<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 SEPTEMBER 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)
<TABLE>
<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 [ ]
186,403,741 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 November 6, 2000.
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CONOCO INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C> <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............................................................................ 11
(b) Results of Operations.......................................................................... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................... 21
Part II - Other Information
Item 1. Legal Proceedings.............................................................................. 23
Item 5. Other Information
(a) Disclosure Regarding Forward-Looking Information............................................... 23
(b) Other Events................................................................................... 24
Item 6. Exhibits and Reports on Form 8-K............................................................... 25
Signature ............................................................................................... 26
Exhibit Index .......................................................................................... 27
</TABLE>
i
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONOCO INC.
CONSOLIDATED STATEMENT OF INCOME (NOTES 1 AND 3)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(IN MILLIONS, EXCEPT PER SHARE)
<S> <C> <C> <C> <C>
Revenues
Sales and Other Operating Revenues* .............. $ 10,587 $ 7,409 $ 28,468 $ 18,972
Equity in Earnings of Affiliates ................. 87 51 244 84
Other Income ..................................... 23 25 182 93
---------- ---------- ---------- ----------
Total Revenues ........................... 10,697 7,485 28,894 19,149
---------- ---------- ---------- ----------
Cost and Expenses
Cost of Goods Sold ............................... 6,767 4,212 17,649 10,135
Operating Expenses ............................... 520 545 1,573 1,509
Selling, General and Administrative Expenses ..... 199 205 580 588
Exploration Expenses ............................. 81 65 176 185
Depreciation, Depletion and Amortization ......... 305 296 953 880
Taxes Other Than on Income* ...................... 1,782 1,697 5,262 4,943
Interest and Debt Expense ........................ 78 80 250 230
---------- ---------- ---------- ----------
Total Costs and Expenses ................. 9,732 7,100 26,443 18,470
---------- ---------- ---------- ----------
Income Before Income Taxes ........................... 965 385 2,451 679
Provision for Income Taxes ........................... 468 162 1,099 259
---------- ---------- ---------- ----------
Net Income (Note 10) ................................. $ 497 $ 223 $ 1,352 $ 420
========== ========== ========== ==========
Earnings Per Share (Note 4)
Basic ............................................ $ .80 $ .36 $ 2.16 $ .67
Diluted .......................................... $ .79 $ .35 $ 2.14 $ .66
Weighted-average Shares Outstanding (Note 4)
Basic ............................................ 623 627 625 627
Diluted .......................................... 632 637 633 637
Dividends Per Share of Common Stock (Note 5) ......... $ .19 $ .19 $ .57 $ .52
----------
*Includes petroleum excise taxes ..................... $ 1,729 $ 1,654 $ 5,113 $ 4,810
</TABLE>
See notes to consolidated financial statements
1
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CONOCO INC.
CONSOLIDATED BALANCE SHEET (NOTES 1 AND 3)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
ASSETS (IN MILLIONS)
<S> <C> <C>
Current Assets
Cash and Cash Equivalents ........................................................ $ 217 $ 317
Accounts and Notes Receivable .................................................... 2,073 1,735
Inventories (Note 6) ............................................................. 885 703
Other Current Assets ............................................................. 419 313
------------- ------------
Total Current Assets ....................................................... 3,594 3,068
Property, Plant and Equipment ....................................................... 23,429 22,476
Less: Accumulated Depreciation, Depletion and Amortization .......................... (11,403) (11,241)
------------- ------------
Net Property, Plant and Equipment ................................................... 12,026 11,235
Investment in Affiliates ............................................................ 1,788 1,604
Other Assets ........................................................................ 635 468
------------- ------------
Total ...................................................................... $ 18,043 $ 16,375
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable ................................................................. $ 1,811 $ 1,489
Short-term Borrowings and Capital Lease Obligations .............................. 572 663
Income Taxes ..................................................................... 556 303
Other Accrued Liabilities (Note 7) ............................................... 1,551 1,303
------------- ------------
Total Current Liabilities .................................................. 4,490 3,758
Long-term Borrowings and Capital Lease Obligations .................................. 4,266 4,080
Deferred Income Taxes ............................................................... 1,888 1,689
Other Liabilities and Deferred Credits .............................................. 1,943 1,958
------------- ------------
Total Liabilities .......................................................... 12,587 11,485
------------- ------------
Commitments and Contingent Liabilities (Note 8)
Minority Interests .................................................................. 338 335
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 September 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 ................................................................ 1,033 44
Accumulated Other Comprehensive Loss (Note 9) .................................... (727) (372)
Treasury Stock, at cost (5,240,020 and 2,457,960 Class A shares at
September 30, 2000 and December 31, 1999, respectively) ........................ (127) (64)
------------- ------------
Total Stockholders' Equity ................................................. 5,118 4,555
------------- ------------
Total ...................................................................... $ 18,043 $ 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>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
2000 1999
------------- ------------
(IN MILLIONS)
<S> <C> <C>
Cash Provided by Operations
Net Income ................................................................. $ 1,352 $ 420
Adjustments to Reconcile Net Income to Cash Provided by Operations
Depreciation, Depletion and Amortization ................................ 953 880
Dry Hole Costs and Impairment of Unproved Properties .................... 57 83
Deferred Income Taxes ................................................... 189 (73)
Income Applicable to Minority Interests ................................. 17 18
Gain on Asset Dispositions .............................................. (48) (18)
Undistributed Equity Earnings ........................................... (153) (30)
Other Noncash Charges and Credits -- Net ................................ (58) 4
Decrease (Increase) in Operating Assets
Accounts and Notes Receivable ......................................... (407) (281)
Inventories ........................................................... (221) (32)
Other Operating Assets ................................................ (249) 71
Increase (Decrease) in Operating Liabilities
Accounts and Other Operating Payables ................................. 667 487
Income and Other Taxes Payable ........................................ 190 (12)
------------- ------------
Cash Provided by Operations ....................................... 2,289 1,517
------------- ------------
Investing Activities
Purchases of Property, Plant and Equipment ................................. (1,456) (1,104)
Purchase of Saga U.K. Ltd. -- Net of Cash Acquired ......................... (494) --
Purchase of Other Businesses -- Net of Cash Acquired ....................... (31) --
Investments in Affiliates -- Net ........................................... (129) (192)
Proceeds from Sales of Assets and Subsidiaries ............................. 126 52
Net Decrease (Increase) in Short-term Financial Instruments ................ (2) 35
------------- ------------
Cash Used in Investing Activities ................................. (1,986) (1,209)
------------- ------------
Financing Activities
Short-term Borrowings -- Net ............................................... (90) 666
Long-term Borrowings -- Net ................................................ 194 3,950
Related Party Borrowings -- Receipts ....................................... -- 865
-- Payments ....................................... -- (5,461)
Treasury Stock Purchases -- Net ............................................ (82) (42)
Cash Dividends (Note 5) .................................................... (356) (326)
Net Cash Contribution to Owner ............................................. -- (10)
Decrease in Minority Interests ............................................. (18) (16)
------------- ------------
Cash Used in Financing Activities ................................. (352) (374)
------------- ------------
Effect of Exchange Rate Changes on Cash ........................................ (51) (10)
------------- ------------
Decrease in Cash and Cash Equivalents .......................................... (100) (76)
Cash and Cash Equivalents at Beginning of Year ................................. 317 394
------------- ------------
Cash and Cash Equivalents at September 30 ...................................... $ 217 $ 318
============= ============
</TABLE>
See notes to consolidated 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.
Pursuant to the requirements of SFAS No. 133 and SFAS No. 138, we have
substantially completed a review of our underlying business activities in order
to identify contractual arrangements that qualify as derivative financial
instruments. To further prepare for implementing SFAS Nos. 133 and 138, we have
also substantially completed an evaluation of our Risk Management Policy.
Consistent with this policy, we have used, and intend to use stand-alone
derivative financial instruments to manage our commodity price, foreign currency
rate and interest rate risks. We do not believe that reporting such contracts on
the balance sheet at fair value will result in a material impact on our
consolidated financial position or our results of operations upon adoption.
Additionally, we intend to continue trading in limited amounts for profit,
unrelated to our underlying physical business, using stand-alone commodity
derivative financial instruments. Pursuant to the standard, we will continue to
report such contracts on the balance sheet at fair value, consistent with the
current treatment afforded such contracts under existing generally accepted
accounting principles.
In addition to an evaluation of our stand-alone derivative financial
instruments, we have performed an extensive review of our underlying business
activities to identify derivatives that may be embedded within existing
contracts. This review encompassed our physical commodity purchase, sale and
exchange contracts, materials and supplies procurement contracts, vendor
maintenance and construction contracts, as well as certain contracts existing
within our joint venture and partnership arrangements. Contracts related to
foreign exchange exposures, debt agreements, lease arrangements and insurance
policies were also reviewed for embedded derivatives. Based on our review, we
have determined that these contracts either:
o do not contain a derivative pursuant to the standard;
o will qualify for a scope exclusion as permitted by the standard; or
o contain an embedded derivative but, due to the short term nature of the
contract terms, will not result in a material impact on our financial
position or results of operations.
4
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Our assessment was based on an evaluation of contractual arrangements
existing as of September 30, 2000 and the Risk Management Policy we employ.
However, there can be no assurance that:
o Conoco will not modify certain aspects of the Risk Management Policy
currently employed;
o Conoco will not enter into contracts subsequent to September 30, 2000 that
are within the scope of the standard; or
o the economic environment in which Conoco operates will not change.
Any such changes could result in a material impact on Conoco's consolidated
financial statements in future reporting periods.
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 $6 for the third quarter
of 1999 and $21 for the first nine 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 $2 for the third quarter of 1999 and $15
for the first nine 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.
There was no interest expense charged by DuPont in the third quarter of
1999. Interest expense charged by DuPont was $91 for the first nine 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 $32 for the third quarter of 1999 and $211 for
the first nine months of 1999. Purchases of products from DuPont during these
periods were not material. These intercompany arrangements between DuPont and
Conoco were provided for 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 nine months ended September 30, 2000 and September
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 third quarter of 2000 and the first nine months of 2000
included an additional 8,572,004 and 8,157,638 shares, respectively, while the
third quarter of 1999 and first nine months of 1999 included an additional
10,085,208 and 9,227,600 shares, respectively.
5
<PAGE> 8
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Basic.................... 623,482,177 627,355,441 624,559,543 627,486,516
Diluted.................. 632,054,181 637,440,649 632,717,181 636,714,116
</TABLE>
For the three months and nine months ended September 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
nine months ended September 30, 2000, fixed stock options for 107,340 shares 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 nine months ended September 30, 1999, 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
nine months ended September 30, 1999, fixed stock options for 29,316 and 34,335
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 September 30 are as follows:
<TABLE>
<CAPTION>
2000 1999
------ ------
<S> <C> <C>
First quarter.......................................................... $ .19 $ .14
Second quarter......................................................... .19 .19
Third quarter.......................................................... .19 .19
------ ------
Dividends per share paid through September 30 ...................... $ .57 $ .52
====== ======
</TABLE>
On October 23, 2000, Conoco declared a fourth quarter cash dividend of $.19
per share on each outstanding share of Class A and Class B common stock, payable
on December 10, 2000, to shareholders of record on November 10, 2000.
6. INVENTORIES
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
Crude oil and petroleum products.............................. $ 740 $ 554
Other merchandise............................................. 27 33
Materials and supplies........................................ 118 116
------------- ------------
Inventories............................................... $ 885 $ 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
6
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
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 September 30, 2000, Conoco had obligations under
international contracts to purchase, over periods up to 18 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, 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 patents of General Technology Applications (GTA) involving part of a
process for manufacturing a flow improver product and awarded $55 in damages to
GTA. In ruling on the post-trial motions, the judge declined to treble the
damages. Conoco remains convinced that the evidence clearly demonstrates that
Conoco's process does not infringe the GTA patents, and that the trial court
decision will be reversed 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
September 30, 2000, the environmental accrual amounted to $111 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.
7
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
At September 30, 2000, Conoco or DuPont, on behalf of and indemnified by
Conoco, had directly guaranteed $1,145 of the obligations of certain affiliated
companies and others. No material loss is anticipated by reason of such
agreements and guarantees. Conoco had no indirect guarantees as of September 30,
2000.
9. COMPREHENSIVE INCOME
The following sets forth Conoco's comprehensive income for the periods
shown:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income....................................... $ 497 $ 223 $ 1,352 $ 420
Other comprehensive income (loss)
Foreign currency translation adjustment......... (135) 2 (355) (103)
-------- -------- -------- --------
Comprehensive income........................ $ 362 $ 225 $ 997 $ 317
======== ======== ======== ========
</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.
8
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
<TABLE>
<CAPTION>
UPSTREAM DOWNSTREAM
-------------------- -------------------- CORPORATE
UNITED UNITED AND CONSOL-
SEGMENT INFORMATION STATES INT'L. STATES INT'L. OTHER IDATED
------------------- -------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30, 2000
Sales and other operating revenues ....... $ 1,613 $ 935 $ 4,809 $ 3,229 $ 1 $ 10,587
Transfers between segments ............... 175 156 56 194 -- --
-------- -------- -------- -------- --------- --------
Total operating revenues ............ $ 1,788 $ 1,091 $ 4,865 $ 3,423 $ 1 $ 10,587
======== ======== ======== ======== ========= ========
Operating profit ......................... $ 302 $ 517 $ 90 $ 121 $ (67) $ 963
Equity in earnings of affiliates ......... 6 58 18 5 -- 87
Non-operating items
Interest and debt expense ............ -- -- -- -- (78) (78)
Interest income (net of misc.
interest expense) .................. -- -- -- -- 8 8
Other ................................ -- -- -- -- (15) (15)
-------- -------- -------- -------- --------- --------
Income before income taxes ............. 308 575 108 126 (152) 965
Provision for income taxes ............. (103) (323) (39) (39) 36 (468)
-------- -------- -------- -------- --------- --------
Net income (loss) (1) .............. $ 205 $ 252 $ 69 $ 87 $ (116) $ 497
======== ======== ======== ======== ========= ========
THREE MONTHS ENDED SEPTEMBER 30, 1999
Sales and other operating revenues ....... $ 865 $ 564 $ 3,270 $ 2,709 $ 1 $ 7,409
Transfers between segments ............... 115 140 33 100 -- --
-------- -------- -------- -------- --------- --------
Total operating revenues ............ $ 980 $ 704 $ 3,303 $ 2,809 $ 1 $ 7,409
======== ======== ======== ======== ========= ========
Operating profit ......................... $ 96 $ 275 $ 51 $ 56 $ (66) $ 412
Equity in earnings of affiliates ......... 3 34 19 (4) (1) 51
Non-operating items
Interest and debt expense ............ -- -- -- -- (80) (80)
Interest income (net of misc.
interest expense) .................. -- -- -- -- 7 7
Other ................................ -- -- -- -- (5) (5)
-------- -------- -------- -------- --------- --------
Income before income taxes ............... 99 309 70 52 (145) 385
Provision for income taxes ............... (15) (141) (26) (18) 38 (162)
-------- -------- -------- -------- --------- --------
Net income (loss) (1) .............. $ 84 $ 168 $ 44 $ 34 $ (107) $ 223
======== ======== ======== ======== ========= ========
NINE MONTHS ENDED SEPTEMBER 30, 2000
Sales and other operating revenues ....... $ 3,749 $ 2,633 $ 13,033 $ 9,051 $ 2 $ 28,468
Transfers between segments ............... 521 487 144 479 -- --
-------- -------- -------- -------- --------- --------
Total operating revenues ............ $ 4,270 $ 3,120 $ 13,177 $ 9,530 $ 2 $ 28,468
======== ======== ======== ======== ========= ========
Operating profit ......................... $ 706 $ 1,454 $ 182 $ 236 $ (155) $ 2,423
Equity in earnings of affiliates ......... 13 182 45 4 -- 244
Non-operating items
Interest and debt expense ............ -- -- -- -- (250) (250)
Interest income (net of misc.
interest expense) .................. -- -- -- -- 31 31
Other ................................ -- -- -- -- 3 3
-------- -------- -------- -------- --------- --------
Income before income taxes ............... 719 1,636 227 240 (371) 2,451
Provision for income taxes ............... (239) (824) (74) (65) 103 (1,099)
-------- -------- -------- -------- --------- --------
Net income (loss) (1) .............. $ 480 $ 812 $ 153 $ 175 $ (268) $ 1,352
======== ======== ======== ======== ========= ========
</TABLE>
9
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
<TABLE>
<CAPTION>
UPSTREAM DOWNSTREAM
-------------------- -------------------- CORPORATE
UNITED UNITED AND CONSOL-
SEGMENT INFORMATION (CONTINUED) STATES INT'L. STATES INT'L. OTHER IDATED
------------------- -------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30, 1999
Sales and other operating revenues ....... $ 2,272 $ 1,486 $ 7,935 $ 7,254 $ 25 $ 18,972
Transfers between segments ............... 277 324 78 205 -- --
-------- -------- -------- -------- --------- --------
Total operating revenues ........... $ 2,549 $ 1,810 $ 8,013 $ 7,459 $ 25 $ 18,972
======== ======== ======== ======== ========= ========
Operating profit ......................... $ 180 $ 531 $ 78 $ 145 $ (119) $ 815
Equity in earnings of affiliates ......... 7 54 42 (18) (1) 84
Non-operating Items
Interest and debt expense .............. -- -- -- -- (230) (230)
Interest income (net of misc.
interest expense) .................... -- -- -- -- 16 16
Other .................................. -- -- -- -- (6) (6)
-------- -------- -------- -------- --------- --------
Income before income taxes ............... 187 585 120 127 (340) 679
Provision for income taxes ............... (11) (263) (31) (51) 97 (259)
-------- -------- -------- -------- --------- --------
Net income (loss) (1) ................ $ 176 $ 322 $ 89 $ 76 $ (243) $ 420
======== ======== ======== ======== ========= ========
</TABLE>
International upstream capital employed increased $698 versus $3,460
reported at year-end 1999, primarily due to the Saga U.K. Ltd. acquisition.
Also, comparing capital employed versus year-end 1999 as reported for
downstream, United States downstream has increased $220 versus $1,571 and
international downstream has decreased $193 versus $1,416, both primarily due to
working capital changes.
(1) Includes after-tax benefits (charges) from special items:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30, 2000
Property impairments ..................... $ -- $ -- $ -- $ -- $ (26) $ (26)
--------- --------- --------- --------- --------- ---------
Total ............................... $ -- $ -- $ -- $ -- $ (26) $ (26)
========= ========= ========= ========= ========= =========
THREE MONTHS ENDED SEPTEMBER 30, 1999
Litigation ............................... $ -- $ -- $ (18) $ -- $ -- $ (18)
Discontinued businesses .................. -- -- -- -- (20) (20)
--------- --------- --------- --------- --------- ---------
Total ............................... $ -- $ -- $ (18) $ -- $ (20) $ (38)
========= ========= ========= ========= ========= =========
NINE MONTHS ENDED SEPTEMBER 30, 2000
Asset sales .............................. $ 27 $ -- $ -- $ -- $ -- $ 27
Litigation ............................... -- -- (16) -- -- (16)
Discontinued businesses .................. -- -- -- -- (4) (4)
Property impairments ..................... -- -- (3) -- (26) (29)
--------- --------- --------- --------- --------- ---------
Total ............................... $ 27 $ -- $ (19) $ -- $ (30) $ (22)
========= ========= ========= ========= ========= =========
NINE MONTHS ENDED SEPTEMBER 30, 1999
Litigation ............................... $ -- $ -- $ (18) $ -- $ -- $ (18)
Discontinued businesses .................. -- -- -- -- (20) (20)
--------- --------- --------- --------- --------- ---------
Total ............................... $ -- $ -- $ (18) $ -- $ (20) $ (38)
========= ========= ========= ========= ========= =========
</TABLE>
Special items for the third quarter of 2000 included a loss of $26 for the
write-off of Conoco's 37.5 percent interest in a Colombian power venture due to
a combination of continuing weak demand and unsatisfactory rate regulations.
In addition to the special item set forth in the previous paragraph,
special items for the first nine months of 2000 included a $27 gain from the
sale of natural gas processing assets in the U.S., a $19 loss for litigation
provisions and a write-off of related refinery assets, and a loss of $4 for
settlement costs associated with the separation agreement from DuPont related to
a discontinued business.
Special items for the third quarter and first nine months of 1999 totaled
$38 related to the settlement of certain posted price litigation and the
resolution of certain liabilities associated with the separation agreement with
DuPont related to discontinued businesses operated by Conoco in the past.
10
<PAGE> 13
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 nine months of 2000 increased $772
million to $2,289 million versus $1,517 million in the first nine months of
1999. Cash provided by operations before changes in operating assets and
liabilities increased $1,025 million compared to the first nine months of 1999,
primarily due to higher crude oil, natural gas and natural gas liquids prices,
along with stronger refining margins and higher dividends from equity
affiliates. Negative changes to net operating assets and liabilities of $253
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.
INVESTING ACTIVITIES
CAPITAL EXPENDITURES AND INVESTMENTS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
2000 1999
------- -------
(IN MILLIONS)
<S> <C> <C>
Upstream
United States ..................................... $ 390 $ 302
International ..................................... 1,289 546
------- -------
Total upstream ................................ 1,679 848
Downstream
United States ..................................... 230 131
International ..................................... 162 167
------- -------
Total downstream .............................. 392 298
Corporate and other ................................... 139 37
------- -------
Total capital expenditures and investments .... $ 2,210 $ 1,183
======= =======
United States ..................................... $ 759 $ 470
International ..................................... 1,451 713
------- -------
Total ......................................... $ 2,210 $ 1,183
======= =======
</TABLE>
Total capital expenditures and investments were $2,210 million, an increase
of $1,027 million, or 87 percent, versus capital expenditures and investments of
$1,183 million for the first nine months of 1999. The increase was primarily due
to higher spending on international upstream acquisitions 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 $1,679 million in the
first nine months of 2000 compared to $848 million for the first nine months of
1999. The increase of $831 million, or approximately 98 percent, was primarily
the result of the acquisition of both Saga U.K. Ltd., an oil and gas group, from
Norske Hydro ASA of Norway and Canadian natural gas processing and gathering
assets.
11
<PAGE> 14
United States
During the first nine months of 2000, Conoco spent $390 million on U.S.
capital projects, an increase of $88 million, or 29 percent, from $302 million
in the first nine months of 1999. Expenditures in the first nine months of 2000
were focused on development drilling in various locations.
International
International upstream capital expenditures and investments totaled $1,289
million in the first nine months of 2000, an increase of $743 million, or 136
percent, from $546 million in the first nine months of 1999. The increase in
2000 expenditures was primarily the result of the acquisition of Saga U.K. Ltd.
and the acquisition of Canadian natural gas processing and gathering assets.
This increase was 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.
In October 2000, Conoco agreed to acquire an equity interest in the Grane
oil field located in the Norwegian North Sea. We will purchase a 6.4 percent
interest from Statoil for $60 million and expect to invest an additional $120
million in development costs over the next two to three years. The field, which
is expected to produce for 30 years, is planned to begin production in 2003, and
at plateau, is expected to add more than 13,000 barrels of oil per day to
Conoco's Norwegian production. The acquisition is expected to close in the first
quarter 2001, subject to Norwegian government approval.
Downstream
Downstream capital expenditures and investments totaled $392 million in the
first nine months of 2000, an increase of $94 million, or 32 percent, versus
$298 million in the first nine months of 1999, primarily reflecting increased
expenditures in the United States.
United States
During the first nine months of 2000, Conoco spent $230 million on
downstream U.S. capital projects, up $99 million, or 76 percent, from $131
million in the first nine months of 1999. Expenditures in the first nine 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 nine months of 2000, Conoco spent $162 million on
downstream international capital projects, down $5 million, or 3 percent, from
$167 million in the first nine months of 1999. The majority of the funds spent
in 2000 were used to support refining operations including upgrades to meet
future clean fuels specifications in Europe.
Corporate and Other
Corporate and other capital expenditures totaled $139 million in the first
nine months of 2000, an increase of $102 million, compared to $37 million in the
first nine months of 1999. The increased expenditures during the first nine
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 $126 million for the first nine
months of 2000, an increase of $74 million, from $52 million in the first nine
months of 1999. Proceeds in 2000 were primarily the result of the sale of
non-strategic natural gas processing assets in the U.S.
12
<PAGE> 15
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.
At September 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 September 30, 2000, Conoco had no outstanding borrowings under the
credit facility. Conoco maintains a $2,000 million U.S. commercial paper program
and a Euro 500 million European commercial paper program that are fully
supported by the credit facility.
Conoco has the ability to issue commercial paper at any time with
maturities not to exceed 270 days. Conoco had $539 million of commercial paper
outstanding at September 30, 2000 of which $37 million was denominated in
foreign currencies. The weighted-average interest rate was 6.75 percent.
Total Conoco debt was $4,838 million at September 30, 2000, up $95 million
versus $4,743 million at December 31, 1999. The total debt-to-capitalization
ratio was 48.6 percent at September 30, 2000 and 51.0 percent at December 31,
1999.
13
<PAGE> 16
(b) RESULTS OF OPERATIONS
CONSOLIDATED RESULTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
SALES AND OTHER OPERATING REVENUES
Upstream
United States ............................................... $ 1,613 $ 865 $ 3,749 $ 2,272
International ............................................... 935 564 2,633 1,486
---------- ---------- ---------- ----------
Total upstream ............................................ 2,548 1,429 6,382 3,758
Downstream
United States ............................................... 4,809 3,270 13,033 7,935
International ............................................... 3,229 2,709 9,051 7,254
---------- ---------- ---------- ----------
Total downstream .......................................... 8,038 5,979 22,084 15,189
Corporate and other operating ................................ 1 1 2 25
---------- ---------- ---------- ----------
Total sales and other operating revenues .................. $ 10,587 $ 7,409 $ 28,468 $ 18,972
========== ========== ========== ==========
AFTER-TAX OPERATING INCOME
Upstream
United States ............................................... $ 205 $ 84 $ 480 $ 176
International ............................................... 252 168 812 322
---------- ---------- ---------- ----------
Total upstream ............................................ 457 252 1,292 498
Downstream
United States ............................................... 69 44 153 89
International ............................................... 87 34 175 76
---------- ---------- ---------- ----------
Total downstream .......................................... 156 78 328 165
Corporate and other operating ................................ (55) (42) (113) (76)
---------- ---------- ---------- ----------
Total after-tax operating income .......................... 558 288 1,507 587
INTEREST AND OTHER NON-OPERATING INCOME (EXPENSES) NET
OF TAX ...................................................... (61) (65) (155) (167)
---------- ---------- ---------- ----------
NET INCOME ................................................ $ 497 $ 223 $ 1,352 $ 420
========== ========== ========== ==========
</TABLE>
SPECIAL ITEMS
Net income includes the following non-recurring items (special items)
on an after-tax basis:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 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 ............................................ -- (18) (16) (18)
---------- ---------- ---------- ----------
Total downstream special items ....................... $ -- $ (18) $ (19) $ (18)
========== ========== ========== ==========
CORPORATE AND OTHER OPERATING
Property impairments .................................. $ (26) $ -- $ (26) $ --
Discontinued businesses ............................... -- (20) (4) (20)
---------- ---------- ---------- ----------
Total corporate and other operating special items .... $ (26) $ (20) $ (30) $ (20)
========== ========== ========== ==========
TOTAL SPECIAL ITEMS .................................. $ (26) $ (38) $ (22) $ (38)
========== ========== ========== ==========
</TABLE>
14
<PAGE> 17
Special items for the third quarter of 2000 included a loss of $26 million
for the write-off of Conoco's 37.5 percent interest in a Colombian power
venture, due to a combination of continuing weak demand and unsatisfactory rate
regulations.
In addition to the special item set forth in the previous paragraph,
special items for the first nine months of 2000 included a $27 million gain from
the sale of U.S. natural gas processing assets, a $19 million loss for
litigation provisions and a write-off of related refinery assets, and a loss of
$4 million for settlement costs associated with the separation agreement from
DuPont related to a discontinued business.
Special items for the third quarter and first nine months of 1999 totaled
$38 million related to the settlement of certain posted price litigation and the
resolution of certain liabilities associated with the separation agreement with
DuPont related to discontinued businesses operated by Conoco in the past.
Third Quarter 2000 versus Third Quarter 1999
Net income was $497 million in the third quarter of 2000, up 123 percent
from $223 million in the third quarter of 1999. Conoco had net income before
special items of $523 million in the third quarter of 2000, up 100 percent from
$261 million in the third quarter of 1999. These increases primarily reflected
higher natural gas, crude oil and natural gas liquids prices, stronger refining
margins and record worldwide refinery throughputs. Partly offsetting these
increases were lower marketing margins in Europe.
Sales and other operating revenues for the third quarter of 2000 were
$10,587 million, up 43 percent from $7,409 million in the third quarter of 1999,
primarily due to higher crude oil and natural gas prices and improved refined
product prices and volumes. Conoco's worldwide net realized crude oil price was
$28.96 per barrel for the quarter, up $8.94 per barrel, or 45 percent, from
$20.02 per barrel in the third quarter of 1999. Worldwide net realized natural
gas prices averaged $3.30 per thousand cubic feet (mcf) for the quarter,
compared with $2.05 per mcf in the same period in 1999, an improvement of 61
percent.
Income from equity affiliates for the third quarter of 2000 was $87
million, up $36 million compared to $51 million in the third quarter of 1999.
Additional crude oil volumes from Petrozuata, our Venezuelan 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 third quarter of 2000 was $23 million, down 8 percent
from $25 million in the third quarter of 1999. Other income included losses from
the write-off of our 37.5 percent interest in a Colombian power venture and
exchange losses largely offset by income from our recently commenced service
contract in Syria.
Worldwide petroleum liquids production, including our share of equity
affiliates, in the third quarter of 2000 was 365,000 barrels per day versus
382,000 barrels per day in the third quarter of 1999, a 4 percent decrease. U.S.
petroleum liquids production was up 4 percent as a result of additional volumes
from the Ursa field in the Gulf of Mexico. International petroleum liquids
production slipped 7 percent to 284,000 barrels per day due to downtime at the
Britannia, Miller and Banff fields in the North Sea. The increased production
from our Petrozuata joint venture, as well as production from properties in
Vietnam that were acquired in early 2000, helped mitigate the reduction.
Worldwide natural gas production, including our share of equity affiliates,
in the third quarter of 2000 was down 2 percent to 1,522 million cubic feet
(mmcf) per day from 1,560 mmcf per day in the third quarter of 1999. U.S.
natural gas production was down 2 percent, primarily as a result of the
disposition of the Grand Isle assets in the Gulf of Mexico in late 1999.
International natural gas production was 3 percent lower mainly due to downtime
at the Britannia and Miller fields in the U.K. These production declines were
offset by additional volumes from the North Sea "V" fields and new volumes from
the Canadian producing properties acquired in late 1999.
Worldwide refined product sales in the third quarter of 2000 were 1,554,000
barrels per day, up 31 percent from the third quarter of 1999, primarily due to
increased sales volumes throughout all regions. Crude oil and refined product
buy/sell and natural gas and electric power resale activities in the third
quarter of 2000 totaled $2,554 million, up 70 percent compared to $1,503 million
in the third quarter of 1999, primarily due to higher crude oil, refined product
and natural gas prices.
15
<PAGE> 18
Cost of goods sold for the third quarter of 2000 totaled $6,767 million, an
increase of $2,555 million, or 61 percent, compared to $4,212 million in the
third quarter of 1999, primarily due to higher refinery feedstock costs that
reflected the significant rise in crude oil prices and higher throughputs.
Operating expenses for the third quarter of 2000 were $520 million, down
$25 million, or 5 percent, compared to $545 million for the third quarter of
1999. This decrease was primarily due to lower production.
Selling, general and administrative expenses for the third quarter of 2000
were $199 million, a decrease of $6 million, or 3 percent, compared to $205
million for the third quarter of 1999.
Exploration expenses for the third quarter of 2000 totaled $81 million, an
increase of 25 percent compared to $65 million in the third quarter of 1999,
primarily driven by a more focused and ambitious exploration program in the 2000
period as compared to 1999.
Depreciation, depletion and amortization (DD&A) for the third quarter of
2000 totaled $305 million, an increase of $9 million, or 3 percent, compared to
$296 million in the third quarter of 1999. The increase was primarily due to
rate changes.
Provision for income taxes for the third quarter of 2000 totaled $468
million, up 189 percent compared to $162 million for the third quarter of 1999,
and reflected significantly higher pretax income. The effective tax rate,
approximately 48 percent in the third quarter of 2000 compared to 42 percent in
the third quarter of 1999, was higher due to a greater portion of 2000 earnings
being generated by operations in countries with higher tax rates and the reduced
impact of U.S. alternative fuels tax credits on higher pretax income in 2000.
First Nine Months 2000 versus First Nine Months 1999
Conoco had net income of $1,352 million in the first nine months of 2000,
up 222 percent from $420 million in the first nine months of 1999. Conoco had
net income before special items of $1,374 million in the first nine months of
2000, up 200 percent from $458 million in the first nine 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 nine months of 2000 were
$28,468 million, up 50 percent from $18,972 million in the first nine months of
1999, primarily due to higher crude oil and natural gas prices and improved
refined product prices and volumes. Conoco's worldwide net realized crude oil
price was $27.14 per barrel for the first nine months of 2000, up $11.71 per
barrel, or 76 percent, from $15.43 per barrel in the first nine months of 1999.
Worldwide net realized natural gas prices averaged $2.70 per mcf for the first
nine months of 2000, compared with $1.99 per mcf in the same period in 1999, an
improvement of 36 percent.
Income from equity affiliates for the first nine months of 2000 was $244
million, up $160 million compared to $84 million in the first nine 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 nine months of 2000 was $182 million, up 96
percent from $93 million in the first nine months of 1999, primarily due to the
gain from the sale of natural gas processing assets in the U.S., revenue from
our Syrian service contract and additional interest income. These improvements
were partly offset by the write-off of our 37.5 percent interest in a Colombian
power venture.
Worldwide petroleum liquids production, including our share of equity
affiliates, in the first nine months of 2000 was 367,000 barrels per day versus
359,000 barrels per day in the first nine months of 1999, a 2 percent increase.
U.S. petroleum liquids production was up 8 percent as a result of additional
volumes from the Ursa field. International petroleum liquids production was up 1
percent to 287,000 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.
16
<PAGE> 19
Worldwide natural gas production, including our share of equity affiliates,
in the first nine months of 2000 was up 2 percent to 1,688 mmcf per day from
1,651 mmcf per day in the first nine months of 1999. U.S. natural gas production
was down 8 percent, primarily as a result of the disposition of the Grand Isle
assets and the more focused drilling program in the Lobo field, plus natural
declines elsewhere. International natural gas volumes were up 14 percent due to
increased production from 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 nine months of 2000 were
1,509,000 barrels per day, up 31 percent from the first nine months of 1999,
primarily due to increased sales in the U.S. and Europe and increased refinery
throughputs. Crude oil and refined product buy/sell and natural gas and electric
power resale activities in the first nine months of 2000 totaled $6,632 million,
up 77 percent compared to $3,748 million in the first nine months of 1999,
primarily due to higher crude oil, refined product and natural gas prices.
Cost of goods sold for the first nine months of 2000 totaled $17,649
million, an increase of $7,514 million, or 74 percent, compared to $10,135
million in the first nine months of 1999, reflecting higher refinery feedstock
costs and increased throughputs.
Operating expenses for the first nine months of 2000 were $1,573 million,
up $64 million, or 4 percent, compared to $1,509 million for the first nine
months of 1999. This increase was primarily due to litigation provisions
recorded in the first quarter, higher energy costs and higher overall
compensation charges as a result of record earnings.
Selling, general and administrative expenses for the first nine months of
2000 were $580 million, a decrease of $8 million, or 1 percent, compared to $588
million for the first nine months of 1999.
Exploration expenses for the first nine months of 2000 totaled $176
million, a decline of 5 percent, compared to $185 million in the first nine
months of 1999, primarily driven by lower dry hole costs.
DD&A for the first nine months of 2000 totaled $953 million, an increase of
$73 million, or 8 percent, compared to $880 million in the first nine months of
1999. This increase was primarily due to higher volumes, rate changes and the
write-down of a non-operating natural gas processing plant.
Provision for income taxes for the first nine months of 2000 totaled $1,099
million, up 324 percent compared to $259 million for the first nine months of
1999, and reflected significantly higher pretax income. The effective tax rate,
approximately 45 percent in the first nine months of 2000 compared to 38 percent
in the first nine months of 1999, was higher due to a greater portion of 2000
earnings being generated by operations in countries with higher tax rates and
the reduced impact of U.S. alternative fuels tax credits on higher pretax income
in 2000.
17
<PAGE> 20
UPSTREAM SEGMENT RESULTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
After-tax operating income
United States ...................... $ 205 $ 84 $ 480 $ 176
International ...................... 252 168 812 322
---------- ---------- ---------- ----------
After-tax operating income ....... $ 457 $ 252 $ 1,292 $ 498
Special items
United States ...................... $ -- $ -- $ (27) $ --
International ...................... -- -- -- --
---------- ---------- ---------- ----------
Special items .................... $ -- $ -- $ (27) $ --
Earnings before special items
United States ..................... $ 205 $ 84 $ 453 $ 176
International ..................... 252 168 812 322
---------- ---------- ---------- ----------
Earnings before special items .... $ 457 $ 252 $ 1,265 $ 498
========== ========== ========== ==========
</TABLE>
Third Quarter 2000 versus Third Quarter 1999
Upstream earnings before special items were $457 million in the third
quarter of 2000, up 81 percent from $252 million in the third quarter of 1999,
driven by stronger natural gas, crude oil and natural gas liquids prices. U.S.
upstream earnings before special items totaled $205 million in the third quarter
of 2000, up 144 percent from $84 million in the comparable period of 1999,
reflecting higher crude oil, natural gas and natural gas liquids prices, coupled
with higher petroleum liquids production. Partly offsetting this increase was a
drop in natural gas volumes due to the disposition of our Grand Isle assets in
the Gulf of Mexico. International upstream earnings before special items were
$252 million, an increase of 50 percent, from $168 million in the comparable
period in 1999. The improvement was primarily attributable to higher prices and
only minimally offset by lower production.
First Nine Months 2000 versus First Nine Months 1999
Upstream earnings before special items were $1,265 million in the first
nine months of 2000, up 154 percent from $498 million in the first nine months
of 1999. U.S. upstream earnings before special items totaled $453 million in the
first nine months of 2000, up 157 percent from $176 million in the comparable
period of 1999, attributable to 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 and the disposition of our Grand Isle
assets. International upstream earnings before special items were $812 million,
an increase of 152 percent, from $322 million in the comparable period in 1999.
The improvement was primarily due to higher crude oil and natural gas prices.
DOWNSTREAM SEGMENT RESULTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
After-tax operating income
United States ................................ $ 69 $ 44 $ 153 $ 89
International ................................ 87 34 175 76
---------- ---------- ---------- ----------
After-tax operating income ................. $ 156 $ 78 $ 328 $ 165
Special items
United States ................................ $ -- $ 18 $ 19 $ 18
International ................................ -- -- -- --
---------- ---------- ---------- ----------
Special items .............................. $ -- $ 18 $ 19 $ 18
Earnings before special items
United States ............................... $ 69 $ 62 $ 172 $ 107
International ............................... 87 34 175 76
---------- ---------- ---------- ----------
Earnings before special items .............. $ 156 $ 96 $ 347 $ 183
========== ========== ========== ==========
</TABLE>
18
<PAGE> 21
Third Quarter 2000 versus Third Quarter 1999
Downstream earnings before special items were $156 million for the third
quarter of 2000, an increase of 63 percent from $96 million in the comparable
period in 1999. U.S. downstream earnings before special items were $69 million
for the third quarter of 2000, up 11 percent from $62 million for the third
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 crude prices. International downstream earnings
before special items were $87 million for the third quarter of 2000, up 156
percent from $34 million in the comparable period in 1999, reflecting
significantly improved refining margins and higher throughputs, partly offset by
lower European marketing earnings and co-product margins.
First Nine Months 2000 versus First Nine Months 1999
Downstream earnings before special items were $347 million for the first
nine months of 2000, an increase of 90 percent from $183 million in the
comparable period in 1999. U.S. downstream earnings before special items were
$172 million for the first nine months of 2000, up 61 percent from $107 million
for the first nine months of 1999, primarily attributable to stronger refining
margins, partly offset by depressed co-product margins. International downstream
earnings before special items were $175 million for the first nine months of
2000, up 130 percent from $76 million in the comparable period in 1999, and
reflected significantly improved refining margins and higher throughputs, 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
After-tax operating loss.................................. $ (55) $ (42) $ (113) $ (76)
Special items............................................. 26 20 30 20
---------- ---------- ---------- ----------
Losses before special items............................. $ (29) $ (22) $ (83) $ (56)
========== ========== ========== ==========
</TABLE>
Third Quarter 2000 versus Third Quarter 1999
Corporate and other operating losses before special items were $29 million
for the third quarter of 2000, an increase of $7 million compared to the third
quarter of 1999, primarily due to higher compensation costs and a minority
interest preferred return related to the sale of certain corporate assets.
First Nine Months 2000 versus First Nine Months 1999
Corporate and other operating losses before special items were $83 million
for the first nine months of 2000, an increase of 48 percent from a loss of $56
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, a minority interest preferred return
related to the sale of certain corporate assets and higher compensation costs.
INTEREST AND OTHER NON-OPERATING INCOME (EXPENSES) NET OF TAX
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Interest expense on debt.................................. $ (65) $ (65) $ (201) $ (177)
Interest income........................................... 7 3 25 7
Exchange gains (losses)................................... (3) (3) 21 3
---------- ---------- ---------- ----------
Total................................................... $ (61) $ (65) $ (155) $ (167)
========== ========== ========== ==========
</TABLE>
19
<PAGE> 22
Third Quarter 2000 versus Third Quarter 1999
Interest and other non-operating expenses for the third quarter of 2000
amounted to $61 million, a decrease of $4 million, or 6 percent, compared to $65
million in the comparable period in 1999. This improvement is attributable to
higher interest income.
First Nine Months 2000 versus First Nine Months 1999
Interest and other non-operating expenses for the first nine months of 2000
amounted to $155 million, a decrease of $12 million, or 7 percent, compared to
$167 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.
TAX MATTERS
During the first nine months of 2000, Conoco recorded a deferred tax asset
of $32 million as a result of the company's U.S. alternative minimum tax
position. Conoco believes it is more likely than not that the U.S. alternative
minimum tax credits, which created the deferred tax asset, 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.
20
<PAGE> 23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISKS
Information about interest rate risk for the nine months ended September
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 and foreign currency risk for the nine
months ended September 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 SEPTEMBER 30, 2000
Crude Oil and Refined Products
Trading................................................. $ 3 $ (5)
Non-trading(1)(2)....................................... 12 (7)
------ -------
Combined.............................................. $ 15 $ (12)
Natural Gas
Trading................................................. $ 12 $ (1)
Non-trading............................................. 56 (29)
------ -------
Combined.............................................. $ 68 $ (30)
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.
(2) Includes purchased crude oil put options with a strike price of $22.00
(West Texas Intermediate equivalent) per barrel on approximately 25
million barrels during the period of April through December 2001.
Subsequent to September 30, 2000, Conoco purchased crude oil put
options with a strike price of $22.00 (West Texas Intermediate
equivalent) on an additional 38 million barrels during the period
April through December 2001.
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 the end of the period.
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
21
<PAGE> 24
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.
Foreign Currency Risk
In conjunction with our European commercial paper program, initiated in
July 2000, Conoco entered into foreign currency swaps for all non-U.S. dollar
notes issued in order to receive the U.S. dollar equivalent proceeds upon note
issuance and to lock in the forward foreign currency rate on note maturity. At
September 30, 2000, the U.S. dollar equivalent of all non-U.S. dollar notes
outstanding was $37 million, all of which were swapped to U.S. dollar. The
notional amount of the forward portion of these swaps was $39 million and the
estimated fair value was $37 million.
22
<PAGE> 25
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
reports on Form 10-Q for the first and second quarters of 2000.
In June of 1997, Conoco experienced pipeline spills on its Seminoe pipeline
at Banner, Wyoming and Lodge Grass, Montana. In response to these spills, the
U.S. Department of Justice advised Conoco in August 2000 that the U.S.
Government is contemplating a legal proceeding under the Clean Water Act against
Conoco. Such a proceeding may result in monetary sanctions 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, 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 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 potential failure or delays in achieving expected reserve or
production levels from existing and future oil and gas development
projects due to operating hazards, drilling risks and the inherent
uncertainties in predicting oil and gas reserves and oil and gas
reservoir performance;
o unsuccessful exploratory drilling activities;
o failure of new products and services to achieve market acceptance;
o unexpected cost increases or technical difficulties in constructing or
modifying company manufacturing and refining facilities;
o unexpected difficulties in manufacturing, transporting or refining
synthetic crude oil;
o ability to meet government regulations;
23
<PAGE> 26
o potential 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 general domestic and international economic and political conditions;
or
o changes in tax and other laws applicable to our business.
(b) OTHER EVENTS
None.
24
<PAGE> 27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The exhibit index filed with this Form 10-Q is on page 27.
(b) REPORTS ON FORM 8-K
None.
25
<PAGE> 28
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: November 10, 2000
26
<PAGE> 29
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
12 Computation of Ratio of Earnings to Fixed Charges*
27 Financial Data Schedule*
</TABLE>
* Filed herein.
27
