<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 JUNE 30, 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)
DELAWARE (51-0370352)
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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
185,998,717 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 August 4, 2000.
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CONOCO INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
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............................................................................ 10
(b) Results of Operations.......................................................................... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................... 20
Part II - Other Information
Item 1. Legal Proceedings.............................................................................. 21
Item 4. Submission of Matters to a Vote of Security Holders............................................ 21
Item 5. Other Information
(a) Disclosure Regarding Forward-Looking Information............................................... 22
(b) Other Events................................................................................... 22
Item 6. Exhibits and Reports on Form 8-K............................................................... 23
Signature ............................................................................................... 24
Exhibit Index .......................................................................................... 25
</TABLE>
i
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONOCO INC.
CONSOLIDATED STATEMENT OF INCOME (NOTES 1 AND 3)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(IN MILLIONS, EXCEPT PER SHARE)
<S> <C> <C> <C> <C>
Revenues
Sales and Other Operating Revenues* ........ $ 9,357 $ 6,252 $ 17,881 $ 11,563
Equity in Earnings of Affiliates ........... 77 37 157 33
Other Income ............................... 72 40 159 68
----------- ----------- ----------- -----------
Total Revenues ..................... 9,506 6,329 18,197 11,664
----------- ----------- ----------- -----------
Costs and Expenses
Cost of Goods Sold ......................... 5,758 3,395 10,882 5,923
Operating Expenses ......................... 547 487 1,053 964
Selling, General and Administrative Expenses 193 197 381 383
Exploration Expenses ....................... 58 74 95 120
Depreciation, Depletion and Amortization ... 309 282 648 584
Taxes Other Than on Income* ................ 1,778 1,655 3,480 3,246
Interest and Debt Expense .................. 89 79 172 150
----------- ----------- ----------- -----------
Total Costs and Expenses ........... 8,732 6,169 16,711 11,370
----------- ----------- ----------- -----------
Income Before Income Taxes ..................... 774 160 1,486 294
Provision for Income Taxes ..................... 318 46 631 97
----------- ----------- ----------- -----------
Net Income (Note 10) ........................... $ 456 $ 114 $ 855 $ 197
=========== =========== =========== ===========
Earnings Per Share (Note 4)
Basic ...................................... $ .73 $ .18 $ 1.37 $ .31
Diluted .................................... $ .72 $ .18 $ 1.35 $ .31
Weighted-average Shares Outstanding (Note 4)
Basic ...................................... 625 627 625 628
Diluted .................................... 634 638 633 636
Dividends Per Share of Common Stock (Note 5) ... $ .19 $ .19 $ .38 $ .33
----------
* Includes petroleum excise taxes ............ $ 1,727 $ 1,610 $ 3,384 $ 3,156
</TABLE>
See notes to consolidated financial statements
1
<PAGE> 4
CONOCO INC.
CONSOLIDATED BALANCE SHEET (NOTES 1 AND 3)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
ASSETS (IN MILLIONS)
<S> <C> <C>
Current Assets
Cash and Cash Equivalents ........................................................ $ 257 $ 317
Accounts and Notes Receivable .................................................... 1,817 1,735
Inventories (Note 6) ............................................................. 970 703
Other Current Assets ............................................................. 465 313
------------ ------------
Total Current Assets ....................................................... 3,509 3,068
Property, Plant and Equipment ....................................................... 22,532 22,476
Less: Accumulated Depreciation, Depletion and Amortization .......................... (11,323) (11,241)
------------ ------------
Net Property, Plant and Equipment ................................................... 11,209 11,235
Investment in Affiliates ............................................................ 1,713 1,604
Other Assets ........................................................................ 567 468
------------ ------------
Total ...................................................................... $ 16,998 $ 16,375
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable ................................................................. $ 1,765 $ 1,489
Short-term Borrowings and Capital Lease Obligations .............................. 771 663
Income Taxes ..................................................................... 402 303
Other Accrued Liabilities (Note 7) ............................................... 1,210 1,303
------------ ------------
Total Current Liabilities .................................................. 4,148 3,758
Long-term Borrowings and Capital Lease Obligations .................................. 4,074 4,080
Deferred Income Taxes ............................................................... 1,690 1,689
Other Liabilities and Deferred Credits .............................................. 1,859 1,958
------------ ------------
Total Liabilities .......................................................... 11,771 11,485
------------ ------------
Commitments and Contingent Liabilities (Note 8)
Minority Interests .................................................................. 337 335
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 at
June 30, 2000 and 1,600,000,000 shares authorized; 436,543,573 shares issued and
outstanding at December 31, 1999 ............................................... 4 4
Additional Paid-in Capital ....................................................... 4,933 4,941
Retained Earnings ................................................................ 659 44
Accumulated Other Comprehensive Loss (Note 9) .................................... (592) (372)
Treasury Stock, at cost (4,754,602 and 2,457,960 Class A shares at June 30, 2000
and December 31, 1999, respectively) ........................................... (116) (64)
------------ ------------
Total Stockholders' Equity ................................................. 4,890 4,555
------------ ------------
Total ...................................................................... $ 16,998 $ 16,375
============ ============
</TABLE>
See notes to consolidated financial statements
2
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CONOCO INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (NOTES 1 AND 3)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
2000 1999
---------- ----------
(IN MILLIONS)
<S> <C> <C>
Cash Provided by Operations
Net Income .......................................................... $ 855 $ 197
Adjustments to Reconcile Net Income to Cash Provided by Operations
Depreciation, Depletion and Amortization ......................... 648 584
Dry Hole Costs and Impairment of Unproved Properties ............. 33 55
Deferred Income Taxes ............................................ 56 (60)
Income Applicable to Minority Interests .......................... 10 11
Gain on Asset Dispositions ....................................... (50) (22)
Undistributed Equity Earnings .................................... (103) (11)
Other Noncash Charges and Credits-- Net .......................... (85) 10
Decrease (Increase) in Operating Assets
Accounts and Notes Receivable .................................. (120) (38)
Inventories .................................................... (292) (70)
Other Operating Assets ......................................... (160) 41
Increase (Decrease) in Operating Liabilities
Accounts and Other Operating Payables .......................... 272 55
Income and Other Taxes Payable ................................. 50 (82)
---------- ----------
Cash Provided by Operations ................................ 1,114 670
---------- ----------
Investing Activities
Purchases of Property, Plant and Equipment .......................... (957) (762)
Purchase of Businesses-- Net of Cash Acquired ....................... (31) --
Investments in Affiliates-- Net ..................................... (62) (175)
Proceeds from Sales of Assets and Subsidiaries ...................... 125 38
Net Decrease (Increase) in Short-term Financial Instruments ......... (1) 4
---------- ----------
Cash Used in Investing Activities .......................... (926) (895)
---------- ----------
Financing Activities
Short-term Borrowings -- Net ........................................ 105 984
Long-term Borrowings -- Net ......................................... -- 3,950
Related Party Borrowings -- Receipts ................................ -- 865
-- Payments ................................ -- (5,461)
Treasury Stock Purchases -- Net ..................................... (67) (24)
Cash Dividends (Note 5) ............................................. (237) (207)
Net Cash Contribution from Owner .................................... -- 2
Decrease in Minority Interests ...................................... (12) (11)
---------- ----------
Cash Provided by (Used in) Financing Activities ............ (211) 98
---------- ----------
Effect of Exchange Rate Changes on Cash ................................. (37) (15)
---------- ----------
Decrease in Cash and Cash Equivalents ................................... (60) (142)
Cash and Cash Equivalents at Beginning of Year .......................... 317 394
---------- ----------
Cash and Cash Equivalents at June 30 .................................... $ 257 $ 252
========== ==========
</TABLE>
See notes to consolidated financial statements
3
<PAGE> 6
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. RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
In June 2000, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 138, which made certain
amendments to SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". The principal changes made by SFAS No. 138 are as follows:
o the exception from the requirements of SFAS No.133 for "normal
purchases and normal sales" was expanded;
o the specific risks that can be identified as hedged interest rate
risks were redefined;
o allowance for hedge accounting was granted for foreign currency
denominated assets and liabilities for which a foreign currency
transaction gain or loss is recognized in earnings; and
o allowance was granted for certain intercompany derivatives to be
designated as hedging instruments.
Conoco is currently in the process of evaluating these standards and
developing specific steps for their implementation by January 1, 2001.
3. 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 $8 for the second quarter
of 1999 and $15 for the first six months 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 $6 for the second quarter of 1999 and $13
for the first six months 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 $19 for the second quarter of 1999
and $91 for the first six months of 1999. Interest expense 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 $88 for the second quarter of 1999 and $179
for
4
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
the first six months of 1999. Purchases of products from DuPont during these
periods were not material. These intercompany arrangements between DuPont and
Conoco were provided under transition service agreements or other long-term
agreements.
4. 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 three months and six months ended June 30, 2000 and June 30, 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 second quarter of 2000 and the first six months of 2000 included an
additional 9,072,029 and 8,264,459 shares, respectively, while the second
quarter of 1999 and first six months of 1999 included an additional 10,502,805
and 8,772,737 shares, respectively.
The denominator is based on the following weighted-average number of
common shares outstanding:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Basic .............. 624,592,364 627,474,181 625,104,421 627,553,205
Diluted ............ 633,664,393 637,976,986 633,368,880 636,325,942
</TABLE>
For the three months and six months ended June 30, 2000, variable stock
options for 3,124,146 shares of Class A and 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. For the three months and
six months ended June 30, 2000, fixed stock options for 72,454 and 77,194
shares, respectively, of Class A and Class B 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 and six months ended June 30, 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. For the three months and six months ended
June 30, 1999, fixed stock options for 3,793 and 49,419 shares, respectively,
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.
5. DIVIDENDS
Dividends per share paid through June 30 are as follows:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
First quarter ................................... $ .19 $ .14
Second quarter .................................. .19 .19
-------- --------
Dividends per share paid through June 30 .... $ .38 $ .33
======== ========
</TABLE>
On July 24, 2000, Conoco declared a third quarter cash dividend of $.19
per share on each outstanding share of Class A and Class B common stock,
payable on September 10, 2000, to shareholders of record on August 10, 2000.
5
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
6. INVENTORIES
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
<S> <C> <C>
Crude oil and petroleum products ....... $ 821 $ 554
Other merchandise ...................... 29 33
Materials and supplies ................. 120 116
-------- --------
Inventories ........................ $ 970 $ 703
======== ========
</TABLE>
7. 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 made under existing company
severance policies, generally based on years of service up to a maximum amount
that varied by country.
During 1999, 704 employees left Conoco as part of the implementation of
the realignment plans, with related charges against the restructuring reserve
of $68. In the fourth quarter 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 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 six months of 2000, 79 employees left Conoco as part of
the realignment plans. Related charges against the reserve totaled $6. The
remaining reserve balance was reversed to earnings in the second quarter of
2000.
8. 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 June 30, 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 that date. 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, actions related
to gas measurement and valuation methods, actions related to joint interest
billings to operating agreement partners, and claims for damages resulting from
leaking underground storage tanks. As a result of the separation agreement with
DuPont, Conoco has also assumed responsibility for current and future claims
related to certain discontinued chemicals and agricultural chemicals businesses
operated by Conoco in the past. In general, the effect on future financial
results is not subject to reasonable estimation because considerable
uncertainty exists. Conoco believes the ultimate liabilities resulting from
such lawsuits and claims may be significant to results of operations in the
period in which they are recognized but will not materially affect the
consolidated financial position of Conoco.
On May 2, 2000, a jury in federal court in Virginia found that Conoco
infringed several patents of General Technology Applications (GTA) involving
part of a process for manufacturing a flow improver product and awarded
6
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
$55 in damages to GTA. In ruling on the post-trial motions, the judge declined
to treble the damages. The judge granted an injunction against Conoco but
stayed it pending appeal. Conoco 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 June 30, 2000, the environmental accrual amounted to $108 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. These agreements provide for
Conoco to use the services of, or purchase products from, these affiliated and
other companies to ensure these companies achieve specified minimum revenues.
At June 30, 2000, these indirect guarantees totaled $7. In addition, at June
30, 2000, Conoco or DuPont, on behalf of and indemnified by Conoco, had
directly guaranteed $1,148 of the obligations of certain affiliated companies
and others. No material loss is anticipated by reason of such agreements and
guarantees.
9. COMPREHENSIVE INCOME
The following sets forth Conoco's comprehensive income for the periods
shown:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income .................................. $ 456 $ 114 $ 855 $ 197
Other comprehensive loss
Foreign currency translation adjustment ... (175) (12) (220) (105)
-------- -------- -------- --------
Comprehensive income ................. $ 281 $ 102 $ 635 $ 92
======== ======== ======== ========
</TABLE>
10. 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 the 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.
7
<PAGE> 10
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 JUNE 30, 2000
Sales and other operating revenues ....... $ 1,129 $ 803 $ 4,507 $ 2,918 $ -- $ 9,357
Transfers between segments ............... 169 163 51 150 -- --
----------- ----------- ----------- ----------- ----------- -----------
Total operating revenues ........... $ 1,298 $ 966 $ 4,558 $ 3,068 $ -- $ 9,357
=========== =========== =========== =========== =========== ===========
Operating profit ......................... $ 195 $ 434 $ 132 $ 50 $ (52) $ 759
Equity in earnings of affiliates ......... 2 52 20 3 -- 77
Non-operating items
Interest and debt expense ........... -- -- -- -- (89) (89)
Interest income (net of misc.
interest expense) .................. -- -- -- -- 12 12
Other ............................... -- -- -- -- 15 15
----------- ----------- ----------- ----------- ----------- -----------
Income before income taxes ............... 197 486 152 53 (114) 774
Provision for income taxes ............... (64) (223) (54) (14) 37 (318)
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) (1) .............. $ 133 $ 263 $ 98 $ 39 $ (77) $ 456
=========== =========== =========== =========== =========== ===========
THREE MONTHS ENDED JUNE 30, 1999
Sales and other operating revenues ....... $ 701 $ 443 $ 2,703 $ 2,402 $ 3 $ 6,252
Transfers between segments ............... 88 105 27 62 -- --
----------- ----------- ----------- ----------- ----------- -----------
Total operating revenues ........... $ 789 $ 548 $ 2,730 $ 2,464 $ 3 $ 6,252
=========== =========== =========== =========== =========== ===========
Operating profit ......................... $ 53 $ 137 $ 13 $ 31 $ (33) $ 201
Equity in earnings of affiliates ......... 2 25 15 (5) -- 37
Non-operating items
Interest and debt expense ........... -- -- -- -- (79) (79)
Interest income (net of misc.
interest expense) ................. -- -- -- -- 6 6
Other ............................... -- -- -- -- (5) (5)
----------- ----------- ----------- ----------- ----------- -----------
Income before income taxes ............... 55 162 28 26 (111) 160
Provision for income taxes ............... (3) (76) -- (7) 40 (46)
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) .................. $ 52 $ 86 $ 28 $ 19 $ (71) $ 114
=========== =========== =========== =========== =========== ===========
SIX MONTHS ENDED JUNE 30, 2000
Sales and other operating revenues ....... $ 2,136 $ 1,698 $ 8,224 $ 5,822 $ 1 $ 17,881
Transfers between segments ............... 346 331 88 285 -- --
----------- ----------- ----------- ----------- ----------- -----------
Total operating revenues ........... $ 2,482 $ 2,029 $ 8,312 $ 6,107 $ 1 $ 17,881
=========== =========== =========== =========== =========== ===========
Operating profit ......................... $ 404 $ 937 $ 92 $ 115 $ (88) $ 1,460
Equity in earnings of affiliates ......... 7 124 27 (1) -- 157
Non-operating items
Interest and debt expense ........... -- -- -- -- (172) (172)
Interest income (net of misc.
interest expense) .................. -- -- -- -- 23 23
Other ............................... -- -- -- -- 18 18
----------- ----------- ----------- ----------- ----------- -----------
Income before income taxes ............... 411 1,061 119 114 (219) 1,486
Provision for income taxes ............... (136) (501) (35) (26) 67 (631)
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) (1) .............. $ 275 $ 560 $ 84 $ 88 $ (152) $ 855
=========== =========== =========== =========== =========== ===========
</TABLE>
8
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
<TABLE>
<CAPTION>
UPSTREAM DOWNSTREAM
-------------------------- ---------------------------- CORPORATE
UNITED UNITED AND
SEGMENT INFORMATION (CONTINUED) STATES INTERNATIONAL STATES INTERNATIONAL OTHER CONSOLIDATED
-------------------------------- ----------- ------------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1999
Sales and other operating revenues ....... $ 1,407 $ 922 $ 4,665 $ 4,545 $ 24 $ 11,563
Transfers between segments ............... 162 184 45 105 -- --
----------- ----------- ----------- ----------- ----------- -----------
Total operating revenues .......... $ 1,569 $ 1,106 $ 4,710 $ 4,650 $ 24 $ 11,563
=========== =========== =========== =========== =========== ===========
Operating profit ......................... $ 84 $ 256 $ 27 $ 89 $ (53) $ 403
Equity in earnings of affiliates ......... 4 20 23 (14) -- 33
Non-operating Items
Interest and debt expense .......... -- -- -- -- (150) (150)
Interest income (net of misc.
interest expense) ................. -- -- -- -- 9 9
Other .............................. -- -- -- -- (1) (1)
----------- ----------- ----------- ----------- ----------- -----------
Income before income taxes ............... 88 276 50 75 (195) 294
Provision for income taxes ............... 4 (122) (5) (33) 59 (97)
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) ................. $ 92 $ 154 $ 45 $ 42 $ (136) $ 197
=========== =========== =========== =========== =========== ===========
----------
(1) Includes after-tax benefits (charges) from special items:
THREE MONTHS ENDED JUNE 30, 2000
Litigation and settlement charges ........ $ -- $ -- $ -- $ -- $ (4) $ (4)
----------- ----------- ----------- ----------- ----------- -----------
Total .............................. $ -- $ -- $ -- $ -- $ (4) $ (4)
=========== =========== =========== =========== =========== ===========
SIX MONTHS ENDED JUNE 30, 2000
Asset sales .............................. $ 27 $ -- $ -- $ -- $ -- $ 27
Litigation and settlement charges ........ -- -- (16) -- (4) (20)
Property impairments ..................... -- -- (3) -- -- (3)
----------- ----------- ----------- ----------- ----------- -----------
Total .............................. $ 27 $ -- $ (19) $ -- $ (4) $ 4
=========== =========== =========== =========== =========== ===========
</TABLE>
Special items for the second quarter of 2000 included a loss of $4 for
settlement costs associated with the separation agreement from DuPont related
to a discontinued business.
In addition to the special item set forth in the previous paragraph,
special items for the first six months of 2000 included a $27 gain from the
sale of natural gas processing assets in the U.S. and a $19 loss for litigation
provisions and a write-off of related refinery assets.
There were no special items in the second quarter or first six months of
1999.
9
<PAGE> 12
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 six months of 2000 increased $444
million to $1,114 million versus $670 million in the first six months of 1999.
Cash provided by operations before changes in operating assets and liabilities
increased $600 million compared to the first six months of 1999, primarily due
to higher crude oil, natural gas and natural gas liquids prices, along with
increased production and higher dividends from equity affiliates. Negative
changes to net operating assets and liabilities of $156 million were due to
increased inventories, a decrease in trust fund balances in 1999 related to the
sale and purchase of certain assets, and funds required for the recent
commencement of a service contract in Syria, partially offset by higher taxes
payable. The seasonal increase in crude oil and petroleum products inventory
volumes during the first six months of 2000 was greater than in the prior year
period. Prices applied to these increased inventory volumes were also higher.
INVESTING ACTIVITIES
CAPITAL EXPENDITURES AND INVESTMENTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
2000 1999
------------ ------------
(IN MILLIONS)
<S> <C> <C>
Upstream
United States ...................................... $ 253 $ 207
International ...................................... 501 376
------------ ------------
Total upstream ................................. 754 583
Downstream
United States ...................................... 120 79
International ...................................... 114 119
------------ ------------
Total downstream ............................... 234 198
Corporate and other .................................... 73 13
------------ ------------
Total capital expenditures and investments ..... $ 1,061 $ 794
============ ============
United States ...................................... $ 446 $ 299
International ...................................... 615 495
------------ ------------
Total .......................................... $ 1,061 $ 794
============ ============
</TABLE>
Total capital expenditures and investments were $1,061 million, an
increase of $267 million, or 34 percent, versus capital expenditures and
investments of $794 million for the first six months of 1999. The increase was
primarily due to higher spending on upstream capital projects and the
construction of a power generation facility. A more detailed description and
analysis of capital expenditures and investments by operating segment within
the United States and international follows below. Capital expenditures and
investments include capitalized exploratory wells but do not include expensed
exploration costs.
Upstream
Upstream capital expenditures and investments totaled $754 million in the
first six months of 2000 compared to $583 million for the first six months of
1999. The increase of $171 million, or approximately 29 percent, was primarily
as a result of the acquisition of Canadian natural gas processing and gathering
assets.
10
<PAGE> 13
United States
During the first six months of 2000, Conoco spent $253 million on U.S.
capital projects, an increase of $46 million, or 22 percent, from $207 million
in the first six months of 1999. Expenditures in the first six months of 2000
were focused on development drilling in various locations.
International
International upstream capital expenditures and investments totaled $501
million in the first six months of 2000, an increase of $125 million, or 33
percent, from $376 million in the first six months of 1999. The increase in
2000 expenditures was primarily as 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.
Conoco has agreed to acquire interests in several North Sea properties by
purchasing for $540 million Saga UK Ltd., an oil and gas group owned by Norsk
Hydro ASA of Norway. We completed this acquisition in August 2000.
Downstream
Downstream capital expenditures and investments totaled $234 million in
the first six months of 2000, an increase of $36 million, or 18 percent, versus
$198 million in the first six months of 1999, primarily reflecting increased
expenditures in the United States.
United States
During the first six months of 2000, Conoco spent $120 million on
downstream U.S. capital projects, up $41 million, or 52 percent, from $79
million in the first six months of 1999. Expenditures in the first six months
of 2000 were focused on the new units being installed at our Lake Charles,
Louisiana refinery to process synthetic crude from Petrozuata, as well as our
ongoing refining and marketing operations.
International
During the first six months of 2000, Conoco spent $114 million on
downstream international capital expenditures and investments, down $5 million,
or 4 percent, from $119 million in the first six 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 $73 million in the first
six months of 2000, an increase of $60 million, compared to $13 million in the
first six months of 1999. The increased expenditures during the first six
months of 2000 were primarily related to the construction of a domestic power
generation facility.
PROCEEDS FROM SALES OF ASSETS AND SUBSIDIARIES
Proceeds from asset sales amounted to $125 million for the first six
months of 2000, an increase of $87 million, from $38 million in the first six
months of 1999. Proceeds in 2000 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.
11
<PAGE> 14
At June 30, 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, with four years remaining, in the amount of $650 million.
At June 30, 2000, Conoco had no outstanding borrowings under the credit
facility. Conoco maintains a $2,000 million U.S. commercial paper program that
is fully supported by the credit facility. The program gives Conoco the ability
to issue commercial paper at any time with maturities not to exceed 270 days.
The weighted-average interest rate on commercial paper of $737 million
outstanding at June 30, 2000 was 6.81 percent.
Conoco recently began a Euro 500 million European commercial paper
program. The program gives Conoco the ability to issue commercial paper in the
European market at any time with maturities not to exceed 183 days. The program
is an alternative to the use of U.S. commercial paper and is not expected to
increase the company's current debt level. This program will complement our
$2,000 million U.S. commercial paper program and is fully supported by our
existing revolving credit facility. At June 30, 2000, there was no outstanding
commercial paper under this program.
Total Conoco debt was $4,845 million at June 30, 2000, up $102 million
versus $4,743 million at December 31, 1999. The total debt-to-capitalization
ratio was 49.8 percent at June 30, 2000 and 51.0 percent at December 31, 1999.
12
<PAGE> 15
(b) RESULTS OF OPERATIONS
CONSOLIDATED RESULTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
SALES AND OTHER OPERATING REVENUES
Upstream
United States ......................................... $ 1,129 $ 701 $ 2,136 $ 1,407
International ......................................... 803 443 1,698 922
---------- ---------- ---------- ----------
Total upstream ...................................... 1,932 1,144 3,834 2,329
Downstream
United States ......................................... 4,507 2,703 8,224 4,665
International ......................................... 2,918 2,402 5,822 4,545
---------- ---------- ---------- ----------
Total downstream .................................... 7,425 5,105 14,046 9,210
Corporate and other operating........................... -- 3 1 24
---------- ---------- ---------- ----------
Total sales and other operating revenues ............ $ 9,357 $ 6,252 $ 17,881 $ 11,563
========== ========== ========== ==========
AFTER-TAX OPERATING INCOME
Upstream
United States ......................................... $ 133 $ 52 $ 275 $ 92
International ......................................... 263 86 560 154
---------- ---------- ---------- ----------
Total upstream ...................................... 396 138 835 246
Downstream
United States ......................................... 98 28 84 45
International ......................................... 39 19 88 42
---------- ---------- ---------- ----------
Total downstream .................................... 137 47 172 87
Corporate and other operating .......................... (33) (19) (58) (34)
---------- ---------- ---------- ----------
Total after-tax operating income .................... 500 166 949 299
INTEREST AND OTHER NON-OPERATING INCOME (EXPENSES) NET
OF TAX ................................................ (44) (52) (94) (102)
---------- ---------- ---------- ----------
NET INCOME .......................................... $ 456 $ 114 $ 855 $ 197
========== ========== ========== ==========
</TABLE>
SPECIAL ITEMS
Net income includes the following non-recurring items (special items)
on an after-tax basis:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <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) $ --
========== ========== ========== ==========
CORPORATE AND OTHER OPERATING
Litigation and settlement charges ....................... $ (4) $ -- $ (4) $ --
---------- ---------- ---------- ----------
Total corporate and other operating special items .... $ (4) $ -- $ (4) $ --
========== ========== ========== ==========
TOTAL SPECIAL ITEMS .................................. $ (4) $ -- $ 4 $ --
========== ========== ========== ==========
</TABLE>
13
<PAGE> 16
Special items for the second quarter of 2000 included a loss of $4 million
for settlement costs associated with the separation agreement from DuPont
related to a discontinued business.
In addition to the special item set forth in the previous paragraph,
special items for the first six months of 2000 included a $27 million gain from
the sale of natural gas processing assets in the U.S. and a $19 million loss
for litigation provisions and a write-off of related refinery assets.
There were no special items in the second quarter or first six months of
1999.
Second Quarter 2000 versus Second Quarter 1999
Net income was $456 million in the second quarter of 2000, up 300 percent
from $114 million in the second quarter of 1999. Conoco had net income before
special items of $460 million in the second quarter of 2000, up 304 percent
from $114 million in the second quarter of 1999. These increases primarily
reflected higher crude oil, natural gas and natural gas liquids prices and
stronger refining margins, combined with increased production, partly offset by
higher operating expenses and lower marketing margins in Europe.
Sales and other operating revenues for the second quarter of 2000 were
$9,357 million, up 50 percent from $6,252 million in the second quarter of
1999, primarily due to higher crude oil and natural gas prices and improved
refined product prices, along with increased production and refined product
sales volumes. Conoco's worldwide net realized crude oil price was $26.11 per
barrel for the quarter, up $10.96 per barrel, or 72 percent, from $15.15 per
barrel in the second quarter of 1999. Worldwide net realized natural gas prices
averaged $2.56 per thousand cubic feet (mcf) for the quarter, compared with
$1.83 per mcf in the same period in 1999, an improvement of 40 percent.
Income from equity affiliates for the second quarter of 2000 was $77
million, up $40 million compared to $37 million in the second quarter of 1999.
Additional crude oil volumes from our Petrozuata joint venture, higher crude
oil prices and the impact of the improved refining environment on our Excel
Paralubes and Melaka refinery downstream joint ventures primarily drove this
increase.
Other income for the second quarter of 2000 was $72 million, up 80 percent
from $40 million in the second quarter of 1999, primarily due to higher foreign
exchange gains and interest income.
Worldwide petroleum liquids production, including our share of equity
affiliates, in the second quarter of 2000 was 361,000 barrels per day versus
344,000 barrels per day in the second quarter of 1999, a 5 percent increase.
U.S. petroleum liquids production was up 12 percent as a result of additional
volumes from the Ursa field in the Gulf of Mexico. International petroleum
liquids production was up 3 percent to 278,000 barrels per day due to increased
production volumes from our Petrozuata joint venture, as well as production
from properties in Vietnam that were acquired in early 2000.
Worldwide natural gas production, including our share of equity
affiliates, in the second quarter of 2000 was up 8 percent to 1,703 million
cubic feet (mmcf) per day from 1,579 mmcf per day in the second quarter of
1999. U.S. natural gas production was down 7 percent, primarily as a result of
the more focused drilling program in the South Texas Lobo field, plus natural
declines elsewhere. International natural gas production was up 28 percent due
to increased production from the Britannia, Murdoch and "V" fields in the U.K.,
as well as new production from the U.K. Vampire field and properties in Canada
that were acquired in late 1999.
Worldwide refined product sales in the second quarter of 2000 were
1,601,000 barrels per day, up 38 percent from the second quarter of 1999,
primarily due to increased sales in the U.S. 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 second quarter of 2000
totaled $2,218 million, up 72 percent compared to $1,288 million in the second
quarter of 1999, primarily due to higher crude oil and refined product prices
and increased refined product sales volumes.
Cost of goods sold for the second quarter of 2000 totaled $5,758 million,
an increase of $2,363 million, or 70 percent, compared to $3,395 million in the
second quarter of 1999, primarily due to higher refinery feedstock costs and
increased throughputs.
14
<PAGE> 17
Operating expenses for the second quarter of 2000 were $547 million, up
$60 million, or 12 percent, compared to $487 million for the second quarter of
1999. This increase was primarily due to increased production and higher
overall compensation charges as a result of record earnings.
Selling, general and administrative expenses for the second quarter of
2000 were $193 million, a decrease of $4 million, or 2 percent, compared to
$197 million for the second quarter of 1999.
Exploration expenses for the second quarter of 2000 totaled $58 million,
down 22 percent compared to $74 million in the second quarter of 1999,
primarily driven by lower dry hole costs.
Depreciation, depletion and amortization (DD&A) for the second quarter of
2000 totaled $309 million, an increase of $27 million, or 10 percent, compared
to $282 million in the second quarter of 1999. This increase was primarily due
to higher production and rate changes.
Provision for income taxes for the second quarter of 2000 totaled $318
million, up 591 percent compared to $46 million for the second quarter of 1999,
reflecting significantly higher pretax income. The effective tax rate of
approximately 41 percent in the second quarter of 2000, compared to 29 percent
in the second quarter of 1999, was higher due to a greater portion of 2000
earnings being generated by operations in countries with higher effective tax
rates and the reduced impact of U.S. alternative fuels tax credits on higher
pretax income in 2000.
First Six Months 2000 versus First Six Months 1999
Conoco had net income of $855 million in the first six months of 2000, up
334 percent from $197 million in the first six months of 1999. Conoco had net
income before special items of $851 million in the first six months of 2000, up
332 percent from $197 million in the first six months of 1999. These increases
primarily reflected higher crude oil, natural gas and natural gas liquids
prices and stronger refining margins, combined with increased production,
partly offset by higher operating expenses.
Sales and other operating revenues for the first six months of 2000 were
$17,881 million, up 55 percent from $11,563 million in the first six months of
1999, primarily due to higher crude oil and natural gas prices and improved
refined product prices, along with increased production and refined product
sales volumes. Conoco's worldwide net realized crude oil price was $26.20 per
barrel for the first six months of 2000, up $13.18 per barrel, or 101 percent,
from $13.02 per barrel in the first six months of 1999. Worldwide net realized
natural gas prices averaged $2.44 per mcf for the first six months of 2000,
compared with $1.96 per mcf in the same period in 1999, an improvement of 24
percent.
Income from equity affiliates for the first six months of 2000 was $157
million, up $124 million compared to $33 million in the first six months of
1999. Additional crude oil volumes from our Petrozuata joint venture, higher
crude oil prices and the impact of the improved refining environment on our
Excel Paralubes and Melaka refinery downstream joint ventures primarily drove
this increase.
Other income for the first six months of 2000 was $159 million, up 134
percent from $68 million in the first six months of 1999, primarily due to the
gain from the sale of natural gas processing assets in the U.S., higher foreign
exchange gains and additional interest income.
Worldwide petroleum liquids production, including our share of equity
affiliates, in the first six months of 2000 was 368,000 barrels per day versus
348,000 barrels per day in the first six months of 1999, a 6 percent increase.
U.S. petroleum liquids production was up 11 percent as a result of additional
volumes from the Ursa field. International petroleum liquids production was up
4 percent to 289,000 barrels per day due to increased production volumes in
Venezuela and Norway, and production from properties in Vietnam acquired in
early 2000, partly offset by decreases in the U.K. and Indonesia.
Worldwide natural gas production, including our share of equity
affiliates, in the first six months of 2000 was up 4 percent to 1,773 mmcf per
day from 1,697 mmcf per day in the first six months of 1999. U.S. natural gas
production was down 11 percent, primarily as a result of the more focused
drilling program in the Lobo field, plus natural declines elsewhere.
International natural gas volumes were up 22 percent due to increased
production from
15
<PAGE> 18
the Britannia and "V" fields in the U.K., as well as new production from the
U.K. Vampire field and properties in Canada acquired in late 1999.
Worldwide refined product sales in the first six months of 2000 were
1,486,000 barrels per day, up 31 percent from the first six months of 1999,
primarily due to increased sales in the U.S. and Europe and increased
throughput at the Melaka refinery. Crude oil and refined product buy/sell and
natural gas and electric power resale activities in the first six months of
2000 totaled $4,078 million, up 82 percent compared to $2,245 million in the
first six months of 1999, primarily due to higher crude oil and refined product
prices and increased refined product sales volumes.
Cost of goods sold for the first six months of 2000 totaled $10,882
million, an increase of $4,959 million, or 84 percent, compared to $5,923
million in the first six months of 1999, reflecting higher refinery feedstock
costs and increased throughputs.
Operating expenses for the first six months of 2000 were $1,053 million,
up $89 million, or 9 percent, compared to $964 million for the first six months
of 1999. This increase was primarily due to litigation provisions recorded in
the first quarter, increased production and higher overall compensation charges
as a result of record earnings.
Selling, general and administrative expenses for the first six months of
2000 were $381 million, a decrease of $2 million, or 1 percent, compared to
$383 million for the first six months of 1999.
Exploration expenses for the first six months of 2000 totaled $95 million,
a decline of 21 percent, compared to $120 million in the first six months of
1999, primarily driven by lower dry hole costs and lower costs associated with
a more focused exploration program.
DD&A for the first six months of 2000 totaled $648 million, an increase of
$64 million, or 11 percent, compared to $584 million in the first six months of
1999. This increase was primarily due to higher volumes and rate changes and
the write-down of a non-operating natural gas processing plant in the first
quarter.
Provision for income taxes for the first six months of 2000 totaled $631
million, up 551 percent compared to $97 million for the first six months of
1999, reflecting significantly higher pretax income. The effective tax rate of
approximately 42 percent in the first six months of 2000, compared to 33
percent in the first six months of 1999, was higher due to a greater portion of
2000 earnings being generated by operations in countries with higher effective
tax rates and the reduced impact of U.S. alternative fuels tax credits on
higher pretax income in 2000.
UPSTREAM SEGMENT RESULTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
After-tax operating income
United States ...................... $ 133 $ 52 $ 275 $ 92
International ...................... 263 86 560 154
--------- --------- --------- ---------
After-tax operating income ....... $ 396 $ 138 $ 835 $ 246
Special items
United States ...................... $ -- $ -- $ (27) $ --
International ...................... -- -- -- --
--------- --------- --------- ---------
Special items .................... $ -- $ -- $ (27) $ --
Earnings before special items
United States ...................... $ 133 $ 52 $ 248 $ 92
International ...................... 263 86 560 154
--------- --------- --------- ---------
Earnings before special items .... $ 396 $ 138 $ 808 $ 246
========= ========= ========= =========
</TABLE>
16
<PAGE> 19
Second Quarter 2000 versus Second Quarter 1999
Upstream earnings before special items were $396 million in the second
quarter of 2000, up 187 percent from $138 million in the second quarter of
1999, driven by strong crude oil, natural gas, and natural gas liquids prices,
coupled with increased production. U.S. upstream earnings before special items
totaled $133 million in the second quarter of 2000, up 156 percent from $52
million in the comparable period of 1999, reflecting higher crude oil, natural
gas and natural gas liquids prices and increased petroleum liquids production.
Partly offsetting this increase was an anticipated drop in natural gas volumes
due to the more focused drilling program in the Lobo field. International
upstream earnings before special items were $263 million, an increase of 206
percent, from $86 million in the comparable period in 1999. The improvement was
primarily attributable to higher prices, production growth and lower
exploration expenses.
First Six Months 2000 versus First Six Months 1999
Upstream earnings before special items were $808 million in the first six
months of 2000, up 228 percent from $246 million in the first six months of
1999. U.S. upstream earnings before special items totaled $248 million in the
first six months of 2000, up 170 percent from $92 million in the comparable
period of 1999, on higher crude oil, natural gas, and natural gas liquids
prices and increased petroleum liquids production. Partly offsetting this
increase was an anticipated drop in natural gas volumes due to the more focused
drilling program in the Lobo field. International upstream earnings before
special items were $560 million, an increase of 264 percent, from $154 million
in the comparable period in 1999. The improvement was primarily attributable to
higher prices, production growth and lower exploration expenses.
DOWNSTREAM SEGMENT RESULTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
After-tax operating income
United States ...................... $ 98 $ 28 $ 84 $ 45
International ...................... 39 19 88 42
---------- ---------- ---------- ----------
After-tax operating income ....... $ 137 $ 47 $ 172 $ 87
Special items
United States ...................... $ -- $ -- $ 19 $ --
International ...................... -- -- -- --
---------- ---------- ---------- ----------
Special items .................... $ -- $ -- $ 19 $ --
Earnings before special items
United States ...................... $ 98 $ 28 $ 103 $ 45
International ...................... 39 19 88 42
---------- ---------- ---------- ----------
Earnings before special items .... $ 137 $ 47 $ 191 $ 87
========== ========== ========== ==========
</TABLE>
Second Quarter 2000 versus Second Quarter 1999
Downstream earnings before special items were $137 million for the second
quarter of 2000, an increase of 191 percent from $47 million in the comparable
period in 1999. U.S. downstream earnings before special items were $98 million
for the second quarter of 2000, up 250 percent from $28 million for the second
quarter of 1999. The increase was primarily attributable to the impact of
stronger refining margins, higher refinery throughputs and improved refinery
yields, partly offset by depressed margins for co-products such as premium
petroleum coke caused by higher feedstock prices. International downstream
earnings before special items were $39 million for the second quarter of 2000,
up 105 percent from $19 million in the comparable period in 1999, reflecting
the improved refining environment, partly offset by lower European marketing
earnings and co-product margins.
17
<PAGE> 20
First Six Months 2000 versus First Six Months 1999
Downstream earnings before special items were $191 million for the first
six months of 2000, an increase of 120 percent from $87 million in the
comparable period in 1999. U.S. downstream earnings before special items were
$103 million for the first six months of 2000, up 129 percent from $45 million
for the first six months of 1999, primarily attributable to stronger refining
margins, partly offset by depressed co-product margins. International downstream
earnings before special items were $88 million for the first six months of 2000,
up 110 percent from $42 million in the comparable period in 1999, reflecting the
improved refining environment, partly offset by the impact of lower European
marketing earnings and co-product margins.
CORPORATE AND OTHER OPERATING SEGMENT RESULTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
After-tax operating loss ......................... $ (33) $ (19) $ (58) $ (34)
Special items .................................... 4 -- 4 --
-------- -------- -------- --------
Losses before special items .................... $ (29) $ (19) $ (54) $ (34)
======== ======== ======== ========
</TABLE>
Second Quarter 2000 versus Second Quarter 1999
Corporate and other operating losses before special items were $29 million
for the second quarter of 2000, an increase of $10 million compared to the
second quarter of 1999, primarily due to Conoco's new corporate advertising
program and a minority interest preferred return related to the sale of certain
corporate assets.
First Six Months 2000 versus First Six Months 1999
Corporate and other operating losses before special items were $54 million
for the first six months of 2000, an increase of 59 percent from a loss of $34
million for the comparable period in 1999. The increase is a result of
increased business development costs in the emerging power sector, the
introduction of Conoco's corporate advertising program and a minority interest
preferred return related to the sale of certain corporate assets.
INTEREST AND OTHER NON-OPERATING INCOME (EXPENSES) NET OF TAX
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Interest expense on debt ....... $ (70) $ (57) $ (136) $ (112)
Interest income ................ 10 1 18 4
Exchange gains ................. 16 4 24 6
-------- -------- -------- --------
Total ....................... $ (44) $ (52) $ (94) $ (102)
======== ======== ======== ========
</TABLE>
Second Quarter 2000 versus Second Quarter 1999
Interest and other non-operating expenses for the second quarter of 2000
amounted to $44 million, a decrease of $8 million, or 15 percent, compared to
$52 million in the comparable period in 1999. This improvement is attributable
to foreign currency exchange gains and higher interest income, partially offset
by higher interest expense on debt.
First Six Months 2000 versus First Six Months 1999
Interest and other non-operating expenses for the first six months of 2000
amounted to $94 million, a decrease of $8 million, or 8 percent compared to
$102 million in the comparable period of 1999. This improvement is attributable
to foreign currency exchange gains and higher interest income, partially offset
by higher interest expense on debt.
18
<PAGE> 21
TAX MATTERS
During the first six months of 2000, Conoco recorded deferred tax assets
of $41 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.
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 made under
existing company severance policies, generally based on years of service up to
a maximum amount that varied by country.
During 1999, 704 employees left Conoco as part of the implementation of
the realignment plans, with related charges against the restructuring reserve
of $68 million. In the fourth quarter 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 six months of 2000, 79 employees left Conoco as part of
the realignment plans. Related charges against the reserve totaled $6 million.
The remaining reserve balance was reversed to earnings in the second quarter of
2000.
19
<PAGE> 22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISKS
Information about foreign currency risk and interest rate risk for the six
months ended June 30, 2000 did not differ materially from that discussed under
"Quantitative and Qualitative Disclosures 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 six months ended June 30, 2000,
are summarized below.
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 as follows:
<TABLE>
<CAPTION>
CHANGE IN FAIR VALUE
FROM 10% ADVERSE
FAIR VALUE PRICE CHANGE
------------ -------------------
(IN MILLIONS)
<S> <C> <C>
AT JUNE 30, 2000
Crude Oil and Refined Products
Trading ........................ $ 11 $ 4
Non-trading (1) ................ 1 (6)
------------ ------------
Combined ..................... $ 12 $ (2)
Natural Gas
Trading ........................ $ 5 $ (2)
Non-trading .................... 43 (17)
------------ ------------
Combined ..................... $ 48 $ (19)
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.
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.
20
<PAGE> 23
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments with respect to the legal
proceedings previously reported in the 1999 Annual Report on Form 10-K and the
first quarter 2000 report on Form 10-Q.
In June 1998, the United States Environmental Protection Agency and the
Louisiana Department of Environmental Quality conducted a multi-media
environmental inspection of Conoco's Lake Charles refinery. Conoco has been
advised that the United States and the State of Louisiana, in response to the
inspection findings, are contemplating filing an enforcement action under the
Clean Water Act and Clean Air Act. Governmental monetary sanctions resulting
from this matter could be in excess of $100,000.
In February 2000, Conoco voluntarily disclosed the results of a
self-initiated environmental audit of its Ponca City refinery to the Oklahoma
Department of Environmental Quality (ODEQ). In response to the audit findings,
Conoco and the ODEQ entered into cooperative negotiations to address compliance
issues identified by the audit. As a result, Conoco and the ODEQ have agreed to
enter into a consent order to resolve these issues. The consent order will
assess monetary sanctions against Conoco in the amount of $462,000, $363,000 of
which may be satisfied by the timely implementation of a supplemental
environmental project.
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, actions related
to gas measurement and valuation methods, actions related to joint interest
billings to operating agreement partners, and claims for damages resulting from
leaking underground storage tanks. As a result of the separation agreement with
DuPont, Conoco has also assumed responsibility for current and future claims
related to certain discontinued chemicals and agricultural chemicals businesses
operated by Conoco in the past. In general, the effect on future financial
results is not subject to reasonable estimation because considerable
uncertainty exists. Conoco believes the ultimate liabilities resulting from
such lawsuits and claims may be significant to results of operations in the
period in which they are recognized but will not materially affect the
consolidated financial position of Conoco.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Conoco's annual meeting of stockholders was held on May 16, 2000 for the
purpose of (1) electing three directors and (2) ratifying the appointment of
PricewaterhouseCoopers LLP as Conoco's independent public accountants for 2000.
1. Election of Directors
Stockholders elected Archie W. Dunham, William K. Reilly and Franklin A.
Thomas, each for a three-year term expiring at the 2003 Annual Meeting. The
vote tabulation for each individual director was as follows:
<TABLE>
<CAPTION>
DIRECTOR FOR WITHHELD
-------- --- --------
<S> <C> <C>
Archie W. Dunham........................... 2,110,666,431 22,851,516
William K. Reilly.......................... 1,897,044,544 236,473,403
Franklin A. Thomas......................... 2,110,307,496 23,210,451
</TABLE>
Directors continuing in office were Kenneth M. Duberstein, Ruth R. Harkin,
Charles C. Krulak, Frank A. McPherson, William R. Rhodes and A. R. "Tony"
Sanchez, Jr.
2. Proposal ratifying the appointment of PricewaterhouseCoopers LLP as
Conoco's independent public accountants for 2000.
<TABLE>
<S> <C>
For......................................... 2,123,500,335
Against..................................... 1,898,410
Abstain..................................... 8,119,202
</TABLE>
21
<PAGE> 24
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;
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
None.
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<PAGE> 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The exhibit index filed with this Form 10-Q is on page 25.
(b) REPORTS ON FORM 8-K
None.
23
<PAGE> 26
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: August 10, 2000
24
<PAGE> 27
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.1 Conoco Inc. Key Employee Severance Plan, as amended*
10.2 Conoco Inc. Key Employee Temporary Severance Plan, as amended*
12 Computation of Ratio of Earnings to Fixed Charges*
27 Financial Data Schedule*
* Filed herein.
</TABLE>
25
