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)
May 17, 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).
On March 31, 2000, the company combined its gas gathering,
processing and marketing business with the gas gathering and
processing business of Duke Energy Corporation in a new company,
Duke Energy Field Services (DEFS). Phillips' consolidated
results of operations for the three months ended March 31, 2000,
include the activity of its gas gathering, processing and
marketing business. At the close of business on March 31, 2000,
Phillips began accounting for its 30.3 percent investment in the
new company on an equity basis. In connection with the closing,
Phillips received $1.22 billion in cash on April 3, 2000.
On April 26, 2000, Phillips completed the purchase of all of
ARCO's Alaskan oil and gas properties and those related marine
assets that are currently operating. Phillips expects to
complete the balance of the acquisition (three double-hulled
tankers under construction and certain pipeline assets) late in
the second quarter or early in the third quarter of 2000,
following the expiration of pre-emptive rights and the grant of
consents to certain contract assignments and regulatory
approvals.
This Form 8-K is being filed to report the pro forma impact of
the transactions noted above on Phillips' first quarter 2000
results of operations and financial position.
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 approximately
$6.5 billion for the acquisition of all of ARCO Alaska. The
acquisition is being accounted for using the purchase
method. The purchase of ARCO Alaska is retroactive to
January 1, 2000, with appropriate adjustments to give the
parties the benefit of the transaction as if it had been
consummated at that earlier date. The following unaudited
pro forma financial information represents the combination
of the consolidated historical financial statements of
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Phillips with the combined financial statements of ARCO
Alaska.
Phillips' historical consolidated income statement for the
year ending December 31, 1999, has been adjusted on a pro
forma basis to reflect the March 31, 2000, DEFS transaction
as reported in the company's Current Report on Form 8-K
filed on April 13, 2000. Phillips' historical consolidated
income statement for the period ending March 31, 2000, is
also adjusted herein to reflect the DEFS transaction. The
unaudited pro forma income statement information for the
year ending December 31, 1999, and for the three-month
period ending March 31, 2000, were prepared assuming the
DEFS and the Phillips and ARCO Alaska combinations occurred
January 1, 1999. The unaudited pro forma balance sheet
information at March 31, 2000, was prepared as if the ARCO
Alaska transaction and the receipt of the cash from the
DEFS transaction had occurred March 31, 2000.
This pro forma financial information is not intended to
reflect results from operations or the financial position
which would have actually resulted had the combinations 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.
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, as well as the financial
disclosures included in the company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2000, and the
historical combined ARCO Alaska financial statements
included in Phillips' 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
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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
------------------------------------------
Pro Forma Phillips
Phillips Adjustments and ARCO
Year Ended As ARCO Increase/ Alaska
December 31, 1999 Adjusted Alaska (Decrease) 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
- -------------------------------------------------------------------
Total Revenues 13,161 1,881 (18) 15,024
- -------------------------------------------------------------------
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
- -------------------------------------------------------------------
Total Costs and
Expenses 12,077 1,033 462 13,572
- -------------------------------------------------------------------
Income before income
taxes 1,084 848 (480) 1,452
Provision for income
taxes 537 293 (158)(f) 672
- -------------------------------------------------------------------
Net Income $ 547 555 (322) 780
===================================================================
Net Income Per Share of
Common Stock
Basic $ 2.16 3.09
Diluted 2.15 3.07
- -------------------------------------------------------------------
Average Common Shares
Outstanding
(in thousands)
Basic 252,827 252,827
Diluted 254,433 254,433
- -------------------------------------------------------------------
See Notes to Unaudited Pro Forma Financial Statements.
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Unaudited Pro Forma Consolidated Phillips Petroleum Company
Statement of Income
Millions of Dollars
-------------------------------------------
Pro Forma
Adjustments
Increase/
(Decrease) Phillips
------------- and ARCO
Three Months Ended ARCO ARCO Alaska
March 31, 2000 Phillips Alaska DEFS Alaska Combined
-------- ------ ----- ------ --------
(g)
Revenues
Sales and other
operating revenues $4,735 693 (219) - 5,209
Equity in earnings of
affiliated companies 21 - 41 - 62
Other revenues 12 8 - (5)(b) 15
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Total Revenues 4,768 701 (178) (5) 5,286
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Costs and Expenses
Purchased crude oil and
products 3,083 8 (63) - 3,028
Production and operating
expenses 519 71 (46) 8 (c) 552
Exploration expenses 51 17 - 1 (d) 69
Selling, general and
administrative expenses 185 11 - - 196
Depreciation, depletion
and amortization 234 87 (22) 24 (d) 323
Taxes other than income
taxes 62 85 (5) - 142
Interest expense 61 3 - 82 (e) 146
Foreign currency
transaction losses 18 - - - 18
Preferred dividend
requirements of
capital trusts 13 - - - 13
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Total Costs and
Expenses 4,226 282 (136) 115 4,487
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Income before income
taxes 542 419 (42) (120) 799
Provision for income
taxes 292 156 (16) (37)(f) 395
- -------------------------------------------------------------------
Net Income $ 250 263 (26) (83) 404
===================================================================
Net Income Per Share of
Common Stock
Basic $ .99 1.59
Diluted .98 1.59
- -------------------------------------------------------------------
Average Common Shares
Outstanding
(in thousands)
Basic 253,718 253,718
Diluted 254,677 254,677
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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
--------------------------------------------
Pro Forma
Adjustments
Increase/
(Decrease) Phillips
-------------- and ARCO
ARCO ARCO Alaska
At March 31, 2000 Phillips Alaska DEFS Alaska Combined
-------- ------ ------ ------ --------
(g)
Assets
Cash and cash
equivalents $ 131 11 1,220 (1,031)(d) 331
Accounts and notes
receivable 1,637 53 - - 1,690
Inventories 570 71 - 170 (h) 811
Deferred income taxes 129 - - - 129
Prepaid expenses and
other current assets 171 17 - - 188
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Total Current Assets 2,638 152 1,220 (861) 3,149
Investments and
long-term receivables 2,247 397 (1,071) (395)(b) 1,178
Properties, plants and
equipment (net) 9,995 4,951 - 1,454 (d) 16,400
Deferred income taxes 83 - - - 83
Deferred charges 99 9 - - 108
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Total $15,062 5,509 149 198 20,918
====================================================================
Liabilities
Accounts payable $ 1,681 151 - - 1,832
Notes payable and
long-term debt due
within one year 80 - - 3,933 (e) 4,013
Accrued income and
other taxes 567 42 53 - 662
Other accruals 273 47 - - 320
- --------------------------------------------------------------------
Total Current
Liabilities 2,601 240 53 3,933 6,827
Long-term debt 3,889 596 - 928 (e) 5,413
Accrued dismantlement,
removal and
environmental costs 661 792 - (792)(i) 661
Deferred income taxes 1,474 - (55) - 1,419
Employee benefit
obligations 491 - - 33 (j) 524
Other liabilities and
deferred credits 591 28 149 - 768
- --------------------------------------------------------------------
Total Liabilities 9,707 1,656 147 4,102 15,612
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Company-Obligated
Mandatorily Redeemable
Preferred Securities
of Phillips 66 Capital
Trusts I and II 650 - - - 650
- --------------------------------------------------------------------
Total Common
Stockholders' Equity 4,705 3,853 2 (3,904) 4,656
- --------------------------------------------------------------------
Total $15,062 5,509 149 198 20,918
====================================================================
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 for 1999 has been
adjusted on a pro forma basis to reflect the March 31, 2000,
DEFS transaction as reported 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 was $18 million in 1999, and was
$5 million for the three-month period ending March 31, 2000.
(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 (see Note (h)) 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)
-----------------------------------------------------------
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 (see Note (e)) $5,191
===========================================================
*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 (i)),
Phillips estimates that amortization of undeveloped
leasehold investment would have increased $7 million in 1999
and $1 million for the three months ending March 31, 2000.
Depreciation, depletion and amortization (predominately unit-
of-production) would have been $94 million higher in 1999
and $24 million higher for the three-month period ending
March 31, 2000.
(e) Phillips expects to incur $5,191 million of debt to make
cash payments to BP (see Note (d)) of which $3,933 million would
be current debt and $1,258 million long-term debt. Phillips is
not assuming $330 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 $928 million.
At Phillips' April 26, 2000, 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 -- $82 million for the three months ending
March 31, 2000. At the date of this report, the company has
pending an offering of term debt, the proceeds of which are
proposed to be applied to repay a portion of this commercial
paper. A one-eighth percent variance in the average
borrowing rate would change pretax interest expense by
$6 million per year.
(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.
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(g) Phillips' historical income statement for the period ending
March 31, 2000, is adjusted herein to reflect the DEFS
transaction. The pro forma adjustments in this filing are
similar in nature to the pro forma adjustments described in
Phillips' Current Report on Form 8-K filed on April 13, 2000. In
connection with the closing of the DEFS transaction, Phillips
received $1.22 billion in cash on April 3, 2000. Phillips'
historical balance sheet at March 31, 2000, is adjusted herein to
reflect this cash receipt.
(h) Phillips paid BP $170 million to purchase, at estimated fair
value, the crude oil inventory still in pipelines, tanks or on
tankers at closing. Previously BP's downstream business had
purchased the crude oil from ARCO Alaska at the North Slope.
This one-time special purchase of crude oil inventory, after
adjustment to reflect the final determined fair value of the
inventory, will be recorded in cost of goods sold as the
inventory is sold in the second quarter of 2000. As this crude
oil is sold, it will be replaced by lower-cost inventory, which
will reflect related production and transportation costs. The
pro forma income statements do not reflect this non-recurring
item.
(i) 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.
(j) 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 17, 2000 -----------------------------
Rand C. Berney
Vice President and Controller
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