<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 MARCH 31, 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
MARCH 31, 2000: 97,688,887.
<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 Months Ended
March 31,
---------------------------
2000 1999
------ ------
(Millions of dollars, except
per share amounts)
<S> <C> <C>
REVENUES
Net sales and other operating
revenues............................. $338.4 $221.2
Earnings from equity affiliate........ 6.5 5.0
Other revenues........................ 7.1 13.2
------ ------
Net revenues........................ 352.0 239.4
------ ------
EXPENSES
Operating expenses.................... 43.0 50.5
Exploration expenses.................. 68.6 39.0
Selling, general and administrative
expenses............................. 13.5 12.7
Taxes other than income taxes......... 15.1 8.8
Depreciation, depletion and
amortization......................... 114.7 113.3
Interest.............................. 14.7 20.5
------ ------
Total expenses...................... 269.6 244.8
------ ------
Income (loss) before income taxes..... 82.4 (5.4)
Income tax provision (benefit)........ 5.0 (24.4)
------ ------
Net income.......................... $ 77.4 $ 19.0
====== ======
Basic earnings per share.............. $ 0.79 $ 0.20
====== ======
Diluted earnings per share............ $ 0.78 $ 0.19
====== ======
Cash dividends paid per share
of common stock....................... $0.075 $0.075
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
-1-
<PAGE>
VASTAR RESOURCES, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
-------- ------------
(Millions of dollars)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $ 4.8 $ 40.6
Accounts receivable:
Trade......................................... 124.2 130.5
Related parties............................... 91.4 86.9
Inventories.................................... 11.6 7.0
Prepaid expenses and other assets.............. 39.8 42.1
-------- --------
Total current assets.......................... 271.8 307.1
Oil and gas properties and equipment, net....... 2,396.3 2,320.2
Other long-term assets.......................... 79.2 82.7
-------- --------
Total assets.................................. $2,747.3 $2,710.0
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade......................................... $ 254.4 $ 258.8
Related party................................. 12.0 6.3
Accrued liabilities............................ 67.1 77.8
-------- --------
Total current liabilities.................... 333.5 342.9
Long-term debt.................................. 939.9 975.0
Deferred liabilities and credits................ 317.3 313.2
Deferred income taxes........................... 278.3 272.9
-------- --------
Total liabilities............................. 1,869.0 1,904.0
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized,
110,000,000 shares; issued and outstanding,
97,688,887 shares as of March 31, 2000 and
97,644,950 shares as of December 31, 1999...... 1.0 1.0
Additional paid-in-capital...................... 466.6 464.3
Accumulated earnings............................ 410.7 340.7
-------- --------
Total stockholders' equity.................... 878.3 806.0
-------- --------
Total liabilities and stockholders' equity $2,747.3 $2,710.0
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
-2-
<PAGE>
VASTAR RESOURCES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
--------------------------
2000 1999
------ ------
(Millions of dollars)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................... $ 77.4 $ 19.0
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization........... 114.7 113.3
Deferred income taxes.............................. 5.4 (17.7)
Dry hole expense and undeveloped leasehold
amortization..................................... 46.5 14.1
Loss (gain) on asset sales......................... 0.1 (8.5)
Earnings from equity affiliate..................... (6.5) (5.0)
Cash dividends from equity affiliate............... 12.0 ---
Net change in accounts receivable, inventories
and accounts payable............................. (1.5) 54.8
Other.............................................. (14.8) (16.4)
------- -------
Net cash provided by operating activities............ 233.3 153.6
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties and equipment,
including dry hole costs.......................... (230.7) (141.8)
Proceeds from asset sales............................ 3.5 13.9
Other................................................ (1.7) 0.5
------- -------
Net cash used by investing activities................ (228.9) (127.4)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock............................. 2.3 0.3
Proceeds from long-term debt issuance................ --- 632.8
Repayments of long-term debt......................... (35.1) (645.3)
Dividends paid....................................... (7.4) (7.3)
------- -------
Net cash used by financing activities................ (40.2) (19.5)
------- -------
Net change in cash and cash equivalents.............. (35.8) 6.7
Cash and cash equivalents at beginning of period..... 40.6 4.3
------- -------
Cash and cash equivalents at end of period........... $ 4.8 $ 11.0
======= =======
</TABLE>
The accompanying notes are an integral part of these 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 financial
statements for the year ended December 31, 1999 and the notes thereto contained
in Vastar's Form 10-K for the year ended December 31, 1999. Certain previously
reported amounts have been reclassified to conform to current year presentation.
NOTE 2. NET SALES AND OTHER OPERATING REVENUES.
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
--------------------------
2000 1999
------ ------
(Millions of dollars)
<S> <C> <C>
Sales and other operating revenues:
Unrelated parties............................ $ 369.6 $ 188.6
Related parties (1).......................... 227.3 165.2
------- -------
Total....................................... 596.9 353.8
Less:
Purchases (2)................................ (246.1) (130.3)
Delivery expense............................. (12.4) (2.3)
------- -------
Net sales and
other operating revenues..................... $ 338.4 $ 221.2
======= =======
- -----------------
(1) Average costs of related-party sales..... $ 216.0 $ 168.2
(2) Cost of purchases from related parties.... $ 22.1 $ 16.3
</TABLE>
-4-
<PAGE>
VASTAR RESOURCES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
(Unaudited)
NOTE 3. RELATIONSHIP WITH ATLANTIC RICHFIELD COMPANY (ARCO).
As of March 31, 2000, ARCO owned 80,000,001 shares (81.9 percent) of our
outstanding common stock.
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 owns, through a subsidiary,
81.9 percent of the Common Stock, par value $0.01 per share, of Vastar and a
change of control of the Company has occurred.
Simultaneous with the consummation of the merger, the Chairman of the Board
of the Company, Michael E. Wiley, and three additional members of the Board of
Directors of the Company, Terry G. Dallas, Marie L. Knowles and Donald R.
Voelte, Jr., resigned. The Board of Directors thereafter reduced the size of the
Board of Directors to five positions which are occupied by the remaining members
of the Board of Directors. The Board of Directors also elected Charles D.
Davidson as Chairman of the Board. The Board of Directors now consists of the
following members: Charles D. Davidson, Chairman, Jimmie D. Callison, Robert C.
LeVine, Steven J. Shapiro and William D. Schulte.
On March 16, 2000, BP Amoco p.l.c. advised Vastar's Board of Directors of its
intention to acquire, for $71.00 per share, the approximately 17.6 million
shares, or 18.1 percent, of Vastar's common stock that are publicly traded. The
proposal was conditional on the completion of BP Amoco's acquisition of ARCO.
Vastar has formed a special committee of independent directors to evaluate the
proposal.
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 merger. However,
ARCO became a subsidiary of BP America Inc. on April 18, 2000 and as of that
date is no longer the common parent of the Affiliated Group. Vastar expects to
sign a replacement tax sharing agreement with BP America Inc. that will contain
all of the material provisions that were in the tax sharing agreement between
Vastar and ARCO and with an effective date of April 18, 2000.
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 quarter of 2000 and 1999, we recognized our accrued share of
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. Our equity investment in Southern Company Energy
Marketing was $41.4 million as of March 31, 2000, and $46.9 million as of
December 31, 1999. 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)
<TABLE>
<CAPTION>
NOTE 5. EXPLORATION EXPENSES.
Three Months Ended
March 31,
2000 1999
----- -----
(Millions of dollars)
<S> <C> <C>
Dry hole costs............................. $37.7 $ 5.4
Geological and geophysical................. 10.6 14.1
Undeveloped leasehold amortization......... 8.8 8.7
Staff...................................... 10.6 9.4
Lease rentals.............................. 0.9 1.4
----- -----
Total.................................... $68.6 $39.0
===== =====
NOTE 6. EARNINGS PER SHARE.
Three Months Ended
March 31,
2000 1999
----- -----
(Millions, except
per share amounts)
Basic earnings per share:
Income available to common shareholders.... $77.4 $19.0
Average shares of stock outstanding........ 97.7 97.4
Basic earnings per share................... $0.79 $0.20
Diluted earnings per share:
Income available to common shareholders.... $77.4 $19.0
Incremental shares assuming the exercise
of stock options.......................... 1.0 0.5
Average shares of stock outstanding plus
effect of dilutive securities............. 98.7 97.9
Diluted earnings per share................. $0.78 $0.19
</TABLE>
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. All stock options granted under our other stock option
plans and programs are already vested and exercisable.
The exercise prices of these stock options range from $14.00 to $72.16 per
share. Outstanding stock options consist of the following:
March 31, 2000
--------------
Vested and exercisable........................... 1.6 million
Vested and unexercisable......................... 0.6 million
Non-vested....................................... 0.4 million
-------------
Total............................................ 2.6 million
=============
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 owns, through a subsidiary,
81.9 percent of the Common Stock, par value $0.01 per share, of Vastar and a
change of control of the Company has occurred. As a result, all of the above
described 2.6 million stock options became exercisable.
-6-
<PAGE>
VASTAR RESOURCES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
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 addition, in connection with the BP Amoco p.l.c. tender offer proposed,
six lawsuits purporting to be class actions have been filed in the Delaware
Chancery Court against Vastar, its directors, ARCO and BP Amoco. Vastar believes
these lawsuits are without merit. 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 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 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 establishing accounting reserves.
Vastar and ARCO have agreements whereby we have agreed to indemnify ARCO
against certain claims or liabilities. Our indemnity obligations cover claims
and liabilities which 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
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
March 31, 2000 this contract has a remaining life of slightly less than one year
and remaining costs of $54.8 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 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 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
-7-
<PAGE>
VASTAR RESOURCES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
NOTE 8. COMMITMENTS AND CONTINGENCIES - (continued).
payment, for 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 to secure the payment of these guaranteed
obligations. As of March 31, 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 March 31, 2000, no
loans were outstanding under this arrangement.
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 March 31, 2000 and December 31, 1999 were insignificant.
NOTE 9. TAXES.
The provision (benefit) for taxes on income is comprised of the following:
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
--------------------------
2000 1999
------ ------
(Millions of dollars)
<S> <C> <C>
Federal:
Current............................... $(0.8) $ (6.7)
Deferred.............................. 3.7 (17.6)
----- ------
Total federal........................ 2.9 (24.3)
----- ------
State:
Current............................... 0.4 0.0
Deferred.............................. 1.7 (0.1)
----- ------
Total state.......................... 2.1 (0.1)
----- ------
Total income tax provision (benefit)... $ 5.0 $(24.4)
===== ======
</TABLE>
-8-
<PAGE>
VASTAR RESOURCES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
NOTE 9. TAXES - (continued).
A reconciliation of the income tax provision (benefit) with tax at the
federal statutory rate for the specified period is as follows:
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
--------------------------
2000 1999
------ ------
(Million of dollars)
<S> <C> <C>
Income (loss) before taxes........ $ 82.4 $ (5.4)
====== ======
Tax at the statutory rate......... $ 28.8 $ (1.9)
Increase (reduction) in taxes
resulting from:
State income taxes (net
of federal effect)............. 1.3 (0.1)
Tax credits and other........... (25.1) (22.4)
------ ------
Income tax provision (benefit)... $ 5.0 $(24.4)
====== ======
</TABLE>
Pursuant to the Internal Revenue Code, Section 29 tax credits can be used
to reduce the ARCO consolidated tax group's regular income tax liability after
foreign tax credits (the "Regular Tax"), but not below the ARCO consolidated tax
group's tentative minimum tax liability. If Section 29 tax credits are not used
by the ARCO consolidated tax group due to this limitation, the portion of the
unused credits that does not exceed the Regular Tax is carried forward to be
used in a subsequent year.
-9-
<PAGE>
VASTAR RESOURCES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
NOTE 10. LONG-TERM DEBT.
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
March 31, 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......... 299.1 299.1
6.00% Putable/Callable Notes, due 2000/2010...... 100.0 100.0
Commercial Paper................................. 191.1 226.3
------ ------
Total............................................ $939.9 $975.0
====== ======
</TABLE>
- --------------
* Issuances pursuant to the Medium Term Note Program.
We received notice that the putable/callable notes will be put to us in
April. We will fund the payment of the notes with proceeds obtained from our
Commercial Paper Program.
We had one interest rate swap for $100.0 million outstanding at March 31,
2000 related to the putable/callable notes. The swap will expire simultaneously
with the repayment of the putable/callable notes. The swap effectively changes
the 6.0 percent fixed rate to a floating rate. The financial impact of settling
this swap during the first quarter 2000 was immaterial.
Our commercial paper and the putable/callable notes due 2000/2010 have been
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 $1.8 million for the first quarter of 2000.
Interest capitalized during the first quarter of 1999 was immaterial. The
increase from period to period resulted from increased Gulf of Mexico deepwater
drilling and construction projects.
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.
SFAS No. 133, as revised by SFAS No. 137, 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.
-10-
<PAGE>
VASTAR RESOURCES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
NOTE 12. SUBSEQUENT EVENTS.
On April 13, 2000, Vastar declared a quarterly dividend of $0.075 per
share of common stock, payable on June 1, 2000 to stockholders of record
on May 5, 2000.
On March 16, 2000, BP Amoco p.l.c. advised Vastar's Board of Directors of
its intention to acquire, for $71.00 per share, the approximately 17.6 million
shares, or 18.1 percent, of Vastar's common stock that are publicly traded. The
proposal was conditional on the completion of BP Amoco's acquisition of ARCO.
Vastar has formed a special committee of independent directors to evaluate the
proposal.
In connection with the BP Amoco proposal, six lawsuits purporting to be
class actions have been filed in the Delaware Chancery Court against Vastar, its
directors, ARCO and BP Amoco. Vastar believes these lawsuits are without merit.
See Item 1 of Part II of this Form 10-Q for further information.
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 owns, through a
subsidiary, 81.9 percent of the Common Stock, par value $0.01 per share, of
Vastar, and a change of control of the Company has occurred.
Simultaneous with the consummation of the merger, the Chairman of the Board
of the Company, Michael E. Wiley, and three additional members of the Board of
Directors of the Company, Terry G. Dallas, Marie L. Knowles and Donald R.
Voelte, Jr., resigned. The Board of Directors thereafter reduced the size of the
Board of Directors to five positions which are occupied by the remaining members
of the Board of Directors. The Board of Directors also elected Charles D.
Davidson as Chairman of the Board. The Board of Directors now consists of the
following members: Charles D. Davidson, Chairman, Jimmie D. Callison, Robert C.
LeVine, Steven J. Shapiro and William D. Schulte.
If the completion of the above-described combination of BP Amoco and ARCO
resulted in a change of control as such term is defined in an existing agreement
between Vastar and Southern Energy, Southern Energy may have a right to purchase
Vastar's interest in Southern Company Energy Marketing.
-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>
Three Months Ended
March 31,
--------------------
2000 1999
------ ------
<S> <C> <C>
Total production (MMcfed)*............ 1,455 1,503
Natural gas
Sales (MMcfd)*....................... 1,388 1,566
Production (MMcfd)................... 1,054 1,168
Average sales price (per Mcf)*....... $ 2.33 $ 1.61
Average wellhead price (per Mcf)..... $ 2.19 $ 1.62
Crude oil
Sales (MBbld)*....................... 108.4 118.0
Production (MBbld)................... 46.0 46.7
Average realized price (per Bbl)*.... $24.73 $11.16
Natural gas liquids (NGLs)
Production (MBbld)................... 20.8 9.2
Average realized price (per Bbl)..... $19.11 $ 8.10
- ---------------------
* As generally used in the oil and 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
</TABLE>
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>
Three Months Ended
March 31,
--------------------
2000 1999
------ ------
(Millions of dollars)
<S> <C> <C>
REVENUES
Natural gas
Sales................................ $ 294.7 $227.1
Purchases............................ (86.0) (58.9)
Delivery expense..................... (10.0) (0.6)
------- ------
Net sales - natural gas............ 198.7 167.6
------- ------
Crude oil
Sales................................ 258.4 117.5
Purchases............................ (153.5) (69.2)
Delivery expense..................... (1.4) (1.4)
------- ------
Net sales - crude oil............... 103.5 46.9
------- ------
NGLs
Sales................................ 43.8 9.2
Purchases and other costs............ (7.6) (2.5)
------- ------
Net sales - NGLs.................... 36.2 6.7
------- ------
Net sales and other operating
revenues.......................... 338.4 221.2
Earnings from equity affiliate........ 6.5 5.0
Other revenues........................ 7.1 13.2
------- ------
Net revenues........................ 352.0 239.4
------- ------
EXPENSES
Operating expenses.................... 43.0 50.5
Exploration expenses.................. 68.6 39.0
Selling, general and administrative
expenses............................. 13.5 12.7
Taxes other than income taxes......... 15.1 8.8
Depreciation, depletion and
amortization......................... 114.7 113.3
Interest.............................. 14.7 20.5
------- ------
Total expenses...................... 269.6 244.8
------- ------
Income (loss) before income taxes..... 82.4 (5.4)
Income tax provision (benefit)........ 5.0 (24.4)
------- ------
Net income.......................... $ 77.4 $ 19.0
======= ======
</TABLE>
-13-
<PAGE>
FIRST QUARTER 2000 VS. FIRST QUARTER 1999
Our net income for first quarter 2000 was $77.4 million, up 307 percent,
compared to $19.0 million for first quarter 1999. This increase was primarily
due to higher average sales prices for all commodities. Total production
decreased slightly in first quarter 2000 to 1,455 MMcfed as compared to first
quarter 1999.
Our natural gas sales revenues increased by 30 percent to $294.7 million
for first quarter 2000 as compared to first quarter 1999. The increase in
revenues was a result of a 45 percent increase in average sales price.
Our average natural gas wellhead price for first quarter 2000 was $2.19 per
Mcf, an increase of 57 cents per Mcf as compared to first 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 first quarter
2000 was $2.55 per Mcf compared to $1.77 per Mcf for first 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 gas production
(effectively lowering the price we received) and (2) a hedging gain in the first
quarter 2000 of $2.8 million compared to a $9.8 million gain during the first
quarter of 1999.
Our average natural gas production for first quarter 2000 decreased by 114
MMcfd to 1,054 MMcfd as compared to first quarter 1999. The lower production
level was primarily a result of natural field declines and asset sales completed
in the last nine months of 1999. We began arresting the natural field declines
with our development work on the 23 shelf properties acquired in October 1998.
Our crude oil sales revenues for first quarter 2000 increased by 120
percent to $258.4 million as compared to first quarter 1999. This increase was
due to higher average market prices for first quarter 2000, partially offset by
slightly lower volumes available for sale.
Our average crude oil realized price for 2000 increased $13.57 per Bbl to
$24.73 per Bbl as compared to first quarter 1999. The average price for first
quarter 2000 for NYMEX-WTI-at-Cushing (a benchmark from which crude oil price
trends can be analyzed) was $27.33 per Bbl compared to $11.85 per Bbl for the
first quarter 1999. Our realized price for crude oil did not recognize the full
extent of the general market price increase primarily because of an $8.6 million
hedging loss in the first quarter 2000.
Net sales revenues for NGLs for first quarter 2000 were $36.2 million, 440
percent higher as compared to first quarter 1999. Our net NGL sales revenues for
first quarter 2000 reflect both an increase in commodity prices and an increase
in NGL production as compared to first quarter 1999. NGL prices often fluctuate
with the price of crude oil, and as crude oil prices increased in 1999, NGL
prices generally followed the same trend. 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 20.8 MBbld in 2000 as compared to 9.2 MBbld in the first
quarter 1999.
Our other revenues for first quarter 2000 were $6.1 million lower as
compared to first quarter 1999. The decrease reflects the net gains of $8.5
million associated with the sale of our interest in various oil and gas
properties in the first quarter of last year.
-14-
<PAGE>
Operating expense for first quarter 2000 was lower when compared to first
quarter 1999 due to (1) our sales in 1999 of certain properties with high
operating expenses and (2) reducing operating costs at the 23 Gulf of Mexico
shelf fields that we acquired in October 1998. Operating expenses were 32
cents per Mcfe in the first quarter of 2000 compared to 37 cents per Mcfe in
1999.
Total exploration expenses were $68.6 million, $29.6 million higher than
first quarter 1999, primarily as a result of higher dry hole expense. Our dry
hole expenses for first quarter 2000 were $37.7 million as compared to $5.4
million for first quarter 1999. The increase in dry hole expense was primarily
due to two offshore wells (one deepwater well and one shelf well) being
decisioned dry in the first quarter 2000. In the first quarter 2000, we
decisioned 8 of 14 gross wells as successes. In the first quarter 1999, we
decisioned 11 of 14 gross wells as successes.
Our taxes other than income taxes for the first quarter of 2000 were $6.3
million higher compared to first quarter 1999. The increase is primarily the
result of higher commodity prices.
Our interest expense for the first quarter of 2000 decreased by $5.8
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 quarter 2000 as compared to the first quarter 1999. We
capitalized $1.8 million of interest in the first quarter 2000 compared to an
immaterial amount of interest in the first quarter 1999.
We recorded a first quarter 2000 income tax provision of $5.0 million
compared to a benefit of $24.4 million for first quarter 1999 primarily due to
higher pre-tax earnings.
LIQUIDITY AND CAPITAL RESOURCES.
In the first quarter 2000, cash flow provided by operating activities was
$233.3 million as compared to $153.6 million for first quarter 1999. This
increase was primarily due to higher commodity prices in the first quarter 2000
as compared to the corresponding period last year.
Net cash used by investing activities in first quarter 2000 was $228.9
million, which was 80 percent higher when compared to first quarter of 1999 as a
result of several tactical acquisitions completed in the first quarter of this
year along with the deferral of some capital projects in first quarter 1999
because of the low price environment. Proceeds from asset sales were $3.5
million in the first quarter 2000 compared to $13.9 million received in the
first quarter of 1999.
-15-
<PAGE>
<TABLE>
<CAPTION>
The following table summarizes our capital investments for the comparative
periods.
For the Three Months Ended
March 31,
---------------------------
2000 1999
------ ------
(Millions of dollars)
<S> <C> <C>
Exploratory drilling................................ $ 52.5 $ 46.6
Development drilling................................ 89.8 58.2
Property acquisitions............................... 57.2 17.4
Other additions..................................... 31.2 19.6
------ ------
Total additions to property, plant and equipment.... 230.7 141.8
Geological and geophysical.......................... 10.6 14.1
------ ------
Total capital program.............................. $241.3 $155.9
====== ======
</TABLE>
Our planned 2000 capital-spending program is $850 million, a 28 percent
increase over the $664 million in capital investments made during 1999.
Cash flows used by financing activities were $40.2 million in the first
quarter 2000, which included a $35.1 million net decrease in long-term debt.
Vastar's ratio of earnings to fixed charges was 5.7 for the three months
ended March 31, 2000, and 0.8 for the three months ended March 31, 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.
As a result of all of our hedging transactions for natural gas and crude
oil, we realized a pre-tax loss of approximately $6.8 million in first quarter
2000 compared to a pre-tax gain of approximately $9.8 million in first quarter
1999.
The following table summarizes our open crude oil hedging positions as of
March 31, 2000:
<TABLE>
<CAPTION>
Average Weighted Average
Financial Instrument Time Period Volume Prices per Bbl
-------------------- ---------------- -------- ---------------
<S> <C> <C> <C>
Collars April - Dec 2000 22 MBbld $18.83 - $23.34
Puts Sold April - Dec 2000 22 MBbld $ 15.83
</TABLE>
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.
-16-
<PAGE>
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 March 31, 2000 was a $19.2 million loss for crude
oil. This hypothetical gain/loss is calculated based on brokers' forward price
quotes and NYMEX forward price quotes as of March 31, 2000, which, for the
remainder of year 2000, averaged $26.26 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 $12.2 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 $2.14 per Mcf and
$2.94 per Mcf (Henry Hub), and crude oil prices fluctuated between $24.23 per
Bbl and $34.13 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. In July 1999, we entered
into agreements with an unrelated third party that have the effect of monetizing
the remaining 25 MMcfd. As of March 31, 2000 these contracts have a remaining
average life of approximately 11 years.
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 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 first quarter 2000 interest
expense by $1.1 million.
We had one interest rate swap for $100.0 million outstanding at March 31,
2000 related to our putable/callable notes. This swap will terminate in April
2000. The swap effectively changes the 6.0 percent fixed rate to a floating
rate. The financial impact of settling this swap during the first quarter 2000
was immaterial.
-17-
<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.
SFAS No. 133, as revised by SFAS No. 137, 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.
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.
-18-
<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 BP Amoco's tender offer 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 and its nine
directors have been officially served in two of the six suits, Giarraputo and
Rothe. Vastar believes that these lawsuits are without merit.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
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
-19-
<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: April 20, 2000 /s/ Joseph P. McCoy
------------------------------
Joseph P. McCoy
Vice President and Controller
(Duly Authorized Officer and
Principal Accounting Officer)
-20-
<PAGE>
Exhibit Index
Exhibit
No. Description
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
<PAGE>
EXHIBIT 12
VASTAR RESOURCES, INC.
STATEMENT SETTING FORTH DETAIL OF COMPUTATION OF
RATIO OF EARNINGS TO FIXED CHARGES
(Unaudited)
<TABLE>
<CAPTION>
For the three
months ended
March 31,
-------------
2000 1999
---- ----
(Millions of dollars,
except ratio amounts)
<S> <C> <C>
Income (loss) from continuing operations
before income taxes, minority
interest and cumulative effect of
change in accounting principle(1)...............$ 82.4 $(5.4)
Fixed Charges:
Interest expense charged to income,
and portion of rentals
representative of interest.................... 15.8 21.6
Capitalized Interest............................ 1.8 ---
----- -----
Total fixed charges(2)............................. 17.6 21.6
----- -----
Earnings (1) + (2) $100.0 $16.2
====== =====
Ratio of earnings to fixed charges 5.7 0.8
====== =====
</TABLE>
The Company has no issuances of preferred stock.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
Vastar Resources, Inc.: Financial Data Schedule as of the three months ending
March 31, 2000. This schedule contains summary financial information extracted
from the Consolidated Statement of Income and the Consolidated Balance Sheet and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 4,800
<SECURITIES> 0
<RECEIVABLES> 215,600
<ALLOWANCES> 0
<INVENTORY> 11,600
<CURRENT-ASSETS> 271,800
<PP&E> 6,448,600
<DEPRECIATION> 4,052,300
<TOTAL-ASSETS> 2,747,300
<CURRENT-LIABILITIES> 333,500
<BONDS> 939,900
0
0
<COMMON> 1,000
<OTHER-SE> 877,300
<TOTAL-LIABILITY-AND-EQUITY> 2,747,300
<SALES> 596,900
<TOTAL-REVENUES> 352,000
<CGS> 172,800
<TOTAL-COSTS> 241,400
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,700
<INCOME-PRETAX> 82,400
<INCOME-TAX> 5,000
<INCOME-CONTINUING> 77,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 77,400
<EPS-BASIC> 0.79
<EPS-DILUTED> 0.78
</TABLE>
