UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported)
JANUARY 30, 2003
CONOCOPHILLIPS
(Exact name of registrant as specified in its charter)
Delaware 000-49987 01-0562944
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation) File Number) Identification No.)
600 North Dairy Ashford, Houston, Texas 77079
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
281-293-1000
ITEM 5. OTHER EVENTS.
On January 29, 2003, ConocoPhillips reported fourth-quarter net operating income
(which excludes special items) of $747 million, or $1.10 per share, compared
with $212 million, or 55 cents per share, for the fourth quarter of 2001.
Fourth-quarter 2002 net operating income does not include $31 million, or 4
cents per share, of earnings from marketing assets recently announced as held
for sale and reported as a part of discontinued operations. Including special
items of $1.2 billion, the company had a loss of $410 million, or 60 cents per
share, compared with net income of $162 million, or 42 cents per share, for the
same quarter in 2001. Total revenues were $23.5 billion, versus $8.7 billion a
year ago.
As part of its business plan, ConocoPhillips is evaluating its asset portfolio
to identify assets that do not meet its return targets. During the fourth
quarter of 2002, ConocoPhillips sold more than $600 million of assets in its
upstream business, announced plans to dispose of a substantial portion of its
downstream marketing assets, and entered into an agreement to sell its Woods
Cross refinery and associated marketing assets, subject to regulatory approvals.
The ConocoPhillips merger was consummated on August 30, 2002, and used purchase
accounting to recognize the fair value of the Conoco assets and liabilities.
Consequently, the results of the fourth quarter reflect the first full quarter
of operations of the combined company. Results for the twelve months of 2002
include eight months of activity for Phillips and four months of activity for
ConocoPhillips. Prior periods reflect only Phillips results, which have been
restated for discontinued operations as a result of dispositions required by the
Federal Trade Commission and the planned disposition of certain marketing
assets.
The special items of $1.2 billion in the fourth quarter were primarily related
to the company's rationalization plan for its marketing assets. As part of this
plan, ConocoPhillips will dispose of a substantial portion of its company-owned
retail sites and exit certain geographic markets. As previously announced, the
company expects to recognize approximately $1.3 billion of after-tax charges as
a result of this rationalization plan. In the fourth quarter, the company
recognized $1.1 billion of this after-tax charge in connection with asset
impairments and restructuring losses. The charges primarily related to the
impairment of property, plant and equipment ($177 million), goodwill ($257
million), and intangibles ($345 million), as well as expected impairments and
early cancellation penalties on various lease-financing structures ($315
million). Additional net income charges (approximately $200 million) related to
the impairment of retail sites covered by lease-financing structures cannot be
recognized under generally accepted accounting principles until 2003. Special
items also included after-tax restructuring charges in continuing operations of
$53 million related to the integration and streamlining of ConocoPhillips'
operations, and earnings of $22 million related to results from all discontinued
operations.
The company closed out all positions related to Conoco's July 2001 Gulf Canada
acquisition oil and gas hedging program at a $7 million gain for the fourth
quarter of 2002. The company also had a $14 million after-tax loss related to
foreign currency exchange.
For the twelve months of 2002, net operating income (which excludes special
items) was $1.5 billion, or $3.11 per share, based on 485,533,000 average shares
outstanding. This is compared with full-year 2001 net operating income of $1.7
billion, or $5.68 per share, based on 295,016,000 average shares outstanding.
Including special items, the company had a loss of $277 million, or 57 cents per
share, compared with net income of $1.7 billion, or $5.63 per share, for 2001.
Total revenues were $57.2 billion, versus $24.8 billion a year ago.
Through twelve months, the company's cash flows from operating activities were
approximately $5 billion, compared with $3.6 billion for the same period of
2001. Capital spending was approximately $4 billion, versus $3 billion a year
ago.
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Total debt at the end of the fourth quarter was $19.8 billion, down from $20.5
billion at the end of the previous quarter, as a result of operating cash flows
and asset sales. At the end of December, the company's debt-to-capital ratio was
40 percent, unchanged from the end of the third quarter of 2002.
ConocoPhillips is moving forward with its plan to dispose of a substantial
portion of its marketing assets in its downstream business as part of optimizing
its portfolio mix. ConocoPhillips' after-tax planned turnaround costs are
expected to impact first quarter earnings by approximately $50 million.
ConocoPhillips continues to manage supply volatility resulting from the loss of
Venezuelan crude oil supply. Although a slight impact to the company's refinery
crude oil capacity utilization rate is anticipated, ConocoPhillips expects it
will remain near 90 percent for the first quarter.
As evidenced in the fourth quarter, both the company's upstream and downstream
businesses have been impacted by the recent events in Venezuela. Assuming a
continuation of December's realized prices and margins, ConocoPhillips expects
to be impacted by approximately $30 million to $50 million per month as long as
the shutdown continues. This estimate assumes that the company's total
Venezuelan crude oil production of 75,000 to 80,000 BPD remains shut in, and
that refinery runs are reduced approximately 40,000 barrels per day with a
less-than-optimum crude slate.
CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Current Report contains forward-looking statements within the meaning of
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. The forward-looking statements, such as "the company expects to recognize
approximately $1.3 billion of after-tax charges as a result of this
rationalization plan;" "ConocoPhillips' after-tax planned turnaround costs are
expected to impact first quarter earnings by approximately $50 million;"
"although a slight impact to the company's refinery crude oil capacity
utilization rate is anticipated, ConocoPhillips expects it will remain near 90
percent for the first quarter;" and "ConocoPhillips expects to be impacted by
approximately $30 million to $50 million per month as long as the shutdown [in
Venezuela] continues" are based on management's expectations, estimates and
projections about ConocoPhillips and the petroleum industry in general on the
date this statement was released. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions that are
difficult to predict. Further, certain forward-looking statements are based on
assumptions as to future events that may not prove to be accurate. Therefore,
actual outcomes and results may differ materially from what is expressed or
forecast in such forward-looking statements. Economic, business, competitive and
regulatory factors that may affect ConocoPhillips' business are generally as set
forth in ConocoPhillips' filings with the Securities and Exchange Commission
(SEC). ConocoPhillips is under no obligation (and expressly disclaims any such
obligation) to update or alter its forward-looking statements whether as a
result of new information, future events or otherwise.
A preliminary, unaudited consolidated statement of operations of ConocoPhillips
for the quarters and years ending December 31, 2002 and 2001, follows:
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Millions of Dollars
Three Months Ended Twelve Months Ended
December 31 December 31
2002 2001 2002 2001
Revenues
Sales and other operating revenues* $ 23,346 8,689 56,748 24,621
Equity in earnings (losses) of affiliated companies 123 (65) 261 41
Other income 58 57 215 111
--------- ------ ------- -------
23,527 8,681 57,224 24,773
--------- ------ ------- -------
Costs and expenses
Purchased crude oil and products 15,127 5,669 37,824 13,437
Production and operating expenses 1,736 905 4,995 2,643
Selling, general and administrative expenses 643 210 1,652 613
Exploration expenses 248 104 563 306
Depreciation, depletion and amortization 884 406 2,223 1,344
Property impairments 151 3 177 26
Taxes other than income taxes* 3,313 933 6,937 2,740
Accretion on discounted contingent liabilities 5 1 22 7
Interest and debt expense 219 98 566 338
Foreign currency transaction losses 35 1 24 11
Preferred dividend requirements of capital trusts
and minority interest 14 12 48 53
--------- ------ ------- -------
22,375 8,342 55,031 21,518
--------- ------ ------- -------
Income from continuing operations before income taxes 1,152 339 2,193 3,255
Provision for income taxes 575 192 1,461 1,644
--------- ------ ------- -------
Income from continuing operations 577 147 732 1,611
Income(loss) from operations of discontinued
businesses, net of income taxes (986) 15 (993) 32
--------- ------ ------- -------
Income/(loss) before extraordinary item and cumulative
effect of change in accounting principle (409) 162 (261) 1,643
Extraordinary items (1) -- (16) (10)
Cumulative effect of change in accounting principle -- -- -- 28
--------- ------ ------- -------
Net income/(loss) $ (410) 162 (277) 1,661
========== ====== ======= =======
Net income/(loss) per share of common stock
Basic
Continuing operations $ 0.85 $ 0.38 $ 1.52 $ 5.50
Discontinued operations (1.45) 0.04 (2.06) 0.11
Before extraordinary item and cumulative
effect of change in accounting principle (0.60) 0.42 (0.54) 5.61
Extraordinary items -- -- (0.03) (0.04)
Cumulative effect of change in accounting principle -- -- -- 0.10
Net income/(loss) $ (0.60) 0.42 (0.57) 5.67
Diluted
Continuing operations 0.85 0.38 1.51 5.46
Discontinued operations (1.45) 0.04 (2.05) 0.11
Before extraordinary item and cumulative
effect of change in accounting principle $ (0.60) 0.42 (0.54) 5.57
Extraordinary items -- -- (0.03) (0.03)
Cumulative effect of change in accounting principle -- -- -- 0.09
Net income/(loss) $ (0.60) 0.42 (0.57) 5.63
Average common shares outstanding (in thousands)
Basic 678,431 381,453 482,080 292,964
Diluted 681,525 384,212 485,533 295,016
*Includes excise taxes on petroleum products sales 3,093 801 6,236 2,178
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ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(b) Pro Forma Financial Information.
Basis of Presentation
The following unaudited pro forma condensed combined financial
statement has been prepared to illustrate the estimated effect of the
merger between Phillips Petroleum Company (Phillips) and Conoco Inc.
(Conoco). The unaudited pro forma combined statement of income for the
nine months ended September 30, 2002, was prepared assuming the merger
occurred January 1, 2002.
This pro forma financial information is not intended to reflect the
results of operations which would have actually resulted had the merger
been effective on the date indicated. Moreover, this pro forma
information is not intended to be indicative of the results of
operations which may be achieved by ConocoPhillips in the future. The
pro forma adjustments use estimates and assumptions based on currently
available information. Management believes that the estimates and
assumptions are reasonable, and that the significant effects of the
transactions are properly reflected. However, actual results may
materially differ from this pro forma financial information.
The unaudited pro forma condensed combined financial statements contain
pro forma adjustments for the disposition of assets required by order
of the U.S. Federal Trade Commission.
The preliminary purchase price allocation is subject to revision as
more detailed analysis is completed and additional information on the
fair value of Conoco's assets and liabilities becomes available. Final
purchase accounting adjustments may therefore differ from the pro forma
adjustments presented here.
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Unaudited Pro Forma Combined ConocoPhillips
Statement of Income
Millions of Dollars
------------------------------------------------------------------------------------------
Eight Pro Forma
Historical Adjusted Months Purchase
Nine Months Ended ConocoPhillips, Non-Recurring Historical Historical Accounting Pro Forma
September 30, 2002 As Reported Charges* ConocoPhillips Conoco** Adjustments ConocoPhillips
-------------- -------------- -------------- ---------- ----------- --------------
REVENUES
Sales and other operating revenues $ 36,271 -- 36,271 23,844 (16)(b) 60,099
Equity in earnings of affiliates 138 -- 138 212 (21)(c) 329
Other income 104 -- 104 190 -- 294
-------- --- ------- ------ ---- -------
Total Revenues 36,513 -- 36,513 24,246 (37) 60,722
-------- --- ------- ------ ---- -------
COSTS AND EXPENSES
Purchased crude oil and products 23,706 -- 23,706 14,013 (8)(b) 37,711
Production and operating expenses 3,245 (340) 2,905 1,924 (15)(b) 4,814
Selling, general and administrative 1,651 (279) 1,372 546 1,918
expenses
Exploration expenses 315 -- 315 273 588
Depreciation, depletion and amortization 1,412 -- 1,412 1,203 (110)(c) 2,569
64 (d)
Property impairments 26 -- 26 -- -- 26
Taxes other than income taxes 4,641 -- 4,641 5,187 -- 9,828
Accretion on discounted liabilities 18 -- 18 -- 10 (e) 28
Interest and debt expense 347 -- 347 341 (66)(f) 622
Foreign currency transaction (gains)
losses (11) -- (11) 18 -- 7
Preferred dividend requirements of
capital trusts and minority interests 34 -- 34 29 -- 63
-------- --- ------- ------ ---- -------
Total Costs and Expenses 35,384 (619) 34,765 23,534 (125) 58,174
-------- --- ------- ------ ---- -------
Income from continuing operations
before income taxes 1,129 619 1,748 712 88 2,548
Provision for income taxes 917 149 1,066 550 44 (g) 1,660
-------- --- ------- ------ ---- -------
INCOME FROM CONTINUING
OPERATIONS (a) $ 212 470 682 162 44 888
======== === ======= ====== ==== =======
INCOME FROM CONTINUING OPERATIONS
PER SHARE
Basic $.51 1.64 1.31
Diluted .50 1.62 1.30
-------- ------- -------
AVERAGE COMMON SHARES OUTSTANDING (IN
THOUSANDS)
Basic 416,293 416,293 677,144
Diluted 422,212 422,212 683,101
-------- ------- -------
-----------
See Notes to Unaudited Pro Forma Financial Statements.
* Adjusted to exclude non-recurring charges directly related to the merger,
including the write-down of purchased in-process research and development
costs ($246 million both before and after tax, excluded from production and
operating expenses), and work force reduction and other charges ($373 million
before tax, $224 million after tax--$94 million before tax excluded from
production and operating expenses and $279 million before tax excluded from
selling, general and administrative expenses).
** Certain amounts have been reclassified to conform to ConocoPhillips'
presentation.
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NOTES TO UNAUDITED PRO FORMA CONOCOPHILLIPS
FINANCIAL STATEMENT
(a) On August 30, 2002, the U.S. Federal Trade Commission (FTC) accepted for
public comment an Agreement Containing Consent Orders (Consent
Agreement) that permitted Conoco and Phillips to close the merger. This
Consent Agreement included a proposed Decision and Order that required,
among other things, the divestiture of specified Conoco and Phillips
assets. These assets include:
o Phillips' Woods Cross business unit, which includes the Woods Cross,
Utah, refinery and associated Phillips motor fuel marketing operations
(both retail and wholesale) in Utah, Idaho, Wyoming, and Montana, as
well as Phillips' 50 percent interests in two refined products
terminals in Boise and Burley, Idaho;
o Conoco's Commerce City, Colorado, refinery;
o Phillips' Colorado motor fuel marketing operations (both retail and
wholesale);
o Phillips' refined products terminal in Spokane, Washington;
o Phillips' propane terminal assets at Jefferson City, Missouri, and
East St. Louis, Illinois, which include the propane portions of these
terminals and the customer relationships and contracts for the supply
of propane therefrom;
o Certain of Conoco's midstream natural gas gathering and processing
assets in southeast New Mexico; and
o Certain of Conoco's midstream natural gas gathering assets in West
Texas.
These operations are excluded from income from continuing operations. No
pro forma adjustments have been made to reflect any earnings benefit
from the reinvestment of any proceeds which might be recovered, or
reduction of debt which may arise as a consequence of the asset
dispositions required under the consent agreement.
(b) Primarily reflects the elimination of a deferred credit arising from a
prior year settlement for future price modifications to a U.K. long-term
natural gas sales contract, as well as the revaluation of certain other
long-term contracts to their fair value.
(c) Reflects the estimated effects of depreciating and amortizing purchase
accounting adjustment balances in properties, plants and equipment;
equity method investments; and identifiable intangible assets with
definite lives, over their estimated useful lives.
(d) Under ConocoPhillips' accounting policy and current prevalent industry
practice for the acquisition of oil and gas businesses, ConocoPhillips
did not record an initial liability for the estimated costs of removing
Conoco's properties, plants and equipment at the end of their useful
lives. Instead, currently estimated total undiscounted removal costs are
accrued as an additional component of depreciation, building the
liability for removal over the remaining useful lives of the properties,
plants and equipment on a unit-of-production basis.
(e) Includes the impact of conforming accounting policies and discounting
Conoco's environmental liabilities and recording the corresponding
accretion.
(f) Reflects the restatement of Conoco's fixed-rate debt to fair value and
the corresponding reduction in interest expense as the resulting premium
is amortized. Also reflects the capitalization of interest based on the
estimated fair value of Conoco's qualifying assets using a
weighted-average interest rate of 5.3 percent.
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(g) Reflects the estimated federal and state income tax effects of the pro
forma adjustments to Conoco's pretax income using an approximate
blended statutory rate of 50 percent.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CONOCOPHILLIPS
January 30, 2003 /s/ Rand C. Berney
-------------------------------------------
Rand C. Berney
Vice President and Controller
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