<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
COMMISSION FILE NUMBER 1-13108
VASTAR RESOURCES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4446177
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
15375 MEMORIAL DRIVE
HOUSTON, TEXAS 77079
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
__________________
(281) 584-6000
(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
--- ---
NUMBER OF SHARES OF COMMON STOCK, $.01 PAR VALUE, OUTSTANDING AS OF
JUNE 30, 2000: 97,774,687
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VASTAR RESOURCES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
--------------- --------------
2000 1999 2000 1999
------ ------ ------ ------
(Millions of dollars, except
per share amounts)
<S> <C> <C> <C> <C>
REVENUES
Net sales and other operating
revenues............................ $424.2 $257.6 $762.6 $478.8
Earnings from equity affiliate....... 4.3 4.4 10.8 9.4
Other revenues....................... 13.7 19.7 20.8 32.9
------ ------ ------ ------
Net revenues...................... 442.2 281.7 794.2 521.1
------ ------ ------ ------
EXPENSES
Operating expenses................... 47.0 47.0 90.0 97.5
Exploration expenses................. 48.5 46.3 117.1 85.3
Selling, general and administrative
expenses............................ 18.1 12.4 31.6 25.1
Taxes other than income taxes........ 17.9 11.9 33.0 20.7
Depreciation, depletion and
amortization........................ 115.7 103.6 230.4 216.9
Interest............................. 16.9 20.5 31.6 41.0
------ ------ ------ ------
Total expenses.................... 264.1 241.7 533.7 486.5
------ ------ ------ ------
Income before income taxes........... 178.1 40.0 260.5 34.6
Income tax provision (benefit)....... 42.3 (8.3) 47.3 (32.7)
------ ------ ------ ------
Net income........................ $135.8 $ 48.3 $213.2 $ 67.3
====== ====== ====== ======
Basic earnings per share............. $ 1.39 $ 0.49 $ 2.18 $ 0.69
====== ====== ====== ======
Diluted earnings per share........... $ 1.37 $ 0.49 $ 2.15 $ 0.68
====== ====== ====== ======
Cash dividends paid per share
of common stock...................... $0.075 $0.075 $0.150 $0.150
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
-1-
<PAGE>
VASTAR RESOURCES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- -----------
(Millions of dollars)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 9.9 $ 40.6
Accounts receivable:
Trade........................................ 171.6 130.5
Related parties.............................. 126.9 86.9
Inventories................................... 9.2 7.0
Prepaid expenses and other assets............. 49.8 42.1
-------- --------
Total current assets......................... 367.4 307.1
Oil and gas properties and equipment, net...... 2,520.8 2,320.2
Other long-term assets......................... 83.9 82.7
-------- --------
Total assets................................. $2,972.1 $2,710.0
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade........................................ $ 291.6 $ 258.8
Related parties.............................. 15.6 6.3
Accrued liabilities........................... 109.1 77.8
-------- --------
Total current liabilities................... 416.3 342.9
Long-term debt................................. 963.8 975.0
Deferred liabilities and credits............... 318.3 313.2
Deferred income taxes.......................... 262.0 272.9
-------- --------
Total liabilities............................ 1,960.4 1,904.0
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized,
110,000,000 shares; issued and outstanding,
97,774,687 shares as of June 30, 2000 and
97,644,950 shares as of December 31, 1999..... 1.0 1.0
Capital in excess of par value of stock........ 471.5 464.3
Accumulated earnings........................... 539.2 340.7
-------- --------
Total stockholders' equity................... 1,011.7 806.0
-------- --------
Total liabilities and stockholders' equity..... $2,972.1 $2,710.0
======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
-2-
<PAGE>
VASTAR RESOURCES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
------------------------
2000 1999
---------- -----------
(Millions of dollars)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................... $ 213.2 $ 67.3
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization.......... 230.4 216.9
Deferred income taxes............................. (10.9) (10.7)
Dry hole expense and undeveloped leasehold
amortization.................................... 77.0 44.4
Gain on asset sales............................... (3.3) (23.4)
Earnings from equity affiliate.................... (10.8) ( 9.4)
Cash dividends from equity affiliate.............. 13.4 ---
Net change in accounts receivable, inventories
and accounts payable............................ (41.2) 8.3
Other............................................. 6.5 (18.4)
------- -------
Net cash provided by operating activities........... 474.3 275.0
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties and equipment,
including dry hole costs......................... (492.3) (251.5)
Proceeds from asset sales........................... 7.5 48.7
Other............................................... (1.3) (3.0)
------- -------
Net cash used by investing activities............... (486.1) (205.8)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock............................ 7.1 2.3
Proceeds from long-term debt issuance............... 88.8 604.7
Repayments of long-term debt........................ (100.0) (645.3)
Dividends paid...................................... (14.8) (14.6)
------- -------
Net cash used by financing activities............... (18.9) (52.9)
------- -------
Net change in cash and cash equivalents............. (30.7) 16.3
Cash and cash equivalents at beginning of period.... 40.6 4.3
------- -------
Cash and cash equivalents at end of period.......... $ 9.9 $ 20.6
======= =======
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
-3-
<PAGE>
VASTAR RESOURCES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. INTRODUCTION.
The accompanying financial statements are unaudited and have been prepared
from our records. In the opinion of our management, these financial statements
reflect all adjustments (consisting only of items of a normal recurring nature)
necessary for a fair presentation of our financial position and results of
operations in conformity with generally accepted accounting principles. These
statements are presented in accordance with the requirements of Regulation S-X,
which does not require all disclosures normally required by generally accepted
accounting principles or those normally required in annual reports on Form 10-K.
You should read these interim financial statements together with the following:
(1) the annual financial statements for the year ended December 31, 1999 and the
related notes contained in our annual report on Form 10-K for the year ended
December 31, 1999 and (2) the quarterly financial statement and the related
notes in our quarterly report on Form 10-Q for the quarter ended March 31, 2000.
Certain previously reported amounts have been reclassified to conform to current
year presentation.
NOTE 2. NET SALES AND OTHER OPERATING REVENUES.
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
------------------ ------------------
2000 1999 2000 1999
------- ------- -------- -------
(Millions of dollars)
Sales and other operating revenues:
Unrelated parties................... $ 416.1 $ 267.5 $ 785.7 $ 456.1
Related parties (1)(B).............. 338.8 192.1 566.1 357.3
------- ------- -------- -------
Total.............................. 754.9 459.6 1,351.8 813.4
Less:
Purchases (2)....................... (315.8) (194.0) (561.9) (324.3)
Delivery expense.................... (14.9) (8.0) (27.3) (10.3)
------- ------- -------- -------
Net sales and
other operating revenues............ $ 424.2 $ 257.6 $ 762.6 $ 478.8
======= ======= ======== =======
--------------------
(1) Average costs of related-party
sales (A)(B)..................... $ 275.7 $ 171.8 $ 491.7 $ 340.0
(2) Related-party purchase cost (B).. $ 31.6 $ 17.3 $ 53.7 $ 33.6
(A) Determined by the weighted average lifting cost per equivalent of production
and the cost of purchased volumes multiplied by the volumes we sold to related
parties.
(B) Transactions with BP Amoco p.l.c. are reported as related party beginning
April 18.
-4-
<PAGE>
VASTAR RESOURCES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
(Unaudited)
NOTE 3. RELATIONSHIP WITH ATLANTIC RICHFIELD COMPANY (ARCO).
On April 18, 2000, the combination of BP Amoco p.l.c. and ARCO was
completed. As a result of the combination, BP Amoco indirectly owned, through a
subsidiary, as of April 18, 2000, 80,000,001 (81.9 percent) of the Common Stock,
par value $0.01 per share, of Vastar and a change of control of the Company
occurred.
As of June 30, 2000, BP Amoco owned 80,000,001 shares (81.8 percent) of our
outstanding common stock.
On March 16, 2000, BP Amoco p.l.c. advised our board of directors of its
intention to acquire, for $71.00 per share, the shares of Vastar's common stock
that are publicly traded. The proposal was conditional on the completion of BP
Amoco's acquisition of ARCO. We formed a special committee of independent
directors to evaluate the proposal.
On May 24, 2000, we announced that our board of directors had unanimously
recommended approval of an $83.00 per share cash merger offer from BP Amoco to
acquire the approximately 18.2 percent, or approximately 17.8 million shares, of
our common stock that is currently held by the public. We and subsidiaries of
BP Amoco have entered into a merger agreement. Closing is contingent on
approval by the holders of at least two-thirds of our shares not held by BP
Amoco. The record date for the meeting has been set for July 28, 2000. We
expect to announce the date of the shareholder meeting within the next thirty
days. A preliminary proxy statement has been filed with the Securities and
Exchange Commission.
The tax sharing agreement between Vastar and ARCO is applicable to Vastar
for the period that ARCO is the common parent of the affiliated group of which
Vastar is a member (the "Affiliated Group"). ARCO remained the common parent of
the Affiliated Group immediately after the above-described closing of the
combination between BP Amoco and ARCO. Immediately after the closing and on the
same date, ARCO became a subsidiary of BP America Inc. and thus was no longer
the common parent of the Affiliated Group. Vastar has signed a replacement tax
sharing agreement with BP America Inc. that contains all of the material
provisions that were in the tax sharing agreement between Vastar and ARCO and
has an effective date of April 18, 2000. Refer to Note 9, Taxes, contained
within this Form 10-Q for further discussions.
Vastar receives various services from its parent ARCO on a continuing basis
and at times has been party to various marketing arrangements for the sale of
crude oil, natural gas and natural gas liquids with ARCO. All intercompany
arrangements with ARCO, with the exception of the tax sharing agreement, settle
in cash on 30 day term (or less). The tax sharing agreement settles on the same
schedule as estimated tax payments due to the IRS. ARCO does not provide any
ongoing source of financing for Vastar. All services provided by ARCO to Vastar
are billed at ARCO's cost. Although the cost of these services are not regularly
tested against third party data, it is management's belief that they approximate
the same cost that would be available in the market place.
NOTE 4. SOUTHERN COMPANY ENERGY MARKETING L.P.
Southern Company Energy Marketing is a strategic marketing alliance between
Southern Energy, Inc. and Vastar. Through subsidiaries, we currently hold a 40
percent interest in Southern Company Energy Marketing and Southern Energy holds
a 60 percent interest.
We follow the equity method of accounting for our interest in Southern
Company Energy Marketing and recognize into income the greater of our interest
in Southern Company Energy Marketing's earnings or our minimum cash
distribution. In the first six months of 2000 and 1999, we recognized our
accrued share of the minimum distributions, net of any applicable exceptions. In
the first quarter 2000 we received a cash distribution of $12.0 million relating
to the 1999 minimum distribution amount. In the second quarter 2000, we received
an additional cash distribution of $1.4 million relating to the 1999 minimum
distribution amount. Our equity investment in Southern Company Energy Marketing
was $44.3 million as of June 30, 2000, and $46.9 million as of December 31,
1999. Vastar and Southern Energy, Inc. are negotiating the sale of Vastar's 40
percent interest in Southern Company Energy Marketing L.P. to Southern Energy.
As of the date hereof, no letter of intent or agreement has been signed. For
additional details regarding Southern Company Energy Marketing, refer to our
annual report on Form 10-K for the year ended December 31, 1999.
-5-
<PAGE>
VASTAR RESOURCES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
(Unaudited)
NOTE 5. EXPLORATION EXPENSES.
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
-------------- ---------------
2000 1999 2000 1999
------ ------ ------ ------
(Millions of dollars)
Dry hole costs........................... $ 21.8 $ 21.5 $ 59.5 $26.9
Geological and geophysical............... 5.2 4.1 15.8 18.2
Undeveloped leasehold amortization....... 8.7 8.8 17.5 17.5
Staff.................................... 10.2 10.0 20.8 19.4
Lease rentals............................ 2.6 1.9 3.5 3.3
------ ------ ------ -----
Total................................... $ 48.5 $ 46.3 $117.1 $85.3
====== ====== ====== =====
NOTE 6. EARNINGS PER SHARE.
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
-------------- ---------------
2000 1999 2000 1999
------ ------ ------ ------
(Millions, except per share amounts)
Basic earnings per share:
Income available to common shareholders... $135.8 $ 48.3 $213.2 $67.3
Average shares of stock outstanding....... 97.7 97.5 97.7 97.4
Basic earnings per share................... $ 1.39 $ 0.49 $ 2.18 $0.69
Diluted earnings per share:
Income available to common shareholders... $135.8 $ 48.3 $213.2 $ 67.3
Incremental shares assuming the exercise
of stock options......................... 1.4 0.9 1.2 0.9
Average shares of stock outstanding plus
effect of dilutive securities............ 99.1 98.4 98.9 98.3
Diluted earnings per share................. $ 1.37 $ 0.49 $ 2.15 $0.68
NOTE 7. STOCK OPTIONS.
Our board of directors previously adopted various arrangements that become
operative upon a change of control of Vastar. One of these arrangements, our
Amended and Restated Executive Long-Term Incentive Plan, provides that, if a
change of control occurs, all stock options granted under the plan will become
immediately exercisable.
On April 18, 2000, the combination of BP Amoco p.l.c. and ARCO was
completed. As a result of the combination, BP Amoco indirectly owned, through a
subsidiary, approximately 81.9 percent of the Common Stock, par value $0.01 per
share, of Vastar and a change of control of the Company occurred. As a result,
all stock options became exercisable.
-6-
<PAGE>
VASTAR RESOURCES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
(Unaudited)
NOTE 7. STOCK OPTIONS - continued.
Vastar, ARCO and ARCO's subsidiary, Kernel Holdings, Inc. have entered into
a merger agreement, dated as of May 24, 2000. Under the agreement, Vastar and
ARCO have agreed to take all actions that are necessary so that immediately
prior to the completion of the merger, each stock option granted by Vastar to
buy shares of its common stock, whether or not then exercisable, will be
cancelled and only entitle the holder thereof to receive an amount in cash equal
to the total number of shares subject to the option multiplied by the excess of
$83 over the exercise price per share of the option. For the merger to occur,
the merger agreement and the merger must be approved at a special meeting of
Shareholders. For additional information refer to Note 3, contained within this
Form 10-Q.
NOTE 8. COMMITMENTS AND CONTINGENCIES.
Vastar and its subsidiaries are involved in a number of lawsuits, all of
which have arisen in the ordinary course of our business. We believe that any
ultimate liability resulting from these suits will not have a material adverse
effect on our financial position, results of operations or cash flows.
In connection with the BP Amoco p.l.c. tender offer, six lawsuits
purporting to be class actions have been filed in the Delaware Chancery Court
against Vastar, its directors, ARCO and BP Amoco. On May 23, 2000, the parties
to the stockholder litigation agreed in principle on a settlement of the
litigation, and executed a memorandum of understanding to reflect the terms of
the settlement. The parties agreed that the $83 per share price approved by
Vastar's Board of Directors on May 23, 2000 is fair, adequate and reasonable
consideration for the shares of Vastar's common stock held by the public. The
parties also agreed to enter into a settlement agreement, cooperate in public
disclosures related to the settlement, and use best efforts to gain approval of
the settlement from the Delaware courts. Without any admission of fault by any
defendant, the memorandum of understanding provides for a dismissal of all
claims with prejudice and a release in favor of all defendants of any and all
claims that have been or could have been asserted by the plaintiffs or any
members of the purported class. The memorandum of understanding also provides
that the defendants will not oppose an application by the plaintiffs' counsel to
the Delaware court for an aggregate award of fees and expenses in an amount not
to exceed $2.1 million, which will be paid by Vastar. The settlement is subject
to, among other things, completion of confirmatory discovery by the plaintiffs
(which has occurred), execution of a settlement agreement, final approval of the
settlement by the Delaware court, and completion of the merger. See Item 1 of
Part II of this Form 10-Q for further information.
Our operations and financial position continue to be affected from time to
time in varying degrees by domestic and foreign political developments as well
as legislation and regulations pertaining to restrictions on oil and natural gas
production, imports and exports, natural gas regulation, taxes, environmental
regulations and cancellation of contract rights. Both the likelihood of such
occurrences and their overall effect on us could vary greatly and are not
predictable. These uncertainties are part of a number of items that we have
taken and will continue to take into account in periodically assessing our
estimates of liabilities.
Vastar and ARCO have agreements whereby we have agreed to indemnify ARCO
against certain claims or liabilities. Our indemnity obligations cover claims
and liabilities that could be made against ARCO relating to ARCO's historical
ownership and operation of the properties transferred by ARCO to us upon the
formation of Vastar. They also included liabilities under laws relating to the
protection of the environment and the workplace and liabilities arising out of
certain litigation described in the agreements. ARCO has agreed to indemnify
Vastar with respect to other claims and liabilities and other litigation matters
not related to our business or properties as reflected in our consolidated
financial statements.
In September 1996, we entered into a contract with Diamond Offshore
Drilling Company for the major upgrade and operation of a semisubmersible
drilling rig, Ocean Victory, for a three-year deepwater drilling program in the
Gulf of Mexico, which began in November 1997. Since November 1997, scheduled
-7-
<PAGE>
VASTAR RESOURCES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
(Unaudited)
NOTE 8. COMMITMENTS AND CONTINGENCIES - continued.
increases in the day rates and our request of Diamond to make improvements to
the rig have resulted in higher costs during the remaining contract term. As of
June 30, 2000, this contract has a remaining life of slightly more than one-half
of a year and remaining costs of $40.1 million. This amount does not take into
consideration any reimbursements that we might receive from partners or
potential partners. We have three one-year options to renew the term of the
contract, subject to renegotiating the day rates.
In December 1998, we entered into an agreement with R&B Falcon Drilling Co.
for the operation of a semisubmersible, ultra-deepwater drilling rig, for a
three-year deepwater-drilling program in the Gulf of Mexico. The drilling
program is scheduled to commence in 2001. This contract is for three years and
has an anticipated cost of approximately $220.0 million, before any
reimbursement from partners or potential partners and operating cost
escalations. We have several options relating to the term and pricing of the
contract, including the option to extend the term of the contract for up to five
additional years.
Vastar has significant credit risk exposure to Southern Company Energy
Marketing and Southern Energy. The credit risk exposure consists of three
principal items. First, Southern Company Energy Marketing has promised to make
certain minimum cash distributions to Vastar. Southern Energy has guaranteed
this obligation as well as the amounts due to Vastar upon the exercise of
Vastar's option to sell its remaining interest on January 1, 2003. Second,
Southern Company Energy Marketing is obligated to pay, and Southern Energy has
guaranteed payment, for natural gas purchased under the Gas Purchase and Sale
Agreement between Vastar and Southern Company Energy Marketing, pursuant to
which Vastar has agreed to sell substantially all of its production to Southern
Company Energy Marketing. Third, Vastar has been indemnified by Southern
Energy, with certain limitations, with respect to amounts which Vastar may be
required to pay under guarantees which Vastar has issued to secure certain
obligations of Southern Company Energy Marketing. If Southern Energy does not
maintain in effect an investment grade rating from Moody's or Standard and
Poors, Southern Energy has agreed to provide credit enhancement(s) to secure the
payment of these guaranteed obligations. As of June 30, 2000, Southern Energy
has maintained the required investment grade rating.
Pursuant to a working capital loan arrangement, we have agreed to loan
Southern Company Energy Marketing up to $20.0 million. At June 30, 2000, no
loans were outstanding under this arrangement.
Vastar and Southern Energy have agreed to guarantee certain obligations of
Southern Company Energy Marketing. Refer to our annual report on Form 10-K for
the year ended December 31, 1999 for a description of these obligations.
Vastar and Southern Energy, Inc. are negotiating the sale of Vastar's 40
percent interest in Southern Company Energy Marketing L.P. to Southern Energy.
We have performed and continue to perform ongoing credit evaluations of our
other customers and generally do not require collateral on our credit sales.
Any amounts anticipated as uncollectible are charged to income and credited to a
valuation account. The amounts included in the allowance for uncollectible
accounts receivable at June 30, 2000 and December 31, 1999 were insignificant.
-8-
<PAGE>
VASTAR RESOURCES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
(Unaudited)
NOTE 9. TAXES.
The provision (benefit) for taxes on income is comprised of the following:
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
--------------- ---------------
2000 1999 2000 1999
------ ----- ------ ------
(Millions of dollars)
Federal:
Current............................... $ 57.7 $(15.4) $ 56.9 $(22.1)
Deferred.............................. (19.8) 6.1 (16.1) (11.5)
------ ----- ------ ------
Total federal....................... 37.9 (9.3) 40.8 (33.6)
------ ----- ------ ------
State:
Current............................... 0.9 0.1 1.3 0.1
Deferred.............................. 3.5 0.9 5.2 0.8
------ ----- ------ ------
Total state......................... 4.4 1.0 6.5 0.9
------ ----- ------ ------
Total income tax provision (benefit)....... $ 42.3 $(8.3) $ 47.3 $(32.7)
====== ===== ====== ======
The following is a reconciliation of our income tax provision (benefit) with tax
at the federal statutory rate for the specified periods:
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
--------------- ---------------
2000 1999 2000 1999
------ ------ ------ ------
(Millions of dollars)
Income before taxes............. $178.1 $ 40.0 $260.5 $ 34.6
====== ====== ====== ======
Tax at the statutory rate....... $ 62.3 $ 14.0 $ 91.1 $ 12.1
Increase (reduction) in taxes
resulting from:
State income taxes (net
of federal effect)........... 2.9 0.7 4.2 0.6
Tax credits................... (23.6) (23.0) (49.6) (45.4)
Other......................... 0.7 -- 1.6 --
------ ------ ------ ------
Income tax provision (benefit).. $ 42.3 $ (8.3) $ 47.3 $(32.7)
====== ====== ====== ======
-9-
<PAGE>
VASTAR RESOURCES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
(Unaudited)
9. TAXES - continued.
Vastar and its subsidiaries are parties to a tax sharing agreement with
ARCO that applies generally to all business activity prior to April 18, 2000.
Vastar entered into a new tax sharing agreement with BP America, Inc.
effective April 18, 2000. That agreement contains all of the material provisions
included in the tax sharing agreement with ARCO with the following
modifications. The agreement allows Vastar, in certain circumstances, the option
of receiving a cash payment equal to the discounted value of certain of its
Section 29 tax credits, notwithstanding the fact that such credits have not
reduced the BP America consolidated tax group's liability. Vastar may exercise
this option with respect to all or any portion of its Section 29 tax credits
that are being carried forward by the BP America consolidated tax group for the
taxable years 2000, 2001 and 2002, provided however, that the option is not
applicable to Section 29 tax credits generated from properties acquired by
Vastar after 1999. The discounted value that applies if the option is exercised
varies with each taxable year and is the only compensation that will be paid to
Vastar. The discounted value for the taxable years 2000, 2001 and 2002 is 85
percent, 88 percent and 90 percent, respectively. The option is not applicable
for any taxable year beginning after 2002. In exchange for the option, Vastar
agreed that its Section 29 tax credit carry forwards will not have a priority
over other BP America group members' Section 29 tax credit carry forwards that
are attributable to credits generated on or after April 18, 2000.
The BP America tax sharing agreement increases the maximum annual refund for
Section 29 tax credits from properties acquired on or after June 1, 1995 to
$20 million.
NOTE 10. LONG-TERM DEBT.
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- ----
(Millions of dollars)
<S> <C> <C>
8.75% Notes, issued February 1995, due in 2005......... $149.7 $149.6
6.95% Notes, issued November 1996, due 2006*........... 75.0 75.0
6.96% Notes, issued February 1997, due 2007*........... 75.0 75.0
6.39% Notes, issued January 1998, due 2008*............ 50.0 50.0
6.50% Notes, issued March 1999, due 2009............... 299.2 299.1
6.00% Putable/Callable Notes, due 2000/2010............ --- 100.0
Commercial Paper....................................... 314.9 226.3
------ ------
Total.................................................. $963.8 $975.0
====== ======
------------
* Issuances pursuant to the Medium Term Note Program.
</TABLE>
The putable/callable notes were put to us in April 2000. We funded the
payment of the notes with proceeds obtained from our Commercial Paper Program.
Our commercial paper is classified as long-term debt in accordance with
Statement of Financial Accounting Standards Number 6, "Classification of Short-
Term Obligations Expected to Be Refinanced."
Interest capitalized was $1.1 million for the second quarter of 2000 and
$2.9 million for the first six months of 2000. Interest capitalized during the
first and second quarters of 1999 was immaterial.
-10-
<PAGE>
VASTAR RESOURCES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
NOTE 11. NEW ACCOUNTING STANDARDS.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This standard requires us to recognize all
of our derivative and hedging instruments in our statements of financial
position as either assets or liabilities and measured at fair value. In
addition, all hedging relationships must be designated, documented and
reassessed periodically. On July 7, 1999, the Financial Accounting Standards
Board delayed the effective date of SFAS No. 133 for one year. The delay,
published as SFAS No. 137, applies to quarterly and annual financial statements.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities" which modified FAS No. 133. SFAS No. 133, as revised
by SFAS No. 137 and SFAS No. 138 is effective for all fiscal quarters of all
fiscal years beginning after June 15, 2000. We are continuing to evaluate the
impact the provisions of these standards will have on us.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements".
SAB 101 provides guidance on the recognition, presentation and disclosure of
revenue in financial statements filed with the SEC. The SEC has since issued SAB
101A and SAB 101B to extend the date for the required disclosure. SAB 101, as
amended by SAB 101A and SAB 101B is to be implemented no later than the fourth
fiscal quarter of fiscal years beginning after December 15, 1999. We are
currently evaluating the impact that the provisions of this bulletin will have
on us.
NOTE 12. SUBSEQUENT EVENTS.
On July 20, 2000, Vastar declared a quarterly dividend of $0.075 per share
of common stock, payable on September 1, 2000 to stockholders of record on
August 4, 2000.
On July 20, our board of directors set a record date of July 28, 2000 for a
planned special meeting of shareholders to vote on the company's proposed merger
with BP Amoco. Only shareholders of record, those who own shares at the close of
business on July 28, 2000, will be eligible to vote at the special meeting. The
date of the special meeting is expected to be announced within the next thirty
days.
Vastar and BP Amoco are in negotiations relating to Vastar's Ocean Victory
deepwater drilling rig. In connection with the anticipated closing of the
recently announced merger between a subsidiary of BP Amoco and Vastar, BP Amoco
desires to enter into an agreement with Vastar which would allow BP Amoco to use
Vastar's Ocean Victory deepwater drilling rig to begin drilling a BP Amoco
project prior to the closing of the merger assuming Vastar's current well
operations have been completed. Under the agreement under discussion, BP Amoco
would pay, for the period when the rig is in BP Amoco's possession, (i) all
costs of the rig which Vastar would otherwise incur and (ii) a daily fee which
would compensate Vastar for its opportunity costs and additional operating
costs. BP would also indemnify Vastar for any and all liability which Vastar
might incur as a result of the agreement. In the event the merger does not
occur, the Ocean Victory would be returned to Vastar's control after BP Amoco's
drilling project was completed.
-11-
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS.
Sales and production volumes and average price statistics for the specified
periods were as follows:
<TABLE>
<CAPTION>
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
------------------ -------------------
2000 1999 2000 1999
-------- ------ ------- ----------
<S> <C> <C> <C> <C>
Total production (MMcfed)*.......... 1,480 1,453 1,468 1,479
NATURAL GAS
Sales (MMcfd)*..................... 1,386 1,472 1,387 1,519
Production (MMcfd)................. 1,045 1,095 1,050 1,132
Average sales price (per Mcf)*..... $ 3.16 $ 1.98 $ 2.75 $ 1.79
Average wellhead price (per Mcf)... $ 2.97 $ 1.89 $ 2.58 $ 1.75
CRUDE OIL
Sales (MBbld)*..................... 132.1 123.9 120.2 120.9
Production (MBbld)................. 53.8 43.1 49.9 44.9
Average realized price (per Bbl)*.. $24.41 $15.20 $24.56 $13.11
NATURAL GAS LIQUIDS ("NGLs")
Production (MBbld)................. 18.7 16.6 19.8 12.9
Average realized price (per Bbl)... $19.27 $11.02 $19.18 $ 9.99
</TABLE>
---------------------
* As generally used in the oil and natural gas business and in this Form
10-Q, the following terms have the following meanings:
MMcfd = million cubic feet per day MBbld = thousand barrels per day
Mcf = thousand cubic feet Bbl = barrel
MMcfed = million cubic feet equivalent per
day
Six Mcf = one barrel
In calculating Mcf and Bbl equivalents, we use a generally recognized
standard in which one Bbl is equal to six Mcf.
-12-
<PAGE>
RESULTS OF OPERATIONS - (continued).
The following table sets forth the statement of income for the specified
period:
<TABLE>
<CAPTION>
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
---------------------- ------------------------
2000 1999 2000 1999
---------- -------- ---------- ---------
(Millions of dollars)
<S> <C> <C> <C> <C>
REVENUES
Natural gas:
Sales........................................... $ 399.0 $ 265.6 $ 693.7 $ 492.7
Purchases....................................... (115.0) (78.0) (201.0) (136.9)
Delivery expense................................ (12.0) (6.2) (22.0) (6.8)
------- ------- ------- -------
Net sales - natural gas....................... 272.0 181.4 470.7 349.0
------- ------- ------- -------
Crude oil:
Sales........................................... 316.0 173.5 574.3 291.0
Purchases....................................... (194.7) (112.6) (348.1) (181.8)
Delivery expense................................ (1.8) (1.4) (3.2) (2.8)
------- ------- ------- -------
Net sales - crude oil.......................... 119.5 59.5 223.0 106.4
------- ------- ------- -------
NGLs and other:
Sales........................................... 40.0 20.5 83.8 29.7
Purchases and other costs....................... (7.3) (3.8) (14.9) (6.3)
------- ------- ------- -------
Net sales - NGLs and other..................... 32.7 16.7 68.9 23.4
------- ------- ------- -------
Net sales and other operating
revenues..................................... 424.2 257.6 762.6 478.8
Earnings from equity affiliate................... 4.3 4.4 10.8 9.4
Other revenues................................... 13.7 19.7 20.8 32.9
------- ------- ------- -------
Net revenues................................... 442.2 281.7 794.2 521.1
------- ------- ------- -------
EXPENSES
Operating expenses............................... 47.0 47.0 90.0 97.5
Exploration expenses............................. 48.5 46.3 117.1 85.3
Selling, general and administrative
expenses........................................ 18.1 12.4 31.6 25.1
Taxes other than income taxes.................... 17.9 11.9 33.0 20.7
Depreciation, depletion and
amortization.................................... 115.7 103.6 230.4 216.9
Interest......................................... 16.9 20.5 31.6 41.0
------- ------- ------- -------
Total expenses................................. 264.1 241.7 533.7 486.5
------- ------- ------- -------
Income before income taxes....................... 178.1 40.0 260.5 34.6
Income tax provision (benefit)................... 42.3 (8.3) 47.3 (32.7)
------- ------- ------- -------
Net income..................................... $135.8 $ 48.3 $ 213.2 $ 67.3
======= ======= ======= =======
</TABLE>
-13-
<PAGE>
SECOND QUARTER 2000 VS. SECOND QUARTER 1999
Our net income for second quarter 2000 was $135.8 million, up 181 percent,
compared to $48.3 million for second quarter 1999. This increase was primarily
due to higher average sales prices for all commodities. Total production
increased 2 percent in second quarter 2000 to 1,480 MMcfed as compared to
second quarter 1999.
Our natural gas sales revenues increased by 50 percent to $399.0 million
for second quarter 2000 as compared to second quarter 1999. The increase in
revenues was a result of a 60 percent increase in average sales price.
Our average natural gas wellhead price for second quarter 2000 was $2.97
per Mcf, an increase of $1.08 per Mcf as compared to second quarter 1999. The
average price for natural gas sold at Henry Hub, Louisiana (a benchmark from
which general natural gas price trends can be analyzed) during second quarter
2000 was $3.48 per Mcf compared to $2.17 per Mcf for second quarter 1999. Our
realized price for natural gas did not recognize the full extent of the general
market price increase because of (1) a widening of the basis differentials
between Henry Hub and the locations where we sold our natural gas production
(effectively lowering the price we received) and (2) a lower hedging gain in the
second quarter 2000 of $0.1 million compared to a $2.6 million gain during the
second quarter of 1999.
Our average natural gas production for second quarter 2000 decreased by 50
MMcfd to 1,045 MMcfd as compared to second quarter 1999. The lower production
level was primarily a result of natural field declines.
Our crude oil sales revenues for second quarter 2000 increased by 82
percent to $316.0 million as compared to second quarter 1999. This increase was
due to higher average market prices for second quarter 2000, combined with
higher volumes available for sale.
Our average crude oil realized price for second quarter 2000 increased
$9.21 per Bbl to $24.41 per Bbl as compared to second quarter 1999. The average
price for second quarter 2000 for NYMEX-WTI-at-Cushing (a benchmark from which
crude oil price trends can be analyzed) was $28.32 per Bbl compared to $16.35
per Bbl for the second quarter 1999. Our realized price for crude oil did not
recognize the full extent of the general market price increase primarily because
of an $11.4 million hedging loss in the second quarter 2000.
Our crude oil production for second quarter 2000 increased by 10.7 MBbld to
53.8 MBbld compared to second quarter 1999. The start-up of Mississippi Canyon
764 and production increases at Ship Shoal 182, South Timbalier 26 and 37 and
other fields more than offset natural field declines that normally occur in oil
and gas fields.
Net sales revenues for NGLs for second quarter 2000 were $32.7 million, 96
percent higher as compared to second quarter 1999. Our net NGL sales revenues
for second quarter 2000 reflect both an increase in commodity prices and an
increase in NGL production as compared to second quarter 1999. NGL prices often
fluctuate with the price of crude oil, and as crude oil prices increased in
2000, NGL prices generally followed the same trend. Our NGL average realized
price for the second quarter 2000 increased 75 percent when compared to the
second quarter 1999. As prices improved, the economics of extracting natural gas
liquids were more favorable than bypassing the processing plants and selling the
wet gas stream as natural gas. As a result, our NGL production improved to 18.7
MBbld in second quarter 2000 as compared to 16.6 MBbld in the second quarter
1999.
Our other revenues for second quarter 2000 were $6.0 million lower as
compared to second quarter 1999 as a result of the sale of our interest in
various oil and natural gas properties in the second quarter last year.
- 14-
<PAGE>
Total exploration expenses were $48.5 million in second quarter 2000, and
were slightly higher when compared to the same period last year. Our dry hole
expenses for second quarter 2000 were $21.8 million as compared to $21.5 million
for second quarter 1999. Drilling results in the second quarter 2000 reflect 18
of 22 gross wells as successes. The results in second quarter 1999, reflect 7 of
14 gross wells as successes.
Our selling, general and administrative expenses increased $5.7 million in
second quarter 2000 as compared to second quarter 1999. The increase is
primarily related to additional costs of $5.4 million incurred in the second
quarter 2000 as a result of the pending merger with BP Amoco.
Our taxes other than income taxes for the second quarter 2000 were $17.9
million, $6.0 million higher compared to the second quarter 1999. The increase
reflects the impact of higher commodity prices on production related taxes.
Our interest expense for the second quarter of 2000 decreased by $3.6
million as compared to the same period last year. The decrease in interest
expense was primarily a result of lower average outstanding long-term debt
levels in the second quarter 2000 as compared to the second quarter 1999,
partially offset by higher interest rates. We capitalized $1.1 million of
interest in the second quarter 2000 compared to an immaterial amount of interest
in the second quarter 1999.
We recorded a second quarter 2000 income tax provision of $42.3 million
compared to a benefit of $8.3 million for second quarter 1999 primarily due to
higher pre-tax earnings. The income tax provision for the second quarter 2000
includes the net benefit of $23.6 million of Internal Revenue Code Section 29
(Section 29) tax credits. The income tax benefit for the second quarter of 1999
includes $23.0 million of Section 29 tax credits.
FIRST SIX MONTHS 2000 VS. FIRST SIX MONTHS 1999
Our net income for the first six months of 2000 was $213.2 million, up 217
percent, compared to $67.3 million for the first six months of 1999. This
increase was primarily due to higher average sales prices for all commodities.
Our total production declined slightly in the first six months of 2000 to 1,468
MMcfed as compared to first six months of 1999.
Our natural gas sales revenues increased by 41 percent to $693.7 million
for first six months of 2000 as compared to first six months of 1999. The
increase in revenues was a result of a 54 percent increase in average sales
price.
Our average natural gas wellhead price for the first six months of 2000 was
$2.58 per Mcf, an increase of $0.83 per Mcf as compared to the first six months
of 1999. The average price for natural gas sold at Henry Hub, Louisiana (a
benchmark from which general natural gas price trends can be analyzed) during
the first six months 2000 was $3.02 per Mcf compared to $1.97 per Mcf for
the first six months of 1999. Our realized price for natural gas did not
recognize the full extent of the general market price increase because of (1) a
widening of the basis differentials between Henry Hub and the locations where we
sold our natural gas production (effectively lowering the price we received) and
(2) a lower hedging gain in the first six months of 2000 of $2.9 million
compared to a $12.4 million gain during the first six months of 1999.
Our average natural gas production for the first six months of 2000
decreased by 82 MMcfd to 1,050 MMcfd as compared to the first six months of
1999. The lower production level was primarily a result of natural field
declines.
Our crude oil sales revenues for the first six months of 2000 increased by
97 percent to $574.3 million as compared to the first six months of 1999. This
increase was due to higher average market prices for the first six months of
2000, combined with higher volumes available for sale.
-15-
<PAGE>
Our average crude oil realized price for the first six months of 2000
increased $11.45 per Bbl to $24.56 per Bbl as compared to the first six months
of 1999. The average price for the first six months of 2000 for NYMEX-WTI-at-
Cushing (a benchmark from which crude oil price trends can be analyzed) was
$28.32 per Bbl compared to $14.10 per Bbl for the first six months of 1999. Our
realized price for crude oil did not recognize the full extent of the general
market price increase primarily because of a $20.0 million hedging loss in the
first six months of 2000.
Our crude oil production for the first six months of 2000 increased by 5.0
MBbld to 49.9 MBbld compared to the first six months 1999. The start-up of
Mississippi Canyon 764 and production increases at Ship Shoal 182, South
Timbalier 26 and 37 and other fields more than offset natural field declines.
Net sales revenues for NGLs for the first six months of 2000 were $68.9
million, 194 percent higher as compared to the first six months of 1999. Our net
NGL sales revenues for the first six months of 2000 reflect both an increase in
commodity prices and an increase in NGL production as compared to the first six
months of 1999. NGL prices often fluctuate with the price of crude oil, and as
crude oil prices increased in 2000, NGL prices generally followed the same
trend. Our NGL average realized price for the first six months of 2000 increased
92 percent when compared to the first six months of 1999. As prices
improved, the economics of extracting natural gas liquids were more favorable
than bypassing the processing plants and selling the wet gas stream as natural
gas. As a result, our NGL production improved to 19.8 MBbld in the first six
months of 2000 as compared to 12.9 MBbld in the first six months of 1999.
Our other revenues for first six months of 2000 were $20.8 million, $12.1
million lower than the first six months of 1999. This is related to sales of our
interest in various oil and natural gas properties occurring last year.
Total exploration expenses were $117.1 million for the first six months of
this year, $31.8 million higher when compared to the same period last year. The
increase was principally dry hole expense, which for the first six months of
2000 was $59.5 million as compared to $26.9 million for the first six months of
1999. In the first six months of 2000, 26 of 36 gross wells were successful
compared to 18 of 28 gross wells first six months 1999.
Our selling, general and administrative expenses increased $6.5 million in
the first six months of 2000 as compared to the first six months of 1999. The
increase is primarily related to costs incurred in the second quarter 2000 as a
result of the proposed merger with BP Amoco.
Our taxes other than income taxes for the first six months of 2000 were
$33.0 million, $12.3 million higher compared to the first six months of 1999.
The increase reflects the impact of higher commodity prices on production and
severance taxes.
Our interest expense for the first six months of 2000 decreased by $9.4
million as compared to the same period last year. The decrease in interest
expense was primarily a result of lower average outstanding long-term debt
levels in the first six months of 2000 as compared to the first six months of
1999, partially offset by higher interest rates. We capitalized $2.9 million of
interest in the first six months of 2000 compared to an immaterial amount of
interest in the first six months of 1999.
We recorded an income tax provision of $47.3 million for the first six
months of 2000 compared to a benefit of $32.7 million for the first six months
of 1999 primarily due to higher pre-tax earnings. The income tax provision for
the first six months of 2000 includes the net benefit of $49.6 million of
Section 29 tax credits. The income tax benefit for the first six months of 1999
includes $45.4 million of Section 29 tax credits.
-16-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES.
In the first six months of 2000, cash flow provided by operating activities
was $474.3 million as compared to $275.0 million for the first six months of
1999. This increase was primarily due to higher commodity prices in the first
six months of 2000 as compared to the corresponding period last year.
Net cash used by investing activities in the first six months of 2000 was
$486.1 million, which was 136 percent higher when compared to the first six
months of 1999. The following table summarizes our capital investments for the
comparative periods.
For the Six Months Ended
June 30,
------------------------
2000 1999
------ ------
(Millions of dollars)
Exploratory drilling.............................. $124.7 $ 85.6
Development drilling.............................. 208.2 97.6
Property acquisitions............................. 98.9 26.4
Other additions................................... 60.5 41.9
------ ------
Total additions to property, plant and equipment.. 492.3 251.5
Geological and geophysical........................ 15.8 18.2
------ ------
Total capital program............................. $508.1 $269.7
====== ======
Our capital-spending program increase during the first six months of 2000
is primarily associated with (1) producing property acquisitions, most notable
is South Timbalier Block 26, (2) increased drilling costs on the offshore Gulf
of Mexico and (3) an increased amount of drilling activity in the first half of
2000 compared to the first half of 1999. We had approximately five more drilling
rigs working in the first half of 2000 as compared to the first half of 1999.
Proceeds from asset sales were $7.5 million in the first six months of 2000
compared to $48.7 million received in the first six months of 1999.
Cash flows used by financing activities were $18.9 million in the first six
months of 2000, which included a $11.2 million net decrease in long-term debt.
Vastar's ratio of earnings to fixed charges was 8.1 for the six months
ended June 30, 2000, and 1.8 for the six months ended 1999. This ratio was
computed by dividing earnings by fixed charges. For this calculation, earnings
include income before income taxes and fixed charges. Fixed charges include
interest, amortization of debt expenses and the estimated interest component of
rental expense.
RISK MANAGEMENT AND MARKET-SENSITIVE INSTRUMENTS.
The following discussion of our risk-management activities includes
"forward-looking statements" that involve various uncertainties. Actual results
could differ materially from those projected in the forward-looking statements.
Refer to the "Cautionary Statement for Purposes of the Private Litigation Reform
Act of 1995" in Items 1 and 2 of our annual report Form 10-K for the year ended
December 31, 1999.
We use various financial instruments for non-trading purposes in the normal
course of our business to manage and reduce price volatility and other market
risks associated with our natural gas and petroleum liquids production. This
activity is referred to as hedging. We structure these arrangements to reduce
our exposure to commodity price decreases, but they can also limit the benefit
we might otherwise receive from commodity price increases. Our risk management
activity is generally accomplished by purchasing and/or selling exchange-traded
futures and over-the-counter options.
-17-
<PAGE>
As a result of all of our hedging transactions for natural gas and crude
oil, we realized a pre-tax loss of approximately $17.1 million in the first six
months of 2000 compared to a pre-tax gain of approximately $12.4 million in the
first six months of 1999.
The following table summarizes our open crude oil hedging positions as of
June 30, 2000:
Average Weighted Average
Financial Instrument* Time Period Volume Prices per Bbl
--------------------- --------------- -------- ---------------
Collars July - Dec 2000 20 MBbld $18.90 - $23.41
Puts Sold July - Dec 2000 20 MBbld $15.90
___________
* As of the date of this filing we have no gas price hedges.
A "collar" is a financial instrument or a combination of financial
instruments which establishes a range of prices to be received relating to a set
commodity volume. This arrangement, in effect, allows us to receive no less than
a stated minimum or floor price per unit of volume and no more than a stated
maximum or ceiling price per unit of volume.
A "put" is an option contract that gives the holder the right to sell a
stated volume of the underlying commodity at a specified price for a certain
fixed period of time.
A "call" is an option contract that gives the holder the right to buy a
stated volume of the underlying commodity at a specified price for a certain
fixed period of time.
The fair value (our unrealized pre-tax gain or loss) for our 2000 hedged
transactions in place as of June 30, 2000 was a $25.5 million loss for crude
oil. This hypothetical gain/loss is calculated based on brokers' forward price
quotes and NYMEX forward price quotes as of June 30, 2000, which, for the
remainder of year 2000, averaged $30.49 per Bbl for crude oil. The actual gains
or losses we will realize from our hedge transactions may vary significantly due
to the fluctuation of prices in the commodity markets. For example, a
hypothetical 10 percent increase in the forward price quotes would increase the
unrealized loss for crude oil hedges by approximately $9.1 million. A
hypothetical 10 percent decrease in the forward price quotes would decrease the
unrealized loss for crude oil hedges by approximately $9.1 million. In order to
calculate the hypothetical gain/loss, the relevant variables are (1) the type of
commodity, (2) the delivery price and (3) the delivery location. We do not take
into account the time value of money because of the short-term nature of our
hedging instruments. These calculations may be used to analyze the gains and
losses we might realize on our financial hedging contracts and do not reflect
the effects of price changes on our actual physical commodity sales. During the
first quarter of 2000, natural gas prices fluctuated between $2.85 per Mcf and
$4.59 per Mcf (Henry Hub), and crude oil prices fluctuated between $23.85 per
Bbl and $34.65 per Bbl (NYMEX-WTI-at-Cushing).
We also have long-term natural gas sales contracts with certain
cogeneration facilities. Approximately 62 MMcfd of the approximately 87 MMcfd of
natural gas volumes related to these contracts are for a fixed price of
approximately $2.45 per Mcf for the remainder of 2000. As of June 30, 2000,
these contracts have a remaining average life of approximately 11 years. In July
1999, we entered into agreements with an unrelated third party that have the
effect of monetizing the remaining 25 MMcfd.
During first quarter 2000, our long-term sales commitments did not exceed
the total of our proprietary production and other natural gas production
controlled by us through call rights with third-party producers and marketing
agreements with royalty owners.
Our borrowings under our Commercial Paper Program and $1.1 billion
committed bank line of credit are subject to interest rate risk. Assuming the
principal amount of our borrowings as of June 30, 2000 remains unchanged, higher
interest rates would increase our interest expense. For example, a 10 percent
increase in the London Interbank Offered Rate (a benchmark pursuant to which the
Company's interest rates may be set) would have increased our second quarter
2000 interest expense by $0.5 million.
We had no interest rate swaps outstanding at June 30, 2000.
-18-
<PAGE>
NEW ACCOUNTING STANDARDS.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This standard requires us to recognize all
of our derivative and hedging instruments in our statements of financial
position as either assets or liabilities and measured at fair value. In
addition, all hedging relationships must be designated, documented and
reassessed periodically. On July 7, 1999, the Financial Accounting Standards
Board delayed the effective date of SFAS No. 133 for one year. The delay,
published as SFAS No. 137, applies to quarterly and annual financial statements.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities" which modified FAS No. 133. SFAS No. 133, as revised
by SFAS No. 137 and SFAS No. 138, is effective for all fiscal quarters of all
fiscal years beginning after June 15, 2000. We are continuing to evaluate the
impact the provisions of these standards will have on us.
In December 1999, the Secruties and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) 101, "Revenue Recognition in Fiancial Statements". SAB
101 provides guidance on the recognition, presentation and disclosure of revenue
in financial statements filed with the SEC. The SEC staff issued SAB 101A and
SAB 101B to extend the date for the required disclosure. SAB 101, as amended by
SAB 101A and SAB 101B is to be implemented no later than the fourth fiscal
quarter of fiscal years beginning after December 15, 1999. We are currently
evaluating the impact that the provisions of this bulletin will have on us.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 2. "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Risk Management and Market-Sensitive Instruments" in
this Form 10-Q.
------------------------
We caution against projecting any future results based on present earnings
levels because of economic uncertainties, the extent and form of existing or
future governmental regulations and other possible actions by governments.
The foregoing financial information is unaudited and has been prepared from
the books and records of Vastar. In the opinion of our management, the financial
information reflects all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the financial position,
results of operations and cash flows in conformity with generally accepted
accounting principles.
-19-
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
On March 17, 2000, six purported class action suits were filed in New
Castle County, Delaware Chancery Court against Vastar Resources, Inc., Atlantic
Richfield Company, BP Amoco p.l.c., and Vastar's nine individual directors. The
suits are each brought by individual Vastar stockholders on behalf of a
purported class of all Vastar minority stockholders. The suits allege that BP
Amoco's proposed tender offer price for Vastar's minority shares is inadequate.
The suits generally seek class action certification, an injunction against the
proposed transaction as it is presently proposed, rescission or rescissory
damages, other monetary damages, and attorney fees and court costs. The suits
are Giarraputo vs. Callison, et al., No. 17888-NC; Vogel vs. Callison, et al.,
No. 17890-NC; Rothe vs. Vastar Resources, et al., No. 17891-NC; Fischbein vs.
Callison, et al., No. 17894-NC; Turner vs. Callison, et al., No. 17895-NC; and
Phares vs. Callison, et al., No. 17896-NC. Vastar believes that these lawsuits
are without merit.
On May 23, 2000, the parties to the stockholder litigation agreed in
principle on a settlement of the litigation, and executed a memorandum of
understanding to reflect the terms of the settlement. The parties agreed that
the $83 per share price approved by Vastar's Board of Directors on May 23, 2000
is fair, adequate and reasonable consideration for the shares of Vastar's
common stock held by the public. The parties also agreed to enter into a
settlement agreement, cooperate in public disclosures related to the
settlement, and use best efforts to gain approval of the settlement from the
Delaware courts. Without any admission of fault by any defendant, the
memorandum of understanding provides for a dismissal of all claims with
prejudice and a release in favor of all defendants of any and all claims that
have been or could have been asserted by the plaintiffs or any members of the
purported class. The memorandum of understanding also provides that the
defendants will not oppose an application by the plaintiffs' counsel to the
Delaware court for an aggregate award of fees and expenses in an amount not to
exceed $2.1 million, which will be paid by Vastar. The settlement is subject to,
among other things, completion of confirmatory discovery by the plaintiffs
(which has occurred), execution of a settlement agreement, final approval of the
settlement by the Delaware court, and completion of the merger.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
2 Agreement and Plan of Merger, dated as of May 24, 2000, among
Atlantic Richfield Company, Kernel Holdings, Inc. and Vastar
Resources, Inc. (filed as Appendix A to Vastar's Preliminary
Proxy Statement on Schedule 14A, filed on June 14, 2000 and
incorporated herein by reference).
10.1 Tax Sharing Agreement by and among BP America Inc. and affiliated
corporations dated effective April 18, 2000.
10.2 First Amendment to Vastar Resources, Inc. Stock Option Plan for
Outside Directors, effective as of October 20, 1999.
10.3 First Amendment to Vastar Resources, Inc. Deferral Plan for
Outside Directors, effective as of October 20, 1999.
10.4 Second Amendment to Deferral Plan for Outside Directors,
effective as of May 24, 2000.
10.5 Special Amendment to Certain Vastar Resources, Inc. Plans,
effective as of May 24, 2000.
10.6 Second Amendment to Executive Deferral Plan,
effective as of May 24, 2000.
10.7 First Amendment to Vastar Resources, Inc. Retirement Plan for
Outside Directors, effective as of October 20, 1999.
10.8 Second Amendment to Executive Medical Plan, effective as of
May 24, 2000.
10.9 Capital Accumulation Plan Amendment and Restatement,
effective as of March 15, 1999.
10.10 Amendment No. 1 to Vastar Resources, Inc. Capital Accumulation
Plan, effective as of April 18, 2000.
10.11 Corrected First Amendment to Amended and Restated Supplementary
Executive Retirement Plan, effective as of July 21, 1999.
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
Date of Report Item No. Financial Statements
-------------- -------- --------------------
April 18, 2000 1,5 None
April 27, 2000 5 None
April 28, 2000 5 None
July 20, 2000 5,7 None
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<PAGE>
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.
VASTAR RESOURCES, INC.
(Registrant)
Dated: August 4, 2000 /s/ Steven J. Shapiro
------------------------------
Steven J. Shapiro
Senior Vice President and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
-21-
<PAGE>
Exhibit Index
Exhibit
No. Description
2 Agreement and Plan of Merger, dated as of May 24, 2000,
among Atlantic Richfield Company, Kernel Holdings, Inc.
and Vastar Resources, Inc. (filed as Appendix A to
Vastar's Preliminary Proxy Statement on Schedule 14A,
filed on June 14, 2000 and incorporated herein by
reference).
10.1 Tax Sharing Agreement by and among BP America Inc. and
affiliated corporations dated effective April 18, 2000.
10.2 First Amendment to Vastar Resources, Inc. Stock Option
Plan for Outside Directors, effective as of October 20,
1999.
10.3 First Amendment to Vastar Resources, Inc. Deferral Plan
for Outside Directors, effective as of October 20,
1999.
10.4 Second Amendment to Deferral Plan for Outside
Directors, effective as of May 24, 2000.
10.5 Special Amendment to Certain Vastar Resources, Inc.
Plans, effective as of May 24, 2000.
10.6 Second Amendment to Executive Deferral Plan,
effective as of May 24, 2000.
10.7 First Amendment to Vastar Resources, Inc. Retirement
Plan for Outside Directors, effective as of
October 20, 1999.
10.8 Second Amendment to Executive Medical Plan,
effective as of May 24, 2000.
10.9 Capital Accumulation Plan Amendment and Restatement,
effective as of March 15, 1999.
10.10 Amendment No. 1 to Vastar Resources, Inc. Capital
Accumulation Plan, effective as of April 18, 2000.
10.11 Corrected First Amendment to Amended and Restated
Supplementary Executive Retirement Plan, effective as
of July 21, 1999.
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule.
-22-
