UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported)
March 15, 2000
PHILLIPS PETROLEUM COMPANY
(Exact name of registrant as specified in its charter)
Delaware 1-720 73-0400345
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
Phillips Building, Bartlesville, Oklahoma 74004
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
918-661-6600
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Item 5. Other Events.
On March 15, 2000, Phillips Petroleum Company, a Delaware corporation
(Phillips or the company), announced it had signed a definitive
agreement to purchase all of Atlantic Richfield Company's (ARCO)
Alaskan businesses (referred to herein as ARCO Alaska).
Item 7. Financial Statements and Exhibits.
(b) Pro Forma Financial Information.
Basis of Presentation
The following unaudited pro forma financial statements reflect
Phillips' initial purchase price of $6.5 billion for the
acquisition of all of Atlantic Richfield Company's Alaskan
businesses, herein referred to as ARCO Alaska. The acquisition
is being accounted for using the purchase method. The purchase
of ARCO Alaska is retroactive to January 1, 2000, and the
activity from that point to the closing of the transaction will
be reflected as an adjustment to the purchase price. The
following unaudited pro forma financial statements represent the
combination of the pro forma adjusted consolidated historical
financial statements of Phillips and the combined financial
statements of ARCO Alaska.
Phillips' historical consolidated income statement for the year
ending December 31, 1999, and its consolidated balance sheet at
December 31, 1999, have been adjusted on a pro forma basis to
reflect the March 31, 2000, disposition of the company's gas
gathering, processing and marketing business and the acquisition
of 30.3 percent of Duke Energy Field Services LLC as reported in
Phillips Petroleum Company's Current Report on Form 8-K filed on
April 13, 2000. The unaudited pro forma income statement
contained herein was prepared assuming the Phillips and ARCO
Alaska combination occurred January 1, 1999, while the unaudited
pro forma balance sheet was prepared as if the combination
occurred December 31, 1999.
This pro forma financial information is not intended to reflect
results from operations or the financial position which would
have actually resulted had the acquisition been effective on the
dates indicated. Moreover, this pro forma information is not
intended to be indicative of the results of operations or
financial position which may be obtained in the future.
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This pro forma financial information should be read in
conjunction with the historical financial statements included in
Phillips' Annual Report on Form 10-K for the year ended
December 31, 1999, and the historical combined ARCO Alaska financial
statements included in Phillips Petroleum Company's Current
Report on Form 8-K, filed on April 18, 2000. The pro forma
adjustments use estimates and assumptions based on currently
available information. Management believes that the estimates
and assumptions are reasonable, and that the significant effects
of the transactions are properly reflected. However, actual
results may materially differ from the estimates and assumptions
used.
This preliminary purchase price allocation may be subject to
revision once additional information on the fair value of ARCO
Alaska's assets and liabilities becomes available and once a
thorough review of ARCO Alaska's accounting policies and
procedures has been completed. Actual purchase accounting
adjustments may therefore differ from the pro forma information
presented here. This preliminary allocation also does not
reflect any effects of the Alignment Agreement announced on
April 13, 2000, between the various owners of the Prudhoe Bay
Unit. The Alignment Agreement, scheduled to be implemented
July 1, 2000, will alter working interest percentages between the
owners and establish BP Amoco p.l.c. as the sole operator of the
Prudhoe Bay Unit, retroactive to January 1, 2000.
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Unaudited Pro Forma Consolidated Phillips Petroleum Company
Statement of Income
Millions of Dollars
-------------------------------------------------
Phillips
Phillips and ARCO
Year Ended As Pro Forma Alaska
December 31, 1999 Adjusted ARCO Alaska Adjustments Combined
-------- ----------- ----------- --------
(a)
Revenues
Sales and other
operating revenues $12,815 1,822 - 14,637
Equity in earnings of
affiliated companies 167 1 - 168
Other revenues 179 58 (18)(b) 219
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Total Revenues 13,161 1,881 (18) 15,024
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Costs and Expenses
Purchased crude oil and
products 7,832 20 - 7,852
Production and operating
expenses 1,886 298 31 (c) 2,215
Exploration expenses 225 50 7 (d) 282
Selling, general and
administrative expenses 665 54 - 719
Depreciation, depletion
and amortization 822 363 94 (d) 1,279
Property impairments 69 - - 69
Taxes other than income
taxes 213 239 - 452
Interest expense 279 9 330 (e) 618
Foreign currency
transaction losses 33 - - 33
Preferred dividend
requirements of
capital trusts 53 - - 53
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Total Costs and
Expenses 12,077 1,033 462 13,572
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Income before income
taxes 1,084 848 (480) 1,452
Provision for income
taxes 537 293 (158)(f) 672
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Net Income $ 547 555 (322) 780
===========================================================================
Net Income Per Share of
Common Stock
Basic $ 2.16 3.09
Diluted 2.15 3.07
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Average Common Shares
Outstanding
(in thousands)
Basic 252,827 252,827
Diluted 254,433 254,433
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See Notes to Unaudited Pro Forma Financial Statements.
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Unaudited Pro Forma Consolidated Phillips Petroleum Company
Condensed Balance Sheet
Millions of Dollars
-------------------------------------------------
Phillips
Phillips and ARCO
As Pro Forma Alaska
At December 31, 1999 Adjusted ARCO Alaska Adjustments Combined
-------- ----------- ----------- --------
(a)
Assets
Cash and cash
equivalents $ 1,273 7 (1,031)(d) 249
Accounts and notes
receivable 1,710 57 - 1,767
Inventories 515 70 170 (g) 755
Deferred income taxes
and other current
assets 309 6 - 315
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Total Current Assets 3,807 140 (861) 3,086
Investments and
long-term receivables 1,099 397 (395)(b) 1,101
Properties, plants and
equipment (net) 10,046 4,838 1,567 (d) 16,451
Deferred income taxes
and other charges 183 11 - 194
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Total $15,135 5,386 311 20,832
===========================================================================
Liabilities
Accounts payable $ 1,501 90 - 1,591
Notes payable and
long-term debt due
within one year 23 - - 23
Accrued income and
other taxes 448 80 - 528
Other accruals 406 4 - 410
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Total Current
Liabilities 2,378 174 - 2,552
Long-term debt 4,271 565 4,891 (e) 9,727
Accrued dismantlement,
removal and
environmental costs 683 780 (780)(h) 683
Deferred income taxes 1,425 - - 1,425
Employee benefit
obligations 480 - 33 (i) 513
Other liabilities and
deferred credits 697 34 - 731
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Total Liabilities 9,934 1,553 4,144 15,631
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Company-Obligated
Mandatorily Redeemable
Preferred Securities
of Phillips 66 Capital
Trusts I and II 650 - - 650
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Total Common
Stockholders' Equity 4,551 3,833 (3,833) 4,551
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Total $15,135 5,386 311 20,832
===========================================================================
See Notes to Unaudited Pro Forma Financial Statements.
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Notes to Unaudited Pro Forma Phillips Petroleum Company
Financial Statements
(a) Phillips' historical income statement and balance sheet for
1999 have been adjusted on a pro forma basis to reflect the
March 31, 2000, disposition of the company's gas gathering,
processing and marketing segment and the acquisition of
30.3 percent of Duke Energy Field Services LLC as discussed
in Phillips' Current Report on Form 8-K filed on April 13,
2000.
(b) Under the terms of the purchase agreement for ARCO Alaska,
BP Amoco p.l.c. (BP) will retain a tax-advantaged
$395 million tanker capital construction fund. Interest
income on this capital construction fund in 1999 was
$18 million.
(c) Phillips will conform ARCO Alaska's accounting policy on
tertiary injection programs to Phillips', expensing the
costs of such programs.
(d) The following is a preliminary estimate of the purchase
price for ARCO Alaska:
Millions
of Dollars
----------
Base price $6,475
Estimated transaction-related costs 10
Special one-time purchase of crude oil inventory 170
Adjustment to purchase price based upon
West Texas Intermediate crude prices
exceeding $25 per barrel and actual
North Slope volumes sold 73*
Net cash generated between January 1, 2000,
and closing, retained by BP (241)
Phillips' assumption of ARCO Alaska marine
terminal revenue bonds (265)
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Adjusted cash price 6,222
Use of cash on hand to make payments to BP (1,031)
-----------------------------------------------------------
Debt incurred by Phillips to make cash
payments to BP $5,191
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*This is the adjustment for the period from January 1, 2000,
through March 31, 2000. Another $427 million of contingent
payments could be paid over the next five years, but the
company does not believe such future payments are
determinable beyond a reasonable doubt and so has not recorded
the $427 million as an obligation. The making of such
payments in the future will increase long-lived assets.
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The purchase price has been preliminarily allocated based on
the fair value of the assets and liabilities acquired.
Based upon the above preliminary estimate of the purchase
price, Phillips does not anticipate recording goodwill
related to the acquisition. The company expects the tax
basis in the purchased assets to essentially equal the
purchase price, so deferred tax liabilities at the time of
acquisition are expected to be minimal.
Based on this preliminary allocation of the purchase price
to the various ARCO Alaska property, plant and equipment
components and a preliminary estimate of the costs to remove
such assets at the end of their useful lives (see Note (h)),
Phillips estimates that amortization of undeveloped
leasehold investment would have increased $7 million and
depreciation, depletion and amortization (predominately
unit-of-production) would have been $94 million higher in
1999.
(e) Phillips expects to incur $5,191 million of debt to make
cash payments to BP (see Note (d)). Phillips is not
assuming $300 million of debt owed by ARCO Alaska to BP,
related to the construction of three new tankers. This
results in a net adjustment to long-term debt of
$4,891 million.
At Phillips' present average commercial paper borrowing rate
of 6.35 percent, the $5,191 million of additional debt would
result in $330 million per year of interest expense. The
company may refinance a portion of this commercial paper
borrowing later in 2000. A one-eighth percent variance in
the average borrowing rate would change pretax interest
expense by $6 million.
(f) The pro forma adjustment to income taxes reflects the
statutory federal and state income tax effects of the pro
forma adjustments to ARCO Alaska's pretax income, and also
includes the estimated effect of the acquisition on (1) the
allocation of Phillips' interest expense deductions to
various taxing jurisdictions, (2) the allocation of
worldwide Phillips' taxable income to various states
(including Alaska) that require unitary tax calculations,
and (3) enhanced oil recovery tax credits.
(g) This is an estimate to reflect Phillips' $170 million fair
value purchase of the crude oil inventory still in
pipelines, tanks or on tankers at closing. BP's downstream
business had previously purchased the crude oil from ARCO
Alaska at the North Slope. This one-time special purchase
of crude oil inventory will be recorded in cost of goods
sold as the inventory is sold in the second quarter of 2000.
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As it is sold, it will be replaced by a lower-cost
inventory, which will reflect related production and
transportation costs. The pro forma income statement does
not reflect this non-recurring item.
(h) Under Phillips' accounting policy and prevalent industry
accounting practice for the acquisition of oil and gas
businesses, Phillips will not record an initial liability
for the estimated costs of removing properties, plants and
equipment at the end of their useful lives. Instead, a
preliminary estimate of $1,550 million of such removal costs
will be accrued as an additional component of future
depreciation, building the liability for removal gradually
over the remaining lives of the properties, plants and
equipment.
(i) A preliminary estimate of the existing projected benefit
obligation assumed by Phillips for pension, retiree medical
and retiree life insurance benefits for the entire ARCO
Alaska work force is $33 million.
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(c) Exhibits.
None.
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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 hereunto duly authorized.
PHILLIPS PETROLEUM COMPANY
/s/ Rand C. Berney
May 5, 2000 -----------------------------
Rand C. Berney
Vice President and Controller
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