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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 21, 1998
REGISTRATION NO. 333-60119
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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CONOCO INC.
(Exact Name of Registrant as Specified in Its Charter)
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DELAWARE 2911
(State or Other Jurisdiction of (Primary Standard Industrial
Incorporation or Organization) Classification Code Number)
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DELAWARE 51-0370352
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
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600 NORTH DAIRY ASHFORD
HOUSTON, TEXAS 77079
(281) 293-1000
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
R. A. HARRINGTON
SENIOR VICE PRESIDENT, LEGAL, AND
GENERAL COUNSEL
CONOCO INC.
600 NORTH DAIRY ASHFORD
HOUSTON, TEXAS 77079
TEL: (281) 293-1000
FAX: (281) 293-1440
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
Copies to:
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MATTHEW J. MALLOW, ESQ. WALTER J. SMITH, ESQ.
EILEEN NUGENT SIMON, ESQ. BAKER & BOTTS, L.L.P.
SKADDEN, ARPS, SLATE, ONE SHELL PLAZA
MEAGHER & FLOM LLP 910 LOUISIANA
919 THIRD AVENUE HOUSTON, TEXAS 77002
NEW YORK, NEW YORK 10022 TEL: (713) 229-1234
TEL: (212) 735-3000 FAX: (713) 229-1522
FAX: (212) 735-2000
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MATTHEW J. MALLOW, ESQ. JOHN W. WHITE, ESQ.
EILEEN NUGENT SIMON, ESQ. CRAVATH, SWAINE & MOORE
SKADDEN, ARPS, SLATE, 825 EIGHTH AVENUE
MEAGHER & FLOM LLP NEW YORK, NEW YORK 10019
919 THIRD AVENUE TEL: (212) 474-1000
NEW YORK, NEW YORK 10022 FAX: (212) 474-3700
TEL: (212) 735-3000
FAX: (212) 735-2000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM AMOUNT OF
TITLE OF SECURITIES AGGREGATE OFFERING REGISTRATION
BEING REGISTERED PRICE(1) FEE
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Class A Common Stock, $.01 par value per share.............. $100,000,000 $29,500
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Preferred Share Purchase Rights ("Rights")(2)...............
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Options to purchase Class A Common Stock and stock
appreciation rights with respect to Class A Common
Stock(3).................................................. $214,425,000 $63,256
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Total....................................................... $314,425,000 $92,756(4)
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(1) Estimated solely for the purpose of computing the registration fee in
accordance with Rule 457(o) of the Securities Act.
(2) Rights initially will trade together with the Class A Common Stock. The
value attributable to the Rights, if any, will be reflected in the market
price of the Class A Common Stock.
(3) Consists of options to purchase Class A Common Stock and stock appreciation
rights with respect to Class A Common Stock (collectively, the "Conoco
Options") to be granted by Conoco Inc. under its 1998 Stock and Performance
Incentive Plan and its 1998 Key Employee Stock Performance Plan upon
surrender by the holders thereof of options to purchase common stock, $0.30
par value per share, of E.I. du Pont de Nemours and Company and of stock
appreciation rights with respect to DuPont common stock (collectively, the
"DuPont Options"). The aggregate offering price of the Conoco Options has
been determined based on the aggregate in-the-money value of the DuPont
Options eligible to be surrendered calculated using the average of the high
and low prices of DuPont common stock on August 18, 1998.
(4) A filing fee of $29,500 has previously been paid. The Registrant is
registering an additional $214,425,000 aggregate offering price of
securities, and an additional fee of $63,256 is being paid herewith.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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EXPLANATORY NOTE
This registration statement contains two forms of prospectus: one to be
used in connection with an offering in the United States and Canada (the "U.S.
Prospectus") and one to be used in connection with a concurrent international
offering outside the United States and Canada (the "International Prospectus").
The International Prospectus is substantially the same as the U.S. Prospectus
except for the front outside cover page. The form of the U.S. Prospectus is
included herein and is followed by the page to be used in the International
Prospectus which differs from that in the U.S. Prospectus. The page for the
International Prospectus included herein is labeled "Alternate Page for
International Prospectus." Each of the U.S. Prospectus and the International
Prospectus will be filed with the Securities and Exchange Commission pursuant to
Rule 424(b) under the Securities Act of 1933.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS (Subject to Completion)
Issued August 21, 1998
[CONOCO LOGO]
Shares
Conoco Inc.
CLASS A COMMON STOCK
------------------------
Of the shares of the Class A Common Stock of Conoco Inc. (the "Company"
or "Conoco") being offered, shares are being offered initially in the United
States and Canada by the U.S. Underwriters (the "U.S. Offering") and
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. It is
currently estimated that the public offering price per share will be between
$ and $ . See "Underwriters" for a discussion of the factors to be
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 approximately percent of the Company's Common Stock
representing approximately percent of the combined voting power of all classes
of voting stock of the Company (or percent if the U.S. Underwriters exercise
their over-allotment option in full). Accordingly, DuPont will continue to
control the Company. See "Arrangements Between the Company and DuPont" and
"Principal Stockholder."
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Application will be made to list the Class A Common Stock on the New York Stock
Exchange ("NYSE") under the trading symbol "CLL."
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SEE "RISK FACTORS" BEGINNING ON PAGE 17 FOR INFORMATION CONCERNING CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
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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 TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
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Per Share................................................... $ $ $
Total(3).................................................... $ $ $
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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) Before deducting expenses payable by the Company, estimated at $ .
(3) The Company has granted the U.S. Underwriters an option, exercisable
within 30 days of the date hereof, to purchase up to an aggregate of
additional shares of Class A Common Stock at the price to public
shown above less underwriting discounts and commissions for the purpose
of covering over-allotments, if any. If the U.S. Underwriters exercise
such option in full, the total price to public, underwriting discounts
and commissions and proceeds to the Company will be $ , $
and $ , respectively. See "Underwriters."
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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 , 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.
, 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.
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UNTIL , 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.
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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."
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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.......................... 17
Use of Proceeds....................... 22
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....................... 35
Business.............................. 53
Management............................ 82
Arrangements between the Company and
DuPont.............................. 96
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Principal Stockholder................. 101
Description of Capital Stock.......... 102
Shares Eligible for Future Sale....... 110
Certain United States Federal Tax
Considerations for Non-U.S. Holders
of Class A Common Stock............. 111
Underwriters.......................... 113
Legal Matters......................... 117
Experts............................... 117
Available Information................. 117
Index to Combined Financial
Statements.......................... F-1
Annex A -- Report of DeGolyer and
MacNaughton......................... A-1
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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.
Unless otherwise indicated or unless the context otherwise requires, all
information in this Prospectus: (i) gives effect to the amendment to the
Company's Certificate of Incorporation to change the Company's authorized
capital stock to Class A Common Stock, par value $.01 per share, Class B Common
Stock, par value $.01 per share, and Preferred Stock, par value $.01 per share
("Preferred Stock"), and (ii) gives effect to the conversion of each outstanding
share of the Company's current common stock, par value $.01 per share, into
shares of its newly created Class B Common Stock. 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
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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 (i) gives effect to the
transactions described below under "-- Separation from DuPont" and (ii) assumes
no exercise of the Underwriters' over-allotment option.
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, representing a 27 percent improvement in net income over the prior
year.
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
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also has a 16 percent interest in the Shell-operated Ursa field ("Ursa"), one of
the largest discoveries to date 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
6
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Luna trend in Northern South America and the Caribbean, and selected basins in
the Asia Pacific region. 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, up 30 percent from 1996, 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 European
refineries in 1996 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 Corporation ("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 $250 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> 9
For the year ended December 31, 1997, Downstream reported earnings of $307
million, up 6 percent from 1996, 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.
8
<PAGE> 10
THE OFFERINGS
Class A Common Stock
offered:(1)
U.S. Offering............ shares
International Offering... shares
Total................. shares
Common Stock to be
outstanding after the
Offerings(1)(2)
Class A Common Stock..... shares
Class B Common Stock..... shares
Total................. shares
Use of proceeds............ The net proceeds of approximately $ 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 $ per share of 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 December 1998 (anticipated to be
$ per share) 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....... "CLL"
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."
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
9
<PAGE> 11
by DuPont, 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.
- ---------------
(1) Assumes that the U.S. Underwriters do not exercise their over-allotment
option to purchase up to an aggregate of additional shares of
Class A Common Stock.
(2) 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 in substitution for DuPont Stock Options and DuPont SARs (as
defined herein). See "Management -- Compensation of Executive Officers" and
"-- Treatment of Outstanding Stock Options and Stock Appreciation Rights."
10
<PAGE> 12
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 advised the
Company that it expects to fully divest its ownership interest in the Company
over time. The determination as to the form and timing of such divestiture will
be based on financial and business considerations and prevailing market
conditions. The form of divestiture could include further stock offerings, a
distribution to DuPont's stockholders of DuPont's remaining shares of Common
Stock (commonly referred to as a "spin-off"), the sale of all or a portion of
DuPont's shares of Common Stock to one or more third parties or a combination of
the foregoing.
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 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 approximately
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 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."
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.
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
11
<PAGE> 13
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, 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.
Certain pension assets will be held in trust with the DuPont Pension and
Retirement Plan until the date on which DuPont ceases to own securities
representing more than 80 percent of the voting power or 80 percent of the
economic value of all of the outstanding shares of Common Stock, on which date
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.
12
<PAGE> 14
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 all current employees of the Company the option, subject to specific
country tax and legal requirements, to convert all or part of their options to
purchase DuPont common stock or appreciation rights ("SARs") with respect to
DuPont common stock into comparable options to acquire Class A Common Stock, or
SARs with respect to Class A Common Stock, with an equal aggregate intrinsic
value. The conversion offer 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 $150 to 200 million after-tax depending on the
market price of DuPont common stock at the time of conversion and the number of
outstanding Conoco employee options to purchase DuPont common stock. Since the
conversion 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."
13
<PAGE> 15
<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 $26,157 $11,424
Cost of Goods Sold and
Other Operating
Expenses................ 11,349 10,640 11,146 14,560 16,226 7,667 6,754 16,218 6,748
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 1 160 70
------- ------- ------- ------- ------- ------- ------- ------- -------
Income Before Income
Taxes................... 1,179 973 1,349 1,901 2,107 1,177 784 1,885 659
Provision for Income
Taxes................... 424 551 774 1,038 1,010 590 254 932 221
------- ------- ------- ------- ------- ------- ------- ------- -------
Net Income(2)..... $ 755 $ 422 $ 575 $ 863 $ 1,097 $ 587 $ 530 $ 953 $ 438
======= ======= ======= ======= ======= ======= ======= ======= =======
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...................
Diluted.................
Pro Forma Weighted Average
Shares Outstanding:
Basic...................
Diluted.................
</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 1,790 999 862 567 276 294
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 15,420
Long-Term Borrowings -- Related Parties................ 2,102 2,279 2,141 2,287 1,450 1,181 130
Long-Term Borrowings -- Other Related Party............ -- -- -- -- -- -- 4,000
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 4,641
OTHER DATA:
Cash Provided by Operations............................ 2,132 2,143 1,924 2,396 2,876 548
Capital Expenditures and Investments................... 1,743 1,665 1,837 1,944 3,114 1,050
</TABLE>
14
<PAGE> 16
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
------ ------ ------ ------ ------
<S> <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
<CAPTION>
<S> <C>
OPERATING DATA:
Proved Reserves at December 31(1):
Oil (MMbbls)(2)......................
Natural Gas (Bcf)....................
Total Proved Reserves (MMBOE)(3).....
International Proved Reserves (% of
Total)...............................
Reserve Replacement Ratio(1)...........
Reserve Life (years)(1)(4).............
Finding and Development Costs per
BOE(1)(3)(5).........................
Average Daily Production(1):
Oil (Mbbls/day)(2)...................
Natural Gas (MMcf/day)...............
Total Production (MBOE/day)(3).......
Average Production Costs per
BOE(3)(6)............................
Refinery Capacity at December 31
(Mbbls/day)(1)(7)....................
Refinery Utilization(7)................
Total Refinery Inputs
(Mbbls/day)(1)(8)....................
Sales of Refined Products
(Mbbls/day)(1).......................
Retail Marketing Outlets at December
31(9):
United States .......................
International........................
</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.
15
<PAGE> 17
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).
16
<PAGE> 18
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 40 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, social instability 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, the risks of war,
expropriation, nationalization, renegotiation or nullification of existing
concessions and contracts, taxation policies, foreign exchange and repatriation
restrictions, changing political conditions, international monetary fluctuations
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 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.
17
<PAGE> 19
The Company is also exposed to fluctuations in foreign currency exchange
rates. From time to time, the Company may attempt to mitigate the effect of such
fluctuations by hedging specific exposures, although there can be no assurance
that these efforts will be successful.
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 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,
18
<PAGE> 20
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 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. 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> 21
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 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 that would alter or adversely
affect the powers, preferences or special rights of the shares of their
respective class. See "Description of Capital Stock."
CONTROL BY DUPONT; POTENTIAL CONFLICTS OF INTEREST
After completion of the Offerings, DuPont will own approximately percent
of the Company's outstanding Common Stock, and approximately percent of the
combined voting power of all classes of voting stock of the Company. After the
Offerings, through its ability to elect the majority of the Board of Directors
of the Company, DuPont 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. 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."
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
20
<PAGE> 22
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 of the Company (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 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 plans to adopt 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 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
Prior to the Offerings, there has been no public market for the Class A
Common Stock. Although application will be made to list the Class A Common Stock
on the NYSE, 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 will be 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.
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 approximately percent of the
combined voting power of all classes of voting
21
<PAGE> 23
stock of the Company. Following the expiration of the 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 ownership interest in the Company over time, subject to DuPont's business
needs, prevailing market conditions and other factors. The form of divestiture
could include further stock offerings, a spin-off, the sale of all or a portion
of its shares of Common Stock to one or more third parties or a combination of
the foregoing. 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 estimated net proceeds from the sale of the Class A Common Stock
offered hereby, assuming an initial offering price of $ per share, and after
deducting estimated offering expenses and the underwriting discounts and
commissions payable by the Company, are approximately $ million (or
approximately $ million if the U.S. Underwriters' over-allotment option is
exercised in full). 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 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 $797 million,
due January 2, 2000, and bearing interest at a rate equal to the six-month LIBOR
plus 0.375 percent per annum and (iii) several promissory notes with an
aggregate principal amount of approximately $462 million, having various
maturity dates, and bearing interest at a rate equal to the six-month NIBOR plus
0.375 percent per annum. The $7.5 billion promissory note was incurred in
payment of a dividend. The promissory note with a principal amount of
approximately $797 million was incurred to finance the purchase by the Company
of certain loans made by DuPont to Conoco. The purchased loans, as well as the
several promissory notes with an aggregate principal amount of approximately
$462 million, were incurred to finance certain capital expenditures,
acquisitions and working capital.
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 will have approximately $225 million
in cash and cash equivalents.
DIVIDEND POLICY
The Company currently intends to pay to its stockholders a dividend of
$ per quarter ($ annually) per share of Class A Common Stock and Class B
Common Stock. The first dividend (which is anticipated to be approximately
$ per share) is expected to be paid in December 1998, 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> 24
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, at an assumed public offering price of $ per
share of Class A Common Stock and the application of the estimated net proceeds
as described herein under "Use of Proceeds."
<TABLE>
<CAPTION>
PRO FORMA, AS
HISTORIC PRO FORMA(1) ADJUSTED(1)
-------- ------------- -------------
(IN MILLIONS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Short Term Borrowings -- Related Parties(2)............. $ 1,087 $ -- $ --
Other Short Term Borrowings and Capital Lease
Obligations(2)........................................ 51 51 51
Long-Term Borrowings -- Related Parties(2).............. $ 1,181 $1,259 $ 130
Long-Term Borrowings -- Other Related Party(2).......... -- 7,500 4,000
Other Long-Term Borrowings and Capital Lease
Obligations(2)........................................ 103 103 103
Owner's Net Investment:
Class A Common Stock, $0.01 par value; shares
authorized; shares issued and outstanding
for pro forma, as adjusted(3)...................... -- -- (4)
Class B Common Stock, $0.01 par value; shares
authorized; shares issued and outstanding
for pro forma, as adjusted......................... -- -- (4)
Additional Paid-in Capital............................ -- -- --
Owner's Net Investment and Accumulated Other
Comprehensive Loss/Stockholders' Equity............ 8,223 980
------- ------ ------
Total Capitalization.......................... $10,645 $9,893 $
======= ====== ======
</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."
(4) To be completed upon finalization of the Offerings.
23
<PAGE> 25
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 all current employees of the Company the option, subject to specific
country tax and legal requirements, to convert all or part of their options to
purchase DuPont common stock or SARs with respect to DuPont common stock, into
comparable options to acquire Class A Common Stock, or SARs with respect to
Class A Common Stock, with an equal aggregate intrinsic value. The conversion
offer 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 $150 to
200 million after-tax depending on the market price of DuPont common stock at
the time of conversion and the number of outstanding Conoco employee options to
purchase DuPont common stock. Since the conversion 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> 26
<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 $26,157 $11,424
Cost of Goods Sold and
Other Operating
Expenses................ 11,349 10,640 11,146 14,560 16,226 7,667 6,754 16,218 6,748
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 1 160 70
------- ------- ------- ------- ------- ------- ------- ------- -------
Income Before Income
Taxes................... 1,179 973 1,349 1,901 2,107 1,177 784 1,885 659
Provision for Income
Taxes................... 424 551 774 1,038 1,010 590 254 932 221
------- ------- ------- ------- ------- ------- ------- ------- -------
Net Income(2)..... $ 755 $ 422 $ 575 $ 863 $ 1,097 $ 587 $ 530 $ 953 $ 438
======= ======= ======= ======= ======= ======= ======= ======= =======
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...................
Diluted.................
Pro Forma Weighted Average
Shares Outstanding:
Basic...................
Diluted.................
</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 1,790 999 862 567 276 294
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 15,420
Long-Term Borrowings -- Related Parties..................... 2,102 2,279 2,141 2,287 1,450 1,181 130
Long-Term Borrowings -- Other Related Party................. -- -- -- -- -- -- 4,000
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 4,641
OTHER DATA:
Cash Provided by Operations................................. 2,132 2,143 1,924 2,396 2,876 548
Capital Expenditures and Investments........................ 1,743 1,665 1,837 1,944 3,114 1,050
</TABLE>
25
<PAGE> 27
<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> 28
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> 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 $ (24)(a) $26,157 $ -- $26,157
2(b)
(11)(c)
(73)(d)
Cost of Goods Sold and Other Operating
Expenses................................ 16,226 (8)(a) 16,218 -- 16,218
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................. 36 403(c) 439 (279)(p) 160
------- ----- ------- -------- -------
Income Before Income Taxes................ 2,107 (501) 1,606 279 1,885
Provision for Income Taxes................ 1,010 (169)(e) 841 91(p) 932
------- ----- ------- -------- -------
Net Income...................... $ 1,097 $(332) $ 765 $ 188 $ 953
======= ===== ======= ======== =======
Pro Forma Earnings Per Share
Basic...................................
Diluted.................................
Pro Forma Weighted Average Shares
Outstanding
Basic...................................
Diluted.................................
</TABLE>
See Notes to Pro Forma Combined Financial Statements
28
<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 $ (12)(a) $12,514 $ -- $12,514
1(b)
(6)(c)
(69)(d)
Cost of Goods Sold and Other Operating
Expenses.................................. 7,667 (4)(a) 7,663 -- 7,663
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................... 24 198(c) 222 (139)(p) 83
------- ----- ------- ----- -------
Income Before Income Taxes.................. 1,177 (280) 897 139 1,036
Provision for Income Taxes.................. 590 (98)(e) 492 49(p) 541
------- ----- ------- ----- -------
Net Income........................ $ 587 $(182) $ 405 $ 90 $ 495
======= ===== ======= ===== =======
Pro Forma Earnings Per Share
Basic.....................................
Diluted...................................
Pro Forma Weighted Average Shares
Outstanding
Basic.....................................
Diluted...................................
</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 $ (10)(a) $11,424 $ -- $11,424
1(b)
(33)(c)
(20)(d)
Cost of Goods Sold and Other Operating
Expenses.................................. 6,754 (6)(a) 6,748 -- 6,748
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................... 1 208(c) 209 (139)(p) 70
------- ----- ------- ----- -------
Income Before Income Taxes.................. 784 (264) 520 139 659
Provision for Income Taxes.................. 254 (68)(e) 186 35(p) 221
------- ----- ------- ----- -------
Net Income........................ $ 530 $(196) $ 334 $ 104 $ 438
======= ===== ======= ===== =======
Pro Forma Earnings Per Share
Basic.....................................
Diluted...................................
Pro Forma Weighted Average Shares
Outstanding
Basic.....................................
Diluted...................................
</TABLE>
See Notes to Pro Forma Combined Financial Statements
29
<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 $ 522(f) $ 1,193 $ 3,500(l) $ 225
(259)(g) (968)(n)
618(h) (3,500)(m)
(517)(h)
Marketable Securities........................ 7 -- 7 -- 7
Accounts and Notes Receivable................ 1,252 -- 1,252 -- 1,252
Notes Receivable -- Related Parties.......... 465 (465)(h) -- -- --
Inventories.................................. 981 -- 981 -- 981
Prepaid Expenses............................. 305 -- 305 -- 305
------- ------- ------- ------- -------
Total Current Assets................ 3,839 (101) 3,738 (968) 2,770
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 (153)(h) -- -- --
(459)(f)
Other Assets................................. 524 (63)(f) 461 -- 461
------- ------- ------- ------- -------
Total Assets........................ $17,164 $ (776) $16,388 $ (968) $15,420
======= ======= ======= ======= =======
LIABILITIES AND OWNER'S NET INVESTMENT
Accounts Payable............................. $ 1,129 $ -- $ 1,129 $ -- $ 1,129
Short-Term Borrowings -- Related Parties..... 1,087 (492)(k) -- --
(595)(h)
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 (1,087) 2,476 -- 2,476
------- ------- ------- ------- -------
Long-Term Borrowings -- Related Parties...... 1,181 78(h) 1,259 (968)(n) 130
(161)(o)
Long-Term Borrowings -- Other Related
Party...................................... 7,500(j) 7,500 (3,500)(m) 4,000
Other Long-Term Borrowings and Capital Lease
Obligations................................ 103 -- 103 -- 103
Deferred Income Taxes........................ 1,861 (24)(i) 1,837 -- 1,837
Other Liabilities and Deferred Credits....... 1,925 -- 1,925 -- 1,925
------- ------- ------- ------- -------
Total Liabilities................... 8,633 6,467 15,100 (4,629) 10,471
------- ------- ------- ------- -------
Minority Interests........................... 308 -- 308 -- 308
Owner's Net Investment and Accumulated Other
Comprehensive Loss/Stockholders' Equity.... 8,223 (7,500)(j) 980 3,500(l) 4,641
(259)(g) 161(o)
24(i)
492(k)
------- ------- ------- ------- -------
Total Liabilities and Owner's Net
Investment/Stockholders' Equity... $17,164 $ (776) $16,388 $ (968) $15,420
======= ======= ======= ======= =======
</TABLE>
See Notes to Pro Forma Combined Financial Statements
30
<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 Offering, 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 Offering, 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. Prior to or concurrently with the consummation of the Offerings the
following transactions will have occurred: (a) to structure the Company on a
stand-alone basis, certain subsidiaries and assets and liabilities will be
transferred between DuPont and Conoco; (b) the Company will use the net proceeds
of the Offerings to repay a portion of the Long-Term Borrowings -- Other Related
Party so that the remaining balance of Long-Term Borrowings -- Other Related
Party is $4,000 at the closing of the Offerings; (c) several loans in existence
prior to the Offerings will be repaid or purchased by the Company or contributed
as capital to the Company by DuPont so that the remaining aggregate balances of
Long-Term Borrowings -- Related Parties are $130 at the closing of the
Offerings; and (d) 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. One assumption inherent to all
the pro forma adjustments is that DuPont's ownership interest in the Company
remains 50 percent or more for at least one year from the date of the Offerings.
Based on this assumption, the Company does not expect any change to Selling,
General and Administrative Expense levels, as the historical expense
approximates the pro forma expense level. Should DuPont's ownership interest
fall below 50 percent, pro forma Selling, General and Administrative expenses
would increase by approximately $15 to $20 on a full year basis.
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
31
<PAGE> 33
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS)
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, 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.
Subject to completion of the Offerings, the Company and DuPont expect to
give all current employees of the Company the option, subject to specific
country tax and legal requirements, to convert all or part of their options to
purchase DuPont common stock or SARs with respect to DuPont common stock into
comparable Class A Common Stock options, or SARs with respect to Class A Common
Stock, with an equal aggregate intrinsic value. The conversion offer 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 $150 to 200 after-tax
depending on the market price of DuPont common stock at the time of conversion
and the number of outstanding Conoco employee options to purchase DuPont common
stock. Since the conversion 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 50 percent of all outstanding
DuPont stock options and SARs held by Conoco employees will be voluntarily
converted. 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, 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 the loss of insurance premium income, and the associated cost,
from a Conoco-owned captive insurance company providing insurance coverage to
certain DuPont assets. After the Offerings, the Company will cease providing
insurance coverage to DuPont.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 JUNE 30, 1997 JUNE 30, 1998
----------------- ------------- -------------
<S> <C> <C> <C>
Captive Insurance:
Loss of Revenue..................... (24) (12) (10)
Remove associated Operating
Expense.......................... (8) (4) (6)
</TABLE>
(b) Represents an increase in fees charged by Conoco for services, based on
new contractual commitments, provided to DuPont such as research and development
and securing supplies of natural gas for various DuPont facilities.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 JUNE 30, 1997 JUNE 30, 1998
----------------- ------------- -------------
<S> <C> <C> <C>
Increased Revenue................. 2 1 1
</TABLE>
(c) Reflects a decrease in interest income due to collection of Notes
Receivables -- 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 ($1,259)
and the new
32
<PAGE> 34
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS)
Long-Term Borrowings -- Other Related Party ($7,500) by an assumed 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......................... 403 198 208
</TABLE>
(d) Reflects the impact of changes in currency exchange rates on certain
intercompany loans denominated in foreign currencies purchased by the Company
from DuPont. These loans are to Western European petroleum operations for which
the local currency has been designated as the functional currency.
(e) 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
(f) Reflects the collection of a $459 Long-Term Note Receivable -- Related
Parties by the Company's captive insurance company, and the sale of $63 of
securities held by that subsidiary.
(g) A portion ($239) of the cash generated by the transactions described in
(f) above will be used 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.
(h) Reflects collection of the remaining balance due on all Notes
Receivable -- Related Parties ($465 and $153) plus additional Long Term
Borrowings -- Related Parties ($78) to finance the purchase of loans made by
DuPont to the Company. These funds will be used to repay a portion of Short-Term
Borrowings -- Related Parties ($595).
(i) 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.
(j) 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.
33
<PAGE> 35
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS)
(k) Represents a capital contribution by DuPont of $492 of Short-Term
Borrowings -- Related Parties relating to certain non-interest bearing advances
made by DuPont to the Company's United Kingdom subsidiaries.
Offering Adjustments
(l) Represents the receipt by Conoco of $3,500 in proceeds from the
Offerings (consisting of the assumed sale of million shares at $ per
share), net of underwriting discounts of $ and estimated expenses of the
Offerings of $ .
(m) Represents the payment to DuPont by the Company with respect to
Long-Term Borrowings -- Other Related Party of the net proceeds from the
Offerings.
(n) Represents the payment to DuPont by Conoco with respect to Long Term
Borrowings -- Related Parties of all cash in excess of $225.
(o) Represents the capital contribution by DuPont of $161 of Long-Term
Borrowings -- Related Parties relating to loans made by DuPont to the Company
prior to the Offerings. This capital contribution represents the amount needed
for the Company to have Long-Term Borrowings -- Related Parties of $130 at
completion of the Offerings.
(p) Represents the reduction of interest expense and the associated
increase in income taxes resulting from the payment to DuPont of the Long-Term
Borrowings described in (m) and (n) above as well as the capital contribution
described in (o) 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 outstanding DuPont stock options, applying the treasury stock method, which
are expected to be converted into Conoco stock options, using the anticipated
weighted-average exercise price of the outstanding options and the anticipated
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.
34
<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 $1.7 billion, averaging about $340 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 to report
35
<PAGE> 37
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 all current employees of the Company the option, subject to specific
country and legal requirements, to convert all or part of their options to
purchase DuPont common stock or SARs with respect to DuPont common stock into
comparable options to acquire Class A Common Stock, or SARs with respect to
Class A Common Stock, with an equal aggregate intrinsic value. The conversion
offer 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 $150 to 200
million after-tax, depending on the market price of DuPont common stock at the
time of conversion and the number of options to purchase DuPont common stock or
SARs converted. Since the conversion 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."
36
<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>
NON-RECURRING ITEMS
Combined net income includes the following material non-recurring 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 non-recurring items............... $(45) $ (6) $ 80 $ 24 $26
==== ==== ==== ==== ===
</TABLE>
First half 1998 non-recurring 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.
Non-recurring 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 disposing of marginal properties and concentrating operations
on core properties. A U.K. tax rate change
37
<PAGE> 39
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.
Non-recurring 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.
Non-recurring 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 excluding the above non-recurring items ("underlying
net income") 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
underlying net income of $504 million in the first half of 1998, down 10 percent
from $563 million in the first half of 1997. Lower underlying net income
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, lower exploration overhead and operating expenses and lower
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.
38
<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 underlying net income 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 new
exploration activity 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 underlying net income 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.
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. .
39
<PAGE> 41
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 U.S. exploration overhead and operating costs and higher 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
Non-recurring Items............................... 39 58 (147) (24) (54)
---- ---- ---- ---- ----
Combined Underlying Net Income.................... $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 underlying
net income 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 being 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 underlying net income totaled $144 million in the first half
of 1998, down 40 percent from $241 million in the comparable period of 1997.
Lower U.S. Upstream underlying net income 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 underlying net income was $161 million,
down 15 percent, from $189 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 Ula and Gyda fields in Norway, earnings
benefited from higher production from countries with relatively lower tax rates
(primarily the United Kingdom and Nigeria).
40
<PAGE> 42
1997 versus 1996
Upstream combined net income was $884 million in 1997, up 30 percent,
compared to $681 million in 1996. Upstream underlying net income 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 underlying net income 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, underlying net income 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 underlying net income 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 underlying net income 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, underlying net income 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.
41
<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
Non-recurring Items............................... 6 (52) 67 -- 28
---- ---- ---- ---- ----
Combined Underlying Net Income.................... $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 underlying net income totaled $209
million in the first half of 1988, up 15 percent from $181 million in the first
half of 1997, due to higher European refined product margins.
U.S. Downstream underlying net income 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 underlying net income 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 underlying net income 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 underlying net income was $239 million
versus $136 million in 1996, an increase of 81 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 underlying net income 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 underlying net income 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 underlying net income 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.
42
<PAGE> 44
International Downstream underlying net income 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).
43
<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 $2.5 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
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<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.
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.
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.
-- 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, which is scheduled to begin production in the third
quarter of 1998. 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 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.
45
<PAGE> 47
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.
Investments in 1995 totaled $293 million and included costs for the
construction of a plant to produce Conoco LiquidPower(R), the acquisition of 61
retail marketing outlets, and initial costs associated with the Lake Charles
refinery expansion.
-- 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. 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 and Turkey, and continuing the construction of the Melaka
refinery, which is expected to begin operations in the second half of 1998.
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.
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.
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.
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.
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<PAGE> 48
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 plans to
enter into a $500 million Revolving Credit Facility with DuPont to fund routine
working capital requirements. 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."
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.
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.
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<PAGE> 49
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 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, capital expenditures, cash returns from
affiliates and certain tax payments.
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<PAGE> 50
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 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 are 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
49
<PAGE> 51
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 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 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 may 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, 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.
50
<PAGE> 52
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 the Year 2000 issue as a broad business issue, whose
impact extends beyond traditional computer hardware and software to automated
plant systems and instrumentation, as well as to business third parties. The
Company has committed resources to conduct risk assessments in each of these
areas and is taking steps necessary to maintain business continuity. Failure by
the Company, key suppliers, customers, and/or other constituents such as
governments to become Year 2000 compliant on a timely basis could have a
material adverse impact on the Company's operations or financial condition. The
Company has established a "Year 2000 Project Team" to lead and coordinate all of
its Year 2000 activities globally. The team is responsible for providing the
necessary guidelines, leadership, tools and knowledge required to address this
issue. It is also responsible for monitoring and reporting to executive
management periodically.
As to the systems of third parties linked to those of the Company, there
can be no guarantee those systems that are not now compliant will be timely
converted to Year 2000 compliance. Additionally, there can be no guarantee third
parties of business importance to Conoco will successfully reprogram or replace,
and test, all of their own computer hardware, software and process control
systems. The failure of key third parties to achieve Year 2000 compliance could
have a material adverse effect on Conoco's results of operations. Conoco is
developing contingency plans to appropriately respond in the event certain third
parties fail to become Year 2000 compliant.
The Company estimates it will incur $15 million in out-of-pocket costs to
become Year 2000 compliant and believes these costs will not have a material
adverse effect on the Company's financial condition, operations or liquidity.
The Company will devote all necessary resources to make its key systems Year
2000 capable on a timely basis. See "Risk Factors -- Risk of Year 2000
Noncompliance."
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
51
<PAGE> 53
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.
52
<PAGE> 54
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,
representing a 27 percent improvement in net income over the prior year.
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.
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<PAGE> 55
Excluding the recording of the Petrozuata reserves, Conoco replaced
approximately 123 percent of its 1997 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.
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
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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.
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,
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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.
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,
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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.
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
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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 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, anticipates drilling two wells to test the potential
of this acreage 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.
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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).
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 one well on the acreage (which was
a non-commercial discovery) and plans two additional wells 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.
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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 30-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.
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 27,000 barrels per day 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
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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.
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
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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.
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
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<PAGE> 64
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>
<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>
63
<PAGE> 65
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.
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.
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<PAGE> 66
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.
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.
65
<PAGE> 67
DOWNSTREAM
SUMMARY
Downstream operations encompass refining crude oil and other feedstocks
into petroleum products, buying and selling crude oil and refined products and
transportating, 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 $600 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 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, marketing sales averaged 984,000 barrels of
refined product 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,
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<PAGE> 68
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.
<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.
67
<PAGE> 69
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.
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
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<PAGE> 70
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, 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
69
<PAGE> 71
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.
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 72 percent of the assets and 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.
70
<PAGE> 72
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 their peer group for financial and operating performance 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.
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.
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<PAGE> 73
<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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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> 75
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> 76
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> 77
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 is also considering a proposal for a multi-site industrial
energy project involving various DuPont facilities in the United States.
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 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.
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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 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.
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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 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
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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.
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,
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$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 are 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. The Company does not carry
business interruption insurance. 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
Two of three proceedings instituted by governmental authorities against
Conoco for alleged violations of RCRA with the potential for monetary sanctions
in excess of $100,000, have been resolved by Conoco's executing Consent Orders
and agreeing to pay cash penalties of $112,500 and $72,500, respectively, and to
perform a Supplemental Environmental Project over the next two years applicable
to both proceedings at an expected total cost of approximately $600,000. With
regard to the third proceeding, although regulatory authorities have requested a
civil penalty of $169,000, 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.
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.
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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 and severance tax payments 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. Certain
employees at the Company's U.S. refineries are represented by the Oil, Chemical
and Atomic Workers International Union under collective bargaining agreements.
The Company believes that its relations with its employees are good.
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<PAGE> 83
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is information concerning the current executive officers
and current and prospective directors of the Company.
<TABLE>
<CAPTION>
NAME AGE(2) POSITION WITH THE COMPANY TERM EXPIRES
---- ------ ------------------------- ------------
<S> <C> <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)............. 63 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 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 Citicorp 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. 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 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,
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<PAGE> 84
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, Citicorp and its subsidiary, Citibank, N.A., Cummins Engine
Company, Inc., Lucent Technologies, Inc. and PepsiCo, Inc.
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.
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<PAGE> 85
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 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
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<PAGE> 86
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 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. The Audit and Compliance Committee selects an independent accounting
firm, subject to shareholder ratification, to audit the financial statements of
the Company. The 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
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<PAGE> 87
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 June 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........................................... 834,487(6)
Frank A. McPherson......................................... 1,000(7)
Gary M. Pfeiffer........................................... 43,237(8)
William K. Reilly.......................................... 7,407
Gary W. Edwards............................................ 442,516(9)
Robert E. McKee III........................................ 372,089(10)
Robert W. Goldman.......................................... 105,661(11)
Rick A. Harrington......................................... 97,703(12)
Directors, and Executive Officers as a Group (12
persons)................................................. 3,399,381
</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.
(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 June 15, pursuant to
stock options awarded under employee compensation plans
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<PAGE> 88
of DuPont: Mr. Woolard -- 1,101,240; Mr. Dunham -- 704,428; Mr.
Pfeiffer -- 31,602; Mr. Edwards -- 367,846; Mr. McKee -- 296,398; Mr.
Goldman -- 93,306; and Mr. Harrington -- 89,058.
(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.
(6) Includes (i) 104,880 shares held in Dunham Management Trust, a revocable
grantor trust and (ii) 6,204 shares held in deferred compensation.
(7) The 1,000 shares listed above are owned by Mr. McPherson and his spouse
jointly.
(8) Includes 1,796 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
Employees of the Company who hold, 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 to convert each such DuPont Option or DuPont
SAR, subject to specific country tax and legal requirements, effective as of the
consummation of the Offerings, into a Company Stock Option or an appreciation
right with respect to Class A Common Stock (a "Company SAR"), as applicable. The
number of shares subject to each such Company Stock Option and each such Company
SAR, and the exercise price per share of each such Company Stock Option and
Company SAR, will be determined in a manner that will reflect, in the aggregate,
the difference 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. All Company Stock Options and Company SARs
which are converted from DuPont Options and DuPont SARs will remain subject to
the threshold, vesting and option length terms and conditions to which they were
subject prior to such conversion. Termination provisions will be governed by
those established for Company Stock Options and Company SARs. The conversion
will be 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."
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<PAGE> 89
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.
(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.
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<PAGE> 90
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
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.
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<PAGE> 91
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.
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>
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<PAGE> 92
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"). A maximum of shares of Class A Common Stock has
been reserved for issuance under the Plan, generally subject to equitable
adjustment upon the occurrence of any stock dividend, stock split, subdivision
or consolidation.
Pursuant to the Plan, the Company may grant Company Stock Options
(including "incentive stock options" and "nonqualified stock options"), SARs
(either in connection with stock options granted under the Plan or independently
of options), performance awards and other stock- or cash-based awards
("Awards"). It is the intent of the Company that certain Awards under the Plan
will satisfy applicable requirements of section 162(m) ("Section 162(m)") of the
Code.
The Plan will be administered by the Compensation Committee. The
Compensation Committee shall have full authority, subject to the provisions of
the Plan and except with respect to nonemployee directors, to, among other
things, determine the persons to whom Awards will be granted, determine the
terms and conditions (including any applicable performance criteria) of such
Awards, and prescribe, amend and rescind rules and regulations relating to the
Plan.
Grants of Awards may be made under the Plan to selected employees,
independent contractors and nonemployee directors of the Company and its present
or future subsidiaries, in the discretion of the Compensation Committee.
STOCK OPTIONS AND APPRECIATION RIGHTS
Stock options may be either "incentive stock options," as such term is
defined in Section 422 of the Code, or nonqualified stock options. The exercise
price per share of Class A Common Stock subject to an option 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 be exercisable at such times and upon
such conditions as the Compensation Committee may determine, as reflected in the
applicable Award agreement. The exercise period shall be determined by the
Compensation Committee except that, in the case of an incentive stock option,
such exercise period shall not exceed ten years from the date of grant of such
incentive stock option.
The Compensation Committee will set forth in the applicable Award agreement
the treatment of stock options and SARs in the event that the employment of a
participant is terminated.
STOCK AWARDS
A stock award ("Stock Award") is an Award of the right to receive cash or
Class A Common Stock at a future date that may be subject to such restrictions
on transferability and other restrictions as the Compensation Committee may
impose at the date of grant or thereafter, which restrictions may lapse
separately or in combination at such times, under such circumstances (including
without limitation a specified period of employment or the satisfaction of
preestablished performance goals), in such installments, or otherwise, as the
Compensation Committee may determine. All other terms and conditions of Stock
Awards will be set forth in the applicable Award agreement.
PERFORMANCE AWARDS
The Performance Award component of the Plan provides for the payment of
Awards to participants if, and only to the extent that, performance goals
established by the Compensation Committee are met with respect to the
appropriate applicable performance period. The Compensation Committee will
establish performance goals expressed in terms of the achievement of one or more
performance measures, including revenue, net income, stock price, market share,
earnings per share, return on equity, return on assets, 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 additions, proceeds from
dispositions, production volumes, refinery runs, net cash flow before financing
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<PAGE> 93
activities, reserve replacement ratio, finding and development costs, refinery
utilizations, total market value and other appropriate financial measures
determined by the Compensation Committee. Such performance goals may relate to
the performance of the Company, a business unit, product line, territory or any
combination thereof.
All other terms and conditions of Performance Awards will be set forth in
the applicable Award agreement.
DIRECTORS' AWARDS
For information concerning awards to be granted to Directors, see
"-- Election and Compensation of Directors."
CERTAIN LIMITATIONS
No participant in the Plan may be granted, in respect of any calendar year,
Company Stock Options or SARs representing an aggregate of more than
shares of Class A Common Stock, Stock Awards covering or relating to more than
shares of Common Stock or Performance Awards having an aggregate value
determined on the date of grant in excess of $ .
CHANGE IN CONTROL
Unless otherwise provided in an Award agreement, in the event of a "Change
in Control" of the Company (as defined in the Plan), each unvested equity Award
outstanding under the Plan will be vested.
AMENDMENT AND TERMINATION
The 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.
TRANSFERABILITY
Except as otherwise determined by the Compensation Committee, Awards
granted under the Plan may not be transferred other than by will or by the laws
of descent and distribution.
1998 KEY EMPLOYEE STOCK PERFORMANCE PLAN
The Company has adopted the 1998 Key Employee Stock Performance Plan (the
"1998 Plan"). A maximum of shares of Class A Common Stock has been
reserved for issuance under the 1998 Plan, generally subject to equitable
adjustment upon the occurrence of any stock dividend, stock split, subdivision
or consolidation. Pursuant to the 1998 Plan, there may be granted Company Stock
Options (which includes "incentive stock options" and "nonqualified stock
options") and SARs.
The 1998 Plan will be administered by the Compensation Committee. The
Compensation Committee shall have full authority, subject to the provisions of
the 1998 Plan to, among other things, determine the persons to whom Company
Stock Options and SARs will be granted, determine the terms and conditions
(including any applicable performance criteria) of such Company Stock Options
and SARs, and prescribe, amend and rescind rules and regulations relating to the
1998 Plan. Grants of Company Stock Options and SARs may be made under the Plan
to selected employees of the Company and its present or future subsidiaries, in
the discretion of the Compensation Committee.
In the event of a "Change of Control" (as defined in the 1998 Plan),
Company Stock Options held by active employees that were not previously vested
or exercisable will become fully vested and exercisable and remain exercisable
for the remainder of their term.
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<PAGE> 94
The 1998 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.
GLOBAL STOCK PERFORMANCE SHARING PLAN
The Company has adopted the Global Stock 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 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 certain management employees who receive Company Stock Options or SARs
under the 1998 Stock and Performance Incentive Plan as of the closing of the
Offerings will not be granted Company Stock Options or SARs under the Global
Plan as of such date. 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 a "Change of Control" (as defined in the Global Plan),
Company Stock Options and SARs that were not previously exercisable will become
fully exercisable and 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............................................
Gary W. Edwards.............................................
Robert E. McKee III.........................................
Robert W. Goldman...........................................
Rick A. Harrington..........................................
Nonemployee Director Group ( persons)......................
All Other Employees ( persons).............................
</TABLE>
- ---------------
(1) Company Stock Options and SARs have an exercise price of per share
and become exerciseable 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.
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<PAGE> 95
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.
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 (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.
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<PAGE> 96
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
within two years of a "Change in Control" of the Company either 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, (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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<PAGE> 97
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). 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 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 each of such agreements, or the transactions provided for therein, or any
amendments thereof will be effected 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 have entered 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 for all liabilities, known 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), and all of the
assets transferred to the Company in connection with the Separation, but
excluding the Company's coal business, and to place sole financial
responsibility for DuPont's other businesses with DuPont. Certain environmental
matters and claims will not be assumed by the Company, but will be retained
exclusively by DuPont. The parties have also agreed to bear responsibility in
proportion 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 the assumption or
retention of liabilities by the Company and DuPont, the conduct of
96
<PAGE> 98
the parties' respective businesses subsequent to the Separation, and for
misstatements or omissions in the Registration Statement of which this
Prospectus is a part with respect to information provided by the other party.
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 (together with its subsidiaries (excluding the Company and its
subsidiaries)), holds 50 percent or more of the voting power of the outstanding
Common Stock of the Company, (i) DuPont will have the right to designate a
majority of the nominees for election to 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 holds less than 50 percent but more
than 10 percent of the voting power of outstanding Common Stock of the Company,
DuPont will have the right to designate a number of directors proportionate to
its voting power of the outstanding Common Stock of the Company, and, so long as
DuPont holds greater than percent of the voting power, all Committees of
the Board of Directors will be required to contain at least one director
designated by DuPont. In addition, as long as DuPont owns 50 percent or more of
the voting power of the outstanding Common Stock of the Company, (i) the Company
will not be permitted to make certain changes in its accounting principles or
practices without the consent of DuPont and (ii) the Company will be required to
deliver to DuPont certain financial information of the Company. The Separation
Agreement also generally provides that 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 spin-off of DuPont's
Class B Common Stock to its stockholders, will (i) seek such ruling on the basis
that it will amend the Certificate of Incorporation of Conoco to include a
provision providing for the automatic conversion of all Class B Common Stock
into Class A Common Stock under certain circumstances and (ii) amend the
Certificate of Incorporation of Conoco to so provide.
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."
The Separation Agreement requires the Company to refinance or retire such Note
on or prior to January 2, 2000. 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.
The Separation Agreement contemplates that all cash generated by Conoco and
its subsidiaries prior to the closing of the Offerings will be for the account
of DuPont, except that DuPont has agreed that immediately 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 and its
subsidiaries will have an aggregate of $225 million of cash and cash equivalents
on hand. 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. 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.
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
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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, such that immediately following the Offerings, the
aggregate principal amount owed by the Company to DuPont pursuant to the Note
will be $4.0 billion. 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) and (iii) of "Use of Proceeds." Pursuant to the
Employee Matters Agreement, the Company will also owe DuPont an additional
amount of $130 million. See "--Employee Matters Agreement."
Prior to the Offerings, the Company plans to enter into a $500 million
Revolving Credit Facility with DuPont to fund routine working capital
requirements. Terms and conditions of the facility will be similar to the Note.
TAX SHARING AGREEMENT
Following the Offerings, the Company and certain of its subsidiaries may
continue to be 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 and local 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
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 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.
In general, the Company will be included in the Consolidated Group for so
long as DuPont beneficially owns at least 80 percent of the total voting power
and value of the outstanding stock of the Company. Each member of a consolidated
group for 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, during the period in which the Company is
included in the Consolidated Group, the Company could be liable in the event
that any federal tax liability is incurred, but not discharged, by any other
member of the Consolidated Group.
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EMPLOYEE MATTERS AGREEMENT
Prior to the Offerings, DuPont and Conoco will have entered into an
agreement (the "Employee Matters Agreement"), which sets forth the understanding
between the parties with respect to current and former employees of DuPont and
Conoco, 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 agreements, accrued wages and workers'
compensation, holiday, vacation and sick day 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) Conoco, or an appropriate Conoco subsidiary, will assume and be
solely responsible for all liabilities and obligations whatsoever with respect
to current officers and employees of the businesses owned and operated by Conoco
and former officers and employees of such businesses who, immediately prior to
the termination of their employment, were employed in such businesses (the
"Transferred Business Employees").
Following the Separation, 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 more than 80 percent of the voting power or 80 percent of the
economic value of all outstanding shares of Common Stock (the "Ownership
Reduction Date"), Conoco will establish its own retirement plan (the "Conoco
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 to the trustee of the Conoco Retirement Plan an amount approximately
equal to $820 million (plus or minus any investment gains and losses and
benefits payments made between the Separation and the Ownership Reduction Date),
which amount has been determined to be equal to the actuarially accrued
liability of Conoco Retirement Plan Participants (as defined in the Employee
Matters Agreement).
Following the Separation, Conoco will continue to maintain its "benefit
restoration plans" relating to Conoco Retirement Plan Participants. In addition,
Conoco will assume and be solely responsible for the liabilities and obligations
relating to Conoco Retirement Plan Participants who participate in DuPont's
benefit restoration plan relating to the DuPont Pension Plan.
Effective as of the Separation, Conoco will establish a benefit restoration
plan relating to the Conoco Thrift Plan for the benefit of current or former
employees of Conoco 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 Conoco who
participated in the DuPont Salary Deferral and Savings Restoration Plan.
Employees of the Company who hold, as of the closing of the Offerings,
DuPont Stock Options or DuPont SARs will be able to convert each such DuPont
Option or DuPont SAR, subject to specific country tax and legal requirements,
effective as of the closing of the Offerings, into a Company Stock Option or
Company SAR, as applicable. The number of shares subject to each such Company
Stock Option and each such Company SAR, and the exercise price per share of each
such Company Option and Company SAR, will be determined in a manner that will
reflect, in the aggregate, the difference 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. All Company
Stock Options and Company SARs which are converted from DuPont Options and
DuPont SARs will remain subject to the threshold, vesting and option length
terms and conditions to which they were subject prior to such conversion.
Termination provisions will be governed by those established for Company Stock
Options and SARs. The conversion will be in accordance with such procedures and
at such time as is determined by DuPont's Compensation Committee and the
Company. Retired employees of the Company who hold DuPont Options or DuPont SARs
will not participate in the conversion. 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 convert them to Company Options or Company SARs, will
continue to be obligations solely of DuPont. The Company has agreed to pay to
DuPont an amount equal to the estimated aggregate potential increase in value
subsequent to the Offerings (as determined pursuant to a formula set forth in
the Employee Matters Agreement) of the DuPont Options and DuPont
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SARs held by employees of the Company and not converted. The amount to be owed
by the Company to DuPont pursuant to this provision is currently expected to be
approximately $130 million.
TRANSITIONAL SERVICES AGREEMENT
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,
transportation, financial and administrative services, engineering 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 MANAGEMENT MASTER SERVICE AGREEMENTS
Prior to the Offerings, DuPont and the Company will enter into two master
service agreements ("MSAs") which will provide for the provision of information
systems services, information asset allocations and facilities sharing
arrangements between the Company and DuPont. The term of the MSAs will be two
years, but the scope and term of any particular service will vary, including
services provided by third parties which are made available to the extent they
are provided for in any relevant third party agreement. The MSAs will also
provide for the entering into of local service agreements ("LSAs") between the
respective affiliates or subsidiaries of the parties with respect to services
provided outside of the United States. The agreements will provide that services
are to be provided at cost; however, services provided by third parties which
are made available to the recipient of such services will be provided at the
price charged by such third parties. Certain long-term services, including
telecommunication services and facilities sharing arrangements, may continue on
a year-to-year basis following the expiration of the initial two-year term.
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. 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.
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
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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. 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
approximately percent of the combined voting power of all classes of voting
stock of the Company. Under applicable provisions of the Delaware General
Corporation Law, DuPont will therefore 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)
shares of Class A Common Stock, par value $.01 per share, and 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) shares of
Preferred Stock, par value $.01 per share, none of which is outstanding as of
the date hereof. Of the shares of Class A Common Stock,
shares are being offered in the Offerings (or shares if the U.S.
Underwriters exercise their over-allotment option in full). Of the
shares of Class B Common Stock, 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 form of the Company's Certificate of
Incorporation and its 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
all shares 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 all shares of Class A Common Stock and Class B Common
Stock present in person or represented by proxy, 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
require the approval only of a majority of the votes entitled to be cast by all
shares of Class A Common Stock and Class B Common Stock present in person or
represented by proxy, 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
consisting of shares of Class A Common Stock and Class B 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 affiliates (excluding the Company) at the option of the holder
thereof into one share of Class A Common Stock. Following the occurrence of any
distribution of Class B Common Stock to stockholders 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 Spin Off"),
shares of Class B Common Stock will no longer be convertible into shares of
Class A Common Stock.
Prior to the occurrence of a Tax-Free Spin-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 convert to shares of Class A Common
Stock upon such disposition. Shares of Class B Common Stock transferred to
stockholders of DuPont in a Tax-Free Spin-Off will not convert to shares of
Class A Common Stock and, following a Tax-Free Spin-Off, shares of Class B
Common Stock will be transferable as Class B Common Stock, subject to applicable
laws. DuPont has no current plans with respect to a Tax-Free Spin-Off of the
Company.
All shares of Class B Common Stock will automatically convert into Class A
Common Stock if a Tax-Free Spin-Off has not occurred and the number of
outstanding shares of Class B Common Stock beneficially owned by DuPont or any
of its affiliates falls below 50 percent of the aggregate number of outstanding
shares of Common Stock. This feature of 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 each class of Common Stock, 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.
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 and preferences 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 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 could have certain anti-takeover
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effects. The Company has no present plans to issue any shares of 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.
The Board of Directors has designated shares of Series A Junior
Participating Preferred Stock, par value $.01. 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, subject to any rights of holders
of Preferred Stock to elect additional directors under specified circumstances,
the number of directors of the Company shall be fixed from time to time
exclusively by resolution of the Board of Directors adopted by the affirmative
vote of directors constituting not less than 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 provides that, subject to the rights of
holders of Preferred Stock or any other series or class of stock to elect
directors under specified circumstances and except as provided below, directors
may be removed, with or without cause, by the affirmative vote of holders of at
least a majority of the voting power of the then outstanding shares of stock of
the Company entitled to vote generally in the election of directors (the "Voting
Stock"), voting together as a single class; provided, however, that during the
period (i) beginning on the first date that DuPont (together with its
subsidiaries (excluding the Company and its subsidiaries)) ceases to
beneficially own 50 percent or more of the then outstanding Voting Stock (the
"First Trigger Date") and (ii) ending on the date that DuPont (together with its
subsidiaries (excluding the Company and its subsidiaries)) ceases to own 30
percent or more of the then outstanding Voting Stock (the "Second Trigger
Date"), directors may be removed, with or without cause, only by the affirmative
vote of holders of at least 66 2/3 percent of the voting power of the Voting
Stock, voting together as a single class. Notwithstanding the foregoing, after
the Second Trigger Date, directors of the Company may only be removed for cause,
such removal to be by the affirmative vote of holders of at least a majority of
the voting power of the then outstanding Voting Stock, voting together as a
single class. Unless the Board of Directors had 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
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appeal; (ii) such director has been found by the affirmative vote of a majority
of the entire Board of Directors at any regular or special meeting of the Board
of Directors called for that purpose or by a court of competent jurisdiction to
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.
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 as 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.
Special Meetings
The By-laws provide that 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 expressly
denies stockholders the right to call special meetings after the Second Trigger
Date. In addition, the Certificate of Incorporation provides 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 action required or permitted to be taken by stockholders may
be effected only at a duly called annual or special meeting of stockholders and
may not be effected by a written consent.
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 either (i)
the same consideration in form and amount 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 the outstanding Class A Common Stock, Class B
Common Stock or Voting 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 Voting Stock, or (b) the transaction
is approved by (i) a majority of Continuing Directors (as defined below) or (ii)
holders of (x) 66 2/3 percent of the voting power of the Voting Stock, voting
together as a single class, (y) a majority of the voting power of the
disinterested shares, and (z) after the First Trigger Date, if there are any
shares of Class B Common Stock outstanding, a majority of the voting power of
the disinterested shares of each class of Common Stock; provided that, after the
Second Trigger Date, the required approval percentages in clause (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.
Under the Fair Price Provision, a "Related Person" is any person (other
than DuPont) that beneficially owns 15 percent or more of the Class A Common
Stock, Class B Common Stock, or the Voting Stock 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. The relevant "Business Combinations" involving the Company
covered by the Fair Price Provision are (1) any merger,
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consolidation or share exchange of the Company or any subsidiary of the Company
with 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 Corporation to a Related Person or an affiliate of a Related
Person, (3) certain reclassifications, recapitalizations and other corporate
actions requiring a shareholder 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 Corporation 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 provisions (and, where applicable, corresponding By-law
provisions) with respect to written consent, stockholder right to call special
meetings, and board classification and removal provisions, require approval by
66 2/3 percent of the voting power of the Voting Stock, voting together as a
single class, and, after the Second Trigger Date, 80 percent of such voting
power; provided, that after the First Trigger Date, if there are any shares of
Class B Common Stock outstanding, approval by a majority of the voting power 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 currently expects to adopt a Share Purchase Rights
Plan (the "Rights Plan") at or prior to the closing of the Offerings. Pursuant
to the Rights Plan, the Board of Directors 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 will entitle
the registered holder thereof to purchase from the Company one one-thousandth of
a share of a new series of junior participating preferred stock, par value $.01
per share (the "Junior Preferred Shares"), of the Company at a price of
$ (the "Purchase Price"), subject to adjustment. The description and
terms of the Rights will be set forth in a rights agreement (the "Rights
Agreement"), between the Company and the designated rights agent (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."
Until the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons (an "Acquiring
Person") have 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 will provide 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
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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
become 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 market value 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
market value of two times the exercise price of the Right.
At any time prior to the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of shares causing a person or group
of affiliated persons to 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"). The redemption of the Rights
may be made effective at such time, on such basis and with such conditions as
the Board of Directors, in its sole discretion, may establish. 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; provided, however, that, from and
after such time as any person or group of affiliated or associated persons
becomes an Acquiring Person, no such amendment may adversely affect the
interests of the holders of the Rights. In addition, all amendments require the
consent of DuPont, so long as DuPont holds 30 percent of voting power of the
outstanding shares of Common Stock. In addition, no amendments to the definition
of "Acquiring Person" can be made at any time without DuPont's consent, so long
as 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 also 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 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
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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.
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 mergers or consolidations or
acquisitions of additional shares of the corporation, with the corporation for a
three-year period following the date that such stockholder becomes an interested
stockholder unless (i) prior to such date, 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 date,
the business combination is approved by the board of directors of the
corporation and authorized at an annual or special meeting of stockholders by
the affirmative vote of at least 66 2/3 percent of the outstanding voting stock
not owned by the interested stockholder. 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
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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.
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 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.
LISTING
Application will be made to list the Class A Common Stock on the New York
Stock Exchange under the symbol "CLL."
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 shares of
Class A Common Stock and 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 shares of 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 and days, respectively, 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 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
Global Stock Performance Sharing Plan (the "Global Plan"). The Company intends
to file a registration statement 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 issues 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 expects to reduce its ownership
interest in the Company over time, subject to prevailing market and other
conditions. The Company is unable to estimate the amount, timing or nature of
future sales of outstanding Common Stock. 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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CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS OF CLASS A COMMON STOCK
The following is a general summary of certain 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, 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., 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 Limited, J.P.
Morgan Securities Ltd., Smith Barney Inc., BT Alex. Brown International 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.........................
Credit Suisse First Boston Corporation....................
Goldman, Sachs & Co. .....................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated........
J.P. Morgan Securities Inc. ..............................
Smith Barney Inc. ........................................
BT Alex. Brown Incorporated...............................
Schroder & Co. Inc. ......................................
Subtotal.............................................
--------
International Underwriters:
Morgan Stanley & Co. International Limited................
Credit Suisse First Boston (Europe) Limited...............
Goldman Sachs International...............................
Merrill Lynch International Limited.......................
J.P. Morgan Securities Ltd. ..............................
Smith Barney Inc. ........................................
BT Alex. Brown International, a division of Bankers Trust
International, PLC.....................................
J. Henry Schroder & Co. Limited...........................
Subtotal.............................................
--------
Total.............................................
========
</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
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and pay for all of the shares of Class A Common Stock offered hereby (other than
those covered by the U.S. Underwriters' over-allotment option described below)
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."
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
114
<PAGE> 116
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 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
$ per share under the public offering price. Any Underwriter may allow, and
such dealers may reallow, a concession not in excess of $ per share to other
Underwriters or to certain dealers. After the initial offering of the Shares,
the offering price and other selling terms may from time to time be varied by
the Representatives.
The Company has granted to the U.S. Underwriters an option, exercisable for
30 days from the date of this Prospectus, to purchase up to an aggregate of
additional Shares at the price to public set forth on the cover page
hereof, less underwriting discounts and commissions. The U.S. Underwriters may
exercise such option solely for the purpose of covering over-allotments, if any,
made in connection with the offering of the shares of Class A Common Stock
offered hereby. To the extent such option is exercised, each U.S. Underwriter
will become obligated, subject to certain conditions, to purchase approximately
the same percentage of such additional shares of Class A Common Stock as the
number set forth next to such U.S. Underwriter's name in the preceding table
bears to the total number of shares of Class A Common Stock set forth next to
the names of all U.S. Underwriters in the preceding table.
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.
Application will be made to list the Class A Common Stock on the NYSE under
the trading symbol "CLL." 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 shares offered hereby
for directors, officers and employees of the Company and certain other persons
designated by the Board of Directors. The number of shares of Class A Common
Stock available for sale to the general public will be reduced to the extent
such persons purchase such reserved shares. Any reserved shares which are not so
purchased will be offered by the Underwriters to the general public on the same
basis as the other shares offered hereby.
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 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
115
<PAGE> 117
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 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 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 Offering. 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.
From time to time, the Underwriters and certain of their affiliates have
provided, and continue to provide, investment banking services and trading
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 Common
Stock. The initial public offering price will be determined by negotiations
between DuPont and the Company on the one hand and the U.S. Representatives on
the other hand. Among the factors to be considered in determining the initial
public offering price will be 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. The estimated initial public offering price range set forth on the
cover page of this Prospectus is subject to change as a result of market
conditions and other factors.
116
<PAGE> 118
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 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.
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.
117
<PAGE> 119
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
Interim Combined Statement of Income -- Six Months Ended
June 30, 1997 and 1998................................. F-38
Interim Combined Balance Sheet -- at December 31, 1997 and
June 30, 1998.......................................... F-39
Interim Combined Statement of Cash Flows -- Six Months
Ended June 30, 1997 and 1998........................... F-40
Notes to Interim Combined Financial Statements............ F-41
</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> 120
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 sheet and the related
combined statements of income, of cash flows and of owner's net investment and
accumulated other comprehensive loss 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> 121
FINANCIAL STATEMENTS
CONOCO
COMBINED STATEMENT OF INCOME (NOTE 1)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
1995 1996 1997
----------- ----------- -----------
(DOLLARS 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.....................................................
Diluted...................................................
Unaudited Pro Forma Weighted Average Shares Outstanding
(Note 2)..................................................
Basic.....................................................
Diluted...................................................
- ---------------
*Includes petroleum excise taxes............................ $ 5,655 $ 5,461 $ 5,349
</TABLE>
See accompanying Notes to Combined Financial Statements
F-3
<PAGE> 122
FINANCIAL STATEMENTS
CONOCO
COMBINED BALANCE SHEET (NOTE 1)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1996 1997
------- --------
(DOLLARS 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> 123
FINANCIAL STATEMENTS
CONOCO
COMBINED STATEMENT OF CASH FLOWS (NOTE 1)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1995 1996 1997
------- ------- -------
(DOLLARS 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> 124
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
----------- ------------- ----------------- -------
(DOLLARS 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> 125
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> 126
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. 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.
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
F-8
<PAGE> 127
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
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.
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, 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
F-9
<PAGE> 128
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
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 outstanding DuPont stock options (see Note 20 to the
Combined Financial Statements), applying the treasury stock method, which are
expected to be converted into Conoco stock options, using the anticipated
weighted-average exercise price of the outstanding options and the anticipated
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.
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
F-10
<PAGE> 129
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
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.
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.
F-11
<PAGE> 130
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
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> 131
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.
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 --
</TABLE>
F-13
<PAGE> 132
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
<TABLE>
<CAPTION>
1996 1997
----------------- ------------------
DEFERRED TAX ASSET LIABILITY ASSET LIABILITY
------------ ----- --------- ------ ---------
<S> <C> <C> <C> <C>
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.
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.
F-14
<PAGE> 133
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
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>
Upstream....................................... $13,872 $15,227 $ 6,550 $ 7,581
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.
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.
F-15
<PAGE> 134
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
<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 was 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.
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.
F-16
<PAGE> 135
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
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>
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.
F-17
<PAGE> 136
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
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.
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.
F-18
<PAGE> 137
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
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 all current employees of the Company the option, subject to specific
country tax and legal requirements, to convert all or part of their options to
purchase DuPont common stock or SARs with respect to DuPont common stock, into
comparable options to acquire Class A Common Stock, or SARs with respect to
Class A Common Stock, with an equal aggregate intrinsic value. The conversion
offer 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 $150 to
200 after-tax depending on the market price of DuPont common stock at the time
of conversion and the number of outstanding Conoco employee options to purchase
DuPont common stock.
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 fair value 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. Through February 13, 1999, optionees are eligible for reload options
upon the exercise of stock options with the condition that shares received from
the exercise are held for at least five years. A reload option is granted at the
fair market value on the date of grant and has a term equal to the remaining
term of the original option. The maximum number of reload options granted is
limited to the number of shares subject to option in the original option times
the original price divided by the option price of the reload 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
F-19
<PAGE> 138
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
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>
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>
F-20
<PAGE> 139
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
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.
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).
F-21
<PAGE> 140
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
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>
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
F-22
<PAGE> 141
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
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>
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>
F-23
<PAGE> 142
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
<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 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.
F-24
<PAGE> 143
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
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.
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>
F-25
<PAGE> 144
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
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 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 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, 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
F-26
<PAGE> 145
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
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, 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 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
</TABLE>
F-27
<PAGE> 146
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>
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
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>
F-28
<PAGE> 147
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
(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 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.
F-29
<PAGE> 148
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
<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> 149
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> 150
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> 151
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.
(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> 152
SUPPLEMENTAL PETROLEUM DATA
(UNAUDITED)
(IN BILLION CUBIC FEET)
ESTIMATED PROVED RESERVES OF GAS
<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(1)....... 167 41 270 167 3 264(2) -- 36 -- -- 2 6
Sale of reserves(3)........... (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(4)................ 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) Includes reserves acquired through property exchanges.
(2) Includes reserves acquired in the South Texas Lobo trend.
(3) Includes reserves disposed of through property exchanges.
(4) 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> 153
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> 154
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> 155
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................ $5,474 $5,994 $5,999 $6,763
Cost of Goods Sold and Other Expenses(1).......... 5,091 5,548 5,509 6,293
Net Income........................................ 207(2) 188(3) 267(4) 201
1997
Sales and Other Operating Revenues................ $6,560 $5,915 $6,671 $6,650
Cost of Goods Sold and Other Expenses(1).......... 5,898 5,501 6,269 6,452
Net Income........................................ 341 246(5) 289(6) 221(7)
Pro Forma Earnings Per Share (see Note 2)
Basic...........................................
Diluted.........................................
Pro Forma Weighted Average Shares Outstanding (see
Note 2)
Basic...........................................
Diluted.........................................
</TABLE>
- ---------------
(1) Excludes interest and debt expense and provision for income taxes.
(2) Includes gain of $16 from sale of U.S. producing properties.
(3) 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.
(4) Includes gain of $19 from sale of Ireland marketing operations.
(5) Includes gain of $24 from sale of U.S. producing properties.
(6) 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.
(7) 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.
F-37
<PAGE> 156
INTERIM COMBINED FINANCIAL STATEMENTS
CONOCO
COMBINED STATEMENT OF INCOME (NOTES 1 AND 2)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
---------------------
1997 1998
-------- --------
(DOLLARS 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.....................................................
Diluted...................................................
Pro Forma Weighted Average Shares Outstanding(Note 4).......
Basic.....................................................
Diluted...................................................
- ---------------
* Includes petroleum excise taxes........................... $ 2,577 $ 2,806
</TABLE>
See accompanying Notes to Interim Combined Financial Statements
F-38
<PAGE> 157
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)
------------ ---------- --------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Current Assets
Cash and Cash Equivalents............................. $ 1,147 $ 829 $ 1,193
Marketable Securities................................. 7 7 7
Accounts and Notes Receivable......................... 1,497 1,252 1,252
Notes Receivable -- Related Parties................... 490 465 --
Inventories (Note 6).................................. 830 981 981
Prepaid Expenses...................................... 236 305 305
-------- -------- --------
Total Current Assets.......................... 4,207 3,839 3,738
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 $ 16,388
======== ======== ========
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 --
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 2,476
Long-Term Borrowings -- Related Parties................. 1,450 1,181 1,259
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 15,100
-------- -------- --------
Commitments and Contingent Liabilities (Note 8)
Minority Interests...................................... 309 308 308
Owner's Net Investment.................................. 8,087 8,441 1,198
Accumulated Other Comprehensive Loss (Note 7)........... (191) (218) (218)
-------- -------- --------
Total Owner's Net Investment and Accumulated
Other Comprehensive Loss.................... 7,896 8,223 980
-------- -------- --------
Total......................................... $ 17,062 $ 17,164 $ 16,388
======== ======== ========
</TABLE>
See accompanying Notes to Interim Combined Financial Statements
F-39
<PAGE> 158
INTERIM COMBINED FINANCIAL STATEMENTS
CONOCO
COMBINED STATEMENT OF CASH FLOWS (NOTES 1 AND 2)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
----------------------
1997 1998
--------- --------
(DOLLARS 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-40
<PAGE> 159
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-41
<PAGE> 160
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS)
These intercompany arrangements between DuPont and Conoco will continue
after the offering 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 outstanding DuPont stock options (see Note 20 to the
Combined Financial Statements), applying the treasury stock method, which are
expected to be converted into Conoco stock options, using the anticipated
weighted-average exercise price of the outstanding options and the anticipated
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. Prior to or concurrent with the
Offerings, 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 unaudited pro forma column reflects the dividend and adjustments for
(a) the collection ($1,155) and payment ($595) of certain related party notes
receivable and borrowings, (b) the capital contribution of
F-42
<PAGE> 161
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS)
certain related party borrowings of $492, (c) the sale of certain securities
included in other assets of $63, (d) the purchase of certain subsidiaries from
DuPont and the refund of prepaid insurance premiums to DuPont in the amount of
$259, and (e) 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> <C> <C>
Net Income............................................. $ 587 $530
Other Comprehensive Income (Loss):
Foreign Currency Translation Adjustment.............. $(113) $(27)
Minimum Pension Liability Adjustment................. -- (113) -- (27)
----- ----- ---- ----
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.
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
F-43
<PAGE> 162
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS)
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. 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-44
<PAGE> 163
ANNEX A
DEGOLYER AND MACNAUGHTON
ONE ENERGY SQUARE
DALLAS, TEXAS 75206
July 20, 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 are judged to be
economically producible in future years from known reservoirs under existing
economic and operating conditions and assuming continuation of current
regulatory practices using conventional production methods and equipment. Proved
reserves are defined as those that have been proved to a high degree of
certainty by reason of actual completion, successful testing, or in certain
cases by adequate core analyses and electrical-log interpretation when the
producing characteristics of the formation are known from nearby fields. These
reserves are defined areally by reasonable geological interpretation of
structure and known continuity of oil- or gas-saturated material. This
definition is in agreement with the definition of proved reserves prescribed by
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> 164
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> 165
CONOCO LOGO
<PAGE> 166
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
PROSPECTUS (Subject to Completion)
Issued August 21, 1998
[CONOCO LOGO]
Shares
Conoco Inc.
CLASS A COMMON STOCK
------------------------
Of the shares of the Class A Common Stock of Conoco Inc. (the "Company"
or "Conoco") being offered, shares are being offered initially in the United
States and Canada by the U.S. Underwriters (the "U.S. Offering") and
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. It is
currently estimated that the public offering price per share will be between
$ and $ . See "Underwriters" for a discussion of the factors to be
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 upon completion of the Offerings, DuPont, through its ownership of
100 percent of the outstanding Class B Common Stock, will indirectly own
approximately percent of the Company's Common Stock representing approximately
percent of the combined voting power of all classes of voting stock of the
Company (or percent if the U.S. Underwriters exercise their over-allotment
option in full). Accordingly, DuPont will continue to control the Company. See
"Arrangements between the Company and DuPont" and "Principal Stockholder."
------------------------
Application will be made to list the Class A Common Stock on the New York Stock
Exchange ("NYSE") under the trading symbol "CLL."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 17 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.
--------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
-------- ---------------------- -----------
<S> <C> <C> <C>
Per Share................................................... $ $ $
Total(3).................................................... $ $ $
</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) Before deducting expenses payable by the Company, estimated at $ .
(3) The Company has granted the U.S. Underwriters an option, exercisable
within 30 days of the date hereof, to purchase up to an aggregate of
additional shares of Class A Common Stock at the price to public
shown above less underwriting discounts and commissions for the purpose
of covering over-allotments, if any. If the U.S. Underwriters exercise
such option in full, the total price to public, underwriting discounts
and commissions and proceeds to the Company will be $ , $
and $ , respectively. See "Underwriters."
------------------------
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 , 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 & CO.
J.P. MORGAN SECURITIES LTD. SALOMON SMITH BARNEY INTERNATIONAL
BT ALEX. BROWN INTERNATIONAL SCHRODERS
, 1998
<PAGE> 167
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is a table of the registration fee for the Securities and
Exchange Commission, the filing fee for the National Association of Securities
Dealers, Inc., the listing fee for the New York Stock Exchange and estimates of
all other expenses to be incurred in connection with the issuance and
distribution of the securities described in this Registration Statement, other
than underwriting discounts and commissions:
<TABLE>
<S> <C>
SEC registration fee........................................ $92,756
NASD filing fee............................................. 30,500
NYSE listing fee............................................ *
Blue sky fees and expenses.................................. *
Printing expenses........................................... *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Transfer Agent and registrar fees........................... *
Miscellaneous............................................... *
-------
Total............................................. $ *
=======
</TABLE>
- ---------------
* To follow by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify directors and officers as well as other employees and
individuals against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement in connection with specified actions, suits or
proceedings, whether civil, criminal, administrative or investigative (other
than as action by or in the right of the corporation -- a "derivative action"),
if they acted in good faith and in a manner they reasonably believed to be in or
not opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe their conduct
was unlawful. A similar standard is applicable in the case of derivative
actions, except that indemnification only extends to expenses (including
attorneys' fees) incurred in connection with the defense or settlement of such
action, and the statute required court approval before there can be any
indemnification where the person seeking indemnification has been found liable
to the corporation. The statute provides that it is not exclusive of other
indemnification that may be granted by a corporation's charter, By-laws,
disinterested director vote, stockholder vote, agreement or otherwise.
Section 102(b)(7) of the Delaware General Corporation Law permits a
corporation to provide in its certificate of incorporation that a director of
the corporation shall not be personably liable to the corporation 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
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
payments of unlawful dividends or unlawful stock repurchases or redemptions, or
(iv) for any transaction from which the director derived an improper personal
benefit.
Article 5E(2) of the Registrant's Certificate of Incorporation provides
that no director shall be personally liable to the Company or any of 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)
pursuant to section 174 of the Delaware General Corporation Law or (iv) for any
transaction from which the director derived an improper personal benefit. Any
amendment to or repeal of such Article 5E(2) shall not adversely affect any
right or protection of a director of the registrant for or with respect to any
acts or omissions of such director occurring prior to such amendment or repeal.
The Company's By-laws provide for indemnification of directors and officers to
the maximum extent permitted by Delaware law.
II-1
<PAGE> 168
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Not applicable.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1 -- Form of Underwriting Agreement.*
3.1 -- Certificate of Incorporation.*
3.2 -- By-laws of the Company*
4.1 -- Specimen Certificate for shares of Class A Common Stock
of the Registrant*
4.2 -- Specimen Certificate for shares of Class B Common Stock
of the Registrant*
4.3 -- Description of Conoco's Preferred Share Purchase Rights*
4.4 -- Promissory Note to DuPont Energy Company*
4.5 -- Promissory Note to DuPont Chemical and Energy Operations
Inc.*
4.6 -- Promissory Note to DuPont Chemical and Energy Operations
Inc.*
5.1 -- Opinion as to the legality of the Class A Common Stock
being offered*
10.1 -- Restructuring, Transfer and Separation Agreement between
DuPont and Conoco*
10.2 -- Tax Sharing Agreements between DuPont and Conoco*
10.3 -- Employee Matters Agreement between DuPont and Conoco*
10.4 -- Information Management Master Services Agreement between
DuPont and Conoco*
10.5 -- Transitional Services Agreement between DuPont and the
Company*
10.6 -- Registration Rights Agreement between DuPont and Conoco*
10.7 -- Natural Gas Purchase Agreement between DuPont and Conoco*
10.8 -- Severance Agreement, dated May 10, 1998, between Conoco
and Archie W. Dunham*
10.9 -- 1998 Stock and Performance Incentive Plan*
10.10 -- 1998 Key Employee Stock Performance Plan*
10.11 -- Deferred Compensation Plan for Nonemployee Directors*
10.12 -- Conoco Inc. Key Employee Severance Plan*
10.13 -- Conoco Inc. Key Employee Temporary Severance Plan*
10.14 -- DuPont Salary Deferral and Savings Restoration Plan*
10.15 -- Directors' Charitable Gift Plan*
10.16 -- Rights Agreement of the Company*
11.1 -- Statement regarding computation of per share earnings*
21.1 -- List of Principal Subsidiaries of the Registrant*
23.1 -- Consent of PricewaterhouseCoopers LLP***
23.2 -- Consent of DeGolyer and MacNaughton**
23.3 -- Consent regarding legality opinion (included in Exhibit
5.1)*
24 -- Power of Attorney**
27 -- Financial Data Schedule***
99 -- Consents of Proposed Directors*
</TABLE>
- ---------------
* To follow by amendment
** Filed previously
*** Filed herein
(b) Financial Data Schedules:
The following financial statement schedules are filed herewith:
Summary Financial Information -- Balance Sheet and Income Statement
at December 31, 1997
Summary Financial Information -- Balance Sheet and Income Statement
at June 30, 1998
II-2
<PAGE> 169
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.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of the
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 170
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Houston,
State of Texas, on August 21, 1998.
CONOCO INC.
By: /s/ ARCHIE W. DUNHAM
----------------------------------
Name: Archie W. Dunham
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed below by the following
persons in the capacities indicated on August 21, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ ARCHIE W. DUNHAM President, Chief Executive Officer and
- ----------------------------------------------------- Director
Archie W. Dunham
/s/ ROBERT W. GOLDMAN Senior Vice President, Finance, and Chief
- ----------------------------------------------------- Financial Officer (Principal Financial
Robert W. Goldman Officer and Principal Accounting Officer)
* Chairman of the Board and Director
- -----------------------------------------------------
Edgar S. Woolard, Jr.
* Director
- -----------------------------------------------------
Gary M. Pfeiffer
*By: /s/ ARCHIE W. DUNHAM
------------------------------------------------
Archie W. Dunham
Attorney-in-Fact
</TABLE>
II-4
<PAGE> 171
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1 -- Form of Underwriting Agreement.*
3.1 -- Certificate of Incorporation.*
3.2 -- By-laws of the Company*
4.1 -- Specimen Certificate for shares of Class A Common Stock
of the Registrant*
4.2 -- Specimen Certificate for shares of Class B Common Stock
of the Registrant*
4.3 -- Description of Conoco's Preferred Share Purchase Rights*
4.4 -- Promissory Note to DuPont Energy Company*
4.5 -- Promissory Note to DuPont Chemical and Energy Operations
Inc.*
4.6 -- Promissory Note to DuPont Chemical and Energy Operations
Inc.*
5.1 -- Opinion as to the legality of the Class A Common Stock
being offered*
10.1 -- Restructuring, Transfer and Separation Agreement between
DuPont and Conoco*
10.2 -- Tax Sharing Agreements between DuPont and Conoco*
10.3 -- Employee Matters Agreement between DuPont and Conoco*
10.4 -- Information Management Master Services Agreement between
DuPont and Conoco*
10.5 -- Transitional Services Agreement between DuPont and the
Company*
10.6 -- Registration Rights Agreement between DuPont and Conoco*
10.7 -- Natural Gas Purchase Agreement between DuPont and Conoco*
10.8 -- Severance Agreement, dated May 10, 1998, between Conoco
and Archie W. Dunham*
10.9 -- 1998 Stock and Performance Incentive Plan*
10.10 -- 1998 Key Employee Stock Performance Plan*
10.11 -- Deferred Compensation Plan for Nonemployee Directors*
10.12 -- Conoco Inc. Key Employee Severance Plan*
10.13 -- Conoco Inc. Key Employee Temporary Severance Plan*
10.14 -- DuPont Salary Deferral and Savings Restoration Plan*
10.15 -- Directors' Charitable Gift Plan*
10.16 -- Rights Agreement of the Company*
11.1 -- Statement regarding computation of per share earnings*
21.1 -- List of Principal Subsidiaries of the Registrant*
23.1 -- Consent of PricewaterhouseCoopers LLP***
23.2 -- Consent of DeGolyer and MacNaughton**
23.3 -- Consent regarding legality opinion (included in Exhibit
5.1)*
24 -- Power of Attorney**
27 -- Financial Data Schedule***
99 -- Consents of Proposed Directors*
</TABLE>
- ---------------
* To follow by amendment
** Filed previously
*** Filed herein
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Amendment No. 1 to the Registration Statement on Form S-1 (No. 333-60119) of our
report dated July 24, 1998 relating to the combined financial statements of
Conoco, which appear in such Prospectus. We also consent to the references to us
under the headings "Experts" and "Selected Historical and Pro Forma Financial
Information" in such Prospectus. However, it should be noted that
PricewaterhouseCoopers LLP has not prepared or certified such "Selected
Historical and Pro Forma Financial Information."
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
August 21, 1998
<TABLE> <S> <C>
<ARTICLE> 5 <LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S BALANCE SHEET AT DECEMBER 31, 1997 AND JUNE 30, 1998 AND INCOME
STATEMENT FOR THE PERIODS ENDED DECEMBER 31, 1997 AND JUNE 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND THEIR
RELATED FOOTNOTES.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> JUN-30-1998 DEC-31-1997
<CASH> 829 1,147
<SECURITIES> 7 7
<RECEIVABLES> 1,717 1,987
<ALLOWANCES> 0 0
<INVENTORY> 981 830
<CURRENT-ASSETS> 3,839 4,207
<PP&E> 21,569 21,229
<DEPRECIATION> 10,521 10,401
<TOTAL-ASSETS> 17,164 17,062
<CURRENT-LIABILITIES> 3,563 3,640
<BONDS> 1,284 1,556
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 8,223 7,896
<TOTAL-LIABILITY-AND-EQUITY> 17,164 17,062
<SALES> 11,348 25,796
<TOTAL-REVENUES> 11,486 26,263
<CGS> 0 0
<TOTAL-COSTS> 10,702 24,156
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1 36
<INCOME-PRETAX> 784 2,107
<INCOME-TAX> 254 1,010
<INCOME-CONTINUING> 530 1,097
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 530 1,097
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
