<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-14521
CONOCO INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE (51-0370352)
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
</TABLE>
600 NORTH DAIRY ASHFORD ROAD
HOUSTON, TEXAS 77079
(Address of principal executive offices)
(281) 293-1000
(Registrant's telephone number, including area code)
---------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No
187,517,669 shares of Class A common stock, $0.01 par value, and
436,786,482 shares of Class B common stock, $0.01 par value, were outstanding as
of May 5, 2000.
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CONOCO INC.
TABLE OF CONTENTS
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Page(s)
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Part I - Financial Information
Item 1. Financial Statements
Consolidated Statement of Income..................................................... 1
Consolidated Balance Sheet........................................................... 2
Consolidated Statement of Cash Flows................................................. 3
Notes to Consolidated Financial Statements........................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations
(a) Financial Condition............................................................ 9
(b) Results of Operations.......................................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................... 16
Part II - Other Information
Item 1. Legal Proceedings.............................................................. 18
Item 5. Other Information
(a) Disclosure Regarding Forward-Looking Information............................... 18
(b) Other Events................................................................... 19
Item 6. Exhibits and Reports on Form 8-K............................................... 19
Signature.............................................................................. 20
Exhibit Index.......................................................................... 21
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i
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONOCO INC.
CONSOLIDATED STATEMENT OF INCOME (NOTES 1 AND 2)
(UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
2000 1999
----------- ------------
(IN MILLIONS,
EXCEPT PER SHARE)
<S> <C> <C>
Revenues
Sales and Other Operating Revenues*....................... $8,524 $5,311
Equity in Earnings of Affiliates.......................... 80 (4)
Other Income.............................................. 87 28
------ ------
Total Revenues.................................... 8,691 5,335
------ ------
Costs and Expenses
Cost of Goods Sold........................................ 5,124 2,528
Operating Expenses........................................ 506 477
Selling, General and Administrative Expenses.............. 188 186
Exploration Expenses...................................... 37 46
Depreciation, Depletion and Amortization.................. 339 302
Taxes Other Than on Income*............................... 1,702 1,591
Interest and Debt Expense................................. 83 71
------ ------
Total Costs and Expenses.......................... 7,979 5,201
------ ------
Income Before Income Taxes.................................... 712 134
Provision for Income Taxes.................................... 313 51
------ ------
Net Income (Note 9)........................................... $ 399 $ 83
====== ======
Earnings Per Share (Note 3)
Basic..................................................... $ .64 $ .13
Diluted................................................... $ .63 $ .13
Weighted-average Shares Outstanding (Note 3)
Basic..................................................... 626 628
Diluted................................................... 633 635
Dividends Per Share of Common Stock (Note 4).................. $ .19 $ .14
- ----------------------------
* Includes petroleum excise taxes........................... $1,657 $ 1,546
</TABLE>
See notes to consolidated financial statements
1
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CONOCO INC.
CONSOLIDATED BALANCE SHEET (NOTES 1 AND 2)
(UNAUDITED)
ASSETS
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<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
(IN MILLIONS)
<S> <C> <C>
Current Assets
Cash and Cash Equivalents ......................................................... $ 259 $ 317
Accounts and Notes Receivable ..................................................... 1,705 1,735
Inventories (Note 5) .............................................................. 929 703
Other Current Assets .............................................................. 418 313
-------- --------
Total Current Assets ........................................................ 3,311 3,068
Property, Plant and Equipment ........................................................ 22,643 22,476
Less: Accumulated Depreciation, Depletion and Amortization ........................... (11,374) (11,241)
-------- --------
Net Property, Plant and Equipment .................................................... 11,269 11,235
Investment in Affiliates ............................................................. 1,655 1,604
Other Assets ......................................................................... 521 468
-------- --------
Total ....................................................................... $ 16,756 $ 16,375
======== ========
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Current Liabilities
Accounts Payable .................................................................. $ 1,578 $ 1,489
Short-term Borrowings and Capital Lease Obligations ............................... 705 663
Income Taxes ...................................................................... 395 303
Other Accrued Liabilities (Note 6) ................................................ 1,311 1,303
-------- --------
Total Current Liabilities ................................................... 3,989 3,758
Long-term Borrowings and Capital Lease Obligations ................................... 4,077 4,080
Deferred Income Taxes ................................................................ 1,648 1,689
Other Liabilities and Deferred Credits ............................................... 1,950 1,958
-------- --------
Total Liabilities ........................................................... 11,664 11,485
-------- --------
Commitments and Contingent Liabilities (Note 7)
Minority Interests ................................................................... 333 335
Stockholders' Equity
Preferred Stock, $.01 par value
250,000,000 shares authorized; none issued ...................................... -- --
Class A Common Stock, $.01 par value
3,000,000,000 shares authorized; 191,497,821 shares issued ...................... 2 2
Class B Common Stock, $.01 par value
1,599,776,271 shares authorized; 436,786,482 shares issued and outstanding ...... 4 4
Additional Paid-in Capital ........................................................ 4,932 4,941
Retained Earnings ................................................................. 328 44
Accumulated Other Comprehensive Loss (Note 8) ..................................... (417) (372)
Treasury Stock, at cost (3,672,413 and 2,457,960 Class A shares at March 31, 2000
and December 31, 1999, respectively) ............................................ (90) (64)
-------- --------
Total Stockholders' Equity .................................................. 4,759 4,555
-------- --------
Total ....................................................................... $ 16,756 $ 16,375
======== ========
</TABLE>
See notes to consolidated financial statements
2
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CONOCO INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (NOTES 1 AND 2)
(UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
2000 1999
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Cash Provided by Operations
Net Income ......................................................... $ 399 $ 83
Adjustments to Reconcile Net Income to Cash Provided by Operations
Depreciation, Depletion and Amortization ........................ 339 302
Dry Hole Costs and Impairment of Unproved Properties ............ 13 17
Deferred Income Taxes ........................................... 1 (42)
Income Applicable to Minority Interests ......................... 4 5
(Gain) Loss on Asset Dispositions ............................... (42) 1
Undistributed Equity Earnings ................................... (58) 11
Other Noncash Charges and Credits-- Net ......................... (34) (4)
Decrease (Increase) in Operating Assets
Accounts and Notes Receivable ................................. 24 (52)
Inventories ................................................... (233) (107)
Other Operating Assets ........................................ (155) 25
Increase (Decrease) in Operating Liabilities
Accounts and Other Operating Payables ......................... 105 183
Income and Other Taxes Payable ................................ 106 (29)
--------- ---------
Cash Provided by Operations ............................... 469 393
--------- ---------
Investing Activities
Purchases of Property, Plant and Equipment ......................... (457) (457)
Investments in Affiliates-- Net .................................... (31) (100)
Proceeds from Sales of Assets and Subsidiaries ..................... 92 18
Net Increase in Short-term Financial Instruments ................... -- (8)
--------- ---------
Cash Used in Investing Activities ......................... (396) (547)
--------- ---------
Financing Activities
Short-term Borrowings-- Net ........................................ 41 (1)
Long-term Borrowings-- Net ......................................... -- (19)
Related Party Borrowings-- Receipts ................................ -- 710
-- Payments ............................... -- (410)
Treasury Stock Purchases-- Net ..................................... (33) (18)
Cash Dividends (Note 4) ............................................ (119) (88)
Net Cash Contribution from Owner ................................... -- 19
Decrease in Minority Interests ..................................... (7) (5)
--------- ---------
Cash Used in Financing Activities ......................... (118) 188
--------- ---------
Effect of Exchange Rate Changes on Cash ................................ (13) (3)
--------- ---------
Increase (Decrease) in Cash and Cash Equivalents ....................... (58) 31
Cash and Cash Equivalents at Beginning of Year ......................... 317 394
--------- ---------
Cash and Cash Equivalents at March 31 .................................. $ 259 $ 425
========= =========
</TABLE>
See notes to consolidated financial statements
3
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CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
1. BASIS OF PRESENTATION AND ACCOUNTING POLICY
These consolidated 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
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in Conoco's 1999 Annual Report
to Shareholders and incorporated by reference into Conoco's Form 10-K.
Conoco accrues in advance for planned major maintenance. Costs accrued,
which are classified as liabilities on the balance sheet, are primarily related
to work done as part of refinery turnarounds and drydock maintenance for
tankers, barges and boats.
2. RELATED PARTY TRANSACTIONS
The 1999 consolidated financial statements included related party
transactions with E. I. du Pont de Nemours and Company (DuPont), Conoco's former
parent company, involving services such as cash management, other financial
services, purchasing, legal, computer, corporate aviation and general corporate
expenses that were provided between the Conoco and DuPont organizations.
Amounts charged to Conoco for these services were $7 for the first quarter
of 1999 and were principally included in selling, general and administrative
expenses. Conoco provided DuPont services such as computer, legal and
purchasing, as well as certain technical and plant operating services, which
amounted to $7 for the first quarter of 1999. These charges to DuPont were
treated as reductions, as appropriate, of cost of goods sold, operating expenses
or selling, general and administrative expenses.
Interest expense charged by DuPont was $72 for the first quarter of 1999
and reflected market-based interest rates. A portion of this was capitalized as
costs associated with major construction projects.
Sales and other operating revenues included sales of products from Conoco
to DuPont, principally natural gas and gas liquids supplied to several DuPont
plant sites. These sales totaled $91 in the first quarter of 1999. Purchases of
products from DuPont during this period were not material. These intercompany
arrangements between DuPont and Conoco were provided under transition service
agreements or other long-term agreements.
3. EARNINGS PER SHARE
Basic earnings per share (EPS) is computed by dividing net income (the
numerator) by the weighted-average number of common shares outstanding plus the
effects of certain Conoco employee and director awards and fee deferrals that
are invested in Conoco stock units (the denominator). Diluted EPS is similarly
computed, except that the denominator is increased to include the dilutive
effects of outstanding stock options awarded under Conoco's compensation plans.
For the first quarter of 2000 and the first quarter of 1999, basic EPS
reflected the weighted-average number of shares of Class A and Class B common
stock and deferred award units outstanding. Corresponding diluted EPS for the
first quarter of 2000 included an additional 7,697,659 shares while the first
quarter of 1999 included an additional 7,347,178 shares.
4
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
The denominator is based on the following weighted-average number of common
shares outstanding:
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THREE MONTHS ENDED
MARCH 31,
-----------------------------
2000 1999
------------ --------------
<S> <C> <C>
Basic......................... 625,616,017 627,633,168
Diluted....................... 633,313,676 634,980,346
</TABLE>
For the three months ended March 31, 2000, variable stock options for
1,724,146 shares of Class A common stock and 1,400,000 shares of Class B common
stock were not included in the computation of diluted EPS since the threshold
price required for these options to be vested had not been reached, and fixed
stock options for 9,532,761 shares of Class A common stock were not included in
the diluted earnings per share calculation because the exercise price was
greater than the average market price.
For the three months ended March 31, 1999, variable stock options for
1,724,146 shares of Class A common stock were not included in the computation of
diluted EPS since the threshold price required for these options to be vested
had not been reached, and fixed stock options for 12,736,261 shares of Class A
common stock were not included in the diluted earnings per share calculation
because the exercise price was greater than the average market price.
Common shares held as treasury stock are deducted in determining the number
of shares outstanding.
4. DIVIDENDS
Conoco declared a first quarter cash dividend on January 26, 2000, of $.19
per share on each outstanding share of Class A and Class B common stock. These
dividends were paid on March 10, 2000, to shareholders of record on February 10,
2000.
On April 25, 2000, Conoco declared a second quarter cash dividend of $.19
per share on each outstanding share of Class A and Class B common stock, payable
on June 10, 2000, to stockholders of record on May 10, 2000.
5. INVENTORIES
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<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
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Crude oil and petroleum products.................. $775 $554
Other merchandise................................. 39 33
Materials and supplies............................ 115 116
---- ----
Inventories................................... $929 $703
==== ====
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6. RESTRUCTURING
In December 1998, Conoco announced that, as a result of a comprehensive
review of its assets and long-term strategy, Conoco would make organizational
realignments consistent with furthering the efficiency of operations and taking
advantage of synergies created by the upgrading of its asset portfolio.
Associated with the announcement, Conoco recorded an $82 pretax ($52 after-tax)
charge to operating expense in the fourth quarter of 1998. Nearly all of this
charge represented termination payments and related employee benefits to be made
to the estimated 975 persons in both upstream and downstream businesses affected
by the restructuring. Payments were, and will continue to be, made under
existing company severance policies, generally based on years of service up to a
maximum amount that varies by country.
During 1999, 704 employees left Conoco as part of the implementation of the
realignment plans, with related charges against the restructuring reserve of
$68. In the fourth quarter of 1999, estimates of the number of
5
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
severances were revised due to changes in operational requirements. The original
number of estimated severances was reduced by 137 positions, primarily in our
upstream business, to 838 positions. The reduction of positions to be eliminated
resulted in a corresponding reduction in the restructuring reserve of $3 that
was recorded in the fourth quarter of 1999. Total charges and adjustments to the
reserve during 1999 were $71, resulting in a December 31, 1999 reserve balance
of $11. During the first quarter of 2000, 63 employees left Conoco as part of
the realignment plan. Related charges against the reserve totaled $5. The
remainder of the accrual will be utilized upon the pending closing of certain
asset sales.
7. COMMITMENTS AND CONTINGENT LIABILITIES
Conoco has various purchase commitments for materials, supplies, services
and items of permanent investment incident to the ordinary conduct of business.
In the aggregate, such commitments are not at prices in excess of current
market. In addition, at March 31, 2000, Conoco had obligations under
international contracts to purchase, over periods up to 19 years, natural gas at
prices that were in excess of market prices at March 31, 2000. No material
annual loss is expected from these long-term commitments.
Conoco is subject to various lawsuits and claims involving a variety of
matters including, along with other oil companies, actions challenging oil and
gas royalty and severance tax payments based on posted prices, and claims for
damages resulting from leaking underground storage tanks. As a result of the
separation agreement with DuPont, Conoco has also assumed responsibility for
current and future claims related to certain discontinued chemicals and
agricultural chemicals businesses operated by Conoco in the past. In general,
the effect on future financial results is not subject to reasonable estimation
because considerable uncertainty exists. Conoco believes the ultimate
liabilities resulting from such lawsuits and claims may be material to results
of operations in the period in which they are recognized but will not materially
affect the consolidated financial position of Conoco.
On May 2, 2000, a jury in federal court in Virginia found that Conoco
infringed patents of General Technology Applications (GTA) involving the process
for manufacturing a flow improver product and awarded $55 in damages to GTA.
Conoco also has potential exposure to treble damages as a result of the jury's
findings. Conoco intends to appeal the verdict and remains convinced that the
evidence clearly demonstrates that Conoco's process does not infringe the GTA
patents and that Conoco will ultimately prevail on appeal.
Conoco is also subject to contingencies pursuant to environmental laws and
regulations that in the future may require further action to correct the effects
on the environment of prior disposal practices or releases of petroleum
substances by Conoco or other parties. Conoco has accrued for certain
environmental remediation activities consistent with the policy set forth in
note 2 to the consolidated financial statements presented in Conoco's 1999
Annual Report to Shareholders and incorporated by reference into Conoco's Form
10-K. Conoco assumed environmental remediation liabilities from DuPont related
to certain discontinued chemicals and agricultural chemicals businesses operated
by Conoco in the past that are included in the environmental accrual. At March
31, 2000, such accrual amounted to $110 and, in management's opinion, was
appropriate based on existing facts and circumstances. 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. 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 consolidated financial position of Conoco.
Conoco has indirectly guaranteed various debt obligations under agreements
with certain affiliated and other companies to provide specified minimum
revenues from shipments or purchases of products. At March 31, 2000, these
indirect guarantees totaled $6 and Conoco or DuPont, on behalf of and
indemnified by Conoco, had directly guaranteed $1,143 of the obligations of
certain affiliated companies and others. No material loss is anticipated by
reason of such agreements and guarantees.
6
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
8. COMPREHENSIVE INCOME (LOSS)
The following sets forth Conoco's comprehensive income (loss) for the
periods shown:
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THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
------ -----
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Net income....................................................................... $399 $ 83
Other comprehensive income (loss)
Foreign currency translation adjustment........................................ (45) (93)
---- ----
Comprehensive income (loss)...................................................... $354 $(10)
==== ====
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9. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION
Conoco is involved in both the upstream and downstream operating segments
of the petroleum industry. Upstream operating segment activities include
exploring for, developing, producing and selling crude oil, natural gas and
natural gas liquids. Downstream operating segment activities include refining
crude oil and other feedstocks into petroleum products, buying and selling crude
oil and refined products, and transporting, distributing and marketing petroleum
products. Conoco has four reporting segments for its upstream and downstream
operating segments that reflect geographic division between the United States
and international. Corporate and other includes general corporate expenses,
financing costs and other non-operating items and results for power. Conoco
sells its products worldwide. Major products include crude oil, natural gas and
refined products that are sold primarily in the energy and transportation
markets. Conoco's sales are not materially dependent on a single customer or
small group of customers. Transfers between segments are on the basis of
estimated market values.
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<CAPTION>
UPSTREAM DOWNSTREAM
-------------------------- ------------------------- CORPORATE
UNITED UNITED AND
SEGMENT INFORMATION STATES INTERNATIONAL STATES INTERNATIONAL OTHER CONSOLIDATED
- -------------------- ------- ------------- ------ ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED MARCH 31, 2000
Sales and other operating revenues ............... $ 1,007 $ 895 $ 3,717 $ 2,904 $ 1 $ 8,524
Transfers between segments ....................... 177 168 37 135 -- --
--------- ---------- -------- ---------- -------- ----------
Total operating revenues ..................... $ 1,184 $ 1,063 $ 3,754 $ 3,039 $ 1 $ 8,524
========= ========== ======== ========== ======== ==========
Operating profit ................................. $ 209 $ 503 $ (40) $ 65 $ (36) $ 701
Equity in earnings of affiliates ................. 5 72 7 (4) -- 80
Non-operating items
Interest and debt expense ..................... -- -- -- -- (83) (83)
Interest income (net of misc.
interest expense) .......................... -- -- -- -- 11 11
Other ......................................... -- -- -- -- 3 3
--------- ---------- -------- ---------- -------- ----------
Income before income taxes ....................... 214 575 (33) 61 (105) 712
Provision for income taxes ....................... (72) (278) 19 (12) 30 (313)
--------- ---------- -------- ---------- -------- ----------
Net income (loss) (1) ........................ $ 142 $ 297 $ (14) $ 49 $ (75) $ 399
========= ========== ======== ========== ======== ==========
</TABLE>
7
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
<TABLE>
<CAPTION>
UPSTREAM DOWNSTREAM
-------------------------- -------------------------- CORPORATE
UNITED UNITED AND
SEGMENT INFORMATION STATES INTERNATIONAL STATES INTERNATIONAL OTHER CONSOLIDATED
- -------------------- ------- ------------- ------ ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED MARCH 31, 1999
Sales and other operating revenues ..... $ 706 $ 479 $ 1,962 $ 2,143 $ 21 $ 5,311
Transfers between segments ............. 74 79 18 43 -- --
-------- ---------- -------- ---------- ---------- ----------
Total operating revenues ........... $ 780 $ 558 $ 1,980 $ 2,186 $ 21 $ 5,311
======== ========== ======== ========== ========== ==========
Operating profit ....................... $ 31 $ 119 $ 14 $ 58 $ (20) $ 202
Equity in earnings of affiliates ....... 2 (5) 8 (9) -- (4)
Non-operating items
Interest and debt expense ............ -- -- -- -- (71) (71)
Interest income (net of misc.
interest expense) ................... -- -- -- -- 3 3
Other ................................ -- -- -- -- 4 4
-------- ---------- -------- ---------- ---------- ----------
Income before income taxes ............. 33 114 22 49 (84) 134
Provision for income taxes ............. 7 (46) (5) (26) 19 (51)
-------- ---------- -------- ---------- ---------- ----------
Net income (loss) .................. $ 40 $ 68 $ 17 $ 23 $ (65) $ 83
======== ========== ======== ========== ========== ==========
- -----------------------
(1) Includes after-tax benefits (charges) from special items:
THREE MONTHS ENDED MARCH 31, 2000
Asset sales ............................ $ 27 $ -- $ -- $ -- $ -- $ 27
Litigation and settlement charges ...... -- -- (16) -- -- (16)
Property impairments ................... -- -- (3) -- -- (3)
-------- ---------- -------- ---------- ---------- ----------
Total ............................. $ 27 $ -- $ (19) $ -- $ -- $ 8
======== ========== ======== ========== ========== ==========
THREE MONTHS ENDED MARCH 31, 1999 ...... $ -- $ -- $ -- $ -- $ -- $ --
======== ========== ======== ========== ========== ==========
</TABLE>
Special items for the first quarter of 2000 included a $27 gain from the
sale of natural gas processing assets in the U.S., partly offset by a $19 loss
for litigation provisions and a write-off of related refinery assets.
There were no special items in the first quarter of 1999.
8
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(a) FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
CASH PROVIDED BY OPERATIONS
Cash provided by operations in the first three months of 2000 increased $76
million to $469 million versus $393 million in the first three months of 1999.
Cash provided by operations before changes in operating assets and liabilities
increased $249 million compared to the first three months of 1999, primarily due
to higher crude oil, natural gas and natural gas liquids prices, along with
increased petroleum liquids production. Negative changes to net operating assets
and liabilities of $173 million were due to a decrease in trust fund balances in
1999 related to the sale and purchase of certain assets, increased inventories,
and funds required for the recent commencement of a service contract in Syria,
partially offset by higher taxes payable. Crude oil and petroleum products
inventory volumes were increased during the quarter in preparation for
seasonally higher summer sales. Crude oil prices applied to these increased
inventory volumes were also higher.
INVESTING ACTIVITIES
CAPITAL EXPENDITURES AND INVESTMENTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
2000 1999
---- ----
(IN MILLIONS)
<S> <C> <C>
Upstream
United States ................................ $ 83 $113
International ................................ 257 198
---- ----
Total upstream ........................... 340 311
Downstream
United States ................................ 60 32
International ................................ 64 70
---- ----
Total downstream ......................... 124 102
Corporate and other ............................ 25 2
---- ----
Total capital expenditures and investments $489 $415
==== ====
United States ................................ $168 $147
International ................................ 321 268
---- ----
Total .................................... $489 $415
==== ====
</TABLE>
Total capital expenditures and investments were $489 million, an increase
of $74 million, or 18 percent, versus first quarter 1999 capital expenditures
and investments. The increase was primarily due to higher spending on upstream
international capital projects. Described below is a more detailed analysis of
capital expenditures and investments by operating segment within the United
States and international. Capital expenditures and investments include
capitalized exploratory wells but do not include expensed exploration costs.
Upstream
Upstream capital expenditures and investments totaled $340 million in the
first three months of 2000, compared to $311 million for the first three months
of 1999. The increase of $29 million, or approximately 9 percent, was primarily
a result of the acquisition of Canadian natural gas processing and gathering
assets, partly offset by a reduction in our capital expenditures in the U.S.
9
<PAGE> 12
United States
During the first three months of 2000, Conoco spent $83 million on U.S.
capital projects, a decrease of $30 million, or 27 percent, from $113 million in
the first three months of 1999. Expenditures in the first three months of 2000
focused on development drilling in various locations. Decreases versus 1999 were
attributable to the completion of the Ursa field in the deepwater Gulf of
Mexico, a reduced drilling program in the Lobo field in South Texas and reduced
deepwater Gulf of Mexico exploration spending due to the drillship Deepwater
Pathfinder being out of service.
International
International upstream capital expenditures and investments totaled $257
million in the first three months of 2000, an increase of $59 million, or 30
percent, from $198 million in the first three months of 1999. The increase in
2000 expenditures was a result of the acquisition of Canadian natural gas
processing and gathering assets, partly offset by lower cash requirements for
Petrozuata, our joint venture in Venezuela, due to Petrozuata generating more
cash from higher crude oil volumes and prices.
Downstream
Downstream capital expenditures and investments totaled $124 million in the
first three months of 2000, an increase of $22 million, or 22 percent, versus
$102 million in the first three months of 1999, primarily reflecting increased
expenditures on refining and marketing operations in the United States.
United States
During the first three months of 2000, Conoco spent $60 million on
downstream U.S. capital projects, up $28 million, or 88 percent, from $32
million in the first three months of 1999. Expenditures in the first three
months of 2000 were focused on the new processing unit being constructed at our
Lake Charles, Louisiana refinery to process synthetic crude from Petrozuata, as
well as our ongoing marketing and refining operations.
International
During the first three months of 2000, Conoco spent $64 million on
downstream international capital expenditures and investments, down $6 million,
or 9 percent, from $70 million in the first three months of 1999. The majority
of the funds spent in 2000 were used to support continuing refining operations
including upgrades to meet future clean fuels specifications in Europe.
Corporate and Other
Corporate and other capital expenditures totaled $25 million in the first
three months of 2000, an increase of $23 million, compared to $2 million in the
first three months of 1999. The increased expenditures during the first three
months of 2000 were primarily related to the construction of power generation
facilities.
PROCEEDS FROM SALES OF ASSETS AND SUBSIDIARIES
Proceeds from asset sales amounted to $92 million for the first three
months of 2000, an increase of $74 million, from $18 million in the first three
months of 1999. These proceeds were primarily the result of the sale of
non-strategic natural gas processing assets in the U.S.
FINANCING ACTIVITIES
Conoco's ability to maintain and grow its operating income and cash flow is
dependent upon continued capital spending to replace depleting assets. Conoco
believes its future cash flow from operations and its borrowing capacity should
be sufficient to fund its payments of dividends, if any, capital expenditures
and working capital requirements and to service debt.
10
<PAGE> 13
At March 31, 2000, Conoco had an unsecured $2,000 million revolving credit
facility with a syndicate of U. S. and international banks. The terms consist of
a 364-day committed facility in the amount of $1,350 million and a five-year
committed facility in the amount of $650 million. At March 31, 2000, Conoco had
no outstanding borrowings under the credit facility. Conoco maintains a $2,000
million commercial paper program that is fully supported by the credit facility.
The program gives Conoco the ability to issue commercial paper at any time with
various maturities not to exceed 270 days. The weighted-average interest rate on
commercial paper outstanding of $671 million was 6.11 percent at March 31, 2000.
Total Conoco debt was $4,782 million at March 31, 2000, up $39 million
versus $4,743 million at December 31, 1999. The total debt-to-capitalization
ratio was 50 percent at March 31, 2000 and 51 percent at December 31, 1999.
(b) RESULTS OF OPERATIONS
CONSOLIDATED RESULTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
2000 1999
------- -------
SALES AND OTHER OPERATING REVENUES (IN MILLIONS)
<S> <C> <C>
Upstream
United States .................................................. $ 1,007 $ 706
International .................................................. 895 479
------- -------
Total upstream ............................................ 1,902 1,185
Downstream
United States .................................................. 3,717 1,962
International .................................................. 2,904 2,143
------- -------
Total downstream .......................................... 6,621 4,105
Corporate and other .............................................. 1 21
------- -------
Total sales and other operating revenues .................. $ 8,524 $ 5,311
======= =======
AFTER-TAX OPERATING INCOME
Upstream
United States .................................................. $ 142 $ 40
International .................................................. 297 68
------- -------
Total upstream ............................................ 439 108
Downstream
United States .................................................. (14) 17
International .................................................. 49 23
------- -------
Total downstream .......................................... 35 40
Corporate and other operating .................................... (25) (15)
------- -------
Total after-tax operating income .......................... 449 133
INTEREST AND OTHER NON-OPERATING INCOME (EXPENSES) NET OF TAXES..... (50) (50)
------- -------
NET INCOME ......................................................... $ 399 $ 83
======= =======
</TABLE>
11
<PAGE> 14
SPECIAL ITEMS
Net income includes the following non-recurring items (special items) on an
after-tax basis:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
2000 1999
---------- ----------
(IN MILLIONS)
<S> <C> <C>
UPSTREAM
Asset sales .............................. $ 27 $ --
---------- ----------
Total upstream special items ......... $ 27 $ --
========== ==========
DOWNSTREAM
Property impairments ..................... $ (3) $ --
Litigation and settlement charges ........ (16) --
---------- ----------
Total downstream special items ....... $ (19) $ --
========== ==========
TOTAL SPECIAL ITEMS ......................... $ 8 $ --
========== ==========
</TABLE>
Special items for the first three months of 2000 included a $27 million
gain from the sale of certain natural gas processing assets in the U.S., partly
offset by a $19 million loss for litigation provisions and a write-off of
related refinery assets. There were no special items for the first three months
of 1999.
First Quarter 2000 versus First Quarter 1999
Net income was $399 million in 2000, up 381 percent from $83 million in the
first quarter of 1999. Conoco had net income before special items of $391
million in the first quarter of 2000, up 371 percent from $83 million in the
first quarter of 1999. These increases primarily reflected higher crude oil,
natural gas and natural gas liquids prices, along with increased petroleum
liquids production.
Sales and other operating revenues for the first quarter of 2000 were
$8,524 million, up 60 percent from $5,311 million in the first quarter of 1999,
primarily due to higher crude oil and natural gas prices and improved refined
product prices, along with increased production volumes and refinery
throughputs. Conoco's worldwide net realized crude oil price was $26.29 per
barrel for the quarter, up $15.29 per barrel, or 139 percent, from $11.00 per
barrel in the first quarter of 1999. Worldwide net realized natural gas prices
averaged $2.32 per thousand cubic feet (mcf) for the quarter, compared with
$2.08 per mcf in the same period in 1999, an improvement of 12 percent.
Income from equity affiliates for the first quarter of 2000 was $80
million, up $84 million compared to a loss of $4 million in the first quarter of
1999. Additional crude oil volumes from our Petrozuata joint venture and higher
crude oil prices drove this improvement.
Other income for the first quarter of 2000 was $87 million, up 211 percent
from $28 million in the first quarter of 1999, primarily due to the gain from
the sale of natural gas processing assets in the U.S. and additional interest
income.
Worldwide petroleum liquids production, including our share of equity
affiliates, in the first quarter of 2000 was 375,000 barrels per day versus
351,000 barrels per day in the first quarter of 1999, a 7 percent increase. U.S.
petroleum liquids production was up 9 percent, as volumes from the Ursa field
more than compensated for the disposition of the Grand Isle field last year and
natural declines elsewhere. International petroleum liquids production was up 6
percent to 301,000 barrels per day due to increased production volumes in
Venezuela and Norway, and immediate production from our recent acquisition
offshore Vietnam, partly offset by decreases in the U.K.
Worldwide natural gas production, including our share of equity affiliates,
in the first quarter of 2000 was up 1 percent to 1,842 million cubic feet (mmcf)
per day from 1,816 mmcf per day in the first quarter of 1999. U.S. natural gas
production was down 14 percent, primarily as a result of the reduced development
drilling in the Lobo
12
<PAGE> 15
field and natural declines elsewhere. International natural gas production was
up 18 percent due to the production from the Vampire and Britannia gas fields in
the U.K. and the newly acquired properties in Canada.
Worldwide refined product sales were 1,369,000 barrels per day, up 24
percent from 1999 primarily due to increased sales in the U.S. and Europe and
increased throughput at the Melaka refinery in Asia Pacific. Crude oil and
refined product buy/sell and natural gas and electric power resale activities in
the first quarter of 2000 totaled $1,860 million, up 94 percent compared to $957
million in the first quarter of 1999, primarily due to higher crude oil and
refined product prices.
Cost of goods sold for the first quarter of 2000 totaled $5,124 million, an
increase of $2,596 million, or 103 percent, compared to $2,528 million in the
first quarter of 1999, primarily due to higher refinery feedstock costs driven
by higher crude oil prices and increased throughputs.
Operating expenses for the first quarter of 2000 were $506 million, up $29
million, or 6 percent, compared to $477 million for the first quarter of 1999.
This increase was almost entirely due to litigation provisions recorded this
quarter.
Exploration expenses for the first quarter of 2000 totaled $37 million,
down 20 percent compared to $46 million in the first quarter of 1999, primarily
driven by lower dry hole costs and lower costs associated with a more focused
exploration program.
Depreciation, depletion and amortization (DD&A) for the first quarter of
2000 totaled $339 million, an increase of $37 million, or 12 percent, compared
to $302 million in the first quarter of 1999. This increase was primarily due to
DD&A rate changes and field mix and the write-down of a non-operating natural
gas processing plant.
Provision for income taxes for the first quarter of 2000 totaled $313
million, up 514 percent compared to $51 million for the first quarter of 1999,
which reflected significantly higher pretax income in the first quarter of 2000
versus 1999. A higher effective tax rate of approximately 44 percent in the
first quarter of 2000, compared to 38 percent in the first quarter of 1999, was
primarily due to the impact of U.S. alternative fuels tax credits on lower
pretax income for that period.
UPSTREAM SEGMENT RESULTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
(IN MILLIONS)
2000 1999
---------- ----------
<S> <C> <C>
After-tax operating income
United States ........................ $ 142 $ 40
International ........................ 297 68
---------- ----------
After-tax operating income ......... $ 439 $ 108
Special items
United States ........................ $ (27) $ --
International ........................ -- --
---------- ----------
Special items ...................... $ (27) $ --
Earnings before special items
United States ........................ $ 115 $ 40
International ........................ 297 68
---------- ----------
Earnings before special items ...... $ 412 $ 108
========== ==========
</TABLE>
First Quarter 2000 versus First Quarter 1999
Upstream earnings before special items were $412 million in the first
quarter of 2000, up 281 percent from $108 million in the first quarter of 1999.
U.S. upstream earnings before special items totaled $115 million in the first
quarter of 2000, up 188 percent from $40 million in the comparable period of
1999, and reflected higher prices and increased petroleum liquids production.
Partly offsetting this increase was an anticipated drop in natural gas volumes
and a write-down of a non-operating natural gas processing plant that was shut
down as part of our effort to move away from a midstream business of scattered
assets in mature basins towards a more profitable business built on centralized,
large-scale gas processing systems. International upstream earnings before
special items were
13
<PAGE> 16
$297 million, an increase of 337 percent, from $68 million in the comparable
period in 1999. The improvement was primarily attributable to higher crude oil
prices and production growth.
DOWNSTREAM SEGMENT RESULTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
2000 1999
---------- ----------
(IN MILLIONS)
<S> <C> <C>
After-tax operating income
United States ....................... $ (14) $ 17
International ....................... 49 23
---------- ----------
After-tax operating income ....... $ 35 $ 40
Special items
United States ....................... $ 19 $ --
International ....................... -- --
---------- ----------
Special items .................... $ 19 $ --
Earnings before special items
United States ....................... $ 5 $ 17
International ....................... 49 23
---------- ----------
Earnings before special items .... $ 54 $ 40
========== ==========
</TABLE>
First Quarter 2000 versus First Quarter 1999
Downstream earnings before special items were $54 million for the first
three months of 2000, an increase of 35 percent from $40 million in the
comparable period in 1999. U.S. downstream earnings before special items were $5
million for the first three months of 2000, down 71 percent from $17 million for
the first three months of 1999, primarily attributable to the impact of higher
feedstock costs that continued to impair refining earnings. International
downstream earnings before special items were $49 million for the first three
months of 2000, up 113 percent from $23 million in the comparable period in
1999, reflecting the improved refining environment, partly offset by lower
European marketing earnings.
CORPORATE AND OTHER SEGMENT RESULTS
CORPORATE AND OTHER OPERATING
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
2000 1999
---------- ----------
(IN MILLIONS)
<S> <C> <C>
After-tax operating loss ............... $ (25) $ (15)
Special items .......................... -- --
---------- ----------
Losses before special items ......... $ (25) $ (15)
========== ==========
</TABLE>
First Quarter 2000 versus First Quarter 1999
Corporate and other operating losses were $25 million for the first quarter
of 2000, an increase of $10 million compared to first quarter 1999, primarily
due to increased business development costs in the emerging power sector, the
introduction of Conoco's corporate advertising program and minority interest
earnings related to the sale of certain corporate assets.
14
<PAGE> 17
INTEREST AND OTHER NON-OPERATING EXPENSES NET OF TAX
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
2000 1999
---------- ----------
(IN MILLIONS)
<S> <C> <C>
Interest expense on debt .......... $ (66) $ (55)
Interest income ................... 8 3
Exchange gains .................... 8 2
---------- ----------
Total ......................... $ (50) $ (50)
========== ==========
</TABLE>
First Quarter 2000 versus First Quarter 1999
Interest and other non-operating expenses for the first quarter of 2000
amounted to $50 million, the same as the comparable period in 1999, with the
adverse impact of increased interest rates offset by higher interest income and
exchange gains realized in 2000.
TAX MATTERS
During the period ended March 31, 2000, Conoco recorded deferred tax assets
of $19 million related to carryforwards of foreign tax credits, alternative
fuels tax credits and the U.S. alternative minimum tax. Conoco believes it is
more likely than not that the deferred tax assets related to these foreign tax
credits and alternative fuels tax credits will be realized in the current year.
Furthermore, Conoco believes it is more likely than not that the alternative
minimum tax credits will be realized in future years.
YEAR 2000
Historically, many computerized systems used two digits rather than four
digits to define the applicable year, which could have resulted in recognizing a
date using "00" as the year 1900 rather than the year 2000. Conoco experienced
no critical failures during the Year 2000 rollover, nor have we experienced any
critical failures to date. Prior to the rollover date, Conoco addressed Year
2000 issues within its individual business units, and progress was reported
periodically to management and the board of directors. Since the rollover date,
the Year 2000 Compliance and Mitigation Plans have been stepped down, but
Emergency Recovery Plans remain in place.
Although Conoco believes that internal Year 2000 issues pose no material
threat to its business, results of operations or financial condition, Conoco
cannot predict the potential impact of any post rollover failures experienced by
third parties critical to Conoco's operations. Post Year 2000 rollover failures
among critical third parties could possibly cause significant business
interruptions. At this time, we cannot quantify the potential impact of such
failures. For this reason, Conoco remains on alert for third-party Year 2000
failures.
The total cost of Year 2000 activities was $42 million, which was not
material to Conoco's operations, liquidity or capital resources. Costs to
address failures during 2000 will be handled as a part of normal operations,
since Conoco does not anticipate any critical failures resulting from this
issue.
This disclosure is provided pursuant to Securities Exchange Act Release No.
39-40277. As such, it is protected as a forward-looking statement under Section
21E of the Securities Exchange Act of 1934. This disclosure is also subject to
protection under the Year 2000 Information and Readiness Disclosure Act of 1998,
15 USC Section 1 (1999), as a "Year 2000 Statement" and "Year 2000 Readiness
Disclosure" as defined therein.
RESTRUCTURING
In December 1998, Conoco announced that, as a result of a comprehensive
review of its assets and long-term strategy, Conoco would make organizational
realignments consistent with furthering the efficiency of operations and taking
advantage of synergies created by the upgrading of its asset portfolio.
Associated with the announcement, Conoco recorded an $82 million pretax ($52
million after-tax) charge to operating expense in the fourth quarter of 1998.
Nearly all of this charge represented termination payments and related employee
benefits to be made to the estimated 975 persons in both upstream and downstream
businesses affected by the restructuring. Payments were,
15
<PAGE> 18
and will continue to be, made under existing company severance policies,
generally based on years of service up to a maximum amount that varies by
country.
During 1999, 704 employees left Conoco as part of the implementation of the
realignment plans, with related charges against the restructuring reserve of $68
million. In the fourth quarter of 1999, estimates of the number of severances
were revised due to changes in operational requirements. The original number of
estimated severances was reduced by 137 positions, primarily in our upstream
business, to 838 positions. The reduction of positions to be eliminated resulted
in a corresponding reduction in the restructuring reserve of $3 million that was
recorded in the fourth quarter of 1999. Total charges and adjustments to the
reserve during 1999 were $71 million, resulting in a December 31, 1999 reserve
balance of $11 million. During the first quarter of 2000, 63 employees left
Conoco as part of the realignment plan. Related charges against the reserve
totaled $5 million. The remainder of the accrual will be utilized upon the
pending closing of certain asset sales.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISKS
Information about foreign currency risk and interest rate risk for the
three months ended March 31, 2000 did not differ materially from that discussed
under Quantitative and Qualitative Disclosure About Market Risk in Conoco's 1999
Annual Report to Shareholders and incorporated by reference into Item 7A of
Conoco's Form 10-K.
Changes in commodity price risk for the three months ended March 31, 2000,
are as follows:
Commodity Price Risk
The fair value gain or loss of outstanding derivative commodity instruments
and the change in fair value that would be expected from a 10 percent adverse
price change are shown in the table below:
<TABLE>
<CAPTION>
CHANGE IN FAIR VALUE
FROM 10% ADVERSE
FAIR VALUE PRICE CHANGE
---------- --------------------
(IN MILLIONS)
AT MARCH 31, 2000
<S> <C> <C>
Crude Oil and Refined Products
Trading ............................. $ 13 $ 3
Non-trading (1) ..................... (3) (6)
---------- ----------
Combined ......................... $ 10 $ (3)
Natural Gas
Trading ............................. $ 2 $ --
Non-trading ......................... 13 (7)
---------- ----------
Combined ......................... $ 15 $ (7)
AT DECEMBER 31, 1999
Crude Oil and Refined Products
Trading ............................. $ 10 $ 2
Non-trading ......................... 10 (4)
---------- ----------
Combined ......................... $ 20 $ (2)
Natural Gas
Trading ............................. $ -- $ --
Non-trading ......................... -- (8)
---------- ----------
Combined ......................... $ -- $ (8)
</TABLE>
----------------
(1) Includes purchased crude oil put options with a strike price of $20.49
(West Texas Intermediate equivalent) per barrel on approximately 59
million barrels during the period of April through December 2000.
16
<PAGE> 19
The fair values of the futures contracts are based on quoted market prices
obtained from the New York Mercantile Exchange or the International Petroleum
Exchange of London. The fair values of swaps and other over-the-counter
instruments are estimated based on quoted market prices of comparable contracts
and approximate the gain or loss that would have been realized if the contracts
had been closed out at year-end.
Price-risk sensitivities were calculated by assuming an across-the-board 10
percent adverse change in prices regardless of term or historical relationships
between the contractual price of the instrument and the underlying commodity
price. In the event of an actual 10 percent change in prompt month crude or
natural gas prices, the fair value of Conoco's derivative portfolio would
typically change less than that shown in the table due to lower volatility in
out-month prices.
17
<PAGE> 20
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 6, 1996, the Department of Justice filed a complaint in the United
States District Court for the District of Montana against Yellowstone Pipeline
Company (YPL) and Conoco Pipe Line Company, as a 40 percent owner and operator
of YPL. The complaint alleges discharges of oil from a YPL pipeline in January
1993 and seeks civil penalties of up to $25,000 per day for each violation or up
to $1,000 for each barrel of oil discharged. The parties reached an agreement to
settle the case that requires the defendants to pay a penalty of $165,000 and
construct a fish passageway as a "Supplemental Environmental Project" in the
Jocko River to enhance the bull trout population. The court entered final
settlement documents, the penalty has been paid, and Conoco is in the process of
implementing the terms of the settlement agreement.
On March 27, 2000, the Montana Department of Environmental Quality issued a
violation letter to the Conoco Billings Refinery for violations of the State's
3-hour SO2 limit. The letter did not include a proposed penalty. However, under
the Montana Penalty Assessment Policy, the draft penalty could be in excess of
$100,000.
Conoco is subject to various lawsuits and claims involving a variety of
matters including, along with other oil companies, actions challenging oil and
gas royalty and severance tax payments based on posted prices, and claims for
damages resulting from leaking underground storage tanks. As a result of its
separation from DuPont, Conoco has also assumed responsibility for current and
future claims related to certain discontinued chemicals and agricultural
chemicals businesses operated by Conoco in the past. In general, the effect on
future financial results is not subject to reasonable estimation because
considerable uncertainty exists. We believe the ultimate liabilities resulting
from such lawsuits and claims may be material to results of operations in the
period in which they are recognized, but will not materially affect the
consolidated financial position of Conoco.
ITEM 5. OTHER INFORMATION
(a) DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION
This quarterly report on Form 10-Q includes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. You can identify our forward-looking
statements by the words "expects," "intends," "plans," "projects," "believes,"
"estimates" and similar expressions.
We have based the forward-looking statements related to our operations on
our current expectations, estimates and projections about the petroleum industry
and us in general. We caution you that these statements are not guarantees of
future performance and involve risks, uncertainties and assumptions that we
cannot predict. In addition, we have based many of these forward-looking
statements on assumptions about future events that may prove to be inaccurate.
Accordingly, our actual outcomes and results may differ materially from what we
have expressed or forecasted in the forward-looking statements. Any differences
could result from a variety of factors including the following:
o fluctuations in crude oil and natural gas prices and refining and marketing
margins;
o failure or delays in achieving expected production from existing and future
oil and gas development projects;
o uncertainties inherent in predicting oil and gas reserves and oil and gas
reservoir performance;
o lack of exploration success;
o disruption or interruption of our production facilities due to accidents or
political events;
o international monetary conditions and exchange controls;
18
<PAGE> 21
o liability for remedial actions under environmental regulations;
o liability resulting from litigation;
o world economic and political conditions; or
o changes in tax and other laws applicable to our business.
(b) OTHER EVENTS
On May 1, 2000, the board of directors of Conoco Inc. expanded the
authorized number of members of the board to nine, and elected retired Marine
Corps General Charles C. Krulak and Kenneth M. Duberstein to fill the vacancies
created by the expansion.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The exhibit index filed with this Form 10-Q is on page 21.
(b) REPORTS ON FORM 8-K
None.
19
<PAGE> 22
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CONOCO INC.
(Registrant)
By: /s/ W. DAVID WELCH
---------------------------------
(As Duly Authorized Officer and
Principal Accounting Officer)
Date: May 10, 2000
20
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
4.1 Consent Action dated December 31, 1999 amending the Thrift Plan for
Employees of Conoco Inc.*
12 Computation of Ratio of Earnings to Fixed Charges*
27 Financial Data Schedule*
</TABLE>
* Filed herein.
21
<PAGE> 1
EXHIBIT 4.1
CONSENT ACTION OF CONOCO INC.
The undersigned, President and Chief Executive Officer of Conoco Inc.,
pursuant to a delegation from the Board of Directors of Conoco Inc., effective
August 12, 1989; subsequent delegations pursuant to corporate Authority
limitations and Governance guidelines issued on June 1, 1994, February 10, 1997,
October 30, 1997 and April 21, 1999; and pursuant to Article XIX. of the Thrift
Plan for Employees of Conoco Inc. and Article XIX. of the Thrift Plan for Retail
Employees of Conoco Inc., consents to the following actions:
RESOLVED, That effective January 1, 2000, Article V. A. and B. of
Chapter 1 of the Thrift Plan for Employees of Conoco Inc. shall be amended to
read as follows:
V. CONOCO CONTRIBUTIONS
A. Amount of Company Contributions
1. Company shall contribute out of its
accumulated earnings and profits to a
Participant's Regular Account an amount
equal to 100 percent of each Participant's
Basic Deposits, except as hereinafter
provided in Article VI. Such contributions
shall be paid to the Trustee at least
monthly.
2. Starting in the month in which Conoco makes
its first contribution pursuant to Article
V.B. of the Plan, as amended effective
January 1, 2000, Conoco shall make a monthly
contribution to the Trustee of 1 percent of
the monthly compensation in the month
preceding the month in which such
contribution is made of all Employees
eligible to participate in the Plan in the
month preceding the month in which the
contribution is made, except as hereinafter
provided in Article VI. Each Employee who is
eligible to participate in the Plan in the
month preceding the month in which the
contribution is made to the Trustee shall be
allocated an amount which is 1 percent of
his monthly Compensation in the month
preceding the month in which the
contribution is made to the Trustee. Such
contributions shall be allocated by the
Trustee in the month following the month in
which the contribution is made to the
Trustee among the Regular Employee Accounts
of all Employees eligible to participate in
the Plan in the month preceding the month in
which the contribution is made to the
Trustee. After allocation by the Trustee,
such contributions shall be invested as
provided in Article VII.A.
1
<PAGE> 2
B. Additional Conoco Contributions
This is a profit sharing plan. Conoco may from time
to time voluntarily make additional contributions
subject to the following provisions, conditions, and
limitations:
1. No such additional contribution shall be
made unless the same is specifically
authorized by the Board or its delegee.
2. No such additional contribution shall be
applicable to the employees of any
Affiliated Company participating in the Plan
unless such applicability to such employees
is authorized by the board of directors of
such Affiliated Company.
3. Such additional contribution shall be a
percentage of the monthly Compensation in
the month preceding the month in which such
contribution is made of all Employees
eligible to participate in the Plan in the
month preceding the month in which the
contribution is made to the Trustee and
shall be paid monthly to the Trustee. The
Trustee shall allocate the contribution in
the month following the month in which the
contribution is made to the Trustee among
the Regular Employee Accounts of all
Employees eligible to participate in the
Plan in the month preceding the month in
which such contribution is made to the
Trustee. Each Employee who is eligible to
participate in the Plan in the month
preceding the month in which the
contribution is made to the Trustee shall be
allocated an amount which is a percentage of
his monthly Compensation in the month
preceding the month in which such
contribution is made. Such percentage shall
be the same proportion that the Company
contribution under this Article V.B. bears
to the monthly Compensation of all Employees
eligible to participate in the Plan in the
month preceding the month in which the
contribution is made to the Trustee. After
allocation by the Trustee, such
contributions shall be invested as provided
in Article VII.A.
4. Monthly contributions under Article V.A.2.
and V.B.3. shall not exceed 6 percent of the
monthly Compensation of all Employees
eligible to participate in the Plan in the
month preceding the month in which such
contributions are made to the Trustee.
2
<PAGE> 3
FURTHER RESOLVED, That effective January 1, 2000, the first sentence of
Article VII.A. of Chapter 1 of the Thrift Plan for Employees of Conoco Inc.
shall be amended to read as follows:
A. Investment Direction
A Participant in the Plan shall instruct the Trustee in the
form prescribed by the Benefit Board as to the Investment
Direction for future deposits, contributions and income to his
Employee Account, except that Company contributions made
pursuant to Article V.A.2. or Article V.B. shall be invested
by the Trustee in the Conoco Stock Fund: Class B Common Stock.
FURTHER RESOLVED, That Effective January 1, 2000, the first sentence of
the third paragraph of Article VIII.A.2. shall be amended to read as follows:
Brokerage commissions, transfer taxes, and other charges and expenses
in connection with the purchase or sale of securities shall be added to
the cost of such securities or deducted from the proceeds thereof, as
the case may be. Notwithstanding the preceding sentence, brokerage
commissions, transfer taxes, and other charges and expenses in
connection with the purchase of shares of the Conoco Stock Fund: Class
B Common Stock purchased with Company contributions made pursuant to
Article V.A.2. or B.3. shall not be added to the cost of such
securities.
FURTHER RESOLVED, That effective January 1, 2000, Article XIV.H.(a) of
Chapter 1 of the Thrift Plan for Employees of Conoco Inc. shall be amended to
read as follows:
Brokerage fees, transfer taxes, investment fees, wrap fees, rebalancing
fees and other expenses incident to the purchase, sale and operation of
securities and other investments and incident to the administration of
Options A, B, C and D shall be included in the cost of such securities
or investments or deducted from the sale proceeds, as the case may be.
Notwithstanding the preceding sentence, brokerage commissions, transfer
taxes, and other charges and expenses in connection with the purchase
of shares of Conoco Stock Fund: Class B Common Stock purchased with
Company contributions made pursuant to Article V.A.2. or B.3 shall not
be added to the cost of such securities.
FURTHER RESOLVED, That effective January 1, 1997, Article X.E.1. and 2.
of Chapter 1 of the Thrift Plan for Employees of Conoco Inc. shall be amended to
read as follows:
E. Compliance with Minimum Distribution Rules
1. General Rule
Notwithstanding any other provision of this Plan,
beginning January 1, 1985, a Member, Beneficiary
Member, Terminated Member, Retired Member, or
Alternate Payee shall receive
3
<PAGE> 4
Minimum Distributions. "Minimum Distributions" shall
mean distributions in such amounts as are required to
satisfy section 401(a)(9) of the Code, the incidental
death benefit rule of section 401(a)(9)(G) of the
Code, and regulations under both of those Code
sections, and which are made no later than required
to satisfy section 401(a)(9) of the Code and
regulations thereunder. Except as provided in Article
X.E.2., 3. and 4. below, a Member, Beneficiary
Member, Terminated Member, Retired Member, or
Alternate Payee shall receive his Minimum
Distributions on or before his Required Beginning
Date in the form of a lump sum payment of his entire
Vested Account.
In the case of a Member, Terminated Member, or
Retired Member, who reaches age 70 1/2 prior to the
year 2000, or a 5 percent owner of the Company, the
Required Beginning Date is April 1 of the year
following the year in which such individual turned
age 70 1/2.
In the case of a Member, Terminated Member, or
Retired Member, who reaches age 70 1/2 on or after
January 1, 2000, the Required Beginning Date is April
1 of the calendar year following the later of the
calendar year in which the individual reaches age 70
1/2 or the calendar year in which the individual
ceases to be employed by the Corporate Employer.
In the case of a Beneficiary Member or Alternate
Payee, the Required Beginning Date is December 31 of
the year in which the Member to whom the benefit
relates turns or would have turned age 70 1/2, if
such Member turns or would have turned age 70 1/2
prior to the year 2000.
In the case of a Beneficiary Member or Alternate
Payee, the Required Beginning Date is December 31 of
the later of the calendar year in which the Member to
whom the benefit relates turns 70 1/2, would have
turned age 70 1/2, or ceases to be employed by the
Corporate Employer, if such Member turned or would
have turned age 70 1/2 on or after January 1, 2000.
2. Active Employee
If a Member, who attains age 70 1/2 before January 1,
2000, has not terminated employment with Conoco on
April 1 of the calendar year following the calendar
year in which he attained age 70 1/2, his Minimum
Distribution will begin no later than that date in
the form of a Lifetime Periodic Payment.
FURTHER RESOLVED, That effective January 1, 1999, Article X.E.1. and 2.
of the Thrift Plan for Retail Employees of Conoco Inc. shall be amended to read
as follows:
4
<PAGE> 5
E. Compliance with Minimum Distribution Rules
1. General Rule
Notwithstanding any other provision of this Plan, a
Member, Beneficiary Member, Terminated Member,
Retired Member, or Alternate Payee shall receive
minimum Distributions. "Minimum Distributions" shall
mean distributions in such amounts as are required to
satisfy section 401(a)(9) of the Code, the incidental
death benefit rule of section 401(a)(9)(G) of the
Code, and regulations under both of those Code
sections, and which are made no later than required
to satisfy section 401(a)(9) of the Code and
regulations thereunder. Except as provided in Article
X.E.2., 3. and 4. below, a Member, Beneficiary
Member, Terminated Member, Retired Member, or
Alternate Payee shall receive his Minimum
Distributions on or before his Required Beginning
Date in the form of a lump sum payment of his entire
Vested Account.
In the case of a Member, Terminated Member or Retired
Member, who reaches age 70 1/2 prior to the year
2000, or a 5 percent owner of the Company, the
Required Beginning Date is April 1 of the year
following the year in which such individual turned
age 70 1/2.
In the case of a Member, Terminated Member, or
Retired Member, who reaches age 70 1/2 on or after
January 1, 2000, the Required Beginning Date is April
1 of the calendar year following the later of the
calendar year in which the individual reaches age 70
1/2 or the calendar year in which the individual
ceases to be employed by the Corporate Employer.
In the case of a Beneficiary Member or Alternate
Payee, the Required Beginning Date is December 31 of
the year in which the Member to whom the benefit
relates turns or would have turned age 70 1/2 prior
to the year 2000.
In the case of a Beneficiary Member or Alternate
Payee, the Required Beginning Date is December 31 of
the later of the calendar year in which the Member to
whom the benefit relates turns 70 1/2, would have
turned age 70 1/2, or ceases to be employed by the
Corporate Employer, if such Member turned or would
have turned age 70 1/2 on or after January 1, 2000.
5
<PAGE> 6
2. Active Employee
If a Member, who attains age 70 1/2 before January 1,
2000, has not terminated employment with Conoco on
April 1 of the calendar year following the calendar
year in which he attained age 70 1/2, his Minimum
Distribution will begin no later than that date in
the form of a Lifetime Periodic Payment.
Witness the signature this 31st day of December 1999.
/s/ Archie W. Dunham
---------------------------------------
Archie W. Dunham
6
<PAGE> 1
EXHIBIT 12
CONOCO INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
--------------- -----------------------------------------------
2000 1999 1998 1997 1996 1995
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net income ..................................................... $ 399 $ 744 $ 450 $ 1,097 $ 863 $ 575
Provision for income taxes ..................................... 313 473 244 1,010 1,038 774
Equity in earnings of affiliates ............................... (80) (150) (22) (40) 25 (22)
------- ------- ------- ------- ------- -------
Pretax income before adjustment for minority interests in
consolidated subsidiaries or income or loss from equity
affiliates .................................................. 632 1,067 672 2,067 1,926 1,327
Fixed charges (see below) ...................................... 102 412 337 174 188 210
Amortization of capitalized interest ........................... 10 46 40 46 53 53
Distributed income in equity affiliates ........................ 22 77 105 58 85 42
Capitalized interest ........................................... (3) (6) (72) (94) (75) (95)
------- ------- ------- ------- ------- -------
Total adjusted earnings available for payment of
fixed charges (a)(b) ............................... $ 763 $ 1,596 $ 1,082 $ 2,251 $ 2,177 $ 1,537
======= ======= ======= ======= ======= =======
Ratio of earnings to fixed charges ............................. 7.5 3.9 3.2 12.9 11.6 7.3
Fixed charges
Interest and debt expense - borrowings .................... $ 83 $ 311 $ 199 $ 36 $ 74 $ 74
Capitalized interest ...................................... 3 6 72 94 75 95
Rental expense representative of interest factor .......... 16 95 66 44 39 41
------- ------- ------- ------- ------- -------
Total fixed charges ................................... $ 102 $ 412 $ 337 $ 174 $ 188 $ 210
======= ======= ======= ======= ======= =======
Ratio of earnings to fixed charges excluding special items
Earnings from above ....................................... $ 763 $ 1,596 $ 1,082 $ 2,251 $ 2,177 $ 1,537
Special items (pretax) (c) ................................ (12) 60 454 (91) (22) 71
------- ------- ------- ------- ------- -------
Earnings adjusted for special items ......................... $ 751 $ 1,656 $ 1,536 $ 2,160 $ 2,155 $ 1,608
======= ======= ======= ======= ======= =======
Fixed charges from above ....................................... $ 102 $ 412 $ 337 $ 174 $ 188 $ 210
======= ======= ======= ======= ======= =======
Ratio of earnings adjusted for special items to fixed
charges ..................................................... 7.4 4.0 4.6 12.4 11.5 7.7
</TABLE>
- -------------------------
a) Equity affiliate pretax losses, where incurred, include no guaranteed
payments.
b) There are no fixed charges in subsidiaries with minority interests.
c) Includes special items as reported in first quarter 2000 Form 10-Q. See
Conoco's 1999 Form 10-K for discussion of prior years' special items.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000 OF CONOCO INC. AND CONSOLIDATED
SUBSIDIARIES. THE SCHEDULE IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 259
<SECURITIES> 0
<RECEIVABLES> 1,705
<ALLOWANCES> 0
<INVENTORY> 929
<CURRENT-ASSETS> 3,311
<PP&E> 22,643
<DEPRECIATION> 11,374
<TOTAL-ASSETS> 16,756
<CURRENT-LIABILITIES> 3,989
<BONDS> 4,077
0
0
<COMMON> 6
<OTHER-SE> 4,759
<TOTAL-LIABILITY-AND-EQUITY> 16,756
<SALES> 8,524
<TOTAL-REVENUES> 8,691
<CGS> 5,124
<TOTAL-COSTS> 7,896<F1>
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 83
<INCOME-PRETAX> 712
<INCOME-TAX> 313
<INCOME-CONTINUING> 399
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 399
<EPS-BASIC> .64<F2>
<EPS-DILUTED> .63<F2>
<FN>
<F1>COST OF GOODS SOLD; OPERATING EXPENSES; SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES; EXPLORATION EXPENSE; DEPRECIATION, DEPLETION AND AMORTIZATION; AND
TAXES OTHER THAN ON INCOME.
<F2>BASIC EARNINGS PER SHARE AND DILUTED EARNINGS PER SHARE.
</FN>
</TABLE>
