
Non-current assets.......................................... 5,218 6,826
------ ------
Total assets...................................... $6,721 $9,369
------ ------
Short-term borrowings*...................................... $ 241 $ 550
Other current liabilities................................... 929 1,308
Long-term borrowings*....................................... 3,097 4,364
Other long-term liabilities................................. 646 645
------ ------
Total liabilities................................. $4,913 $6,867
------ ------
Conoco's investment in affiliates (includes advances)....... $ 703 $1,085
====== ======
</TABLE>
- ---------------
* Conoco's pro rata interest in total borrowings was $935 in 1996 and $1,586 in
1997, of which $453 in 1996 and $826 in 1997 were guaranteed by the Company.
These amounts are included in the guarantees disclosed in Note 25.
At December 31, 1997, Conoco's equity in undistributed earnings of its
affiliated companies was $79.
12. OTHER ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
------------
1996 1997
---- ----
<S> <C> <C>
Prepaid pension cost (see Note 23).......................... $ 79 $ 71
Long-term notes receivables................................. 26 74
Other securities and investments............................ 482 100
Other....................................................... 187 247
---- ----
$774 $492
==== ====
</TABLE>
Other securities and investments include $478 and $97 at December 31, 1996
and 1997, respectively, representing marketable securities classified as
available for sale and reported at fair value. The remainder represents numerous
small investments which are reported at cost.
F-16
<PAGE> 329
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
13. ACCOUNTS PAYABLE
<TABLE>
<CAPTION>
DECEMBER 31
----------------
1996 1997
------ ------
<S> <C> <C>
Trade....................................................... $ 804 $ 969
Payables to banks........................................... 216 117
Related parties (see Note 3)................................ 5 4
------ ------
$1,025 $1,090
====== ======
</TABLE>
Payables to banks represent checks issued on certain disbursement accounts
but not presented to the banks for payment.
14. OTHER SHORT-TERM BORROWINGS AND CAPITAL LEASE OBLIGATIONS
<TABLE>
<CAPTION>
DECEMBER 31
------------
1996 1997
---- ----
<S> <C> <C>
Industrial development bonds................................ $24 $24
Bank borrowings (foreign currency).......................... -- 21
Long-term borrowings payable within one year................ 4 25
Capital lease obligations................................... 4 2
--- ---
$32 $72
=== ===
</TABLE>
The Company has uncommitted short-term bank credit lines of approximately
$55 and $42 at December 31, 1996 and 1997, respectively. These lines are
denominated in various foreign currencies to support general operating needs in
their respective countries. No advances were outstanding under these lines at
these respective dates.
The weighted average interest rate on other short-term borrowings
outstanding at December 31, 1996 and 1997 was 3.8 percent and 3.7 percent,
respectively.
15. OTHER ACCRUED LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31
----------------
1996 1997
------ ------
<S> <C> <C>
Taxes other than on income.................................. $ 309 $ 376
Operating expenses.......................................... 334 343
Payroll and other employee-related costs.................... 133 135
Accrued postretirement benefits cost (see Note 22).......... 16 24
Other....................................................... 318 411
------ ------
$1,110 $1,289
====== ======
</TABLE>
F-17
<PAGE> 330
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
16. OTHER LONG-TERM BORROWINGS AND CAPITAL LEASE OBLIGATIONS
<TABLE>
<CAPTION>
DECEMBER 31
------------
1996 1997
---- ----
<S> <C> <C>
5.75% notes due 2026........................................ $ 16 $ 16
6.50% notes due 2008........................................ 7 7
Other loans (various currencies) due 1998-2007*............. 21 30
Capitalization obligations to affiliates due 1998-1999...... 22 20
Capital lease obligations................................... 35 33
---- ----
$101 $106
==== ====
</TABLE>
- ---------------
* Average interest rates were 6.0 percent and 7.3 percent at December 31, 1996
and 1997, respectively.
Maturities of long-term borrowings, together with sinking fund requirements
for years ending after December 31, 1998 are $24, $4, $4, and $4 for the years
1999, 2000, 2001 and 2002, respectively.
17. OTHER LIABILITIES AND DEFERRED CREDITS
<TABLE>
<CAPTION>
DECEMBER 31
----------------
1996 1997
------ ------
<S> <C> <C>
Deferred gas revenue*....................................... $ -- $ 379
Accrued postretirement benefits cost (see Note 22).......... 327 318
Abandonment costs........................................... 317 310
Accrued pension liability (see Note 23)..................... 165 230
Environmental remediation costs (see Note 25)............... 140 132
Other....................................................... 441 553
------ ------
$1,390 $1,922
====== ======
</TABLE>
- ---------------
* Includes $303 received from a contract for future sales of natural gas to
Centrica, a United Kingdom gas marketing company.
18. MINORITY INTERESTS
In 1996, certain upstream subsidiaries contributed assets with an aggregate
fair value of $613 to Conoco Oil & Gas Associates L.P. (COGA) for a general
partnership interest of 67 percent. The remaining 33 percent was purchased by
Vanguard Energy Investors L.P. (Vanguard) as a limited partner. The net result
of this transaction was to increase minority interests by $297.
Vanguard is entitled to a cumulative annual priority return on its
investment and participation in residual earnings at rates established in the
partnership agreement. The priority return rate, currently 6.52 percent, is
negotiated every four years commencing in 1999. In the event the parties are
unable to agree on a new return rate, the partnership would be liquidated with
resultant cash outflows not expected to be materially different from the
recorded amount of minority interest. Vanguard's share of COGA's earnings was
$18 or 17 percent in 1996 and $22 or 18 percent in 1997.
F-18
<PAGE> 331
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
19. OTHER COMPREHENSIVE INCOME
Changes in related components of other comprehensive income (loss) are
reported net of associated income tax effects as summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------------------------------------------------------------
1995 1996 1997
------------------------------- ------------------------------- -------------------------------
PRETAX INCOME TAX AFTER-TAX PRETAX INCOME TAX AFTER-TAX PRETAX INCOME TAX AFTER-TAX
------ ---------- --------- ------ ---------- --------- ------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Minimum Pension Liability
Adjustment.............. $(3) $(1) $(2) $(15) $(5) $(10) $ (20) $(7) $ (13)
Foreign Currency
Translation
Adjustment*............. (39) -- (39) (121) -- (121)
--- --- --- ---- --- ---- ----- --- -----
Other Comprehensive Income
(Loss).................. $(3) $(1) $(2) $(54) $(5) $(49) $(141) $(7) $(134)
=== === === ==== === ==== ===== === =====
</TABLE>
- ---------------
* Effective January 1, 1996, local currency was adopted as the functional
currency for the Company's integrated Western European petroleum operations to
properly reflect changed circumstances in their primary economic environment.
20. COMPENSATION PLANS
Employees of Conoco participate in stock-based compensation plans that are
administered through DuPont and involve options to acquire DuPont common stock.
Accordingly, option and expense information presented herein represents the
Company's portion of the overall plans.
Subject to completion of the Offerings, the Company and DuPont expect to
give certain current employees of the Company the option, subject to specific
country tax and legal requirements, to participate in a program involving the
cancellation of all or part of their options to purchase DuPont common stock or
SARs with respect to DuPont common stock and the issuance by the Company upon
such cancellation of comparable options to acquire Class A Common Stock, or SARs
with respect to Class A Common Stock. Participation in the program will be
deemed a change in the terms of certain awards granted to Conoco employees. As a
result, the Company will incur a non-cash charge to compensation expense, in the
quarter the Offerings are completed, of approximately $192 after-tax depending
on the number of outstanding Conoco employee options to purchase DuPont common
stock canceled.
From time to time, the DuPont Board of Directors has approved the adoption
of a worldwide Corporate Sharing Program. Under these programs, a majority of
the Company's employees received a one-time grant to acquire shares of DuPont
common stock at the fair market value at the date of grant. Option terms are
"fixed" and generally are exercisable one year after date of grant and expire 10
years from date of grant. There are no additional shares that may be subject to
option under existing programs.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations in accounting for its stock option
plans. Accordingly, no compensation expense has been recognized for fixed
options.
Stock option awards under the DuPont Stock Performance Plan may be granted
to key employees of the Company and may be "fixed" and/or "variable". The
purchase price of shares subject to option is the market price of DuPont stock
at the date of grant. In January 1997, a reload feature was added to the Stock
Performance Plan to accelerate stock ownership by more effectively using stock
options. Participants are eligible for reload options through February 13, 1999
upon the exercise of stock options with the condition that shares received from
the exercise of the original option may not be sold for at least five years.
Reloads are granted at the market price on the reload grant date and have a term
equal to the remaining term of the
F-19
<PAGE> 332
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
original option. The number of new options granted under a reload option is
equal to the number of shares required to satisfy the total exercise price of
the original option.
Generally, fixed options are fully exercisable from one to three years
after date of grant and expire 10 years from date of grant. Beginning in 1998,
shares otherwise receivable from the exercise of nonqualified options can be
deferred as stock units for a designated future delivery.
During 1997 variable stock option grants were made to certain senior
management. These options are subject to forfeiture if, within five years from
the date of grant, the market price of DuPont common stock does not achieve a
price of $75 per share for 50 percent of the options and $90 per share for the
remaining 50 percent. At December 31, 1997, none of the outstanding variable
options were exercisable.
For all related DuPont plans, the maximum number of shares that may be
subject to option for any consecutive five-year period is 72 million shares.
Subject to this limit, additional shares that may have been made subject to
options for the years 1995, 1996 and 1997 were 56,770,460, 59,078,926 and
56,842,462, respectively.
Awards for 1997 under the DuPont Stock Performance Plan (granted to key
employees in 1998) consisted of 1,185,276 fixed options to acquire DuPont common
stock at the fair market value ($59.50 per share) on the date of grant. These
options vest over a three-year period and, except for the last six months of the
ten-year option term, are exercisable when the market price of DuPont common
stock exceeds the option grant price by 20 percent.
The following table summarizes activity for fixed and variable options for
the last three years:
<TABLE>
<CAPTION>
FIXED VARIABLE
--------------------- ---------------------
NUMBER WEIGHTED- NUMBER WEIGHTED-
OF AVERAGE OF AVERAGE
SHARES PRICE SHARES PRICE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
January 1, 1995........................... 4,980,083 $20.80 --
Granted................................... 3,556,392 $28.26 -- --
Exercised................................. 614,269 $18.56 -- --
Forfeited................................. 110,659 $28.08 -- --
--------- ------ --------- ------
December 31, 1995......................... 7,811,547 $24.27 -- --
Granted................................... 1,140,780 $39.20 -- --
Exercised................................. 1,781,277 $23.33 -- --
Forfeited................................. 95,330 $26.38 -- --
--------- ------ --------- ------
December 31, 1996......................... 7,075,720 $26.88 -- --
Granted................................... 2,761,416 $52.90 1,259,600 $52.50
Exercised................................. 730,383 $23.97 -- --
Forfeited................................. 116,325 $50.44 -- --
--------- ------ --------- ------
December 31, 1997......................... 8,990,428 $35.14 1,259,600 $52.50
</TABLE>
Fixed options exercisable at the end of the last three years and the
weighted-average fair value of fixed options granted are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Options exercisable at year-end:
Number of shares............................... 4,377,657 5,934,940 6,229,012
Weighted-average price......................... $ 21.14 $ 24.51 $ 27.26
Weighted-average fair value of options granted
during the year................................ $ 5.92 $ 9.01 $ 12.84
</TABLE>
F-20
<PAGE> 333
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
The weighted-average fair value of variable options granted during 1997 was
$13.03 per share.
The fair value of options is calculated using the Black-Scholes option
pricing model. Assumptions used were as follows:
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- ----------------
FIXED FIXED FIXED VARIABLE
----- ----- ----- --------
<S> <C> <C> <C> <C>
Dividend yield......................................... 3.4% 2.6% 2.2% 2.2%
Volatility............................................. 20.6% 21.0% 18.6% 18.6%
Risk-free interest rate................................ 7.6% 5.4% 6.4% 6.4%
Expected life (years).................................. 4.5 6.0 5.6 5.7
</TABLE>
The following table summarizes information concerning currently outstanding
and exercisable fixed options. For total variable options outstanding at
December 31, 1997, the weighted-average remaining contractual life was 9.1
years.
<TABLE>
<CAPTION>
EXERCISE EXERCISE EXERCISE
PRICE PRICE PRICE
DECEMBER 31, 1997 $13.17-$19.63 $22.63-$33.88 $35.00-$55.50
----------------- ------------- ------------- -------------
<S> <C> <C> <C>
Options outstanding............................ 1,140,519 3,977,927 3,871,982
Weighted-average remaining contractual life
(years)...................................... 2.6 6.2 8.9
Weighted-average price......................... $ 18.37 $ 26.49 $ 48.38
Options exercisable............................ 1,140,519 3,977,927 1,110,566
Weighted-average price......................... $ 18.37 $ 26.49 $ 39.19
</TABLE>
As reported on the New York Stock Exchange, the market price range of
DuPont common stock for the year 1997 was $46 3/8 to $69 3/4 per share and the
closing price on December 31, 1997 was $60 1/16 per share.
Under the Conoco Unit Option Plan, key salaried employees in certain grade
levels who show early evidence of ability to assume significant responsibility
and leadership are offered stock appreciation rights. Annual grants under the
plan are granted to approximately 20 percent of eligible employees who are
awarded appreciation rights on theoretical DuPont stock valued at approximately
40 percent of the employee's annual base pay. These unit options, exercisable
only in cash, have a ten-year life with twenty percent vesting each of the first
five years. At December 31, 1996 and 1997, unit options outstanding were 954,374
and 908,532, respectively. At these same dates, related liability provisions
totaled $18 and $27, respectively. The maximum number of unit options allowed to
be outstanding under the plan is 6,150,000.
Compensation expense recognized in income for stock-based employee
compensation awards was $8, $13 and $26 for 1995, 1996 and 1997, respectively.
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation", was issued in 1995. The Company has elected not to
adopt the optional recognition provisions of SFAS No. 123. If the Company had
adopted these recognition provisions, net income would have been reduced by $13,
$6 and $28 for 1995, 1996 and 1997, respectively.
Awards under the Variable Compensation Plan may be granted in stock and/or
cash to employees who have contributed most in a general way to the Company's
success, consideration being given to ability to succeed to more important
managerial responsibility. Overall amounts are dependent on financial
performance of DuPont and Conoco and other factors, and are subject to maximum
limits as defined by the plan. Amounts charged against earnings in anticipation
of awards to be made later were $24 in 1995, $38 in 1996 and $38 in 1997. Awards
made for plan years 1995, 1996 and 1997 were $26, $38 and $45, respectively. In
accordance with the terms of the Variable Compensation Plan and similar plans of
subsidiaries, 154,918 shares of common stock are awaiting delivery from awards
for 1997 and prior years.
F-21
<PAGE> 334
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Awards under the separate Conoco Challenge Program may be granted in cash
to employees not covered by the Variable Compensation Plan. This plan provides
awards based on meeting financial goals and upholding Conoco's core values.
Overall amounts are dependent on Company earnings and cash provided by
operations and are subject to maximum limits as defined by the plan. Amounts
charged against earnings in anticipation of awards to be made later were $12 in
1995, $47 in 1996 and $49 in 1997. Awards made for plan years 1995, 1996 and
1997 were $20, $47 and $47, respectively.
21. INVESTMENT ACTIVITIES
Purchases of property, plant and equipment in 1997 include $929 for
upstream natural gas properties in South Texas (see Supplemental Petroleum
Data).
Proceeds from sales of assets in 1997 includes $272 from the sale of
certain upstream North Sea properties.
22. OTHER POSTRETIREMENT BENEFITS
Conoco and certain subsidiaries provide medical and life insurance benefits
to retirees and survivors. The associated plans, principally health, are
unfunded, and approved claims are paid from Company funds. Under the terms of
these plans, the Company reserves the right to change, modify or discontinue the
plans.
Net postretirement benefits cost includes the following components:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Service cost................................................ $ 5 $ 7 $ 6
Interest cost............................................... 18 16 18
Amortization of net gains and prior service credit.......... (7) (5) (5)
--- --- ---
Net postretirement benefits cost............................ $16 $18 $19
</TABLE>
The following provides a reconciliation of the accumulated postretirement
benefit obligation for these plans to the liabilities reflected in the Combined
Balance Sheet (see Notes 15 and 17):
<TABLE>
<CAPTION>
DECEMBER 31
-------------
1996 1997
----- -----
<S> <C> <C>
Accumulated postretirement benefit obligation for:
Retirees and survivors.................................... $(152) $(194)
Fully eligible employees.................................. (5) (6)
Other employees........................................... (85) (101)
----- -----
(242) (301)
Unrecognized net loss (gain)................................ (41) 14
Unrecognized prior service credit........................... (60) (55)
----- -----
Accrued postretirement benefits cost........................ $(343) $(342)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
-----------
1996 1997
---- ----
<S> <C> <C>
FINANCIAL ASSUMPTIONS
Discount rate............................................... 7.75% 7.00%
Long-term rate of compensation increase..................... 5.00% 5.00%
Health care escalation rate................................. 4.50% 4.50%
</TABLE>
F-22
<PAGE> 335
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Conoco has communicated to plan participants that any increase in the
annual health care escalation rate above 4.5 percent will be borne by the
participants and, therefore, result in no increase to the accumulated
postretirement benefit obligation or the other postretirement benefits cost.
23. PENSIONS
The Company participates in the DuPont U.S. defined benefit plan which
covers substantially all U.S. employees and has separate defined benefit plans
covering certain U.S. and non-U.S. employees. The benefits for these plans are
based primarily on years of service and employees' pay near retirement. The
Company's funding policy is consistent with the funding requirements of federal
law and regulations.
With respect to the DuPont U.S. defined benefit pension plan, the Company
and DuPont agreed upon an amount of approximately $820 at the date of the
Offerings that will eventually be transferred to a separate trust for the
Company's pension plan. This amount, adjusted for benefit payments and
investment return from the date of the Offerings, will be transferred to the
Company within six months following the date which DuPont owns neither 80
percent of the voting power nor 80 percent of the economic value of the Common
Stock, assuming certain conditions are satisfied. The Company allocated the
pension obligations based on the Company's individual employees covered and
allocated the unrecognized prior service cost and unrecognized net gain in
proportion to the Company's projected benefit obligation to the total projected
benefit obligation of the DuPont plan. The projected benefit obligation
approximates $644 and $723 at December 31, 1996 and 1997, respectively, and the
prepaid pension asset is $79 and $71 at December 31, 1996 and 1997,
respectively. The net pension cost components disclosed in the table below
include the net periodic pension cost based on the allocations described above.
Pension coverage for employees of the Company's non-U.S. subsidiaries is
provided, to the extent deemed appropriate, through separate plans. Obligations
under such plans are systematically provided for by depositing funds with
trustees, under insurance policies or by book reserves.
Net pension cost/(credit) for defined benefit plans includes the following
components:
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Service cost -- benefits earned during the
period..................................... $ 51 $ 55 $ 60
Interest cost on projected benefit
obligation................................. 71 76 88
Return on assets
Actual (gain).............................. $(196) $(134) $(192)
Deferred gain.............................. 122 (74) 43 (91) 94 (98)
----- ----- -----
Amortization of net gains and prior service
cost....................................... (4) (3) 3
---- ---- ----
Net pension cost............................. $ 44 $ 37 $ 53
==== ==== ====
</TABLE>
F-23
<PAGE> 336
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
The funded status of these plans (excluding the DuPont United States
defined benefit plan) was as follows:
<TABLE>
<CAPTION>
ACCUMULATED BENEFIT
EXCEEDING ASSETS
DECEMBER 31
--------------------
1996 1997
------- -------
<S> <C> <C>
Actuarial present value of:
Vested benefit obligation................................. $(485) $(616)
----- -----
Accumulated benefit obligation............................ $(489) $(616)
===== =====
Projected benefit obligation.............................. $(533) $(682)
Plan assets at fair value................................... 323 386
----- -----
Excess of assets over projected benefit obligation.......... (210) (296)
Unrecognized net (gain) loss*............................... 29 109
Unrecognized prior service cost............................. 129 121
Additional minimum liability................................ (113) (164)
----- -----
Accrued pension liability (see Note 17)..................... $(165) $(230)
===== =====
- ---------------
* Includes the unamortized balance of unrecognized net
(gain) at January 1, 1985, the initial application date of
Statement of Financial Accounting Standards No. 87,
"Employers' Accounting for Pensions"...................... $ (19) $ (17)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
--------------
UNITED STATES PLAN ASSUMPTIONS 1996 1997
------------------------------ ---- ----
<S> <C> <C>
Discount rate............................................... 7.75% 7.00%
Long-term rate of compensation increase..................... 5.00% 5.00%
Long-term rate of return on plan assets..................... 9.00% 9.00%
</TABLE>
For non-U.S. plans, similar economic assumptions were used. At December 31,
1997, U.S. plan assets consisted principally of common stocks, including 151,611
shares of DuPont.
24. FINANCIAL INSTRUMENTS AND OTHER RISK MANAGEMENT ACTIVITIES
Conoco operates in the worldwide crude oil, refined product, natural gas,
natural gas liquids and electric power markets and is exposed to fluctuations in
hydrocarbon prices, foreign currency rates, and interest rates that can affect
the revenues and cost of operating, investing and financing. Conoco's management
has used and intends to use financial and commodity-based derivative contracts
to reduce the risk in overall earnings and cash flow when the benefits provided
are anticipated to more than offset the risk management costs involved.
The Company has established a Financial Risk Management Policy Framework
that provides guidelines for entering into contractual arrangements
(derivatives) to manage the Company's commodity price, foreign currency rate,
and interest rate risks. The Conoco Risk Management Committee has ongoing
responsibility for the content of this policy and has principal oversight
responsibility to ensure the Company is in compliance with the policy and that
procedures and controls are in place for the use of commodity, foreign currency
and interest rate instruments. These procedures clearly establish derivative
control and valuation processes, routine monitoring and reporting requirements,
and counterparty credit approval procedures. Additionally, the Company's
internal audit group conducts routine reviews of these risk management
activities to assess the adequacy of internal controls. The audit results are
reviewed by the Conoco Risk Management Committee and by line management.
The counterparties to these contractual arrangements are limited to major
financial institutions and other established companies in the petroleum
industry. Although the Company is exposed to credit loss in the event of
nonperformance by these counterparties, this exposure is managed through credit
approvals, limits and
F-24
<PAGE> 337
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
monitoring procedures and limits to the period over which unpaid balances are
allowed to accumulate. The Company has not experienced nonperformance by
counterparties to these contracts and no material loss would be expected from
any such nonperformance.
COMMODITY PRICE RISK
The Company enters into energy-related futures, forwards, swaps and options
in various markets to balance its physical systems, to meet customer needs and
to manage its exposure to price fluctuations on anticipated crude oil, natural
gas, refined product and electric power transactions.
These instruments provide a natural extension of the underlying cash market
and are used to physically acquire a portion of supply requirements as well as
to manage pricing of near-term physical requirements. The commodity futures
market has underlying principles of increased liquidity and longer trading
periods than the cash market and is one method of managing price risk in the
energy business.
From time to time, management may use derivatives to establish longer-term
positions to hedge the price risk for the Company's equity crude oil and natural
gas production as well as refinery margins.
Under the Company's policy, hedging includes only those transactions that
offset physical positions and reduce overall Company exposure to prevailing
market price risk. Trading is defined as any transaction that does not meet the
definition of hedging. After-tax gain/loss from risk trading has not been
material.
FOREIGN CURRENCY RISK
Conoco has foreign currency exchange rate risk resulting from operations in
over 40 countries around the world. Effective January 1, 1996, the Company
determined that the local currency should be the functional currency for its
integrated Western European petroleum operations. At this time, the Company does
not intend to comprehensively hedge its exposure to currency rate changes,
although it may choose to selectively hedge exposures to foreign currency rate
risk resulting from transactions in currencies that are not the functional
currency. Examples include firm commitments for capital projects, certain local
currency tax payments and cash returns from net investments in foreign
affiliates to be remitted within the coming year.
At December 31, 1997, the Company had open forward exchange contracts
designated as a hedge of firm foreign currency commitments. The notional amount
of these contracts was $50 and the estimated fair value was $38. The Company had
no open forward exchange contracts at December 31, 1996.
INTEREST RATE RISK
Prior to this planned offering, the Company had no material interest rate
risk to manage. Subsequent to this offering, however, the Company would intend
to manage any resultant significant interest rate exposure by using a
combination of financial derivative instruments as part of a program to manage
the fixed and floating interest rate mix of the total debt portfolio and related
overall cost of borrowing.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying values of most financial instruments are based on historical
costs. The carrying values of marketable securities, receivables, payables and
short-term obligations approximate their fair value because of their short
maturity. Long-term receivables from and long-term borrowings due to related
parties approximate fair value because associated interest rates are market
based. Excluding amounts due related parties, the estimated fair value of other
long-term borrowings outstanding at December 31, 1996 and 1997 of $101 and $106,
respectively, was $103 and $108, respectively. These estimates were based on
quoted market prices for the same or similar issues, or the current rates
offered to the Company for issues with the same remaining maturities.
F-25
<PAGE> 338
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
SUMMARY OF OUTSTANDING DERIVATIVE FINANCIAL INSTRUMENTS
Set forth below is a summary of the fair values, carrying amounts and
notional values of outstanding commodity financial instruments at December 31,
1996 and 1997.
Notional amounts represent the face amount of the contractual arrangements
and are not a measure of market or credit exposure. The fair value of swaps and
other over-the-counter instruments are estimated based on quoted market prices
of comparable contracts and approximate the gain or (loss) that would have been
realized if the contracts had been closed out at balance sheet date. Carrying
amounts represent the receivable (payable) recorded in the Combined Balance
Sheet.
<TABLE>
<CAPTION>
FAIR CARRYING NOTIONAL
COMMODITY DERIVATIVES VALUE AMOUNT VALUE
--------------------- ----- -------- --------
<S> <C> <C> <C>
December 31, 1996:
Hedging................................................... $ 2 $ 5 $ 273
Trading................................................... 1 -- 291
December 31, 1997:
Hedging................................................... $10 $12 $1,037
Trading................................................... (2) (1) 1,089
</TABLE>
Estimated fair values for hedging instruments only represent the value of
the hedge component of the transactions and, thus, are not indicative of the
fair value of the Company's overall hedged position.
25. COMMITMENTS AND CONTINGENT LIABILITIES
The Company uses various leased facilities and equipment in its operations.
Future minimum lease payments under noncancelable operating leases are $178,
$156, $119, $106 and $97 for the years 1998, 1999, 2000, 2001 and 2002,
respectively, and $582 for subsequent years, and are not reduced by
noncancelable minimum sublease rentals due in the future in the amount of $120.
Rental expense under operating leases was $124 in 1995, $118 in 1996 and $132 in
1997.
The Company has various purchase commitments for materials, supplies and
items of permanent investment incident to the ordinary conduct of business. In
the aggregate, such commitments are not at prices in excess of current market.
In addition, at December 31, 1997, the Company has obligations to purchase, over
periods up to twenty-one years, natural gas at prices that were in excess of
year-end 1997 market prices. No material annual loss is expected from these
long-term commitments.
The Company is subject to various lawsuits and claims involving a variety
of matters including, along with other oil companies, actions challenging oil
and gas royalty, severance tax payments and other payments, including claims
based on posted prices, and claims for damages resulting from leaking
underground storage tanks. In general, the effect on future financial results is
not subject to reasonable estimation because considerable uncertainty exists.
The Company believes the ultimate liabilities resulting from such lawsuits and
claims may be material to results of operations in the period in which they are
recognized but will not materially affect the combined financial position of the
Company. In addition to the litigation settlements referenced in Note 26, during
the second quarter of 1998 the Company recorded non-recurring after-tax charges
of $28 for anticipated costs to resolve various litigation.
The Company is also subject to contingencies pursuant to environmental laws
and regulations that in the future may require the Company to take further
action to correct the effects on the environment of prior disposal practices or
releases of petroleum substances by the Company or other parties. The Company
has accrued for certain environmental remediation activities consistent with the
policy set forth in Note 2. At December 31, 1996 and 1997, such accrual amounted
to $152 and $144, respectively, and, in management's opinion, was appropriate
based on existing facts and circumstances. Under adverse changes in
circumstances,
F-26
<PAGE> 339
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
potential liability may exceed amounts accrued. In the event future monitoring
and remediation expenditures are in excess of amounts accrued, they may be
significant to results of operations in the period recognized but management
does not anticipate they will have a material adverse effect on the combined
financial position of the Company.
The Company has indirectly guaranteed various debt obligations under
agreements with certain affiliated and other companies to provide specified
minimum revenues from shipments or purchases of products. These indirect
guarantees totaled $19 at December 31, 1996 and 1997. The Company, along with
certain European DuPont subsidiaries, also participates in a multiparty account
banking agreement, which provides for the indirect guarantee of bank account
overdrafts of certain European DuPont subsidiaries. Management believes the
exposure under this agreement is not material and expects to terminate the
agreement prior to completion of the Offerings. In addition, the Company or
DuPont, on behalf of the Company, had directly guaranteed obligations of certain
affiliated companies and others. These guarantees totaled $663 and $1,131 at
December 31, 1996 and 1997, respectively. The increase during 1997 is primarily
related to financing associated with the Petrozuata heavy oil venture in
Venezuela. No material loss is anticipated by reason of such agreements and
guarantees.
The Company's operations, particularly oil and gas exploration and
production, can be affected by changing economic, regulatory and political
environments in the various countries, including the United States, in which it
operates. In certain locations, host governments have imposed restrictions,
controls and taxes, and in others, political conditions have existed that may
threaten the safety of employees and the Company's continued presence in those
countries. Internal unrest or strained relations between a host government and
the Company or other governments may affect the Company's operations. Those
developments have, at times, significantly affected the Company's operations and
related results and are carefully considered by management when evaluating the
level of current and future activity in such countries.
Areas in which the Company has significant operations include the United
States, the United Kingdom, Norway, Germany, Venezuela, the United Arab
Emirates, Indonesia, Russia, Canada, the Czech Republic, Malaysia and Nigeria.
26. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
The Company has two principal business segments. The Upstream segment
explores for, develops, produces and markets crude oil and natural gas, and
processes natural gas to recover and market higher-value liquids. The Downstream
segment refines, markets, transports and trades crude oil and petroleum
products. Corporate and Other includes general corporate expenses, financing
costs and other nonoperating items, and results for electric power and
related-party insurance operations. The Company sells its products worldwide;
however, about 55 percent and 41 percent of sales are made in the United States
and Europe, respectively. Major products include crude oil, natural gas and
refined products that are sold primarily in the energy and transportation
markets. The Company's sales are not materially dependent on a single customer
or small group
F-27
<PAGE> 340
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
of customers. Transfers between segments and geographic areas are on the basis
of estimated market values. Corporate assets include cash and cash equivalents.
<TABLE>
<CAPTION>
CORPORATE
SEGMENT INFORMATION UPSTREAM DOWNSTREAM AND OTHER COMBINED
------------------- -------- ---------- --------- --------
<S> <C> <C> <C> <C>
1995
Sales and Other Operating Revenues(1)(2)............ $3,270 $17,038 $ 20 $20,328
Transfers Between Segments.......................... 910 92 -- --
------ ------- ------ -------
Total Revenues............................ $4,180 $17,130 $ 20 $20,328
====== ======= ====== =======
Operating Profit.................................... $1,121 $ 319 $ (110) $ 1,330
Equity in Earnings of Affiliates.................... (5) 27 -- 22
Corporate Nonoperating Items:
Interest and Debt Expense......................... (74) (74)
Interest Income (net of misc. interest expense)... 118 118
Other............................................. (47) (47)
Provision for Income Taxes.......................... (624) (113) (37) (774)
------ ------- ------ -------
Net Income (Loss)(3).............................. $ 492 $ 233 $ (150) $ 575
====== ======= ====== =======
Assets at December 31:
Identifiable Assets............................... $7,059 $ 5,242 $1,473 $13,774
Investment in Affiliates.......................... 171 284 -- 455
------ ------- ------ -------
Total..................................... $7,230 $ 5,526 $1,473 $14,229
====== ======= ====== =======
Depreciation, Depletion and Amortization(4)......... $ 812 $ 286 $ -- $ 1,098
Capital Expenditures and Investments(5)............. $1,224 $ 613 $ -- $ 1,837
1996
Sales and Other Operating Revenues(1)(2)............ $4,726 $19,425 $ 79 $24,230
Transfers Between Segments.......................... 1,159 122 -- --
------ ------- ------ -------
Total Revenues............................ $5,885 $19,547 $ 79 $24,230
====== ======= ====== =======
Operating Profit.................................... $1,559 $ 446 $ (118) $ 1,887
Equity in Earnings of Affiliates.................... (30) 5 -- (25)
Corporate Nonoperating Items:
Interest and Debt Expense......................... (74) (74)
Interest Income (net of misc. interest expense)... 124 124
Other............................................. (11) (11)
Provision for Income Taxes.......................... (848) (162) (28) (1,038)
------ ------- ------ -------
Net Income (Loss)(6).............................. $ 681 $ 289 $ (107) $ 863
====== ======= ====== =======
Assets at December 31:
Identifiable Assets............................... $7,486 $ 5,360 $1,677 $14,523
Investment in Affiliates.......................... 234 469 -- 703
------ ------- ------ -------
Total..................................... $7,720 $ 5,829 $1,677 $15,226
====== ======= ====== =======
Depreciation, Depletion and Amortization(4)......... $ 822 $ 293 $ -- $ 1,115
Capital Expenditures and Investments(5)............. $1,264 $ 680 $ -- $ 1,944
</TABLE>
F-28
<PAGE> 341
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
<TABLE>
<CAPTION>
CORPORATE
SEGMENT INFORMATION UPSTREAM DOWNSTREAM AND OTHER COMBINED
------------------- -------- ---------- --------- --------
<S> <C> <C> <C> <C>
1997
Sales and Other Operating Revenues(1)(2)............ $5,254 $20,033 $ 509 $25,796
Transfers Between Segments.......................... 1,221 108 -- --
------ ------- ------ -------
Total Revenues............................ $6,475 $20,141 $ 509 $25,796
====== ======= ====== =======
Operating Profit.................................... $1,663 $ 472 $ (132) $ 2,003
Equity in Earnings of Affiliates.................... 11 29 -- 40
Corporate Nonoperating Items:
Interest and Debt Expense......................... (36) (36)
Interest Income (net of misc. interest expense)... 77 77
Other............................................. 23 23
Provision for Income Taxes.......................... (790) (194) (26) (1,010)
------ ------- ------ -------
Net Income (Loss)(7).............................. $ 884 $ 307 $ (94) $ 1,097
====== ======= ====== =======
Assets at December 31:
Identifiable Assets............................... $8,538 $ 5,247 $2,192 $15,977
Investment in Affiliates.......................... 411 651 23 1,085
------ ------- ------ -------
Total..................................... $8,949 $ 5,898 $2,215 $17,062
====== ======= ====== =======
Depreciation, Depletion and Amortization(4)......... $ 892 $ 333 $ -- $ 1,225
Capital Expenditures and Investments(5)............. $2,533 $ 558 $ 23 $ 3,114
</TABLE>
- ---------------
(1) Sales exceeding 10 percent of combined sales and other operating revenues:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Refined products........................................ $14,444 $15,953 $15,829
Crude oil............................................... 3,062 4,286 4,879
Natural gas............................................. 1,494 2,378 2,971
</TABLE>
(2) Includes sales of purchased products substantially at cost:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Buy/sell supply transactions settled in cash:
Crude oil................................................ $1,845 $2,820 $3,566
Refined products......................................... 454 729 683
Natural gas resales........................................ 192 560 773
Electric power resales..................................... -- 58 487
</TABLE>
(3) Includes $45 charge ($39 Upstream/$6 Downstream) for write-down of certain
North American and European assets associated with the adoption of new
accounting standards involving the impairment of long-lived assets (SFAS No.
121).
(4) Includes impairment of unproved properties.
(5) Includes investments in affiliates.
(6) Includes charges of $63 for write-down of investment in an Upstream European
natural gas marketing joint venture and $22 ($11 Upstream/$11 Downstream),
principally for employee separation costs in the United States;
substantially offset by Downstream benefits of $44 related to environmental
insurance recoveries and $19 from sale of Ireland operations, and by
Upstream gain of $16 from sale of U.S. producing properties.
(7) Includes combined gain of $240 from sale of Upstream properties in the North
Sea and the United States, and $30 benefit ($19 Upstream/$11 Downstream)
from reduction in foreign tax rate; partly offset
F-29
<PAGE> 342
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
by Upstream charges of $112 for impairment of nonrevenue producing
properties, and Downstream charges of $55 for write-down of an office
building held for sale and $23 for litigation settlements.
<TABLE>
<CAPTION>
UNITED OTHER CORPORATE/
GEOGRAPHIC INFORMATION STATES EUROPE REGIONS NONOPERATING COMBINED
---------------------- ------- ------- ------- ------------ --------
<S> <C> <C> <C> <C> <C>
1995
Sales and Other Operating Revenues....... $10,094 $ 9,490 $ 744 $ -- $20,328
Transfers Between Geographical Areas..... 2 1 120 -- --
------- ------- ------ ------ -------
Total.......................... $10,096 $ 9,491 $ 864 $ -- $20,328
======= ======= ====== ====== =======
Net Income............................... $ 335 $ 309 $ 12 $ (81) $ 575
Assets at December 31:
Identifiable Assets.................... $ 5,405 $ 6,285 $ 611 $1,473 $13,774
Investment in Affiliates............... 213 166 76 -- 455
------- ------- ------ ------ -------
Total.......................... $ 5,618 $ 6,451 $ 687 $1,473 $14,229
======= ======= ====== ====== =======
1996
Sales and Other Operating Revenues....... $13,386 $10,049 $ 795 $ -- $24,230
Transfers Between Geographical Areas..... 1 -- 151 -- --
------- ------- ------ ------ -------
Total.......................... $13,387 $10,049 $ 946 $ -- $24,230
======= ======= ====== ====== =======
Net Income............................... $ 447 $ 427 $ 22 $ (33) $ 863
Assets at December 31:
Identifiable Assets.................... $ 5,398 $ 6,692 $ 756 $1,677 $14,523
Investment in Affiliates............... 259 241 203 -- 703
------- ------- ------ ------ -------
Total.......................... $ 5,657 $ 6,933 $ 959 $1,677 $15,226
======= ======= ====== ====== =======
1997
Sales and Other Operating Revenues....... $15,229 $ 9,585 $ 982 $ -- $25,796
Transfers Between Geographical Areas..... 5 -- 191 -- --
------- ------- ------ ------ -------
Total.......................... $15,234 $ 9,585 $1,173 $ -- $25,796
======= ======= ====== ====== =======
Net Income............................... $ 612 $ 647 $ (150)(1) $ (12) $ 1,097
Assets at December 31:
Identifiable Assets.................... $ 6,269 $ 6,757 $ 759 $2,192 $15,977
Investment in Affiliates............... 381 276 428 -- 1,085
------- ------- ------ ------ -------
Total.......................... $ 6,650 $ 7,033 $1,187 $2,192 $17,062
======= ======= ====== ====== =======
</TABLE>
- ---------------
(1) Includes charges of $112 for impairment of nonrevenue producing properties.
27. OTHER FINANCIAL INFORMATION
Research and development expenses were $36, $41 and $44 for the years 1995,
1996 and 1997, respectively.
Maintenance and repair expenses were $356, $337 and $372 for the years
1995, 1996 and 1997, respectively.
28. SUBSEQUENT EVENTS
In July 1998, a dividend of $7,500 was paid by the Company in the form of a
promissory note to all shareholders of record as of July 20, 1998. The
promissory note is due January 2, 2000 and bears interest at an annual interest
rate of 6.0125 percent.
F-30
<PAGE> 343
SUPPLEMENTAL PETROLEUM DATA
(UNAUDITED)
(DOLLARS IN MILLIONS)
OIL AND GAS PRODUCING ACTIVITIES
Supplemental Petroleum Data disclosures are presented in accordance with
the provisions of Statement of Financial Accounting Standards No. 69,
"Disclosures About Oil and Gas Producing Activities."
Accordingly, volumes of reserves and production exclude royalty interests
of others, and royalty payments are reflected as reductions in revenues.
RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES
<TABLE>
<CAPTION>
TOTAL WORLDWIDE UNITED STATES EUROPE OTHER REGIONS
------------------------ --------------------- ----------------------- ---------------------
1995 1996 1997 1995 1996 1997 1995 1996 1997 1995 1996 1997
------ ------ ------ ----- ----- ----- ----- ------ ------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
COMBINED COMPANIES
Revenues:
Sales to unaffiliated
customers............... $1,863 $2,479 $2,603 $ 443 $ 621 $ 787 $ 817 $1,204 $1,181 $ 603 $ 654 $ 635
Transfers to other company
operations.............. 862 927 849 386 363 272 477 566 577 (1) (2) --
Exploration, including dry
hole costs................ (275) (374) (412) (80) (131) (101) (134) (156) (131) (61) (87) (180)
Production.................. (727) (755) (854) (287) (297) (320) (347) (372) (409) (93) (86) (125)
Depreciation, depletion,
amortization and valuation
provisions................ (727) (800) (872) (290) (302) (279) (362) (443) (419) (75) (55) (174)(1)
Other(2).................... 82 69 321 48 48 106 31 (1) 215 3 22 --
Income Taxes................ (626) (912) (847) (24) (47) (109) (242) (436) (393) (360) (429) (345)
------ ------ ------ ----- ----- ----- ----- ------ ------ ----- ----- -----
Results of operations..... 452 634 788 196 255 356 240 362 621 16 17 (189)
------ ------ ------ ----- ----- ----- ----- ------ ------ ----- ----- -----
EQUITY AFFILIATES
Results of operations....... 12 32 30 -- 7 7 12 25 29 -- -- (6)
------ ------ ------ ----- ----- ----- ----- ------ ------ ----- ----- -----
Total............... $ 464 $ 666 $ 818 $ 196 $ 262 $ 363 $ 252 $ 387 $ 650 $ 16 $ 17 $(195)
====== ====== ====== ===== ===== ===== ===== ====== ====== ===== ===== =====
</TABLE>
- ---------------
(1) Includes charges of $112 for impairment of nonrevenue producing properties.
(2) Includes gain/(loss) on disposal of fixed assets and other miscellaneous
revenues and expenses.
F-31
<PAGE> 344
SUPPLEMENTAL PETROLEUM DATA
(UNAUDITED)
(DOLLARS IN MILLIONS)
COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION, EXPLORATION AND DEVELOPMENT
ACTIVITIES (1)
<TABLE>
<CAPTION>
TOTAL WORLDWIDE UNITED STATES EUROPE OTHER REGIONS
------------------------ -------------------- ------------------ ------------------
1995 1996 1997 1995 1996 1997 1995 1996 1997 1995 1996 1997
------ ------ ------ ---- ---- ------ ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
COMBINED COMPANIES
Property acquisitions
Proved(2)........................... $ 96 $ 21 $ 152 $ 95 $ 14 $ 148 $ -- $ -- $ -- $ 1 $ 7 $ 4
Unproved............................ 58 42 831 29 41 723(3) 1 -- 95 28 1 13
Exploration........................... 358 445 450 128 144 107 159 169 135 71 132 208
Development........................... 745 828 921 242 203 289 463 543 568 40 82 64
------ ------ ------ ---- ---- ------ ---- ---- ---- ---- ---- ----
Total combined companies...... 1,257 1,336 2,354 494 402 1,267 623 712 798 140 222 289
------ ------ ------ ---- ---- ------ ---- ---- ---- ---- ---- ----
EQUITY AFFILIATES
Development........................... 14 19 263 4 5 12 10 14 2 -- -- 249(4)
------ ------ ------ ---- ---- ------ ---- ---- ---- ---- ---- ----
Total equity affiliates....... 14 19 263 4 5 12 10 14 2 -- -- 249
------ ------ ------ ---- ---- ------ ---- ---- ---- ---- ---- ----
Total......................... $1,271 $1,355 $2,617 $498 $407 $1,279 $633 $726 $800 $140 $222 $538
====== ====== ====== ==== ==== ====== ==== ==== ==== ==== ==== ====
</TABLE>
- ---------------
(1) These data comprise all costs incurred in the activities shown, whether
capitalized or charged to expense at the time they were incurred.
(2) Does not include properties acquired through property exchanges.
(3) Includes acquisition costs associated with gas reserves acquired in the
South Texas Lobo trend.
(4) Includes Conoco's equity share of the Petrozuata heavy oil venture in
Venezuela.
CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING ACTIVITIES
<TABLE>
<CAPTION>
TOTAL WORLDWIDE UNITED STATES EUROPE
--------------------------- ------------------------ ------------------------
DECEMBER 31 1995 1996 1997 1995 1996 1997 1995 1996 1997
----------- ------- ------- ------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
COMBINED COMPANIES
Gross costs:
Proved properties....... $11,023 $11,914 $12,420 $4,440 $4,255 $4,676 $5,220 $6,268 $6,276
Unproved properties..... 883 913 1,491 251 262 774(1) 439 444 432
Accumulated depreciation,
depletion, amortization
and valuation
allowances:
Proved properties....... 6,290 6,729 6,940 2,822 2,739 2,836 2,425 2,947 3,001
Unproved properties..... 156 157 261 76 77 71 7 7 7
------- ------- ------- ------ ------ ------ ------ ------ ------
Total net costs of
combined
companies....... 5,460 5,941 6,710 1,793 1,701 2,543 3,227 3,758 3,700
------- ------- ------- ------ ------ ------ ------ ------ ------
EQUITY AFFILIATES
Net costs of equity
affiliates:
Proved properties....... 197 199 441 34 37 45 163 162 147
------- ------- ------- ------ ------ ------ ------ ------ ------
Total............. $ 5,657 $ 6,140 $ 7,151 $1,827 $1,738 $2,588 $3,390 $3,920 $3,847
======= ======= ======= ====== ====== ====== ====== ====== ======
<CAPTION>
OTHER REGIONS
------------------------
DECEMBER 31 1995 1996 1997
----------- ------ ------ ------
<S> <C> <C> <C>
COMBINED COMPANIES
Gross costs:
Proved properties....... $1,363 $1,391 $1,468
Unproved properties..... 193 207 285
Accumulated depreciation,
depletion, amortization
and valuation
allowances:
Proved properties....... 1,043 1,043 1,103
Unproved properties..... 73 73 183
------ ------ ------
Total net costs of
combined
companies....... 440 482 467
------ ------ ------
EQUITY AFFILIATES
Net costs of equity
affiliates:
Proved properties....... -- -- 249(2)
------ ------ ------
Total............. $ 440 $ 482 $ 716
====== ====== ======
</TABLE>
- ---------------
(1) Includes acquisition costs associated with gas reserves acquired in the
South Texas Lobo trend.
(2) Includes Conoco's equity share of the Petrozuata heavy oil venture in
Venezuela.
F-32
<PAGE> 345
SUPPLEMENTAL PETROLEUM DATA
(UNAUDITED)
(IN MILLIONS OF BARRELS)
ESTIMATED PROVED RESERVES OF OIL (1)
<TABLE>
<CAPTION>
TOTAL WORLDWIDE UNITED STATES EUROPE OTHER REGIONS
------------------- ------------------ ------------------ ------------------
1995 1996 1997 1995 1996 1997 1995 1996 1997 1995 1996 1997
---- ---- ----- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PROVED DEVELOPED AND UNDEVELOPED RESERVES
OF COMBINED COMPANIES
Beginning of year......................... 953 933 926 336 294 299 394 408 413 223 231 214
Revisions and other changes............... (1) 55 54 (8) 11 3 (9) 36 43 16 8 8
Extensions and discoveries................ 122 75 62 25 31 12 72 35 44 25 9 6
Improved recovery......................... 4 4 3 1 4 3 3 -- -- -- -- --
Purchase of reserves(2)................... 5 (1) 5 3 (1) 4 -- -- 1 2 -- --
Sale of reserves(3)....................... (33) (12) (27) (33) (10) (11) -- -- (16) -- (2) --
Production................................ (117) (128) (130) (30) (30) (33) (52) (66) (64) (35) (32) (33)
---- ---- ----- --- --- --- --- --- --- --- --- ---
End of year(4)............................ 933 926 893 294 299 277 408 413 421 231 214 195
---- ---- ----- --- --- --- --- --- --- --- --- ---
PROVED DEVELOPED AND UNDEVELOPED RESERVES
OF EQUITY AFFILIATES
Beginning of year......................... 35 44 47 -- -- -- 35 44 47 -- -- --
Revisions and other changes............... 5 8 10 -- -- -- 5 8 10 -- -- --
Extensions and discoveries................ 8 -- 680 -- -- -- 8 -- -- -- -- 680(5)
Production................................ (4) (5) (6) -- -- -- (4) (5) (6) -- -- --
---- ---- ----- --- --- --- --- --- --- --- --- ---
End of year............................... 44 47 731 -- -- -- 44 47 51 -- -- 680
---- ---- ----- --- --- --- --- --- --- --- --- ---
Total............................. 977 973 1,624 294 299 277 452 460 472 231 214 875
---- ---- ----- --- --- --- --- --- --- --- --- ---
PROVED DEVELOPED RESERVES OF COMBINED
COMPANIES
Beginning of year......................... 706 684 630 324 265 258 171 217 185 211 202 187
End of year............................... 684 630 600 265 258 242 217 185 174 202 187 184
PROVED DEVELOPED RESERVES OF EQUITY
AFFILIATES
Beginning of year......................... 28 32 39 -- -- -- 28 32 39 -- -- --
End of year............................... 32 39 43 -- -- -- 32 39 43 -- -- --
</TABLE>
- ---------------
(1) Oil reserves comprise crude oil and condensate and natural gas liquids
expected to be removed for the Company's account from its natural gas
deliveries. Proved Developed Reserves and Proved Undeveloped Reserves are
calculated according to the definitions set forth in Rule 4-10 of Regulation
S-X of the Commission.
(2) Includes reserves acquired through property exchanges.
(3) Includes reserves disposed of through property exchanges.
(4) Includes reserves of 89 and 87 at year-end 1996 and 1997 attributable to
Conoco Oil & Gas Associates L.P. in which there is a minority interest with
an approximate 17 and 18 percent revenue share at year-end 1996 and 1997,
respectively. See Note 18.
(5) Includes Conoco's equity share of the Petrozuata heavy oil venture in
Venezuela.
F-33
<PAGE> 346
SUPPLEMENTAL PETROLEUM DATA
(UNAUDITED)
(IN BILLION CUBIC FEET)
ESTIMATED PROVED RESERVES OF GAS(1)
<TABLE>
<CAPTION>
TOTAL WORLDWIDE UNITED STATES EUROPE OTHER REGIONS
--------------------- --------------------- --------------------- ---------------------
1995 1996 1997 1995 1996 1997 1995 1996 1997 1995 1996 1997
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PROVED DEVELOPED AND
UNDEVELOPED RESERVES OF
COMBINED COMPANIES
Beginning of year............. 4,330 4,709 5,063 1,749 1,891 1,822 2,431 2,649 3,068 150 169 173
Revisions and other changes... 292 41 134 95 79 -- 195 (39) 97 2 1 37
Extensions and discoveries.... 400 780 518 225 176 453 147 574 59 28 30 6
Improved recovery............. 1 -- 1 1 -- 1 -- -- -- -- -- --
Purchase of reserves(2)....... 167 41 270 167 3 264(3) -- 36 -- -- 2 6
Sale of reserves(4)........... (78) (71) (62) (78) (57) (46) -- -- (7) -- (14) (9)
Production.................... (403) (437) (433) (268) (270) (259) (124) (152) (157) (11) (15) (17)
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
End of year(5)................ 4,709 5,063 5,491 1,891 1,822 2,235 2,649 3,068 3,060 169 173 196
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
PROVED DEVELOPED AND
UNDEVELOPED RESERVES OF
EQUITY AFFILIATES
Beginning of year............. 344 339 333 344 339 333 -- -- -- -- -- --
Revisions and other changes... -- -- (6) -- -- (6) -- -- -- -- -- --
Extensions and discoveries.... -- -- 49 -- -- 49 -- -- -- -- -- --
Purchase of reserves.......... -- -- -- -- -- -- -- -- -- -- -- --
Sale of reserves.............. -- -- -- -- -- -- -- -- -- -- -- --
Production.................... (5) (6) (6) (5) (6) (6) -- -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
End of year................... 339 333 370 339 333 370 -- -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total................. 5,048 5,396 5,861 2,230 2,155 2,605 2,649 3,068 3,060 169 173 196
===== ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
PROVED DEVELOPED RESERVES OF
COMBINED COMPANIES
Beginning of year............. 2,496 2,933 2,843 1,687 1,733 1,672 683 1,071 1,041 126 129 130
End of year................... 2,933 2,843 3,061 1,733 1,672 1,801 1,071 1,041 1,091 129 130 169
PROVED DEVELOPED RESERVES OF
EQUITY AFFILIATES...........
Beginning of year............. 45 40 36 45 40 36 -- -- -- -- -- --
End of year................... 40 36 40 40 36 40 -- -- -- -- -- --
</TABLE>
- ---------------
(1) Oil reserves comprise crude oil and condensate and natural gas liquids
expected to be removed for the Company's account from its natural gas
deliveries. Proved Developed Reserves and Proved Undeveloped Reserves are
calculated according to the definitions set forth in Rule 4-10 of Regulation
S-X of the Commission.
(2) Includes reserves acquired through property exchanges.
(3) Includes reserves acquired in the South Texas Lobo trend.
(4) Includes reserves disposed of through property exchanges.
(5) Includes reserves of 104 and 115 at year-end 1996 and 1997, respectively,
attributable to Conoco Oil & Associates L.P. in which there is a minority
interest with an approximate 17 percent and 18 percent revenue share at
year-end 1996 and 1997, respectively. See Note 18.
F-34
<PAGE> 347
SUPPLEMENTAL PETROLEUM DATA
(UNAUDITED)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS RESERVES
The information on the following page has been prepared in accordance with
Statement of Financial Accounting Standards No. 69, which requires the
standardized measure of discounted future net cash flows to be based on year-end
sales prices, costs and statutory income tax rates and a 10 percent annual
discount rate. Specifically, the per-barrel oil sales prices used to calculate
the December 31, 1997, data averaged $15.34 for the United States, $16.11 for
Europe and $14.92 for Other Regions, and the gas prices per thousand cubic feet
averaged approximately $2.07 for the United States, $2.75 for Europe and $1.52
for Other Regions. Because prices used in the calculation are as of December 31,
the standardized measure could vary significantly from year to year based on
market conditions at that specific date.
The projections should not be viewed as realistic estimates of future cash
flows nor should the "standardized measure" be interpreted as representing
current value to the Company. Material revisions to estimates of proved reserves
may occur in the future, development and production of the reserves may not
occur in the periods assumed, actual prices realized are expected to vary
significantly from those used and actual costs may also vary. The Company's
investment and operating decisions are not based on the information presented on
the following page, but on a wide range of reserve estimates that includes
probable as well as proved reserves, and on different price and cost assumptions
from those reflected in this information.
Beyond the above considerations, the "standardized measure" is also not
directly comparable with asset balances appearing elsewhere in the financial
statements because any such comparison would require reconciling adjustments,
including reduction of the asset balances for related deferred income taxes.
F-35
<PAGE> 348
SUPPLEMENTAL PETROLEUM DATA
(UNAUDITED)
(DOLLARS IN MILLIONS)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS RESERVES
<TABLE>
<CAPTION>
TOTAL WORLDWIDE UNITED STATES EUROPE
---------------------------- --------------------------- ---------------------------
1995 1996 1997 1995 1996 1997 1995 1996 1997
------- -------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
COMBINED COMPANIES
Future cash flows:
Revenues............. $26,766 $ 34,366 $26,666 $ 7,631 $10,044 $ 8,355 $14,995 $19,364 $15,119
Production costs..... (9,152) (10,406) (9,251) (3,038) (3,085) (2,997) (5,154) (6,378) (5,387)
Development costs.... (1,583) (1,669) (1,586) (218) (283) (446) (1,234) (1,294) (1,094)
Income tax expense... (7,404) (10,364) (6,822) (1,169) (2,041) (1,175) (3,758) (5,179) (3,921)
------- -------- ------- ------- ------- ------- ------- ------- -------
Future net cash
flows................ 8,627 11,927 9,007 3,206 4,635 3,737 4,849 6,513 4,717
Discounted to present
value at a 10% annual
rate................. (3,469) (4,638) (3,384) (1,456) (2,088) (1,552) (1,813) (2,317) (1,679)
------- -------- ------- ------- ------- ------- ------- ------- -------
Total*......... 5,158 7,289 5,623 1,750 2,547 2,185 3,036 4,196 3,038
------- -------- ------- ------- ------- ------- ------- ------- -------
EQUITY AFFILIATES
Future cash flows:
Revenues............. 1,401 1,971 8,520 647 968 893 754 1,003 651
Production costs..... (617) (597) (2,640) (246) (242) (267) (371) (355) (315)
Development costs.... (237) (180) (1,300) (205) (157) (174) (32) (23) (30)
Income tax expense... (209) (496) (1,090) (51) (193) (161) (158) (303) (170)
------- -------- ------- ------- ------- ------- ------- ------- -------
Future net cash
flows................ 338 698 3,490 145 376 291 193 322 136
Discounted to present
value at a 10% annual
rate................. (187) (398) (2,886) (116) (277) (226) (71) (121) (44)
------- -------- ------- ------- ------- ------- ------- ------- -------
Total.......... 151 300 604 29 99 65 122 201 92
------- -------- ------- ------- ------- ------- ------- ------- -------
Total.......... $ 5,309 $ 7,589 $ 6,227 $ 1,779 $ 2,646 $ 2,250 $ 3,158 $ 4,397 $ 3,130
======= ======== ======= ======= ======= ======= ======= ======= =======
<CAPTION>
OTHER REGIONS
---------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
COMBINED COMPANIES
Future cash flows:
Revenues............. $ 4,140 $ 4,958 $ 3,192
Production costs..... (960) (943) (867)
Development costs.... (131) (92) (46)
Income tax expense... (2,477) (3,144) (1,726)
------- ------- -------
Future net cash
flows................ 572 779 553
Discounted to present
value at a 10% annual
rate................. (200) (233) (153)
------- ------- -------
Total*......... 372 546 400
------- ------- -------
EQUITY AFFILIATES
Future cash flows:
Revenues............. -- -- 6,976
Production costs..... -- -- (2,058)
Development costs.... -- -- (1,096)
Income tax expense... -- -- (759)
------- ------- -------
Future net cash
flows................ -- -- 3,063
Discounted to present
value at a 10% annual
rate................. -- -- (2,616)
------- ------- -------
Total.......... -- -- 447
------- ------- -------
Total.......... $ 372 $ 546 $ 847
======= ======= =======
</TABLE>
- ---------------
* Includes $686 and $372 at year-end 1996 and 1997, respectively, attributable
to Conoco Oil & Gas Associates L.P. in which there is a minority interest with
an approximate 17 and 18 percent revenue share at year-end 1996 and 1997,
respectively. See Note 18.
SUMMARY OF CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
RELATING TO PROVED OIL AND GAS RESERVES
<TABLE>
<CAPTION>
COMBINED COMPANIES EQUITY AFFILIATES
--------------------------- -----------------------
1995 1996 1997 1995 1996 1997
------- ------- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1............................ $ 4,275 $ 5,158 $ 7,289 $ 145 $ 151 $ 300
Sales and transfers of oil and gas produced, net
of production costs........................... (1,998) (2,647) (2,583) (42) (73) (56)
Development costs incurred during the period.... 745 828 921 14 20 218
Net changes in prices and in development and
production costs.............................. 675 2,525 (4,974) 81 119 (1,242)
Extensions, discoveries and improved recovery,
less related costs............................ 1,219 1,630 818 -- 4 1,181
Revisions of previous quantity estimates........ 375 553 439 68 83 37
Purchases (sales) of reserves in place -- net... (62) (54) 36 -- -- --
Accretion of discount........................... 753 931 1,312 13 25 55
Net change in income taxes...................... (897) (1,676) 2,285 (108) (152) 16
Other........................................... 73 41 80 (20) 123 95
------- ------- ------- ----- ----- -------
Balance at December 31.......................... $ 5,158 $ 7,289 $ 5,623 $ 151 $ 300 $ 604
======= ======= ======= ===== ===== =======
</TABLE>
F-36
<PAGE> 349
COMBINED QUARTERLY FINANCIAL DATA
(UNAUDITED)
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1996
Sales and Other Operating Revenues(1)............. $5,474 $5,994 $5,999 $6,763
Cost of Goods Sold and Other Expenses(2).......... 5,091 5,548 5,509 6,293
Interest & Debt Expense........................... 22 18 16 18
Net Income........................................ 207(3) 188(4) 267(5) 201
1997
Sales and Other Operating Revenues(1)............. $6,560 $5,915 $6,671 $6,650
Cost of Goods Sold and Other Expenses(2).......... 5,898 5,501 6,269 6,452
Interest & Debt Expense........................... 15 9 7 5
Net Income........................................ 341 246(6) 289(7) 221(8)
Pro Forma Earnings Per Share(9)
Basic........................................... $ 0.56 $ 0.41 $ 0.48 $ 0.36
Diluted......................................... $ 0.56 $ 0.40 $ 0.47 $ 0.36
Pro Forma Weighted Average Shares Outstanding(9)
Basic........................................... 606 606 606 606
Diluted......................................... 611 611 611 611
</TABLE>
- ---------------
(1) Excludes other income of $64, $10, $74 and $38 in each of the quarters in
1996 and $55, $70, $28 and $314 in each of the quarters in 1997.
(2) Excludes provision for income taxes.
(3) Includes gain of $16 from sale of U.S. producing properties.
(4) Includes a net charge of $41 reflecting: a charge of $63 for write-down of
investment in a European natural gas marketing joint venture; a charge of
$22 principally for employee separation costs; and a benefit of $44 related
to environmental insurance recoveries.
(5) Includes gain of $19 from sale of Ireland marketing operations.
(6) Includes gain of $24 from sale of U.S. producing properties.
(7) Includes net benefit of $37 reflecting: gain of $30 from sale of North Sea
properties; benefit of $30 from foreign tax rate change; and charge of $23
for litigation settlements.
(8) Includes a net benefit of $19 reflecting: a gain of $186 from the sale of
North Sea and U.S. Upstream properties; a charge of $112 for impairment of
nonrevenue producing properties; and a charge of $55 for write-down of an
office building held for sale.
(9) See Note 2 to the Combined Financial Statements.
F-37
<PAGE> 350
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors and Shareholders
of E. I. du Pont de Nemours and Company
We have reviewed the accompanying combined balance sheet of Conoco as of
June 30, 1998, and the related combined statements of income and of cash flows
for the six-month periods ended June 30, 1998 and 1997. This financial
information is the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying combined interim financial information for it
to be in conformity with generally accepted accounting principles.
We previously audited in accordance with generally accepted auditing
standards the combined balance sheet as of December 31, 1997 and the related
combined statements of income, of cash flows, and of owner's net investment and
accumulated other comprehensive loss for the year then ended, and in our report
dated July 24, 1998 presented on page F-2 of this Registration Statement we
expressed an unqualified opinion on those combined financial statements. In our
opinion, the information set forth in the accompanying combined balance sheet
information as of December 31, 1997 is fairly stated in all material respects in
relation to the combined balance sheet from which it has been derived.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
September 28, 1998
F-38
<PAGE> 351
INTERIM COMBINED FINANCIAL STATEMENTS
CONOCO
COMBINED STATEMENT OF INCOME (NOTES 1 AND 2)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
-------------------
1997 1998
------- -------
(IN MILLIONS,
EXCEPT PER SHARE)
<S> <C> <C>
Revenues
Sales and Other Operating Revenues*....................... $12,475 $11,348
Other Income.............................................. 125 138
------- -------
Total Revenues.................................... 12,600 11,486
------- -------
Costs and Expenses
Cost of Goods Sold and Other Operating Expenses........... 7,667 6,754
Selling, General and Administrative Expenses.............. 355 370
Exploration Expenses...................................... 192 176
Depreciation, Depletion and Amortization.................. 516 505
Taxes Other Than on Income*............................... 2,669 2,896
Interest and Debt Expense................................. 24 1
------- -------
Total Costs and Expenses.......................... 11,423 10,702
------- -------
Income Before Income Taxes.................................. 1,177 784
Provision for Income Taxes.................................. 590 254
------- -------
Net Income (Note 3)......................................... $ 587 $ 530
======= =======
Pro Forma Earnings Per Share(Note 4)........................
Basic..................................................... $ 0.93 $ 0.84
Diluted................................................... $ 0.92 $ 0.83
Pro Forma Weighted Average Shares Outstanding(Note 4).......
Basic..................................................... 628 628
Diluted................................................... 637 637
- ---------------
* Includes petroleum excise taxes........................... $ 2,577 $ 2,806
</TABLE>
See accompanying Notes to Interim Combined Financial Statements
F-39
<PAGE> 352
INTERIM COMBINED FINANCIAL STATEMENTS
CONOCO
COMBINED BALANCE SHEET (NOTES 1 AND 2)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, 1998
DECEMBER 31, --------------------------
1997 HISTORICAL PRO FORMA (5)
------------ ---------- -------------
(IN MILLIONS)
<S> <C> <C> <C>
Current Assets
Cash and Cash Equivalents............................. $ 1,147 $ 829 $ 123
Marketable Securities................................. 7 7 7
Accounts and Notes Receivable......................... 1,497 1,252 1,252
Notes Receivable -- Related Parties................... 490 465 377
Inventories (Note 6).................................. 830 981 981
Prepaid Expenses...................................... 236 305 305
-------- -------- --------
Total Current Assets.......................... 4,207 3,839 3,045
Property, Plant and Equipment........................... 21,229 21,569 21,569
Less: Accumulated Depreciation, Depletion and
Amortization.......................................... (10,401) (10,521) (10,521)
-------- -------- --------
Net Property, Plant and Equipment....................... 10,828 11,048 11,048
-------- -------- --------
Investment in Affiliates................................ 1,085 1,141 1,141
Long-Term Notes Receivable -- Related Parties........... 450 612 --
Other Assets............................................ 492 524 461
-------- -------- --------
Total......................................... $ 17,062 $ 17,164 $ 15,695
======== ======== ========
LIABILITIES AND OWNER'S NET INVESTMENT AND ACCUMULATED OTHER COMPREHENSIVE LOSS
Current Liabilities
Accounts Payable...................................... $ 1,090 $ 1,129 $ 1,129
Short-Term Borrowings -- Related Parties.............. 644 1,087 272
Other Short-Term Borrowings and Capital Lease
Obligations........................................ 72 51 51
Income Taxes.......................................... 545 253 253
Other Accrued Liabilities............................. 1,289 1,043 1,043
-------- -------- --------
Total Current Liabilities..................... 3,640 3,563 2,748
Long-Term Borrowings -- Related Parties................. 1,450 1,181 1,002
Long-Term Borrowings -- Other Related Party (Note 5).... -- -- 7,500
Other Long-Term Borrowings and Capital Lease
Obligations........................................... 106 103 103
Deferred Income Taxes................................... 1,739 1,861 1,837
Other Liabilities and Deferred Credits.................. 1,922 1,925 1,925
-------- -------- --------
Total Liabilities............................. 8,857 8,633 15,115
-------- -------- --------
Commitments and Contingent Liabilities (Note 8)
Minority Interests...................................... 309 308 308
Owner's Net Investment.................................. 8,087 8,441 490
Accumulated Other Comprehensive Loss (Note 7)........... (191) (218) (218)
-------- -------- --------
Total Owner's Net Investment and Accumulated
Other Comprehensive Loss.................... 7,896 8,223 272
-------- -------- --------
Total......................................... $ 17,062 $ 17,164 $ 15,695
======== ======== ========
</TABLE>
See accompanying Notes to Interim Combined Financial Statements
F-40
<PAGE> 353
INTERIM COMBINED FINANCIAL STATEMENTS
CONOCO
COMBINED STATEMENT OF CASH FLOWS (NOTES 1 AND 2)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
------------------
1997 1998
------- ------
(IN MILLIONS)
<S> <C> <C>
Cash Provided by Operations
Net Income................................................ $ 587 $ 530
Adjustments to Reconcile Net Income to Cash Provided by
Operations:
Depreciation, Depletion and Amortization............... 516 505
Dry Hole Costs and Impairment of Unproved Properties... 67 68
Deferred Income Taxes.................................. 113 107
Income Applicable to Minority Interests................ 13 11
Other Noncash Charges and Credits -- Net............... (77) (55)
Decrease (Increase) in Operating Assets:
Accounts and Notes Receivable........................ 191 85
Inventories.......................................... (189) (153)
Other Operating Assets............................... (120) (90)
Increase (Decrease) in Operating Liabilities:
Accounts Payable and Other Operating Liabilities..... (121) (191)
Accrued Interest and Income Taxes.................... (125) (269)
------- ------
Cash Provided by Operations....................... 855 548
------- ------
Investment Activities
Purchases of Property, Plant and Equipment................ (1,611) (941)
Investments in Affiliates................................. (204) (109)
Proceeds from Sales of Assets............................. 134 348
Net Decrease (Increase) in Short-Term Financial
Instruments............................................ (32) (16)
------- ------
Cash Used for Investment Activities............... (1,713) (718)
------- ------
Financing Activities
Short-Term Borrowings -- Receipts........................ -- --
-- Payments.................... (1) (19)
Other Long-Term Borrowings -- Receipts.................... -- --
-- Payments............... (1) (2)
Transactions with Related Parties:
Notes Receivable -- Receipts........................... 322 25
-- Payments......................... (44) (162)
Borrowings -- Receipts................................. 670 260
-- Payments................................ (327) (62)
Net Cash Contribution From (To) Owner.................. 335 (177)
Increase (Decrease) in Minority Interests................. (11) (12)
------- ------
Cash Provided by (Used for) Financing
Activities....................................... 943 (149)
------- ------
Effect of Exchange Rate Changes on Cash..................... (42) 1
------- ------
Increase (Decrease) in Cash and Cash Equivalents............ $ 43 $ (318)
Cash and Cash Equivalents at Beginning of Year.............. 846 1,147
------- ------
Cash and Cash Equivalents at June 30........................ $ 889 $ 829
======= ======
</TABLE>
See accompanying Notes to Interim Combined Financial Statements
F-41
<PAGE> 354
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN MILLIONS)
1. BASIS OF PRESENTATION
On May 11, 1998, E. I. du Pont de Nemours and Company ("DuPont") announced
its intention to offer in an initial public offering a portion of its interest
in the common stock of Conoco Inc., a wholly owned energy subsidiary. This
initial public offering is DuPont's first step in the planned divestiture of its
entire petroleum business.
Throughout the period covered by the Combined Financial Statements,
operations were conducted by Conoco Inc., subsidiaries of Conoco Inc. and, in
some cases, subsidiaries of DuPont. These operations are collectively referred
to herein as the Company or "Conoco". Certain subsidiaries and, in some cases,
assets, liabilities, and related operations not currently owned by Conoco will
be transferred to Conoco. The accompanying Combined Financial Statements are
presented on a carve-out basis and include the historical operations of entities
owned by Conoco and operations to be transferred to Conoco by DuPont. In this
context, no direct ownership relationship existed among all the various units
comprising Conoco; accordingly, DuPont and its subsidiaries' net investment in
Conoco ("Owner's Net Investment") is shown in lieu of Stockholder's Equity in
the Combined Financial Statements. The Combined Financial Statements included
herein have been prepared from DuPont's historical accounting records.
These Combined Interim Financial Statements are unaudited, but reflect all
adjustments that, in the opinion of management, are necessary to provide a fair
presentation of the financial position, results of operations and cash flows for
the dates and periods covered. All such adjustments are of a normal recurring
nature. Interim period results are not necessarily indicative of results of
operations or cash flows for a full-year period. These interim statements should
be read in conjunction with the Audited Combined Financial Statements for the
years ended December 31, 1995, 1996 and 1997 presented herein.
2. RELATED PARTY TRANSACTIONS
The Combined Financial Statements include significant transactions with
DuPont involving services (such as cash management, other financial services,
purchasing, legal, computer and corporate aviation) that were provided between
Conoco and centralized DuPont organizations. The costs of services have been
directly charged or allocated between Conoco and DuPont using methods management
believes are reasonable. Such charges and allocations are not necessarily
indicative of what would have been incurred if Conoco had been a separate
entity. Amounts charged and allocated to Conoco for these services were $63 and
$72 for the first six months of 1997 and 1998, respectively, and are principally
included in Selling, General and Administrative Expenses. Conoco provided DuPont
services such as computer, legal and purchasing, as well as certain technical
and plant operating services, which amounted to $31 and $25 in first six months
of 1997 and 1998, respectively. These charges to DuPont were treated as
reductions of Cost of Goods Sold and Other Operating Expenses and Selling,
General and Administrative Expenses.
Interest expense charged by DuPont was $65 and $55 for the first six months
of 1997 and 1998, respectively, and reflects market-based rates. A portion of
historical related party interest cost and other interest expense of $44 and $57
was capitalized as cost associated with major construction projects in the first
six months of 1997 and 1998, respectively. Interest income from DuPont was $6
and $33 for the same periods and also reflects market-based rates.
Sales and Other Operating Revenues include sales of products from Conoco to
DuPont, principally natural gas and gas liquids to supply several DuPont plant
sites. These sales totaled $231 and $209 for the first six months of 1997 and
1998, respectively. Also included are revenues from insurance premiums charged
DuPont for property and casualty coverage outside the United States. These
revenues totaled $11 and $10 for the first six months of 1997 and 1998,
respectively. Purchases of products from DuPont during these periods were not
material.
F-42
<PAGE> 355
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS)
These intercompany arrangements between DuPont and Conoco will continue
after the Offerings under transition service agreements or other long-term
agreements. It is not anticipated that a change, if any, in these costs and
revenues would have a material effect on the Company's results of operations or
combined financial position.
Accounts and Notes Receivable include amounts due from DuPont of $79 and
$34 at December 31, 1997, and June 30, 1998, respectively, representing current
month balances of transactions between Conoco and DuPont, mainly product sales
and net interest on borrowings. Accounts Payable include amounts due DuPont of
$4 and $40 at December 31, 1997, and June 30, 1998, respectively.
Amounts representing notes receivable or borrowings from DuPont, including
its subsidiary organizations, are identified for related parties and presented
separately in the Combined Balance Sheet. The current portion of Notes
Receivable represents the accumulation of a variety of cash transfers and
operating transactions with DuPont. These balances are generally
interest-bearing and represent net amounts of cash transferred for funding and
cash management purposes and amounts charged between the companies for certain
product and service purchases and asset transfers. The long-term portion of
Notes Receivable and amounts shown for Short-Term and Long-Term Borrowings
represent borrowings between Conoco and DuPont with established due dates at
market-based interest rates, except for certain short-term non-interest bearing
borrowings due DuPont of $492 at December 31, 1997, and June 30, 1998.
3. SPECIAL ITEMS
Net income for the first six months of 1997 included a gain of $24 from the
sale of certain Upstream North Sea properties. Net income for the first six
months of 1998 included a gain of $23 from the sale of certain Upstream North
Sea properties and a $31 tax benefit from the sale of an international Upstream
subsidiary, partly offset by a $28 charge for U.S. Downstream litigation.
4. EARNINGS PER SHARE
The Company's historical capital structure is not indicative of its
prospective structure since no direct ownership relationship existed among all
the various units comprising Conoco. Accordingly, historical earnings per share
has not been presented in the interim Combined Financial Statements.
Unaudited pro forma basic earnings per share includes the shares of both
the Class A and Class B common shares deemed to be outstanding as of the date of
the Offerings. Unaudited pro forma diluted earnings per share includes the
dilutive effect of the 8.6 million shares of Conoco Common Stock issuable upon
exercise of Conoco stock options (see Note 20 to the Combined Financial
Statements), after applying the treasury stock method, which are expected to be
issued upon cancellation of outstanding DuPont stock options, using the
anticipated weighted-average exercise price of the outstanding options and the
initial public offering price. In accordance with SEC Staff Accounting Bulletin
No. 98, pro forma basic and diluted earnings per share have been presented for
the most recent annual and subsequent interim periods only.
5. INTERIM PRO FORMA COMBINED BALANCE SHEET
The unaudited pro forma column on the accompanying combined balance sheet
reflects the application of pro forma adjustments to the historical amounts as
of June 30, 1998. In July 1998, a dividend of $7,500 was declared and paid by
the Company in the form of a promissory note to all shareholders of record as of
July 20, 1998. The promissory note is due January 2, 2000 and bears interest at
an annual interest rate of 6.0125 percent. On September 28, 1998, the Company
declared a dividend of a receivable from DuPont evidenced by a promissory note
in the amount of $700 million. Prior to or concurrent with the Offerings, DuPont
and Conoco will enter into a Restructuring, Transfer and Separation Agreement
and certain other agreements with respect to employee benefit arrangements,
information management, the provision of interim services,
F-43
<PAGE> 356
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS)
financing arrangements, tax sharing, environmental liabilities and various
commercial arrangements. These agreements generally provide for restructuring
and settlement of certain intercompany loans, purchase or transfer of certain
subsidiaries, and other arrangements to be undertaken in connection with the
Separation and the Offerings.
The unaudited pro forma column reflects the dividends and adjustments, as
provided for in the Separation Agreement, for (a) the settlement of intercompany
loans, (b) the purchase of certain subsidiaries from DuPont and the refund of
prepaid insurance premiums to DuPont in the amount of $267, and (c) the effect
of the separate return income tax method reflecting a reduction in Deferred
Income Taxes ($24) resulting from the transfer of international production
subsidiaries from the original tax jurisdiction to another tax jurisdiction.
6. INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ --------
<S> <C> <C>
Crude oil and petroleum products............................ $675 $821
Other merchandise........................................... 25 24
Materials and supplies...................................... 130 136
---- ----
$830 $981
==== ====
</TABLE>
7. OTHER COMPREHENSIVE INCOME
The following sets forth the Company's comprehensive income for the periods
shown:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
----------------------------
1997 1998
------------- ------------
<S> <C> <C>
Net Income.................................................. $ 587 $530
Other Comprehensive Income (Loss):
Foreign Currency Translation Adjustment................... (113) (27)
Minimum Pension Liability Adjustment...................... -- --
------ ----
Comprehensive Income........................................ $ 474 $503
====== ====
</TABLE>
8. COMMITMENTS AND CONTINGENT LIABILITIES
The Company has various purchase commitments for materials, supplies and
items of permanent investment incident to the ordinary conduct of business. In
the aggregate, such commitments are not at prices in excess of current market.
In addition, at June 30, 1998, the Company has obligations to purchase, over
periods up to twenty years, natural gas at prices that were in excess of current
market prices. No material annual loss is expected from these long-term
commitments.
The Company is subject to various lawsuits and claims involving a variety
of matters including, along with other oil companies, actions challenging oil
and gas royalty and severance tax payments based on posted prices, and claims
for damages resulting from leaking underground storage tanks. In general, the
effect on future financial results is not subject to reasonable estimation
because considerable uncertainty exists. The Company believes the ultimate
liabilities resulting from such lawsuits and claims may be material to results
of operations in the period in which they are recognized but will not materially
affect the combined financial position of the Company. In the six months of
1998, the Company recorded non-recurring after-tax charges of $28 for
anticipated costs to resolve various litigation.
F-44
<PAGE> 357
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS)
The Company is also subject to contingencies pursuant to environmental laws
and regulations that in the future may require the Company to take further
action to correct the effects on the environment of prior disposal practices or
releases of petroleum substances by the Company or other parties. The Company
has accrued for certain environmental remediation activities consistent with the
policy set forth in Note 2 to the Combined Financial Statements. At June 30,
1998, such accrual amounted to $140 and, in management's opinion, was
appropriate based on existing facts and circumstances. Under adverse changes in
circumstances, potential liability may exceed amounts accrued. In the event
future monitoring and remediation expenditures are in excess of amounts accrued,
they may be significant to results of operations in the period recognized but
management does not anticipate they will have a material adverse effect on the
combined financial position of the Company.
The Company has indirectly guaranteed various debt obligations under
agreements with certain affiliates and other companies to provide specified
minimum revenues from shipments or purchases of products. At June 30, 1998,
these indirect guarantees totaled $19, and the Company or DuPont, on behalf of
the Company, had directly guaranteed $1,168 of the obligations of certain
affiliated companies and others. The Company, along with certain European DuPont
subsidiaries, also participates in a multiparty account banking agreement, which
provides for the indirect guarantee of bank account overdrafts of certain
European DuPont subsidiaries. Management believes the exposure under this
agreement is not material and expects to terminate the agreement prior to
completion of the Offerings. No material loss is anticipated by reason of such
agreements and guarantees.
F-45
<PAGE> 358
ANNEX A
DEGOLYER AND MACNAUGHTON
ONE ENERGY SQUARE
DALLAS, TEXAS 75206
September 23, 1998
Conoco Inc.
600 North Dairy Ashford
Houston, Texas 77001-6651
Gentlemen:
Pursuant to your request, we have prepared estimates of the proved oil,
condensate, natural gas liquids, and natural gas reserves, as of December 31,
1997, of certain properties in Canada, Nigeria, Norway, Russia, the United
Kingdom, the United States, and Venezuela owned by Conoco Inc. (Conoco). The
properties consist of working interests located in Alberta, Canada, in the
offshore waters of Nigeria, Norway, and the United Kingdom, in northern European
Russia, in Colorado, New Mexico, Virginia, Texas and in the offshore waters of
Louisiana of the United States, and in the Orinoco Heavy Oil Belt of Venezuela.
The estimates are discussed in detail in our "Report as of December 31, 1997 on
Proved Reserves of Certain Properties owned by Conoco Inc.," (the Report). We
also have reviewed Conoco's estimates of the reserves, as of December 31, 1997,
of the same properties included in the Report.
Proved reserves estimated by us and referred to herein have, in our
opinion, been prepared in accordance with Rule 4-10(a)(2) of Regulation S-X of
the Securities and Exchange Commission of the United States.
Conoco represents that its estimates of the proved reserves, as of December
31, 1997, net to its leasehold interests in the properties included in the
Report are as follows, expressed in millions of barrels (MMbbl) or billions of
cubic feet (Bcf):
<TABLE>
<CAPTION>
OIL, CONDENSATE, AND
NATURAL GAS LIQUIDS NATURAL GAS NET EQUIVALENT
(MMBBL) (BCF) (MMBBL)
- -------------------- ----------- --------------
<S> <C> <C>
1,260 4,523 2,014
</TABLE>
Note: Net-equivalent million barrels is based on 6,000 cubic
feet of gas being equivalent to 1 barrel of oil,
condensate, or natural gas liquids.
Conoco has advised us, and we have assumed, that its estimates of proved
oil, condensate, natural gas liquids, and natural gas reserves are in accordance
with the rules and regulations of the Securities and Exchange Commission.
A-1
<PAGE> 359
DEGOLYER AND MACNAUGHTON
Our estimates of the proved reserves, as of December 31, 1997, of the
properties included in the Report are as follows, expressed in millions of
barrels (MMbbl) or billions of cubic feet (Bcf):
<TABLE>
<CAPTION>
OIL, CONDENSATE, AND
NATURAL GAS LIQUIDS NATURAL GAS NET EQUIVALENT
(MMBBL) (BCF) (MMBBL)
- -------------------- ----------- --------------
<S> <C> <C>
1,255 4,498 2,005
</TABLE>
Note: Net-equivalent million barrels is based on 6,000 cubic
feet of gas being equivalent to 1 barrel of oil,
condensate, or natural gas liquids.
In comparing the detailed reserves estimates prepared by us and those
prepared by Conoco for the properties involved, we have found differences, both
positive and negative, in reserves estimates for individual properties. These
differences appear to be compensating to a great extent when considering the
reserves of Conoco in the properties included in the Report, resulting in
overall differences not being substantial. It is our opinion that the reserves
estimates prepared by Conoco on the properties reviewed by us and referred to
above, when compared on the basis of net equivalent million barrels of oil, do
not differ materially from those prepared by us.
Submitted,
/s/ DeGOLYER and MacNAUGHTON
DeGOLYER and MacNAUGHTON
[SEAL]
/s/ W.G. McGILVRAY, P.E.
W.G. McGilvray, P.E.
Executive Vice President
DeGolyer and MacNaughton
A-2
<PAGE> 360
CONOCO LOGO
