2003
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One) | ||
[x] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) | |
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended
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December 31, 2003 | |
OR
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) | |
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
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to | |||||
Commission file number 000-49987
ConocoPhillips
Delaware | 01-0562944 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
600 North Dairy Ashford
Houston, TX 77079
(Address of principal executive offices)
Registrants telephone number, including area code: 281-293-1000
_________________________
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange | ||
Title of each class |
on which registered |
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Common Stock, $.01 Par Value
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New York Stock Exchange | |
Preferred Share Purchase Rights Expiring
June 30, 2012
|
New York Stock Exchange | |
6.375% Notes due 2009
|
New York Stock Exchange | |
6.65% Debentures due July 15, 2018
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New York Stock Exchange | |
7% Debentures due 2029
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New York Stock Exchange | |
7.125% Debentures due March 15, 2028
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New York Stock Exchange | |
9 3/8% Notes due 2011
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes X No
The aggregate market value of common stock held by non-affiliates of the registrant on June 30, 2003, the last business day of the registrants most recently completed second fiscal quarter, based on the closing price on that date of $54.80, was $37.2 billion. The registrant, solely for the purpose of this required presentation, had deemed its Board of Directors and the Compensation and Benefits Trust to be affiliates, and deducted their stockholdings of 369,905 and 26,035,094 shares, respectively, in determining the aggregate market value.
The registrant had 684,182,093 shares of common stock outstanding at January 31, 2004.
Documents incorporated by reference:
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 5, 2004 (Part III)
TABLE OF CONTENTS
PART I |
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1 and 2. | 1 | |||||||
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3. | 32 | |||||||
4. | 34 | |||||||
35 | ||||||||
PART II |
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5. | 37 | |||||||
6. | 38 | |||||||
7. | 39 | |||||||
7A. | 84 | |||||||
8. | 89 | |||||||
9. | 183 | |||||||
9A. | 183 | |||||||
PART III |
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10. | 184 | |||||||
11. | 184 | |||||||
12. | 184 | |||||||
13. | 184 | |||||||
14. | 184 | |||||||
PART IV |
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15. | 185 | |||||||
By-Laws | ||||||||
Directors' Charitable Gift Program | ||||||||
Matching Gift Plan for Directors & Executives | ||||||||
Key Employee Deferred Compensation Plan | ||||||||
Computation of Ratio of Earnings to Fixed Charges | ||||||||
List of Principal Subsidiaries | ||||||||
Consent of Independent Auditors | ||||||||
Certification of CEO Pursuant to Section 302 | ||||||||
Certification of CFO Pursuant to Section 302 | ||||||||
Certifications Pursuant to Section 906 |
PART I
Unless otherwise indicated, the company, we, our, us, and ConocoPhillips are used in this report to refer to the businesses of ConocoPhillips and its consolidated subsidiaries. Conoco and Phillips are used in this report to refer to the individual companies prior to the merger date of August 30, 2002. Items 1 and 2, Business and Properties, contain forward-looking statements including, without limitation, statements relating to the companys plans, strategies, objectives, expectations, intentions, and resources, that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The words forecasts, intends, believes, expects, plans, scheduled, goal, may, anticipates, estimates, and similar expressions identify forward-looking statements. The company does not undertake to update, revise or correct any of the forward-looking information. Readers are cautioned that such forward-looking statements should be read in conjunction with the companys disclosures under the heading: CAUTIONARY STATEMENT FOR THE PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, beginning on page 83.
Items 1 and 2. BUSINESS AND PROPERTIES
CORPORATE STRUCTURE
ConocoPhillips is a major, integrated, global energy company. ConocoPhillips was incorporated in the state of Delaware on November 16, 2001, in connection with, and in anticipation of, the merger between Conoco Inc. (Conoco) and Phillips Petroleum Company (Phillips). The merger between Conoco and Phillips (the merger) was consummated on August 30, 2002, at which time Conoco and Phillips combined their businesses by merging with separate acquisition subsidiaries of ConocoPhillips. As a result of the merger, Conoco and Phillips each became wholly owned subsidiaries of ConocoPhillips. For accounting purposes, Phillips was designated as the acquirer of Conoco and ConocoPhillips was treated as the successor of Phillips. Accordingly, Phillips operations and results are presented in this Form 10-K for all periods prior to the close of the merger. From the merger date forward, the operations and results of ConocoPhillips reflect the combined operations of the two companies. Subsequent to the merger, Conoco was renamed ConocoPhillips Holding Company, and Phillips was renamed ConocoPhillips Company, but for ease of reference, those companies will be referred to respectively in this document as Conoco and Phillips.
Our business is organized into five operating segments:
1) | Exploration and Production (E&P)This segment primarily explores for and produces crude oil, natural gas, and natural gas liquids on a worldwide basis. | |||
2) | MidstreamThrough both consolidated and equity interests, this segment gathers and processes natural gas produced by ConocoPhillips and others, and fractionates and markets natural gas liquids, primarily in the United States, Canada and Trinidad. The Midstream segment includes our 30.3 percent equity investment in Duke Energy Field Services, LLC, a joint venture with Duke Energy. | |||
3) | Refining and Marketing (R&M)This segment refines, markets and transports crude oil and petroleum products, mainly in the United States, Europe and Asia. | |||
4) | ChemicalsThis segment manufactures and markets petrochemicals and plastics on a worldwide basis. The Chemicals segment consists of our 50 percent equity investment in Chevron Phillips Chemical Company LLC, a joint venture with ChevronTexaco Corporation. |
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5) | Emerging BusinessesThis segment encompasses the development of new businesses beyond our traditional operations. Emerging Businesses includes new technologies related to natural gas conversion into clean fuels and related products (gas-to-liquids), technology solutions, power generation, and emerging technologies. |
At December 31, 2003, ConocoPhillips employed approximately 39,000 people.
SEGMENT AND GEOGRAPHIC INFORMATION
For operating segment information and geographic information, see Note 28Segment Disclosures and Related Information in the Notes to Consolidated Financial Statements, which is incorporated herein by reference.
EXPLORATION AND PRODUCTION (E&P)
This segment explores for and produces crude oil, natural gas, and natural gas liquids on a worldwide basis. It also mines deposits of oil sands in Canada to extract the bitumen and upgrade it into a synthetic crude oil. At December 31, 2003, our E&P operations were producing in the United States, the Norwegian and U.K. sectors of the North Sea, Canada, Nigeria, Venezuela, offshore Timor Lesté in the Timor Sea, offshore Australia, offshore China, offshore the United Arab Emirates, offshore Vietnam, Russia, and Indonesia.
The information listed below appears in the supplemental oil and gas operations disclosures on pages 154 through 172 and is incorporated herein by reference:
| Proved worldwide crude oil, natural gas and natural gas liquids reserves; | |||
| Net production of crude oil, natural gas and natural gas liquids; | |||
| Average sales prices of crude oil, natural gas and natural gas liquids; | |||
| Average production costs per barrel-of-oil-equivalent; | |||
| Net wells completed, wells in progress, and productive wells; and | |||
| Developed and undeveloped acreage. |
In 2003, our worldwide production, including our share of equity affiliates production, averaged 1,590,000 barrels-of-oil-equivalent (BOE) per day, a 49 percent increase from 1,069,000 BOE per day in 2002. During 2003, 674,000 BOE per day were produced in the United States, a 15 percent increase from 587,000 BOE per day in 2002. Production from our international E&P operations averaged 916,000 BOE per day in 2003, up 90 percent from 482,000 BOE per day in 2002. In addition, our Canadian Syncrude mining operations had net production of 19,000 barrels per day in 2003, compared with 8,000 barrels per day in 2002. The increased production mainly reflects the impact of the merger. We convert our natural gas production to BOE based on a 6:1 ratio: six thousand cubic feet of natural gas equals one barrel-of-oil-equivalent.
Our worldwide annual average crude oil sales price increased 14 percent in 2003, from $24.07 per barrel to $27.47 per barrel. Our annual average worldwide natural gas sales price also increased, going from $2.77 per thousand cubic feet in 2002 to $4.07 per thousand cubic feet in 2003.
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Finding and development costs in 2003 were $5.35 per barrel-of-oil-equivalent, compared with $5.57 in 2002. Over the last five years, our finding and development costs averaged $4.29 per barrel-of-oil-equivalent. Finding and development costs per barrel-of-oil-equivalent is calculated by dividing the net reserve change for the period (excluding production and sales) into the costs incurred for the period, as reported in the Costs Incurred disclosure required by Statement of Financial Accounting Standards No. 69, Disclosures about Oil and Gas Producing Activities.
At December 31, 2003, ConocoPhillips, including its share of equity affiliates, held a combined 52.6 million net developed and undeveloped acres, compared with 101.9 million net acres at year-end 2002. The decrease in acreage primarily reflects the removal of acreage in Somalia, where operations had been suspended by declarations of force majeure. At year-end 2003, we held acreage in 25 countries.
E&PU.S. OPERATIONS
In 2003, U.S. E&P operations contributed 43 percent of our worldwide liquids production and 42 percent of our worldwide natural gas production. Our U.S. E&P operations are managed in two divisions: Alaska and the Lower 48 States.
Alaska
We are a major producer of crude oil on Alaskas North Slope, and we produce
natural gas in the Cook Inlet. A brief summary of our major Alaska producing
fields, transportation infrastructure, and exploration activities follows.
Greater Prudhoe Area
The Greater Prudhoe Area is comprised of the Prudhoe Bay field and satellites,
as well as the Greater Point McIntyre Area fields. We have a 36.1 percent
interest in all fields within the Greater Prudhoe Area, all of which are
operated by BP p.l.c. (BP).
The Prudhoe Bay field is the largest oil field on Alaskas North Slope. It is the site of a large waterflood and enhanced oil recovery project, as well as a gas processing plant that processes and reinjects natural gas back into the reservoir. Our net crude oil production from the Prudhoe Bay field averaged 121,500 barrels per day in 2003, compared with 130,800 barrels per day in 2002, while natural gas liquids production averaged 23,000 barrels per day in 2003, compared with 24,100 barrels per day in 2002. Normal field declines were the main cause of the lower production rates in 2003.
Prudhoe Bay satellite fields Aurora, Borealis, Polaris, Midnight Sun, and Orion produced 16,200 net barrels per day of crude oil in 2003, compared with 12,700 net barrels per day in 2002. Borealis contributed the biggest share in 2003, producing 10,300 net barrels per day. All Prudhoe Bay satellite fields are produced through Prudhoe Bay production facilities. Development options and plans are being studied for other potential Prudhoe Bay satellites.
The Greater Point McIntyre Area (GPMA) is made up of the Point McIntyre, Niakuk, Lisburne, West Beach, and North Prudhoe Bay State fields. The fields within the GPMA are generally produced through the Lisburne Production Center. Net crude oil production for GPMA averaged 18,200 barrels per day in 2003, compared with 19,800 barrels per day in 2002. The bulk of this production came from the Point McIntyre field, which is approximately seven miles north of the Prudhoe Bay field and extends into the Beaufort Sea.
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Greater Kuparuk Area
We operate the Greater Kuparuk Area, which is comprised of the Kuparuk field
and four satellite fields: Tarn, Tabasco, Meltwater, and West Sak. Our
ownership interest is 55.2 percent in the Kuparuk field, which is located about
40 miles west of Prudhoe Bay. Field installations include three central
production facilities that separate oil, natural gas and water. The natural
gas is either used for fuel or compressed for reinjection. Our net crude oil
production from the Kuparuk field averaged 78,600 barrels per day in 2003,
compared with 79,000 barrels per day in 2002. Natural production declines from
Kuparuk were offset by an average of 8,000 barrels per day of production from
the Palm discovery that extended the Kuparuk field to the west about three
miles. Development of the Palm discovery included the construction of a new
drill site and the drilling of 17 wells. Palm production began in November
2002.
Other fields in the Greater Kuparuk Area produced 21,800 net barrels per day of crude oil in 2003, primarily from the Tarn, Tabasco, and Meltwater satellites. We have a 55.3 percent interest in Tarn and Tabasco and a 55.4 percent interest in Meltwater.
The Greater Kuparuk Area also includes the West Sak heavy-oil field. Annual production rates increased from 3,300 net barrels per day in 2002 to 3,800 net barrels per day in 2003. Progress was made in 2003 towards proving concepts necessary for full-scale development of this field. Eight wells were drilled during the year, increasing production from 3,300 net barrels per day in the month of December 2002 to 5,000 net barrels per day in the month of December 2003. We have a 55.3 percent interest in this field.
Western North Slope
The Alpine field, located west of the Kuparuk field, began production in
November 2000. In 2003, the field produced at a net rate of 64,500 barrels of
oil per day, compared with 63,400 barrels per day in 2002. We are the operator
and hold a 78 percent interest in Alpine.
In May 2003, we announced plans to increase produced water and natural gas handling capacities at our Alpine production facilities. Although we inject seawater into the Alpine reservoir as a means of enhanced oil recovery, most production has been almost 100 percent oil. Eventually, the injected water and natural gas will start to break through into the producing wells, requiring an increase in the amount of produced water and natural gas that needs to be handled. The increase in water and natural gas handling capacities should allow crude oil production to remain at or slightly above current production rates for a longer period of time than could otherwise have been achieved. Startup of the expanded facilities is planned to commence by the end of 2004.
In January 2003, ConocoPhillips and the U.S. Department of Interior Bureau of Land Management signed a Memorandum of Understanding that provides for completion of an Environmental Impact Statement (EIS) for five prospective Alpine satellites: Fiord, Nanuq, Lookout, Spark, and Alpine West, as well as future potential developments in the northeast corner of the National Petroleum Reserve-Alaska (NPR-A) and near the Alpine oil field. A final decision to move forward on these projects will be made after the EIS is completed, currently expected in second half of 2004, and the appropriate permits have been granted.
Cook Inlet
Our assets in Alaska include the North Cook Inlet field, the Beluga River
natural gas field, and the Kenai liquefied natural gas facility.
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We have a 100 percent interest in the North Cook Inlet field. Net production in 2003 averaged 112 million cubic feet per day, compared with 125 million cubic feet per day in 2002. All of the production from the North Cook Inlet field is used to supply our share of gas to the Kenai liquefied natural gas plant. The decline in production in 2003 was the result of well problems. Well work completed in late 2003 and planned for 2004 is expected to improve production.
Our interest in the Beluga River field is 33 percent. Net production averaged 63 million cubic feet per day in 2003, compared with 41 million cubic feet per day in 2002. Gas from the Beluga River field is sold to local utilities, industrial consumers, and used as back-up supply to the Kenai liquefied natural gas plant.
We have a 70 percent interest in the Kenai liquefied natural gas plant, which supplies liquefied natural gas to two utility companies in Japan. Utilizing two ships, the company transports the liquefied natural gas to Japan, where it is reconverted to dry gas at the receiving terminal. We sold 44.0 billion cubic feet of liquefied natural gas to Japan in 2003, compared with 44.4 billion cubic feet in 2002.
Exploration
We drilled or participated in three exploratory wells during 2003, on locations
near Alpine, the NPR-A and the Cook Inlet. Two of these wells are pending
further appraisal, and one was a dry hole. We plan to drill or participate in
four exploration wells in Alaska during 2004.
Transportation
We transport the petroleum liquids we produce on the North Slope to market
through the Trans-Alaska Pipeline System (TAPS), an 800-mile pipeline, marine
terminal, spill response and escort vessel system that ties the North Slope of
Alaska to the port of Valdez in south-central Alaska.
In 2001, ConocoPhillips and the five other owners of TAPS completed and filed state and federal applications for renewal of the pipelines right-of-way permit through 2034. The State of Alaska approved the 30-year right-of-way renewal in November 2002 and U.S. federal approval was received in January 2003.
Regulatory approval was received in early 2003 for us to purchase an additional 1.5 percent interest in TAPS from Amerada Hess Corporation, thereby increasing our ownership in TAPS to 28.3 percent. The purchase was effective January 24, 2003. We also have ownership interests in the Alpine, Kuparuk and Oliktok pipelines on the North Slope.
We continue to evaluate a gas pipeline project to deliver natural gas from Alaskas North Slope to the Lower 48. Given the size of the project and risk associated with it, we continue to believe that risk mitigation mechanisms and improvements in project economics are necessary before this project can proceed. Activities in 2003 included promoting state and federal legislation that would lower the economic risk of the project.
Our wholly owned subsidiary, Polar Tankers Inc., manages the marine transportation of our Alaska North Slope production. Polar Tankers is based in Long Beach, California, and operates six ships in the Alaskan trade, chartering additional third-party-operated vessels as necessary. In 2001, Polar Tankers brought the Polar Endeavour into service; the Polar Resolution was brought into service in 2002; and the Polar Discovery was brought into service in 2003. These 125,000 deadweight-ton, double-hulled crude oil tankers are the first three of five Endeavour Class tankers that we plan to add to our Alaska-trade fleet. The fourth and fifth tankers are scheduled to enter the fleet in 2004 and 2005, respectively.
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Lower 48 States
| Offshore: Gulf of Mexico | |||
| Onshore: various trends in Texas, New Mexico, Oklahoma, Louisiana, Utah, Colorado, and Wyoming |
Gulf of Mexico
Our current portfolio of producing properties in the Gulf of Mexico includes
three fields operated by us and six fields operated by other companies. The
number of fields declined in 2003 with the divestiture of properties as part of
our portfolio rationalization program. At December 31, 2003, we had 22 leases
in production or under development in the deepwater Gulf of Mexico.
We hold a 16 percent interest in the co-venturer-operated Ursa field. The Ursa tension-leg platform was installed in late 1998 in approximately 3,900 feet of water, with first production occurring in March 1999. Our net production in 2003 averaged 13,300 barrels per day of liquids and 13 million cubic feet per day of natural gas.
The Princess field is a northern, subsalt extension of the Ursa field. It was discovered in 2000, with first production beginning in late 2002 from an extended-reach well from the Ursa platform. A three-well subsea tieback to the Ursa platform was completed in 2003. Our net production in 2003 averaged 2,600 barrels per day of liquids and 7.3 million cubic feet per day of natural gas. We hold a 16 percent interest in Princess.
We operate and hold a 75 percent interest in the Garden Banks 783 and 784 leases which contain the Magnolia field discovered in 1999. Installation of a tension-leg platform, to be located in almost 4,700 feet of water, is expected in mid-2004, with first oil scheduled for late 2004. Peak production of 49,000 net barrels-of-oil-equivalent per day is expected in 2005 from proved reserves.
We have a 16.8 percent interest in the K2 discovery. K2, located in Green Canyon Block 562, was discovered in 1999, with appraisal drilling continuing in 2003. A development option under consideration would utilize a subsea tieback to a nearby third-party platform. Project sanctioning is expected in the first quarter of 2004.
In July 2003, we announced a discovery with the Lorien well in Green Canyon Block 199. The well was drilled in 2,177 feet of water and encountered more than 120 feet of hydrocarbons. The well has been suspended pending further appraisal of the hydrocarbon zone. We are the operator with a 65 percent interest.
During 2003, two deepwater exploratory wells did not encounter commercial quantities of hydrocarbons: the Voss well in Keathley Canyon Block 511 and the Yorick well in Green Canyon Block 435.
Onshore
Our onshore Lower 48 production is primarily natural gas, with the majority of
the production located in the Lobo Trend in south Texas, the San Juan Basin of
New Mexico, and the Guymon-Hugoton Trend in the panhandles of Texas and
Oklahoma. We also have oil and natural gas production from the Permian Basin
in West Texas and Southeast New Mexico. Other positions and production are
maintained in other parts of Texas and Oklahoma, the Arkansas/Louisiana/Texas
area, and onshore Gulf Coast area. In
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addition, we hold coalbed methane acreage positions in the Powder River Basin in Wyoming, the Uinta Basin in Utah, and the Black Warrior Basin in Alabama.
Activities in 2003 primarily were centered on continued optimization and development of these mature assets. Combined production from Lower 48 onshore fields in 2003 averaged a net 1,237 million cubic feet per day of natural gas and 57,000 barrels per day of liquids.
E&PNORTHWEST EUROPE
In 2003, E&P operations in Northwest Europe contributed 30 percent of our worldwide liquids production and 34 percent of our worldwide natural gas production. Our Northwest Europe assets are principally located in the Norwegian and U.K. sectors of the North Sea.
Norway
The Ekofisk Area is located approximately 200 miles offshore Norway in the
center of the North Sea. The Ekofisk Area is comprised of four producing
fields: Ekofisk, Eldfisk, Embla, and Tor. Ekofisk serves as a hub for
petroleum operations in the area, with surrounding developments utilizing the
Ekofisk infrastructure. Net production in 2003 from the Ekofisk Area was
126,500 barrels of liquids per day and 127 million cubic feet of natural gas
per day, compared with 127,000 barrels of liquids per day and 133 million cubic
feet of natural gas per day in 2002. We are operator and hold a 35.1 percent
interest in Ekofisk.
In 2003, we and our co-venturers approved a plan for further development of the Ekofisk Area. The project consists of two interrelated components. A new platform, Ekofisk 2/4M, is anticipated to have 30 well slots, a high-pressure separator and equipment for produced water treatment. The project also includes modification on the existing Ekofisk Complex to increase process capacity. Construction began in 2003 and production from the new platform is projected to begin in the fall of 2005.
We also have ownership interests in other producing fields in the Norwegian North Sea, including a 24.3 percent interest in the Heidrun field, a 10.3 percent interest in the Statfjord field, a 23.3 percent interest in the Huldra field, a 1.6 percent interest in the Troll field, a 9.1 percent interest in the Visund field, and a 2.4 percent interest in the Oseberg area. Production from these and other fields in the Norwegian sector of the North Sea and the Norwegian Sea averaged a net 93,300 barrels of liquids per day and 149 million cubic feet of natural gas per day in 2003.
In September 2003, production began from the Grane field, in which we have a 6.4 percent interest. Peak production from this field is expected in 2005, and is anticipated to be approximately 14,000 net barrels per day from proved reserves.
We also have interests in certain of the transportation and processing infrastructure of the Norwegian North Sea, including a 35.1 percent interest in the Norpipe Oil Pipeline System, a 2.3 percent interest in Gassled, which owns most of the Norwegian gas transportation system, and a 1.6 percent interest in the southern part of the planned Langeled gas pipeline.
United Kingdom
We are the largest owner in, and the joint operator of, the Britannia natural
gas/condensate field, in which we have a 58.7 percent interest. Our net
production from Britannia averaged 391 million cubic feet of natural gas per
day and 14,500 barrels of liquids per day in 2003. Oil and gas production from
Britannia is delivered by pipeline to Scotland. Development drilling on
Britannia is expected to continue into the year 2006.
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In December 2003, we approved a plan for the development of the Callanish and Brodgar fields. These new Britannia satellite development projects will be tied back to the Britannia facility, with first production targeted for 2007. The development plan has been submitted for government approval. We have a 75 percent interest in the Brodgar field and an 83.5 percent interest in the Callanish field.
We operate and hold a 36.5 percent interest in the Judy/Joanne fields, which together comprise J-Block. Additionally, the Jade field began production in the first quarter of 2002 from a wellhead platform and pipeline tied to the J-Block facilities. We are the operator of and hold a 32.5 percent interest in Jade. Together, these fields produced a net 18,100 barrels of liquids per day and 118 million cubic feet of natural gas per day in 2003.
ConocoPhillips continues to supply gas from J-Block to Enron Capital and Trade Resources Limited (Enron Capital), which was placed in Administration in the United Kingdom on November 29, 2001. ConocoPhillips has been paid all amounts currently due and payable by Enron Capital in respect of the J-Block gas sales agreement, including outstanding amounts due for the period prior to the appointment of the Administrator. We believe that Enron Capital will continue to pay the amounts due for gas supplied by us in accordance with the terms of the gas sales agreement. We do not currently expect that we will have to curtail sales of gas under the gas sales agreement or shut in production as a result of the Administration of Enron Capital. However, in the event that the arrangements for the processing of Enron Capitals gas are terminated or Enron Capital goes into liquidation, there may be additional risk of production being reduced or shut-in.
We have various ownership interests in 13 producing gas fields in the southern North Sea, in the Rotliegendes and Carboniferous areas. These fields mostly feed into the ConocoPhillips-operated Theddlethorpe gas processing facility through three ConocoPhillips-operated pipeline systems. Net production in 2003 averaged 371 million cubic feet per day of natural gas and 2,000 barrels of liquids per day.
During 2003 we continued the development of the CMS3 area in the southern sector of the U.K. North Sea, which consists of five natural gas reservoirs currently being developed by us as a single, unitized project. The McAdam and Watt fields were brought onstream in 2003, following the Hawksley and Murdoch K fields in 2002. Drilling operations on the final reservoir, Boulton H, are ongoing into 2004. Collectively, these fields are known as CMS3 due to their utilization of the production and transportation facilities of the ConocoPhillips-operated Caister Murdoch System (CMS). We are the operator of CMS3 and hold a 59.5 percent interest.
We also have ownership interests in several other producing fields in the U.K. North Sea, including a 23.4 percent interest in the Alba field, a 40 percent interest in the MacCulloch field, an 11.5 percent interest in the Armada field, and a 4.8 percent interest in the Statfjord field. Production from these and the other remaining fields in the U.K. sector of the North Sea averaged a net 44,500 barrels of liquids per day and 61 million cubic feet of natural gas per day in 2003.
We have a 24 percent interest in the Clair field development in the Atlantic Margin. The Clair development is comprised of a conventional steel jacket structure with minimum manned facilities topside. First production from Clair is targeted for late 2004.
The Interconnector pipeline, which connects the United Kingdom and Belgium, facilitates the marketing throughout Europe of the natural gas we produce in the United Kingdom. Our 10 percent equity share of the Interconnector pipeline allows us to ship approximately 200 million cubic feet of natural gas per day to markets in continental Europe. We have multi-year contracts to supply natural gas to Gasunie in the Netherlands and Wingas in Germany.
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Exploration
In the U.K. sector of the North Sea, we drilled or participated in four exploratory and appraisal wells during 2003 in the southern North Sea, the central North Sea near the Jade and Britannia fields, and the West of Shetland deepwater area. Of the four wells, two are moving forward with development plans and two were dry holes. We plan to participate in three exploratory wells in 2004, including two wells in the southern North Sea and one on a structure adjacent to the Callanish field.
E&PCANADA
In 2003, E&P operations in Canada contributed 5 percent of our worldwide liquids production and 13 percent of our worldwide natural gas production, excluding Syncrude production.
Conventional Oil and Gas Operations
Operations in western Canada encompass properties in Alberta, northeastern
British Columbia and southwestern Saskatchewan. We separate our holdings in
western Canada into four geographic regions. The north region contains a mix
of oil and natural gas, and primarily is winter access. The central and west
regions produce mainly natural gas. The south region has shallow gas and
medium-to-heavy oil. Production from conventional oil and gas operations in
western Canada averaged a net 40,500 barrels per day of liquids and 435 million
cubic feet per day of natural gas in 2003.
We are working with three other energy companies, as members of the Mackenzie Delta Producers Group (Group), on the development of the Mackenzie Valley pipeline, which is proposed to transport onshore gas production from the Mackenzie Delta in northern Canada to existing markets. Initial design capacity for the Mackenzie Valley pipeline is proposed to be 1,200 million cubic feet per day, but capacity would be expandable with additional compression. We would hold a 16 percent interest in the pipeline and a 75 percent interest in the development of the Parsons Lake gas field. The Parsons Lake gas field would be one of the three primary fields in the Mackenzie Delta that would anchor the pipeline development. Conceptual engineering commenced in April 2002. Regulatory applications for the project are expected to be submitted in mid-2004 and first gas production is currently targeted for late 2009.
We owned a 46.7 percent interest in Petrovera, a joint venture that combined a substantial portion of our Canadian heavy-oil assets and certain associated natural gas assets. The asset base of the joint venture was located mainly in southwestern Saskatchewan. Net production in 2003 was 15,300 barrels of petroleum liquids per day, and was included in equity affiliate production. On February 18, 2004, we sold our interest in the joint venture.
Exploration
We hold exploration acreage in three areas of Canada: offshore eastern Canada,
the foothills of western Alberta, and the Mackenzie Delta/Beaufort Sea. In
eastern Canada, we hold a 20 percent interest in deepwater Nova Scotia, EL
2359. After participating in the Newburn well in 2002, we are waiting on the
results from drilling in adjacent blocks. In deepwater Newfoundland, we are
working to convert our large Laurentian permit into specific exploration
licenses. We hope to complete this in 2004 and expect to
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acquire seismic in 2005. In the foothills, two out of three exploratory wells drilled in 2003 were successful. In the Mackenzie Delta/Beaufort Sea, we began drilling a well in early 2004.
Other Canadian Operations
We have two oil sands projects in Canada: Syncrude Canada Ltd. and Surmont.
Syncrude Canada Ltd.
We own a 9.03 percent undivided interest in Syncrude Canada Ltd., a joint
venture created by a number of energy companies for the purpose of mining
shallow deposits of oil sands, extracting the bitumen, and upgrading it into a
light sweet crude oil called Syncrude. The primary plant and facilities are
located at Mildred Lake, about 25 miles north of Fort McMurray, Alberta,
together with an auxiliary mining and extraction facility approximately 20
miles from the Mildred Lake plant. Syncrude Canada Ltd. holds eight oil sands
leases and the associated surface rights, of which our share is approximately
23,000 net acres. Our net share of production averaged 19,000 barrels per day
in 2003.
We continued with development of the Stage III expansion-mining project in 2003, which is expected to increase our Syncrude production. The Aurora Train 2 project (the new mine) was completed and started up in the fourth quarter of 2003. The expansion project is expected to bring various units onstream during 2004, while the completion of a new coker to service the expanded project is anticipated in the second half of 2005.
The U.S. Securities and Exchange Commissions regulations define this project as mining-related and not part of conventional oil and gas operations. As such, Syncrude operations are not included in our proved oil and gas reserves or production as reported in the supplemental oil and gas information.
Surmont
The Surmont lease is located about 35 miles south of Fort McMurray, Alberta.
We own a 43.5 percent interest and are the operator. The project will use a
method called steam assisted gravity drainage, that involves the injection of
steam deep into the oil sands, effectively melting the bitumen, which is then
recovered and pumped to the surface for further processing. In May 2003, we
received regulatory approval to develop the oil sands from the Alberta Energy
and Utilities Board, and in late 2003 our Board of Directors approved the
project. Construction of the facilities is expected to begin in early 2004,
with first oil production scheduled for 2006.
E&PSOUTH AMERICA
In 2003, E&P operations in South America were comprised of interests in Venezuela, Ecuador and Brazil. South American operations contributed 8 percent of our worldwide liquids production in 2003.
Venezuela
In December of 2002, civil unrest in Venezuela caused economic and other disruptions that shut down most oil and gas operations in Venezuela, including the companys Petrozuata and Hamaca operations. Production from these operations resumed in the first quarter of 2003.
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Petrozuata
Petrozuata is a Venezuelan Corporation formed under a 35-year Association
Agreement between a wholly owned subsidiary of ConocoPhillips that has a 50.1
percent non-controlling equity interest and PDVSA Petroleo, a subsidiary of
Petroleos de Venezuela S.A. (PDVSA), the national oil company of Venezuela.
The project is an integrated operation that produces extra-heavy crude oil from reserves in the Zuata region of the Orinoco Oil Belt, transports it to the Jose industrial complex on the north coast of Venezuela, and upgrades it into medium-grade crude oil. Associated by-products produced are liquefied petroleum gas, sulfur, petroleum coke and heavy gas oil. The medium-grade crude oil produced by Petrozuata is used as a feedstock for our Lake Charles, Louisiana, refinery and the Cardon refinery in Venezuela operated by PDVSA. Our net production was 51,600 barrels of heavy crude oil per day in 2003, and is included in equity affiliate production.
We entered into an agreement to purchase up to 104,000 barrels per day of the Petrozuata upgraded crude oil for a market-based formula price over the term of the joint venture in the event that Petrozuata is unable to sell the production for higher prices. All upgraded crude oil sales are denominated in U.S. dollars. By-products produced by the upgrading facility are sold to a variety of domestic and foreign purchasers. The loading facilities at Jose transfer crude oil and some of the by-products to ocean vessels for export.
Hamaca
The Hamaca project also involves the development of heavy-oil reserves from the
Orinoco Oil Belt. ConocoPhillips owns a 40 percent interest in the Hamaca
project, which is operated by Petrolera Ameriven on behalf of the owners. The
other participants in Hamaca are PDVSA and ChevronTexaco Corporation. Our
interest is held through a joint limited liability company, Hamaca Holding LLC,
for which we use the equity method of accounting.
Net production averaged 22,100 barrels per day of heavy crude oil in 2003, and is included in equity affiliate production. The joint-venture agreement has a 35-year term.
Construction of the heavy-oil upgrader, pipelines and associated production facilities at the Jose industrial complex began in 2000. The upgrader is expected to begin producing commercial quantities of medium-grade crude oil by the end of 2004, at which time our net production from the Hamaca field is expected to increase to approximately 71,000 barrels per day from proved reserves.
Gulf of Paria
In 1999 the Corocoro discovery in the Gulf of Paria West Block was made and
later confirmed with appraisal drilling in 2001 and 2002. In 2003, Venezuelan
authorities approved Phase I of the development plan for the Corocoro field.
We operate the field with a 32.2 percent interest. In accordance with the
profit sharing agreement that governs the block, a subsidiary of PDVSA elected
to acquire a 35 percent interest in the development, lowering our interest from
50 percent to 32.5 percent. In September 2003, we acquired a 37.5 percent
interest in the adjoining Gulf of Paria East Block, onto which a portion of the
Corocoro discovery extends.
Plataforma Deltana Block 2
We acquired a 40 percent interest in Plataforma Deltana Block 2 in 2003. The
block is co-venturer-operated and holds a gas discovery made by PDVSA in 1983.
Appraisal wells are planned in 2004. Contingent on the results of the
appraisal wells, development of the field may include a well platform in
approximately 300 feet of water, a 170-mile pipeline to shore, and a liquefied
natural gas plant. The liquefied natural gas would be shipped to the U.S.
market.
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Brazil
We have concession agreements on two deepwater exploration blocks (BM-ES-11 and
BM-PAMA-3) offshore Brazil. These blocks were acquired in Brazils third bid
round held in June 2001. We entered into joint ventures on both blocks in late
2002, reducing our interest to 70 percent in BM-ES-11 and 65 percent in
BM-PAMA-3. In 2003, further evaluation led to the write-off of our leasehold
investment in BM-ES-11, and we initiated the process to exit the block.
Further evaluation of BM-PAMA-3 is planned for 2004.
Ecuador
We sold our 14 percent, non-operator interest in Block 16 and the associated
fields on December 5, 2003, with an effective date of January 1, 2003. We have
no other assets in Ecuador, and have exited the country.
E&PASIA PACIFIC
In 2003, E&P operations in the Asia Pacific area contributed 6 percent of our worldwide liquids production and 9 percent of our worldwide natural gas production.
China
Our combined net production of crude oil from the Xijiang facilities averaged
10,900 barrels per day in 2003. The Xijiang development consists of three
fields located approximately 80 miles from Hong Kong in the South China Sea.
The facilities include two manned platforms and a floating production, storage
and offloading facility.
Production from Phase I development of the Peng Lai 19-3 field in Bohai Bay Block 11-05 began in late December 2002. In 2003, the field produced 14,800 net barrels of oil per day. We have a 49 percent interest, with the remainder held by the China National Offshore Oil Corporation. The Phase I development utilizes one wellhead platform and a floating production, storage and offloading facility.
We continue to move forward with the design for Phase II of the Peng Lai 19-3 development. Phase II would include multiple wellhead platforms, and a larger floating production, storage and offloading facility. The Peng Lai 25-6 field, discovered in 2000 and located three miles east of Peng Lai 19-3, will be developed in conjunction with Phase II of the Peng Lai 19-3 development project.
Exploration activity continued in 2003 in Block 11-05, with two successful wells announced. The Peng Lai 19-9-1 well, located about two miles east of the Peng Lai 19-3 field, discovered the Peng Lai 19-9 field that will be part of the Phase II development. Drilling of the Peng Lai 13-1-1 well, located about 18 miles north of the Peng Lai 19-3 field, was completed in March 2003.
Indonesia
We operate nine Production Sharing Contracts (PSCs) in Indonesia and have a
non-operator interest in four others. Our assets are concentrated in two core
areas: the West Natuna Sea and South Sumatra; with a potentially emerging area
offshore East Java. We are a party to five long-term U.S. dollar pipeline gas
contracts that have been signed in Indonesia. Production of natural gas from
Indonesia averaged a net 255 million cubic feet per day in 2003, while
production of crude oil averaged a net 16,000 barrels per day.
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Offshore Assets
We operate three offshore PSCs: 1) South Natuna Sea Block B, 2) Nila, and 3)
Ketapang. We also hold a non-operator interest in the Pangkah PSC offshore
East Java. We participate in various natural gas marketing arrangements in
connection with these assets, including being a co-venturer in the West Natuna
Gas Supply Group (WNG). The WNG jointly markets natural gas from certain
fields in three South Natuna Sea PSCs to Singapore.
The Kakap PSC, adjacent to the South Natuna Sea Block B, was sold in September 2003. The property was selected for disposition because of its high operating cost structure and limited further exploration potential. In addition, during 2003 we relinquished the Tobong PSC and sold the Sebuku PSC after concluding that neither PSC had significant remaining exploration potential.
The South Natuna Sea Block B PSC has two currently producing mature oil fields and 15 gas fields (some with recoverable oil volumes) in various phases of development. The largest current development in Block B is the Belanak oil and gas field, in which a floating production, storage and offloading vessel is under construction. The vessel is expected to be completed, and oil production to commence, in the first half of 2005. Two additional developments that would produce into the Belanak infrastructure are scheduled for startup in 2006 and 2008.
We also have an active exploration program in both the Natuna Sea and East Java. During 2003, two unsuccessful exploratory wells were drilled in the Natuna Sea Nila Block. An additional well in the Nila Block is planned for 2004. During 2003, in the East Java offshore Ketapang Block, two appraisal wells were drilled on the Bukit Tua oil field discovery, one of which was successful, and one of which was unsuccessful. An additional appraisal well and an exploration well are planned for 2004.
Onshore Assets
We operate six onshore PSCs: 1) Corridor TAC, 2) Corridor PSC, 3) South Jambi
B, 4) Sakakemang JOB (jointly operated with a co-venturer), 5) Block A PSC in
Aceh, and 6) Warim. We also hold non-operator interests in the Banyumas PSC in
Java and the Bentu and Korinci-Baru PSCs in Sumatra. The Tungkal PSC was sold
in December 2003. As with our offshore properties, we participate in various
gas marketing arrangements in connection with these fields. Exploration
efforts focus on locating additional natural gas reserves.
We announced in March 2003 the successful test of the Suban-8 delineation well on the southwest flank of the Suban gas field, located in the Corridor PSC of South Sumatra. In December 2003, we began an exploratory well in the Corridor Block to test a gas prospect located close to other producing fields. We continue to appraise and develop the Suban gas field. In addition, we completed the successful test of the North Sumpal-1 well in the Sakakemang Block located in South Sumatra, and continued on the construction of the South Jambi gas project in the South Jambi B Block also located in South Sumatra.
We are a 35 percent owner of TransAsia Pipeline Company Pvt. Ltd., a consortium company, which has a 40 percent ownership in PT Transportasi Gas Indonesia, an Indonesian limited liability company, which owns and operates the Grissik to Duri gas pipeline.
Vietnam
We have a 23.25 percent interest in Block 15-1 in the Cuu Long Basin in the
South China Sea. In 2001, the co-venturers in Block 15-1 declared the
southwest portion of the Su Tu Den (Black Lion) field commercial after a
successful appraisal program. In addition, an appraisal well in the northeast
portion of Su Tu Den was successfully drilled in 2002. The Su Tu Den Phase I
development project was approved in December 2001. Production from Su Tu Den
Phase I began in the fourth quarter of 2003. The initial net
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production rate was approximately 16,000 barrels of oil per day from seven wells located in the Phase I area. The oil is being processed and stored in a new floating production, storage and offloading vessel, which has a 1 million barrel storage capacity and can initially process up to 65,000 gross barrels per day.
An exploration discovery was also made on the nearby Su Tu Vang (Golden Lion) prospect in the third quarter of 2001. The potential commerciality of Su Tu Vang and the northeast portion of Su Tu Den are being evaluated. In addition, in the fourth quarter of 2003, a successful exploration well was drilled in the Su Tu Trang (White Lion) area (southeast area of the block).
We have a 36 percent interest in the Rang Dong field in Block 15-2 in the Cuu Long Basin. In the third quarter of 2002, production began from two new wellhead platforms in the Rang Dong field. During late 2003, field facilities were upgraded to include a utilities/living quarters platform, and a central processing platform with facilities to enable gas lift, gas export and water injection. With the completion of these facilities, water injection became possible on all three wellhead platforms and gas lift became possible on two of the wellhead platforms. A successful appraisal step-out well, Rang Dong-12X, was drilled in the central part of the field in late 2001, and a development plan for this area of the field is being evaluated.
We also own interests in offshore Blocks 16-2, 5-3, 133 and 134, as well as a 16.33 percent interest in the Nam Con Son gas pipeline.
Timor Sea and Australia
Bayu-Undan
The unitized Bayu-Undan field, located in the Timor Sea, is being developed in
two phases. Phase I is a gas-recycle project, where condensate and natural gas
liquids will be separated and removed and the dry gas reinjected back into the
reservoir. This phase began production in February 2004, and is expected to
average a net rate of 23,000 barrels of liquids per day from proved reserves in
2004.
In June 2003, we announced that the Gas Development Plan for the field had received approval from the Timor Sea Designated Authority. This final approval allowed Phase II, the development of the natural gas reserves, to proceed. Phase II will involve a natural gas pipeline from the field to Darwin, and a liquefied natural gas (LNG) facility located at Wickham Point, Darwin. In March 2002, we announced that we had signed a Heads of Agreement (LNG HOA) with The Tokyo Electric Power Company, Incorporated (TEPCO) and Tokyo Gas Co., Ltd. (Tokyo Gas). Under the LNG HOA, TEPCO and Tokyo Gas would purchase 3 million tons per year in total of LNG for a period of 17 years, utilizing natural gas from the Bayu-Undan field. The approval of the Gas Development Plan by the Timor Sea Designated Authority satisfied the remaining condition precedent necessary for the LNG HOA to have a binding effect and for the project to proceed. As a result of project approvals, we added 1.36 trillion cubic feet of net proved natural gas reserves in 2003. The first LNG cargo is scheduled for delivery in early 2006. We have a 56.7 percent controlling interest in the integrated project.
Greater Sunrise
We and our co-venturers continue to evaluate commercial development options and
LNG markets in the Asia Pacific region and the North American west coast for
the natural gas and condensate from the Greater Sunrise field. The development
options under consideration consist of an offshore floating LNG facility and an
onshore LNG facility located in Darwin, Australia. Efforts are under way to
market LNG into both the Asian and North American west coast markets. Further
engineering studies relating to design and development concepts also continue.
We have a 30 percent, non-operator interest in Greater Sunrise.
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E&PAFRICA AND THE MIDDLE EAST
Nigeria
Our crude oil production from five leases in Nigeria averaged a net 36,900
barrels per day in 2003, while net natural gas production averaged 63 million
cubic feet per day. These five leases include four onshore Oil Mining Leases
(OML) and a shallow-water offshore OML. Continued development and exploratory
drilling is planned for 2004 on the onshore leases.
We also have production sharing contracts on deepwater Nigeria Oil Prospecting Leases (OPLs), including OPL 318 with a 50 percent interest where we are the operator, OPL 214 with a 20 percent interest and OPL 248 with a 40 percent interest. We are planning to drill the first exploration well on OPL 248 in 2004.
We have a 20 percent interest in a 480-megawatt gas-fired power plant being constructed to supply electricity to Nigerias national electricity supplier. When operational, the plant will consume 68 million cubic feet per day of natural gas sourced from within our Nigerian proved natural gas reserves. The plant is expected to become operational in 2005.
In October 2003, ConocoPhillips, the Nigerian National Petroleum Corporation (NNPC), Eni and ChevronTexaco signed a Heads of Agreement (HOA) to conduct front-end engineering and design work for a new LNG facility that would be constructed in Nigerias central Niger Delta. The co-venturers have agreed to form an incorporated joint venture, to be known as Brass LNG Limited to undertake the project. The front-end engineering and design work will be for two trains, each nominally sized at 5 million metric tons per year. Natural gas supplies for the facility would come from natural gas reserves within oil and gas fields already operated by existing Nigerian Agip Oil Company and ChevronTexaco joint ventures. The front-end studies are expected to be completed in 2005, and the LNG facility is targeted to be operational in 2009.
Angola
We have a 20 percent interest in exploratory activity in deepwater Block 34,
offshore Angola. The first exploration well, completed in 2002, did not
encounter commercial quantities of hydrocarbons, which led to a substantial
financial impairment of our investment in the block. The second exploration
well, drilled in late 2003, was also unsuccessful, leading to a write-off of
our remaining investment in the block.
Cameroon
In December 2002, we announced a successful test of an exploratory well
offshore Cameroon. The well, located in exploration permit PH 77, offshore in
the Douala Basin, obtained a maximum flow rate of 3,000 barrels of oil per day
and 1.8 million cubic feet of natural gas per day during the test. Contractor
interests in the permit are held 50 percent by ConocoPhillips and 50 percent by
a subsidiary of Petronas Carigali (Petronas). We serve as the operator of the
consortium. We are currently analyzing well results, and developing plans to
evaluate the discovery and other identified exploration prospects.
Dubai
In Dubai, United Arab Emirates, we are using horizontal drilling techniques and
advanced reservoir drainage technology to enhance the efficiency of the
offshore production operations and improve recovery rates from four fields that
we operate.
Saudi Arabia
We had a 15 percent interest in Core Venture 1 and a 30 percent interest in
Core Venture 3 of the Kingdom of Saudi Arabias natural gas initiative.
Agreement could not be reached during the negotiation of the implementation
agreement, leading to the termination of both projects.
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E&PRUSSIA AND CASPIAN SEA REGION
Russia
We have a 50 percent ownership interest in Polar Lights Company, a Russian
limited liability company established in January 1992 to develop the Ardalin
field in the Timan-Pechora basin in Northern Russia. We account for our
interest using the equity method. Polar Lights started producing oil in August
1994 from the Ardalin field. In June 2002, production commenced from the
Oshkotyn field, the first of three satellite fields under development. In
2003, production began from the other two satellite fields: East Kolva and
Dyusushev.
Our net production from Polar Lights averaged 13,600 barrels of petroleum liquids per day in 2003, and is included in equity affiliate production.
Caspian Sea
In the North Caspian Sea, we have an 8.33 percent interest in the Republic of
Kazakhstans North Caspian Sea Production Sharing Agreement (NCPSA), which
includes the Kashagan field. During 2003, we, along with four of the remaining
five co-venturers, exercised our pre-emptive rights to acquire a proportionate
share of BG Internationals sale of their 16.67 percent interest in the
project. Upon Republic of Kazakhstan approval of the transaction, our interest
in the NCPSA will increase to 10.19 percent.
The exploration area consists of 10.5 blocks, totaling nearly 2,000 square miles. The initial production phase of the contract is for 20 years, with options to extend the agreement an additional 20 years. In June 2002, we and the other contracting companies, in conjunction with KazMunayGas, which represents the Government of the Republic of Kazakhstan, declared the Kashagan discovery commercial. In February 2004, the Kashagan Development Plan was approved by the Republic of Kazakhstan.
The contracting companies plan to continue to explore other structures within the North Caspian Sea license. In October 2002, we and our co-venturers announced a new hydrocarbon discovery on the Kalamkas More prospect located approximately 40 miles southwest of the Kashagan field. Exploratory drilling continued in 2003 with three additional wells drilled. The Aktote #1 and the Kashagan Southwest #1 were announced as discoveries in November 2003. Operations on the Kairan #1 well were suspended for the winter period and will resume in the spring of 2004.
In the South Caspian Sea offshore Azerbaijan, we have a 20 percent interest in the Zafar Mashal prospect. The first exploratory well began in late 2003 and is planned for completion in 2004.
E&POTHER
In July 2003, we signed a Heads of Agreement with Qatar Petroleum for the development of Qatargas 3, a large-scale liquefied natural gas (LNG) project located in Qatar and servicing the U.S. natural gas markets. The agreement provided the framework for the necessary project agreements and the completion of feasibility studies. Qatargas 3 is planned as an integrated project, jointly owned by ConocoPhillips (30 percent) and Qatar Petroleum. It would consist of the facilities to produce gas from Qatars offshore North Field, yielding approximately 7.5 million gross tons per year of LNG from a new facility located in Ras Laffan Industrial City. The LNG would be shipped from Qatar to the United States in a fleet of new LNG carriers. We would purchase the LNG and be responsible for regasification and marketing within the United States. The project could result in sales of natural gas up to 1 billion cubic feet per day. Startup of the Qatargas 3 project is estimated to be in the 2009 timeframe.
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In December 2003, we signed a Statement of Intent with Qatar Petroleum regarding the construction of a gas-to-liquids (GTL) plant in Ras Laffan, Qatar. The agreement initiates the detailed technical and commercial pre-front-end engineering and design studies and established principles for negotiating a Heads of Agreement for an integrated reservoir-to-market GTL project.
In late 2003, we signed an agreement with Freeport LNG Development, L.P. to participate in its proposed LNG receiving terminal in Quintana, Texas. This agreement gives us 1 billion cubic feet per day of regasification capacity in the terminal and a 50 percent interest in the general partnership managing the venture. The terminal will be designed with a storage capacity of 6.9 billion cubic feet and a send-out capacity of 1.5 billion cubic feet per day. Pending government approvals, construction is scheduled to begin in the second half of 2004, with commercial startup in mid-2007.
We are continuing with plans to develop a project to build a liquefied natural gas import terminal in northern Baja California to provide access to gas markets in that region. Although we wrote-off our investment in the proposed Rosarito LNG terminal, we continue working with federal, state, and local officials in Mexico to evaluate various other alternatives, which includes offshore options.
E&PRESERVES
The company has not filed any information with any other federal authority or agency with respect to its estimated total proved reserves at December 31, 2003. No difference exists between the companys estimated total proved reserves for year-end 2002 and year-end 2001, which are shown in this filing, and estimates of these reserves shown in a filing with another federal agency in 2003.
DELIVERY COMMITMENTS
The Commercial organization optimizes the commodity flows of our E&P segment. This group markets our crude oil and natural gas production, with commodity buyers, traders and marketers in offices in Houston, London, Singapore and Calgary.
We sell crude oil and natural gas from our E&P producing operations under a variety of contractual arrangements, some of which specify the delivery of a fixed and determinable quantity. Our Commercial organization also enters into natural gas sales contracts where the source of the natural gas used to fulfill the contract can be the spot market, or a combination of our reserves and the spot market. Worldwide, we are contractually committed to deliver approximately 4.8 trillion cubic feet of natural gas and 270 million barrels of crude oil in the future, including the minority interests of consolidated subsidiaries. These contracts have various expiration dates through the year 2025. The crude oil commitment and approximately 4.3 trillion cubic feet of the natural gas commitment are expected to come from proved reserves in the United States, the Timor Sea, Nigeria, and the United Kingdom. The remainder of the natural gas commitment will be purchased in the spot market.
MIDSTREAM
Our Midstream business is conducted through owned and operated assets as well as through our 30.3 percent equity investment in Duke Energy Field Services, LLC (DEFS). The Midstream businesses purchase raw natural gas from producers and gather natural gas through extensive pipeline gathering systems. The gathered natural gas is then processed to extract natural gas liquids from the raw gas stream. The remaining
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residue gas is marketed to electrical utilities, industrial users, and gas marketing companies. Most of the natural gas liquids are fractionated-separated into individual components like ethane, butane and propaneand marketed as chemical feedstock, fuel, or blendstock. Total natural gas liquids extracted in 2003, including our share of DEFS, was 219,000 barrels per day, with 167,000 barrels per day of natural gas liquids fractionated.
DEFS markets a substantial portion of its natural gas liquids to ConocoPhillips and Chevron Phillips Chemical Company LLC (a joint venture between ConocoPhillips and ChevronTexaco) under a supply agreement that continues until December 31, 2014. This purchase commitment is on an if-produced, will-purchase basis and so it has no fixed production schedule, but has had, and is expected over the remaining term of the contract to have, a relatively stable purchase pattern. Under this agreement, natural gas liquids are purchased at various published market index prices, less transportation and fractionation fees. DEFS also purchases raw natural gas from our E&P operations in the United States.
DEFS is headquartered in Denver, Colorado. At December 31, 2003, DEFS owned and operated 56 natural gas liquids extraction plants, and owned an equity interest in another 10. Also at year end, DEFS gathering and transmission systems included approximately 58,000 miles of pipeline. In 2003, DEFS raw natural gas throughput averaged 6.7 billion cubic feet per day, and natural gas liquids extraction averaged 365,000 barrels per day. DEFS assets are primarily located in the Gulf Coast area, West Texas, Oklahoma, the Texas Panhandle, the Rocky Mountain area, and western Canada.
Outside of DEFS, our U.S. Midstream assets are located primarily in New Mexico, Texas and Louisiana. At December 31, 2003, these assets included seven fully owned and operated natural gas liquids extraction plants, plus two additional plants that we operate and in which we own a 95 percent and a 50 percent interest. These nine plants have a combined natural gas net plant inlet capacity of 762 million cubic feet per day. One of the plants in Louisiana also includes a 10,500 barrel-per-day liquids fractionator. We also have minor interests in two other natural gas liquids extraction plants, and we own underground natural gas liquids storage facilities in Texas and Louisiana.
We own a 25,000 barrel-per-day capacity liquids fractionation plant in Gallup, New Mexico; a 22.5 percent equity interest in Gulf Coast Fractionators, which owns a natural gas liquids fractionating plant in Mt. Belvieu, Texas (with our net share of capacity at 25,000 barrels per day); and a 40 percent interest in a fractionation plant in Conway, Kansas (with our share of capacity at 42,000 barrels per day). We own a 700-mile intrastate natural gas and liquids pipeline system in Louisiana and gas gathering and natural gas liquids pipelines in several states.
Our Canadian natural gas liquids business includes the following assets:
| A 92 percent operating interest in the 2.4 billion-cubic-feet-per-day Empress natural gas processing and fractionation facilities near Medicine Hat, Alberta, with natural gas liquids production capacity of 50,000 barrels per day; | |||
| A 580-mile Petroleum Transmission Company pipeline from Empress to Winnipeg and six related pipeline terminals; | |||
| Two underground natural gas liquids storage facilities, comprised of the Richardson caverns with a one million barrel capacity and the Dewdney caverns with a three million barrel capacity along with 0.6 billion cubic feet of natural gas storage capacity; and | |||
| A 10 percent interest in the 1,902-mile Cochin liquefied petroleum gas pipeline, originating in Edmonton, Alberta, and ending in Sarnia, Ontario, and a terminal storage system that transports propane, ethane and ethylene. |
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Canadian natural gas liquids extracted averaged 45,000 barrels per day in 2003.
We also own a 39 percent equity interest in Phoenix Park Gas Processors Limited, a joint venture with the National Gas Company of Trinidad and Tobago Limited, which processes gas in Trinidad and markets natural gas liquids throughout the Caribbean and into the U.S. Gulf Coast. Phoenix Parks facilities include a gas processing plant and a natural gas liquids fractionator. Our share of natural gas liquids extracted averaged 11,100 barrels per day in 2003.
In early 2004, we approved the disposal of some of our non-DEFS Midstream assets located in the Lower 48 states that are not associated with our E&P operations.
REFINING AND MARKETING (R&M)
R&M operations encompass refining crude oil and other feedstocks into petroleum products (such as gasoline, distillates and aviation fuels), buying, selling and transporting crude oil, and buying, transporting, distributing and marketing petroleum products. R&M has operations in the United States, Europe and Asia Pacific.
The Commercial organization optimizes the commodity flows of our R&M segment. This organization selects and procures feedstocks for R&Ms refineries. Commercial also supplies the gas and power needs of the R&M facilities. Commercial has buyers, traders and marketers in offices in Houston, London, Singapore and Calgary.
As a condition to the merger, the U.S. Federal Trade Commission (FTC) required that we divest specified Conoco and Phillips assets, the most significant of which were Phillips Woods Cross, Utah, refinery and associated motor fuel marketing operations; Conocos Commerce City, Colorado, refinery and related crude oil pipelines; and Phillips Colorado motor fuel marketing operations. All FTC-mandated dispositions were completed in late-2002 or during 2003.
In addition, in December 2002, we committed to and initiated a plan to sell approximately 3,200 marketing sites that did not fit into our long-range plans. In the third quarter of 2003, we concluded the sale of all of the Exxon-branded marketing assets in New York and New England, including contracts with independent dealers and marketers. Approximately 230 of the 3,200 sites were included in this package. In the fourth quarter of 2003, we concluded the sale of our Circle K subsidiary, representing approximately 1,660 sites, as well as the assignment of the franchise relationship with more than 350 franchised and licensed stores. Other, smaller dispositions also occurred during 2003. In January 2004, we signed agreements to sell our Mobil-branded marketing assets on the East Coast in two separate transactions. Assets in the packages include 104 company-owned and operated sites, and 352 dealer sites. Each of the transactions is expected to close in the second quarter of 2004. Discussions are under way with potential buyers for the remaining sites, and we expect to complete the sales of these assets during 2004.
Both the FTC-required dispositions and the retail site dispositions were classified as discontinued operations for financial reporting purposes, and are included in Corporate and Other. Accordingly, they are excluded from the descriptions of R&Ms continuing operations contained in this section. See Note 4Discontinued Operations, in the Notes to Consolidated Financial Statements, for additional information.
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UNITED STATES
Refining
At December 31, 2003, we owned and operated 12 crude oil refineries in the United States, having an aggregate rated crude oil refining capacity at year-end 2003 of 2,168,000 barrels per day. The average purchase cost of a barrel of crude delivered to our U.S. refineries in 2003 was $29.10, compared to $24.92 in 2002.
East Coast Region
Bayway Refinery
Located on the New York Harbor in Linden, New Jersey, Bayway has a crude oil
processing capacity of 250,000 barrels per day and processes mainly light
low-sulfur crudes. Crude oil is supplied to the refinery by tanker, primarily
from the North Sea and West Africa. The refinery produces a high percentage of
transportation fuels such as gasoline, diesel, and jet fuel along with home
heating oil. Other products include petrochemical feedstocks (propylene) and
residual fuel oil. The facility distributes its refined products to East Coast
customers through pipelines, barges, railcars and trucks. The mix of products
produced changes to meet seasonal demand. Gasoline is in higher demand during
the summer, while in winter, the refinery optimizes operations to increase
heating oil production. A 775 million-pound-per-year polypropylene plant
became operational in March 2003.
Trainer Refinery
The Trainer refinery is located in Trainer, Pennsylvania, about 10 miles
southwest of the Philadelphia airport on the Delaware River. The refinery has
a crude oil processing capacity of 180,000 barrels per day and processes mainly
light low-sulfur crudes. The Bayway and Trainer refineries are operated in
coordination with each other by sharing crude oil cargoes, moving feedstocks
between the facilities, and sharing certain personnel. Trainer receives crude
oil from the North Sea and West Africa. The refinery produces a high
percentage of transportation fuels such as gasoline, diesel, and jet fuel along
with home heating oil. Other products include residual fuel oil and liquefied
petroleum gas. Refined products are distributed to customers in Pennsylvania,
New York and New Jersey via pipeline, barge, railcar and truck.
Gulf Coast Region
Alliance Refinery
The Alliance refinery, located in Belle Chasse, Louisiana, on the Mississippi
River, is about 25 miles south of New Orleans and 63 miles north of the Gulf of
Mexico. The refinery has a crude oil processing capacity of 250,000 barrels
per day and processes mainly light low-sulfur crudes. Alliance receives
domestic crude oil via pipeline, and crude oil from the North Sea and West
Africa via pipeline connected to the Louisiana Offshore Oil Port. The refinery
produces a high percentage of transportation fuels such as gasoline, diesel,
and jet fuel along with home heating oil. Other products include petrochemical
feedstocks (benzene) and anode petroleum coke. The majority of the refined
products are distributed to customers through the Colonial and Plantation
pipeline systems.
Lake Charles Refinery
The Lake Charles refinery is located in Westlake, Louisiana. The refinery has
a crude oil processing capacity of 252,000 barrels per day. The refinery
receives domestic and international crude oil and processes heavy, high-sulfur,
low-sulfur and acidic crude oil. While the sources of international crude oil
can vary, the majority is Venezuelan and Mexican heavy crudes delivered via
tanker. The refinery produces a high percentage of transportation fuels such
as gasoline, off-road diesel, and jet fuel along with heating oil. The
majority of the refined products are distributed to customers by truck, railcar
or major common-carrier pipelines. In addition, refined products can be sold
into export markets through the refinerys marine terminal.
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The Lake Charles facilities also include a specialty coker and calciner that manufactures graphite and anode petroleum cokes supplied to the steel and aluminum industries, and provides a substantial increase in light oils production by breaking down the heaviest part of the crude barrel to allow additional production of diesel fuel and gasoline.
The Lake Charles refinery supplies feedstocks to Excel Paralubes, Penreco and Venture Coke Company (Venco), all joint ventures that are part of our Specialty Businesses function within R&M.
Sweeny Refinery
The Sweeny refinery is located in Old Ocean, Texas, about 65 miles southwest of
Houston. The refinery has a crude oil processing capacity of 215,000 barrels
per day. The refinery primarily receives crude oil through 100 percent owned
and jointly owned terminals on the Gulf Coast, including a deepwater terminal
at Freeport, Texas. The refinery produces a high percentage of transportation
fuels such as gasoline, diesel, and jet fuel along with home heating oil.
Other products include petrochemical feedstocks (benzene) and petroleum (fuel)
coke. Refined products are distributed throughout the Midwest and southeastern
United States through pipeline, barge and railcar.
ConocoPhillips has a 50 percent interest in Merey Sweeny, L.P., a limited partnership that owns a 58,000 barrel-per-day delayed coker and related facilities at the Sweeny refinery. PDVSA, which owns the remaining 50 percent interest, supplies the refinery with up to 165,000 barrels per day of Venezuelan Merey, or equivalent, crude oil. We are the operating partner.
Central Region
Wood River Refinery
The Wood River refinery is located in Roxana, Illinois, about 15 miles north of
St. Louis, Missouri, on the east side of the Mississippi River. It is our
largest refinery, with a crude oil processing capacity of 286,000 barrels per
day. The refinery can process a mix of both light low-sulfur and heavy
high-sulfur crudes, which it receives from domestic and foreign sources by
pipeline. The refinery produces a high percentage of transportation fuels such
as gasoline, diesel, and jet fuel along with home heating oil. Other products
include petrochemical feedstocks (benzene) and asphalt. Through an off-take
agreement, a significant portion of its gasoline, diesel and jet fuel is sold
to a third party at the refinery for delivery via pipelines into the upper
Midwest, including the Chicago, Illinois, and Milwaukee, Wisconsin,
metropolitan areas. Remaining refined products are distributed to customers in
the Midwest by pipeline, truck, barge and railcar.
During 2003, we purchased certain assets at Premcors Hartford, Ill., refinery. The purchase included the coker, crude unit, catalytic cracker, alkylation unit, isomerization unit, a portion of the site utilities and a portion of the storage tanks at the Premcor facility. The overall production of the Wood River refinery will only increase slightly, but the purchase will enable the refinery to process heavier, lower cost crude oil.
Ponca City Refinery
Our refinery located in Ponca City, Oklahoma, has a crude oil processing
capacity of 194,000 barrels per day. Both foreign and domestic crudes are
delivered by pipeline from the Gulf of Mexico, Oklahoma, Kansas, Texas and
Canada. The refinerys facilities include fluid catalytic cracking, delayed
coking and hydrodesulfurization units, which enable it to produce high ratios
of gasoline and diesel fuel from crude oil. Finished petroleum products are
shipped by truck, railcar and company-owned and common-carrier pipelines to
markets throughout the Midcontinent region.
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Borger Refinery
The Borger refinery is located in Borger, Texas, in the Texas Panhandle about
50 miles north of Amarillo. It includes a natural gas liquids fractionation
facility. The crude oil processing capacity is 148,000 barrels per day, and
the natural gas liquids fractionation capacity is 95,000 barrels per day. The
refinery processes mainly heavy high-sulfur crudes. The refinery receives
crude oil and natural gas liquids feedstocks through our pipelines from west
Texas, the Texas Panhandle and Wyoming. The Borger refinery can also receive
foreign crude oil via our pipeline systems. The refinery produces a high
percentage of transportation fuels such as gasoline, diesel, and jet fuel along
with a variety of natural gas liquids and solvents. Pipelines move refined
products from the refinery to west Texas, New Mexico, Arizona, Colorado, and
the Midcontinent region.
Billings Refinery
The Billings refinery is located in Billings, Montana, and has a crude oil
processing capacity of 60,000 barrels per day, processing a mixture of about 95
percent Canadian heavy high-sulfur crude plus domestic high-sulfur and
low-sulfur crudes, all delivered by pipeline. A delayed coker converts heavy
high-sulfur residue into higher value light oils. The refinery produces a high
percentage of transportation fuels such as gasoline, jet fuel, and diesel, as
well as fuel grade petroleum coke. Finished petroleum products from the
refinery are delivered via company-owned pipelines, railcars, and trucks.
Pipelines transport most of the refined products to markets in Montana,
Wyoming, Utah, and Washington.
West Coast Region
Los Angeles Refinery
The Los Angeles refinery is composed of two linked facilities located about
five miles apart in Carson and Wilmington, California, about 15 miles southeast
of the Los Angeles International airport. Carson serves as the front-end of
the refinery by processing crude oil, and Wilmington serves as the back-end by
upgrading products. The refinery has a crude oil processing capacity of
132,000 barrels per day and processes mainly heavy high-sulfur crudes. The
refinery receives domestic crude oil via pipeline from California and foreign
and domestic crude oil by tanker through company-owned and third-party
terminals in the Port of Los Angeles. The refinery produces a high percentage
of transportation fuels such as gasoline, diesel, and jet fuel. Other products
include fuel-grade petroleum coke. The refinery produces California Air
Resources Board (CARB) gasoline using ethanol, which we use to replace methyl
tertiary-butyl ether (MTBE) to meet federally mandated oxygenate requirements.
Refined products are distributed to customers in southern California, Nevada
and Arizona by pipeline and truck.
San Francisco Area Refinery
The San Francisco Area refinery is composed of two linked facilities located
about 200 miles apart. The Santa Maria facility is located in Arroyo Grande,
California, about 200 miles south of San Francisco, while the Rodeo facility is
in the San Francisco Bay area. The refinerys crude oil processing capacity is
109,000 barrels per day of mainly heavy high-sulfur crudes. Both the Santa
Maria and Rodeo facilities have calciners to upgrade the value of the coke that
is produced. The refinery receives crude oil from central California,
including the Elk Hills oil field, and foreign crude oil by tanker.
Semi-refined liquid products from the Santa Maria facility are sent by pipeline
to the Rodeo facility for upgrading to finished petroleum products. The
refinery produces transportation fuels such as gasoline, diesel, and jet fuel.
Other products include calcine and fuel grade petroleum coke. The refinery
produces CARB gasoline using ethanol, which we use to replace MTBE to meet
federally mandated oxygenate requirements. Refined products are distributed by
pipeline, railcar, truck and barge.
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Ferndale Refinery
The Ferndale refinery in Ferndale, Washington, is about 20 miles south of the
United States-Canada border on Puget Sound. The refinery has a crude oil
processing capacity of 92,000 barrels per day. The refinery primarily receives
crude oil from the Alaskan North Slope, with secondary sources supplied by
Canada or the Far East. Ferndale operates a deepwater dock that is capable of
taking in full tankers bringing North Slope crude oil from Valdez, Alaska. The
refinery is also connected to the Terasen crude oil pipeline that originates in
Canada. The refinery produces transportation fuels such as gasoline, diesel,
and jet fuel. Other products include residual fuel oil supplying the northwest
marine transportation market. Construction of a new fluidized catalytic
cracking unit to increase the yield of transportation fuel, and a new S Zorb
unit that reduces the sulfur in gasoline, both became fully operational in
2003. Most refined products are distributed by pipeline and barge to major
markets in the northwest United States.
Marketing
In the United States, we market gasoline, diesel fuel, and aviation fuel through approximately 14,300 outlets in 44 states. The majority of these sites utilize the Conoco, Phillips 66 or 76 brands.
Wholesale
In our wholesale operations, we utilize a network of marketers and dealers
operating approximately 13,300 outlets. We place a strong emphasis on the
wholesale channel of trade because of its lower capital requirements and higher
return on capital. Our refineries and transportation systems provide strategic
support to these operations. We also buy and sell petroleum products in spot
markets. Our refined products are marketed on both a branded and unbranded
basis.
In addition to automotive gasoline and diesel fuel, we produce and market aviation gasoline, which is used by smaller, piston-engine aircraft. Aviation gasoline and jet fuel are sold through independent marketers at approximately 570 Phillips 66 branded locations in the United States.
Retail
In our retail operations, we own and operate approximately 330 sites under the
Phillips 66, Conoco and 76 brands. Company-operated retail operations are
focused in 10 states, mainly in the Midcontinent, Rocky Mountains, and West
Coast regions. Most of these outlets market merchandise through the Kicks 66,
Breakplace, or Circle K brand convenience stores.
At December 31, 2003, CFJ Properties, our 50/50 joint venture with Flying J, owned and operated 97 truck travel plazas that carry the Conoco and/or Flying J brands. The merger of Conoco and Phillips triggered change of control provisions in the joint venture agreement, giving Flying J the option to purchase our interest in CFJ Properties at fair value. A third party is determining the fair value of the joint venture. Once that binding appraised value is determined, Flying J will have 30 days to exercise their purchase option. Assuming Flying J does not exercise its purchase option, we plan to continue as a co-venturer in CFJ Properties.
Transportation
Pipelines and Terminals
At December 31, 2003, we had approximately 32,800 miles of common-carrier crude
oil, raw natural gas liquids and products pipeline systems in the United
States, including those partially owned and/or operated by affiliates. We also
owned and/or operated 76 finished product terminals, eight liquefied petroleum
gas terminals, 11 crude oil terminals and one coke exporting facility.
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Tankers
At December 31, 2003, we had under charter 13 double-hulled crude oil tankers,
with capacities ranging in size from 650,000 to 1,100,000 barrels. These
tankers are utilized to transport feedstocks to certain of our U.S. refineries.
We also had an ocean-going barge under charter, as well as a domestic fleet of
both owned and chartered boats and barges providing inland waterway
transportation. The information above excludes the operations of the companys
subsidiary, Polar Tankers Inc., which is discussed in the E&P section, as well
as an owned tanker on lease to a third party for use in the North Sea.
Specialty Businesses
We manufacture and sell a variety of lubricants and specialty products including petroleum cokes, lubes (such as automotive and industrial lubricants), solvents, and pipeline flow improvers to commercial, industrial and wholesale accounts worldwide.
Lubricants are marketed under the Conoco, Phillips 66, 76 Lubricants and Kendall Motor Oil brands. The distribution network consists of over 900 outlets, including mass merchandise stores, fast lubes, tire stores, automotive dealers, and convenience stores. Lubricants are also sold to industrial customers in many markets.
Excel Paralubes is a joint-venture hydrocracked lubricant base oil manufacturing facility, located adjacent to our Lake Charles refinery, and is 50 percent owned by us. Excel Paralubes lube oil facility produces approximately 20,000 barrels per day of high-quality, clear hydrocracked base oils. Hydrocracked base oils are second in quality only to synthetic base oils, but are produced at a much lower cost. The Lake Charles refinery supplies Excel Paralubes with gas-oil feedstocks. We purchase 50 percent of the joint ventures output, and market it to third parties.
We have a 50 percent interest in Penreco, a fully integrated specialties company, which manufactures and markets highly refined specialty petroleum products, including solvents, waxes, petrolatums and white oils, for global markets.
We manufacture high-quality graphite and anode-grade cokes in the United States and Europe, for use in the global steel and aluminum industries. Venco is a coke calcining joint venture in which we have a 50 percent interest. Base green petroleum coke volumes are supplied to Vencos Lake Charles calcining facility from our Alliance, Lake Charles, and Ponca City refineries.
INTERNATIONAL
Refining
At December 31, 2003, we owned or had an interest in six refineries outside the United States with an aggregate rated crude oil capacity of 442,000 net barrels per day. The average purchase cost of crude oil delivered to the companys international refineries in 2003 was $28.94 per barrel, compared with $24.55 per barrel in 2002.
Humber Refinery
Our wholly owned Humber refinery is located in North Lincolnshire, United
Kingdom. The refinerys crude oil processing capacity is 234,000 barrels per
day. Crude oil processed at the refinery is supplied primarily from the North
Sea and includes lower-cost, acidic crudes. The refinery also processes other
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intermediate feedstocks, mostly vacuum gas oils and residual fuel oil. The refinerys location on the east coast of England provides for cost-effective North Sea crude imports and product exports to European and world markets.
The Humber refinery is a fully integrated refinery that produces a full slate of light products and minimal fuel oil. The refinery also has two coking units with associated calcining plants, which upgrade the heavy bottoms and imported feedstocks into light-oil products and high-value graphite and anode petroleum cokes. Approximately 60 percent of the light oils produced in the refinery are marketed in the United Kingdom, while the other products are exported to the rest of Europe and the United States.
Whitegate Refinery
The Whitegate refinery is located in Cork, Ireland, and in 2003 had a crude oil
processing capacity of 72,000 barrels per day. Effective January 1, 2004, the
rated processing capacity was increased to 75,000 barrels per day due to
incremental debottlenecking. Crude oil processed by the refinery is light
sweet crude sourced mostly from the North Sea. The refinery primarily produces
transportation fuels and fuel oil, which are distributed to the inland market
via truck and sea, as well as being exported to the European market. We also
operate a deepwater crude oil and products storage complex with a 7.5 million
barrel capacity in Bantry Bay, Cork, Ireland.
MiRO Refinery
The Mineraloel Raffinerie Oberrhein GmbH (MiRO) refinery in Karlsruhe, Germany,
is a joint-venture refinery with a crude oil processing capacity of 283,000
barrels per day. We have an 18.75 percent interest in MiRO, giving us a net
capacity share of 53,000 barrels per day. Approximately 60 percent of the
refinerys crude oil feedstock is low-cost, high-sulfur crude. The MiRO
complex is a fully integrated refinery producing gasoline, middle distillates,
and specialty products along with a small amount of residual fuel oil. The
refinery has a high capacity to convert lower-cost feedstocks into higher value
products, primarily with a fluid catalytic cracker and delayed coker. The
refinery produces both fuel grade and specialty calcined cokes. The refinery
processes crude and other feedstocks supplied by each of the partners in
proportion to their respective ownership interests.
Czech Republic Refineries
Through our participation in Ceská rafinérská, a.s.
(CRC), we have a 16.33 percent ownership in two refineries in the Czech Republic, giving us a net
capacity share of 27,000 barrels per day. Effective January 1, 2004, the rated
crude oil processing capacity was increased to 28,000 barrels per day for our
share, due to incremental debottlenecking. The refinery at Litvinov has a
crude oil processing capacity of 109,200 barrels per day and processes low cost
Russian export blend crude oil delivered from Russia by pipeline.
Litvinov
includes both hydrocracking and visbreaking, producing a high yield of
transport fuels and petrochemical feedstocks and only a small amount of fuel
oil. The Kralupy refinery has a crude oil processing capacity of 60,800
barrels per day and processes low sulfur crude, mostly from the Mediterranean.
Kralupy has a new fluidized catalytic cracking unit, which gives the refinery a
high yield of transport fuels. The two refineries complement each other and
are run on an overall optimized basis, with certain intermediate streams moving
between the two plants. CRC processes crude and other feedstocks supplied by
ConocoPhillips and the other partners, with each partner receiving their
proportionate share of the resulting products. We market our share of these
finished products in both the Czech Republic and in neighboring markets.
Melaka Refinery
The refinery in Melaka, Malaysia, is a joint venture with Petronas, the
Malaysian state oil company. We own a 47 percent interest in the joint
venture. In 2003, the refinery had a rated crude oil processing capacity of
120,000 barrels per day, of which our share was 56,000 barrels per day.
Effective January 1,
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2004, our share of the rated crude oil processing capacity was increased to 57,500 barrels per day due to incremental debottlenecking. Crude oil processed by the refinery is sourced mostly from the Middle East. The refinery produces a full range of refined petroleum products. The refinery capitalizes on our proprietary coking technology to upgrade low-cost feedstocks to higher-margin products. Our share of refined products is distributed by truck to the companys ProJET retail sites in Malaysia, or transported by sea primarily to Asian markets.
Marketing
We have marketing operations in 15 European countries. Our European marketing strategy is to sell primarily through owned, leased or joint-venture retail sites using a low-cost, high-volume, low-price strategy. We also market aviation fuels, liquid petroleum gases, heating oils, transportation fuels and marine bunkers to commercial customers and into the bulk or spot market.
We use the JET brand name to market retail and wholesale products in our wholly owned operations in Austria, Belgium, the Czech Republic, Denmark, Finland, Germany, Hungary, Luxembourg, Norway, Poland, Slovakia, Sweden and the United Kingdom. In addition, various joint ventures in which we have an equity interest market products in Switzerland and Turkey under the Coop and Tabas or Turkpetrol brand names, respectively.
As of December 31, 2003, we had approximately 2,100 marketing outlets in our European operations, of which about 1,200 were company-owned, and 900 were dealer-owned. Through our joint venture operations in Turkey and Switzerland, we also have interests in approximately 800 additional sites.
The companys largest branded site networks are in Germany and the United Kingdom, which account for approximately 60 percent of our total European branded units.
As of December 31, 2003, we had approximately 140 marketing outlets in our wholly owned Thailand operations in Asia. In addition, through a joint venture in Malaysia with Sime Darby Bhd., a company that has a major presence in the Malaysian business sector, we also have an interest in another approximately 40 retail sites. In Thailand and Malaysia, retail products are marketed under the JET and ProJET brands, respectively.
CHEMICALS
On July 1, 2000, ConocoPhillips and ChevronTexaco combined their worldwide chemicals businesses, excluding ChevronTexacos Oronite business, into a new company, Chevron Phillips Chemical Company LLC (CPChem). In addition to contributing the assets and operations included in our Chemicals segment, we also contributed the natural gas liquids business associated with our Sweeny, Texas, complex. ConocoPhillips and ChevronTexaco each own 50 percent of CPChem. We use the equity method of accounting for our investment in CPChem.
CPChem, headquartered in The Woodlands, Texas, has 32 production facilities and six research and technology centers. CPChem uses natural gas liquids and other feedstocks to produce petrochemicals such as ethylene, propylene, styrene, benzene and paraxylene. These products are then marketed and sold, or used as feedstocks to produce plastics and commodity chemicals, such as polyethylene, polystyrene, and cyclohexane.
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CPChems domestic production facilities are located at Baytown, Borger, Conroe, La Porte, Orange, Pasadena, Port Arthur and Old Ocean, Texas; St. James, Louisiana; Pascagoula, Mississippi; Marietta, Ohio; and Guayama, Puerto Rico. CPChem also has nine plastic pipe plants and one pipe fittings plant in eight states.
Major international production facilities are located in Belgium, China, Saudi Arabia, Singapore, South Korea and Qatar. There is one plastic pipe plant in Mexico.
CPChem has research facilities in Oklahoma, Ohio and Texas, as well as in Singapore and Belgium.
Construction of a major olefins and polyolefins complex in Mesaieed, Qatar, named Q-Chem I, was completed in 2003. The facility, which is operating and in the final stages of performance testing, has an annual capacity of approximately 1.1 billion pounds of ethylene, 1 billion pounds of polyethylene and 100 million pounds of 1-hexene. CPChem has a 49 percent interest, with a Qatar state firm owning the remaining 51 percent interest.
CPChem has also signed an agreement for the development of a second complex to be built in Mesaieed, Qatar, named Q-Chem II. The facility will be designed to produce polyethylene and normal alpha olefins, on a site adjacent to the newly-constructed Q-Chem I complex. CPChem and Qatar Petroleum, through the Q-Chem II joint venture, entered into a separate agreement with Atofina and Qatar Petrochemical Company to jointly develop an ethane cracker in northern Qatar at Ras Laffan Industrial City. Final approval of the Q-Chem II projects by CPChems Board of Directors is expected to be requested in 2005, with startup expected in 2008.
CPChem announced plans in 2002 for a 50 percent-owned joint venture project in Al Jubail, Saudi Arabia. The project includes the construction of an integrated olefins, ethyl benzene and styrene monomer facility on a site adjacent to the existing aromatics complex owned by Saudi Chevron Phillips Company, a 50 percent-owned CPChem joint venture. The project also includes the expansion of Saudi Chevron Phillips Companys benzene facility. This additional benzene capacity will be used to provide feedstock for the new facility. Final approval of the project by CPChems Board of Directors is expected to be requested in 2004, with operational startup expected in 2007.
A brief description of CPChems major product lines follows.
Olefins and Polyolefins
Ethylene: Ethylene is a basic building block for plastics and also a raw
material for chemicals used to make paints, detergents and antifreeze.
Ethylene is produced at Old Ocean, Port Arthur and Baytown, Texas, as well as
in Qatar. CPChems net annual capacity at December 31, 2003, was approximately
8.1 billion pounds.
Polyethylene: Polyethylene is used to make a wide variety of plastic products, including various containers, shopping and trash bags, and plastic films. Polyethylene is produced at Pasadena, Baytown, and Orange, Texas, as well as in China, Singapore and Qatar. CPChems net annual capacity at December 31, 2003, was approximately 5.9 billion pounds.
Plastic Pipe: Polyethylene plastic pipe is produced at nine plants in the United States and one plant in Mexico. Pipe fittings are produced at one plant in the United States. CPChems net annual capacity at December 31, 2003, was approximately 564 million pounds.
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Normal Alpha Olefins: Normal alpha olefins can be custom blended for special applications and are used extensively as polyethylene comonomers and are also used in synthetic lubricants and additives. Normal alpha olefins are produced at Baytown, Texas and in Qatar. CPChems net annual capacity at December 31, 2003, was approximately 1.5 billion pounds.
Aromatics and Styrenics
Styrene: Styrene, produced from benzene and ethylene, is used as a feedstock
for polystyrene and is also used to produce a variety of polymers with end-uses
that include packaging, rubber products, automotive and other applications.
Styrene is produced at St. James, Louisiana. CPChems net annual capacity at
December 31, 2003, was approximately 2.1 billion pounds.
Polystyrene: Polystyrene is a thermoplastic polymer used to make packing materials, cups, toys, furniture, and housewares. It is produced at Marietta, Ohio, and in China. CPChems net annual capacity at December 31, 2003, was approximately 990 million pounds.
Benzene: Benzene is a building block chemical used in the production of ethylbenzene, cumene, and cyclohexane. Benzene is produced at Pascagoula, Mississippi and in Saudi Arabia. CPChems net annual capacity at December 31, 2003, was approximately 2.1 billion pounds.
Cyclohexane: Cyclohexane is a derivative of benzene that is predominantly used in intermediates for the manufacture of nylon. It is produced at Port Arthur, Texas, and in Saudi Arabia. CPChems net annual capacity at December 31, 2003, was approximately 1.2 billion pounds. This includes the capacity of a new plant in Port Arthur that commenced operations in February 2004, and excludes the capacity of a plant, also in Port Arthur, that was shut down. In addition, CPChem markets cyclohexane production from ConocoPhillips Sweeny and Borger complexes.
K-Resin®: K-Resin® is a styrene-butadiene copolymer used to produce a clear, shatter-resistant resin. It is produced at Pasadena, Texas, and in South Korea. CPChems net annual capacity at December 31, 2003, was approximately 269 million pounds.
Paraxylene: Paraxylene is an aromatic used as a feedstock for polyester and certain plastics. It is currently produced at Pascagoula, Mississippi. The Pascagoula plants annual capacity at December 31, 2003, was approximately 1.0 billion pounds. A plant in Guayama, Puerto Rico, with an annual capacity at December 31, 2003, of approximately 715 million pounds, was reconfigured in 2003 and is currently idled. Operations at the Puerto Rico plant could resume when market conditions improve.
Specialty Products
Specialty Chemicals: CPChem manufactures, markets and distributes organosulfur,
paraffinic, olefinic and aromatic specialty chemicals as well as a complete
line of natural gas odorants, specialty catalysts, specialty fuels, mining
chemicals and oilfield drilling additives, enhancers and cements. These
products are manufactured and processed in Borger and Conroe, Texas, and
Tessenderlo, Belgium.
Ryton® Polyphenylene Sulfide: CPChem produces high-performance polyphenylene sulfide polymers (PPS) sold under the trademark Ryton®, which is produced at Borger, Texas. CPChems annual capacity of Ryton PPS at December 31, 2003, was 22 million pounds. Ryton PPS compounds are produced at La Porte, Texas, as well as in Belgium and Singapore. These facilities have a net annual capacity of approximately 44 million pounds of Ryton PPS compounds in the aggregate.
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EMERGING BUSINESSES
Emerging Businesses encompass the development of new businesses beyond our traditional operations. As a result of market, operating and technological uncertainties, we terminated our carbon fibers project during 2003.
GAS-TO-LIQUIDS (GTL)
The GTL process refines natural gas into a wide range of transportable products. Our GTL research facility is located in Ponca City, Oklahoma, and includes laboratories, pilot plants, and a demonstration plant to facilitate technology advancements. The 400 barrel-per-day demonstration plant, designed to produce clean fuels from natural gas, was completed in April 2003. The plant has been commissioned and operations started, with thorough testing scheduled throughout 2004.
TECHNOLOGY SOLUTIONS
Our Technology Solutions businesses provide technologies and services that can be used in our operations or licensed to third parties. Downstream, major product lines include sulfur removal technologies (S Zorb), alkylation technologies (ReVAP), and delayed coking technologies. For upstream and downstream, Technology Solutions offers analytical services, pilot plant, and industrial hygiene services.
POWER GENERATION
The focus of our power business is on developing integrated projects in support of the companys E&P and R&M strategies and business objectives. The projects that enable these strategies are included within the respective E&P and R&M segments. The projects and assets that have a significant merchant component are included in the Emerging Businesses segment.
The power business is developing a 730-megawatt gas-fired combined heat and power plant in North Lincolnshire, United Kingdom. The facility will provide steam and electricity to the Humber refinery and steam to a neighboring refinery, as well as market power into the U.K. market. Construction began in 2002, with commercial operation anticipated in 2004.
We also own or have an interest in gas-fired cogeneration plants in Orange and Corpus Christi, Texas, and a petroleum coke-fired plant in Lake Charles, Louisiana.
EMERGING TECHNOLOGY
Emerging Technology focuses on developing new business opportunities designed to provide growth options for ConocoPhillips well into the future. Example areas of interest include renewable energy, advanced hydrocarbon processes, energy conversion technologies and new petroleum-based products.
COMPETITION
We compete with private, public and state-owned companies in all facets of the petroleum and chemicals businesses. Some of our competitors are larger and have greater resources. Each of the segments in which we operate is highly competitive. No single competitor, or small group of competitors, dominates any of our business lines.
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Upstream, our E&P segment competes with numerous other companies in the industry to locate and obtain new sources of supply, and to produce oil and natural gas in an efficient, cost-effective manner. Based on reserves statistics published in the September 15, 2003, issue of the Oil and Gas Journal, we had the eighth-largest total of worldwide reserves of non-government-controlled companies. We deliver our oil and natural gas production into the worldwide oil and natural gas commodity markets. The principal methods of competing include geological, geophysical and engineering research and technology; experience and expertise; and economic analysis in connection with property acquisitions.
The Midstream segment, through our equity investment in DEFS and our consolidated operations, competes with numerous other integrated petroleum companies, as well as natural gas transmission and distribution companies, to deliver the components of natural gas to end users in the commodity natural gas markets. DEFS is one of the largest producers of natural gas liquids in the United States, based on the November 17, 2003, Gas Processors Report. DEFS principle methods of competing include economically securing the right to purchase raw natural gas into its gathering systems, managing the pressure of those systems, operating efficient natural gas liquids processing plants, and securing markets for the products produced.
Downstream, our R&M segment competes primarily in the United States, Europe and the Asia Pacific region. Based on the statistics published in the December 22, 2003, issue of the Oil and Gas Journal, we had the largest U.S. refining capacity of about 15 large refiners of petroleum products. Worldwide, we ranked fourth among non-government-controlled companies. In the Chemicals segment, through our equity investment, CPChem generally ranks within the top 10 producers of its major product lines, based on average 2003 production capacity, as published by Chemical Market Associates Inc. Petroleum products, petrochemicals and plastics are delivered into the worldwide commodity markets. Elements of downstream competition include product improvement, new product development, low-cost structures, and manufacturing and distribution systems. In the marketing portion of the business, competitive factors include product properties and processibility, reliability of supply, customer service, price and credit terms, advertising and sales promotion, and development of customer loyalty to ConocoPhillips or CPChems branded products.
GENERAL
At the end of 2003, we held a total of 1,918 active patents in 68 countries worldwide, including 733 active U.S. patents. During 2003, we received 57 patents in the United States and 136 foreign patents. Our products and processes generated licensing revenues of $35 million in 2003. The overall profitability of any business segment is not dependent on any single patent, trademark, license, franchise or concession.
Company-sponsored research and development activities charged against earnings were $136 million, $355 million and $44 million in 2003, 2002 and 2001, respectively.
The environmental information contained in Managements Discussion and Analysis on pages 72 through 75 under the caption, Environmental is incorporated herein by reference. It includes information on expensed and capitalized environmental costs for 2003 and those expected for 2004 and 2005.
Like all major international oil companies, we have for many years operated in countries that are subject to U.S. government restrictions or prohibitions on business activities by U.S. companies. In some cases, business is permitted if we have received a license from the Office of Foreign Assets Control (OFAC). The regulations implementing the restrictions are complicated and subject to interpretation by OFAC. We have programs designed to ensure compliance with the restrictions and believe that our present operations comply with applicable laws and regulations.
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In view of recent political, diplomatic and military developments in the Middle East, and throughout the world, we have reexamined our policies and procedures in order to prevent any actions that would violate the letter, or even the spirit of the restrictions. These developments may affect prices, production levels, allocation and distribution of raw materials and products, including their import, export and ownership; the amount of tax and timing of payment; and the cost of compliance with environmental regulations.
Following the events of September 11, 2001, a number of institutional investors and state governmental agencies have questioned the appropriateness of U.S. companies transacting business in or with any country that has reportedly been linked to terrorism, even if the country is not subject to legal restrictions. We have reexamined our policies and business ventures to ensure that our activities in or with certain countries are consistent with the U.S. governments policy, interests and objectives in such countries.
Web Site Access to SEC Reports
Our Internet Web site address is http://www.conocophillips.com. Information contained on our Internet Web site is not part of this report on Form 10-K.
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available on our Web site, free of charge, as soon as reasonably practicable after such reports are filed with, or furnished to, the SEC. Alternatively, you may access these reports at the SECs Internet Web site at http://www.sec.gov.
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Item 3. LEGAL PROCEEDINGS
The following is a description of reportable legal proceedings including those involving governmental authorities under federal, state and local laws regulating the discharge of materials into the environment for this reporting period. The following proceedings include those matters that arose during the fourth quarter of 2003 and those matters previously reported in ConocoPhillips 2002 Form 10-K and our first-, second- and third-quarter 2003 Forms 10-Q that have not been resolved. While it is not possible to accurately predict the final outcome of these pending proceedings, if any one or more of such proceeding was decided adversely to ConocoPhillips, there would be no material effect on our consolidated financial position. Nevertheless, such proceedings are reported pursuant to the United States Securities and Exchange Commissions regulations.
In December 2003, we entered into an Administrative Consent Order and Notice of Noncompliance with the Massachusetts Department of Environmental Protection for alleged violations of State II and Hazardous Waste requirements at various retail gasoline outlets formerly owned by us. This Consent Agreement provides for the payment of a civil administrative penalty in the amount of $106,250.
In November 2003, the U.S. Environmental Protection Agency (EPA) issued us a notice of violation for alleged violations of the gasoline Reid Vapor Pressure rules in 1999, 2000 and 2001 at our Wood River and Billings refineries. The notice of violation seeks a proposed penalty of $127,000. We are currently working with EPA toward a negotiated resolution of this matter.
On September 17, 2003, U.S. EPA Region 10 notified ConocoPhillips of its intent to assess civil penalties for alleged National Pollution Discharge Elimination System (NPDES) permit violations at our Tyonek offshore platform located near Cook Inlet, Alaska. The alleged violations arise from our July 2003 NPDES self-disclosure report to EPA Region 10. On February 10, 2004, EPA Region 10 issued to us a proposed Complaint for Civil Penalties and a proposed Consent Decree for the alleged permit violations. The proposed consent decree provides for the payment of a $450,000 civil penalty. We are currently working with the EPA and the U.S. Department of Justice (DOJ) on the terms of the agreements and expect the matter to be finalized by the end of the second quarter of 2004.
On August 24, 2003, the Contra Costa County District Attorneys Office in California issued a demand letter to ConocoPhillips seeking civil penalties in the amount of $524,000 for 31 alleged violations of the Bay Area Air Quality Management District regulations at our Rodeo facility of the San Francisco area refinery. The demand has been reduced to $361,000. These alleged violations cover the period from mid-2001 through August 2003. We are currently working with the Contra Costa County District Attorneys Office toward a negotiated resolution of this matter.
In August of 2003, EPA Region 6 issued a Show Cause Order alleging violations of the Clean Water Act at the Borger refinery. The alleged violations relate primarily to discharges of selenium and reported exceedances of permit limits for whole effluent toxicity. We met with EPA staff on October 29, 2003, to discuss the allegations. We believe the EPA staff is evaluating the information presented at the meeting. The EPA has not yet proposed a penalty amount.
On December 31, 2002, we received a Revised Proposed Agreed Order, which amended the June 24, 2002, Proposed Agreed Order, from the Texas Commission on Environmental Quality (TCEQ), proposing a penalty of $458,163 in connection with alleged air emission violations at our Borger refinery as a result of an inspection conducted by the TCEQ in October 2000. On March 19, 2003, the TCEQ issued a recalculation of the proposed penalty in the amount of $467,834. We are currently working with TCEQ toward a negotiated resolution of this matter.
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On December 17, 2002, the DOJ notified ConocoPhillips of various alleged violations of the NPDES permit for the Sweeny refinery. DOJ asserts that these alleged violations occurred at various times during the period beginning January 1997 through July 2002. We have reached a tentative agreement with the DOJ that will require us to pay a civil penalty and/or perform certain work valued at $700,000.
In December 2002, the Louisiana Department of Environmental Quality (LDEQ) notified ConocoPhillips of its intent to assess civil penalties for over 120 alleged regulatory violations at various Circle K stores in the Baton Rouge, Louisiana area. On October 6, 2003, the LDEQ notified ConocoPhillips that the civil penalty assessment for these alleged violations is $189,659. This matter was settled in November 2003.
On November 14, 2002, the TCEQ issued a proposed agreed Findings Order to resolve alleged water discharge violations of the Texas Water Code and Commission Rules at the Sweeny refinery for the period beginning March 2000 through July 2002. The proposed order assesses a penalty in the amount of $488,125. We have agreed with the TCEQ to settlement terms that are expected to be finalized during the first quarter of 2004.
On July 15, 2002, the United States filed a Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) cost recovery action against ConocoPhillips alleging that the United States has incurred unreimbursed oversight costs at the Lowry Superfund Site located in Arapahoe County, Colorado. The United States seeks recovery of approximately $12.3 million in past oversight costs and a declaratory judgment for future CERCLA response cost liability. Pursuant to the terms of a prior settlement agreement between us, Waste Management, Inc. and others, Waste Management has assumed our defense for this matter and it is our position that Waste Management should indemnify us for any liability arising from this action.
We have responded to information requests from EPA regarding New Source Review compliance at our Alliance, Bayway, Borger, Ferndale, Los Angeles, Sweeny, Trainer, and Wood River refineries; and the Rodeo and Santa Maria units of our San Francisco refinery. Although we have not been notified of any formal findings or violations arising from these information requests, we have been informed that the EPA is contemplating the filing of a civil proceeding against us for alleged violations of the Clean Air Act. We are currently seeking a negotiated resolution of these matters, which will likely result in increased environmental capital expenditures and governmental monetary sanctions.
All significant litigation arising from the March 27, 2000, explosion and fire that occurred in an out-of-service butadiene storage tank at the K-Resin® styrene-butadiene copolymer plant has now been resolved.
In June of 1997, we experienced pipeline spills on our Seminole pipeline at Banner, Wyoming, and Lodge Grass, Montana. In response to these spills, the DOJ advised us in August 2000 that the United States is contemplating a legal proceeding under the Clean Water Act against us. We and DOJ have reached a tentative agreement that will require us to pay a $465,000 civil penalty.
Additionally, we are subject to various lawsuits and claims including, but not limited to: actions challenging oil and gas royalty and severance tax payments; actions related to gas measurement and valuation methods; actions related to joint interest billings to operating agreement partners; and claims for damages resulting from leaking underground storage tanks or other accidental releases, with related toxic tort claims. As a result of Conocos separation agreement with DuPont in October 1998, we also have assumed responsibility for current and future claims related to certain discontinued chemicals and agricultural chemicals businesses operated by Conoco in the past. In general, the effect on future financial results is not subject to reasonable estimation because considerable uncertainty exists. The ultimate liabilities resulting from such lawsuits and claims may be material to results of operations in the period in which they are recognized.
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EXECUTIVE OFFICERS OF THE REGISTRANT
Name | Position Held | Age* | ||||
Rand C. Berney | Vice President and Controller
|
48 | ||||
William B. Berry | Executive Vice President, Exploration and Production
|
51 | ||||
John A. Carrig | Executive Vice President, Finance, and Chief Financial Officer
|
52 | ||||
Archie W. Dunham | Chairman of the Board of Directors
|
65 | ||||
Philip L. Frederickson | Executive Vice President, Commercial
|
47 | ||||
Stephen F. Gates | Senior Vice President, Legal, and General Counsel
|
57 | ||||
John E. Lowe | Executive Vice President, Planning, Strategy and Corporate Affairs
|
45 | ||||
J. J. Mulva | President and Chief Executive Officer
|
57 | ||||
J. W. Nokes | Executive Vice President, Refining, Marketing, Supply and
Transportation
|
57 |
*On March 1, 2004. |
There is no family relationship among the officers named above. Each officer of the company is elected by the Board of Directors at its first meeting after the Annual Meeting of Stockholders and thereafter as appropriate. Each officer of the company holds office from date of election until the first meeting of the directors held after the next Annual Meeting of Stockholders or until a successor is elected. The date of the next annual meeting is May 5, 2004. Set forth below is information concerning the executive officers.
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Rand C. Berney was appointed Vice President and Controller of ConocoPhillips upon completion of the merger. Prior to the merger, he was Phillips Vice President and Controller since 1997.
William B. Berry was appointed Executive Vice President, Exploration and Production of ConocoPhillips on January 1, 2003, having previously served as President of ConocoPhillips Asia Pacific operations since completion of the merger. Prior to the merger, he was Phillips Senior Vice President E&P Eurasia-Middle East operations since 2001; and Phillips Vice President E&P Eurasia operations since 1998.
John A. Carrig was appointed Executive Vice President, Finance, and Chief Financial Officer of ConocoPhillips upon completion of the merger. Prior to the merger, he was Phillips Senior Vice President and Chief Financial Officer since 2001; Phillips Senior Vice President, Treasurer and Chief Financial Officer since 2000; and Phillips Vice President and Treasurer since 1996.
Archie W. Dunham was appointed Chairman of the Board of Directors of ConocoPhillips upon completion of the merger. Prior to the merger, he was Conocos Chairman of the Board, President and Chief Executive Officer since 1999; and Conocos President and Chief Executive Officer since 1996.
Philip L. Frederickson was appointed Executive Vice President, Commercial of ConocoPhillips upon completion of the merger. Prior to the merger, he was Conocos Senior Vice President of Corporate Strategy and Business Development since 2001; and Conocos Vice President of Business Development since 1998.
Stephen F. Gates was appointed Senior Vice President, Legal, and General Counsel of ConocoPhillips effective May 1, 2003. Prior to joining ConocoPhillips, he was a partner at Mayer, Brown, Rowe & Maw. Previously, he served as senior vice president and general counsel of FMC Corporation in 2000 and 2001. Prior to that, he served at BP Amoco (now BP plc) where he was executive vice president and group chief of staff after serving as vice president and general counsel of Amoco.
John E. Lowe was appointed Executive Vice President, Planning, Strategy and Corporate Affairs of ConocoPhillips upon completion of the merger. Prior to the merger, he was Phillips Senior Vice President, Corporate Strategy and Development since 2001; Phillips Senior Vice President of Planning and Strategic Transactions since 2000; Phillips Vice President of Planning and Strategic Transactions since 1999; and Phillips Manager of Strategic Growth Projects since earlier in 1999.
J. J. Mulva was appointed President and Chief Executive Officer of ConocoPhillips upon completion of the merger. Prior to the merger, he was Phillips Chairman of the Board of Directors and Chief Executive Officer since 1999; and Phillips Vice Chairman of the Board of Directors, President, and Chief Executive Officer since earlier in 1999.
J. W. Nokes was appointed Executive Vice President, Refining, Marketing, Supply and Transportation of ConocoPhillips upon completion of the merger. Prior to the merger, he was Conocos Executive Vice President, Worldwide Refining, Marketing, Supply and Transportation since 1999.
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PART II
Item 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Quarterly Common Stock Prices and Cash Dividends Per Share
ConocoPhillips common stock began trading on September 3, 2002, the first trading day after the effective date of the merger. ConocoPhillips common stock is traded on the New York Stock Exchange, under the symbol COP.
Stock Price |
||||||||||||
High | Low | Dividends | ||||||||||
2003 |
||||||||||||
First |
$ | 53.85 | 45.14 | .40 | ||||||||
Second |
55.95 | 49.67 | .40 | |||||||||
Third |
57.53 | 51.29 | .40 | |||||||||
Fourth |
66.04 | 54.29 | .43 | |||||||||
2002 |
||||||||||||
Third (from September 3) |
$ | 53.20 | 45.87 | .36 | ||||||||
Fourth |
50.75 | 44.03 | .40 | |||||||||
Phillips Petroleum Companys (predecessor to ConocoPhillips) stock was traded primarily on the New York, Pacific and Toronto stock exchanges. On August 30, 2002, it ceased trading.
Stock Price |
||||||||||||
Phillips Petroleum Company (predecessor to ConocoPhillips) | High | Low | Dividends | |||||||||
2002 |
||||||||||||
First |
$ | 63.80 | 55.30 | .36 | ||||||||
Second |
64.10 | 54.53 | .36 | |||||||||
Third (through August 30) |
59.21 | 44.75 | N/A | |||||||||
Closing Stock Price at December 31, 2003 |
$ | 65.57 | ||||||||||
Closing Stock Price at January 31, 2004 |
$ | 65.88 | ||||||||||
Number of Stockholders of Record at January 31, 2004* |
59,165 | |||||||||||
* | In determining the number of stockholders, we consider clearing agencies and security position listings as one stockholder for each agency or listing. |
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Item 6. SELECTED FINANCIAL DATA
Millions of Dollars Except Per Share Amounts |
||||||||||||||||||||
2003 | 2002 | * | 2001 | * | 2000 | 1999 | ||||||||||||||
Sales and other operating
revenues |
$ | 104,196 | 56,748 | 24,892 | 22,155 | 14,988 | ||||||||||||||
Income from continuing operations |
4,593 | 698 | 1,601 | 1,848 | 604 | |||||||||||||||
Per common share |
||||||||||||||||||||
Basic |
6.75 | 1.45 | 5.46 | 7.26 | 2.39 | |||||||||||||||
Diluted |
6.70 | 1.44 | 5.43 | 7.21 | 2.37 | |||||||||||||||
Net income (loss) |
4,735 | (295 | ) | 1,661 | 1,862 | 609 | ||||||||||||||
Per common share |
||||||||||||||||||||
Basic |
6.96 | (.61 | ) | 5.67 | 7.32 | 2.41 | ||||||||||||||
Diluted |
6.91 | (.61 | ) | 5.63 | 7.26 | 2.39 | ||||||||||||||
Total assets |
82,455 | 76,836 | 35,217 | 20,509 | 15,201 | |||||||||||||||
Long-term debt |
16,340 | 18,917 | 8,610 | 6,622 | 4,271 | |||||||||||||||
Mandatorily redeemable other
minority interests and preferred
securities |
141 | 491 | 650 | 650 | 650 | |||||||||||||||
Cash dividends declared per
common share |
1.63 | 1.48 | 1.40 | 1.36 | 1.36 | |||||||||||||||
* | Income from continuing operations, including related per share amounts, have been restated to reflect the adoption of Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections, as it relates to the classification of premiums paid on the early retirement of debt. |
See Managements Discussion and Analysis of Financial Condition and Results of Operations for a discussion of factors that will enhance an understanding of this data. The following transactions affect the comparability of the amounts included in the table above:
| The merger of Conoco and Phillips in 2002; | |||
| The classification of a substantial portion of our retail marketing operations as discontinued operations in late 2002; | |||
| The acquisition of Tosco Corporation in 2001; | |||
| The acquisition of Atlantic Richfield Companys Alaskan operations in 2000; and | |||
| The contribution of a significant portion of the companys midstream and chemicals businesses into joint ventures accounted for using equity-method accounting in 2000. |
Also, see Note 2Changes in Accounting Principles, in the Notes to Consolidated Financial Statements, for information on changes in accounting principles that affect the comparability of the amounts included in the table above.
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Item 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
February 25, 2004
Managements Discussion and Analysis is the companys analysis of its financial performance and of significant trends that may affect future performance. It should be read in conjunction with the financial statements and notes, and supplemental oil and gas disclosures. It contains forward-looking statements including, without limitation, statements relating to the companys plans, strategies, objectives, expectations, intentions, and resources that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The words intends, believes, expects, plans, scheduled, anticipates, estimates, and similar expressions identify forward-looking statements. The company does not undertake to update, revise or correct any of the forward-looking information unless required to do so under the federal securities laws. Readers are cautioned that such forward-looking statements should be read in conjunction with the companys disclosures under the heading: CAUTIONARY STATEMENT FOR THE PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, beginning on page 83.
RESULTS OF OPERATIONS
Merger of Conoco and Phillips
On August 30, 2002, Conoco Inc. (Conoco) and Phillips Petroleum Company (Phillips) combined their businesses by merging with wholly owned subsidiaries of a new company named ConocoPhillips (the merger). The merger was accounted for using the purchase method of accounting, with Phillips designated as the acquirer for accounting purposes. Because Phillips was designated as the acquirer, its operations and results are presented in this annual report for all periods prior to the close of the merger. From the merger date forward, the operations and results of ConocoPhillips reflect the combined operations of the two companies.
Business Environment and Executive Summary
Our overall earnings depend primarily upon the profitability of our Exploration and Production (E&P) and Refining and Marketing (R&M) segments. Our earnings normally are less impacted by results from the Midstream, Chemicals and Emerging Businesses segments.
Crude oil and natural gas prices, along with refining margins, play the most significant roles in our profitability. These prices and margins are driven by market factors over which we have no control. However, from a competitive perspective, there are other important factors that we must manage well to be successful, including:
| Operating our producing properties and refining and marketing operations safely, consistently and in an environmentally sound manner. Safety is our first priority and we are committed to protecting the health and safety of everyone who has a role in our operations. Consistently high utilization rates at our refineries, minimizing downtime in producing fields, and maximizing the development of our reserves all enable us to capture the value the market gives us in terms of prices and margins. Finally, our operations are conducted in a manner that emphasizes our environmental stewardship. |
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| Controlling costs and expenses. Since we cannot control the prices of the commodity products we sell, keeping our operating and overhead costs low, within the context of our commitment to safety and environmental stewardship, is a top priority. We monitor these costs using various methodologies that are reported to senior management monthly, on both an absolute-dollar basis and a per-unit basis. Low operating and overhead costs are critical to maintaining competitive positions in our industries, as such, cost control is a component of our variable compensation programs. | |||
| Selecting the appropriate projects in which to invest our capital dollars. We participate in capital-intensive industries. As a result, we must often invest significant capital dollars to explore for new oil and gas fields, develop newly discovered fields, maintain existing fields, or continue to maintain and improve our refinery complexes. We invest in those projects that are expected to provide an adequate financial return on invested dollars. However, there are often long lead times from the time we make an investment to the time that investment is operational and begins generating financial returns. Our capital spending in 2003 totaled $6.2 billion, and we anticipate capital spending to be approximately $6.9 billion in 2004. | |||
| Evaluating our asset portfolio. We continue to evaluate opportunities to acquire assets that will contribute to future growth at competitive prices. We also continually assess our assets to determine if any no longer fit our growth strategy and should be sold or otherwise disposed. This management of our asset portfolio is important to ensuring our long-term growth and maintaining adequate financial returns. | |||
| Hiring, developing and retaining a talented workforce. We want to attract, train, develop and retain individuals with the knowledge and skills to implement our business strategy and who support our values and ethics. |
Many of our key performance indicators are shown in the statistical tables provided at the beginning of our operating segment sections that follow. These include crude oil and natural gas prices and production, natural gas liquids prices, refining capacity utilization, and refinery output. We also use the return on capital employed measure.
Other significant factors that can and/or do affect our profitability include:
| Property and leasehold impairments. As mentioned above, we participate in capital intensive industries. At times, these investments become impaired when our reserve estimates are revised downward, when crude oil or natural gas prices decline significantly for long periods of time, or when a decision to dispose of an asset leads to a write-down to fair market value. Also, at times we invest large amounts of money in exploration blocks which, if exploratory drilling proves unsuccessful, could lead to material impairment of leasehold values. | |||
| Goodwill. As a result of recent mergers and acquisitions, we have a significant amount of goodwill on our balance sheet. Although our latest tests indicate that no goodwill impairment is currently required, future deterioration in market conditions could lead to goodwill impairments that would have a substantial negative affect on the companys profitability. | |||
| Tax jurisdictions. As a global company, our operations are located in countries with different tax rates and fiscal structures. Accordingly, our overall effective tax rate can vary significantly between periods based on the mix of earnings within our global operations. |
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Segment Analysis
The E&P segments results are most closely linked to crude oil and natural gas
prices. These are commodity products, the prices of which are subject to
factors external to our company and over which we have no control. We
benefited from favorable crude oil prices in 2003, which contributed
significantly to what we view as strong results from this segment in 2003. For
a discussion of factors impacting crude oil and natural gas prices in 2003, as
well as our view of the potential movement of these prices into 2004, see the
Outlook section. At year-end 2003, we estimated that a $1 per barrel change
in crude oil prices would have an estimated $170 million annual impact on net
income. For natural gas, the corresponding impact is approximately $40 million
for a 10 cent per thousand cubic feet price change.
The Midstream segments results are most closely linked to natural gas liquids prices. The most important factor on the profitability of this segment is the results from our 30.3 percent equity investment in Duke Energy Field Services, LLC (DEFS). Higher natural gas liquids prices improved results from this segment in 2003. In early 2004, we approved the disposal of some of our non-DEFS Midstream assets located in the Lower 48 states that are not associated with our E&P operations.
Refining margins, refinery utilization, cost control, and marketing margins primarily drive the R&M segments results. Refining margins are subject to movements in the cost of crude oil and other feedstocks, and the sales prices for refined products, which are subject to market factors over which we have no control. Refining margins in 2003 were much improved over 2002, resulting in improved R&M profitability. See the Outlook section for further discussion of refining margins in 2003 and our view of their potential movement into 2004. At year-end 2003, we estimated that a 25 cent per barrel change in refining margins would have an estimated $125 million annual impact on net income. For wholesale marketing margins, the corresponding impact is approximately $100 million for a 1 cent per gallon margin change. Our refineries operated at 94 percent of rated capacity in 2003, and our goal in 2004 is to operate at about the same level.
The Chemicals segment consists of our 50 percent interest in Chevron Phillips Chemical Company LLC (CPChem). The chemicals and plastics industry is mainly a commodity-based industry where the margins for key products are based on market factors over which CPChem has little or no control. The chemicals and plastics industry has been in a cyclical downturn for the last several years. In this difficult market environment, CPChem has placed great emphasis on safety, cost control and managing its capacity utilization. In addition, CPChem is investing in feedstock-advantaged areas in the Middle East with access to large, growing markets, such as Asia. With its low cost structure, we feel CPChem is well positioned to benefit from improved margins when the chemicals industry emerges from its downturn.
The Emerging Businesses segment represents our investment in new technologies or businesses outside our normal scope of operations. We do not expect the results from this segment to be material to our consolidated results. However, the businesses in this segment allow us to support our primary segments by staying current on new technologies that could become important drivers of profitability in future years.
At December 31, 2003, we had a debt-to-capital ratio of 34 percent. We have made a priority of using funds available after paying dividends and capital spending to reduce debt. We reduced our debt by $4.8 billion in 2003. We feel that by lowering our debt-to-capital ratio over the next several years to about 30 percent, we can improve our cost of capital and further position ourselves for growth opportunities in the future.
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Consolidated Results
Millions of Dollars |
||||||||||||
Years Ended December 31 |
2003 | 2002 | 2001 | |||||||||
Income from continuing operations |
$ | 4,593 | 698 | 1,601 | ||||||||
Income (loss) from discontinued
operations |
237 | (993 | ) | 32 | ||||||||
Cumulative effect of accounting changes |
(95 | )* | | 28 | ||||||||
Net income (loss) |
$ | 4,735 | (295 | ) | 1,661 | |||||||
* | Includes a $107 million charge related to discontinued operations. |
A summary of the companys net income (loss) by business segment follows:
Millions of Dollars |
||||||||||||
Years Ended December 31 |
2003 | 2002 | 2001 | |||||||||
Exploration and Production (E&P) |
$ | 4,302 | 1,749 | 1,699 | ||||||||
Midstream |
130 | 55 | 120 | |||||||||
Refining and Marketing (R&M) |
1,272 | 143 | 397 | |||||||||
Chemicals |
7 | (14 | ) | (128 | ) | |||||||
Emerging Businesses |
(99 | ) | (310 | ) | (12 | ) | ||||||
Corporate and Other* |
(877 | ) | (1,918 | ) | (415 | ) | ||||||
Net income (loss) |
$ | 4,735 | (295 | ) | 1,661 | |||||||
* | Includes income (loss) from discontinued operations. |
2003 vs. 2002
Net income was $4,735 million in 2003, compared with a net loss of $295 million in 2002. The improved results in 2003 were primarily due to:
| Increased E&P and R&M production volumes as a result of the merger; | |||
| Higher crude oil, natural gas, and natural gas liquids prices in our E&P segment; | |||
| Improved refining and marketing margins in our R&M segment; | |||
| Lower impairments and lease loss accruals related to discontinued operations; and | |||
| Lower merger-related expenses in 2003, compared with 2002. |
See the Segment Results section for additional information on our E&P and R&M results, as well as our other reporting segments.
2002 vs. 2001
We incurred a net loss of $295 million in 2002, compared with net income of $1,661 million in 2001. The decrease was primarily attributable to recognizing impairments and loss accruals totaling $1,077 million after-tax associated with our retail and wholesale marketing operations that were classified as discontinued operations in late 2002, as well as merger-related costs totaling $557 million after-tax. Also negatively impacting results for 2002 were other asset impairments totaling $192 million after-tax, lower refining
42
margins, lower natural gas sales prices, decreased equity earnings from Duke Energy Field Services, LLC (DEFS), and higher interest expense. These factors were partially offset by improved results from Chemicals and higher production volumes in E&P after the merger.
Income Statement Analysis
2003 vs. 2002
The merger affects the comparability of the 2003 and 2002 periods. 2003 includes a full year of ConocoPhillips operations, while 2002 includes only four months of combined operations. Prior to August 30, 2002, our results reflect Phillips operations only. Accordingly, the merger significantly increased:
| Sales revenues and purchase costs due to higher volumes of products being bought and sold; | |||
| Equity earnings due to an increased number of equity affiliates; | |||
| Production and operating expenses and selling, general and administrative expenses due to the increased size and scope of operations following the merger, partially offset by lower merger-related costs in 2003; | |||
| Depreciation, depletion and amortization due to the increased depreciable asset base; | |||
| Taxes other than income taxes due to higher gasoline sales, production volumes and property and payroll taxes; and | |||
| Interest and debt expense due to higher debt levels following the merger. |
In addition to the merger impact, sales and other operating revenues and purchase costs increased because of higher prices for key products such as crude oil, natural gas, automotive gasoline and distillates. These are commodity products and their price levels are determined by market factors.
Our share of earnings from affiliates acquired in the merger accounted for the majority of the increase in the equity earnings. Of these, the E&P joint ventures in Canada (Petrovera) and Venezuela (Petrozuata), along with CFJ Properties in our R&M segment, provided the largest equity earnings. On February 18, 2004, we sold our interest in the Petrovera joint venture. Of the equity affiliates held prior to the merger, our equity earnings from DEFS improved on higher natural gas liquids prices, and our earnings from Hamaca, an E&P heavy-oil joint venture in Venezuela, increased due to higher crude oil production.
A higher net gain on asset sales was primarily responsible for the increase in other income in 2003. During 2003 we sold several E&P operations that did not fit into our long-term growth strategy. In addition, 2003 included gains attributable to insurance demutualization benefits. See the Corporate and Other section of Segment Results for additional information on these insurance benefits.
Selling, general and administrative expenses in 2002 included a $246 million charge for the write-off of in-process research and development costs acquired in the merger. The absence of such a significant charge in the 2003 period reduced the impact of the merger on this line item.
Property impairments increased by $75 million in 2003, compared with 2002. The 2003 impairments were recorded as a result of asset status changes from held-for-use to held-for-sale, producing properties that failed to meet recoverability tests, and tax law changes in Norway affecting asset removal costs. During 2002, property impairments were triggered by asset dispositions and the impairment of tradenames. See Note 12Property Impairments, in the Notes to Financial Statements, for additional information.
43
Accretion on discounted liabilities increased $123 million in 2003, reflecting accretion expense on environmental liabilities assumed in the merger and discounted obligations associated with the retirement and removal of long-lived assets that became effective January 1, 2003, with the adoption of Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations. See Note 2Changes in Accounting Principles, in the Notes to Financial Statements, for additional information on SFAS No. 143.
In addition to the merger impact, interest and debt expense also increased in 2003 because of the adoption of Financial Accounting Standards Board (FASB) Interpretation No. 46, Consolidation of Variable Interest Entities, (FIN 46). The adoption of FIN 46 for variable interest entities involving synthetic leases and certain other financing structures, effective January 1, 2003, resulted in increased balance sheet debt, which resulted in higher interest expense in 2003. See Note 2Changes in Accounting Principles, and Note 14 Debt, in the Notes to Consolidated Financial Statements, for additional information.
During 2003, we recognized a $28 million gain on subsidiary equity transactions related to our E&P Bayu-Undan development in the Timor Sea. See Note 7Subsidiary Equity Transactions, in the Notes to Consolidated Financial Statements, for additional information.
Our effective tax rate in 2003 was 45 percent, compared with 67 percent in 2002. The lower effective tax rate in 2003 primarily was the result of a higher proportion of income in lower-tax-rate jurisdictions and the one-time impact of tax law changes in certain international jurisdictions. Contributing to the higher effective tax rate in 2002 was a write-off of in-process research and development costs, as well as the partial impairment of an exploration prospect, both without corresponding tax benefits in 2002.
Our discontinued operations had income of $237 million in 2003, compared with a net loss of $993 million in 2002. The net loss in 2002 reflected charges totaling $1,008 million after-tax related to the impairment of properties, plants and equipment; goodwill; intangible assets; and provisions for losses associated with various operating lease commitments. For additional information about our discontinued operations, see Note 4Discontinued Operations, in the Notes to Consolidated Financial Statements.
We adopted SFAS No. 143 effective January 1, 2003, resulting in the recognition of a benefit of $145 million for the cumulative effect of this accounting change. Also effective January 1, 2003, we adopted FIN 46 for variable interest entities involving synthetic leases and certain other financing structures created prior to February 1, 2003. This resulted in a charge of $240 million for the cumulative effect of this accounting change. Together, these resulted in a net charge of $95 million. For additional information on these accounting changes, see Note 2Changes in Accounting Principles, in the Notes to Consolidated Financial Statements.
2002 vs. 2001
In addition to the merger of Conoco and Phillips on August 30, 2002, ConocoPhillips closed on the $7 billion acquisition of Tosco Corporation on September 14, 2001. Together, these transactions significantly increased operating revenues; equity earnings; other income; purchase costs; operating expenses; selling, general and administrative expenses; depreciation, depletion and amortization; taxes other than income taxes; accretion on discounted liabilities; and interest and debt expense in 2002, compared with 2001.
44
Restructuring Accruals
As a result of the merger, we began a restructuring program in September 2002 to capture the benefits of combining Conoco and Phillips by eliminating redundancies, consolidating assets, and sharing common services and functions across regions. We expect the restructuring program to be completed by the end of the first quarter of 2004. From September 2002 through December 31, 2003, approximately 3,900 positions worldwide had been identified for elimination. Of this total, approximately 3,000 employees had been terminated by December 31, 2003. The information in Note 5Restructuring, in the Notes to Consolidated Financial Statements, is incorporated herein by reference.
Segment Results
E&P
2003 | 2002 | 2001 | ||||||||||
Millions of Dollars |
||||||||||||
Net Income |
||||||||||||
Alaska |
$ | 1,445 | 870 | 866 | ||||||||
Lower 48 |
929 | 286 | 476 | |||||||||
United States |
2,374 | 1,156 | 1,342 | |||||||||
International |
1,928 | 593 | 357 | |||||||||
$ | 4,302 | 1,749 | 1,699 | |||||||||
Dollars Per Unit | ||||||||||||
Average Sales Prices |
||||||||||||
Crude oil (per barrel) |
||||||||||||
United States |
$ | 28.85 | 23.83 | 23.57 | ||||||||
International |
28.27 | 25.14 | 24.16 | |||||||||
Total consolidated |
28.54 | 24.38 | 23.77 | |||||||||
Equity affiliates |
18.58 | 18.41 | 12.36 | |||||||||
Worldwide |
27.47 | 24.07 | 23.74 | |||||||||
Natural
gaslease (per thousand cubic feet) |
||||||||||||
United States |
4.62 | 2.75 | 3.56 | |||||||||
International |
3.71 | 2.79 | 2.60 | |||||||||
Total consolidated |
4.07 | 2.77 | 3.23 | |||||||||
Equity affiliates |
4.44 | 2.71 | | |||||||||
Worldwide |
4.07 | 2.77 | 3.23 | |||||||||
Average Production Costs Per Barrel of Oil Equivalent |
||||||||||||
United States |
$ | 5.89 | 5.66 | 5.52 | ||||||||
International |
4.25 | 3.99 | 2.70 | |||||||||
Total consolidated |
5.00 | 4.94 | 4.60 | |||||||||
Equity affiliates |
4.72 | 4.38 | 2.74 | |||||||||
Worldwide |
4.98 | 4.92 | 4.60 | |||||||||
Finding and Development Costs Per Barrel of Oil
Equivalent* |
||||||||||||
United States |
$ | 9.30 | 7.46 | 5.15 | ||||||||
International |
4.54 | 5.09 | 6.80 | |||||||||
Worldwide |
5.35 | 5.57 | 5.97 | |||||||||
* | Includes our share of equity affiliates. |
45
2003 | 2002 | 2001 | ||||||||||
Millions of Dollars |
||||||||||||
Worldwide Exploration Expenses |
||||||||||||
General administrative; geological and geophysical; and
lease rentals |
$ | 301 | 285 | 207 | ||||||||
Leasehold impairment |
133 | 146 | 51 | |||||||||
Dry holes |
167 | 161 | 48 | |||||||||
$ | 601 | 592 | 306 | |||||||||
Thousands of Barrels Daily |
||||||||||||
Operating Statistics |
||||||||||||
Crude oil produced |
||||||||||||
Alaska |
325 | 331 | 339 | |||||||||
Lower 48 |
54 | 40 | 34 | |||||||||
United States |
379 | 371 | 373 | |||||||||
European North Sea |
290 | 196 | 136 | |||||||||
Asia Pacific |
61 | 24 | 17 | |||||||||
Canada |
30 | 13 | 1 | |||||||||
Other areas |
72 | 43 | 34 | |||||||||
Total consolidated |
832 | 647 | 561 | |||||||||
Equity affiliates |
102 | 35 | 2 | |||||||||
934 | 682 | 563 | ||||||||||
Natural gas liquids
produced |
||||||||||||
Alaska |
23 | 24 | 25 | |||||||||
Lower 48 |
25 | 8 | 1 | |||||||||
United States |
48 | 32 | 26 | |||||||||
European North Sea |
9 | 8 | 7 | |||||||||
Canada |
10 | 4 | | |||||||||
Other areas |
2 | 2 | 2 | |||||||||
69 | 46 | 35 | ||||||||||
Millions of Cubic Feet Daily |
||||||||||||
Natural gas produced* |
||||||||||||
Alaska |
184 | 175 | 177 | |||||||||
Lower 48 |
1,295 | 928 | 740 | |||||||||
United States |
1,479 | 1,103 | 917 | |||||||||
European North Sea |
1,215 | 595 | 308 | |||||||||
Asia Pacific |
318 | 137 | 51 | |||||||||
Canada |
435 | 165 | 18 | |||||||||
Other areas |
63 | 43 | 41 | |||||||||
Total consolidated |
3,510 | 2,043 | 1,335 | |||||||||
Equity affiliates |
12 | 4 | | |||||||||
3,522 | 2,047 | 1,335 | ||||||||||
* | Represents quantities available for sale. Excludes gas equivalent of natural gas liquids shown above. |
Thousands of Barrels Daily |
||||||||||||
Mining
operations Syncrude produced |
19 | 8 | | |||||||||
46
2003 vs. 2002
The E&P segment explores for and produces crude oil, natural gas, and natural gas liquids on a worldwide basis. It also mines deposits of oil sands in Canada to extract the bitumen and upgrade it into a synthetic crude oil. At December 31, 2003, our E&P operations were producing in the United States, the Norwegian and U.K. sectors of the North Sea, Canada, Nigeria, Venezuela, offshore Timor Lesté in the Timor Sea, offshore Australia, offshore China, offshore the United Arab Emirates, offshore Vietnam, Russia, and Indonesia.
Net income from the E&P segment increased 146 percent in 2003, compared with 2002. The improvement reflects higher production volumes, primarily due to the merger; higher crude oil and natural gas prices; and an increased net gain on asset sales. These items were partially offset by higher production and operating expenses; depreciation, depletion and amortization; and taxes other than income taxes, all the result of the larger size and scope of our operations following the merger.
In addition, 2003 included benefits of $233 million in our international E&P operations from changes in income tax and site restoration laws, as well as an equity realignment of certain Australian operations. Also, the cumulative effect of the adoption of SFAS No. 143 and the adoption of FIN 46 for variable interest entities involving synthetic leases and certain other financing structures increased E&Ps net income by $142 million in 2003.
Our average worldwide crude oil sales price was $27.47 per barrel in 2003, compared with $24.07 in 2002. We also benefited from higher natural gas prices in 2003, with our average worldwide price increasing from $2.77 per thousand cubic feet in 2002 to $4.07 in 2003. If crude oil and natural gas prices in 2004 do not remain at the historically strong levels experienced in 2003, E&Ps earnings will be negatively impacted in 2004. See the Outlook section for additional discussion of crude oil and natural gas prices.
ConocoPhillips proved reserves at year-end 2003 were 7.85 billion barrels of oil equivalent, a slight increase over 7.81 billion barrels at year-end 2002. Our Canadian Syncrude mining operations had an additional 265 million barrels of proved oil sands reserves at the end of 2003, compared with 272 million barrels at year-end 2002.
2002 vs. 2001
Net income from the E&P segment increased 3 percent in 2002, compared with 2001. Although E&P benefited from four months of increased production volumes in 2002 following the merger, this increase was mostly offset by lower natural gas sales prices, higher exploration expenses, and the unfavorable $24 million impact of a tax law change in the United Kingdom. Our average worldwide crude oil sales price was $24.07 per barrel in 2002, a 1 percent increase over $23.74 in 2001. Our average worldwide natural gas price in 2002 was $2.77 per thousand cubic feet, a 14 percent decrease from $3.23 in 2001.
Our proved reserves at year-end 2002 were 7.81 billion barrels of oil equivalent, a 52 percent increase over year-end 2001s 5.13 billion barrels of oil equivalent. The increase was attributable to the merger.
47
U.S. E&P
2003 vs. 2002
Net income from our U.S. E&P operations increased 105 percent in 2003, compared with 2002. Net income from our Alaskan operations increased $575 million in 2003. The improvement in Alaska reflects higher crude oil prices, and a net $143 million benefit from the cumulative effect of adopting SFAS No. 143 and FIN 46, partially offset by slightly lower crude oil production volumes. The West Coast price of our Alaskan crude oil production increased 22 percent in 2003, from $23.75 per barrel in 2002 to $28.87 per barrel in 2003. Normal field declines and some operating interruptions in 2003 were mostly offset by increased production from the Borealis satellite field, the new Kuparuk Palm drill site, and Alpine, which enabled us to experience only a slight decrease in our Alaska crude oil production rate in 2003.
Our E&P Lower 48 net income increased $643 million in 2003, primarily because of increased natural gas production and sales prices, as well as, to a lesser extent, higher crude oil production and prices. U.S. Lower 48 natural gas prices increased 71 percent in 2003. Our increased production volumes in the Lower 48 mainly were the result of the merger, partially offset by the impact of asset dispositions. We continued our Lower 48/Gulf of Mexico asset rationalization program in 2003, which resulted in the sale of properties that did not fit into our long-term growth strategy. As planned, we are exiting the shallow water areas of the Gulf of Mexico. The Lower 48 operations recognized a net $1 million charge from the cumulative effect of adopting SFAS No. 143 and FIN 46 effective January 1, 2003.
2002 vs. 2001
Net income from U.S. E&P operations decreased 14 percent in 2002, compared with 2001. Although net income for 2002 benefited from four months of increased production volumes following the merger, this increase was more than offset by lower natural gas prices, lower production volumes in Alaska, and higher dry hole costs. Our U.S. average natural gas price in 2002 was 23 percent lower than in 2001.
Our U.S. crude oil production decreased slightly in 2002, while natural gas production increased 20 percent. The increase in natural gas production was mainly due to four months of production from fields acquired in the merger. The merger impact on total crude oil production was offset by lower production in Alaska, which experienced normal field declines, along with operating interruptions at the Prudhoe Bay field.
International E&P
2003 vs. 2002
Net income from our international E&P operations increased 225 percent in 2003, compared with 2002. Increased production volumes following the merger accounted for the majority of the earnings improvement. Higher crude oil and natural gas prices contributed to the remaining increase.
International E&Ps production on a barrel-of-oil-equivalent basis averaged 916,000 barrels per day in 2003, compared with 482,000 barrels per day in 2002. In addition, our Syncrude mining operations produced 19,000 barrels per day in 2003, compared with 8,000 barrels per day in 2002. Although the merger was the primary reason for the production increase, other items impacting our production rate in 2003 were:
48
| The startup of the Grane field in the Norwegian North Sea in September 2003; | |||
| A full years production from Phase I of the development of the Peng Lai 19-3 field in Chinas Bohai Bay; and | |||
| The startup of production from the Phase I development of the Su Tu Den project in Vietnam late in the fourth quarter of 2003. |
Included in international E&Ps net income in 2003 was a net foreign currency transaction loss of $50 million, compared with a net loss of $34 million in 2002.
International E&Ps net income in 2003 also was favorably impacted by the following items:
| In Norway, the Norway Removal Grant Act (1986) was repealed in the second quarter of 2003. Prior to its repeal, this Act required the Norwegian government to contribute to the cost of removing offshore oil and gas production facilities. Now, the co-venturers in the facilities must fund all removal costs, but can deduct the removal costs, as incurred, under the Petroleum Tax Act, at the marginal tax rate in effect at the time of removal. These changes required us: to recognize an additional liability for the governments share, prior to repeal of the Act, of the future removal costs, with a corresponding increase in properties, plants and equipment (PP&E); and to establish a net deferred tax asset for the temporary differences between the financial basis and tax basis of all of our Norwegian removal assets and liabilities. Some of the increases in PP&E were on shut-in fields, which led to immediate impairments of those properties. The overall impact on 2003 results was a net after-tax benefit of $87 million. | |||
| In the Timor Sea region, ConocoPhillips and its co-venturers received final approvals from authorities to proceed with the natural gas development phase of the Bayu-Undan project in the second quarter of 2003. This approval allowed a broad ownership interest re-alignment among the co-venturers to proceed, which included our sale of a 10 percent interest in the project and the issuance of equity by previously wholly owned subsidiaries. In addition, the ratification of the Australia/Timor Lesté treaty lowered the companys deferred tax liability position. The net result of these events was an after-tax benefit of $51 million in 2003. See Note 7Subsidiary Equity Transactions, in the Notes to Consolidated Financial Statements, for additional information. | |||
| In November 2003, the Canadian Parliament enacted federal tax rate reductions for oil and gas producers. As a result we recognized a $95 million benefit upon revaluation of our deferred tax liability in the fourth quarter. |
2002 vs. 2001
Net income from international E&P operations increased 66 percent in 2002. The improvement reflects four months of increased production volumes following the merger. However, 2002 net income included a $24 million deferred tax charge related to tax law changes in the United Kingdom. Net income in 2002 also included a $77 million leasehold impairment of deepwater Block 34, offshore Angola, due to an unsuccessful exploratory well in the block, along with higher dry hole charges.
Our international crude oil production increased 64 percent in 2002, while natural gas production increased 126 percent. The increases were mainly due to the addition of four months of production from fields acquired in the merger.
49
Midstream
2003 | 2002 | 2001 | ||||||||||
Millions of Dollars |
||||||||||||
Net Income* |
$ | 130 | 55 | 120 | ||||||||
*Includes DEFS related net income: |
$ | 72 | 23 | 101 |
Dollars Per Barrel |
||||||||||||
Average Sales Prices |
||||||||||||
U.S. natural gas liquids* |
||||||||||||
Consolidated |
$ | 22.67 | 19.07 | | ||||||||
Equity |
22.12 | 15.92 | 18.77 | |||||||||
Thousands of Barrels Daily |
||||||||||||
Operating Statistics |
||||||||||||
Natural gas liquids extracted** |
219 | 156 | 120 | |||||||||
Natural gas liquids fractionated |
167 | 133 | 108 | |||||||||
* | Based on index prices from the Mont Belvieu and Conway market hubs that are weighted by natural gas liquids component and location mix. |
** | Includes our share of equity affiliates. |
2003 vs. 2002
The Midstream segment purchases raw natural gas from producers and gathers natural gas through extensive pipeline gathering systems. The natural gas is then processed to extract natural gas liquids from the raw gas stream. The remaining residue gas is marketed to electrical utilities, industrial users, and gas marketing companies. Most of the natural gas liquids are fractionatedseparated into individual components like ethane, butane and propaneand marketed as chemical feedstock, fuel, or blendstock.
Our Midstream segment consists of a 30.3 percent interest in Duke Energy Field Services, LLC (DEFS), as well as our other natural gas gathering and processing operations, and natural gas liquids fractionation and marketing businesses, primarily in the United States, Canada and Trinidad.
Net income from the Midstream segment increased 136 percent in 2003, compared with 2002. The increase primarily was attributable to improved results from DEFS and the addition of midstream operations following the merger. DEFS results mainly increased because of higher natural gas liquids prices in 2003. In addition, DEFS results in 2002 included higher costs for gas imbalance adjustment accruals.
Included in the Midstream segments 2003 net income was a basis-difference benefit of $36 million, compared with $35 million in 2002, representing the amortization of the excess amount of our 30.3 percent equity interest in the net assets of DEFS over the book value of our investment in DEFS.
2002 vs. 2001
Net income from the Midstream segment decreased 54 percent in 2002, compared with 2001. The decrease was primarily due to lower results from DEFS, which experienced a decline in natural gas liquids prices, increased costs for gas imbalance accruals and other adjustments, and higher operating expenses.
50
These items were partially offset by the benefit of four months results from operations acquired in the merger.
Included in the Midstream segments net income in 2002 was a benefit of $35 million, representing the amortization of the basis difference between the book value of ConocoPhillips contribution to DEFS and our 30.3 percent equity interest in DEFS. The corresponding amount for 2001 was $36 million.
51
R&M
2003 | 2002 | 2001 | ||||||||||
Millions of Dollars |
||||||||||||
Net Income |
||||||||||||
United States |
$ | 990 | 138 | 395 | ||||||||
International |
282 | 5 | 2 | |||||||||
$ | 1,272 | 143 | 397 | |||||||||
Dollars Per Gallon |
||||||||||||
U.S. Average Sales Prices* |
||||||||||||
Automotive gasoline |
||||||||||||
Wholesale |
$ | 1.05 | .96 | .83 | ||||||||
Retail |
1.35 | 1.03 | 1.01 | |||||||||
Distillateswholesale |
.92 | .77 | .78 | |||||||||
* | Excludes excise taxes. |
Thousands of Barrels Daily |
||||||||||||
Operating Statistics |
||||||||||||
Refining operations* |
||||||||||||
United States |
||||||||||||
Rated crude oil capacity** |
2,168 | 1,829 | 732 | |||||||||
Crude oil runs |
2,074 | 1,661 | 686 | |||||||||
Capacity utilization (percent) |
96 | % | 91 | 94 | ||||||||
Refinery production |
2,301 | 1,847 | 795 | |||||||||
International |
||||||||||||
Rated crude oil capacity** |
442 | 195 | 22 | |||||||||
Crude oil runs |
385 | 152 | 20 | |||||||||
Capacity utilization (percent) |
87 | % | 78 | 91 | ||||||||
Refinery production |
412 | 164 | 19 | |||||||||
Worldwide |
||||||||||||
Rated crude oil capacity** |
2,610 | 2,024 | 754 | |||||||||
Crude oil runs |
2,459 | 1,813 | 706 | |||||||||
Capacity utilization (percent) |
94 | % | 90 | 94 | ||||||||
Refinery production |
2,713 | 2,011 | 814 | |||||||||
Petroleum products sales volumes |
||||||||||||
United States |
||||||||||||
Automotive gasoline |
1,369 | 1,230 | 537 | |||||||||
Distillates |
575 | 502 | 225 | |||||||||
Aviation fuels |
180 | 185 | 78 | |||||||||
Other products |
492 | 372 | 220 | |||||||||
2,616 | 2,289 | 1,060 | ||||||||||
International |
430 | 162 | 10 | |||||||||
3,046 | 2,451 | 1,070 | ||||||||||
* | Includes our share of equity affiliates. |
** | Weighted-average crude oil capacity for the period, including the refineries acquired in the Tosco acquisition in September 2001 and the refineries acquired as a result of the merger. Actual capacity at year-end 2002 and 2001 was 2,166,000 and 1,656,000 barrels per day, respectively, in the United States and 440,000 and 72,000 barrels per day, respectively, internationally. |
52
2003 vs. 2002
The R&M segments operations encompass refining crude oil and other feedstocks into petroleum products (such as gasoline, distillates and aviation fuels), buying and selling crude oil and refined products, and transporting, distributing and marketing petroleum products. R&M has operations in the United States, Europe and Asia Pacific.
Net income from our R&M segment increased substantially in 2003, compared with 2002. The improved results primarily were due to significantly higher U.S. refining margins. The addition of refining and marketing assets in the merger also contributed to the higher 2003 earnings, as did increased wholesale gasoline margins. Partially offsetting the improvements was a net charge of $125 million for the cumulative effect of the adoption of FIN 46 for variable interest entities involving synthetic leases and certain other financing structures.
Our refineries produced 2.7 million barrels per day of petroleum products in 2003, compared with 2.0 million barrels per day in 2002. The increase reflects the addition of production from refineries acquired in the merger.
2002 vs. 2001
Net income from the R&M segment declined 64 percent in 2002, compared with 2001, reflecting lower refining margins, along with an $84 million after-tax impairment of a tradename and leasehold improvements of certain retail sites. R&M earnings for 2002 included four months results from operations acquired in the merger, as well as the impact of a full years results from Tosco operations, while the 2001 results included Tosco operations for only the last three and one-half months of 2001.
Worldwide crude oil refining capacity utilization was 90 percent in 2002, compared with 94 percent in 2001. Our refineries produced 2.0 million barrels per day of petroleum products in 2002, compared with 814,000 barrels per day in 2001. The increase reflects a full year of operations for refineries acquired in the Tosco acquisition and four months of operations for the refineries acquired in the merger.
U.S. R&M
2003 vs. 2002
Net income from our U.S. R&M operations increased significantly in 2003, compared with 2002. The improved results mainly were due to significantly higher refining margins, particularly during the third quarter of 2003. Industry U.S. refining margins were strong in the third quarter of 2003 due to increased gasoline demand in August and an unusual number of refined product supply disruptions, including refinery outages in the Midwest caused by a major power blackout in August 2003. See the Outlook section for additional discussion of refining margins. We capitalized on the strong refining margins in the third quarter by running our U.S. refineries at a utilization rate of 96 percent during the quarter. However, this rate was negatively impacted by a fire at our Ponca City, Oklahoma, refinery during July that resulted in portions of the facility being shut down. The Ponca City refinerys throughput was restored in the fourth quarter of 2003 to levels achieved before the fire.
53
The addition of refining and marketing assets in the merger also contributed to the higher 2003 earnings, as did increased wholesale gasoline margins. Partially offsetting the margin improvements in 2003 was a net charge of $125 million for the cumulative effect of the adoption of FIN 46 for variable interest entities involving synthetic leases and certain other financing structures, along with higher utility costs.
For the full year of 2003, our U.S. refineries ran at a crude oil capacity utilization rate of 96 percent, compared with 91 percent in 2002. The rate in 2002 was lowered by higher maintenance turnaround activity, the impact of tropical storms on our Gulf Coast refineries, and the loss of Venezuelan crude oil supply in the fourth quarter due to the economic and political instability in that country during the quarter.
2002 vs. 2001
Net income from U.S. R&M operations declined 65 percent in 2002, compared with 2001. The decrease was primarily due to lower refining margins, particularly in the Midcontinent and Gulf Coast regions, along with an $84 million after-tax impairment of a tradename and leasehold improvements of certain retail sites. These items were partially offset by increased production and sales volumes as a result of the Tosco acquisition and the merger. Net income for 2002 included four months of operations acquired in the merger, and a full year of Tosco operations, while the 2001 results included Tosco operations for only three and one-half months. Effective January 1, 2001, we changed our method of accounting for the costs of major maintenance turnarounds from the accrue-in-advance method to the expense-as-incurred method. The cumulative effect of this change in accounting principle increased R&M net income by $26 million. Also included in 2001 was a $27 million write-down of inventories to market value.
International R&M
2003 vs. 2002
Net income from our international R&M operations increased substantially in 2003, compared with 2002. The improvement was due to the larger size and scope of our international refining and marketing operations following the merger, along with higher international refining margins. Prior to the merger, our international R&M operations consisted only of our Whitegate refinery in Ireland with a rated crude oil capacity of 72,000 barrels per day. The merger added one wholly owned and four joint-venture refineries, with a rated crude oil capacity of 370,000 barrels per day. In addition, the merger added an extensive marketing network throughout Europe and Asia. Included in international R&Ms net income in 2003 was a net foreign currency gain of $18 million, compared with a net gain of $9 million in 2002.
Our international crude oil capacity utilization rate was 87 percent in 2003, compared with 78 percent in 2002. The lower utilization rate in 2002 primarily was the result of the Humber refinery in the United Kingdom being shut down for an extended period of time in the fourth quarter due to a power outage and subsequent downtime.
2002 vs. 2001
Net income from international R&M operations increased $3 million in 2002, compared with 2001, reflecting the impact of the merger. The Humber refinery was shut down for an extended period of time during the fourth quarter of 2002, which negatively impacted international R&Ms 2002 results.
54
Chemicals
Millions of Dollars |
||||||||||||
2003 | 2002 | 2001 | ||||||||||
Net Income
(Loss) |
$ | 7 | (14 | ) | (128 | ) | ||||||
2003 vs. 2002
The Chemicals segment consists of our 50 percent interest in Chevron Phillips Chemical Company LLC (CPChem), which we account for using the equity method of accounting. CPChem uses natural gas liquids and other feedstocks to produce petrochemicals such as ethylene, propylene, styrene, benzene, and paraxylene. These products are then marketed and sold, or used as feedstocks to produce plastics and commodity chemicals, such as polyethylene, polystyrene and cyclohexane.
As the results in both years indicate, the chemicals industry continues to be challenged to effectively utilize capacity, manage costs and improve margins in a difficult economic environment. The worldwide chemicals industry experienced an economic downturn beginning in the second half of 2000, and the downturn continued through 2003. The downturn has led to excess production capacity in the industry and pressured margins on key products. The chemicals industry has also been impacted by high energy prices, which negatively impacts both utility and feedstock costs.
2002 vs. 2001
The Chemicals segment incurred a net loss of $14 million in 2002, compared with a net loss of $128 million in 2001. Higher margins in 2002 contributed to the improvement in results. Lower operating expenses, feedstock costs and energy prices in 2002 were partially offset by decreased sales prices.
Due to depressed economic conditions in the chemicals industry, asset retirements and impairments totaling $84 million after-tax were recognized by CPChem in 2001. A developmental reactor at the Pasadena Plastics Complex in Pasadena, Texas, was retired; accelerated depreciation was recognized by CPChem on two polyethylene reactors at the Orange chemical plant in Orange, Texas; an ethylene unit was retired at the Sweeny complex in Old Ocean, Texas; an equity affiliate of CPChem recorded a property impairment related to a polypropylene facility; property impairments were taken on the manufacturing facility in Puerto Rico; and the benzene and cyclohexane units at the Puerto Rico facility were retired. In addition, the valuation allowance on the Puerto Rico facilitys deferred tax asset related to its net operating losses was increased in 2001 so that the deferred tax assets were fully offset by valuation allowances. Partially offsetting these impairments and retirements was a business interruption insurance settlement recognized by CPChem, and a favorable deferred tax adjustment recorded by ConocoPhillips related to the Puerto Rico facility, together totaling $57 million after-tax.
55
Emerging Businesses
Millions of Dollars |
||||||||||||
2003 | 2002 | 2001 | ||||||||||
Net Loss |
||||||||||||
Technology
solutions |
$ | (20 | ) | (16 | ) | (12 | ) | |||||
Gas-to-liquids |
(50 | ) | (273 | ) | | |||||||
Power |
(5 | ) | (3 | ) | | |||||||
Other |
(24 | ) | (18 | ) | | |||||||
$ | (99 | ) | (310 | ) | (12 | ) | ||||||
2003 vs. 2002
The Emerging Businesses segment includes the development of new businesses outside our traditional operations. Emerging Businesses incurred a net loss of $99 million in 2003, compared with a net loss of $310 million in 2002. The net loss in 2003 was less than that in 2002 as a result of a $246 million write-off of purchased in-process research and development costs in the third quarter of 2002 related to Conocos natural gas-to-liquids and other technologies. In accordance with FASB Interpretation No. 4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method, value assigned to research and development activities in the purchase price allocation that have no alternative future use are required to be charged to expense at the date of the consummation of the combination. The $246 million charge was the same on both a before-tax and after-tax basis, because there was no tax basis in the assigned value prior to its write-off.
2002 vs. 2001
The Emerging Businesses segment posted a net loss of $310 million in 2002, compared with a net loss of $12 million in 2001. Results for 2002 included a $246 million write-off of acquired in-process research and development costs described above. The increased number of developing businesses after the merger also contributed to the larger losses in 2002.
Corporate and Other
Millions of Dollars |
||||||||||||
2003 | 2002 | 2001 | ||||||||||
Net Loss |
||||||||||||
Net interest |
$ | (632 | ) | (412 | ) | (262 | ) | |||||
Corporate general and administrative
expenses |
(173 | ) | (173 | ) | (114 | ) | ||||||
Discontinued operations |
237 | (993 | ) | 32 | ||||||||
Merger-related costs |
(223 | ) | (307 | ) | | |||||||
Cumulative effect of accounting changes |
(112 | )* | | | ||||||||
Other |
26 | (33 | ) | (71 | ) | |||||||
$ | (877 | ) | (1,918 | ) | (415 | ) | ||||||
* | Includes a $107 million charge related to discontinued operations. |
56
2003 vs. 2002
Net interest after-tax represents interest expense, net of interest income and capitalized interest, as well as premiums incurred on the early retirement of debt. Net interest increased 53 percent in 2003, compared with 2002. The increase in 2003 mainly was due to our higher debt levels following the merger, the impact of the adoption of FIN 46 for variable interest entities involving synthetic leases and certain other financing structures, and increased premiums on the early retirement of debt. The adoption of FIN 46 at January 1, 2003, increased debt, which resulted in higher interest expense. See Note 2Changes in Accounting Principles, in the Notes to Consolidated Financial Statements, for additional information.
After-tax corporate general and administrative expenses were the same in 2003 as in 2002. Expenses in 2003 were impacted by the merger, as well as the expensing of stock options. Beginning in 2003, on a prospective basis, we elected to use the fair-value accounting method provided for under SFAS No. 123, Accounting for Stock-Based Compensation. Offsetting these items were increased allocations of certain staff costs to the operating segments in 2003. The increased corporate allocations did not have a material impact on the operating segments results.
Income from discontinued operations was $237 million in 2003, compared with a loss of $993 million in 2002. The net loss in 2002 reflects charges totaling $1,008 million after-tax related to the impairment of properties, plants and equipment; goodwill; intangible assets; and provisions for losses associated with various operating lease commitments. For additional information about our discontinued operations, see Note 4Discontinued Operations, in the Notes to Consolidated Financial Statements.
On an after-tax basis, merger-related costs were $223 million in 2003, compared with $307 million in 2002. Included in these costs were employee relocation expenses, transition labor costs, and other charges directly associated with the merger.
The category Other consists primarily of items not directly associated with the operating segments on a stand-alone basis, including certain foreign currency transaction gains and losses, and environmental costs associated with sites no longer in operation. Results from Other were improved in 2003 because of higher foreign currency transaction gains and an after-tax gain of $34 million in the first quarter of 2003, representing beneficial interests we had in certain insurance companies as a result of the conversion of those companies from mutual companies to stock companies, a process known as demutualization. These beneficial interests arose from our prior purchase and ownership of various insurance policies and contracts issued by the mutual companies. Prior to the demutualizations, our mutual ownership interests in these insurance companies were not recognized because the ownership interests in the mutual companies were neither capable of valuation nor marketable. Included in Other in 2003 was a net foreign currency transaction gain of $67 million, after-tax, compared with a net gain of $21 million in 2002.
2002 vs. 2001
Corporate and Others net loss was $1,918 million in 2002, compared with $415 million in 2001. The increased net loss in 2002 reflects losses from discontinued operations, primarily due to impairments, and merger-related costs. Net interest expense and corporate general and administrative costs were also higher in 2002 due to the merger.
57
CAPITAL RESOURCES AND LIQUIDITY
Financial Indicators
Millions of Dollars | ||||||||||||
Except as Indicated |
||||||||||||
2003 | 2002 | 2001 | ||||||||||
Current ratio |
.8 | .9 | 1.3 | |||||||||
Net cash provided by operating activities |
$ | 9,356 | 4,978 | 3,559 | ||||||||
Total debt repayment obligations due within one year |
$ | 1,440 | 849 | 44 | ||||||||
Total debt* |
$ | 17,780 | 19,766 | 8,654 | ||||||||
Mandatorily redeemable preferred securities of trust
subsidiaries* |
$ | | 350 | 650 | ||||||||
Other minority interests |
$ | 842 | 651 | 5 | ||||||||
Common stockholders equity |
$ | 34,366 | 29,517 | 14,340 | ||||||||
Percent of total debt to capital** |
34 | % | 39 | 37 | ||||||||
Percent of floating-rate debt to total debt |
17 | % | 12 | 20 | ||||||||
* | With the adoption of Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities, effective January 1, 2003, the mandatorily redeemable preferred securities were removed from our balance sheet and effectively replaced with debt. |
** | Capital includes total debt, mandatorily redeemable preferred securities, other minority interests and common stockholders equity. |
To meet our liquidity requirements, including funding our capital program, paying dividends and repaying debt, we look to a variety of funding sources, primarily cash generated from operating activities. During 2003, available cash was used to support the companys ongoing capital expenditures program, repay debt and pay dividends. In October 2003, our Board of Directors (Board) declared a dividend of $.43 per share, payable December 1, 2003, which represented a 7.5 percent increase from the previous quarters dividend rate. Total dividends paid on our common stock in 2003 was $1.1 billion. During 2003, cash and cash equivalents increased $183 million to $490 million.
Significant Sources of Capital
Operating Activities
During 2003, cash of $9,356 million was provided by operating activities, an
increase of $4,378 million from 2002. The increase in cash provided by
operating activities was primarily due to:
| Higher crude oil, natural gas and natural gas liquids prices; | |||
| Increased production as a result of the inclusion of Conoco activity for the full year; and | |||
| Higher refining and marketing margins. |
In addition, working capital changes increased cash flow from operating activities $589 million in 2003, compared with an increase of $982 million in 2002. Cash from operating activities provided by discontinued operations amounted to $189 million, compared with $202 million in 2002.
Asset Sales
Following the merger, we initiated an asset disposition program to sell
approximately $3 billion to $4 billion of assets by the end of 2004. Through
year-end 2003, we had sold approximately $3.4 billion of assets and raised
our target to $4.5 billion by year-end 2004. In February 2004, we sold our
46.7 percent interest in Petrovera Resources Limited, which primarily
produced conventional heavy oil in Western Canada. Additional assets
expected to be sold in 2004 are primarily related to our marketing
58
business. In addition, we are proceeding with plans to dispose of some of our non-DEFS Midstream assets. During 2003, $2.7 billion was received from the sale of various assets, including the remaining assets required to be sold by the Federal Trade Commission as a result of the merger, a substantial portion of our U.S. retail marketing sites, and non-strategic E&P properties. Proceeds from these asset sales have been, and will be, used primarily to pay off debt.
Commercial Paper and Credit Facilities
While the stability of our cash flows from operating activities benefits from
geographic diversity and the effects of upstream and downstream integration,
our operating cash flows remain exposed to the volatility of commodity crude
oil and natural gas prices and refining and marketing margins, as well as
periodic cash needs to finance tax payments and crude oil, natural gas and
petroleum product purchases. Our primary funding source for short-term working
capital needs is a $4 billion commercial paper program, a portion of which may
be denominated in other currencies (limited to euro 3 billion equivalent).
Commercial paper maturities are generally limited to 90 days. At December 31,
2003, we had $709 million of commercial paper outstanding, compared with $1,517
million of commercial paper outstanding at December 31, 2002, of which $206
million was denominated in foreign currencies.
Effective October 14, 2003, we entered into two new revolving credit facilities to replace our previously existing $2 billion 364-day facility that expired on that same date. The new revolving credit facilities consist of a $1.5 billion 364-day facility and a $500 million five-year facility. We also have two revolving credit facilities totaling $2 billion expiring in October 2006. There were no outstanding borrowings under these facilities at December 31, 2003. These credit facilities support the companys $4 billion commercial paper program. In addition, one of our Norwegian subsidiaries has two $300 million revolving credit facilities that expire in June 2004, under which no borrowings were outstanding at December 31, 2003.
Moodys Investor Service has maintained a rating of A3 on our senior long-term debt; and Standard and Poors Rating Service and Fitch have maintained ratings of A-. We do not have any ratings triggers on any of our corporate debt that would cause an automatic event of default in the event of a downgrade of our credit rating and thereby impact our access to liquidity. In the event that our credit rating deteriorated to a level that would prohibit us from accessing the commercial paper market, we would still be able to access funds under our $4.6 billion revolving credit facilities. Based on our year-end commercial paper balance of $709 million, we had access to $3.9 billion in borrowing capacity as of December 31, 2003, which provides ample liquidity to cover daily operations.
Shelf Registration
In late 2002, we filed a universal shelf registration statement with the U.S.
Securities and Exchange Commission for various types of debt and equity
securities. As a result, we have available to issue and sell a total of $5
billion of various types of securities under the universal shelf registration
statement.
Minority Interests
At December 31, 2003, we had outstanding $842 million of equity held by
minority interest owners, including a net minority interest of $496 million in
Ashford Energy Capital S.A. and a $141 million net minority interest in Conoco
Corporate Holdings L.P.
| In December 2001, in order to raise funds for general corporate purposes, Conoco and Cold Spring Finance S.a.r.l. formed Ashford Energy Capital S.A. through the contribution of a $1 billion Conoco subsidiary promissory note and $500 million cash by Cold Spring. Through its initial $500 million investment, Cold Spring is entitled to a cumulative annual preferred return based on three-month LIBOR rates, plus 1.27 percent. The preferred return at December 31, 2003, was 2.48 percent. In 2008, and at each 10-year anniversary thereafter, Cold Spring may elect to |
59
remarket their investment in Ashford, and if unsuccessful, could require ConocoPhillips to provide a letter of credit in support of Cold Springs investment, or in the event that such letter of credit is not provided, then cause the redemption of their investment in Ashford. Should ConocoPhillips credit rating fall below investment grade, Ashford would require a letter of credit to support $475 million of the term loans, as of December 31, 2003, made by Ashford to other ConocoPhillips subsidiaries. If the letter of credit is not obtained within 60 days, Cold Spring could cause Ashford to sell the ConocoPhillips subsidiary notes. At December 31, 2003, Ashford held $1.6 billion of ConocoPhillips subsidiary notes and $25 million in investments unrelated to ConocoPhillips. We report Cold Springs investment as a minority interest because it is not mandatorily redeemable and the entity does not have a specified liquidation date. Other than the obligation to make payment on the subsidiary notes described above, Cold Spring does not have recourse to our general credit. | ||||
| In 1999, in order to raise funds for general corporate purposes, Conoco formed Conoco Corporate Holdings L.P., contributing an office building and four aircraft to the partnership. Conoco Corporate Holdings L.P. is a limited-life entity that must be liquidated in 2019. The limited partner interest was sold to Highlander Investors L.L.C. for $141 million, which represented an initial net 47 percent interest. Highlanders current investment in Conoco Corporate Holdings L.P. is 24.4 percent. Highlander is entitled to a cumulative annual priority return on its investment of 7.86 percent. The net minority interest in Conoco Corporate Holdings L.P. was $141 million at December 31, 2003 and 2002, and is callable without penalty beginning in the fourth quarter of 2004. |
Receivables Factoring
At December 31, 2003 and 2002, we also had sold $226 million and $264 million,
respectively, of receivables under factoring arrangements. We retained
servicing responsibility for these sold receivables, which gives us certain
benefits, the fair value of which approximates the fair value of
the liability incurred for continuing to service the receivables. See Note
15Sales of Receivables, in the Notes to Consolidated Financial Statements, for
additional information.
Off-Balance Sheet Arrangements
Receivables Monetization
At December 31, 2002, certain credit card and trade receivables had been sold
to two Qualifying Special Purpose Entities (QSPEs) in revolving-period
securitization arrangements. These arrangements provided for us to sell, and
the QSPEs to purchase, certain receivables and for the QSPEs to then issue
beneficial interests of up to $1.5 billion to five bank-sponsored entities.
All five bank-sponsored entities are multi-seller conduits with access to the
commercial paper market and purchase interests in similar receivables from
numerous other companies unrelated to us. We have no ownership interests, nor
any variable interests, in any of the bank-sponsored entities. As a result, we
do not consolidate any of these entities. Furthermore, we do not consolidate
the QSPEs because they meet the requirements of SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, to be excluded from the consolidated financial statements of
ConocoPhillips.
During 2003, we purchased from the bank-sponsored entities the senior interests of one of our two existing QSPEs and discontinued selling receivables to it. We have consolidated this QSPE since acquiring the senior interests. Also during 2003, the third-party beneficial interest holders approved amendments to the other QSPE to increase the amount of third-party beneficial interests that can be issued to $1.2 billion. These changes resulted in a net reduction of the maximum level of senior beneficial interests that can be issued to third-party beneficial interest holders from $1.5 billion to $1.2 billion. At December 31, 2003
60
and 2002, we had sold accounts receivable of $1.2 billion and $1.3 billion, respectively. The receivables transferred to the QSPE meets the isolation requirements and other requirements of SFAS No. 140 to be accounted for as sales. Accordingly, receivables transferred to the QSPEs were accounted for as sales.
We retain beneficial interests in this QSPE that are subordinate to the beneficial interests issued to the bank-sponsored entities. These retained interests, which are reported on the balance sheet in accounts and notes receivablerelated parties, were $1.3 billion at both December 31, 2003 and 2002. We also retain servicing responsibility related to the sold receivables, which gives us certain benefits, the fair value of which approximates the fair value of the liability incurred for continuing to service the receivables. The carrying value of the subordinated beneficial interests approximates fair market value due to the short term of the underlying assets, which makes stress testing unnecessary.
Preferred Stock
During 1996 and 1997, we formed two statutory business trusts, Phillips 66
Capital I (Trust I) and Phillips 66 Capital II (Trust II), with ConocoPhillips
owning all of the common securities of the trusts. The sole purpose of the
trusts was to issue preferred securities to outside investors, investing the
proceeds thereof in an equivalent amount of subordinated debt securities of
ConocoPhillips. The two trusts were established to raise funds for general
corporate purposes. On May 31, 2002, we redeemed all of the outstanding
subordinated debt securities held by Trust I, which triggered the redemption of
the $300 million of trust preferred securities of Trust I at par value, $25 per
share. The redemption was funded by the issuance of commercial paper.
At December 31, 2003, Trust II had $350 million of mandatorily redeemable preferred securities outstanding, whose sole asset was $361 million of ConocoPhillips subordinated debt securities, which bear interest at 8 percent. Distributions on the trust preferred securities are paid by the trust with funds from interest payments made by ConocoPhillips on the subordinated debt securities. We made interest payments in 2003 totaling $29 million. In addition, we have guaranteed the payment obligations of the trust on the trust preferred securities to the extent we have made interest payments on the subordinated debt securities. Prior to January 1, 2003, we consolidated Trust II and the mandatorily redeemable preferred securities were presented in the mezzanine section of the balance sheet. The subordinated debt securities and related income statement effects were eliminated in our consolidated financial statements. However, with the adoption of the provisions of FIN 46, effective January 1, 2003, we were required to deconsolidate Trust II, which had the effect of increasing debt by $361 million since the subordinated debt securities were no longer eliminated in consolidation, and removing the mandatorily redeemable preferred securities from our balance sheet. When we redeem the subordinated debt securities, Trust II is required to apply all the redemption proceeds to the immediate redemption of the preferred securities. See Note 2Changes in Accounting Principles and Note 19Preferred Stock and Other Minority Interests, in the Notes to Consolidated Financial Statements, for additional information.
Affiliated Companies
As part of our normal ongoing business operations and consistent with normal
industry practice, we invest in, and enter into, numerous agreements with other
parties to pursue business opportunities, which share costs and apportion risks
among the parties as governed by the agreements. At December 31, 2003, we were
liable for certain contingent obligations under various contractual
arrangements as described below.
| Hamaca: The Hamaca project involves the development of heavy-oil reserves from the Orinoco Oil Belt. We own a 40 percent interest in the Hamaca project, which is operated by Petrolera Ameriven on behalf of the owners. The other participants in Hamaca are Petroleos de Venezuela S.A. (PDVSA) and ChevronTexaco Corporation. Our interest is held through a jointly owned |
61
limited liability company, Hamaca Holding LLC, for which we use the equity method of accounting. Hamaca Holding LLC revenues for 2003 were approximately $284 million, expenses were approximately $143 million and cash provided by operating activities was approximately $143 million. We have a 57.1 percent non-controlling ownership interest in Hamaca Holding LLC. In the second quarter of 2001, we, along with our co-venturers in the Hamaca project, secured approximately $1.1 billion in a joint debt financing for our heavy-crude oil project in Venezuela. The Export-Import Bank of the United States provided a guarantee supporting a 17-year-term $628 million bank facility. The joint venture also arranged a $470 million 14-year-term commercial bank facility for the project. Total debt of $969 million was outstanding under these credit facilities at December 31, 2003. Of this amount, $388 million is recourse to ConocoPhillips. The proceeds of these joint financings are being used to primarily fund a heavy-oil upgrader. The remaining necessary funding will be provided by capital contributions from the co-venturers on a pro rata basis to the extent necessary to successfully complete construction. Once completion certification is achieved (required by October 1, 2005), the joint project financings will become non-recourse with respect to the co-venturers and the lenders under those facilities can then look only to the Hamaca projects cash flows for payment. | ||||
| Merey Sweeny L.P. (MSLP): MSLP is a limited partnership in which we and PDVSA each own an indirect 50 percent interest. During 1999, MSLP issued $350 million of 8.85 percent bonds due 2019 that we, along with PDVSA, are jointly-and-severally liable for under a construction completion guarantee. The bond proceeds were used to fund construction of a coker, vacuum unit and related facilities at our Sweeny, Texas, refinery, plus certain improvements to existing facilities at the same location. MSLP owns the coker and vacuum unit and, in the third quarter of 2000, began processing long residue produced from the Venezuelan Merey crude oil delivered under a supply agreement that we have with PDVSA. MSLP charges us a fee, which totaled approximately $145 million in 2003, to process the long residue through the vacuum unit and coker. This is the partnerships primary source of revenue. MSLP revenues for 2003 were approximately $162 million, expenses were approximately $140 million and cash provided by operating activities was approximately $31 million. If completion certification is not attained by June 18, 2004, the 8.85 percent bonds could be called and the bondholders would look to the two MSLP partners for repayment. MSLP is currently awaiting receipt of a permit for a new waste water pipeline and working to resolve issues in placing its insurance program, after which we expect to achieve completion certification in the second quarter of 2004. Upon completion certification, the 8.85 percent bonds become non-recourse to the two MSLP partners and the bondholders can then look only to MSLP cash flows for payment. | |||
We purchased the improvements to existing facilities from MSLP for a price equal to the cost of construction, and MSLP provided seller financing. Terms of financing provide for 240 monthly payments of principal and interest commencing September 2000 with interest accruing at a 7 percent annual rate. The principal balance due on the seller financing was $131 million at December 31, 2003, and is included as long-term debt in our balance sheet. MSLP pays a monthly access fee to us, which totaled approximately $20 million in 2003, for the use of the improvements to the refinery. The access fee equals the monthly principal and interest paid by us to purchase the improvements from MSLP. To the extent the access fee is not paid by MSLP, we are not obligated to make payments for the improvements. | ||||
During the first quarter of 2002, MSLP issued $25 million of tax-exempt bonds due 2021. This issuance, combined with similar bonds MSLP issued in 1998, 2000, and 2001, bring the total outstanding to $100 million. As a result of the companys support as a primary obligor of a 50 percent share of these MSLP financings, $50 million of long-term debt is included in our balance sheet at December 31, 2003 and 2002, respectively. |
62
| Other: At December 31, 2003, we had guarantees of approximately $340 million outstanding for our portion of other joint-venture debt obligations, which have terms of up to 22 years. Included in these outstanding guarantees was $158 million associated with the Polar Lights Company joint venture in Russia. Payment will be required if a joint venture defaults on its debt obligations. |
Capital Requirements
For information about our capital expenditures and investments, see Capital Spending below.
Our balance sheet debt at December 31, 2003, was $17.8 billion. This reflects debt reductions of approximately $4.8 billion during 2003, including accounting changes that increased balance sheet debt approximately $2.8 billion as a result of the adoption of FIN 46. See Note 2Changes in Accounting Principles and Note 14Debt, in the Notes to Consolidated Financial Statements, for additional information.
During 2003, we reduced our commercial paper balance outstanding from $1.5 billion at December 31, 2002, to $709 million at December 31, 2003. In 2003, we paid off the following notes and debt facilities as they were called or matured and funded the payments with cash from operating activities and proceeds from asset dispositions:
| $250 million 8.49% Notes due 2023, at 104.245 percent; | |||
| $150 million 8.25% Mortgage Bonds due May 15, 2003; | |||
| $250 million 7.92% Notes due in 2023, at 103.96 percent; | |||
| $250 million 7.20% Notes due 2023, at 103.60 percent; | |||
| $100 million 6.65% Notes that matured on March 1, 2003; | |||
| $180 million SRW Cogeneration Limited Partnership note; | |||
| $500 million Floating Rate Notes due April 15, 2003; | |||
| $90 million Tosco Trust 2000-E 8.78% Senior Secured Notes due 2010; | |||
| $245 million Tosco Trust 2000-E 8.58% Senior Secured Notes due 2010; | |||
| $199 million Arctic Funding, Limited Partnership 6.85% Senior Secured Note due 2011; | |||
| $100 million of floating rate aviation equipment lease obligations having a final maturity in 2004; | |||
| $489 million of fixed and floating rate ocean vessel lease obligations having final maturities from 2004 to 2005; and | |||
| $1,130 million of floating rate marketing lease obligations having maturities from 2003 to 2006. |
In October and November 2003, we executed certain interest rate swaps that had the effect of converting $1.5 billion of debt from fixed to floating rate. These swaps qualify for hedge accounting under SFAS 133, Accounting for Derivative Instruments and Hedging Activities.
Also during 2003, we issued $79.5 million of tax-exempt bonds and assumed an additional amount of $20 million.
63
Contractual Obligations
The following table summarizes our aggregate contractual fixed and variable obligations as of December 31, 2003:
Millions of Dollars |
||||||||||||||||||||
Payments Due by Period |
||||||||||||||||||||
Up to | 1-3 | 3-5 | After | |||||||||||||||||
At December 31, 2003 | Total | 1 Year | Years | Years | 5 Years | |||||||||||||||
Debt obligations* |
$ | 17,720 | 1,434 | 3,110 | 1,202 | 11,974 | ||||||||||||||
Capital lease obligations |
60 | 6 | 12 | 38 | 4 | |||||||||||||||
Total debt |
17,780 | 1,440 | 3,122 | 1,240 | 11,978 | |||||||||||||||
Operating lease obligations |
3,073 | 471 | 810 | 619 | 1,173 | |||||||||||||||
Purchase obligations** |
58,231 | 19,972 | 4,869 | 3,915 | 29,475 | |||||||||||||||
Other long-term liabilities*** |
||||||||||||||||||||
Asset retirement obligations |
2,685 | 61 | 242 | 364 | 2,018 | |||||||||||||||
Accrued environmental costs |
1,119 | 140 | 304 | 138 | 537 | |||||||||||||||
Total |
$ | 82,888 | 22,084 | 9,347 | 6,276 | 45,181 | ||||||||||||||
* | Total debt excluding capital lease obligations. Includes net unamortized premiums and discounts. |
** | Represents any agreement to purchase goods or services that is enforceable and legally binding and that specifies all significant terms. The majority of the purchase obligations are market-based contracts. Includes: (1) our commercial activities of $23.0 billion, of which $11.1 billion are primarily related to the supply of crude oil to our refineries and the optimization of the supply chain, $5.6 billion primarily related to the supply of unfractionated NGLs to fractionators, optimization of NGL assets, and for resale to customers, $4.4 billion primarily related to natural gas for resale to customers, $1.7 billion of futures, and $217 million related to the purchase side of exchange agreements; (2) $23.3 billion of purchase commitments for products, mostly natural gas and natural gas liquids, from CPChem over the remaining term of 97 years; and (3) purchase commitments for jointly owned fields and facilities where we are the operator, of which some of the obligations will be reimbursed by our co-owners in these properties. Does not include: (1) purchase commitments for jointly owned fields and facilities where we are not the operator; (2) our agreement to purchase up to 104,000 barrels per day of Petrozuata crude oil for a market-based formula price over the term of the Petrozuata joint venture (about 35 years) in the event that Petrozuata is unable to sell the production for higher prices; and (3) an agreement to purchase up to 165,000 barrels per day of Venezuelan Merey, or equivalent, crude oil for a market price over a remaining 16-year term if a variety of conditions are met. |
*** | Does not include: (1) Taxesthe companys consolidated balance sheet reflects liabilities related to income, excise, property, production, payroll and environmental taxes. We anticipate the current liability of $2,676 million for accrued income and other taxes will be paid in the next year. We have other accrued tax liabilities whose resolution may not occur for several years, so it is not possible to determine the exact timing or amount of future payments. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes; (2) Pensionsfor the 2004 through 2008 time period, we expect to contribute an average of $400 million per year to our qualified and non-qualified pension and postretirement medical plans in the United States and an average of $100 million per year to our non-U.S. plans, which are expected to be in excess of required minimums in many cases. Our required minimum funding in 2004 is expected to be $95 million in the United States and $75 million outside the United States; (3) Severancewe have expected severance payments of $109 million in 2004 and $3 million in 2005; and (4) Interestwe anticipate payments of $1,046 million in 2004, $2,012 million for the period 2005 through 2006, $1,708 million for the period 2007 through 2008, and $8,955 million for the remaining years to total $13,721 million. |
64
Capital Spending
Capital Expenditures and Investments
Millions of Dollars |
||||||||||||||||
2004 | ||||||||||||||||
Budget | 2003 | 2002 | 2001 | |||||||||||||
E&P |
||||||||||||||||
United
StatesAlaska |
$ | 656 | 570 | 706 | 965 | |||||||||||
United StatesLower 48 |
763 | 848 | 499 | 389 | ||||||||||||
International |
3,939 | 3,090 | 2,071 | 1,162 | ||||||||||||
5,358 | 4,508 | 3,276 | 2,516 | |||||||||||||
Midstream |
10 | 10 | 5 | | ||||||||||||
R&M |
||||||||||||||||
United States |
1,039 | 860 | 676 | 423 | ||||||||||||
International |
246 | 319 | 164 | 5 | ||||||||||||
1,285 | 1,179 | 840 | 428 | |||||||||||||
Chemicals |
| | 60 | 6 | ||||||||||||
Emerging Businesses |
62 | 284 | 122 | | ||||||||||||
Corporate and Other* |
167 | 188 | 85 | 66 | ||||||||||||
$ | 6,882 | 6,169 | 4,388 | 3,016 | ||||||||||||
United States |
$ | 2,639 | 2,493 | 2,043 | 1,849 | |||||||||||
International |
4,243 | 3,676 | 2,345 | 1,167 | ||||||||||||
$ | 6,882 | 6,169 | 4,388 | 3,016 | ||||||||||||
Discontinued operations |
$ | | 224 | 97 | 69 | |||||||||||
* Excludes discontinued operations. |
Our capital spending for continuing operations for the three-year period ending December 31, 2003, totaled $13.6 billion. Spending was primarily focused on the growth of our E&P business, with 76 percent of total spending for continuing operations in this segment. The capital programs of DEFS, our gas gathering, processing and marketing joint-venture company, and CPChem, our chemicals joint-venture company, are intended to be self-funding, and are not reflected in the amounts above.
Including about $500 million in capitalized interest and $400 million that will be funded by minority interests in the Bayu-Undan gas export project, our Board has approved $6.9 billion for capital projects and investments for continuing operations in 2004, a 12 percent increase over our 2003 capital spending of $6.2 billion. We plan to direct 78 percent of our 2004 capital budget to E&P and 19 percent to R&M. The remaining budget will be allocated toward emerging businesses, mainly power generation; and general corporate purposes, with a majority related to global integration of systems. Thirty-eight percent of the budget is targeted for projects in the United States.
E&P
Capital spending for continuing operations for E&P during the three-year period ending December 31, 2003, totaled $10.3 billion. The expenditures over the three-year period supported several key exploration and development projects including:
| National Petroleum Reserve-Alaska (NPR-A) and satellite field prospects on Alaskas North Slope; |
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| Magnolia development in the deepwater Gulf of Mexico; | |||
| Canadian conventional oil and gas projects, the Surmont oil sands project and expansion of the Syncrude project; | |||
| The Hamaca heavy-oil project in Venezuelas Orinoco Oil Belt; | |||
| The Jade, Clair, CMS3 and Britannia satellite developments in the United Kingdom; | |||
| The Grane field and Ekofisk Area growth project in the Norwegian North Sea; | |||
| The Kashagan field in the north Caspian Sea, offshore Kazakhstan; | |||
| The Peng Lai 19-3 discovery in Chinas Bohai Bay and additional Bohai Bay appraisal and satellite field prospects; | |||
| The Bayu-Undan gas recycle and gas development projects in the Timor Sea; | |||
| Blocks 15-1 and 15-2 in Vietnam; | |||
| The Belanak and Suban projects in Indonesia; and | |||
| Acquisition of deepwater exploratory interests in Angola, Nigeria, Brazil, and the U.S. Gulf of Mexico. |
Capital expenditures for construction of our Endeavour Class tankers and an additional interest in the Trans-Alaska Pipeline System were also included in the E&P segment.
We have contracted to build, for approximately $200 million each, five double-hulled Endeavour Class tankers for use in transporting Alaskan crude oil to the U.S. West Coast. During 2001, the Polar Endeavour, the first Endeavour Class tanker, entered service. The second tanker, the Polar Resolution, entered service in May 2002 and the third tanker, the Polar Discovery, was delivered for service in September 2003. We expect to add a new Endeavour Class tanker to our fleet in both 2004 and 2005, allowing us to retire older ships and cancel non-operated charters.
In Alaska, we continued development drilling in the Kuparuk, Tabasco and West Sak fields in the Greater Kuparuk Area, Prudhoe Bay satellite fields and the Alpine field. In 2003, we, along with our co-venturers, drilled or participated in 71 new development wells at Greater Prudhoe Bay, 17 new development wells at Greater Kuparuk and five development wells at Alpine. Also in 2003, funds were expended on the Alpine capacity expansion project that is expected to start up in the second half of 2004.
In the Lower 48, we continued to explore and develop our acreage positions in the deepwater Gulf of Mexico, South Texas, the San Juan Basin, the Permian Basin, and the Texas Panhandle. In the Gulf of Mexico, development drilling has been completed in the Magnolia and Princess Phase 1 fields. Sanction for the K2 project development is expected in the first quarter of 2004. Preliminary engineering for Princess Phase 2 and Ursa waterflood is expected to begin in the first quarter of 2004. Magnolias tension-leg platform construction is ongoing and first production is expected prior to the end of 2004. In February 2003, we began drilling the Lorien exploration well on Block 199, which was declared a discovery in July. The well has been temporarily suspended pending evaluation of development alternatives. The Voss deepwater exploratory well drilled in Keathley Canyon Block 511 was declared dry in early 2003 and as required was charged against 2002 earnings. The Yorick deepwater exploratory well in Green Canyon Block 435 was declared a dry hole in late 2003.
Onshore capital was focused on natural gas developments in the San Juan Basin of New Mexico and the Lobo Trend of South Texas. In addition, Lower 48 is pursuing select opportunities in its other producing basins.
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In Canada, we continued with development of the Stage III expansion-mining project in the Canadian province of Alberta, which is expected to increase our Canadian Syncrude production. The Aurora Train 2 project (the new mine) started up in late-October 2003. The upgrader expansion project is expected to start up in the second half of 2005. In the fourth quarter of 2003, approval was obtained for our project in Surmont. Our ownership share is 43.5 percent. The Surmont lease covers over 200 square miles. This initial development project is designed to use steam assisted gravity drainage technology, with first oil production expected in 2006. In addition to these projects, we also are involved in conventional oil and gas properties in Canada.
During the fourth quarter of 2001, we began production of heavy crude oil from the Hamaca project in Venezuelas Orinoco Oil Belt. Construction of an upgrader to convert heavy crude oil into a medium-grade crude oil continues. Completion of the upgrader is expected by the end of 2004. We own a 40 percent equity interest in the Hamaca project. Our other heavy-oil project in Venezuela, Petrozuata, incurred capital expenditures in 2003 associated with solids handling and restoration capacity projects, as well as ongoing drilling.
In addition to the Hamaca and Petrozuata developments, we have an interest in the Corocoro oil discovery in Venezuelas Gulf of Paria West. In April 2003, Venezuelan authorities and co-venturers approved Phase I of the development plan for the Corocoro field. We are the operator of the block. In September 2003, we acquired a 37.5 percent interest in the Gulf of Paria East Block. A portion of the Corocoro discovery extends onto this block. Our interest in the development is 32.2 percent.
In February 2003, Venezuelan authorities granted a 35-year license to ChevronTexaco to appraise and develop Plataforma Deltana Block 2. ChevronTexaco selected us as their minority partner in accordance with the terms of the license, which was approved by the Venezuelan government in late 2003. We now have a 40 percent interest in the project. Plataforma Deltana Block 2 is located to the east of our Corocoro discovery. Block 2 already has a gas discovery on it, and additional drilling is planned for 2004.
In Brazil, we added joint-venture partners for our two deepwater blocks, BM-ES-11 and BM-PAMA-3, and purchased additional seismic data in 2002. In 2003, 3-D seismic results indicated the prospect for BM-ES-11 was below expectations, leading to a write-off of our leasehold investment and the initiation of plans to exit the block. Further evaluation of BM-PAMA-3 is planned for 2004.
In 2003, we continued with several development projects in the U.K. and Norwegian sectors of the North Sea, including the Clair field in the U.K. sector. We expect first production from Clair in late 2004. Late in the third quarter of 2003, we and our co-venturers began oil production from the Grane field in the Norwegian North Sea. Net peak production from proved reserves of approximately 14,000 barrels per day is anticipated in 2005.
We continued the development of the CMS3 area, a single unitized project, comprising five natural gas reservoirs in the southern sector of the U.K. North Sea. Collectively, the fields are known as CMS3 due to their utilization of the production and transportation facilities of our operated Caister Murdoch System (CMS). In September 2002, production commenced from the Hawksley field, followed in the fourth quarter by production at the Murdoch K field. During 2003, McAdam came onstream in the second quarter and Watt began in the fourth quarter. Drilling operations on the final reservoir, Boulton H, are ongoing in 2004. We are the operator of CMS3 and hold a 59.5 percent interest.
In December 2003, our Board approved the development of the Britannia field satellites in the North Sea. A development plan has been submitted for government approval. These satellites are comprised of the Callanish and Brodgar fields. The Callanish field is an oil reservoir, and the Brodgar field is a gas
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condensate reservoir with properties similar to those of Britannia. The fields are planned to be developed jointly via a bridge-linked platform to Britannia, with production startup scheduled for 2007. We are the operator of both fields with an interest of 75 percent in Brodgar and 83.5 percent in Callanish.
Elsewhere in the Norwegian sector of the North Sea, in 2003, we, along with our co-venturers, approved a plan to further develop the Ekofisk Area to increase the recovery of oil and gas from the area by improving the areas processing capacity and reliability. The Ekofisk growth project consists of two interrelated components: the construction and installation of a new steel wellhead and process platform and an increase in capacity from existing facilities. We expect to complete and install the steel jacket in 2004 and the topsides early in the summer of 2005. Additional production from this development is anticipated to begin in the fall of 2005. We are modifying the existing Ekofisk Complex and four additional platforms to increase processing capacity.
In 2002, we and our co-venturers, in conjunction with the government of the Republic of Kazakhstan, declared the Kashagan field on the Kazakhstan shelf in the north Caspian Sea to be commercial. A development plan for the field was approved by the Republic of Kazakhstan in February 2004. Four of five planned appraisal wells on Kashagan had been successfully completed by the end of 2003. The fifth well is currently being tested. In May 2002, we along with the other remaining co-venturers, completed the acquisition of proportionate interests of two co-venturers' rights, which increased our ownership interest from 7.14 percent to 8.33 percent. In October 2002, we and our co-venturers announced a new hydrocarbon discovery in the Kazakhstan sector of the Caspian Sea. In 2003, a 3-D survey was carried out over the Kalamkas field and an initial appraisal well is planned for 2005.
During 2003, we exercised our pre-emptive rights related to B.G. Internationals sale of their share in the North Caspian License that includes the Kashagan field. The transaction is expected to close in 2004, at which time our interest in the license will increase from 8.33 percent to 10.19 percent. In November 2003, we and our co-venturers announced the successful completion of the first offshore exploration wells on the Aktote and Kashagan Southwest prospects. These two wells are located in the Kazakhstan sector of the Caspian Sea in an area adjacent to the Kashagan field. Another exploration well, on the Kairan prospect, completed drilling in 2003 and will be tested in 2004.
In late-December 2002, we began production from Phase I of our Peng Lai 19-3 development located on Block 11/05 in Chinas Bohai Bay. During 2003, we continued with planning and design for Phase II of the Peng Lai 19-3 development, which includes multiple wellhead platforms, central processing facilities, and a floating storage and offloading facility. We are developing, in conjunction with Phase II, the Peng Lai 25-6 oil field, located three miles east of Peng Lai 19-3. We also drilled exploration wells on the Peng Lai 19-9 prospect and the Peng Lai 13-1 prospect, which resulted in two discoveries. The Peng Lai 19-9-1 well is located two miles east of the Peng Lai 19-3 oil field, and along with adjacent structures will be a part of the Phase II development.
In the Timor Sea, we continued with development activities associated with the Bayu-Undan gas recycle and gas development projects. We continued to drill future production wells and have installed all major facilities, including two production, processing and living quarters platforms and an unmanned production platform. A multi-product floating, storage and offloading vessel was connected to the production facilities during the fourth quarter of 2003. First liquids production began in February 2004, and full capacity of 62,000 net barrels per day of condensate and natural gas liquids is anticipated to be reached in the third quarter of 2004. An average rate of 23,000 net barrels per day of combined condensate and natural gas liquids is expected for 2004.
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We also have received approval of the gas development plan for the Bayu-Undan project from the Timor Sea Designated Authority, concluded fiscal and legal provisions with the government of Timor Lesté, and executed new production sharing contract (PSC) arrangements with the Designated Authority. The gas development project includes a liquefied natural gas (LNG) plant, including a pipeline to Darwin, Australia. The first LNG cargo from the 3.52 million-ton-per-year facility is scheduled for delivery in early 2006. During the third quarter of 2003, construction of the LNG facility and the pipeline began. In June 2003, we sold what currently equates to a 10.08 percent interest in the unitized Bayu-Undan field; purchased other interests that currently equate to a 2.65 percent interest in the field; sold a 43.3 percent interest in the Bayu-Undan pipeline under construction; and sold a 43.3 percent interest in Darwin LNG Pty Ltd (owner of the LNG plant to be constructed). The net result is that we retain a 56.72 percent controlling interest in the integrated project.
In Vietnams Block 15-1, the Su Tu Den Phase I (southwest area) development project was approved in December 2001 and production from this area began in late-October 2003. We also are evaluating the commerciality of the Su Tu Vang fields and the northeast portion of the Su Tu Den field. In November 2003, we announced the completion of a successful exploratory well in the Su Tu Trang field in Block 15-1. Technical evaluation is in progress to assess the reservoir potential of the Su Tu Trang field.
In the third quarter of 2002, we began production from two new wellhead platforms in the Block 15-2 Rang Dong field in Vietnam. During late 2003, field facilities were upgraded to include a utilities-living quarters platform, and a central processing platform with facilities to enable gas lift, gas export and water injection. With the completion of these facilities, water injection is now possible on all three wellhead platforms and gas lift is possible on the N-1 and E-1 wellhead platforms. These facilities became operational in the fourth quarter of 2003.
We continued with the appraisal and development of key gas fields in Indonesia. In 2003, we announced the successful test of the Suban-8 delineation well on the southwest flank of the Suban gas field, located in the Corridor PSC of South Sumatra. We also completed the successful test of the North Sumpal-1 well in the Sakakemang Block located in South Sumatra, and continued on the construction of the South Jambi gas project in the South Jambi B Block also located in South Sumatra. In addition, we continue to develop the offshore Belanak and other fields in the Block B PSC in the Natuna Sea, for which a floating production storage and offloading vessel is under construction. The vessel is expected to be completed in the first half of 2005.
In May 2002, initial results showed that the first exploratory well drilled in Block 34, offshore Angola, was a dry hole. In view of this information, we reassessed the fair value of the remainder of the block and determined that our investment in the block was impaired by $77 million, both before- and after-tax. In December 2003, the second exploration well was drilled in Block 34, offshore Angola. The well encountered non-commercial gas and was plugged and abandoned. In view of this information, we fully impaired our remaining investment in the block.
In 2003, we obtained a 40 percent interest in Block 248 and a 20 percent interest in Block 214, both offshore Nigeria. First exploration drilling is planned for Block 248 in the second quarter of 2004.
Other capital spending for E&P during the three-year period ended December 31, 2003, supported:
| The Eldfisk waterflood development in Norway; | |||
| The Jade field development in the United Kingdom; | |||
| The acquisition and development of coalbed methane and conventional gas prospects and producing properties in the U.S. Lower 48; and |
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| North Sea prospects in the U.K. and Norwegian sectors, plus other Atlantic Margin wells in the United Kingdom, Greenland and the Faroe Islands. |
2004 Capital Budget
E&Ps 2004 capital budget for continuing operations is $5.4 billion, 19 percent higher than actual expenditures in 2003. Twenty-six percent of E&Ps 2004 capital budget is planned for the United States, with 46 percent of that slated for Alaska.
We have budgeted $628 million for worldwide exploration capital activities in 2004, with 17 percent of that amount, $106 million, allocated to the United States. Outside the United States, significant exploration expenditures are planned in Kazakhstan, Venezuela, the United Kingdom and Norway.
We plan to spend $656 million in 2004 for our Alaskan operations. A majority of the capital spending will fund Prudhoe Bay, Greater Kuparuk and Western North Slope operationsincluding additional work on the Alpine capacity expansion project, Orion and West Sak field developmentsconstruction of Endeavour Class tankers, and the exploratory activity discussed above.
In the Lower 48, offshore capital expenditures will be focused on the continued development of the Magnolia, Ursa and Princess fields in the deepwater Gulf of Mexico. Onshore capital will focus primarily on developing natural gas reserves within core areas, such as the San Juan Basin of New Mexico and the Lobo Trend of South Texas.
E&P is directing $3.9 billion of its 2004 capital budget to international projects. The majority of these funds will be directed to developing major long-term projects, including the Bayu-Undan liquids and gas development projects in the Timor Sea; the Hamaca heavy-oil project in Venezuela; additional development of oil and gas reserves in offshore Block B and onshore South Sumatra blocks in Indonesia; the second phase of Bohai Bay in China; projects in the Caspian region, including Baku-Tbilisi-Ceyhan pipeline; projects in Canada, including Syncrude, Surmont heavy-oil and the Mackenzie Delta gas development; and the Qatargas 3 LNG facility in Qatar. In addition, funds will be used to expand the companys positions in the U.K. and Norwegian sectors of the North Sea.
Costs incurred for the years ended December 31, 2003, 2002, and 2001, relating to the development of proved undeveloped oil and gas reserves were $2,002 million, $1,631 million, and $1,423 million, respectively. As of December 31, 2003, estimated future development costs relating to the development of proved undeveloped oil and gas reserves for the years 2004 through 2006 were projected to be $1,767 million, $1,111 million, and $659 million, respectively.
R&M
Capital spending for continuing operations for R&M during the three-year period ending December 31, 2003, was primarily for refinery-upgrade projects to improve product yields, to meet new environmental standards, to improve the operating integrity of key processing units, and to install advanced process control technology, as well as for safety projects. Total capital spending for continuing operations for R&M for the three-year period was $2.4 billion, representing 18 percent of our total capital spending for continuing operations.
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Key projects during the three-year period included:
| Construction of a polypropylene plant at the Bayway refinery in New Jersey; | |||
| Construction of a fluid catalytic cracking unit and a S Zorb Sulfur Removal Technology (S Zorb) unit at the Ferndale, Washington, refinery; | |||
| Expansion of the alkylation unit at the Los Angeles refinery; | |||
| Capacity expansion and debottlenecking projects at the Borger, Texas, refinery; | |||
| Completion of a commercial S Zorb unit at the Borger refinery; | |||
| An expansion of capacity in the Seaway crude-oil pipeline; and | |||
| Installation of an advanced central control building and associated technologies at the Borger facility. |
In early 2003, we completed three major projects: a polypropylene plant at the Bayway refinery in Linden, New Jersey, and both a fluid catalytic cracking unit and a S Zorb unit at the Ferndale, Washington, refinery. The Bayway polypropylene plant utilizes propylene feedstock from the Bayway refinery to make up to 775 million pounds per year of polypropylene. The plant became operational in March 2003. At Ferndale, the fluid catalytic cracking unit significantly improves gasoline production per barrel of crude input and the new S Zorb unit reduces sulfur in gasoline. Both became fully operational in 2003.
Also in 2003, we made investments related to clean fuels, safety and environmental projects throughout our refining system. We completed projects at our refineries in Ponca City, Oklahoma and Roxana, Illinois, to produce the low-sulfur gasoline required by the Environmental Protection Agency (EPA). We also began construction of a new diesel hydrotreater at the Rodeo facility of our San Francisco area refinery that is expected to produce reformulated California highway diesel an estimated one year ahead of the June 2006 deadline.
In July 2003, we completed the acquisition of certain refining assets in Hartford, Illinois, from Premcor. The operations of these assets are being integrated into the operations of our nearby Wood River refinery. The overall production of the refinery will only increase slightly, but integration of the new assets will enable the refinery to process heavier, lower cost crude oil. Startup of the integrated facilities is expected in the second quarter of 2004.
Internationally, we continue to invest in our ongoing refining and marketing operations, including a replacement reformer at our Humber refinery in the United Kingdom and marketing growth in select countries in Europe and Asia.
2004 Capital Budget
R&Ms 2004 capital budget for continuing operations is $1.3 billion, a 9 percent increase over spending of $1.2 billion in 2003. Domestic spending is expected to consume 81 percent of the R&M budget.
We plan to direct about $900 million of the R&M capital budget to domestic refining, primarily to fund clean fuels projects in order to comply with new EPA standards for refined products. Worldwide, clean fuels spending for our R&M business is expected to be about $600 million, or 55 percent of the total refining budget. Our U.S. marketing and transportation businesses are expected to spend about $125 million, while the remaining budget will fund projects in our international refining and marketing businesses in Europe and the Asia Pacific region.
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Emerging Businesses
Capital spending for Emerging Businesses during 2003 was primarily for construction of the Immingham combined heat and power cogeneration plant near the companys Humber refinery in the United Kingdom. We expect the plant to be operational in mid-2004.
Emerging Businesses 2004 capital budget of $62 million is primarily dedicated to the completion of the Immingham plant.
Contingencies
Legal and Tax Matters
We accrue for contingencies when a loss is probable and the amounts can be reasonably estimated. Based on currently available information, we believe that it is remote that future costs related to known contingent liability exposures will exceed current accruals by an amount that would have a material adverse impact on the companys financial statements.
All significant litigation arising from the March 27, 2000, explosion and fire that occurred in an out-of-service butadiene storage tank at the K-Resin styrene-butadiene copolymer (SBC) plant has now been resolved.
Environmental
We are subject to the same numerous international, federal, state, and local environmental laws and regulations, as are other companies in the petroleum exploration and production industry; and refining, marketing and transportation of crude oil and refined products businesses. The most significant of these environmental laws and regulations include, among others, the:
| Federal Clean Air Act, which governs air emissions; | |||
| Federal Clean Water Act, which governs discharges to water bodies; | |||
| Federal Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), which imposes liability on generators, transporters, and arrangers of hazardous substances at sites where hazardous substance releases have occurred or are threatened to occur; | |||
| Federal Resource Conservation and Recovery Act (RCRA), which governs the treatment, storage, and disposal of solid waste; | |||
| Federal Oil Pollution Act of 1990 (OPA90), under which owners and operators of onshore facilities and pipelines, lessees or permittees of an area in which an offshore facility is located, and owners and operators of vessels are liable for removal costs and damages that result from a discharge of oil into navigable waters of the United States; | |||
| Federal Emergency Planning and Community Right-to-Know Act (EPCRA), which requires facilities to report toxic chemical inventories with local emergency planning committees and responses departments; | |||
| Federal Safe Drinking Water Act, which governs the disposal of wastewater in underground injection wells; and |
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| U.S. Department of the Interior regulations, which relate to offshore oil and gas operations in U.S. waters and impose liability for the cost of pollution cleanup resulting from operations, as well as potential liability for pollution damages. |
These laws and their implementing regulations set limits on emissions and, in the case of discharges to water, establish water quality limits. They also, in most cases, require permits in association with new or modified operations. These permits can require an applicant to collect substantial information in connection with the application process, which can be expensive and time-consuming. In addition, there can be delays associated with notice and comment periods and the agencys processing of the application. Many of the delays associated with the permitting process are beyond the control of the applicant.
Many states and foreign countries where we operate also have, or are developing, similar environmental laws and regulations governing these same types of activities. While similar, in some cases these regulations may impose additional, or more stringent, requirements that can add to the cost and difficulty of marketing or transporting products across state and international borders.
The ultimate financial impact arising from environmental laws and regulations is neither clearly known nor easily determinable as new standards, such as air emission standards, water quality standards and stricter fuel regulations, continue to evolve. However, environmental laws and regulations, including those that may arise to address concerns about global climate change, are expected to continue to have an increasing impact on our operations in the United States and in other countries in which we operate. Notable areas of potential impacts include air emission compliance and remediation obligations in the United States. Under the Clean Air Act, the EPA has promulgated a number of stringent limits on air emissions and established a federally mandated operating permit program. Violations of the Clean Air Act and most other environmental laws and regulations in the United States are enforceable with civil and criminal sanctions.
The EPA also has promulgated specific rules governing the sulfur content of gasoline, known generically as the Tier II Sulfur Rules, the first phase requirements of which became applicable to our gasoline as of January 2004. To meet the requirements, we are implementing a compliance strategy that relies on the use of a combination of technologies, including our proprietary S Zorb technology.
The EPA also has promulgated rules regarding the sulfur content in highway diesel fuel, which become applicable in 2006. In April 2003, the EPA proposed a rule regarding emissions from non-road diesel engines and limiting non-road diesel fuel sulfur content. If promulgated, this rule would significantly reduce non-road diesel fuel sulfur content limits as early as 2007. We are currently evaluating S Zorb systems for removing sulfur from diesel fuel in special applications. The refining industry is actively considering several advanced and conventional technologies for complying with these rules. Because the non-road rule is not final, we are still evaluating and developing capital strategies for future compliance. Additional areas of potential air-related impact are the proposed revisions to the National Ambient Air Quality Standards (NAAQS) and the Kyoto Protocol. In July 1997, the EPA promulgated more stringent revisions to the NAAQS for ozone and particulate matter. Since that time, final adoption of these revisions has been the subject of litigation (American Trucking Association, Inc. et al. v. United States Environmental Protection Agency) that eventually reached the U.S. Supreme Court during the fall of 2000. In February 2001, the U.S. Supreme Court remanded this matter, in part, to the EPA to address the implementation provisions relating to the revised ozone NAAQS. If adopted, the revised NAAQS could result in substantial future environmental expenditures for us.
In 1997, an international conference on global warming concluded an agreement, known as the Kyoto Protocol, which called for reductions of certain emissions that contribute to increases in atmospheric greenhouse gas concentrations. The United States has not ratified the treaty codifying the Kyoto Protocol
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but may in the future. In addition, other countries where we have interests, or may have interests in the future, have made commitments to the Kyoto Protocol and are in various stages of formulating applicable regulations. Currently, it is not possible to accurately estimate the costs that we could incur to comply with such regulations, but such expenditures could be substantial.
We also are subject to certain laws and regulations relating to environmental remediation obligations associated with current and past operations. Such laws and regulations include CERCLA and RCRA and their state equivalents. Remediation obligations include cleanup responsibility arising from petroleum releases from underground storage tanks located at numerous past and present ConocoPhillips-owned and/or operated petroleum-marketing outlets throughout the United States. Federal and state laws require that contamination caused by such underground storage tank releases be assessed and remediated to meet applicable standards. In addition to other cleanup standards, many states have adopted cleanup criteria for methyl tertiary-butyl ether (MTBE) for both soil and groundwater. MTBE standards continue to evolve, and future environmental expenditures associated with the remediation of MTBE-contaminated underground storage tank sites could be substantial.
At RCRA permitted facilities, we are required to assess environmental conditions. If conditions warrant, we may be required to remediate contamination caused by prior operations. In contrast to CERCLA, which is often referred to as Superfund, the cost of corrective action activities under RCRA corrective action programs typically is borne solely by us. Over the next decade, we anticipate that significant ongoing expenditures for RCRA remediation activities may be required, but such annual expenditures for the near term are not expected to vary significantly from the range of such expenditures we have experienced over the past few years. Longer term, expenditures are subject to considerable uncertainty and may fluctuate significantly.
We, from time to time, receive requests for information or notices of potential liability from the EPA and state environmental agencies alleging that we are a potentially responsible party under CERCLA or an equivalent state statute. On occasion, we also have been made a party to cost recovery litigation by those agencies or by private parties. These requests, notices and lawsuits assert potential liability for remediation costs at various sites that typically are not owned by us, but allegedly contain wastes attributable to our past operations. As of December 31, 2002, we reported we had been notified of potential liability under CERCLA and comparable state laws at 58 sites around the United States. In the 2002 report, sites from Phillips and Conoco were listed separately resulting in eight duplicate listings. These duplicate listings are consolidated in this 2003 report. At December 31, 2003, we had combined the eight duplicate listings, reclassified one existing site, and resolved six sites. Additionally, we had received 16 new notices of potential liability, leaving 61 sites where we have been notified of potential liability.
For most Superfund sites, our potential liability will be significantly less than the total site remediation costs because the percentage of waste attributable to us, versus that attributable to all other potentially responsible parties, is relatively low. Although liability of those potentially responsible is generally joint and several for federal sites and frequently so for state sites, other potentially responsible parties at sites where we are a party typically have had the financial strength to meet their obligations, and where they have not, or where potentially responsible parties could not be located, our share of liability has not increased materially. Many of the sites at which we are potentially responsible are still under investigation by the EPA or the state agencies concerned. Prior to actual cleanup, those potentially responsible normally assess site conditions, apportion responsibility and determine the appropriate remediation. In some instances, we may have no liability or attain a settlement of liability. Actual cleanup costs generally occur after the parties obtain EPA or equivalent state agency approval. There are relatively few sites where we are a major participant, and given the timing and amounts of anticipated expenditures, neither the cost of remediation at those sites nor such costs at all CERCLA sites, in the aggregate, is expected to have a material adverse effect on our competitive or financial condition.
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Expensed environmental costs were $593 million in 2003 and are expected to be about $596 million in 2004 and $574 million in 2005. Capitalized environmental costs were $522 million in 2003 and are expected to be about $742 million and $967 million in 2004 and 2005, respectively.
Remediation Accruals
We accrue for remediation activities when it is probable that a liability has been incurred and reasonable estimates of the liability can be made. These accrued liabilities are not reduced for potential recoveries from insurers or other third parties and are not discounted (except those assumed in a purchase business combination, which we do record on a discounted basis).
Many of these liabilities result from CERCLA, RCRA and similar state laws that require us to undertake certain investigative and remedial activities at sites where we conduct, or once conducted, operations or at sites where ConocoPhillips-generated waste was disposed. The accrual also includes a number of sites we have identified that may require environmental remediation, but which are not currently the subject of CERCLA, RCRA or state enforcement activities. If applicable, we accrue receivables for probable insurance or other third-party recoveries. In the future, we may incur significant costs under both CERCLA and RCRA. Considerable uncertainty exists with respect to these costs, and under adverse changes in circumstances, potential liability may exceed amounts accrued as of December 31, 2003.
Remediation activities vary substantially in duration and cost from site to site, depending on the mix of unique site characteristics, evolving remediation technologies, diverse regulatory agencies and enforcement policies, and the presence or absence of potentially liable third parties. Therefore, it is difficult to develop reasonable estimates of future site remediation costs.
At December 31, 2003, our balance sheet included a total environmental accrual related to continuing operations of $1,119 million, compared with $743 million at December 31, 2002. The increase in accruals from year-end 2002, primarily resulted from evaluation of Conoco environmental liabilities during the purchase price allocation period. We expect to incur the majority of these expenditures within the next 30 years.
Notwithstanding any of the foregoing, and as with other companies engaged in similar businesses, environmental costs and liabilities are inherent in our operations and products, and there can be no assurance that material costs and liabilities will not be incurred. However, we currently do not expect any material adverse affect upon our results of operations or financial position as a result of compliance with environmental laws and regulations.
Other
We have deferred tax assets related to certain accrued liabilities, alternative minimum tax credits, and loss carryforwards. Valuation allowances have been established for certain foreign and state net operating loss carryforwards that reduce deferred tax assets to an amount that will, more likely than not, be realized. Uncertainties that may affect the realization of these assets include tax law changes and the future level of product prices and costs. Based on our historical taxable income, our expectations for the future, and available tax-planning strategies, management expects that the net deferred tax assets will be realized as offsets to reversing deferred tax liabilities and as reductions in future taxable income. The alternative minimum tax credit can be carried forward indefinitely to reduce our regular tax liability.
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NEW ACCOUNTING DEVELOPMENTS
In December 2003, the FASB revised and reissued SFAS No. 132 (revised 2003), Employers Disclosures about Pensions and Other Postretirement Benefitsan amendment of FASB Statements No. 87, 88, and 106, which revises and requires additional disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by previous Financial Accounting Board Standards. We adopted the provisions of this Standard effective December 2003. Certain provisions of this Standard regarding disclosure of information about foreign plans and disclosure of estimated future benefit payments are not required until 2004. The adoption of the provisions applicable to 2003 did not have an impact on our results of operations or financial position, nor will the adoption of the additional provisions in 2004 have an impact on our results of operations or financial position.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Liabilities and Equity, to address the balance sheet classification of certain financial instruments that have characteristics of both liabilities and equity. This statement was immediately effective for all contracts created or modified after May 31, 2003, and became effective July 1, 2003, for all previously existing contracts. On November 7, 2003, the FASB issued FASB Staff Position No. FAS 150-3, which deferred certain provisions of SFAS No. 150. As a result of adopting this new accounting standard in the third quarter of 2003, and the subsequent November 7, 2003, deferral of certain provisions, there was no impact on our 2003 financial statements. We continue to monitor the deferral status of SFAS No. 150.
In June 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, which became effective on July 1, 2001, and January 1, 2002, respectively. The Securities and Exchange Commission (SEC) has requested the Emerging Issues Task Force (EITF) to consider the issue of whether SFAS Nos. 141 and 142 require interests held under oil, gas and mineral leases to be separately classified as intangible assets on the balance sheets of companies in the extractive industries. Historically, in accordance with SFAS No. 19, Financial Accounting and Reporting by Oil and Gas Producing Companies, we have capitalized the cost of oil and gas leasehold interests and, consistent with industry practice, reported these assets as part of tangible E&P properties, plants and equipment.
If such interests were deemed to be intangible assets by the EITF, mineral rights to extract oil and gas for both proved and unproved properties would be classified separately from E&P properties, plants and equipment as intangible assets on our balance sheet. This interpretation by the EITF would only affect the classification of oil and gas mineral rights on our balance sheet and would not affect total assets, net worth, results of operations or cash flows.
E&P properties, plants and equipment at December 31, 2003 and 2002, included approximately $10.5 billion and $10.8 billion, respectively, of mineral rights to extract oil and gas, net of accumulated depletion, that would be reclassified on the balance sheet as intangible assets, if the interpretation that the SEC requested the EITF to consider was applied. We plan to continue to classify oil and gas mineral rights as E&P properties, plants and equipment until further guidance is provided by the EITF.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to select appropriate accounting policies and to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. See Note 1Accounting Policies
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in the Notes to Consolidated Financial Statements for descriptions of our major accounting policies. Certain of these accounting policies involve judgments and uncertainties to such an extent that there is a reasonable likelihood that materially different amounts would have been reported under different conditions, or if different assumptions had been used. These critical accounting policies are discussed with the Audit and Compliance Committee on an annual basis and are presented below.
Oil and Gas Accounting
Accounting for oil and gas exploratory activity is subject to special
accounting rules that are unique to the oil and gas industry. The acquisition
of geological and geophysical seismic information, prior to the discovery of
proved reserves, is expensed as incurred, similar to accounting for research
and development costs. However, leasehold acquisition costs and exploratory
well costs are capitalized on the balance sheet, pending determination of
whether proved oil and gas reserves have been discovered on the prospect.
Property Acquisition Costs
For individually significant leaseholds, management periodically assesses for
impairment based on exploration and drilling efforts to date. For leasehold
acquisition costs that individually are relatively small, management exercises
judgment and determines a percentage probability that the prospect ultimately
will fail to find proved oil and gas reserves and pools that leasehold
information with others in the geographic area. For prospects in areas that
have had limited, or no, previous exploratory drilling, the percentage
probability of ultimate failure is normally judged to be quite high. This
judgmental percentage is multiplied by the leasehold acquisition cost, and that
product is divided by the contractual period of the leasehold to determine a
periodic leasehold impairment charge that is reported in exploration expense.
This judgmental probability percentage is reassessed and adjusted throughout
the contractual period of the leasehold based on favorable or unfavorable
exploratory activity on the leasehold or on adjacent leaseholds, and leasehold
impairment amortization expense is adjusted prospectively. By the end of the
contractual period of the leasehold, the impairment probability percentage will
have been adjusted to 100 percent if the leasehold is expected to be abandoned,
or will have been adjusted to zero percent if there is an oil or gas discovery
that is under development. See the supplemental Oil and Gas Operations
disclosures about Costs Incurred and Capitalized Costs for more information
about the amounts and geographic locations of costs incurred in acquisition
activity, and the amounts on the balance sheet related to unproved properties.
Exploratory Costs
For exploratory wells, drilling costs are temporarily capitalized, or
suspended, on the balance sheet, pending a judgmental determination of
whether potentially economic oil and gas reserves have been discovered by the
drilling effort. This judgment usually is made within two months of the
completion of the drilling effort, but can take longer, depending on the
complexity of the geologic structure. Accounting rules require that this
judgment be made at least within one year of well completion. If a judgment is
made that the well did not encounter potentially economic oil and gas
quantities, the well costs are expensed as a dry hole and are reported in
exploration expense. Exploratory wells that are judged to have discovered
potentially economic quantities of oil and gas and that are in areas where a
major capital expenditure (e.g., a pipeline or offshore platform) would be
required before production could begin, and where the economic viability of
that major capital expenditure depends upon the successful completion of
further exploratory work in the area, remain capitalized on the balance sheet
as long as additional exploratory appraisal work is under way or firmly
planned. For complicated offshore exploratory discoveries, it is not unusual
to have exploratory wells remain suspended on the balance sheet for several
years while we perform additional appraisal work on the potential oil and gas
field. Unlike leasehold acquisition costs, there is no periodic impairment
assessment of suspended exploratory well costs. Management continuously
monitors the results of the additional appraisal drilling and seismic work and
expenses the suspended well costs as dry holes when it judges that the
potential field does not warrant further exploratory efforts in the near term.
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See the supplemental Oil and Gas Operations disclosures about Costs Incurred and Capitalized Costs for more information about the amounts and geographic locations of costs incurred in exploration activity and the amounts on the balance sheet related to unproved properties, as well as the Wells In Progress disclosure for the number and geographic location of wells not yet declared productive or dry.
Proved Oil and Gas Reserves
Engineering estimates of the quantities of recoverable oil and gas reserves in
oil and gas fields are inherently imprecise and represent only approximate
amounts because of the subjective judgments involved in developing such
information. Despite the inherent imprecision in these engineering estimates,
accounting rules require supplemental disclosure of proved oil and gas
reserve estimates due to the importance of these estimates to better
understanding the perceived value and future cash flows of a companys oil and
gas operations. The judgmental estimation of proved oil and gas reserves also
is important to the income statement because the proved oil and gas reserve
estimate for a field serves as the denominator in the unit-of-production
calculation of depreciation, depletion and amortization of the capitalized
costs for that field. There are several authoritative guidelines regarding the
engineering criteria that have to be met before estimated oil and gas reserves
can be designated as proved. Our reservoir engineering department has
policies and procedures in place that are consistent with these authoritative
guidelines. We have qualified and experienced internal engineering personnel
who make these estimates. Proved reserve estimates are updated annually and
take into account recent production and seismic information about each field.
Also, as required by authoritative guidelines, the estimated future date when a
field will be permanently shut-in for economic reasons is based on an
extrapolation of oil and gas prices and operating costs prevalent at the
balance sheet date. This estimated date when production will end affects the
amount of estimated recoverable reserves. Therefore, as prices and cost levels
change from year to year, the estimate of proved reserves also changes.
Canadian Syncrude Reserves
Canadian Syncrude proven reserves cannot be measured precisely. Reserve
estimates of Canadian Syncrude are based on subjective judgments involving
geological and engineering assessments of in-place crude bitumen volume, the
mining plan, historical extraction recovery and upgrading yield factors,
installed plant operating capacity and operating approval limits. The
reliability of these estimates at any point in time depends on both the quality
and quantity of the technical and economic data and the efficiency of
extracting the bitumen and upgrading it into a light sweet crude oil. Despite
the inherent imprecision in these engineering estimates, these estimates are
used in determining depreciation expense.
Impairment of Assets
Long-lived assets used in operations are assessed for impairment whenever
changes in facts and circumstances indicate a possible significant
deterioration in the future cash flows expected to be generated by an asset
group. If, upon review, the sum of the undiscounted pretax cash flows is less
than the carrying value of the asset group, the carrying value is written down
to estimated fair value. Individual assets are grouped for impairment purposes
based on a judgmental assessment of the lowest level for which there are
identifiable cash flows that are largely independent of the cash flows of other
groups of assetsgenerally on a field-by-field basis for exploration and
production assets, at an entire complex level for downstream assets, or at a
site level for retail stores. Because there usually is a lack of quoted market
prices for long-lived assets, the fair value usually is based on the present
values of expected future cash flows using discount rates commensurate with the
risks involved in the asset group. The expected future cash flows used for
impairment reviews and related fair-value calculations are based on judgmental
assessments of future production volumes, prices and costs, considering all
available information at the date of review. See Note 12Property Impairments,
in the Notes to Consolidated Financial Statements, for additional information.
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Asset Retirement Obligations and Environmental Costs
Under various contracts, permits and regulations, we have material legal
obligations to remove tangible equipment and restore the land or seabed at the
end of operations at production sites. The largest asset removal obligations
facing us involve removal and disposal of offshore oil and gas platforms around
the world, and oil and gas production facilities and pipelines in Alaska. The
estimated discounted costs of dismantling and removing these facilities are
accrued at the installation of the asset. Estimating the future asset removal
costs necessary for this accounting calculation is difficult. Most of these
removal obligations are many years in the future and the contracts and
regulations often have vague descriptions of what removal practices and
criteria will have to be met when the removal event actually occurs. Asset
removal technologies and costs are constantly changing, as well as political,
environmental, safety and public relations considerations. See Note
1Accounting Policies and Note 13Asset Retirement Obligations and Accrued
Environmental Costs, in the Notes to Consolidated Financial Statements, for
additional information.
Business Acquisitions
Purchase Price Allocation
Accounting for the acquisition of a business requires the allocation of the
purchase price to the various assets and liabilities of the acquired business.
For most assets and liabilities, purchase price allocation is accomplished by
recording the asset or liability at its estimated fair value. The most
difficult estimations of individual fair values are those involving properties,
plants and equipment and identifiable intangible assets. We use all available
information to make these fair value determinations and, for major business
acquisitions, typically engage an outside appraisal firm to assist in the fair
value determination of the acquired long-lived assets. We have, if necessary,
up to one year after the acquisition closing date to finish these fair value
determinations and finalize the purchase price allocation.
Intangible Assets and Goodwill
In connection with the acquisition of Tosco Corporation on September 14, 2001,
and the merger on August 30, 2002, we recorded material intangible assets for
tradenames, air emission permit credits, and permits to operate refineries.
These intangible assets were determined to have indefinite useful lives and so
are not amortized. This judgmental assessment of an indefinite useful life has
to be continuously evaluated in the future. If, due to changes in facts and
circumstances, management determines that these intangible assets then have
definite useful lives, amortization will have to commence at that time on a
prospective basis. As long as these intangible assets are judged to have
indefinite lives, they will be subject to periodic lower-of-cost-or-market
tests, which requires managements judgment of the estimated fair value of
these intangible assets. See Note 6Acquisition of Tosco Corporation, Note
3Merger of Conoco and Phillips, and Note 12Property Impairments, in the Notes
to Consolidated Financial Statements, for additional information.
Also in connection with the acquisition of Tosco and the merger, we recorded a material amount of goodwill. Under the accounting rules for goodwill, this intangible asset is not amortized. Instead, goodwill is subject to annual reviews for impairment based on a two-step accounting test. The first step is to compare the estimated fair value of any reporting units within the company that have recorded goodwill with the recorded net book value (including the goodwill) of the reporting unit. If the estimated fair value of the reporting unit is higher than the recorded net book value, no impairment is deemed to exist and no further testing is required that year. If, however, the estimated fair value of the reporting unit is below the recorded net book value, then a second step must be performed to determine the amount of the goodwill impairment to record, if any. In this second step, the estimated fair value from the first step is used as the purchase price in a hypothetical new acquisition of the reporting unit. The various purchase business combination rules are followed to determine a hypothetical purchase price allocation for the reporting
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units assets and liabilities. The residual amount of goodwill that results from this hypothetical purchase price allocation is compared with the recorded amount of goodwill for the reporting unit, and the recorded amount is written down to the hypothetical amount if lower. The reporting unit or units used to evaluate and measure goodwill for impairment are determined primarily from the manner in which the business is managed. A reporting unit is an operating segment or a component that is one level below an operating segment. A component is a reporting unit if the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component. However, two or more components of an operating segment shall be aggregated and deemed a single reporting unit if the components have similar economic characteristics. We have determined that we have three reporting units for purposes of assigning goodwill and testing for impairment. These are Worldwide Exploration and Production, Worldwide Refining and Worldwide Marketing. Our Midstream, Chemicals and Emerging Businesses operating segments were not assigned any goodwill from the merger because the two predecessor companies operations did not overlap in these operating segments so we were unable to capture significant synergies and strategic advantages from the merger in these areas.
In our Exploration and Production operating segment, management reporting is primarily organized based on geographic areas. All of these geographic areas have similar business processes, distribution networks and customers, and are supported by a worldwide exploration team and shared services organizations. Therefore, all components have been aggregated into one reporting unit, Worldwide Exploration and Production, which is the same as the operating segment. In contrast, in our Refining and Marketing operating segment, management reporting is primarily organized based on functional areas. Because the two broad functional areas of Refining and Marketing have dissimilar business processes and customers, we concluded that it would not be appropriate to aggregate these components into only one reporting unit at the Refining and Marketing operating segment level. Instead, we have identified two reporting units within the operating segment: Worldwide Refining and Worldwide Marketing. Components in those two reporting units have similar business processes, distribution networks and customers. If we later reorganize our businesses or management structure so that the components within these three reporting units are no longer economically similar, the reporting units would be revised and goodwill would be re-assigned using a relative fair value approach in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. Goodwill impairment testing at a lower reporting unit level could result in the recognition of impairment that would not otherwise be recognized at the current higher level of aggregation. In addition, the sale or disposition of a portion of these three reporting units will be allocated a portion of the reporting units goodwill, based on relative fair values, which will adjust the amount of gain or loss on the sale or disposition.
Because quoted market prices for our reporting units are not available, management has to apply judgment in determining the estimated fair value of these reporting units for purposes of performing the first step of the periodic goodwill impairment test. Management uses all available information to make these fair value determinations, including the present values of expected future cash flows using discount rates commensurate with the risks involved in the assets and observed market multiples of operating cash flows and net income, and may engage an outside appraisal firm for assistance. In addition, if the first test step is not met, further judgment has to be applied in determining the fair values of individual assets and liabilities for purposes of the hypothetical purchase price allocation. Again, management has to use all available information to make these fair value determinations and may engage an outside appraisal firm for assistance. At year-end 2003, the estimated fair values of our Worldwide Exploration and Production, Worldwide Refining, and Worldwide Marketing reporting units, excluding those included in discontinued operations, ranged from between 15 percent to 35 percent higher than recorded net book values (including goodwill) of the reporting units. However, a lower fair value estimate in the future for any of these reporting units could result in impairment of the $15.1 billion of goodwill.
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Inventory Valuation
Prior to the acquisition of Tosco in September 2001 and the merger in August
2002, our inventories on the last-in, first-out (LIFO) cost basis were
predominantly reflected on the balance sheet at historical cost layers
established many years ago, when price levels were much lower. Therefore,
prior to 2001, our LIFO inventories were relatively insensitive to current
price level changes. However, the acquisition of Tosco and the ConocoPhillips
merger added LIFO cost layers that were recorded at replacement cost levels
prevalent in late September 2001 and August 2002, respectively. As a result,
our LIFO cost inventories are now much more sensitive to
lower-of-cost-or-market impairment write-downs, whenever price levels fall. We
recorded a LIFO inventory lower-of-cost-or-market impairment in the fourth
quarter of 2001 due to a crude oil price deterioration. While crude oil is not
the only product in the companys LIFO pools, its market value is a major
factor in lower-of-cost-or-market calculations. We estimate that additional
impairments could occur if a 60 percent/40 percent blended average of West
Texas Intermediate/Brent crude oil prices falls below $21.25 per barrel at a
reporting date. The determination of replacement cost values for the
lower-of-cost-or-market test uses objective evidence, but does involve judgment
in determining the most appropriate objective evidence to use in the
calculations.
Projected Benefit Obligations
Determination of the projected benefit obligations for our defined benefit
pension and postretirement plans are important to the recorded amounts for such
obligations on the balance sheet and to the amount of benefit expense in the
income statement. This also impacts the required company contributions into
the plans. The actuarial determination of projected benefit obligations and
company contribution requirements involves judgment about uncertain future
events, including estimated retirement dates, salary levels at retirement,
mortality rates, lump-sum election rates, rates of return on plan assets,
future health care cost-trend rates, and rates of utilization of health care
services by retirees. Due to the specialized nature of these calculations, we
engage outside actuarial firms to assist in the determination of these
projected benefit obligations. For Employee Retirement Income Security
Act-qualified pension plans, the actuary exercises fiduciary care on behalf of
plan participants in the determination of the judgmental assumptions used in
determining required company contributions into plan assets. Due to differing
objectives and requirements between financial accounting rules and the pension
plan funding regulations promulgated by governmental agencies, the actuarial
methods and assumptions for the two purposes differ in certain important
respects. Ultimately, we will be required to fund all promised benefits under
pension and postretirement benefit plans not funded by plan assets or
investment returns, but the judgmental assumptions used in the actuarial
calculations significantly affect periodic financial statements and funding
patterns over time. Benefit expense is particularly sensitive to the discount
rate and return on plan assets assumptions. A 1 percent decrease in the
discount rate would increase annual benefit expense by $85 million, while a 1
percent decrease in the return on plan assets assumption would increase annual
benefit expense by $25 million.
OUTLOOK
After adjusting for asset dispositions, E&Ps worldwide production for 2004 is expected to be about the same level as it was in 2003. The dispositions contributed approximately 37,000 barrels of oil equivalent per day to 2003 production. For 2004, production increases in Asia Pacific and Latin America are expected to offset net declines in the United States, Canada and the North Sea.
In R&M, the optimization of spending related to clean fuels project initiatives will be an important focus area during 2004. In addition, we expect our average refinery crude oil utilization rate for 2004 to average about the same as in 2003.
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Crude oil and natural gas prices are subject to external factors over which we have no control, such as global economic conditions, political events, demand growth, inventory levels, weather, competing fuels prices, and availability of supply. Crude oil prices rose significantly in 2003 due to supply disruptions during the year in several producing countries and the delays in the return of Iraqi crude production to the market in the face of rising global oil demand. As a result of these factors, global oil inventories remained at exceptionally low levels throughout 2003. Low oil inventories, coupled with economic recovery and the prospects for higher oil demand growth are expected to keep prices elevated through the first half of 2004. U.S. natural gas prices weakened moderately during the second half of 2003 from the very strong levels experienced during the second quarter, but the annual average was significantly higher in 2003 versus 2002. Prices weakened in the second half due to a strong buildup of natural gas inventories during the summer and early fall, as mild weather, weak industrial demand and fuel switching reduced natural gas demand. At the same time, high prices and the startup of a mothballed regasification terminal increased LNG imports to the United States. However, natural gas prices rose moderately in December, reflecting continuing concerns about the adequacy of gas supplies in the United States. Supply adequacy concerns are expected to keep prices above historical levels in 2004.
Refining margins are subject to movements in the price of crude oil and other feedstocks, and the prices of petroleum products, which are subject to market factors over which we have no control, such as the U.S. and global economies; government regulations; military, political and social conditions in oil producing countries; seasonal factors that affect demand, such as the summer driving months; and the levels of refining output and product inventories. U.S. and international refining and marketing margins rose in 2003 versus 2002, due to improved refined product demand and a series of supply disruptions. U.S. refining margins were above the five-year historical average in 2003 as a result of refinery outages in several regions of the United States, a product pipeline rupture in Arizona, and labor strikes in Venezuela, which removed both crude and refined products from the market. Combined with strong product demand, product inventories were drawn down to extremely low levels in the first half of the year, which elevated refining margins. Stronger demand in the face of tight supplies also improved marketing margins in 2003 versus 2002. The sustainability of current refining and marketing margins depends on the continued recovery of the global economy and refined product demand growth.
In February 2003, the Venezuelan government implemented a currency exchange control regime. The government has published legal instruments supporting the controls, one of which establishes official exchange rates for the U.S. dollar. The devaluation of the Venezuelan currency by approximately 17 percent in February 2004 did not have a significant impact on our Venezuelan operations; however, future changes in the exchange rate could have a significant impact on our Venezuelan operations. In addition, our Venezuelan operations remain subject to civil unrest in the country. Our Venezuelan operations contributed approximately $150 million to our 2003 net income.
In June 2003, we and our co-venturers in the Mackenzie gas project in Canada announced that funding and participation agreements have been reached and a preliminary information package was submitted to relevant regulatory authorities. The Mackenzie gas project involves natural gas production facilities, compression and gathering pipelines in the Mackenzie Delta area, and a pipeline system in the Mackenzie River Valley. The filing of the information package is a key step in the process leading to the submission of applications for the development of the natural gas fields and pipeline facilities. Regulatory applications are expected to be filed in 2004. First gas production is currently targeted to commence in late 2009.
In July 2003, we signed a Heads of Agreement with Qatar Petroleum for the development of Qatargas 3, a large-scale LNG project located in Qatar and servicing the U.S. natural gas market. This provides the framework for the necessary agreements and the completion of key feasibility studies. Qatargas 3 would be an integrated project, jointly owned by us and Qatar Petroleum, consisting of facilities to produce and liquefy gas from Qatars North field. The LNG would be shipped from Qatar, and we would be
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responsible for regasification and marketing within the United States. Average daily gas sales volumes are projected to be approximately 1 billion cubic feet per day with startup anticipated in the 2009 timeframe.
In late October 2003, we signed a Heads of Agreement with the Nigerian National Petroleum Corporation, ENI and ChevronTexaco to conduct front-end engineering and design work for an LNG facility to be constructed in Nigerias central Niger Delta. The participants have agreed to form an incorporated joint venture, Brass LNG Limited, to undertake the project. The engineering and design studies are expected to be completed in 2005, and the facility is targeted to be operational in 2009.
In December 2003, we signed a Statement of Intent with Qatar Petroleum regarding the construction of a gas-to-liquids plant in Ras Laffan, Qatar. The Statement of Intent initiates detailed technical and commercial pre-front-end engineering and design studies and establishes principles for negotiating a Heads of Agreement for an integrated reservoir-to-market plant. More definite agreements are expected in 2004.
Also in December 2003, we announced the signing of an agreement with Freeport LNG Development, L.P. to participate in its proposed LNG receiving terminal in Quintana, Texas. We would acquire 1 billion cubic feet per day of regasification capacity in the terminal for our use and obtain a 50 percent interest in the general partnership managing the venture. The terminal will be designed with a storage capacity of 6.9 billion cubic feet and a send-out capacity of 1.5 billion cubic feet per day. Pending government approvals, construction is scheduled to begin in the second half of 2004, with commercial startup in mid-2007.
In addition, we and our co-venturer are pursuing a proposed LNG receiving terminal in Harpswell, Maine. The proposal calls for construction of the terminal at a site previously used as a U.S. Navy fuel depot. LNG would be converted back to natural gas at the terminal for delivery through a new pipeline that would connect the terminal to the existing pipeline grid. Depending on receipt of the necessary regulatory approvals, construction could begin in 2006, with the facility operational by 2009.
CAUTIONARY STATEMENT FOR THE PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This annual report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements can be identified by the words expects, anticipates, intends, plans, projects, believes, estimates and similar expressions.
We have based the forward-looking statements relating to our operations on our current expectations, estimates and projections about ourselves and the industries in which we operate in general. We caution you that these statements are not guarantees of future performance and involve risks, uncertainties and assumptions that we cannot predict. In addition, we have based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. Accordingly, our actual outcome and results may differ materially from what we have expressed or forecast in the forward-looking statements. Any differences could result from a variety of factors, including the following:
| Fluctuations in crude oil, natural gas and natural gas liquids prices, refining and marketing margins and margins for our chemicals business; | |||
| Changes in our business, operations, results and prospects; | |||
| The operation and financing of our midstream and chemicals joint ventures; |
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| Potential failure to realize fully or within the expected time frame the expected cost savings and synergies from the combination of Conoco and Phillips; | |||
| Costs or difficulties related to the integration of the businesses of Conoco and Phillips, as well as the continued integration of businesses recently acquired by each of them; | |||
| Potential failure or delays in achieving expected reserve or production levels from existing and future oil and gas development projects due to operating hazards, drilling risks and the inherent uncertainties in predicting oil and gas reserves and oil and gas reservoir performance; | |||
| Unsuccessful exploratory drilling activities; | |||
| Failure of new products and services to achieve market acceptance; | |||
| Unexpected cost increases or technical difficulties in constructing or modifying facilities for exploration and production projects, manufacturing or refining; | |||
| Unexpected difficulties in manufacturing or refining our refined products, including synthetic crude oil, and chemicals products; | |||
| Lack of, or disruptions in, adequate and reliable transportation for our crude oil, natural gas, LNG and refined products; | |||
| Inability to timely obtain or maintain permits, including those necessary for construction of LNG terminals or regasification facilities, comply with government regulations or make capital expenditures required to maintain compliance; | |||
| Potential disruption or interruption of our facilities due to accidents, political events or terrorism; | |||
| International monetary conditions and exchange controls; | |||
| Liability for remedial actions, including removal and reclamation obligations, under environmental regulations; | |||
| Liability resulting from litigation; | |||
| General domestic and international economic and political conditions, including armed hostilities, homeland security, and governmental disputes over territorial boundaries; | |||
| Changes in tax and other laws or regulations applicable to our business; and | |||
| Inability to obtain economical financing for exploration and development projects, construction or modification of facilities and general corporate purposes. |
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Financial Instrument Market Risk
We and certain of our subsidiaries hold and issue derivative contracts and financial instruments that expose cash flows or earnings to changes in commodity prices, foreign exchange rates or interest rates. We may use financial and commodity-based derivative contracts to manage the risks produced by changes in the prices of electric power, natural gas, crude oil and related products, fluctuations in interest rates and foreign currency exchange rates, or to exploit market opportunities.
Our use of derivative instruments is governed by an Authority Limitations document approved by our Board that prohibits the use of highly leveraged derivatives or derivative instruments without sufficient liquidity for comparable valuations without approval from the Chief Executive Officer. The Authority
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Limitations document also authorizes the Chief Executive Officer to establish the maximum Value at Risk (VaR) limits for the company and compliance with these limits is monitored daily. The Chief Financial Officer monitors risks resulting from foreign currency exchange rates and interest rates, while the Executive Vice President of Commercial monitors commodity price risk. Both report to the Chief Executive Officer. The Commercial group manages our commercial marketing, optimizes our commodity flows and positions, monitors related risks of our upstream and downstream businesses, and selectively takes price risk to add value.
Commodity Price Risk
We operate in the worldwide crude oil, refined products, natural gas, natural gas liquids, and electric power markets and are exposed to fluctuations in the prices for these commodities. These fluctuations can affect our revenues, as well as the cost of operating, investing, and financing activities. Generally, our policy is to remain exposed to market prices of commodities; however, executive management may elect to use derivative instruments to hedge the price risk of our crude oil and natural gas production, as well as refinery margins.
Our Commercial group uses futures, forwards, swaps, and options in various markets to optimize the value of our supply chain, which may move our risk profile away from market average prices to accomplish the following objectives:
| Balance physical systems. In addition to cash settlement prior to contract expiration, exchange traded futures contracts also may be settled by physical delivery of the commodity, providing another source of supply to meet our refinery requirements or marketing demand; | |||
| Meet customer needs. Consistent with our policy to generally remain exposed to market prices, we use swap contracts to convert fixed-price sales contracts, which are often requested by natural gas and refined product consumers, to a floating market price; | |||
| Manage the risk to our cash flows from price exposures on specific crude oil, natural gas, refined product and electric power transactions; and | |||
| Enable us to use the market knowledge gained from these activities to do a limited amount of trading not directly related to our physical business. For the 12 months ended December 31, 2003 and 2002, the gains or losses from this activity were not material to our cash flows or income from continuing operations. |
We use a VaR model to estimate the loss in fair value that could potentially result on a single day from the effect of adverse changes in market conditions on the derivative financial instruments and derivative commodity instruments held or issued, including commodity purchase and sales contracts recorded on the balance sheet at December 31, 2003, as derivative instruments in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. Using Monte Carlo simulation, a 95 percent confidence level and a one-day holding period, the VaR for those instruments issued or held for trading purposes at December 31, 2003 and 2002, was immaterial to our net income and cash flows. The VaR for instruments held for purposes other than trading at December 31, 2003 and 2002, was also immaterial to our net income and cash flows.
85
Interest Rate Risk
The following tables provide information about our financial instruments that are sensitive to changes in interest rates. The debt tables present principal cash flows and related weighted-average interest rates by expected maturity dates; the derivative table shows the notional quantities on which the cash flows will be calculated by swap termination date. Weighted-average variable rates are based on implied forward rates in the yield curve at the reporting date. The carrying amount of our floating-rate debt approximates its fair value. The fair value of the fixed-rate financial instruments is estimated based on quoted market prices.
Millions of Dollars Except as Indicated |
||||||||||||||||||||||||
Mandatorily | ||||||||||||||||||||||||
Redeemable Other | ||||||||||||||||||||||||
Minority Interests and | ||||||||||||||||||||||||
Debt |
Preferred Securities |
|||||||||||||||||||||||
Fixed | Average | Floating | Average | Fixed | Average | |||||||||||||||||||
Expected Maturity | Rate | Interest | Rate | Interest | Rate | Interest | ||||||||||||||||||
Date | Maturity | Rate | Maturity | Rate | Maturity | Rate | ||||||||||||||||||
Year-End 2003 |
||||||||||||||||||||||||
2004 |
$ | 1,360 | 5.91 | % | $ | 7 | 5.85 | % | $ | | | % | ||||||||||||
2005 |
1,168 | 8.49 | 8 | 5.85 | | | ||||||||||||||||||
2006 |
1,506 | 5.82 | 320 | 2.71 | | | ||||||||||||||||||
2007 |
612 | 4.88 | | | | | ||||||||||||||||||
2008 |
18 | 7.10 | 500 | 1.05 | | | ||||||||||||||||||
Remaining years |
10,849 | 6.98 | 776 | 1.59 | 141 | 7.86 | ||||||||||||||||||
Total |
$ | 15,513 | $ | 1,611 | $ | 141 | ||||||||||||||||||
Fair value |
$ | 17,294 | $ | 1,611 | $ | 142 | ||||||||||||||||||
Year-End 2002 |
||||||||||||||||||||||||
2003 |
$ | 762 | 7.99 | % | $ | 706 | 2.60 | % | $ | | | % | ||||||||||||
2004 |
1,362 | 5.91 | | | | | ||||||||||||||||||
2005 |
1,169 | 8.49 | | | | | ||||||||||||||||||
2006 |
1,507 | 5.82 | 1,517 | 4.54 | | | ||||||||||||||||||
2007 |
613 | 4.88 | | | | | ||||||||||||||||||
Remaining years |
10,740 | 6.95 | 691 | 6.02 | 491 | 7.96 | ||||||||||||||||||
Total |
$ | 16,153 | $ | 2,914 | $ | 491 | ||||||||||||||||||
Fair value |
$ | 17,930 | $ | 2,914 | $ | 516 | ||||||||||||||||||
86
In October and early November 2003, we executed certain interest rate swaps that had the effect of converting $1.5 billion of debt from fixed to floating rate. Under SFAS 133, Accounting for Derivative Instruments and Hedging Activities, these swaps were designated as hedging the exposure to changes in the fair value of $400 million of 3.625% Notes due 2007, $750 million of 6.35% Notes due 2009, and $350 million of 4.75% Notes due 2012. These swaps qualify for the shortcut method of hedge accounting, so over the term of the swaps we will not recognize gain or loss due to ineffectiveness in the hedge.
Interest Rate Derivatives |
||||||||||||
Expected Maturity Date | Notional | Average Pay Rate | Average Receive Rate | |||||||||
Year-End 2003 |
||||||||||||
2004 |
$ | | | % | | % | ||||||
2005 |
| | | |||||||||
2006variable to fixed |
131 | 5.85 | 1.15 | |||||||||
2007fixed to variable |
400 | 1.07 | 3.63 | |||||||||
2008 |
| | | |||||||||
Remaining yearsfixed to
variable |
1,100 | 2.67 | 5.84 | |||||||||
Total |
$ | 1,631 | ||||||||||
Fair value position |
$ | | ||||||||||
Year-End 2002 |
||||||||||||
2003variable to fixed |
$ | 500 | 3.41 | % | 2.56 | % | ||||||
2004 |
| | | |||||||||
2005 |
| | | |||||||||
2006variable to fixed |
166 | 5.85 | 4.76 | |||||||||
2007 |
| | | |||||||||
Remaining years |
| | | |||||||||
Total |
$ | 666 | ||||||||||
Fair value loss position |
$ | 22 | ||||||||||
Foreign Currency Risk
We have foreign currency exchange rate risk resulting from operations in over 40 countries around the world. We do not comprehensively hedge the exposure to currency rate changes, although we may choose to selectively hedge exposures to foreign currency rate risk. Examples include firm commitments for capital projects, certain local currency tax payments and dividends, and cash returns from net investments in foreign affiliates to be remitted within the coming year.
At December 31, 2003, we held foreign currency swaps hedging short-term intercompany loans between European subsidiaries and a U.S. subsidiary. Although these swaps hedge exposures to fluctuations in exchange rates, we elected not to utilize hedge accounting as allowed by SFAS No. 133. As a result, the change in the fair value of these foreign currency swaps is recorded directly in earnings. Since the gain or loss on the swaps is offset by the gain or loss from remeasuring the intercompany loans into the functional currency of the lender or borrower, there would be no impact to income from an adverse hypothetical 10 percent change in the December 31, 2003, exchange rates. The notional and fair market values of these positions at December 31, 2003, were as follows:
87
Millions of Dollars |
||||||||
Notional | Fair Market Value | |||||||
Foreign Currency Swaps | ||||||||
Sell U.S. dollar, buy euro |
$ | 267 | 2 | |||||
Sell U.S. dollar, buy British pound |
789 | 26 | ||||||
Sell U.S. dollar, buy Danish krone |
12 | | ||||||
Sell U.S. dollar, buy Norway kroner |
380 | 7 | ||||||
Sell U.S. dollar, buy Swedish krona |
93 | 5 | ||||||
At December 31, 2002, ConocoPhillips had the following significant foreign currency derivative contracts:
| Approximately $194 million in foreign currency swaps hedging the companys European commercial paper program, with a fair value of $7.1 million; | |||
| Approximately $536 million in foreign currency swaps hedging short-term intercompany loans between U.K. subsidiaries and a U.S. subsidiary, with a fair value of $9 million; and | |||
| Approximately $24 million in foreign currency swaps hedging the companys firm purchase and sales commitments for gasoline in Germany, with a negative fair value of $4 million. |
Although these swaps hedge exposures to fluctuations in exchange rates, the company elected not to utilize hedge accounting as allowed by SFAS No. 133. As a result, the change in the fair value of these foreign currency swaps is recorded directly in earnings. Assuming an adverse hypothetical 10 percent change in the December 31, 2002, exchange rates, the potential foreign currency remeasurement loss in non-cash pretax earnings from these swaps, intercompany loans, and commercial paper would be approximately $3 million.
In addition to the intercompany loans discussed above, at December 31, 2002, U.S. subsidiaries held long-term sterling-denominated intercompany receivables totaling $152 million due from a U.K. subsidiary. A Norwegian subsidiary held $198 million of intercompany U.S. dollar-denominated receivables due from its U.S. parent at December 31, 2002. The potential foreign currency remeasurement gains or losses in non-cash pretax earnings from a hypothetical 10 percent change in the year-end 2002 exchange rates from these intercompany balances was $35 million.
For additional information about our use of derivative instruments, see Note 18Derivative Instruments in the Notes to Consolidated Financial Statements.
88
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONOCOPHILLIPS
INDEX TO FINANCIAL STATEMENTS
Page |
||||
Report of Management |
90 | |||
Report of Independent Auditors |
91 | |||
Consolidated Income Statement for the years ended December 31, 2003, 2002 and 2001 |
92 | |||
Consolidated Balance Sheet at December 31, 2003 and 2002 |
93 | |||
Consolidated Statement of Cash Flows for the years ended December 31, 2003, 2002
and 2001 |
94 | |||
Consolidated Statement of Changes in Common Stockholders Equity for the years ended
December 31, 2003, 2002 and 2001 |
95 | |||
Notes to Consolidated Financial Statements |
96 | |||
Supplementary Information |
||||
Oil and Gas Operations |
154 | |||
Selected Quarterly Financial Data |
173 | |||
Condensed Consolidating Financial Information |
174 | |||
INDEX TO FINANCIAL STATEMENT SCHEDULES |
||||
Schedule IIValuation and Qualifying Accounts |
186 |
All other schedules are omitted because they are either not required, not significant, not applicable or the information is shown in another schedule, the financial statements or in the notes to consolidated financial statements.
89
Report of Management |
Management prepared, and is responsible for, the consolidated financial statements and the other information appearing in this annual report. The consolidated financial statements present fairly the companys financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States. In preparing its consolidated financial statements, the company includes amounts that are based on estimates and judgments that management believes are reasonable under the circumstances.
The company maintains internal controls designed to provide reasonable assurance that the companys assets are protected from unauthorized use and that all transactions are executed in accordance with established authorizations and recorded properly. The internal controls are supported by written policies and guidelines and are complemented by a staff of internal auditors. Management believes that the internal controls in place at December 31, 2003, provide reasonable assurance that the books and records reflect the transactions of the company and there has been compliance with its policies and procedures.
The companys financial statements have been audited by Ernst & Young LLP, independent auditors selected by the Audit and Compliance Committee of the Board of Directors. Management has made available to Ernst & Young LLP all of the companys financial records and related data, as well as the minutes of stockholders and directors meetings.
/s/ Archie W. Dunham
|
/s/ J. J. Mulva | /s/ John A. Carrig | ||
Archie W. Dunham
|
J. J. Mulva | John A. Carrig | ||
Chairman of the Board
|
President and | Executive Vice President, Finance, | ||
Chief Executive Officer | and Chief Financial Officer |
February 25, 2004
90
Report of Independent Auditors |
The Board of Directors and Stockholders
ConocoPhillips
We have audited the accompanying consolidated balance sheets of ConocoPhillips as of December 31, 2003 and 2002, and the related consolidated statements of income, changes in common stockholders equity, and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the condensed consolidating financial information and financial statement schedule listed in the Index in Item 8. These financial statements, condensed consolidating financial information and schedule are the responsibility of the companys management. Our responsibility is to express an opinion on these financial statements, condensed consolidating financial information and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ConocoPhillips at December 31, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related condensed consolidating financial information and financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, in 2003 ConocoPhillips adopted Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations, SFAS No. 123, Accounting for Stock-Based Compensation, and Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities, and in 2001 ConocoPhillips changed its method of accounting for the costs of major maintenance turnarounds.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Houston, Texas
February 25, 2004
91
Consolidated Income Statement | ConocoPhillips |
Years Ended December 31 | Millions of Dollars |
|||||||||||
2003 | 2002 | 2001 | ||||||||||
Revenues |
||||||||||||
Sales and other operating revenues* |
$ | 104,196 | 56,748 | 24,892 | ||||||||
Equity in earnings of affiliates |
542 | 261 | 41 | |||||||||
Other income |
359 | 192 | 97 | |||||||||
Total Revenues |
105,097 | 57,201 | 25,030 | |||||||||
Costs and Expenses |
||||||||||||
Purchased crude oil and products |
67,424 | 37,823 | 13,708 | |||||||||
Production and operating expenses |
7,208 | 4,698 | 2,643 | |||||||||
Selling, general and administrative expenses |
2,166 | 1,950 | 613 | |||||||||
Exploration expenses |
601 | 592 | 306 | |||||||||
Depreciation, depletion and amortization |
3,485 | 2,223 | 1,344 | |||||||||
Property impairments |
252 | 177 | 26 | |||||||||
Taxes other than income taxes* |
14,679 | 6,937 | 2,740 | |||||||||
Accretion on discounted liabilities |
145 | 22 | 7 | |||||||||
Interest and debt expense |
844 | 566 | 338 | |||||||||
Foreign currency transaction (gains) losses |
(36 | ) | 24 | 11 | ||||||||
Minority interests and preferred dividend requirements of
capital trusts |
20 | 48 | 53 | |||||||||
Total Costs and Expenses |
96,788 | 55,060 | 21,789 | |||||||||
Income from continuing operations before income taxes and
subsidiary equity transactions |
8,309 | 2,141 | 3,241 | |||||||||
Gain on subsidiary equity transactions |
28 | | | |||||||||
Income from continuing operations before income taxes |
8,337 | 2,141 | 3,241 | |||||||||
Provision for income taxes |
3,744 | 1,443 | 1,640 | |||||||||
Income From Continuing Operations |
4,593 | 698 | 1,601 | |||||||||
Income (loss) from discontinued operations |
237 | (993 | ) | 32 | ||||||||
Income (loss) before cumulative effect of changes in
accounting principles |
4,830 | (295 | ) | 1,633 | ||||||||
Cumulative effect of changes in accounting principles |
(95 | ) | | 28 | ||||||||
Net Income (Loss) |
$ | 4,735 | (295 | ) | 1,661 | |||||||
Income (Loss) Per Share of Common Stock |
||||||||||||
Basic |
||||||||||||
Continuing operations |
$ | 6.75 | 1.45 | 5.46 | ||||||||
Discontinued operations |
.35 | (2.06 | ) | .11 | ||||||||
Before cumulative effect of changes in accounting principles |
7.10 | (.61 | ) | 5.57 | ||||||||
Cumulative effect of changes in accounting principles |
(.14 | ) | | .10 | ||||||||
Net Income (Loss) |
$ | 6.96 | (.61 | ) | 5.67 | |||||||
Diluted |
||||||||||||
Continuing operations |
$ | 6.70 | 1.44 | 5.43 | ||||||||
Discontinued operations |
.35 | (2.05 | ) | .11 | ||||||||
Before cumulative effect of changes in accounting principles |
7.05 | (.61 | ) | 5.54 | ||||||||
Cumulative effect of changes in accounting principles |
(.14 | ) | | .09 | ||||||||
Net Income (Loss) |
$ | 6.91 | (.61 | ) | 5.63 | |||||||
Average Common Shares Outstanding (in thousands) |
||||||||||||
Basic |
680,490 | 482,082 | 292,964 | |||||||||
Diluted |
685,433 | 485,505 | 295,016 | |||||||||
*Includes excise taxes on petroleum products sales: |
$ | 13,705 | 6,236 | 2,178 | ||||||||
See Notes to Consolidated Financial Statements. |
92
Consolidated Balance Sheet | ConocoPhillips |
At December 31 | Millions of Dollars |
|||||||
2003 | 2002 | |||||||
Assets |
||||||||
Cash and cash equivalents |
$ | 490 | 307 | |||||
Accounts and notes receivable (net of allowance of $43 million in 2003 and
$48 million in 2002) |
3,606 | 2,873 | ||||||
Accounts and
notes receivablerelated parties |
1,399 | 1,507 | ||||||
Inventories |
3,957 | 3,845 | ||||||
Prepaid expenses and other current assets |
876 | 766 | ||||||
Assets of discontinued operations held for sale |
864 | 1,605 | ||||||
Total Current Assets |
11,192 | 10,903 | ||||||
Investments and long-term receivables |
7,258 | 6,821 | ||||||
Net properties, plants and equipment |
47,428 | 43,030 | ||||||
Goodwill |
15,084 | 14,444 | ||||||
Intangibles |
1,085 | 1,119 | ||||||
Other assets |
408 | 519 | ||||||
Total Assets |
$ | 82,455 | 76,836 | |||||
Liabilities |
||||||||
Accounts payable |
$ | 6,598 | 5,949 | |||||
Accounts payablerelated parties |
301 | 303 | ||||||
Notes payable and long-term debt due within one year |
1,440 | 849 | ||||||
Accrued income and other taxes |
2,676 | 1,991 | ||||||
Other accruals |
2,817 | 3,075 | ||||||
Liabilities of discontinued operations held for sale |
179 | 649 | ||||||
Total Current Liabilities |
14,011 | 12,816 | ||||||
Long-term debt |
16,340 | 18,917 | ||||||
Asset retirement obligations and accrued environmental costs |
3,603 | 1,666 | ||||||
Deferred income taxes |
8,565 | 8,361 | ||||||
Employee benefit obligations |
2,445 | 2,755 | ||||||
Other liabilities and deferred credits |
2,283 | 1,803 | ||||||
Total Liabilities |
47,247 | 46,318 | ||||||
Company-Obligated Mandatorily Redeemable Preferred Securities of Phillips
66 Capital Trust II |
| 350 | ||||||
Other Minority Interests |
842 | 651 | ||||||
Common Stockholders Equity |
||||||||
Common stock (2,500,000,000 shares authorized at $.01 par value) |
||||||||
Issued (2003708,085,097 shares; 2002704,354,839 shares)
|
||||||||
Par value |
7 | 7 | ||||||
Capital in excess of par |
25,361 | 25,178 | ||||||
Compensation and Benefits Trust (CBT) (at cost: 200325,301,314 shares;
200226,785,094 shares) |
(857 | ) | (907 | ) | ||||
Accumulated other comprehensive income (loss) |
821 | (164 | ) | |||||
Unearned employee compensation |
(200 | ) | (218 | ) | ||||
Retained earnings |
9,234 | 5,621 | ||||||
Total Common Stockholders Equity |
34,366 | 29,517 | ||||||
Total |
$ | 82,455 | 76,836 | |||||
93
Consolidated Statement of Cash Flows | ConocoPhillips |
Years Ended December 31 | Millions of Dollars |
|||||||||||
2003 | 2002 | 2001 | ||||||||||
Cash Flows From Operating Activities |
||||||||||||
Income from continuing operations |
$ | 4,593 | 698 | 1,601 | ||||||||
Adjustments to reconcile income from continuing operations to net
cash provided by continuing operations |
||||||||||||
Non-working capital adjustments |
||||||||||||
Depreciation, depletion and amortization |
3,485 | 2,223 | 1,344 | |||||||||
Property impairments |
252 | 177 | 26 | |||||||||
Dry hole costs and leasehold impairment |
300 | 307 | 99 | |||||||||
Accretion on discounted liabilities |
145 | 22 | 7 | |||||||||
Acquired in-process research and development |
| 246 | | |||||||||
Deferred taxes |
401 | 142 | 513 | |||||||||
Undistributed equity earnings |
(59 | ) | 18 | 92 | ||||||||
Gain on asset dispositions |
(211 | ) | (7 | ) | (34 | ) | ||||||
Other |
(328 | ) | (32 | ) | 80 | |||||||
Working capital adjustments* |
||||||||||||
Decrease in aggregate balance of accounts receivable sold |
(161 | ) | (22 | ) | (174 | ) | ||||||
Decrease (increase) in other accounts and notes receivable |
(28 | ) | (401 | ) | 1,357 | |||||||
Decrease (increase) in inventories |
(24 | ) | 200 | (289 | ) | |||||||
Decrease (increase) in prepaid expenses and other current
assets |
(105 | ) | (37 | ) | 50 | |||||||
Increase (decrease) in accounts payable |
345 | 788 | (1,004 | ) | ||||||||
Increase (decrease) in taxes and other accruals |
562 | 454 | (142 | ) | ||||||||
Net cash provided by continuing operations |
9,167 | 4,776 | 3,526 | |||||||||
Net cash provided by discontinued operations |
189 | 202 | 33 | |||||||||
Net Cash Provided by Operating Activities |
9,356 | 4,978 | 3,559 | |||||||||
Cash Flows From Investing Activities |
||||||||||||
Acquisitions, net of cash acquired |
| 1,180 | 80 | |||||||||
Cash consolidated from adoption of FIN 46 |
225 | | | |||||||||
Capital expenditures and investments, including dry hole costs |
(6,169 | ) | (4,388 | ) | (3,016 | ) | ||||||
Proceeds from asset dispositions |
2,659 | 815 | 262 | |||||||||
Long-term advances to affiliates and other investments |
23 | (92 | ) | (28 | ) | |||||||
Net cash used in continuing operations |
(3,262 | ) | (2,485 | ) | (2,702 | ) | ||||||
Net cash used in discontinued operations |
(236 | ) | (99 | ) | (68 | ) | ||||||
Net Cash Used in Investing Activities |
(3,498 | ) | (2,584 | ) | (2,770 | ) | ||||||
Cash Flows From Financing Activities |
||||||||||||
Issuance of debt |
348 | 3,502 | 566 | |||||||||
Repayment of debt |
(5,159 | ) | (4,592 | ) | (945 | ) | ||||||
Redemption of preferred stock of subsidiary |
| (300 | ) | | ||||||||
Issuance of company common stock |
108 | 44 | 51 | |||||||||
Dividends paid on common stock |
(1,107 | ) | (684 | ) | (403 | ) | ||||||
Other |
111 | (190 | ) | (68 | ) | |||||||
Net cash used in continuing operations |
(5,699 | ) | (2,220 | ) | (799 | ) | ||||||
Net Cash Used in Financing Activities |
(5,699 | ) | (2,220 | ) | (799 | ) | ||||||
Effect of Exchange Rate Changes on Cash and Cash Equivalents |
24 | (9 | ) | 3 | ||||||||
Net Change in Cash and Cash Equivalents |
183 | 165 | (7 | ) | ||||||||
Cash and cash equivalents at beginning of year |
307 | 142 | 149 | |||||||||
Cash and Cash Equivalents at End of Year |
$ | 490 | 307 | 142 | ||||||||
94
Consolidated Statement of Changes in Common Stockholders Equity | ConocoPhillips |
Millions of Dollars |
||||||||||||||||||||||||||||||||||||||||||||
Shares of Common Stock |
Common Stock |
Accumulated Other |
Unearned | |||||||||||||||||||||||||||||||||||||||||
Held in | Par | Capital in | Treasury | Comprehensive | Employee | Retained | ||||||||||||||||||||||||||||||||||||||
Issued |
Treasury |
Held in CBT |
Value |
Excess of Par |
Stock |
CBT |
Income (Loss) |
Compensation |
Earnings |
Total |
||||||||||||||||||||||||||||||||||
December 31, 2000 |
306,380,511 | 23,142,005 | 27,849,430 | $ | 383 | 2,153 | (1,156 | ) | (943 | ) | (100 | ) | (263 | ) | 6,019 | 6,093 | ||||||||||||||||||||||||||||
Net income |
1,661 | 1,661 | ||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) |
||||||||||||||||||||||||||||||||||||||||||||
Minimum pension liability adjustment |
(143 | ) | (143 | ) | ||||||||||||||||||||||||||||||||||||||||
Foreign currency translation |
(14 | ) | (14 | ) | ||||||||||||||||||||||||||||||||||||||||
Unrealized loss on securities |
(2 | ) | (2 | ) | ||||||||||||||||||||||||||||||||||||||||
Hedging activities |
(4 | ) | (4 | ) | ||||||||||||||||||||||||||||||||||||||||
Equity affiliates: |
||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation |
(3 | ) | (3 | ) | ||||||||||||||||||||||||||||||||||||||||
Derivatives related |
11 | 11 | ||||||||||||||||||||||||||||||||||||||||||
Comprehensive income |
1,506 | |||||||||||||||||||||||||||||||||||||||||||
Cash dividends paid on common stock |
(403 | ) | (403 | ) | ||||||||||||||||||||||||||||||||||||||||
Tosco acquisition |
124,059,232 | 155 | 6,883 | 7,038 | ||||||||||||||||||||||||||||||||||||||||
Distributed under incentive compensation and
other benefit plans |
(2,416,891 | ) | (292,857 | ) | 33 | 118 | 9 | (84 | ) | 76 | ||||||||||||||||||||||||||||||||||
Recognition of unearned compensation |
26 | 26 | ||||||||||||||||||||||||||||||||||||||||||
Other |
4 | 4 | ||||||||||||||||||||||||||||||||||||||||||
December 31, 2001 |
430,439,743 | 20,725,114 | 27,556,573 | 538 | 9,069 | (1,038 | ) | (934 | ) | (255 | ) | (237 | ) | 7,197 | 14,340 | |||||||||||||||||||||||||||||
Net loss |
(295 | ) | (295 | ) | ||||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) |
||||||||||||||||||||||||||||||||||||||||||||
Minimum pension liability adjustment |
(93 | ) | (93 | ) | ||||||||||||||||||||||||||||||||||||||||
Foreign currency translation |
182 | 182 | ||||||||||||||||||||||||||||||||||||||||||
Unrealized loss on securities |
(3 | ) | (3 | ) | ||||||||||||||||||||||||||||||||||||||||
Hedging activities |
(1 | ) | (1 | ) | ||||||||||||||||||||||||||||||||||||||||
Equity affiliates: |
||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation |
40 | 40 | ||||||||||||||||||||||||||||||||||||||||||
Derivatives related |
(34 | ) | (34 | ) | ||||||||||||||||||||||||||||||||||||||||
Comprehensive loss |
(204 | ) | ||||||||||||||||||||||||||||||||||||||||||
Cash dividends paid on common stock |
(684 | ) | (684 | ) | ||||||||||||||||||||||||||||||||||||||||
ConocoPhillips merger |
273,471,505 | (19,852,674 | ) | (531 | ) | 16,056 | 999 | (562 | ) | 15,962 | ||||||||||||||||||||||||||||||||||
Distributed under incentive compensation and
other benefit plans |
443,591 | (872,440 | ) | (771,479 | ) | 53 | 39 | 27 | (39 | ) | 80 | |||||||||||||||||||||||||||||||||
Recognition of unearned compensation |
19 | 19 | ||||||||||||||||||||||||||||||||||||||||||
Other |
4 | 4 | ||||||||||||||||||||||||||||||||||||||||||
December 31, 2002 |
704,354,839 | | 26,785,094 | 7 | 25,178 | | (907 | ) | (164 | ) | (218 | ) | 5,621 | 29,517 | ||||||||||||||||||||||||||||||
Net income |
4,735 | 4,735 | ||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) |
||||||||||||||||||||||||||||||||||||||||||||
Minimum pension liability adjustment |
168 | 168 | ||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation |
637 | 637 | ||||||||||||||||||||||||||||||||||||||||||
Unrealized gain on securities |
4 | 4 | ||||||||||||||||||||||||||||||||||||||||||
Hedging activities |
7 | 7 | ||||||||||||||||||||||||||||||||||||||||||
Equity affiliates: |
||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation |
149 | 149 | ||||||||||||||||||||||||||||||||||||||||||
Derivatives related |
20 | 20 | ||||||||||||||||||||||||||||||||||||||||||
Comprehensive income |
5,720 | |||||||||||||||||||||||||||||||||||||||||||
Cash dividends paid on common stock |
(1,107 | ) | (1,107 | ) | ||||||||||||||||||||||||||||||||||||||||
Distributed under incentive compensation and
other benefit plans |
3,730,258 | (1,483,780 | ) | 183 | 50 | 233 | ||||||||||||||||||||||||||||||||||||||
Recognition of unearned compensation |
18 | 18 | ||||||||||||||||||||||||||||||||||||||||||
Other |
(15 | ) | (15 | ) | ||||||||||||||||||||||||||||||||||||||||
December 31, 2003 |
708,085,097 | | 25,301,314 | $ | 7 | 25,361 | | (857 | ) | 821 | (200 | ) | 9,234 | 34,366 | ||||||||||||||||||||||||||||||
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Notes to Consolidated Financial Statements | ConocoPhillips |
Note 1Accounting Policies
n | Consolidation Principles and InvestmentsConsolidation decisions are based on the risk, rewards and voting rights associated with our interest in an entity. Entities that are determined to be Variable Interest Entities (VIEs), as defined by Financial Accounting Standards Board (FASB) Interpretation No. 46, as revised, (FIN 46) will be consolidated if we are the primary beneficiary of that entity. For entities that are not VIEs under FIN 46, we consolidate majority-owned, controlled subsidiaries. The equity method is used to account for investments in affiliates in which we exert significant influence, generally having a 20 to 50 percent ownership interest. We also use the equity method for our 50.1 percent and 57.1 percent non-controlling interests in Petrozuata C.A. and Hamaca Holding LLC, respectively, located in Venezuela because the minority shareholders have substantive participating rights, under which all substantive operating decisions (e.g., annual budgets, major financings, selection of senior operating management, etc.) require joint approvals. The cost method is used when we do not have significant influence. Undivided interests in oil and gas joint ventures, pipelines, natural gas plants, certain transportation assets and Canadian Syncrude mining operations are consolidated on a proportionate basis. Other securities and investments, excluding marketable securities, are generally carried at cost. | |||
n | Revenue RecognitionRevenues associated with sales of crude oil, natural gas, natural gas liquids, petroleum and chemical products, and all other items are recorded when title passes to the customer. Revenues include the sales portion of contracts involving purchases and sales necessary to reposition supply to address location or quality or grade requirements (e.g., when we reposition crude by entering into a contract with a counterparty to sell crude in one location and purchase it in a different location) and sales related to purchase for resale activity. Revenues from the production of natural gas properties, in which we have an interest with other producers, are recognized based on the actual volumes we sold during the period. Any differences between volumes sold and entitlement volumes, based on our net working interest, which are deemed non-recoverable through remaining production, are recognized as accounts receivable or accounts payable, as appropriate. Cumulative differences between volumes sold and entitlement volumes are not significant. Revenues associated with royalty fees from licensed technology are recorded based either upon volumes produced by the licensee or upon the successful completion of all substantive performance requirements related to the installation of licensed technology. | |||
n | ReclassificationCertain amounts in the 2002 and 2001 financial statements have been reclassified to conform with the 2003 presentation. | |||
n | Use of EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosures of contingent assets and liabilities. Actual results could differ from the estimates and assumptions used. | |||
n | Cash EquivalentsCash equivalents are highly liquid short-term investments that are readily convertible to known amounts of cash and have original maturities within three months from their date of purchase. They are carried at cost plus accrued interest, which approximates fair value. |
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n | InventoriesWe have several valuation methods for our various types of inventories and consistently use the following methods for each type of inventory. Crude oil, petroleum products, and Canadian Syncrude inventories are valued at the lower of cost or market in the aggregate, primarily on the last-in, first-out (LIFO) basis. Any necessary lower-of-cost-or-market write-downs are recorded as permanent adjustments to the LIFO cost basis. LIFO is used to better match current inventory costs with current revenues and to meet tax-conformity requirements. Costs include both direct and indirect expenditures incurred in bringing an item or product to its existing condition and location, but not unusual/non-recurring costs or research and development costs. Materials, supplies and other miscellaneous inventories are valued using the weighted-average-cost method, consistent with general industry practice. Merchandise inventories at our retail marketing outlets are valued using the first-in, first-out (FIFO) retail method, consistent with general industry practice. | |||
n | Derivative InstrumentsAll derivative instruments are recorded on the balance sheet at fair value in either accounts and notes receivable, other assets, accounts payable, or other liabilities and deferred credits. Recognition of the gain or loss that results from recording and adjusting a derivative to fair value depends on the purpose for issuing or holding the derivative. Gains and losses from derivatives that are not used as hedges are recognized immediately in earnings. For derivative instruments that are designated and qualify as a fair value hedge, the gains or losses from adjusting the derivative to its fair value will be immediately recognized in earnings and, to the extent the hedge is effective, offset the concurrent recognition of changes in the fair value of the hedged item. Gains or losses from derivative instruments that are designated and qualify as a cash flow hedge will be recorded on the balance sheet in accumulated other comprehensive income/(loss) until the hedged transaction is recognized in earnings; however, to the extent the change in the value of the derivative exceeds the change in the anticipated cash flows of the hedged transaction, the excess gains or losses will be recognized immediately in earnings. | |||
In the consolidated income statement, gains and losses from derivatives that are held for trading and not directly related to our physical business are recorded in other income. Gains and losses from derivatives used for other purposes are recorded in either sales and other operating revenues, other income, purchased crude oil and products, interest and debt expense, or foreign currency transaction gains/losses, depending on the purpose for issuing or holding the derivative. | ||||
n | Oil and Gas Exploration and DevelopmentOil and gas exploration and development costs are accounted for using the successful efforts method of accounting. |
Property Acquisition CostsOil and gas leasehold acquisition costs are capitalized and included in the balance sheet caption properties, plants and equipment. Leasehold impairment is recognized based on exploratory experience and managements judgment. Upon discovery of commercial reserves, leasehold costs are transferred to proved properties. | ||||
Exploratory CostsGeological and geophysical costs and the costs of carrying and retaining undeveloped properties are expensed as incurred. Exploratory well costs are capitalized pending further evaluation of whether economically recoverable reserves have been found. If economically recoverable reserves are not found, exploratory well costs are expensed as dry holes. All exploratory wells are evaluated for economic viability within one year of well completion. Exploratory wells that discover potentially economic reserves that are in areas where a major capital expenditure would be required before production could begin, and where the economic viability of that major capital expenditure depends upon the successful completion of further exploratory work in the area, remain capitalized as long as the additional exploratory work is under way or firmly planned. |
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Development CostsCosts incurred to drill and equip development wells, including unsuccessful development wells, are capitalized. | ||||
Depletion and AmortizationLeasehold costs of producing properties are depleted using the unit-of-production method based on estimated proved oil and gas reserves. Amortization of intangible development costs is based on the unit-of-production method using estimated proved developed oil and gas reserves. |
n | Syncrude Mining OperationsCapitalized costs, including support facilities, include the cost of the acquisition and other capital costs incurred. Capital costs are depreciated using the unit-of-production method based on the applicable portion of proven reserves associated with each mine location and its facilities. | |||
n | Intangible Assets Other Than GoodwillIntangible assets that have finite useful lives are amortized by the straight-line method over their useful lives. Intangible assets that have indefinite useful lives are not amortized but are tested at least annually for impairment. Each reporting period, we evaluate the remaining useful lives of intangible assets not being amortized to determine whether events and circumstances continue to support indefinite useful lives. Intangible assets are considered impaired if the fair value of the intangible asset is lower than cost. The fair value of intangible assets is determined based on quoted market prices in active markets, if available. If quoted market prices are not available, fair value of intangible assets is determined based upon the present values of expected future cash flows using discount rates commensurate with the risks involved in the asset, or upon estimated replacement cost, if expected future cash flows from the intangible asset are not determinable. | |||
n | GoodwillGoodwill is not amortized but is tested at least annually for impairment. If the fair value of a reporting unit is less than the recorded book value of the reporting units assets (including goodwill), less liabilities, then a hypothetical purchase price allocation is performed on the reporting units assets and liabilities using the fair value of the reporting unit as the purchase price in the calculation. If the amount of goodwill resulting from this hypothetical purchase price allocation is less than the recorded amount of goodwill, the recorded goodwill is written down to the new amount. For purposes of goodwill impairment calculations, reporting units have been determined to be Worldwide Exploration and Production, Worldwide Refining and Worldwide Marketing. Because quoted market prices are not available for the companys reporting units, the fair value of the reporting units is determined based upon consideration of several factors, including the present values of expected future cash flows using discount rates commensurate with the risks involved in the operations and observed market multiples of operating cash flows and net income. | |||
n | Depreciation and AmortizationDepreciation and amortization of properties, plants and equipment on producing oil and gas properties, certain pipeline assets (those which are expected to have a declining utilization pattern), and on Syncrude mining operations are determined by the unit-of-production method. Depreciation and amortization of all other properties, plants and equipment are determined by either the individual-unit-straight-line method or the group-straight-line method (for those individual units that are highly integrated with other units). | |||
n | Impairment of Properties, Plants and EquipmentProperties, plants and equipment used in operations are assessed for impairment whenever changes in facts and circumstances indicate a possible significant deterioration in the future cash flows expected to be generated by an asset group. If, upon review, the sum of the undiscounted pretax cash flows is less than the carrying value of the asset group, the carrying value is written down to estimated fair value through additional amortization or depreciation provisions in the periods in which the determination of impairment is made. |
98
Individual assets are grouped for impairment purposes at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assetsgenerally on a field-by-field basis for exploration and production assets, at an entire complex level for refining assets or at a site level for retail stores. The fair value of impaired assets is determined based on quoted market prices in active markets, if available, or upon the present values of expected future cash flows using discount rates commensurate with the risks involved in the asset group. Long-lived assets committed by management for disposal within one year are accounted for at the lower of amortized cost or fair value, less cost to sell. | ||||
The expected future cash flows used for impairment reviews and related fair value calculations are based on estimated future production volumes, prices and costs, considering all available evidence at the date of review. If the future production price risk has been hedged, the hedged price is used in the calculations for the period and quantities hedged. The impairment review includes cash flows from proved developed and undeveloped reserves, including any development expenditures necessary to achieve that production. The price and cost outlook assumptions used in impairment reviews differ from the assumptions used in the Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserve Quantities. In that disclosure, Statement of Financial Accounting Standards (SFAS) No. 69, Disclosures about Oil and Gas Producing Activities, requires the use of prices and costs at the balance sheet date, with no projection of future changes in those assumptions. | ||||
n | Maintenance and RepairsThe costs of maintenance and repairs, which are not significant improvements, are expensed when incurred. | |||
n | Shipping and Handling CostsOur Exploration and Production segment includes shipping and handling costs in production and operating expenses, while the Refining and Marketing segment records shipping and handling costs in purchased crude oil and products. Freight costs billed to customers are recorded as a component of revenue. | |||
n | Advertising CostsProduction costs of media advertising are deferred until the first public showing of the advertisement. Advances to secure advertising slots at specific sporting or other events are deferred until the event occurs. All other advertising costs are expensed as incurred, unless the cost has benefits which clearly extend beyond the interim period in which the expenditure is made, in which case the advertising cost is deferred and amortized ratably over the interim periods which clearly benefit from the expenditure. | |||
n | Property DispositionsWhen complete units of depreciable property are retired or sold, the asset cost and related accumulated depreciation are eliminated, with any gain or loss reflected in income. When less than complete units of depreciable property are disposed of or retired, the difference between asset cost and salvage value is charged or credited to accumulated depreciation. | |||
n | Asset Retirement Obligations and Environmental CostsEffective January 1, 2003, the company adopted SFAS No. 143, Accounting for Asset Retirement Obligations, which applies to legal obligations associated with the retirement and removal of long-lived assets. SFAS 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period when it is incurred (typically when the asset is installed at the production location). Through December 31, 2002, the estimated undiscounted costs, net of salvage values, of dismantling and removing major oil and gas production and transportation facilities, including necessary site restoration, were accrued using either the unit-of-production or the straight-line method, which was used for certain regional production transportation assets that are expected to have a straight-line utilization pattern. See Note 2Changes in Accounting Principles for additional information. |
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Environmental expenditures are expensed or capitalized, depending upon their future economic benefit. Expenditures that relate to an existing condition caused by past operations, and do not have a future economic benefit, are expensed. Liabilities for these expenditures are recorded on an undiscounted basis (unless acquired in a purchase business acquisition) when environmental assessments or cleanups are probable and the costs can be reasonably estimated. Recoveries of environmental remediation costs from other parties, such as state reimbursement funds, are recorded as assets when their receipt is probable. | ||||
n | Stock-Based CompensationEffective January 1, 2003, we voluntarily adopted the fair-value accounting method provided for under SFAS No. 123, Accounting for Stock-Based Compensation. We used the prospective transition method provided under SFAS 123, applying the fair-value accounting method and recognizing compensation expense equal to the fair-market value on the grant date for all stock options granted or modified after December 31, 2002. | |||
Employee stock options granted prior to 2003 continue to be accounted for under Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Because the exercise price of our employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is generally recognized under APB No. 25. The following table displays pro forma information as if the provisions of SFAS No. 123 had been applied to all employee stock options granted: |
2003 | 2002 | 2001 | ||||||||||
Net income (loss), as reported |
$ | 4,735 | (295 | ) | 1,661 | |||||||
Add: Stock-based employee compensation expense
included in reported net income, net of related tax
effects |
50 | 74 | 13 | |||||||||
Deduct: Total stock-based employee compensation
expense determined under fair-value based method for
all awards,
net of related tax effects |
78 | 135 | 29 | |||||||||
Pro forma net income (loss) |
$ | 4,707 | (356 | ) | 1,645 | |||||||
Earnings per share: |
||||||||||||
Basicas reported |
$ | 6.96 | (.61 | ) | 5.67 | |||||||
Basicpro forma |
6.92 | (.74 | ) | 5.62 | ||||||||
Dilutedas reported |
6.91 | (.61 | ) | 5.63 | ||||||||
Dilutedpro forma |
6.87 | (.73 | ) | 5.58 | ||||||||
n | Foreign Currency TranslationAdjustments resulting from the process of translating foreign functional currency financial statements into U.S. dollars are included in accumulated other comprehensive income/loss in common stockholders equity. Foreign currency transaction gains and losses are included in current earnings. Most of our foreign operations use their local currency as the functional currency. | |||
n | Income TaxesDeferred income taxes are computed using the liability method and are provided on all temporary differences between the financial-reporting basis and the tax basis of our assets and liabilities, except for deferred taxes on income considered to be permanently reinvested in certain foreign subsidiaries and foreign corporate joint ventures. Allowable tax credits are applied currently as reductions of the provision for income taxes. |
100
n | Net Income Per Share of Common StockBasic income per share of common stock is calculated based upon the daily weighted-average number of common shares outstanding during the year, including unallocated shares held by the stock savings feature of the ConocoPhillips Savings Plan. Diluted income per share of common stock includes the above, plus in-the-money stock options issued under our compensation plans. Treasury stock and shares held by the Compensation and Benefits Trust (CBT) are excluded from the daily weighted-average number of common shares outstanding in both calculations. | |||
n | Capitalized InterestInterest from external borrowings is capitalized on major projects with an expected construction period of one year or longer. Capitalized interest is added to the cost of the underlying asset and is amortized over the useful lives of the assets in the same manner as the underlying assets. | |||
n | Accounting for Sales of Stock by Subsidiary or Equity InvesteesWe recognize a gain or loss upon the direct sale of equity by our subsidiaries or equity investees if the sales price differs from our carrying amount, and provided that the sale of such equity is not part of a broader corporate reorganization. |
Note 2Changes in Accounting Principles
Accounting for Asset Retirement Obligations
Effective January 1, 2003, we adopted SFAS No. 143, Accounting for Asset
Retirement Obligations, which applies to legal obligations associated with the
retirement and removal of long-lived assets. SFAS No. 143 requires entities to
record the fair value of a liability for an asset retirement obligation in the
period when it is incurred (typically when the asset is installed at the
production location). When the liability is initially recorded, the entity
capitalizes the cost by increasing the carrying amount of the related
properties, plants and equipment. Over time, the liability is increased for
the change in its present value each period, and the initial capitalized cost
is depreciated over the useful life of the related asset.
Application of this new accounting principle resulted in an initial increase in net properties, plants and equipment of $1.2 billion and an asset retirement obligation liability increase of $1.1 billion. The cumulative effect of the change increased 2003 net income by $145 million (after reduction of income taxes of $21 million). The 2003 effect of the adoption increased income from continuing operations and net income for 2003 by $32 million, or $.05 per basic and diluted share.
We have numerous asset removal obligations that we are required to perform under law or contract once an asset is permanently taken out of service. Most of these obligations are not expected to be paid until several years, or decades, in the future and will be funded from general company resources at the time of removal. Our largest individual obligations are related to fixed-base offshore production platforms around the world and to production facilities and pipelines in Alaska.
SFAS No. 143 calls for measurements of asset retirement obligations to include, as a component of expected costs, an estimate of the price that a third party would demand, and could expect to receive, for bearing the uncertainties and unforeseeable circumstances inherent in the obligations, sometimes referred to as a market-risk premium. To date, the oil and gas industry has no examples of credit-worthy third parties who are willing to assume this type of risk, for a determinable price, on major oil and gas production facilities and pipelines. Therefore, because determining such a market-risk premium would be an arbitrary process, we have excluded it from our SFAS No. 143 estimates.
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During 2003, our overall asset retirement obligation changed as follows:
Millions | ||||
of Dollars |
||||
Opening balance at January 1, 2003 |
$ | 2,110 | ||
Accretion of discount |
118 | |||
New obligations |
43 | |||
Spending on existing obligations |
(62 | ) | ||
Property dispositions |
(95 | ) | ||
Foreign currency translation |
109 | |||
Adjustment due to repeal of Norway Removal Grant
Act |
414 | |||
Other adjustments |
48 | |||
Ending balance at December 31, 2003 |
$ | 2,685 | ||
The following table presents the pro forma effects of the retroactive application of this change in accounting principle as if the principle had been adopted on January 1, 2001.
Millions of Dollars | ||||||||||||
Except Per Share Amounts |
||||||||||||
2003 | 2002 | 2001 | ||||||||||
Net income (loss)* |
$ | 4,590 | (254 | ) | 1,712 | |||||||
Earnings per share |
||||||||||||
Basic |
6.75 | (.53 | ) | 5.84 | ||||||||
Diluted |
6.70 | (.52 | ) | 5.80 | ||||||||
* Net income of $4,735 million for 2003 has been adjusted to remove the $145 million cumulative effect of the change in accounting principle attributable to SFAS No. 143. |
Millions | ||||
of Dollars |
||||
Pro forma asset retirement obligation |
||||
At January 1, 2002 |
$ | 1,171 | ||
At December 31, 2002 |
2,110 | |||
Consolidation of Variable Interest Entities
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, (FIN 46) to expand existing accounting guidance
about when a company should include in its consolidated financial statements
the assets, liabilities and activities of another entity. In general, a
variable interest entity (VIE) is a corporation, partnership, trust, or any
other legal structure used for business purposes that either (a) does not have
equity investors with voting rights or (b) has equity investors that do not
provide sufficient financial resources for the entity to support its
activities. FIN 46 requires a VIE to be consolidated by a company if that
company is subject to a majority of the risk of loss from the VIEs activities,
is entitled to receive a majority of the VIEs residual returns, or both (the
company required to consolidate is called the primary beneficiary). It also
requires deconsolidation of a VIE if a company is not the primary beneficiary
of the VIE. The interpretation also requires disclosures about VIEs that a
company does not have to consolidate, but in which it has a significant
variable interest, and about any potential VIE when a company is unable to
obtain the information necessary to confirm if an entity is a VIE or determine
if a company is the primary beneficiary.
102
In December 2003, the FASB issued a revision to FIN 46 to clarify some of the provisions and to exempt certain entities from its guidance. Under the new guidance, special effective date provisions apply to enterprises that have fully or partially applied FIN 46 prior to the revision. The consolidation requirements of FIN 46, as revised, apply to all special purpose entities for periods ending after December 15, 2003. For all other types of variable interest entities the consolidation requirement applies for periods ending after March 15, 2004.
We adopted FIN 46 in the third quarter of 2003, with retroactive application to January 1, 2003, for VIEs involving synthetic leases and certain other financing structures as discussed below. We adopted FIN 46 for such VIEs because our work on these VIEs was complete and we believed the FASBs potential modifications of FIN 46 interpretive guidance was unlikely to change the primary beneficiary determination for these VIEs. We consolidated all VIEs created prior to February 1, 2003 (except as noted below), in which we concluded we were the primary beneficiary. In addition, we deconsolidated an entity where we determined we were not the primary beneficiary. The revision of FIN 46 did not change our accounting for any of the entities we consolidated or deconsolidated under FIN 46 in the third quarter. We continue to review FIN 46 and related guidance. If subsequent guidance or interpretation is different from our current understanding, it is possible that our determination of VIEs and primary beneficiaries could change.
There are two entities which could potentially be VIEs for which we were unable to obtain sufficient information to confirm that the entities were VIEs or determine if we are the primary beneficiary. In February 2003, we entered into two agreements establishing separate guarantee facilities of $50 million each for two liquefied natural gas ships that were then under construction. Subject to the terms of each such facility, we will be required to make payments should the charter revenue generated by the respective ship fall below certain specified minimum thresholds, and we will receive payments to the extent that such revenues exceed those thresholds. The net maximum future payments that we may have to make over the 20-year terms of the two agreements could be up to an aggregate of $100 million. Actual gross payments over the 20 years could exceed that amount to the extent cash is received by us. In September 2003, the first ship was delivered to its owner and the second ship is scheduled for delivery to its owner in 2005. We have determined that the agreements give us a variable interest in the two entities involved, but we do not have enough information regarding these entities and their activities to confirm that the entities are VIEs or to determine if we are the primary beneficiary. With respect to the first ship, the amount drawn under the guarantee facility at December 31, 2003, was less than $1 million. We continue to make efforts to obtain the information required to complete the FIN 46 analysis. We currently account for the guarantees under these agreements as guarantees and contingent liabilities. See Note 16Guarantees for additional information.
The adoption of FIN 46 for VIEs involving synthetic leases and certain other financing structures resulted in the following:
Consolidated VIEs
| We consolidated certain VIEs from which we lease certain ocean vessels, airplanes, refining assets, marketing sites and office buildings. The consolidation increased net properties, plants and equipment by $940 million and increased assets of discontinued operations held for sale by $726 million (both are collateral for the debt obligations); increased cash by $225 million; increased debt by $2.4 billion; increased minority interest by $90 million; reduced other accruals by $263 million, and resulted in a cumulative after-tax effect-of-adoption loss that decreased net income and common stockholders equity by $240 million. However, during 2003 we exercised our option to purchase most of these assets and as a result, the leasing arrangements and our involvement with all but one of the associated VIEs was terminated. See Note 14Debt for more |
103
information about the resulting debt redemptions. At December 31, 2003, we continue to lease refining assets totaling $126 million, which are collateral for the debt obligations of $126 million from a VIE. Other than the obligation to make lease payments and residual value guarantees, the creditors of the VIE have no recourse to our general credit. In addition, we discontinued hedge accounting for an interest rate swap since it had been designated as a cash flow hedge of the variable interest rate component of a lease with a VIE that is now consolidated. At December 31, 2003, the fair market value of the swap was a liability of $13 million. | ||||
| Ashford Energy Capital S.A. continues to be consolidated in our financial statements under the provisions of FIN 46 because we are the primary beneficiary. In December 2001, in order to raise funds for general corporate purposes, Conoco and Cold Spring Finance S.a.r.l. formed Ashford Energy Capital S.A. through the contribution of a $1 billion Conoco subsidiary promissory note and $500 million cash. Through its initial $500 million investment, Cold Spring is entitled to a cumulative annual preferred return, based on three-month LIBOR rates, plus 1.27 percent. The preferred return at December 31, 2003, was 2.48 percent. In 2008, and each 10-year anniversary thereafter, Cold Spring may elect to remarket their investment in Ashford, and if unsuccessful, could require ConocoPhillips to provide a letter of credit in support of Cold Springs investment, or in the event that such letter of credit is not provided, then cause the redemption of their investment in Ashford. Should ConocoPhillips credit rating fall below investment grade, Ashford would require a letter of credit to support $475 million of the term loans, as of December 31, 2003, made by Ashford to other ConocoPhillips subsidiaries. If the letter of credit is not obtained within 60 days, Cold Spring could cause Ashford to sell the ConocoPhillips subsidiary notes. At December 31, 2003, Ashford held $1.6 billion of ConocoPhillips subsidiary notes and $25 million in investments unrelated to ConocoPhillips. We report Cold Springs investment as a minority interest because it is not mandatorily redeemable and the entity does not have a specified liquidation date. Other than the obligation to make payment on the subsidiary notes described above, Cold Spring does not have recourse to our general credit. |
Unconsolidated VIEs
| Phillips 66 Capital II (Trust) was deconsolidated under the provisions of FIN 46 because ConocoPhillips is not the primary beneficiary. During 1997 in order to raise funds for general corporate purposes, we formed the Trust (a statutory business trust), in which we own all common beneficial interests. The Trust was created for the sole purpose of issuing mandatorily redeemable preferred securities to third-party investors and investing the proceeds thereof in an approximate equivalent amount of subordinated debt securities of ConocoPhillips. Application of FIN 46 required deconsolidation of the Trust, which increased debt by $361 million since the 8% Junior Subordinated Deferrable Interest Debentures due 2037 were no longer eliminated in consolidation, and the $350 million of mandatorily redeemable preferred securities were deconsolidated. |
In 2003, we recorded a charge of $240 million (after an income tax benefit of $145 million) for the cumulative effect of adopting FIN 46. The effect of adopting FIN 46 increased 2003 income from continuing operations by $34 million, or $.05 per basic and diluted share. Excluding the cumulative effect, the adoption of FIN 46 increased net income by $139 million, or $.20 per basic and diluted share in 2003.
Stock-Based Compensation
Effective January 1, 2003, we adopted the fair-value accounting method provided
for under SFAS No. 123, Accounting for Stock-Based Compensation. We used the
prospective transition method provided under SFAS 123, applying the fair-value
accounting method and recognizing compensation expense for all stock options
granted or modified after December 31, 2002. See Note 1Accounting Policies
and Note 22Employee Benefit Plans for additional information.
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Other
Effective January 1, 2003, we adopted SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. The adoption of SFAS No. 145 requires that gains and losses on
extinguishments of debt no longer be presented as extraordinary items in the
income statement. Accordingly, losses from the extinguishment of debt of $16
million (after reduction for income taxes of $8 million), previously reported
as an extraordinary item in 2002, have been reclassified as a $24 million
charge to other income with the tax benefit reclassified to provision for
income taxes. Similarly, in 2001, a loss from the early retirement of debt of
$10 million (after reduction for income taxes of $4 million), has been
reclassified as a $14 million charge to other income with the tax benefit
reclassified to provision for income taxes.
In December 2003, the FASB revised and reissued SFAS No. 132 (revised 2003), Employers Disclosures about Pensions and Other Postretirement Benefitsan amendment of FASB Statements No. 87, 88 and 106. While requiring certain new disclosures, the new Standard does not change the measurement or recognition of employee benefit plans. We adopted the provisions of this Standard effective December 2003, except for certain provisions regarding disclosure of information about estimated future benefit payments which are not required until periods ending after December 15, 2004.
Effective January 1, 2001, the company changed its method of accounting for the costs of major maintenance turnarounds from the accrue-in-advance method to the expense-as-incurred method to reflect the impact of a turnaround in the period that it occurs. The new method is preferable because it results in the recognition of costs at the time obligations are incurred. The cumulative effect of this accounting change increased net income in 2001 by $28 million (after reduction for income taxes of $15 million).
Note 3Merger of Conoco and Phillips
On August 30, 2002, Conoco and Phillips combined their businesses by merging with separate acquisition subsidiaries of ConocoPhillips (the merger). As a result, each company became a wholly owned subsidiary of ConocoPhillips. For accounting purposes, Phillips was treated as the acquirer of Conoco, and ConocoPhillips was treated as the successor of Phillips. Conocos operating results have been included in ConocoPhillips consolidated financial statements since the merger date.
Immediately after the closing of the merger, former Phillips stockholders held approximately 56 percent of the outstanding shares of ConocoPhillips common stock, while former Conoco stockholders held approximately 44 percent. ConocoPhillips common stock, listed on the New York Stock Exchange under the symbol COP, began trading on September 3, 2002.
The primary reasons for the merger and the principal factors that contributed to a purchase price that resulted in the recognition of goodwill were:
| The combination of Conoco and Phillips would create a stronger, major, integrated oil company with the benefits of increased size and scale, improving the stability of the combined business earnings in varying economic and market climates; | |||
| ConocoPhillips would emerge with a global presence in both upstream and downstream petroleum businesses, increasing its overall international presence to over 40 countries while maintaining a strong domestic base; and | |||
| Combining the two companies operations would provide significant synergies and related cost savings, and improve future access to capital. |
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The $16 billion purchase price attributed to Conoco for accounting purposes was based on an exchange of Conoco shares for ConocoPhillips common shares. ConocoPhillips issued approximately 293 million shares of common stock and approximately 23.3 million of employee stock options in exchange for 627 million shares of Conoco common stock and 49.8 million Conoco stock options. The common stock was valued at $53.15 per share, which was Phillips average common stock price over the two-day trading period immediately before and after the November 18, 2001, public announcement of the transaction. The Conoco stock options, the fair value of which was determined using the Black-Scholes option-pricing model, were exchanged for ConocoPhillips stock options valued at $384 million. Transaction-related costs, included in the purchase price, were $78 million.
The allocation of the purchase price to specific assets and liabilities was based, in part, upon an outside appraisal of the fair value of Conocos assets. The following table summarizes the final purchase price allocation of the fair values of the assets acquired and liabilities assumed as of August 30, 2002:
Millions | ||||
of Dollars |
||||
Cash and cash equivalents |
$ | 1,250 | ||
Accounts and notes receivable |
2,871 | |||
Inventories |
1,615 | |||
Prepaid expenses and other current assets |
327 | |||
Investments and long-term receivables |
2,985 | |||
Properties, plants and equipment (including $300 million of
land) |
18,842 | |||
Goodwill |
12,721 | |||
Intangibles |
554 | |||
In-process research and development |
246 | |||
Other assets |
322 | |||
Total assets |
$ | 41,733 | ||
Accounts payable |
$ | 2,876 | ||
Notes payable and long-term debt due within one year |
3,101 | |||
Accrued income and other taxes |
1,471 | |||
Other accruals |
1,636 | |||
Long-term debt |
8,930 | |||
Accrued dismantlement, removal and environmental costs |
594 | |||
Deferred income taxes |
3,473 | |||
Employee benefit obligations |
1,566 | |||
Other liabilities and deferred credits |
1,385 | |||
Minority interests |
648 | |||
Common stockholders equity |
16,053 | |||
Total liabilities and equity |
$ | 41,733 | ||
Goodwill and certain identifiable intangible assets recorded in the acquisition are not subject to amortization. However, goodwill and intangible assets are tested periodically for impairment as is required by SFAS No. 142, Goodwill and Other Intangible Assets.
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The acquired intangible assets include $441 million assigned to marketing tradenames, which are not subject to amortization, $95 million assigned to refining technology, with a weighted-average amortization period of 12 years, and $18 million assigned to other intangible assets, with a weighted-average amortization period of eight years.
We assigned the Conoco goodwill to specific reporting units in the fourth quarter of 2003. Previously, it had all been reported as part of Corporate and Other. Included in the $12,721 million of goodwill is $3,841 million attributable to recording a liability required for deferred taxes under purchase accounting. This, and the remaining goodwill of $8,880 million, was assigned to reporting units based on the benefits received by the units from the synergies and strategic advantages of the merger. The $12,721 million of goodwill has been allocated to three reporting units. See Note 11Goodwill and Intangibles for additional information. None of the goodwill is deductible for tax purposes. During 2003, the balance of goodwill was adjusted upward by $642 million, primarily due to revisions in the valuation of properties, plants and equipment, and assumed contingent liabilities.
The purchase price allocation included $246 million of in-process research and development costs related to Conocos natural gas-to-liquids and other technologies. In accordance with FASB Interpretation No. 4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method, the value assigned to the research and development activities was charged to selling, general and administrative expenses in the Emerging Businesses segment at the date of the merger, as these research and development costs had no alternative future use.
Merger-related items that reduced our 2003 and 2002 income from continuing operations were:
Millions of Dollars |
||||||||||||||||
Before-Tax |
After-Tax |
|||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
Write-off of acquired in-process research and development
costs |
$ | | 246 | | 246 | |||||||||||
Restructuring charges (see Note 5) |
240 | 422 | 131 | 253 | ||||||||||||
Incremental seismic contract costs |
| 35 | | 22 | ||||||||||||
Transition costs |
110 | 55 | 92 | 36 | ||||||||||||
Total |
$ | 350 | 758 | 223 | 557 | |||||||||||
In total, these items reduced 2003 and 2002 income from continuing operations by $223 million and $557 million, respectively ($.33 per share and $1.15 per share on a diluted basis).
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The following pro forma summary presents information as if the merger had occurred at the beginning of each period presented, and includes for 2002 the $557 million effect of the merger-related items mentioned above.
Millions of Dollars | ||||||||
Except Per Share Amounts |
||||||||
2002 | 2001 | |||||||
Revenues |
$ | 81,433 | 79,554 | |||||
Income from continuing operations |
918 | 3,635 | ||||||
Net income (loss) |
(70 | ) | 4,072 | |||||
Income from continuing operations per share of common
stock |
||||||||
Basic |
1.36 | 5.39 | ||||||
Diluted |
1.34 | 5.32 | ||||||
Net income (loss) per share of common stock |
||||||||
Basic |
(.10 | ) | 6.04 | |||||
Diluted |
(.10 | ) | 5.97 | |||||
During 2001, both Phillips and Conoco entered into other significant transactions that are not reflected in each of their historical income statements for the full year 2001. The pro forma results have been prepared as if the Phillips September 14, 2001, acquisition of Tosco Corporation (Tosco) (see Note 6Acquisition of Tosco Corporation) and Conocos July 16, 2001, $4.6 billion acquisition of Gulf Canada Resources Limited occurred on January 1, 2001. Gulf Canada Resources Limited was a Canadian-based independent exploration and production company with primary operations in Western Canada, Indonesia, the Netherlands and Ecuador.
The pro forma results reflect the following:
| Recognition of depreciation and amortization based on the preliminary allocated purchase price of the properties, plants and equipment acquired; | |||
| Adjustment of interest for the amortization of the fair-value adjustment to debt; | |||
| Cessation of the amortization of deferred gains not recognizable in the purchase price allocation; | |||
| Accretion of discount on environmental accruals recorded at net present value; and | |||
| Various other adjustments to conform Conocos accounting policies to ConocoPhillips. |
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.
The pro forma information does not reflect any anticipated synergies that might be achieved from combining the operations. The pro forma information is not intended to reflect the actual results that would have occurred had the companies been combined during the periods presented. This pro forma information is not intended to be indicative of the results of operations that may be achieved by ConocoPhillips in the future.
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Note 4Discontinued Operations
During 2002 and 2003, we disposed of, or had committed to a plan to dispose of, certain U.S. retail and wholesale marketing assets, certain U.S. refining and related assets, certain U.S. midstream natural gas gathering and processing assets, and exploration and production assets in the Netherlands. Some of these planned dispositions were mandated by the FTC as a condition of the merger. For reporting purposes, these operations are classified as discontinued operations, and in Note 28-Segment Disclosures and Related Information, these operations are included in Corporate and Other.
FTCMandated Divestitures
In the fourth quarter of 2002, we sold our propane terminal assets at Jefferson
City, Missouri, and East St. Louis, Illinois.
During 2003 we sold:
| Our Woods Cross business unit, which includes the Woods Cross, Utah, refinery; the Utah, Idaho, Montana, and Wyoming Phillips-branded motor fuel marketing operations (both retail and wholesale) and associated assets; and a refined products terminal in Spokane, Washington; | |||
| Certain midstream natural gas gathering and processing assets in southeast New Mexico, and certain midstream natural gas gathering assets in West Texas; and | |||
| Our Commerce City, Colorado, refinery, and related crude oil pipelines, and our Colorado Phillips-branded motor fuel marketing operations (both retail and wholesale). |
As a result, all asset dispositions mandated by the FTC as a condition of the merger have been completed.
Other Dispositions
In the fourth quarter of 2002, we committed to and initiated a plan to dispose
of 3,200 marketing sites that did not fit into our long-range plans. In
connection with the anticipated sale of these retail sites, we recorded charges
in 2002 totaling $1,412 million before-tax, $1,008 million after-tax, primarily
related to the impairment of properties, plants and equipment ($249 million);
goodwill ($257 million); intangible asset ($429 million); and provisions for
losses and penalties associated with various operating lease commitments ($477
million).
The intangible asset represented the Circle K tradename. Properties, plants and equipment included land, buildings and equipment of owned retail sites and leasehold improvements of leased sites. Fair value determinations were based on estimated sales prices for comparable sites.
The provisions for losses and penalties associated with various operating lease commitments included obligations for residual value guarantee deficiencies, and future minimum rental payments that existed prior to the commitment date that would continue after the exit plan is completed with no economic benefit. It also included penalties incurred to cancel the contractual arrangements.
In the third quarter of 2003, we concluded the sale of all of our Exxon-branded marketing assets in New York and New England, including contracts with independent dealers and marketers. Approximately 230 of the 3,200 sites were included in this package.
In the fourth quarter of 2003, we completed the sale of The Circle K Corporation and its subsidiaries. The transaction included about 1,660 retail marketing outlets in 16 states and the Circle K brand, as well as the assignment of the franchise relationship with more than 350 franchised and licensed stores. In January 2004, we signed agreements to sell our Mobil-branded marketing assets on the East Coast in two separate
109
transactions. Assets in the packages include 104 company-owned and operated sites, and 352 dealer sites. Each of the transactions is expected to close in the second quarter of 2004. Discussions are under way with potential buyers for the remaining sites, and we expect to complete the sales of these assets during 2004. Based on disposals completed and signed agreements as of December 31, 2003, we recognized an additional charge in 2003 of approximately $96 million before-tax, $11 million after-tax.
Sales and other operating revenues and income (loss) from discontinued operations were as follows:
Millions of Dollars |
||||||||||||
2003 | 2002 | 2001 | ||||||||||
Sales and other operating revenues from discontinued
operations |
$ | 8,076 | 7,406 | 2,670 | ||||||||
Income (loss) from discontinued operations before-tax |
$ | 317 | (1,387 | ) | 47 | |||||||
Income tax expense (benefit) |
80 | (394 | ) | 15 | ||||||||
Income (loss) from discontinued operations |
$ | 237 | (993 | ) | 32 | |||||||
Major classes of assets and liabilities of discontinued operations held for sale at December 31 were as follows:
Millions of Dollars |
||||||||
2003 | 2002 | |||||||
Assets |
||||||||
Inventories |
$ | | 211 | |||||
Other current assets |
| 136 | ||||||
Net properties, plants and equipment |
857 | 1,178 | ||||||
Intangibles |
| 23 | ||||||
Other assets |
7 | 57 | ||||||
Assets of discontinued operations |
$ | 864 | 1,605 | |||||
Liabilities |
||||||||
Accounts payable and other current liabilities |
$ | | 331 | |||||
Long-term debt |
| 34 | ||||||
Asset retirement obligations and accrued environmental costs |
| 86 | ||||||
Deferred income taxes, other liabilities and deferred
credits |
179 | 198 | ||||||
Liabilities of discontinued operations |
$ | 179 | 649 | |||||
Note 5Restructuring
In 2002, as a result of the merger, we began a restructuring program to capture the benefits of combining Conoco and Phillips by eliminating redundancies, consolidating assets, and sharing common services and functions across regions. In connection with this program, the company recorded accruals in 2002 totaling $770 million for anticipated employee severance payments and incremental pension and medical plan benefit costs associated with the work force reductions, site closings, and Conoco employee relocations. Of the total 2002 accrual, $337 million was reflected in the Conoco purchase price allocation as an assumed liability, and $422 million ($253 million after-tax) related to Phillips was reflected in selling, general and administrative expense and production and operating expense, and $11 million before-tax was included in discontinued operations.
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Included in the total accruals of $770 million was $172 million related to pension and other post-retirement benefits that will be paid in conjunction with other retirement benefits over a number of future years. The table below summarizes the balance of the 2002 accrual of $598 million, which consists of severance related benefits to be provided to approximately 2,900 employees worldwide and other merger related expenses. By the end of 2002, approximately 775 employees had been terminated. Changes in the 2002 severance related accrual balance are summarized below.
Millions of Dollars |
||||||||||||
2002 | Reserve at | |||||||||||
Accruals |
Benefit Payments |
December 31, 2002 |
||||||||||
Conoco |
$ | 297 | (191 | ) | 106 | |||||||
Phillips |
301 | (32 | ) | 269 | ||||||||
Total |
$ | 598 | (223 | ) | 375 | |||||||
In 2003, as individual components of the restructuring program were finalized, we recorded an additional $350 million for severance-related benefits, site closings, Conoco employee relocation costs, and pension and other postretirement benefits. Of this total, $110 million was reflected as a purchase price adjustment in the consolidated financial statements and $240 million was reflected in selling, general and administrative expense and production and operating expense. Included in the total 2003 additional accruals of $350 million was a $118 million expense related to pension and other postretirement benefits that will be paid in conjunction with other retirement benefits over a number of future years. This is reported as part of our employee benefit plan obligations. A roll-forward of activity during 2003 is provided below for the non-pension portion of the accrual, which primarily consists of severance-related benefits to be provided to approximately 3,900 employees worldwide, most of whom are in the United States, as well as other merger related expenses.
Millions of Dollars |
||||||||||||||||
Reserve at | Twelve Months 2003 |
Reserve at | ||||||||||||||
December 31, 2002 |
Accruals |
Payments |
December 31, 2003 |
|||||||||||||
Conoco |
$ | 106 | 107 | (130 | ) | 83 | ||||||||||
Phillips |
269 | 125 | (230 | ) | 164 | |||||||||||
Total |
$ | 375 | 232 | (360 | ) | 247 | ||||||||||
The restructuring liability at December 31 of $247 million is expected to be expended by the end of the first quarter of 2004; except for $53 million, classified as long-term. The remaining $194 million is included in other accruals in the current liabilities section of the balance sheet. Approximately 2,225 employees were terminated during 2003 and approximately 3,000 employees have been terminated since the restructuring program was implemented.
Note 6Acquisition of Tosco Corporation
On September 14, 2001, Tosco was merged with a subsidiary of ConocoPhillips, as a result of which we became the owner of 100 percent of the outstanding common stock of Tosco. Toscos results of operations have been included in our consolidated financial statements since that date. Toscos operations included seven U.S. refineries with a total crude oil capacity of 1.31 million barrels per day; one 75,000-barrel-per-
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day refinery located in Cork, Ireland; and various marketing, transportation, distribution and corporate assets.
The primary reasons for our acquisition of Tosco, and the primary factors that contributed to a purchase price that resulted in recognition of goodwill, are:
| The Tosco operations would deliver earnings prospects, and potential strategic and other benefits; | |||
| Combining the two companies operations would provide significant cost savings; | |||
| Adding Tosco to our Refining and Marketing (R&M) operations would give the segment the size, scale and resources to compete more effectively; | |||
| The merger would transform us into a stronger, more integrated oil company with the benefits of increased size and scale, improving the stability of the combined business earnings in varying economic and market climates; | |||
| The combined company would have a stronger balance sheet, improving its access to capital in the future; and | |||
| The increased cash flow and access to capital resulting from the Tosco acquisition would allow us to pursue other opportunities in the future. |
The allocation of the purchase price to specific assets and liabilities was based, in part, upon an outside appraisal of Toscos long-lived assets. Goodwill and indefinite-lived intangible assets recorded in the acquisition are not subject to amortization, but the goodwill and intangible assets will be tested periodically for impairment as required by SFAS No. 142, Goodwill and Other Intangible Assets.
During the third quarter of 2002, we concluded:
| The outside appraisal of the long-lived assets; | |||
| The determination of the fair value of all other Tosco assets and liabilities; | |||
| The tax basis calculation of Toscos assets and liabilities and the related deferred tax liabilities; and | |||
| The allocation of Tosco goodwill to reporting units within the R&M operating segment. |
The resulting adjustments to the purchase price allocation made in 2002 increased goodwill by $341 million. The more significant adjustments to goodwill were a $247 million reduction in the value of refinery air emission permits to reflect a more appropriate appraisal methodology, a $70 million liability recorded for Tosco Long-Term Incentive Plan performance units, and a $69 million increase in deferred tax liabilities, resulting primarily from an updated analysis of the tax bases of Toscos assets and liabilities. All other adjustments in the aggregate reduced goodwill by $45 million.
Tosco Long-Term Incentive Plan performance units were derivative financial instruments tied to our stock price and were marked-to-market each reporting period. The resulting gains or losses from these mark-to-market adjustments were reported in other income in the consolidated income statement. In October 2002, we and former Tosco executives negotiated a complete cancellation of the performance units in exchange for a cash payment to the former executives. During 2002, we recorded gains totaling $38 million, after-tax, as this liability was marked-to-market each reporting period and eventually settled.
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Note 7Subsidiary Equity Transactions
ConocoPhillips, through various affiliates, and its unaffiliated co-venturers received final approvals from authorities in June 2003 to proceed with the natural gas development phase of the Bayu-Undan project in the Timor Sea. The natural gas development phase of the project includes a pipeline from the offshore Bayu-Undan field to Darwin, Australia, and a liquefied natural gas facility, also located in Darwin. The pipeline portion of the project is owned and operated by an unincorporated joint venture, while the liquefied natural gas facility is owned and operated by Darwin LNG Pty Ltd (DLNG). Both of these entities are consolidated subsidiaries of ConocoPhillips.
In June 2003, as part of a broad Bayu-Undan ownership interest re-alignment with co-venturers, these entities issued equity and sold interests to the co-venturers (as described below), which resulted in a gain of $28 million before-tax, $25 million after-tax, in 2003. This non-operating gain is shown in the consolidated statement of income in the line item entitled Gain on subsidiary equity transactions.
DLNGDLNG issued 118.9 million shares of stock, valued at 1 Australian dollar per share, to co-venturers for 118.9 million Australian dollars ($76.2 million U.S. dollars), reducing our ownership interest in DLNG from 100 percent to 56.72 percent. The transaction resulted in a before-tax gain of $21 million in the consolidated financial statements. Deferred income taxes were not recognized because this was an issuance of common stock and therefore not taxable.
Unincorporated Pipeline Joint VentureThe co-venturers purchased pro-rata interests in the pipeline assets held by ConocoPhillips Pipeline Australia Pty Ltd for $26.6 million U.S. dollars and contributed the purchased assets to the unincorporated joint venture, reducing our ownership interest from 100 percent to 56.72 percent. The transaction resulted in a before-tax gain of $7 million. A deferred tax liability of $1.3 million was recorded in connection with the transaction.
Note 8Inventories
Inventories at December 31 were:
Millions of Dollars |
||||||||
2003 | 2002 | |||||||
Crude oil and petroleum
products |
$ | 3,467 | 3,395 | |||||
Materials, supplies and other |
490 | 450 | ||||||
$ | 3,957 | 3,845 | ||||||
Inventories valued on a LIFO basis totaled $3,224 million and $3,349 million at December 31, 2003 and 2002, respectively. The remainder of our inventories are valued under various methods, including FIFO and weighted average. The excess of current replacement cost over LIFO cost of inventories amounted to $1,421 million and $1,803 million at December 31, 2003 and 2002, respectively.
During 2003, certain inventory quantity reductions caused a liquidation of LIFO inventory values. This liquidation increased income from continuing operations by $24 million, of which $22 million was attributable to our R&M segment.
In the fourth quarter of 2001, the company recognized a $42 million before-tax, $27 million after-tax, lower-of-cost-or-market write-down of its petroleum products inventory.
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Note 9Investments and Long-Term Receivables
Components of investments and long-term receivables at December 31 were:
Millions of Dollars |
||||||||
2003 | 2002 | |||||||
Investment in and advances to affiliated
companies |
$ | 6,258 | 5,900 | |||||
Long-term receivables |
476 | 526 | ||||||
Other investments |
524 | 395 | ||||||
$ | 7,258 | 6,821 | ||||||
At December 31, 2003, retained earnings included $835 million related to the undistributed earnings of affiliated companies, and distributions received from affiliates were $496 million, $313 million and $163 million in 2003, 2002 and 2001, respectively.
Equity Investments
We own or owned investments in chemicals, heavy-oil projects, oil and gas
transportation, coal mining and other industries. The affiliated companies for
which we use the equity method of accounting include, among others, the
following companies:
| Chevron Phillips Chemical Co. LLC (CPChem)50 percent ownership interestmanufactures and markets petrochemicals and plastics; | |||
| Duke Energy Field Services, LLC (DEFS)30.3 percent ownership interestowns and operates gas plants, gathering systems, storage facilities and fractionation plants; | |||
| Hamaca Holding LLC57.1 percent non-controlling ownership interestcurrently building facilities to extract extra heavy crude oil from reserves in Eastern Venezuela; | |||
| Merey Sweeny L.P. (MSLP)50 percent ownership interestprocesses heavy crude oil into intermediate products for the Sweeny, Texas, refinery; | |||
| Petrovera Resources Limited46.7 percent ownership interestowns, operates and finances heavy-oil producing properties in Western Canada. On February 18, 2004, we sold our interest in this joint venture; and | |||
| Petrozuata C.A.50.1 percent non-controlling ownership interestproduces extra heavy crude oil and upgrades it into medium grade crude oil at Jose on the northern coast of Venezuela. |
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Summarized 100 percent financial information for equity-basis investments in affiliated companies, combined, was as follows:
2003 | Millions of Dollars |
|||||||||||||||
Other Equity | ||||||||||||||||
DEFS |
CPChem |
Companies |
Total |
|||||||||||||
Revenues |
$ | 8,886 | 7,018 | 13,873 | 29,777 | |||||||||||
Income before income taxes |
268 | 12 | 1,753 | 2,033 | ||||||||||||
Net income |
214 | 7 | 1,274 | 1,495 | ||||||||||||
Current assets |
1,201 | 1,636 | 6,163 | 9,000 | ||||||||||||
Noncurrent assets |
5,313 | 4,606 | 23,776 | 33,695 | ||||||||||||
Current liabilities |
1,274 | 1,184 | 5,909 | 8,367 | ||||||||||||
Noncurrent liabilities |
2,376 | 1,298 | 7,629 | 11,303 | ||||||||||||
2002 | Millions of Dollars |
|||||||||||||||
Other Equity | ||||||||||||||||
DEFS |
CPChem |
Companies |
Total |
|||||||||||||
Revenues |
$ | 5,992 | 5,473 | 5,378 | 16,843 | |||||||||||
Income (loss) before income
taxes |
(37 | ) | (24 | ) | 776 | 715 | ||||||||||
Net income (loss) |
(47 | ) | (30 | ) | 751 | 674 | ||||||||||
Current assets |
1,182 | 1,561 | 5,783 | 8,526 | ||||||||||||
Noncurrent assets |
5,417 | 4,548 | 14,386 | 24,351 | ||||||||||||
Current liabilities |
1,504 | 1,051 | 5,046 | 7,601 | ||||||||||||
Noncurrent liabilities |
2,320 | 1,307 | 9,713 | 13,340 | ||||||||||||
2001 | Millions of Dollars |
|||||||||||||||
Other Equity | ||||||||||||||||
DEFS |
CPChem |
Companies |
Total |
|||||||||||||
Revenues |
$ | 8,321 | 6,010 | 1,555 | 15,886 | |||||||||||
Income (loss) before income
taxes |
367 | (431 | ) | 607 | 543 | |||||||||||
Net income (loss) |
364 | (480 | ) | 414 | 298 | |||||||||||
Our share of income taxes incurred directly by the equity companies is reported in equity in earnings of affiliates, and as such is not included in income taxes in our consolidated financial statements.
Duke Energy Field Services, LLC
DEFS owns and operates gas plants, gathering systems, storage facilities and
fractionation plants. At December 31, 2003, the book value of our common
investment in DEFS was $212 million. Our 30.3 percent share of the net assets
of DEFS was $831 million. This basis difference of $619 million is being
amortized on a straight-line basis through 2014 consistent with the remaining
estimated useful lives of DEFS properties, plants and equipment. Included in
net income for 2003, 2002 and 2001 was after-tax income of $36 million, $35
million and $36 million, respectively, representing the amortization of the
basis difference.
115
DEFS supplies a substantial portion of its natural gas liquids to us and CPChem under a supply agreement that continues until December 31, 2014. This purchase commitment is on an if-produced, will-purchase basis so it has no fixed production schedule, but has been, and is expected to be, a relatively stable purchase pattern over the term of the contract. Natural gas liquids are purchased under this agreement at various published market index prices, less transportation and fractionation fees.
On December 31, 2003, DEFS redeemed the remaining $75 million of its preferred member interests. We received our 30.3 percent share, a $23 million distribution representing the return of our preferred member interests.
Chevron Phillips Chemical Company LLC
CPChem manufactures and markets petrochemicals and plastics. At December 31,
2003, the book value of our investment in CPChem was $1,917 million. Our 50
percent share of the total net assets of CPChem was $1,755 million. This basis
difference of $162 million is being amortized through 2020, consistent with the
remaining estimated useful lives of CPChem properties, plants and equipment.
We have multiple supply and purchase agreements in place with CPChem, ranging in initial terms from one to 99 years, with extension options. These agreements cover sales and purchases of refined products, solvents, and petrochemical and natural gas liquids feedstocks, as well as fuel oils and gases. Delivery quantities vary by product, and are generally on an if-produced, will-purchase basis. All products are purchased and sold under specified pricing formulas based on various published pricing indices, consistent with terms extended to third-party customers.
Note 10Properties, Plants and Equipment
The companys investment in properties, plants and equipment (PP&E), with accumulated depreciation, depletion and amortization (Accum. DD&A), at December 31 was:
Millions of Dollars |
||||||||||||||||||||||||
2003 |
2002 |
|||||||||||||||||||||||
Gross | Accum. | Net | Gross | Accum. | Net | |||||||||||||||||||
PP&E |
DD&A |
PP&E |
PP&E |
DD&A |
PP&E |
|||||||||||||||||||
E&P |
$ | 42,358 | 10,837 | 31,521 | 36,884 | 8,600 | 28,284 | |||||||||||||||||
Midstream |
944 | 87 | 857 | 903 | 16 | 887 | ||||||||||||||||||
R&M |
16,469 | 2,870 | 13,599 | 15,605 | 2,765 | 12,840 | ||||||||||||||||||
Chemicals |
| | | | | | ||||||||||||||||||
Emerging
Businesses |
1,013 | 214 | 799 | 690 | 5 | 685 | ||||||||||||||||||
Corporate and
Other |
1,055 | 403 | 652 | 477 | 143 | 334 | ||||||||||||||||||
$ | 61,839 | 14,411 | 47,428 | 54,559 | 11,529 | 43,030 | ||||||||||||||||||
Our investment in PP&E is recorded at cost. PP&E acquired in mergers and acquisitions is recorded at its fair market value at the time of the merger or acquisition. Effective January 1, 2003, we adopted SFAS No. 143, Accounting for Asset Retirement Obligations, which applies to legal obligations associated with the retirement and removal of long-lived assets. SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period when it is incurred (typically when the asset is installed at the production location). When the liability is initially recorded, the entity capitalizes the cost by increasing the carrying amount of the related PP&E. Over time, the liability is increased for the
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change in its present value each period, and the initial capitalized cost is depreciated over the useful life of the related asset. Application of this new accounting principle resulted in an initial increase in net PP&E of $1.2 billion.
In June 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, which became effective on July 1, 2001, and January 1, 2002, respectively. The Securities and Exchange Commission (SEC) has requested the Emerging Issues Task Force (EITF) to consider the issue of whether SFAS Nos. 141 and 142 require interests held under oil, gas and mineral leases to be separately classified as intangible assets on the balance sheets of companies in the extractive industries. Historically, in accordance with SFAS No. 19, Financial Accounting and Reporting by Oil and Gas Producing Companies, we have capitalized the cost of oil and gas leasehold interests and, consistent with industry practice, reported these assets as part of tangible E&P properties, plants and equipment.
If such interests were deemed to be intangible assets by the EITF, mineral rights to extract oil and gas for both proved and unproved properties would be classified separately from E&P properties, plants and equipment as intangible assets on our balance sheet. This interpretation by the EITF would only affect the classification of oil and gas mineral rights on our balance sheet and would not affect total assets, net worth, results of operations or cash flows.
E&P properties, plants and equipment at December 31, 2003 and 2002, included approximately $10.5 billion and $10.8 billion, respectively, of mineral rights to extract oil and gas, net of accumulated depletion, that would be reclassified on the balance sheet as intangible assets, if the interpretation that the SEC requested the EITF to consider was applied. We plan to continue to classify oil and gas mineral rights as E&P properties, plants and equipment until further guidance is provided by the EITF.
Note 11Goodwill and Intangibles
Changes in the carrying amount of goodwill are as follows:
Millions of Dollars |
||||||||||||||||
E&P |
R&M |
Corporate |
Total |
|||||||||||||
Balance at December 31, 2001 |
$ | 15 | 2,266 | | 2,281 | |||||||||||
Acquired (merger of Conoco and Phillips) |
| | 12,079 | 12,079 | ||||||||||||
Valuation and other adjustments |
| 341 | | 341 | ||||||||||||
Allocated to discontinued operations |
| (257 | ) | | (257 | ) | ||||||||||
Balance at December 31, 2002 |
$ | 15 | 2,350 | 12,079 | 14,444 | |||||||||||
Valuation and other adjustments |
3 | 7 | 630 | 640 | ||||||||||||
Allocation to reporting units |
11,166 | 1,543 | (12,709 | ) | | |||||||||||
Balance at December 31, 2003 |
$ | 11,184 | 3,900 | * | | 15,084 | ||||||||||
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Information on the carrying value of intangible assets follows:
Millions of Dollars |
||||||||||||
Gross Carrying | Accumulated | Net Carrying | ||||||||||
Amount |
Amortization |
Amount |
||||||||||
Amortized Intangible Assets |
||||||||||||
Balance at December 31, 2003 |
||||||||||||
Refining technology related |
$ | 101 | 9 | 92 | ||||||||
Other* |
57 | 29 | 28 | |||||||||
$ | 158 | 38 | 120 | |||||||||
Balance at December 31, 2002 |
||||||||||||
Refining technology related |
$ | 95 | 1 | 94 | ||||||||
Other* |
60 | 22 | 38 | |||||||||
$ | 155 | 23 | 132 | |||||||||
Indefinite-Lived Intangible Assets |
||||
Balance at December 31, 2003 |
||||
Tradenames |
$ | 604 | ||
Refinery air and operating
permits |
315 | |||
Other* |
46 | |||
$ | 965 | |||
Balance at December 31, 2002 |
||||
Tradenames |
$ | 669 | ||
Refinery air and operating
permits |
315 | |||
Other* |
3 | |||
$ | 987 | |||
Amortization expense related to the intangible assets above for the year ended December 31, 2003, was $17 million. The estimated amortization expense for the next five years is approximately $20 million per year. Amortization expense for the year ended December 31, 2002, was not material.
Note 12Property Impairments
During 2003, 2002 and 2001, we recognized the following impairment charges:
Millions of Dollars |
||||||||||||
2003 | 2002 | 2001 | ||||||||||
E&P |
||||||||||||
United States |
$ | 65 | 12 | 3 | ||||||||
International |
180 | 37 | 23 | |||||||||
R&M |
||||||||||||
Tradenames |
| 102 | | |||||||||
Retail site leasehold improvements |
| 26 | | |||||||||
Transportation |
2 | | | |||||||||
Corporate and Other |
5 | | | |||||||||
$ | 252 | 177 | 26 | |||||||||
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2003
The E&P segment recognized property impairments of $245 million in 2003. These
impairments were the result of:
| The write-down to market value of properties planned for disposition; | |||
| Properties failing to meet recoverability tests; and | |||
| International tax law changes affecting asset removal costs. |
2002
Our E&P segment recognized impairments of $49 million on four fields in 2002.
Impairment of the Janice field in the U.K. North Sea was triggered by its sale,
while the Viscount field in the U.K. North Sea was impaired following an
evaluation of development drilling results. Sales of properties in Alaska and
offshore California resulted in the remaining E&P impairments in 2002.
We initiated a plan in late 2002 to sell a substantial portion of our R&M retail sites. The planned dispositions will result in a reduction of the amount of gasoline volumes marketed under our 76 tradename. As a result, the carrying value of the 76 tradename was impaired, with the $102 million impairment determined by an analysis of the discounted cash flows based on the gasoline volumes projected to be sold under the brand name after the planned dispositions, compared with the volumes being sold prior to the dispositions. We also impaired the carrying value of certain leasehold improvements associated with leased retail sites that are held for use by comparing the guaranteed residual values and leasehold improvements with current market values of the related assets.
See Note 4Discontinued Operations for information regarding the impairments recognized in 2002 in connection with the anticipated sale of certain assets mandated by the FTC, and the planned sale of a substantial portion of the companys retail marketing operations.
2001
In the second quarter of 2001, we committed to a plan to sell our 12.5 percent
interest in the Siri oil field, offshore Denmark, triggering a write-down of
the fields assets to fair market value. The sale closed in early 2002. We
also recorded a property impairment on a crude oil tanker that was sold in the
fourth quarter of 2001.
Note 13Asset Retirement Obligations and Accrued Environmental Costs
Asset retirement obligations and accrued environmental costs at December 31 were:
Millions of Dollars |
||||||||
2003 | 2002 | |||||||
Asset retirement obligations |
$ | 2,685 | 1,065 | |||||
Accrued environmental costs |
1,119 | 743 | ||||||
Total asset retirement obligations and accrued environmental costs |
3,804 | 1,808 | ||||||
Asset retirement obligations and accrued environmental costs due
within one year* |
(201 | ) | (142 | ) | ||||
Long-term asset retirement obligations and accrued environmental
costs |
$ | 3,603 | 1,666 | |||||
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Asset Retirement Obligations
For information on the companys adoption of SFAS 143 and related disclosures,
see Note 2Changes in Accounting Principles.
Accrued Environmental Costs
Total environmental accruals at December 31, 2003 and 2002, were $1,119 million
and $743 million, respectively. The 2003 increase in total accrued
environmental costs primarily resulted from evaluation of Conoco environmental
liabilities during the purchase price allocation period.
We had accrued environmental costs of $625 million and $427 million at December 31, 2003 and 2002, respectively, primarily related to cleanup at domestic refineries and underground storage tanks at U.S. service stations, and remediation activities required by the state of Alaska at exploration and production sites formerly owned by Atlantic Richfield Company. We had also accrued in Corporate and Other $367 million and $246 million of environmental costs associated with non-operating sites at December 31, 2003 and 2002, respectively. In addition, $127 million and $70 million were included at December 31, 2003 and 2002, respectively, where the company has been named a potentially responsible party under the Federal Comprehensive Environmental Response, Compensation and Liability Act, or similar state laws. Accrued environmental liabilities will be paid over periods extending up to 30 years.
Because a large portion of our accrued environmental costs were acquired in various business combinations, they are discounted obligations. Expected expenditures for acquired environmental obligations are discounted using a weighted-average 5 percent discount factor, resulting in an accrued balance for acquired environmental liabilities of $908 million at December 31, 2003. The expected future undiscounted payments related to the portion of the accrued environmental costs that have been discounted are: $131 million in 2004, $121 million in 2005, $88 million in 2006, $72 million in 2007, $67 million in 2008, and $596 million for all future years after 2008.
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Note 14Debt
Long-term debt at December 31 was:
Millions of Dollars |
||||||||
2003 | 2002 | |||||||
9 3/8% Notes due 2011 |
$ | 350 | 350 | |||||
8.75% Notes due 2010 |
1,350 | 1,350 | ||||||
8.5% Notes due 2005 |
1,150 | 1,150 | ||||||
8.49% Notes due 2023 |
| 250 | ||||||
8.25% Mortgage Bonds due 2003 |
| 150 | ||||||
8.125% Notes due 2030 |
600 | 600 | ||||||
8% Junior Subordinated Debentures due 2037 |
361 | | ||||||
7.92% Notes due 2023 |
| 250 | ||||||
7.9% Notes due 2047 |
100 | 100 | ||||||
7.8% Notes due 2027 |
300 | 300 | ||||||
7.68% Notes due 2012 |
59 | 64 | ||||||
7.625% Notes due 2006 |
240 | 240 | ||||||
7.25% Notes due 2007 |
200 | 200 | ||||||
7.25% Notes due 2031 |
500 | 500 | ||||||
7.20% Notes due 2023 |
| 250 | ||||||
7.125% Debentures due 2028 |
300 | 300 | ||||||
7% Debentures due 2029 |
200 | 200 | ||||||
6.95% Notes due 2029 |
1,900 | 1,900 | ||||||
6.65% Notes due 2003 |
| 100 | ||||||
6.65% Debentures due 2018 |
300 | 300 | ||||||
6.375% Notes due 2009 |
300 | 300 | ||||||
6.35% Notes due 2009 |
750 | 750 | ||||||
6.35% Notes due 2011 |
1,750 | 1,750 | ||||||
5.90% Notes due 2004 |
1,350 | 1,350 | ||||||
5.90% Notes due 2032 |
600 | 600 | ||||||
5.847% Notes due 2006 |
126 | | ||||||
5.45% Notes due 2006 |
1,250 | 1,250 | ||||||
4.75% Notes due 2012 |
1,000 | 1,000 | ||||||
3.625% Notes due 2007 |
400 | 400 | ||||||
Commercial paper and revolving debt due to banks and others through
2008
at 1.05% - 1.08% at year-end 2003 and 1.46% - 1.94% at year-end 2002 |
709 | 1,517 | ||||||
SRW Cogeneration Limited Partnership |
| 180 | ||||||
Floating Rate Notes due 2003 |
| 500 | ||||||
Industrial Development bonds at 1.1% - 6.1% at year-end 2003 and
1.55% - 3.0% at year-end 2002 |
256 | 153 | ||||||
Guarantee of savings plan bank loan payable at 1.4375% at year-end 2003 |
275 | 299 | ||||||
Note payable to Merey Sweeny, L.P. at 7% |
131 | 131 | ||||||
Marine Terminal Revenue Refunding Bonds at 2.0% at year-end 2003 |
265 | 265 | ||||||
Other notes payable |
52 | 68 | ||||||
Debt at face value |
17,124 | 19,067 | ||||||
Capitalized leases |
60 | 23 | ||||||
Net unamortized premiums and discounts |
596 | 676 | ||||||
Total debt |
17,780 | 19,766 | ||||||
Notes payable and long-term debt due within one year |
(1,440 | ) | (849 | ) | ||||
Long-term debt |
$ | 16,340 | 18,917 | |||||
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Maturities inclusive of net unamortized premiums and discounts in 2004 through 2008 are: $1,440 million (included in current liabilities), $1,237 million, $1,885 million, $653 million and $587 million, respectively.
Effective October 14, 2003, we entered into two new revolving credit facilities, replacing a $2 billion 364-day facility that expired on that same date. The new revolving credit facilities are a $1.5 billion 364-day facility and a $500 million five-year facility. In addition, we have two revolving credit facilities totaling $2 billion expiring in October 2006. In total, at December 31, 2003, we had four bank credit facilities in place, totaling $4 billion, available for use either as direct bank borrowings or as support for the issuance of up to $4 billion in commercial paper, a portion of which may be denominated in other currencies (limited to euro 3 billion equivalent). At December 31, 2003, we had no debt outstanding under these credit facilities, but had $709 million in commercial paper outstanding. The commercial paper is supported 100 percent by the credit facilities and the amount approximates fair value.
At December 31, 2003, $984 million of short-term obligations were classified as non-current, based on managements intent to refinance the obligations on a long-term basis through the use of existing facilities.
One of our Norwegian subsidiaries has two $300 million revolving credit facilities expiring in June 2004, under which no borrowings were outstanding at December 31, 2003.
Depending on the credit facility, borrowings may bear interest at a margin above rates offered by certain designated banks in the London interbank market or at margins above certificate of deposit or prime rates offered by certain designated banks in the United States. The agreements call for commitment fees on available, but unused, amounts. The agreements also contain early termination rights if our current directors or their approved successors cease to be a majority of the Board of Directors.
In the third quarter of 2003, the adoption of FIN 46 for VIEs involving synthetic leases and certain other financing structures, was made and retroactively applied to January 1, 2003. The application of FIN 46 increased our balance sheet debt by approximately $2.8 billion. See Note 2Changes in Accounting Principles for additional information about FIN 46. With the adoption of FIN 46:
| The Phillips 66 Capital Trust II (Trust) is no longer consolidated, which removed $350 million of mandatorily redeemable preferred securities from the consolidated balance sheet and added to long-term debt $361 million of 8% Junior Subordinated Deferrable Interest Debentures due 2037. Previously this debt was eliminated in consolidation; and | |||
| VIEs involving synthetic leases and certain other financing structures in which we are the primary beneficiary were consolidated retroactively as of January 1, 2003, which increased consolidated debt approximately $2.4 billion. Of this $2.4 billion, approximately $1.5 billion was associated with approximately 1,000 retail store sites, the majority of which we have sold or plan to sell, and two office buildings that also are part of our divestiture plan. | |||
The $2.4 billion in debt at January 1, 2003, was comprised of the following: |
| $90 million Tosco Trust 2000E 8.78% Senior Secured Notes due 2010; | |||
| $245 million Tosco Trust 2000E 8.58% Senior Secured Notes due 2010; | |||
| $199 million Arctic Funding, Limited Partnership 6.85% Senior Secured Note due 2011; | |||
| $100 million of floating rate aviation equipment lease obligations having a final maturity in 2004; | |||
| $489 million of various fixed and floating rate ocean vessel lease obligations having final maturities from 2004 to 2005; |
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| $1,130 million of floating rate marketing lease obligations having final maturities from 2003 to 2006; and | |||
| $160 million of refining equipment lease obligations at 5.847% having a final maturity in 2006. |
During 2003, we reduced our commercial paper balance outstanding from $1.5 billion at December 31, 2002, to $709 million at December 31, 2003. In 2003, we paid off the following notes and debt facilities as they were called or matured and funded the payments with cash from operating activities and proceeds from asset dispositions:
| $250 million 8.49% Notes due 2023, at 104.245 percent; | |||
| $150 million 8.25% Mortgage Bonds due May 15, 2003; | |||
| $250 million 7.92% Notes due in 2023, at 103.96 percent; | |||
| $250 million 7.20% Notes due 2023, at 103.60 percent; | |||
| $100 million 6.65% Notes that matured on March 1, 2003; | |||
| $180 million SRW Cogeneration Limited Partnership note; | |||
| $500 million Floating Rate Notes due April 15, 2003; | |||
| $90 million Tosco Trust 2000-E 8.78% Senior Secured Notes due 2010; | |||
| $245 million Tosco Trust 2000-E 8.58% Senior Secured Notes due 2010; | |||
| $199 million Arctic Funding, Limited Partnership 6.85% Senior Secured Note due 2011; | |||
| $100 million of floating rate aviation equipment lease obligations having a final maturity in 2004; | |||
| $489 million of fixed and floating rate ocean vessel lease obligations having final maturities from 2004 to 2005; and | |||
| $1,130 million of floating rate marketing lease obligations having maturities from 2003 to 2006. |
Also, in October and November 2003, we executed certain interest rate swaps that had the effect of converting $1.5 billion of debt from fixed to floating rate. The swaps were placed on $400 million of 3.625% Notes due 2007, $750 million of 6.35% Notes due 2009, and $350 million of 4.75% Notes due 2012. The weighted average floating rate in effect on these notes at December 31, 2003, was 2.26 percent, based on LIBOR. These swaps qualify for hedge accounting under SFAS 133, Accounting for Derivative Instruments and Hedging Activities.
At December 31, 2003, $275 million was outstanding under the ConocoPhillips Savings Plan term loan, which will require repayment in annual installments beginning in 2009 and continuing through 2015. Under this bank loan, any participating bank in the syndicate of lenders may cease to participate on December 5, 2004, by giving not less than 180 days prior notice to the ConocoPhillips Savings Plan and the company. One participating lender has given cessation notice. This note is classified as non-current, based on managements intent to resyndicate the loan or alternatively to refinance the note on a long-term basis through the use of existing facilities.
Each bank participating in the ConocoPhillips Savings Plan loan has the optional right, if our current directors or their approved successors cease to be a majority of the Board, and upon not less than 90 days notice, to cease to participate in the loan. Under the above conditions, we are required to purchase such banks rights and obligations under the loan agreement if they are not transferred to another bank of our choice. See Note 22Employee Benefit Plans for additional discussion of the ConocoPhillips Savings Plan.
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Note 15Sales of Receivables
At December 31, 2002, certain credit card and trade receivables had been sold to two Qualifying Special Purpose Entities (QSPEs) in revolving-period securitization arrangements. These arrangements provided for us to sell, and the QSPEs to purchase, certain receivables and for the QSPEs to then issue beneficial interests of up to $1.5 billion to five bank-sponsored entities. All five bank-sponsored entities are multi-seller conduits with access to the commercial paper market and purchase interests in similar receivables from numerous other companies unrelated to us. We have no ownership interests, nor any variable interests, in any of the bank-sponsored entities. As a result, we do not consolidate any of these entities. Furthermore, we do not consolidate the QSPEs because they meet the requirements of SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, to be excluded from the consolidated financial statements of ConocoPhillips.
During 2003, we purchased from the bank-sponsored entities the senior interests of one of our two existing QSPEs and discontinued selling receivables to it. We have consolidated this QSPE since acquiring the senior interests. Also during 2003, the third-party beneficial interest holders approved amendments to the other QSPE to increase the amount of third-party beneficial interests that can be issued to $1.2 billion. These changes resulted in a net reduction of the maximum level of senior beneficial interests that can be issued to third-party beneficial interest holders from $1.5 billion to $1.2 billion. At December 31, 2003 and 2002, we had sold accounts receivable of $1.2 billion and $1.3 billion, respectively. The receivables transferred to the QSPE meets the isolation requirements and other requirements of SFAS No. 140 to be accounted for as sales. Accordingly, receivables transferred to the QSPEs were accounted for as sales.
We retain beneficial interests in the QSPE that are subordinate to the beneficial interests issued to the bank-sponsored entities. These retained interests, which are reported on the balance sheet in accounts and notes receivablerelated parties, were $1.3 billion at both December 31, 2003 and 2002. We also retain servicing responsibility related to the sold receivables, which gives us certain benefits, the fair value of which approximates the fair value of the liability incurred for continuing to service the receivables. The carrying value of the subordinated beneficial interests approximates fair market value due to the short term of the underlying assets, which makes stress testing unnecessary.
Total cash flows received from and paid under the securitization arrangements were as follows:
Millions of Dollars |
||||||||
2003 | 2002 | |||||||
Receivables sold at beginning of year |
$ | 1,323 | 940 | |||||
Conoco receivables sold at August 30, 2002 |
| 400 | ||||||
New receivables sold |
25,201 | 19,943 | * | |||||
Cash collections remitted |
(25,324 | ) | (19,960 | )* | ||||
Receivables sold at end of year |
$ | 1,200 | 1,323 | |||||
Discounts and other fees paid on revolving
balances |
$ | 19 | 21 | |||||
* | New receivables sold and cash collections remitted under these ongoing revolving securitization arrangements have been revised due to correction of disclosure calculations. |
At December 31, 2003 and 2002, we also had sold $226 million and $264 million of receivables under factoring arrangements. We retain servicing responsibility related to these sold receivables, which gives us certain benefits, the fair value of which approximates the fair value of the liability incurred for continuing to service the receivables.
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Note 16Guarantees
At December 31, 2003, we were liable for certain contingent obligations under various contractual arrangements as described below. We are required to recognize a liability at inception for the fair value of our obligation as a guarantor for guarantees issued or modified after December 31, 2002. Unless the carrying amount of the liability is noted, we have not recognized a liability either because the guarantees were issued prior to December 31, 2002, or because the fair value of the obligation is immaterial.
Construction Completion Guarantees
| We have a construction completion guarantee related to debt and bond financing arrangements secured by the Merey Sweeny, L.P. (MSLP) joint-venture project in Texas. The maximum potential amount of future payment under the guarantee, including joint-and-several debt at its gross amount, is estimated to be $400 million assuming that completion certification is not achieved. Of this amount, $200 million is attributable to Petroleos de Venezuela, S.A. (PDVSA), because they are joint-and-severally liable for a portion of the debt. If completion certification is not attained by June 18, 2004, the full debt balance could be called. MSLP is currently awaiting receipt of a permit for a new waste water pipeline and working to resolve issues in placing its insurance program, after which we expect to achieve completion certification in the second quarter of 2004. The debt is non-recourse to us upon completion certification. |
| We also issued a construction completion guarantee related to debt financing arrangements for the Hamaca Holding LLC joint-venture project in Venezuela. The maximum potential amount of future payments under the guarantee is estimated to be $440 million, which could be payable if the full debt financing capacity is utilized and startup and completion of the Hamaca project is not achieved by October 1, 2005. The project financing debt will become non-recourse upon startup and completion certification. |
Guarantees of Joint-Venture Debt
| At December 31, 2003, we had guarantees of approximately $340 million outstanding for our portion of joint-venture debt obligations, which have terms of up to 22 years. Included in these outstanding guarantees was $156 million associated with the Polar Lights Company joint venture in Russia. Payment will be required if a joint venture defaults on its debt obligations. |
Other Guarantees
| In addition to the construction completion guarantee explained above, the MSLP agreement also requires the partners in the venture to pay cash calls as required to meet the minimum operating requirements of the venture, in the event revenues do not cover expenses over the next 20 years. Our maximum potential future payments under the agreement are estimated to be $300 million, assuming MSLP does not earn any revenue over the entire period and fixed costs cannot be reduced. To the extent revenue is generated by the venture or fixed costs are reduced, future required payments would be reduced accordingly. |
| In February 2003, we entered into two agreements establishing separate guarantee facilities of $50 million each for two liquefied natural gas ships that were then under construction. Subject to the terms of each such facility, we will be required to make payments should the charter revenue generated by the respective ship fall below certain specified minimum thresholds, and we will receive payments to the extent that such revenues exceed those thresholds. The net maximum future payments that we may have to make over the 20-year terms of the two agreements could be up to an aggregate of $100 million. Actual gross payments over the 20 years could exceed that amount to the extent cash is received by us. In the event either ship is sold or a total loss occurs, we also may have recourse to the sales or insurance proceeds to recoup payments made under the |
125
guarantee facilities. In February 2003, based on the then current market view of both long-term and short-term shipping capacity, rates, and utilization probability, we estimated the fair value of the liability under these guarantee facilities to be immaterial. In September 2003, the first ship was delivered to its owner and the second ship is scheduled for delivery to its owner in 2005. With respect to the first ship, the amount drawn under the guarantee facility at December 31, 2003, was less than $1 million. | |||
| We have other guarantees totaling approximately $190 million, which consist primarily of dealer and jobber loan guarantees to support our marketing business, a guarantee supporting a lease assignment on a corporate aircraft, a guarantee associated with a pending lawsuit and guarantees of lease payment obligations for a joint venture. The carrying amount recorded for these other guarantees as of December 31, 2003, was $13 million. These guarantees generally extend up to 15 years and payment would only be required if the dealer, jobber or lessee goes into default, or if an adverse decision occurs in the lawsuit. |
Indemnifications
| Over the years, we have entered into various agreements to sell ownership interests in certain corporations and joint ventures. In addition, we entered into a Tax Sharing Agreement in 1998 related to Conocos separation from DuPont. These agreements typically include indemnifications for additional taxes determined to be due under the relevant tax law, in connection with operations for years prior to the sale or separation. Generally, the obligation extends until the related tax years are closed. The maximum potential amount of future payments under the indemnifications is the amount of additional tax determined to be due under relevant tax law and the various agreements. There are no material outstanding claims that have been asserted under these agreements. |
| During 2003, we sold several assets, including FTC-mandated sales of downstream and midstream assets, certain exploration and production assets, and downstream retail and wholesale sites, giving rise to qualifying indemnifications. Agreements associated with these sales include indemnifications for taxes, environmental liabilities, underground storage tank repairs or replacements, permits and licenses, employee claims, real estate indemnity against tenant defaults, and litigation. The term of these indemnifications is generally indefinite and the maximum amount of future payments is generally unlimited. The carrying amount recorded for these indemnifications as of December 31, 2003, is $221 million. Although it is reasonably possible that future payments may exceed amounts recorded, due to the nature of the indemnifications, it is not possible to make a reasonable estimate of the maximum potential amount of future payments. Included in the carrying amount recorded are $81 million of environmental accruals for known contamination that is included in asset retirement obligations and accrued environmental costs at December 31, 2003. For additional information about environmental liabilities, see Note 13Asset Retirement Obligations and Accrued Environmental Costs, and Note 17Contingencies. |
| As part of our normal ongoing business operations and consistent with industry practice, we enter into numerous agreements with other parties, which apportion future risks among the parties to the transaction or relationship governed by the agreements. One method of apportioning risk is the inclusion of provisions requiring one party to indemnify the other against losses that might otherwise be incurred by the other party in the future. Many of our agreements contain an indemnity or indemnities that require us to perform certain acts, such as remediation, as a result of the occurrence of a triggering event or condition. In some instances we indemnify third parties against losses resulting from certain events or conditions that arise out of the operations of our equity affiliates. |
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The nature of these numerous indemnity obligations are diverse and each has different terms, business purposes, and triggering events or conditions. Consistent with customary business practice, any particular indemnity obligation incurred is the result of a negotiated transaction or contractual relationship for which we have accepted a certain level of risk in return for a financial or other type of benefit. In addition, the indemnities in each agreement vary widely in their definitions of both triggering events and the resulting obligations contingent on those triggering events. | ||||
With regard to indemnifications, our risk management philosophy is to limit risk in any transaction or relationship to the maximum extent reasonable in relation to commercial and other considerations. Before accepting any indemnity obligation, we make an informed risk management decision considering, among other things, the remoteness of the possibility that the triggering event will occur, the potential costs to perform under any resulting indemnity obligation, possible actions to reduce the likelihood of a triggering event or to reduce the costs of performing under the indemnity obligation, whether we are indemnified by an unrelated third party, insurance coverage that may be available to offset the cost of the indemnity obligation, and the benefits from the transaction or relationship. | ||||
Because many of our indemnity obligations are not limited in duration or potential monetary exposure, we cannot calculate a reasonable estimate of the maximum potential amount of future payments that could be paid under our indemnity obligations stemming from all our existing agreements. The carrying amount recorded for these indemnifications as of December 31, 2003, was $224 million, which is for known contamination and is included in asset retirement obligations and accrued environmental costs. For additional information about environmental liabilities and contingencies, see Note 13Asset Retirement Obligations and Accrued Environmental Costs, and Note 17Contingencies. |
Note 17Contingencies
We are subject to various lawsuits and claims including, but not limited to: actions challenging oil and gas royalty and severance tax payments; actions related to gas measurement and valuation methods; actions related to joint interest billings to operating agreement partners; and claims for damages resulting from leaking underground storage tanks, or other accidental releases, with related toxic tort claims. As a result of Conocos separation agreement with DuPont, we also have assumed responsibility for current and future claims related to certain discontinued chemicals and agricultural chemicals businesses operated by Conoco in the past. In general, the effect on future financial results is not subject to reasonable estimation because considerable uncertainty exists. The ultimate liabilities resulting from such lawsuits and claims may be material to results of operations in the period in which they are recognized.
In the case of all known contingencies, we accrue a liability when the loss is probable and the amount is reasonably estimable. We do not reduce these liabilities for potential insurance or third-party recoveries. If applicable, we accrue receivables for probable insurance or other third-party recoveries. Based on currently available information, we believe that it is remote that future costs related to known contingent liability exposures will exceed current accruals by an amount that would have a material adverse impact on our financial statements.
As we learn new facts concerning contingencies, we reassess our position both with respect to accrued liabilities and other potential exposures. Estimates that are particularly sensitive to future changes include contingent liabilities recorded for environmental remediation, tax and legal matters. Estimated future
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environmental remediation costs are subject to change due to such factors as the uncertain magnitude of cleanup costs, the unknown time and extent of such remedial actions that may be required, and the determination of our liability in proportion to that of other responsible parties. Estimated future costs related to tax and legal matters are subject to change as events evolve and as additional information becomes available during the administrative and litigation processes.
EnvironmentalWe are subject to federal, state and local environmental laws and regulations. These may result in obligations to remove or mitigate the effects on the environment of the placement, storage, disposal or release of certain chemical, mineral and petroleum substances at various sites. When we prepare our financial statements, we record accruals for environmental liabilities based on managements best estimates, using all information that is available at the time. We measure estimates and base liabilities on currently available facts, existing technology, and presently enacted laws and regulations, taking into consideration the likely effects of societal and economic factors. When measuring environmental liabilities, we also consider our prior experience in remediation of contaminated sites, other companies cleanup experience, and data released by the U.S. Environmental Protection Agency (EPA) or other organizations. We consider unasserted claims in our determination of environmental liabilities and we accrue them in the period that they are both probable and reasonably estimable.
Although liability of those potentially responsible for environmental remediation costs is generally joint and several for federal sites and frequently so for state sites, we are usually only one of many companies cited at a particular site. Due to the joint and several liabilities, we could be responsible for all of the cleanup costs related to any site at which we have been designated as a potentially responsible party. If we were solely responsible, the costs, in some cases, could be material to our, or one of our segments, operations, capital resources or liquidity. However, settlements and costs incurred in matters that previously have been resolved have not been material to our results of operations or financial condition. We have been successful to date in sharing cleanup costs with other financially sound companies. Many of the sites at which we are potentially responsible are still under investigation by the EPA or the state agencies concerned. Prior to actual cleanup, those potentially responsible normally assess the site conditions, apportion responsibility and determine the appropriate remediation. In some instances, we may have no liability or may attain a settlement of liability. Where it appears that other potentially responsible parties may be financially unable to bear their proportional share, we consider this inability in estimating our potential liability and we adjust our accruals accordingly.
As a result of various acquisitions in the past, we assumed certain environmental obligations. Some of these environmental obligations are mitigated by indemnifications made by others for our benefit and some of the indemnifications are subject to dollar limits and time limits. We have not recorded accruals for any potential contingent liabilities that we expect to be funded by the prior owners under these indemnifications.
We are currently participating in environmental assessments and cleanups at numerous federal Superfund and comparable state sites. After an assessment of environmental exposures for cleanup and other costs, we make accruals on an undiscounted basis (except those assumed in a purchase business combination, which we record such costs on a discounted basis) for planned investigation and remediation activities for sites where it is probable that future costs will be incurred and these costs can be reasonably estimated. We have not reduced these accruals for possible insurance recoveries. In the future, we may be involved in additional environmental assessments, cleanups and proceedings. See Note 13Asset Retirement Obligations and Accrued Environmental Costs for a summary of our accrued environmental liabilities.
Other Legal ProceedingsWe are a party to a number of other legal proceedings pending in various courts or agencies for which, in some instances, no provision has been made.
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Other ContingenciesWe have contingent liabilities resulting from throughput agreements with pipeline and processing companies. Under these agreements, we may be required to provide any such company with additional funds through advances and penalties for fees related to throughput capacity not utilized by us. In addition, we have various purchase commitments for materials, supplies, services and items of permanent investment incident to the ordinary conduct of business.
Note 18Financial Instruments and Derivative Contracts
Derivative Instruments
We, and certain of our subsidiaries, may use financial and commodity-based
derivative contracts to manage exposures to fluctuations in foreign currency
exchange rates, commodity prices, and interest rates, or to exploit market
opportunities. Our use of derivative instruments is governed by an Authority
Limitations document approved by our Board of Directors that prohibits the use
of highly leveraged derivatives or derivative instruments without sufficient
liquidity for comparable valuations without approval from the Chief Executive
Officer. The Authority Limitations document also authorizes the Chief
Executive Officer to establish the maximum Value at Risk (VaR) limits for the
company and compliance with these limits is monitored daily. The Chief
Financial Officer monitors risks resulting from foreign currency exchange rates
and interest rates, while the Executive Vice President of Commercial monitors
commodity price risk. Both report to the Chief Executive Officer. The
Commercial Group manages our commercial marketing, optimizes our commodity
flows and positions, monitors related risks of our upstream and downstream
businesses and selectively takes price risk to add value.
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (Statement No. 133 or SFAS No. 133), requires companies to recognize all derivative instruments as either assets or liabilities on the balance sheet at fair value. Assets and liabilities resulting from derivative contracts open at December 31, 2003, were $340 million and $268 million, respectively, and appear as accounts and notes receivables, other assets, accounts payable, or other liabilities and deferred credits on the balance sheet.
The accounting for changes in fair value (i.e., gains or losses) of a derivative instrument depends on whether it meets the qualifications for, and has been designated as, a SFAS No. 133 hedge, and the type of hedge. At this time, we are not using SFAS No. 133 hedge accounting for commodity derivative contracts, but we are using hedge accounting for the interest-rate derivatives noted below. All gains and losses, realized or unrealized, from derivative contracts not designated as SFAS No. 133 hedges have been recognized in the income statement. Gains and losses from derivative contracts held for trading not directly related to our physical business, whether realized or unrealized, have been reported net in other income.
SFAS No. 133 also requires purchase and sales contracts for commodities that are readily convertible to cash (e.g., crude oil, natural gas, and gasoline) to be recorded on the balance sheet as derivatives unless the contracts are for quantities we expect to use or sell over a reasonable period in the normal course of business (the normal purchases and normal sales exception), among other requirements, and we have documented our intent to apply this exception. Except for contracts to buy or sell natural gas, we generally apply this exception to eligible purchase and sales contracts; however, we may elect not to apply this exception (e.g., when another derivative instrument will be used to mitigate the risk of the purchase or sale contract but hedge accounting will not be applied). When this occurs, both the purchase or sales contract and the derivative contract mitigating the resulting risk will be recorded on the balance sheet at fair value in accordance with the preceding paragraphs. Most of our contracts to buy or sell natural gas are recorded on the balance sheet as derivatives, except for certain long-term contracts to sell our natural gas production, which either have been designated normal purchase/normal sales, or do not meet the SFAS No. 133 definition of a derivative.
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Interest Rate Derivative ContractsDuring the fourth quarter of 2003, we executed interest rate swaps that had the effect of converting $1.5 billion of debt from fixed to floating rates. These swaps qualified for and have been designated as fair-value hedges using the short-cut method of hedge accounting provided by SFAS No. 133, which permits the assumption that changes in the value of the derivative perfectly offset changes in the value of the debt; therefore, no gain or loss is recognized due to hedge ineffectiveness.
Currency Exchange Rate Derivative ContractsWe have foreign currency exchange rate risk resulting from operations in over 40 countries. We do not comprehensively hedge the exposure to currency rate changes, although we may choose to selectively hedge exposures to foreign currency rate risk. Examples include firm commitments for capital projects, certain local currency tax payments and dividends, short-term intercompany loans between subsidiaries operating in different countries, and cash returns from net investments in foreign affiliates to be remitted within the coming year. Hedge accounting is not currently being used for any of our foreign currency derivatives.
Commodity Derivative ContractsWe operate in the worldwide crude oil, refined product, natural gas, natural gas liquids, and electric power markets and are exposed to fluctuations in the prices for these commodities. These fluctuations can affect our revenues as well as the cost of operating, investing, and financing activities. Generally, our policy is to remain exposed to market prices of commodity purchases and sales; however, executive management may elect to use derivative instruments to hedge the price risk of our crude oil and natural gas production, as well as refinery margins.
Our Commercial group uses futures, forwards, swaps, and options in various markets to optimize the value of our supply chain, which may move our risk profile away from market average prices to accomplish the following objectives:
| Balance physical systems. In addition to cash settlement prior to contract expiration, exchange traded futures contracts may also be settled by physical delivery of the commodity, providing another source of supply to meet our refinery requirements or marketing demand; |
| Meet customer needs. Consistent with our policy to generally remain exposed to market prices, we use swap contracts to convert fixed-price sales contracts, which are often requested by natural gas and refined product consumers, to a floating market price; |
| Manage the risk to our cash flows from price exposures on specific crude oil, natural gas, refined product and electric power transactions; and |
| Enable us to use the market knowledge gained from these activities to do a limited amount of trading not directly related to our physical business. For the 12 months ended December 31, 2003, 2002 and 2001, the gains or losses from this activity were not material to our cash flows or income from continuing operations. |
At December 31, 2003, we were not using hedge accounting for any commodity derivative contracts.
Credit Risk
Our financial instruments that are potentially exposed to concentrations of
credit risk consist primarily of cash equivalents, over-the-counter derivative
contracts, and trade receivables. Our cash equivalents, which are placed in
high-quality money market funds and time deposits with major international
banks and financial institutions, are generally not maintained at levels
material to our financial position. The credit risk from our over-the-counter
derivative contracts, such as forwards and swaps, derives from the counterparty
to the transaction, typically a major bank or financial institution. We
closely monitor these credit exposures against predetermined credit limits,
including the continual exposure adjustments that result from market movements.
Individual counterparty exposure is managed within these limits, and
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includes the use of cash-call margins when appropriate, thereby reducing the risk of significant non-performance. We also use futures contracts, but futures have a negligible credit risk because they are traded on the New York Mercantile Exchange or the International Petroleum Exchange of London Limited.
Our trade receivables result primarily from our petroleum operations and reflect a broad national and international customer base, which limits our exposure to concentrations of credit risk. The majority of these receivables have payment terms of 30 days or less, and we continually monitor this exposure and the creditworthiness of the counterparties. We do not generally require collateral to limit the exposure to loss; however, we will sometimes use letters of credit, prepayments, and master netting arrangements to mitigate credit risk with counterparties that both buy from and sell to us, as these agreements permit the amounts owed by us or owed to others to be offset against amounts due us.
Fair Values of Financial Instruments
We used the following methods and assumptions to estimate the fair value of
financial instruments:
| Cash and cash equivalents: The carrying amount reported on the balance sheet approximates fair value. | |||
| Accounts and notes receivable: The carrying amount reported on the balance sheet approximates fair value. | |||
| Debt and mandatorily redeemable preferred securities: The carrying amount of our floating-rate debt approximates fair value. The fair value of the fixed-rate debt and mandatorily redeemable preferred securities is estimated based on quoted market prices. | |||
| Swaps: Fair value is estimated based on forward market prices and approximates the net gains and losses that would have been realized if the contracts had been closed out at year-end. When forward market prices are not available, they are estimated using the forward prices of a similar commodity with adjustments for differences in quality or location. | |||
| Futures: Fair values are based on quoted market prices obtained from the New York Mercantile Exchange, the International Petroleum Exchange of London Limited, or other traded exchanges. | |||
| Forward-exchange contracts: Fair value is estimated by comparing the contract rate to the forward rate in effect on December 31 and approximates the net gains and losses that would have been realized if the contracts had been closed out at year-end. |
Certain of our financial instruments at December 31 were:
Millions of Dollars |
||||||||||||||||
Carrying Amount |
Fair Value |
|||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
Financial assets |
||||||||||||||||
Foreign currency derivatives |
$ | 44 | 17 | 44 | 17 | |||||||||||
Interest rate derivatives |
13 | | 13 | | ||||||||||||
Commodity derivatives |
283 | 180 | 283 | 180 | ||||||||||||
Financial liabilities |
||||||||||||||||
Total debt, excluding capital leases |
17,720 | 19,743 | 18,905 | 20,844 | ||||||||||||
Mandatorily redeemable other
minority interests and preferred
securities |
141 | 491 | 142 | 516 | ||||||||||||
Interest rate derivatives |
13 | 22 | 13 | 22 | ||||||||||||
Foreign currency derivatives |
5 | 4 | 5 | 4 | ||||||||||||
Commodity derivatives |
250 | 180 | 250 | 180 | ||||||||||||
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Note 19Preferred Stock and Other Minority Interests
Company-Obligated Mandatorily Redeemable Preferred
Securities of Phillips 66 Capital Trusts
During 1996 and 1997, we formed two statutory business trusts, Phillips 66
Capital I (Trust I) and Phillips 66 Capital II (Trust II), with ConocoPhillips
owning all the common stock. The trusts were created for the sole purpose of
issuing securities and investing the proceeds thereof in an equivalent amount
of our subordinated debt securities. We established the trusts to raise funds
for general corporate purposes.
On May 31, 2002, we redeemed all of our outstanding 8.24% Junior Subordinated Deferrable Interest Debentures due 2036 held by Trust I. This triggered the redemption of $300 million of Trust Is 8.24% Trust Originated Preferred Securities at par value, $25 per share. A loss of $8 million before-tax, $6 million after-tax, was incurred during the second quarter of 2002 as a result of the redemption.
Trust II has outstanding $350 million of 8% Capital Securities (Capital Securities). The sole asset of Trust II is $361 million of the companys 8% Junior Subordinated Deferrable Interest Debentures due 2037 (Subordinated Debt Securities II) purchased by Trust II on January 17, 1997. The Subordinated Debt Securities II are due January 15, 2037, and are redeemable in whole, or in part, at our option on or after January 15, 2007, at 103.94 percent declining annually until January 15, 2017, when they can be called at par, $1,000 per share, plus accrued and unpaid interest. When we redeem the Subordinated Debt Securities II, Trust II is required to apply all redemption proceeds to the immediate redemption of the Capital Securities. We fully and unconditionally guarantee Trust IIs obligations under the Capital Securities.
Subordinated Debt Securities II are unsecured obligations of ours that are subordinate and junior in right of payment to all our present and future senior indebtedness.
Effective January 1, 2003, with the adoption of FIN 46, Trust II was deconsolidated because we are not the primary beneficiary. Application of FIN 46 required deconsolidation of Trust II, which had the effect of increasing debt by $361 million since the Subordinated Debt Securities II were no longer eliminated in consolidation, and eliminating the $350 million of mandatorily redeemable preferred securities. Prior to the adoption of FIN 46, the subordinated debt securities and related income statement effects were eliminated in the companys consolidated financial statements. See Note 2Changes in Accounting Principles for additional information.
Other Minority Interests
The minority limited partner in Conoco Corporate Holdings L.P., a limited-life
entity that must be liquidated in 2019, is entitled to a cumulative annual 7.86
percent priority return on its investment. The net minority interest in Conoco
Corporate Holdings held by the limited partner was $141 million at December 31,
2003 and 2002, and is callable without penalty beginning in the fourth quarter
of 2004.
The minority interest owner in Ashford Energy Capital S.A. is entitled to a cumulative annual preferred return on its investment, based on three-month LIBOR rates plus 1.27 percent. The preferred return at December 31, 2003 and 2002, was 2.48 percent and 2.70 percent, respectively. At December 31, 2003 and 2002, the minority interest was $496 million and $504 million, respectively.
Ashford Energy Capital S.A. continues to be consolidated in our financial statements under the provisions of FIN 46 because we are the primary beneficiary. See Note 2Changes in Accounting Principles for additional information.
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The remaining minority interest amounts relate to consolidated operating joint ventures that have minority interest owners. The largest amount relates to the Bayu-Undan project. See Note 7-Subsidiary Equity Transactions.
Preferred Stock
We have 500 million shares of preferred stock authorized, par value $.01 per
share, none of which was issued or outstanding at December 31, 2003.
Note 20Preferred Share Purchase Rights
Our Board of Directors authorized and declared a dividend of one preferred share purchase right for each common share outstanding, and authorized and directed the issuance of one right per common share for any newly issued shares. The rights, which expire June 30, 2012, will be exercisable only if a person or group acquires 15 percent or more of the companys common stock or commences a tender offer that would result in ownership of 15 percent or more of the common stock. Each right would entitle stockholders to buy one one-hundredth of a share of preferred stock at an exercise price of $300. In addition, the rights enable holders to either acquire additional shares of ConocoPhillips common stock or purchase the stock of an acquiring company at a discount, depending on specific circumstances. We may redeem the rights in whole, but not in part, for one cent per right.
Note 21Non-Mineral Leases
The company leases ocean transport vessels, railcars, corporate aircraft, service stations, computers, office buildings and other facilities and equipment. Certain leases include escalation clauses for adjusting rentals to reflect changes in price indices, as well as renewal options and/or options to purchase the leased property for the fair market value at the end of the lease term. There are no significant restrictions on us imposed by the leasing agreements in regards to dividends, asset dispositions or borrowing ability. Leased assets under capital leases were not significant in any period presented.
At December 31, 2003, future minimum rental payments due under non-cancelable leases, including those associated with discontinued operations, were:
Millions | ||||
of Dollars |
||||
2004 |
$ | 471 | ||
2005 |
434 | |||
2006 |
376 | |||
2007 |
328 | |||
2008 |
291 | |||
Remaining years |
1,173 | |||
Total |
3,073 | |||
Less income from subleases |
419 | * | ||
Net minimum operating lease
payments |
$ | 2,654 | ||
We have agreements with a shipping company for the long-term charter of two crude oil tankers that are currently under construction. The charters will be accounted for as operating leases upon delivery, which is expected in the first quarter of 2004. Upon delivery, the base term of the charter agreements is 12 years,
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with certain renewal options by ConocoPhillips. The total operating lease commitment over the 12-year term for the two tankers would be $87 million on an estimated bareboat basis.
Operating lease rental expense from continuing operations for the years ended December 31 was:
Millions of Dollars |
||||||||||||
2003 | 2002 | 2001 | ||||||||||
Total rentals* |
$ | 448 | 541 | 271 | ||||||||
Less sublease
rentals |
24 | 21 | 22 | |||||||||
$ | 424 | 520 | 249 | |||||||||
* | Includes $31 million and $12 million of contingent rentals in 2003 and 2002, respectively. Contingent rentals primarily are related to retail sites and refining equipment, and are based on volume of product sold or throughput. Contingent rentals in 2001 were not significant. |
Note 22Employee Benefit Plans
Pension and Postretirement Plans
An analysis of the projected benefit obligations for our pension plans and
accumulated benefit obligations for our postretirement health and life
insurance plans follows:
Millions of Dollars |
||||||||||||||||||||||||
Pension Benefits |
Other Benefits |
|||||||||||||||||||||||
2003 |
2002 |
2003 |
2002 |
|||||||||||||||||||||
U.S. |
Int'l. |
U.S. |
Int'l. |
|||||||||||||||||||||
Change in Benefit Obligation |
||||||||||||||||||||||||
Benefit obligation at January 1 |
$ | 3,079 | 1,501 | 1,432 | 417 | 919 | 239 | |||||||||||||||||
Service cost |
131 | 61 | 75 | 32 | 17 | 9 | ||||||||||||||||||
Interest cost |
197 | 89 | 133 | 48 | 61 | 31 | ||||||||||||||||||
Plan participant contributions |
| 1 | | 2 | 27 | 15 | ||||||||||||||||||
Plan amendments |
| 54 | (12 | ) | | | 133 | |||||||||||||||||
Actuarial (gain) loss |
187 | 268 | 205 | (21 | ) | 46 | 31 | |||||||||||||||||
Acquisitions |
| | 1,349 | 908 | | 509 | ||||||||||||||||||
Benefits paid |
(571 | ) | (60 | ) | (159 | ) | (23 | ) | (72 | ) | (47 | ) | ||||||||||||
Curtailment |
(3 | ) | (5 | ) | (36 | ) | | | (4 | ) | ||||||||||||||
Recognition of termination benefits |
| 9 | 92 | 3 | | 3 | ||||||||||||||||||
Foreign currency exchange rate change |
| 157 | | 135 | 6 | | ||||||||||||||||||
Benefit obligation at December 31 |
$ | 3,020 | 2,075 | 3,079 | 1,501 | 1,004 | 919 | |||||||||||||||||
Accumulated
benefit obligation portion of above at December 31 |
$ | 2,379 | 1,764 | 2,455 | 1,325 | |||||||||||||||||||
Change in Fair Value of Plan Assets |
||||||||||||||||||||||||
Fair value of plan assets at January 1 |
$ | 1,233 | 1,027 | 732 | 381 | 11 | 21 | |||||||||||||||||
Actual return on plan assets |
228 | 133 | (85 | ) | (74 | ) | 2 | (5 | ) | |||||||||||||||
Acquisitions |
| | 600 | 594 | | | ||||||||||||||||||
Company contributions |
570 | 91 | 145 | 39 | 39 | 27 | ||||||||||||||||||
Plan participant contributions |
| 1 | | 2 | 27 | 15 | ||||||||||||||||||
Benefits paid |
(571 | ) | (60 | ) | (159 | ) | (21 | ) | (72 | ) | (47 | ) | ||||||||||||
Foreign currency exchange rate change |
| 111 | | 106 | | | ||||||||||||||||||
Fair value of plan assets at December 31 |
$ | 1,460 | 1,303 | 1,233 | 1,027 | 7 | 11 | |||||||||||||||||
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Millions of Dollars |
||||||||||||||||||||||||
Pension Benefits |
Other Benefits |
|||||||||||||||||||||||
2003 |
2002 |
2003 |
2002 |
|||||||||||||||||||||
U.S. |
Int'l. |
U.S. |
Int'l. |
|||||||||||||||||||||
Funded Status |
||||||||||||||||||||||||
Excess obligation |
$ | (1,560 | ) | (772 | ) | (1,846 | ) | (474 | ) | (997 | ) | (908 | ) | |||||||||||
Unrecognized net actuarial
loss |
554 | 369 | 697 | 171 | 100 | 60 | ||||||||||||||||||
Unrecognized prior service
cost |
26 | 53 | 30 | 5 | 111 | 131 | ||||||||||||||||||
Total recognized amount in
the consolidated balance
sheet |
$ | (980 | ) | (350 | ) | (1,119 | ) | (298 | ) | (786 | ) | (717 | ) | |||||||||||
Components of above amount: |
||||||||||||||||||||||||
Prepaid benefit cost |
$ | | 73 | | 52 | | | |||||||||||||||||
Accrued benefit liability |
(999 | ) | (538 | ) | (1,484 | ) | (400 | ) | (786 | ) | (717 | ) | ||||||||||||
Intangible asset |
5 | 40 | 43 | 3 | | | ||||||||||||||||||
Accumulated other
comprehensive loss |
14 | 75 | 322 | 47 | | | ||||||||||||||||||
Total recognized |
$ | (980 | ) | (350 | ) | (1,119 | ) | (298 | ) | (786 | ) | (717 | ) | |||||||||||
Weighted-Average Assumptions Used to Determine Benefit Obligations at
December 31 |
||||||||||||||||||||||||
Discount rate |
6.00 | % | 5.45 | 6.75 | 5.85 | 6.00 | 6.75 | |||||||||||||||||
Rate of compensation increase |
4.00 | 3.55 | 4.00 | 3.80 | 4.00 | 4.00 | ||||||||||||||||||
Weighted-Average Assumptions Used to Determine Net Periodic Benefit
Cost for years ended December 31 |
||||||||||||||||||||||||
Discount rate |
6.75 | % | 5.85 | 7.25 | 6.30 | 6.75 | 7.25 | |||||||||||||||||
Expected return on plan assets |
7.05 | 7.45 | 8.70 | 7.60 | 5.50 | 5.20 | ||||||||||||||||||
Rate of compensation increase |
4.00 | 3.80 | 4.00 | 3.75 | 4.00 | 4.00 | ||||||||||||||||||
For both U.S. and international pensions, the overall expected long-term rate of return is developed from the expected future return of each asset class, weighted by the expected allocation of pension assets to that asset class. We rely on a variety of independent market forecasts in developing the expected rate of return for each class of assets.
We use a December 31 measurement date for the majority of our plans.
During 2003, we recorded a benefit to other comprehensive income related to minimum pension liability adjustments totaling $280 million ($175 million net of tax), resulting in accumulated other comprehensive loss due to minimum pension liability adjustments at December 31, 2003, of $89 million ($61 million net of tax). During 2002, we recorded charges to other comprehensive loss totaling $149 million ($93 million net of tax), resulting in accumulated other comprehensive loss due to minimum pension liability adjustments at December 31, 2002, of $369 million ($236 million net of tax).
For our tax-qualified pension plans with projected benefit obligations in excess of plan assets, the projected benefit obligation, the accumulated benefit obligation, and the fair value of plan assets were $4,489 million, $3,661 million, and $2,415 million at December 31, 2003, respectively, and $4,288 million, $3,542 million, and $2,259 million at December 31, 2002, respectively.
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For our unfunded non-qualified supplemental key employee pension plans, the projected benefit obligation and the accumulated benefit obligation were $237 million and $177 million, respectively, at December 31, 2003, and were $260 million and $206 million, respectively, at December 31, 2002.
Millions of Dollars |
||||||||||||||||||||||||||||||||||||
Pension Benefits |
Other Benefits |
|||||||||||||||||||||||||||||||||||
2003 |
2002 |
2001 |
2003 |
2002 |
2001 |
|||||||||||||||||||||||||||||||
U.S. |
Int'l. |
U.S. |
Int'l. |
U.S. |
Int'l. |
|||||||||||||||||||||||||||||||
Components of Net
Periodic Benefit
Cost |
||||||||||||||||||||||||||||||||||||
Service cost |
$ | 131 | 61 | 75 | 32 | 40 | 15 | 17 | 9 | 4 | ||||||||||||||||||||||||||
Interest cost |
197 | 89 | 133 | 48 | 82 | 24 | 61 | 31 | 11 | |||||||||||||||||||||||||||
Expected return on
plan assets |
(90 | ) | (78 | ) | (73 | ) | (49 | ) | (74 | ) | (30 | ) | | (1 | ) | (1 | ) | |||||||||||||||||||
Amortization of
prior service cost |
4 | 5 | 5 | 2 | 6 | 1 | 19 | 8 | (1 | ) | ||||||||||||||||||||||||||
Recognized net
actuarial loss |
70 | 17 | 48 | 7 | 16 | | 6 | 3 | 2 | |||||||||||||||||||||||||||
Amortization of net
asset |
| | | | | (1 | ) | | | | ||||||||||||||||||||||||||
Net periodic
benefit cost |
$ | 312 | 94 | 188 | 40 | 70 | 9 | 103 | 50 | 15 | ||||||||||||||||||||||||||
As a result of the ConocoPhillips merger, we recognized settlement losses of $120 million and special termination benefits of $9 million in 2003, and we recorded curtailment losses of $23 million and special termination benefits of $98 million in 2002. During 2001, we recorded a curtailment gain of $2 million and settlement losses of $10 million.
In determining net pension and other postretirement benefit costs, we have elected to amortize net gains and losses on a straight-line basis over 10 years. Prior service cost is amortized on a straight-line basis over the average remaining service period of employees expected to receive benefits under the plan.
We have multiple non-pension postretirement benefit plans for health and life insurance. The health care plans are contributory, with participant and company contributions adjusted annually; the life insurance plans are non-contributory. For most groups of retirees, any increase in the annual health care escalation rate above 4.5 percent is borne by the participant. The weighted-average health care cost trend rate for those participants not subject to the cap is assumed to decrease gradually from 10 percent in 2004 to 5.5 percent in 2015.
The assumed health care cost trend rate impacts the amounts reported. A one-percentage-point change in the assumed health care cost trend rate would have the following effects on the 2003 amounts:
Millions of Dollars |
||||||||
One-Percentage-Point |
||||||||
Increase |
Decrease |
|||||||
Effect on total of service and interest cost
components |
$ | 1 | (1 | ) | ||||
Effect on the postretirement benefit obligation |
18 | (14 | ) | |||||
136
In December 2003, President Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act). The Act expanded Medicare to include, for the first time, coverage for prescription drugs. We sponsor retiree medical programs for most groups of employees in the United States, and we expect that this legislation will eventually reduce our costs for some of these programs. At this point, our investigation into our response to the legislation is preliminary, as we await guidance from various governmental and regulatory agencies concerning the requirements that must be met to obtain these cost reductions, as well as the manner in which such savings should be measured. Because of various uncertainties related to our response to this legislation and the appropriate accounting methodology for this event, we have elected to defer financial recognition of this legislation until the FASB issues final accounting guidance. When issued, that final guidance could require us to change previously reported information. This deferral is permitted under FASB Staff Position No. FAS 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.
Plan Assets
The company follows a policy of broadly diversifying pension plan assets across
asset classes, investment managers, and individual holdings. Asset classes
that are considered appropriate include U.S. equities, non-U.S. equities, U.S.
fixed income, non-U.S. fixed income, real estate, and private equity
investments. Plan fiduciaries may consider and add other asset classes to the
investment program from time to time. Any use of leverage is prohibited. At
December 31, 2003, there were no shares of company stock included in plan
assets, compared with 4,300 shares at year-end 2002. Our funding policy for
U.S. plans is to contribute at least the minimum required by the Employee
Retirement Income Security Act of 1974. Contributions to foreign plans are
dependent upon local laws and tax regulations. In 2004, we expect to
contribute approximately $400 million to our domestic qualified and
non-qualified benefit plans and $100 million to our international qualified and
non-qualified benefit plans.
Weighted-average asset allocations at December 31 by asset category are as follows:
Pension |
||||||||||||||||
U.S. |
International |
|||||||||||||||
2003 |
2002 |
2003 |
2002 |
|||||||||||||
Asset Category |
||||||||||||||||
Equity securities |
62 | % | 55 | 48 | 48 | |||||||||||
Debt securities |
22 | 24 | 46 | 47 | ||||||||||||
Participating interest in annuity
contract |
12 | 16 | | | ||||||||||||
Real estate |
1 | 2 | 1 | 1 | ||||||||||||
Other |
3 | 3 | 5 | 4 | ||||||||||||
100 | % | 100 | 100 | 100 | ||||||||||||
The above asset allocations are all within guidelines established by the plan fiduciaries.
A portion of the U.S. pension plan assets are held as a participating interest in an insurance annuity contract. This participating interest is calculated as the market value of investments held under this contract, less the accumulated benefit obligation covered by the contract, and was valued at $169 million and $198 million at December 31, 2003, and December 31, 2002, respectively. At both December 31, 2003, and December 31, 2002, the participating interest consisted of 62 percent debt securities and 38 percent equity securities. The participating interest is not available for meeting general pension benefit obligations in the near term. No future company contributions are required and no new benefits are being accrued under this insurance annuity contract.
137
Weighted-average target asset allocations by asset category are as follows:
Pension |
||||||||
U.S. |
International |
|||||||
Asset Category |
||||||||
Equity securities |
57 | % | 52 | |||||
Debt securities |
24 | 46 | ||||||
Participating interest in annuity
contract |
12 | | ||||||
Real estate |
5 | 1 | ||||||
Other |
2 | 1 | ||||||
100 | % | 100 | ||||||
Defined Contribution Plans
Prior to the close of business on December 31, 2002, most U.S. employees
(excluding retail service station employees) were eligible to participate in
either the company-sponsored Thrift Plan of Phillips Petroleum Company, the
Long-Term Stock Savings Plan of Phillips Petroleum Company, the Tosco
Corporation Capital Accumulation Plan, and/or the Thrift Plan for Employees of
Conoco Inc. The new ConocoPhillips Savings Plan (CPSP) was created at the
close of business on December 31, 2002, with the merger of the Thrift Plan of
Phillips Petroleum Company into the Long-Term Stock Savings Plan of Phillips
Petroleum Company. The Thrift Plan of Phillips Petroleum Company became the
thrift feature of the CPSP, and the Long-Term Stock Savings Plan became the
stock savings feature. On the same date, most of the accounts in the Tosco
Corporation Capital Accumulation Plan were transferred into the CPSP. On
October 3, 2003, the assets of the Thrift Plan for Employees of Conoco Inc.
were merged into the CPSP, resulting in the CPSP becoming the primary defined
contribution plan for ConocoPhillips.
At December 31, 2003, employees could deposit up to 30 percent of their pay in the thrift feature of the CPSP to a choice of 31 investment funds. ConocoPhillips matched $1 for each $1 deposited, up to 1.25 percent of pay. Company contributions charged to expense for the CPSP and the predecessor plans, excluding the stock savings feature (discussed below), were $19 million in 2003, $40 million in 2002, and $14 million in 2001.
The stock savings feature of the CPSP is a leveraged employee stock ownership plan. Employees may elect to participate in the stock savings feature by contributing 1 percent of their salaries and receiving an allocation of shares of common stock proportionate to their contributions.
In 1990, the Long-Term Stock Savings Plan of Phillips Petroleum Company (now the stock savings feature of the CPSP) borrowed funds that were used to purchase previously unissued shares of company common stock. Since the company guarantees the CPSPs borrowings, the unpaid balance is reported as a liability of the company and unearned compensation is shown as a reduction of common stockholders equity. Dividends on all shares are charged against retained earnings. The debt is serviced by the CPSP from company contributions and dividends received on certain shares of common stock held by the plan, including all unallocated shares. The shares held by the stock savings feature of the CPSP are released for allocation to participant accounts based on debt service payments on CPSP borrowings. In addition, during the period from 2004 through 2008, when no debt principal payments are scheduled to occur, the company has committed to make direct contributions of stock to the stock savings feature of the CPSP, or make prepayments on CPSP borrowings, to ensure a certain minimum level of stock allocation to participant accounts.
138
We recognize interest expense as incurred and compensation expense based on the fair market value of the stock contributed or on the cost of the unallocated shares released, using the shares-allocated method. We recognized total CPSP expense related to the stock savings feature of $76 million, $39 million and $33 million in 2003, 2002 and 2001, respectively, all of which was compensation expense. In 2003, 2002 and 2001, respectively, we made cash contributions to the CPSP of $0.2 million, $2 million and $17 million. In 2003, 2002 and 2001, we contributed 1,483,780 shares, 771,479 shares and 292,857 shares, respectively, of company common stock from the Compensation and Benefits Trust. The shares had a fair market value of $80 million, $41 million and $17 million, respectively. Dividends used to service debt were $28 million each in 2003, 2002 and 2001.
These dividends reduced the amount of expense recognized each period. Interest incurred on the CPSP debt in 2003, 2002 and 2001 was $5 million, $7 million and $17 million, respectively.
The total CPSP stock savings feature shares as of December 31 were:
2003 | 2002 | |||||||
Unallocated
shares |
7,077,880 | 7,717,710 | ||||||
Allocated shares |
10,312,220 | 14,925,443 | ||||||
Total shares |
17,390,100 | 22,643,153 | ||||||
The fair value of unallocated shares at December 31, 2003, and 2002, was $464 million and $373 million, respectively.
We have several defined contribution plans for our international employees, each with its own terms and eligibility depending on location. Total compensation expense recognized for these international plans was approximately $20 million in 2003, and was not significant in 2002 and 2001 because the majority of these plans were acquired in the merger.
Stock-Based Compensation Plans
Under the Phillips Omnibus Securities Plan approved by shareholders in 1993,
stock options and stock awards for certain employees were authorized for up to
eight-tenths of 1 percent (0.8 percent) of the total outstanding shares as of
December 31 of the year preceding the awards. Any shares not issued in the
current year were available for future grant. Upon the adoption of the
Phillips 2002 Omnibus Securities Plan discussed below, the number of shares
available for issuance under the Phillips Omnibus Securities Plan was limited
to 700,000. The term of the Phillips Omnibus Securities Plan ended on December
31, 2002.
In 2001, shareholders approved the Phillips 2002 Omnibus Securities Plan, which has a term of five years, from January 1, 2002, through December 31, 2006, and which is authorized to issue approximately 18,000,000 shares of company common stock. The two plans also provided for non-stock-based awards.
Shares of company stock to employees were:
2003 | 2002 | 2001 | ||||||||||
Shares |
260,677 | 1,090,082 | 237,849 | |||||||||
Weighted-average fair
value |
$ | 48.75 | 57.84 | 56.23 | ||||||||
139
Stock options granted under provisions of the plans and earlier plans permit purchase of our common stock at exercise prices equivalent to the average market price of the stock on the date the options were granted. The options have terms of 10 years and normally become exercisable in increments of up to one-third on each anniversary date following the date of grant. Stock Appreciation Rights (SARs) may, from time to time, be affixed to the options. Options exercised in the form of SARs permit the holder to receive stock, or a combination of cash and stock, subject to a declining cap on the exercise price.
The merger was a change-in-control event that resulted in a lapsing of restrictions on, and payout of, stock and stock option awards under the plans. We offered to exchange certain stock awards under the plans with new awards in the form of restricted stock units. These new restricted stock units were converted, at the time of the merger, into awards based on the same number of shares of our common stock.
Conoco had several stock-based compensation plans that were assumed in the merger: the 1998 Stock and Performance Incentive Plan; the 1998 Key Employee Stock Performance Plan; the 1998 Global Performance Sharing Plan; and the 2001 Global Performance Sharing Plan. Upon the merger, outstanding stock options under these plans were converted to ConocoPhillips stock options at the merger exchange ratio of 0.4677.
The Conoco plans award stock options at exercise prices equivalent to the average market price of the stock on the date the option was granted. Awards have option terms of 10 years and become exercisable based on various formulas, including those that become exercisable one year from date of grant, and those that become exercisable in increments of one-third on each anniversary date following date of grant. In total, there were 10.3 million shares of company stock at December 31, 2003, available for issuance under the Conoco plans.
In August 2002, we issued 23.3 million vested stock options to replace unexercised Conoco stock options at the time of the merger. These options had a weighted-average exercise price of $47.65 per option, and a Black-Scholes option-pricing model value of $16.50 per option. In September 2001, we issued 4.7 million vested stock options to replace unexercised Tosco stock options at the time of the acquisition. These options had a weighted-average exercise price of $23.15 per option, and a Black-Scholes option-pricing model value of $32.51 per option.
A summary of our stock option activity follows:
Weighted-Average | ||||||||
Options |
Exercise Price |
|||||||
Outstanding at December 31, 2000 |
9,862,967 | $ | 43.82 | |||||
Granted (including Tosco
exchange) |
9,038,571 | 38.81 | ||||||
Exercised |
(2,373,062 | ) | 22.36 | |||||
Forfeited |
(96,126 | ) | 60.41 | |||||
Outstanding at December 31, 2001 |
16,432,350 | $ | 44.06 | |||||
Granted (including the merger) |
28,830,903 | 48.11 | ||||||
Exercised |
(2,032,232 | ) | 24.66 | |||||
Forfeited |
(124,416 | ) | 57.78 | |||||
Outstanding at December 31, 2002 |
43,106,605 | $ | 47.65 | |||||
Granted |
6,719,874 | 48.79 | ||||||
Exercised |
(3,697,271 | ) | 31.98 | |||||
Forfeited |
(299,631 | ) | 50.07 | |||||
Outstanding at December 31, 2003 |
45,829,577 | $ | 49.07 | |||||
140
The weighted-average fair market values of the options granted over the past three years, as calculated using the Black-Scholes option-pricing model, and the significant assumptions used to calculate these values were as follows:
2003 | 2002 | 2001 | ||||||||||
Average grant date fair value of
options |
$ | 9.95 | 11.67 | 23.19 | ||||||||
Assumptions used |
||||||||||||
Risk-free interest rate |
3.4 | % | 4.1 | 4.5 | ||||||||
Dividend yield |
3.3 | % | 3.0 | 2.5 | ||||||||
Volatility factor |
25.9 | % | 26.2 | 27.0 | ||||||||
Expected life (years) |
6 | 6 | 5 | |||||||||
Options Outstanding at December 31, 2003
Weighted-Average |
||||||||||||
Exercise Prices |
Options |
Remaining Lives |
Exercise Price |
|||||||||
$12.16 to $41.22 |
7,390,364 | 2.41 years | $ | 34.04 | ||||||||
$42.42 to $49.95 |
23,070,483 | 6.64 years | 47.38 | |||||||||
$50.22 to $66.72 |
15,368,730 | 7.52 years | 58.82 | |||||||||
Options Exercisable at December 31
Weighted-Average | ||||||||||||
Exercise Prices |
Options |
Exercise Price |
||||||||||
2003 |
$12.16 to $41.22 | 7,217,227 | $ | 34.20 | ||||||||
$42.42 to $49.95 | 14,322,066 | 46.83 | ||||||||||
$50.22 to $66.72 | 12,987,973 | 59.54 | ||||||||||
2002 |
$9.04 to $31.44 | 5,067,979 | $ | 25.06 | ||||||||
$31.52 to $44.91 | 6,384,431 | 39.88 | ||||||||||
$45.75 to $66.72 | 21,614,181 | 52.17 | ||||||||||
2001 |
$9.04 to $31.44 | 3,056,009 | $ | 22.67 | ||||||||
$31.52 to $44.91 | 3,075,354 | 38.06 | ||||||||||
$45.75 to $64.43 | 3,525,616 | 48.32 | ||||||||||
For information on our 2003 adoption of SFAS No. 123, see Note 1-Accounting Policies.
Compensation and Benefits Trust (CBT)
The CBT is an irrevocable grantor trust, administered by an independent trustee
and designed to acquire, hold and distribute shares of our common stock to fund
certain future compensation and benefit obligations of the company. The CBT
does not increase or alter the amount of benefits or compensation that will be
paid under existing plans, but offers us enhanced financial flexibility in
providing the funding requirements of those plans. We also have flexibility in
determining the timing of distributions of shares from the CBT to fund
compensation and benefits, subject to a minimum distribution schedule. The
trustee votes shares held by the CBT in accordance with voting directions from
eligible employees, as specified in a trust agreement with the trustee.
141
We sold 29.2 million shares of previously unissued company common stock to the CBT in 1995 for $37 million of cash, previously contributed to the CBT by us, and a promissory note from the CBT to us of $952 million. The CBT is consolidated by ConocoPhillips, therefore the cash contribution and promissory note are eliminated in consolidation. Shares held by the CBT are valued at cost and do not affect earnings per share or total common stockholders equity until after they are transferred out of the CBT. In 2003 and 2002, shares transferred out of the CBT were 1,483,780 and 771,479, respectively. At December 31, 2003, 25.3 million shares remained in the CBT. All shares are required to be transferred out of the CBT by January 1, 2021.
Note 23-Taxes
Taxes charged to income from continuing operations were:
Millions of Dollars |
||||||||||||
2003 | 2002 | 2001 | ||||||||||
Taxes Other Than Income
Taxes |
||||||||||||
Excise |
$ | 13,738 | 6,246 | 2,177 | ||||||||
Property |
290 | 244 | 148 | |||||||||
Production |
413 | 303 | 328 | |||||||||
Payroll |
149 | 99 | 54 | |||||||||
Environmental |
7 | 5 | 14 | |||||||||
Other |
82 | 40 | 19 | |||||||||
$ | 14,679 | 6,937 | 2,740 | |||||||||
Income Taxes |
||||||||||||
Federal |
||||||||||||
Current |
$ | 536 | 64 | 129 | ||||||||
Deferred |
637 | 56 | 426 | |||||||||
Foreign |
||||||||||||
Current |
2,559 | 1,188 | 842 | |||||||||
Deferred |
(161 | ) | 114 | 126 | ||||||||
State and local |
||||||||||||
Current |
136 | 57 | 97 | |||||||||
Deferred |
37 | (36 | ) | 20 | ||||||||
$ | 3,744 | 1,443 | 1,640 | |||||||||
142
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Major components of deferred tax liabilities and assets at December 31 were:
Millions of Dollars |
||||||||
2003 | 2002 | |||||||
Deferred Tax Liabilities |
||||||||
Properties, plants and equipment, and intangibles |
$ | 10,436 | 10,147 | |||||
Investment in joint ventures |
1,490 | 1,013 | ||||||
Inventory |
486 | 385 | ||||||
Other |
267 | 144 | ||||||
Total deferred tax liabilities |
12,679 | 11,689 | ||||||
Deferred Tax Assets |
||||||||
Benefit plan accruals |
1,334 | 1,304 | ||||||
Asset retirement obligations and accrued environmental
costs |
1,584 | 724 | ||||||
Deferred state income tax |
227 | 201 | ||||||
Other financial accruals and deferrals |
144 | 311 | ||||||
Alternative minimum tax carryforwards |
317 | 421 | ||||||
Operating loss and credit carryforwards |
1,105 | 650 | ||||||
Other |
153 | 394 | ||||||
Total deferred tax assets |
4,864 | 4,005 | ||||||
Less valuation allowance |
906 | 608 | ||||||
Net deferred tax assets |
3,958 | 3,397 | ||||||
Net deferred tax liabilities |
$ | 8,721 | 8,292 | |||||
Current assets, long-term assets, current liabilities and long-term liabilities included deferred taxes of $-0- million, $53 million, $209 million and $8,565 million, respectively, at December 31, 2003, and $68 million, $41 million, $40 million and $8,361 million, respectively, at December 31, 2002.
We have operating loss and credit carryovers in multiple taxing jurisdictions. These attributes generally expire between 2004 and 2013 with some carryovers, including the alternative minimum tax, having indefinite carryforward periods.
Valuation allowances have been established for certain operating loss and credit carryforwards that reduce deferred tax assets to an amount that will, more likely than not, be realized. Uncertainties that may affect the realization of these assets include tax law changes and the future level of product prices and costs. During 2003, valuation allowances increased $298 million. This reflects increases of $498 million primarily related to foreign tax loss carryforwards, partially offset by decreases of $200 million, primarily related to foreign tax loss carryforwards that have expired or that have been utilized. Based on our historical taxable income, its expectations for the future, and available tax-planning strategies, management expects that remaining net deferred tax assets will be realized as offsets to reversing deferred tax liabilities and as offsets to the tax consequences of future taxable income.
The Conoco purchase price allocation for the merger resulted in deferred tax liabilities of $3,841 million. Included in this amount is a valuation allowance for certain deferred tax assets of $251 million, for which subsequently recognized tax benefits, if any, will be allocated to goodwill.
143
At December 31, 2003, and December 31, 2002, income considered to be permanently reinvested in certain foreign subsidiaries and foreign corporate joint ventures totaled approximately $2,046 million and $2,171 million, respectively. Deferred income taxes have not been provided on this income, as we do not plan to initiate any action that would require the payment of income taxes. It is not practicable to estimate the amount of additional tax that might be payable on this foreign income if distributed.
The amounts of U.S. and foreign income from continuing operations before income taxes, with a reconciliation of tax at the federal statutory rate with the provision for income taxes, were:
Percent of | ||||||||||||||||||||||||
Millions of Dollars |
Pretax Income |
|||||||||||||||||||||||
2003 | 2002 | 2001 | 2003 | 2002 | 2001 | |||||||||||||||||||
Income from continuing
operations before income
taxes |
||||||||||||||||||||||||
United States |
$ | 4,137 | 605 | 2,066 | 49.6 | % | 28.3 | 63.7 | ||||||||||||||||
Foreign |
4,200 | 1,536 | 1,175 | 50.4 | 71.7 | 36.3 | ||||||||||||||||||
$ | 8,337 | 2,141 | 3,241 | 100.0 | % | 100.0 | 100.0 | |||||||||||||||||
Federal statutory income
tax |
$ | 2,918 | 749 | 1,134 | 35.0 | % | 35.0 | 35.0 | ||||||||||||||||
Foreign taxes in excess of
federal statutory rate |
792 | 680 | 515 | 9.5 | 31.8 | 15.9 | ||||||||||||||||||
Domestic tax credits |
(25 | ) | (77 | ) | (84 | ) | (.3 | ) | (3.6 | ) | (2.6 | ) | ||||||||||||
Write-off of acquired
in-process research and
development costs |
| 86 | | | 4.0 | | ||||||||||||||||||
State income tax |
112 | 14 | 76 | 1.3 | .6 | 2.3 | ||||||||||||||||||
Other |
(53 | ) | (9 | ) | (1 | ) | (.6 | ) | (.4 | ) | | |||||||||||||
$ | 3,744 | 1,443 | 1,640 | 44.9 | % | 67.4 | 50.6 | |||||||||||||||||
Our 2003 tax expense was reduced by $227 million as a result of tax law changes in Norway, Canada and Timor Lesté due to adjustments of net deferred tax liabilities.
144
Note 24-Other Comprehensive Income (Loss)
The components and allocated tax effects of other comprehensive income (loss) follow:
Millions of Dollars |
||||||||||||
Tax Expense | ||||||||||||
Before-Tax |
(Benefit) |
After-Tax |
||||||||||
2003 |
||||||||||||
Minimum pension liability adjustment |
$ | 271 | 103 | 168 | ||||||||
Unrealized gain on securities |
6 | 2 | 4 | |||||||||
Foreign currency translation
adjustments |
865 | 228 | 637 | |||||||||
Hedging activities |
7 | | 7 | |||||||||
Equity affiliates: |
||||||||||||
Foreign currency translation |
149 | | 149 | |||||||||
Derivatives related |
32 | 12 | 20 | |||||||||
Other comprehensive income |
$ | 1,330 | 345 | 985 | ||||||||
2002 |
||||||||||||
Minimum pension liability adjustment |
$ | (149 | ) | (56 | ) | (93 | ) | |||||
Unrealized loss on securities |
(3 | ) | | (3 | ) | |||||||
Foreign currency translation
adjustments |
223 | 41 | 182 | |||||||||
Hedging activities |
(1 | ) | | (1 | ) | |||||||
Equity affiliates: |
||||||||||||
Foreign currency translation |
40 | | 40 | |||||||||
Derivatives related |
(34 | ) | | (34 | ) | |||||||
Other comprehensive income |
$ | 76 | (15 | ) | 91 | |||||||
2001 |
||||||||||||
Minimum pension liability adjustment |
$ | (220 | ) | (77 | ) | (143 | ) | |||||
Unrealized loss on securities |
(3 | ) | (1 | ) | (2 | ) | ||||||
Foreign currency translation
adjustments |
(14 | ) | | (14 | ) | |||||||
Hedging activities |
(4 | ) | | (4 | ) | |||||||
Equity affiliates: |
||||||||||||
Foreign currency translation |
(3 | ) | | (3 | ) | |||||||
Derivatives related |
17 | 6 | 11 | |||||||||
Other comprehensive loss |
$ | (227 | ) | (72 | ) | (155 | ) | |||||
See Note 22 Employee Benefit Plans for more information on the minimum pension liability adjustment. The after-tax amount for 2003 of $168 million includes a net charge of $7 million related to a pension plan for which we are not the primary obligor, and thus is not included in the pension disclosures in Note 22Employee Benefit Plans. The accumulated pension liability adjustment at December 31, 2003, of $68 million also included this $7 million accumulated loss.
Unrealized gain (loss) on securities relate to available-for-sale securities held by irrevocable grantor trusts that fund certain of our domestic, non-qualified supplemental key employee pension plans.
Deferred taxes have not been provided on temporary differences related to foreign currency translation adjustments for investments in certain foreign subsidiaries and foreign corporate joint ventures that are essentially permanent in duration.
145
Accumulated other comprehensive income (loss) in the equity section of the balance sheet included:
Millions of Dollars |
||||||||
2003 | 2002 | |||||||
Minimum pension liability adjustment |
$ | (68 | ) | (236 | ) | |||
Foreign currency translation adjustments |
735 | 98 | ||||||
Unrealized gain on securities |
5 | 1 | ||||||
Deferred net hedging gain/(loss) |
2 | (5 | ) | |||||
Equity affiliates: |
||||||||
Foreign currency translation |
150 | 1 | ||||||
Derivatives related |
(3 | ) | (23 | ) | ||||
Accumulated other comprehensive income
(loss) |
$ | 821 | (164 | ) | ||||
Note 25-Cash Flow Information
Millions of Dollars |
||||||||||||
2003 | 2002 | 2001 | ||||||||||
Non-Cash Investing and Financing
Activities |
||||||||||||
Increase in properties, plants and
equipment in exchange for related
increase in asset retirement obligations
associated with the initial
implementation of SFAS No. 143 |
$ | 1,229 | | | ||||||||
Increase in properties, plants and
equipment from incurrence of asset
retirement obligations due to repeal of
Norway Removal Grant Act |
336 | | | |||||||||
Increase in properties, plants and
equipment related to the implementation
of FIN 46 |
940 | | | |||||||||
Increase in long-term debt through the
implementation and continuing application
of FIN 46 |
2,774 | | | |||||||||
Increase in assets of discontinued
operations held for sale related to
implementation of FIN 46 |
726 | | | |||||||||
The merger by issuance of stock |
| 15,974 | | |||||||||
Acquisition of Tosco by issuance of stock |
| | 7,049 | |||||||||
Investment in properties, plants and
equipment of businesses through the
assumption of non-cash liabilities |
| 181 | 125 | |||||||||
Cash Payments |
||||||||||||
Interest |
$ | 839 | 441 | 324 | ||||||||
Income taxes |
2,909 | 1,363 | 1,504 | |||||||||
146
Note 26-Other Financial Information
Millions of Dollars | ||||||||||||
Except Per Share Amounts |
||||||||||||
2003 | 2002 | 2001 | ||||||||||
Interest |
||||||||||||
Incurred |
||||||||||||
Debt |
$ | 1,061 | 740 | 524 | ||||||||
Other |
110 | 58 | 45 | |||||||||
1,171 | 798 | 569 | ||||||||||
Capitalized |
(327 | ) | (232 | ) | (231 | ) | ||||||
Expensed |
$ | 844 | 566 | 338 | ||||||||
Research and Development Expendituresexpensed |
$ | 136 | 355 | * | 44 | |||||||
* | Includes $246 million of in-process research and development expenses related to the merger. |
Advertising Expenses* |
$ | 70 | 37 | 56 | ||||||||
* | Deferred amounts at December 31 were immaterial in all three years. |
Cash Dividends paid per common share |
$ | 1.63 | 1.48 | 1.40 | ||||||||
Foreign Currency Transaction Gains
(Losses)after-tax |
||||||||||||
E&P |
$ | (50 | ) | (34 | ) | 2 | ||||||
R&M |
18 | 9 | 3 | |||||||||
Chemicals |
| | | |||||||||
Emerging Businesses |
(1 | ) | | | ||||||||
Corporate and Other |
67 | 21 | (8 | ) | ||||||||
$ | 34 | (4 | ) | (3 | ) | |||||||
Note 27-Related Party Transactions
Significant transactions with related parties were:
Millions of Dollars |
||||||||||||
2003 | 2002 | 2001 | ||||||||||
Revenues (a) |
$ | 3,812 | 1,554 | 935 | ||||||||
Purchases (b) |
3,316 | 1,545 | 1,110 | |||||||||
Operating expenses and selling, general
and
administrative expenses (c) |
560 | 279 | 243 | |||||||||
Net interest (income) expense (d) |
19 | (6 | ) | 8 | ||||||||
(a) | Our Exploration and Production (E&P) segment sells natural gas to Duke Energy Field Services, LLC (DEFS) and crude oil to the Malaysian Refining Company Sdn. Bhd (Melaka), among others, for processing and marketing. Natural gas liquids, solvents and petrochemical feedstocks are sold to Chevron Phillips Chemical Company LLC (CPChem) and refined products are sold primarily to CFJ Properties. Also, we charge several of our affiliates including CPChem, MSLP, Hamaca Holding LLC, and Venture Coke Company for the use of common facilities, such as steam generators, waste and water treaters, and warehouse facilities. |
147
(b) | We purchase natural gas and natural gas liquids from DEFS and CPChem for use in our refinery processes and other feedstocks from various affiliates. We purchase crude oil from Petrozuata C.A. and refined products from Melaka. We also pay fees to various pipeline equity companies for transporting finished refined products. |
(c) | We pay processing fees to various affiliates, the most significant being MSLP. Additionally, we pay contract drilling fees to deepwater drillship affiliates, crude oil transportation fees to pipeline equity companies, and commissions to the receivable monetization companies. |
(d) | We pay and/or receive interest to/from various affiliates including the receivable monetization companies and MSLP. |
Elimination of our equity percentage share of profit or loss included in our inventory at December 31, 2003, 2002, and 2001, on the purchases from related parties described above was not material. Additionally, elimination of our profit or loss included in the related parties inventory at December 31, 2003, 2002, and 2001, on the revenues from related parties described above were not material.
Note 28-Segment Disclosures and Related Information
We have organized our reporting structure based on the grouping of similar products and services, resulting in five operating segments:
1) | E&PThis segment primarily explores for and produces crude oil, natural gas, and natural gas liquids on a worldwide basis. At December 31, 2003, E&P was producing in the United States; the Norwegian and U.K. sectors of the North Sea; Canada; Nigeria; Venezuela; the Timor Sea; offshore Australia and China; Indonesia; the United Arab Emirates; Vietnam; and Russia. The E&P segments U.S. and international operations are disclosed separately for reporting purposes. | |||
2) | MidstreamThrough both consolidated and equity interests, this segment gathers and processes natural gas produced by ConocoPhillips and others, and fractionates and markets natural gas liquids, primarily in the United States, Canada and Trinidad. The Midstream segment includes our 30.3 percent equity investment in DEFS. | |||
3) | R&MThis segment refines, markets and transports crude oil and petroleum products, mainly in the United States, Europe and Asia. At December 31, 2003, we owned 12 refineries in the United States; one in the United Kingdom; one in Ireland; and had equity interests in one refinery in Germany, two in the Czech Republic, and one in Malaysia. The R&M segments U.S. and international operations are disclosed separately for reporting purposes. | |||
4) | ChemicalsThis segment manufactures and markets petrochemicals and plastics on a worldwide basis. The Chemicals segment consists of our 50 percent equity investment in CPChem. | |||
5) | Emerging BusinessesThis segment encompasses the development of new businesses beyond our traditional operations. Emerging Businesses includes new technologies related to natural gas conversion into clean fuels and related products (gas-to-liquids), technology solutions, power generation, and emerging technologies. |
148
Corporate and Other includes general corporate overhead; all interest income and expense; preferred dividend requirements of capital trusts; discontinued operations; restructuring charges; goodwill resulting from the merger of Conoco and Phillips that had not yet been allocated to the operating segments; certain eliminations; and various other corporate activities. Corporate assets include all cash and cash equivalents.
We evaluate performance and allocate resources based on net income. Segment accounting policies are the same as those in Note 1-Accounting Policies. Intersegment sales are at prices that approximate market.
Analysis of Results by Operating Segment
Millions of Dollars |
||||||||||||
2003 | 2002 | 2001 | ||||||||||
Sales and Other Operating Revenues |
||||||||||||
E&P |
||||||||||||
United States |
$ | 18,521 | 7,222 | 5,879 | ||||||||
International |
12,964 | 4,850 | 2,266 | |||||||||
Intersegment eliminations-U.S. |
(2,439 | ) | (1,304 | ) | (534 | ) | ||||||
Intersegment eliminations-international |
(3,202 | ) | (484 | ) | | |||||||
E&P |
25,844 | 10,284 | 7,611 | |||||||||
Midstream |
||||||||||||
Total sales |
4,735 | 2,049 | 1,193 | |||||||||
Intersegment eliminations |
(1,431 | ) | (510 | ) | (416 | ) | ||||||
Midstream |
3,304 | 1,539 | 777 | |||||||||
R&M |
||||||||||||
United States |
57,222 | 41,011 | 16,445 | |||||||||
International |
19,454 | 5,630 | 142 | |||||||||
Intersegment eliminations-U.S. |
(1,815 | ) | (1,773 | ) | (92 | ) | ||||||
Intersegment eliminations-international |
(13 | ) | | | ||||||||
R&M |
74,848 | 44,868 | 16,495 | |||||||||
Chemicals |
14 | 13 | | |||||||||
Emerging Businesses |
178 | 36 | 7 | |||||||||
Corporate and Other |
8 | 8 | 2 | |||||||||
Consolidated sales and other operating revenues |
$ | 104,196 | 56,748 | 24,892 | ||||||||
Depreciation, Depletion, Amortization and Impairments |
||||||||||||
E&P |
||||||||||||
United States |
$ | 1,172 | 999 | 817 | ||||||||
International |
1,736 | 735 | 324 | |||||||||
Total E&P |
2,908 | 1,734 | 1,141 | |||||||||
Midstream |
54 | 19 | 1 | |||||||||
R&M |
||||||||||||
United States |
551 | 564 | 203 | |||||||||
International |
140 | 50 | 1 | |||||||||
Total R&M |
691 | 614 | 204 | |||||||||
Chemicals |
| | | |||||||||
Emerging Businesses |
10 | 4 | | |||||||||
Corporate and Other |
74 | 29 | 24 | |||||||||
Consolidated depreciation, depletion, amortization and impairments |
$ | 3,737 | 2,400 | 1,370 | ||||||||
149
Millions of Dollars |
||||||||||||
2003 | 2002 | 2001 | ||||||||||
Equity in Earnings of Affiliates |
||||||||||||
E&P |
||||||||||||
United States |
$ | 27 | 29 | 9 | ||||||||
International |
289 | 162 | 19 | |||||||||
Total E&P |
316 | 191 | 28 | |||||||||
Midstream |
138 | 46 | 165 | |||||||||
R&M |
||||||||||||
United States |
89 | 43 | 88 | |||||||||
International |
5 | | | |||||||||
Total R&M |
94 | 43 | 88 | |||||||||
Chemicals |
(6 | ) | (16 | ) | (240 | ) | ||||||
Emerging Businesses |
| (3 | ) | | ||||||||
Corporate and Other |
| | | |||||||||
Consolidated equity in earnings of affiliates |
$ | 542 | 261 | 41 | ||||||||
Income Taxes |
||||||||||||
E&P |
||||||||||||
United States |
$ | 1,231 | 473 | 670 | ||||||||
International |
2,269 | 1,337 | 913 | |||||||||
Total E&P |
3,500 | 1,810 | 1,583 | |||||||||
Midstream |
83 | 42 | 73 | |||||||||
R&M |
||||||||||||
United States |
652 | 90 | 210 | |||||||||
International |
64 | (11 | ) | | ||||||||
Total R&M |
716 | 79 | 210 | |||||||||
Chemicals |
(12 | ) | (18 | ) | (89 | ) | ||||||
Emerging Businesses |
(51 | ) | (38 | ) | (7 | ) | ||||||
Corporate and Other |
(492 | ) | (432 | ) | (130 | ) | ||||||
Consolidated income taxes |
$ | 3,744 | 1,443 | 1,640 | ||||||||
Net Income (Loss) |
||||||||||||
E&P |
||||||||||||
United States |
$ | 2,374 | 1,156 | 1,342 | ||||||||
International |
1,928 | 593 | 357 | |||||||||
Total E&P |
4,302 | 1,749 | 1,699 | |||||||||
Midstream |
130 | 55 | 120 | |||||||||
R&M |
||||||||||||
United States |
990 | 138 | 395 | |||||||||
International |
282 | 5 | 2 | |||||||||
Total R&M |
1,272 | 143 | 397 | |||||||||
Chemicals |
7 | (14 | ) | (128 | ) | |||||||
Emerging Businesses |
(99 | ) | (310) | * | (12 | ) | ||||||
Corporate and Other |
(877 | ) | (1,918 | ) | (415 | ) | ||||||
Consolidated net income (loss) |
$ | 4,735 | (295 | ) | 1,661 | |||||||
* | Includes a non-cash $246 million write-off of acquired in-process research and development costs. |
150
Millions of Dollars |
||||||||||||
2003 | 2002 | 2001 | ||||||||||
Investments In and Advances To Affiliates |
||||||||||||
E&P |
||||||||||||
United States |
$ | 133 | 156 | 13 | ||||||||
International |
2,351 | 2,184 | 573 | |||||||||
Total E&P |
2,484 | 2,340 | 586 | |||||||||
Midstream |
394 | 318 | 166 | |||||||||
R&M |
||||||||||||
United States |
777 | 762 | 166 | |||||||||
International |
517 | 416 | | |||||||||
Total R&M |
1,294 | 1,178 | 166 | |||||||||
Chemicals |
2,059 | 2,050 | 1,852 | |||||||||
Emerging Businesses |
2 | | | |||||||||
Corporate and Other |
25 | 14 | 18 | |||||||||
Consolidated investments in and advances to
affiliates |
$ | 6,258 | 5,900 | 2,788 | ||||||||
Total Assets |
||||||||||||
E&P |
||||||||||||
United States |
$ | 15,262 | 14,196 | 9,501 | ||||||||
International |
22,458 | 19,526 | 5,280 | |||||||||
Goodwill |
11,184 | 15 | 15 | |||||||||
Total E&P |
48,904 | 33,737 | 14,796 | |||||||||
Midstream |
1,736 | 1,931 | 196 | |||||||||
R&M |
||||||||||||
United States |
17,172 | 16,718 | 12,327 | |||||||||
International |
5,020 | 4,117 | 183 | |||||||||
Goodwill |
3,900 | 2,350 | 2,226 | |||||||||
Total R&M |
26,092 | 23,185 | 14,736 | |||||||||
Chemicals |
2,094 | 2,095 | 1,934 | |||||||||
Emerging Businesses |
843 | 737 | 2 | |||||||||
Corporate and Other |
2,786 | 15,151 | * | 3,553 | ||||||||
Consolidated total assets |
$ | 82,455 | 76,836 | 35,217 | ||||||||
* Includes goodwill not yet allocated to reporting units of $12,079 million. |
Capital Expenditures and Investments* |
||||||||||||
E&P |
||||||||||||
United States |
$ | 1,418 | 1,205 | 1,354 | ||||||||
International |
3,090 | 2,071 | 1,162 | |||||||||
Total E&P |
4,508 | 3,276 | 2,516 | |||||||||
Midstream |
10 | 5 | | |||||||||
R&M |
||||||||||||
United States |
860 | 676 | 423 | |||||||||
International |
319 | 164 | 5 | |||||||||
Total R&M |
1,179 | 840 | 428 | |||||||||
Chemicals |
| 60 | 6 | |||||||||
Emerging Businesses |
284 | 122 | | |||||||||
Corporate and Other |
188 | 85 | 66 | |||||||||
Consolidated capital expenditures and investments |
$ | 6,169 | 4,388 | 3,016 | ||||||||
* Includes dry hole costs. |
151
Additional information on items included in Corporate and Other (on a before-tax basis unless otherwise noted):
Millions of Dollars |
||||||||||||
2003 | 2002 | 2001 | ||||||||||
Interest income |
$ | 104 | 40 | 13 | ||||||||
Interest expense |
844 | 566 | 338 | |||||||||
Significant non-cash items |
||||||||||||
Impairments included in discontinued operations |
96 | 1,048 | | |||||||||
Loss accruals related to retail site leases included in
discontinued operations |
| 477 | | |||||||||
Restructuring charges, net of benefits paid |
| 269 | | |||||||||
Geographic Information
Millions of Dollars |
||||||||||||||||||||||||
Other | ||||||||||||||||||||||||
United | United | Foreign | Worldwide | |||||||||||||||||||||
States |
Norway |
Kingdom |
Canada |
Countries |
Consolidated |
|||||||||||||||||||
2003 |
||||||||||||||||||||||||
Sales and Other |
||||||||||||||||||||||||
Operating Revenues* |
$ | 74,768 | 3,068 | 11,203 | 2,735 | 12,422 | 104,196 | |||||||||||||||||
Long-Lived Assets** |
$ | 29,899 | 4,215 | 5,762 | 4,347 | 9,463 | 53,686 | |||||||||||||||||
2002 |
||||||||||||||||||||||||
Sales and Other |
||||||||||||||||||||||||
Operating Revenues* |
$ | 46,674 | 1,850 | 3,387 | 997 | 3,840 | 56,748 | |||||||||||||||||
Long-Lived Assets** |
$ | 28,492 | 3,767 | 4,969 | 3,460 | 8,242 | 48,930 | |||||||||||||||||
2001 |
||||||||||||||||||||||||
Sales and Other |
||||||||||||||||||||||||
Operating Revenues* |
$ | 22,466 | 1,322 | 380 | 42 | 682 | 24,892 | |||||||||||||||||
Long-Lived Assets** |
$ | 19,955 | 1,484 | 654 | 29 | 2,799 | 24,921 | |||||||||||||||||
* | Sales and other operating revenues are attributable to countries based on the location of the operations generating the revenues. | |
** | Defined as net properties, plants and equipment plus investments in and advances to affiliates. |
Note 29-New Accounting Standards
In December 2003, the FASB revised and reissued SFAS No. 132 (revised 2003), Employers Disclosures about Pensions and Other Postretirement Benefits-an amendment of FASB Statements No. 87, 88, and 106, which revises and requires additional disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by previous Financial Accounting Board Standards. We adopted the provisions of this Standard effective December 2003. Certain provisions of this Standard regarding disclosure of information about foreign plans and disclosure of estimated future benefit payments are not required until 2004. The adoption of the
152
provisions applicable to 2003 did not have an impact on our results of operations or financial position, nor will the adoption of the additional provisions in 2004 have an impact on our results of operations or financial position.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Liabilities and Equity, to address the balance sheet classification of certain financial instruments that have characteristics of both liabilities and equity. This statement was immediately effective for all contracts created or modified after May 31, 2003, and became effective July 1, 2003, for all previously existing contracts. On November 7, 2003, the FASB issued FASB Staff Position No. FAS 150-3, which deferred certain provisions of SFAS No. 150. As a result of adopting this new accounting standard in the third quarter of 2003, and the subsequent November 7, 2003, deferral of certain provisions, there was no impact on our 2003 financial statements. We continue to monitor the deferral status of SFAS No. 150.
153
Oil and Gas Operations (Unaudited)
Exploration and Production
In accordance with SFAS No. 69, Disclosures about Oil and Gas Producing Activities, and regulations of the U.S. Securities and Exchange Commission (SEC), we are making certain supplemental disclosures about our oil and gas exploration and production operations. While this information was developed with reasonable care and disclosed in good faith, it is emphasized that some of the data is necessarily imprecise and represents only approximate amounts because of the subjective judgments involved in developing such information. Accordingly, this information may not necessarily represent our current financial condition or our expected future results.
Our disclosures by geographic area include the United States (U.S.), European North Sea (Norway and the United Kingdom), Asia Pacific, Canada and Other Areas. When we use equity accounting for operations that have proved reserves, these oil and gas operations are shown separately and designated as Equity Affiliates. In 2003 and 2002, these consisted of two heavy-oil projects in Venezuela, an oil development project in Northern Russia and a heavy-oil project in Canada. In 2001, this consisted of a heavy-oil project in Venezuela.
Amounts in 2002 were impacted by the merger of Conoco and Phillips (the merger) in late August 2002.
154
n | Proved Reserves Worldwide |
Years Ended December 31 |
Crude Oil |
|||||||||||||||||||||||||||||||||||||||
Millions of Barrels |
||||||||||||||||||||||||||||||||||||||||
Consolidated Operations |
||||||||||||||||||||||||||||||||||||||||
Lower | Total | European | Asia | Other | Equity | Combined | ||||||||||||||||||||||||||||||||||
Alaska |
48 |
U.S. |
North Sea |
Pacific |
Canada |
Areas |
Total |
Affiliates |
Total |
|||||||||||||||||||||||||||||||
Developed and
Undeveloped |
||||||||||||||||||||||||||||||||||||||||
End of 2000 |
1,604 | 112 | 1,716 | 609 | 136 | 2 | 112 | 2,575 | 613 | 3,188 | ||||||||||||||||||||||||||||||
Revisions |
77 | (2 | ) | 75 | 45 | 9 | | (5 | ) | 124 | 48 | 172 | ||||||||||||||||||||||||||||
Improved recovery |
67 | 1 | 68 | 12 | | | | 80 | | 80 | ||||||||||||||||||||||||||||||
Purchases |
| | | | 17 | | | 17 | | 17 | ||||||||||||||||||||||||||||||
Extensions and
discoveries |
9 | 6 | 15 | 2 | 2 | | 10 | 29 | | 29 | ||||||||||||||||||||||||||||||
Production |
(126 | ) | (12 | ) | (138 | ) | (49 | ) | (6 | ) | | (13 | ) | (206 | ) | (1 | ) | (207 | ) | |||||||||||||||||||||
Sales |
| | | | | | (3 | ) | (3 | ) | | (3 | ) | |||||||||||||||||||||||||||
End of 2001 |
1,631 | 105 | 1,736 | 619 | 158 | * | 2 | 101 | 2,616 | 660 | 3,276 | |||||||||||||||||||||||||||||
Revisions |
32 | (8 | ) | 24 | (31 | ) | (28 | ) | 5 | (4 | ) | (34 | ) | (27 | ) | (61 | ) | |||||||||||||||||||||||
Improved recovery |
46 | 1 | 47 | 7 | | | | 54 | | 54 | ||||||||||||||||||||||||||||||
Purchases |
| 132 | 132 | 405 | 124 | 101 | 99 | 861 | 733 | 1,594 | ||||||||||||||||||||||||||||||
Extensions and
discoveries |
14 | 6 | 20 | 6 | 9 | 1 | 13 | 49 | 4 | 53 | ||||||||||||||||||||||||||||||
Production |
(120 | ) | (14 | ) | (134 | ) | (72 | ) | (9 | ) | (5 | ) | (15 | ) | (235 | ) | (13 | ) | (248 | ) | ||||||||||||||||||||
Sales |
| (2 | ) | (2 | ) | (20 | ) | | (13 | ) | (1 | ) | (36 | ) | | (36 | ) | |||||||||||||||||||||||
End of 2002 |
1,603 | 220 | 1,823 | 914 | 254 | ** | 91 | 193 | 3,275 | 1,357 | 4,632 | |||||||||||||||||||||||||||||
Revisions |
35 | (5 | ) | 30 | 15 | 40 | (9 | ) | (4 | ) | 72 | 48 | 120 | |||||||||||||||||||||||||||
Improved recovery |
15 | 1 | 16 | 47 | | | 1 | 64 | | 64 | ||||||||||||||||||||||||||||||
Purchases |
| | | | 5 | | | 5 | 1 | 6 | ||||||||||||||||||||||||||||||
Extensions and
discoveries |
19 | 4 | 23 | 4 | 10 | 223 | 10 | 270 | 8 | 278 | ||||||||||||||||||||||||||||||
Production |
(119 | ) | (19 | ) | (138 | ) | (106 | ) | (24 | ) | (11 | ) | (27 | ) | (306 | ) | (37 | ) | (343 | ) | ||||||||||||||||||||
Sales |
| (15 | ) | (15 | ) | (9 | ) | (21 | ) | (20 | ) | (25 | ) | (90 | ) | | (90 | ) | ||||||||||||||||||||||
End of 2003 |
1,553 | 186 | 1,739 | 865 | 264 | 274 | 148 | 3,290 | 1,377 | 4,667 | ||||||||||||||||||||||||||||||
Developed |
||||||||||||||||||||||||||||||||||||||||
End of 2000 |
1,207 | 98 | 1,305 | 503 | 16 | 2 | 100 | 1,926 | | 1,926 | ||||||||||||||||||||||||||||||
End of 2001 |
1,275 | 91 | 1,366 | 534 | 13 | 2 | 83 | 1,998 | 47 | 2,045 | ||||||||||||||||||||||||||||||
End of 2002 |
1,335 | 169 | 1,504 | 713 | 55 | 81 | 168 | 2,521 | 378 | 2,899 | ||||||||||||||||||||||||||||||
End of 2003 |
1,365 | 163 | 1,528 | 454 | 95 | 51 | 137 | 2,265 | 529 | 2,794 | ||||||||||||||||||||||||||||||
* | Includes proved reserves of 17 million barrels attributable to a consolidated subsidiary in which there is a 13 percent minority interest. |
** | Includes proved reserves of 14 million barrels attributable to a consolidated subsidiary in which there is a 10 percent minority interest. |
155
n | Purchases in 2002 were primarily related to the merger. | |||
n | At the end of 2000, Other Areas included 2 million barrels of reserves in Venezuela in which we had an economic interest through risk-service contracts. These properties were sold in June 2001. Our net production related to these contracts was approximately 400,000 barrels in 2001 and 1,200,000 barrels in 2000. | |||
n | In addition to conventional crude oil, natural gas and natural gas liquids (NGL) proved reserves, we have proved oil sands reserves in Canada, associated with a Syncrude project totaling 265 million barrels at the end of 2003. For internal management purposes, we view these reserves and their development as part of our total exploration and production operations. However, U.S. Securities and Exchange Commission regulations define these reserves as mining related. Therefore, they are not included in our tabular presentation of proved crude oil, natural gas and NGL reserves. These oil sands reserves also are not included in the standardized measure of discounted future net cash flows relating to proved oil and gas reserve quantities. |
156
Years Ended December 31 |
Natural Gas |
|||||||||||||||||||||||||||||||||||||||
Billions of Cubic Feet |
||||||||||||||||||||||||||||||||||||||||
Consolidated Operations |
||||||||||||||||||||||||||||||||||||||||
Lower | Total | European | Asia | Other | Equity | Combined | ||||||||||||||||||||||||||||||||||
Alaska |
48 |
U.S. |
North Sea |
Pacific |
Canada |
Areas |
Total |
Affiliates |
Total |
|||||||||||||||||||||||||||||||
Developed and
Undeveloped |
||||||||||||||||||||||||||||||||||||||||
End of 2000 |
3,237 | 2,853 | 6,090 | 1,624 | 64 | 64 | 561 | 8,403 | 131 | 8,534 | ||||||||||||||||||||||||||||||
Revisions |
60 | 9 | 69 | (124 | ) | (1 | ) | (2 | ) | 65 | 7 | 14 | 21 | |||||||||||||||||||||||||||
Improved recovery |
| | | 13 | | | | 13 | | 13 | ||||||||||||||||||||||||||||||
Purchases |
| 12 | 12 | 10 | 10 | | | 32 | | 32 | ||||||||||||||||||||||||||||||
Extensions and
discoveries |
5 | 405 | 410 | 23 | 265 | | 109 | 807 | | 807 | ||||||||||||||||||||||||||||||
Production |
(141 | ) | (261 | ) | (402 | ) | (121 | ) | (21 | ) | (7 | ) | (19 | ) | (570 | ) | | (570 | ) | |||||||||||||||||||||
Sales |
| | | (8 | ) | | | | (8 | ) | | (8 | ) | |||||||||||||||||||||||||||
End of 2001 |
3,161 | 3,018 | 6,179 | 1,417 | 317 | * | 55 | 716 | 8,684 | 145 | 8,829 | |||||||||||||||||||||||||||||
Revisions |
(27 | ) | (70 | ) | (97 | ) | (20 | ) | (60 | ) | 16 | (15 | ) | (176 | ) | | (176 | ) | ||||||||||||||||||||||
Improved recovery |
5 | 1 | 6 | 14 | | | | 20 | | 20 | ||||||||||||||||||||||||||||||
Purchases |
| 1,862 | 1,862 | 2,583 | 1,856 | 1,241 | 206 | 7,748 | 17 | 7,765 | ||||||||||||||||||||||||||||||
Extensions and
discoveries |
2 | 225 | 227 | 43 | 6 | 21 | 414 | 711 | 1 | 712 | ||||||||||||||||||||||||||||||
Production |
(147 | ) | (340 | ) | (487 | ) | (226 | ) | (49 | ) | (59 | ) | (19 | ) | (840 | ) | (2 | ) | (842 | ) | ||||||||||||||||||||
Sales |
(5 | ) | (1 | ) | (6 | ) | (4 | ) | | (97 | ) | (161 | ) | (268 | ) | | (268 | ) | ||||||||||||||||||||||
End of 2002 |
2,989 | 4,695 | 7,684 | 3,807 | 2,070 | ** | 1,177 | 1,141 | 15,879 | 161 | 16,040 | |||||||||||||||||||||||||||||
Revisions |
75 | (140 | ) | (65 | ) | 17 | (79 | ) | (51 | ) | | (178 | ) | 65 | (113 | ) | ||||||||||||||||||||||||
Improved recovery |
6 | 1 | 7 | 51 | | | 1 | 59 | | 59 | ||||||||||||||||||||||||||||||
Purchases |
| 39 | 39 | | 60 | | | 99 | | 99 | ||||||||||||||||||||||||||||||
Extensions and
discoveries |
| 254 | 254 | 65 | 1,371 | 90 | 85 | 1,865 | 5 | 1,870 | ||||||||||||||||||||||||||||||
Production |
(148 | ) | (477 | ) | (625 | ) | (462 | ) | (121 | ) | (159 | ) | (35 | ) | (1,402 | ) | (5 | ) | (1,407 | ) | ||||||||||||||||||||
Sales |
| (114 | ) | (114 | ) | (60 | ) | (295 | ) | (15 | ) | (4 | ) | (488 | ) | | (488 | ) | ||||||||||||||||||||||
End of 2003 |
2,922 | 4,258 | 7,180 | 3,418 | 3,006 | 1,042 | 1,188 | 15,834 | 226 | 16,060 | ||||||||||||||||||||||||||||||
Developed |
||||||||||||||||||||||||||||||||||||||||
End of 2000 |
2,969 | 2,564 | 5,533 | 1,059 | 1 | 54 | 335 | 6,982 | | 6,982 | ||||||||||||||||||||||||||||||
End of 2001 |
2,969 | 2,684 | 5,653 | 1,053 | 245 | 45 | 491 | 7,487 | 3 | 7,490 | ||||||||||||||||||||||||||||||
End of 2002 |
2,806 | 4,302 | 7,108 | 3,278 | 832 | 1,098 | 517 | 12,833 | 28 | 12,861 | ||||||||||||||||||||||||||||||
End of 2003 |
2,763 | 3,968 | 6,731 | 2,748 | 1,342 | 971 | 596 | 12,388 | 123 | 12,511 | ||||||||||||||||||||||||||||||
* | Includes proved reserves of 10 billion cubic feet attributable to a consolidated subsidiary in which there is a 13 percent minority interest. |
** | Includes proved reserves of 10 billion cubic feet attributable to a consolidated subsidiary in which there is a 10 percent minority interest. |
157
n | Natural gas production may differ from gas production (delivered for sale) in our statistics disclosure, primarily because the quantities above include gas consumed at the lease, but omit the gas equivalent of liquids extracted at any of our owned, equity-affiliate, or third-party processing plant or facility. | |||
n | Purchases in 2002 were related to the merger. | |||
n | Natural gas reserves are computed at 14.65 pounds per square inch absolute and 60 degrees Fahrenheit. |
158
Years Ended December 31 |
Natural Gas Liquids | |||||||||||||||||||||||||||||||||||||||
Millions of Barrels |
||||||||||||||||||||||||||||||||||||||||
Consolidated Operations |
||||||||||||||||||||||||||||||||||||||||
Lower | Total | European | Asia | Other | Equity | Combined | ||||||||||||||||||||||||||||||||||
Alaska |
48 |
U.S. |
North Sea |
Pacific |
Canada |
Areas |
Total |
Affiliates |
Total |
|||||||||||||||||||||||||||||||
Developed and
Undeveloped |
||||||||||||||||||||||||||||||||||||||||
End of 2000 |
198 | 96 | 294 | 37 | 60 | | 18 | 409 | | 409 | ||||||||||||||||||||||||||||||
Revisions |
(25 | ) | 2 | (23 | ) | | 5 | | (1 | ) | (19 | ) | | (19 | ) | |||||||||||||||||||||||||
Improved recovery |
| | | 1 | | | | 1 | | 1 | ||||||||||||||||||||||||||||||
Purchases |
| | | | 10 | | | 10 | | 10 | ||||||||||||||||||||||||||||||
Extensions and
discoveries |
| 2 | 2 | | | | | 2 | | 2 | ||||||||||||||||||||||||||||||
Production |
(9 | ) | (7 | ) | (16 | ) | (2 | ) | | | (1 | ) | (19 | ) | | (19 | ) | |||||||||||||||||||||||
End of 2001 |
164 | 93 | 257 | 36 | 75 | * | | 16 | 384 | | 384 | |||||||||||||||||||||||||||||
Revisions |
(4 | ) | 5 | 1 | (1 | ) | (11 | ) | | | (11 | ) | | (11 | ) | |||||||||||||||||||||||||
Improved recovery |
| 1 | 1 | | | | | 1 | | 1 | ||||||||||||||||||||||||||||||
Purchases |
| 80 | 80 | 14 | 20 | 38 | 1 | 153 | | 153 | ||||||||||||||||||||||||||||||
Extensions and
discoveries |
| 4 | 4 | | | 1 | | 5 | | 5 | ||||||||||||||||||||||||||||||
Production |
(9 | ) | (9 | ) | (18 | ) | (3 | ) | | (2 | ) | (1 | ) | (24 | ) | | (24 | ) | ||||||||||||||||||||||
Sales |
| | | | | (2 | ) | (1 | ) | (3 | ) | | (3 | ) | ||||||||||||||||||||||||||
End of 2002 |
151 | 174 | 325 | 46 | 84 | ** | 35 | 15 | 505 | | 505 | |||||||||||||||||||||||||||||
Revisions |
(2 | ) | 35 | 33 | 3 | (5 | ) | (1 | ) | 1 | 31 | | 31 | |||||||||||||||||||||||||||
Improved recovery |
| | | 2 | | | | 2 | | 2 | ||||||||||||||||||||||||||||||
Purchases |
| | | | 3 | | | 3 | | 3 | ||||||||||||||||||||||||||||||
Extensions and
discoveries |
| 2 | 2 | | 10 | 2 | | 14 | | 14 | ||||||||||||||||||||||||||||||
Production |
(8 | ) | (17 | ) | (25 | ) | (5 | ) | | (4 | ) | (1 | ) | (35 | ) | | (35 | ) | ||||||||||||||||||||||
Sales |
| (1 | ) | (1 | ) | | (13 | ) | (2 | ) | | (16 | ) | | (16 | ) | ||||||||||||||||||||||||
End of 2003 |
141 | 193 | 334 | 46 | 79 | 30 | 15 | 504 | | 504 | ||||||||||||||||||||||||||||||
Developed |
||||||||||||||||||||||||||||||||||||||||
End of 2000 |
197 | 94 | 291 | 29 | | 1 | 17 | 338 | | 338 | ||||||||||||||||||||||||||||||
End of 2001 |
163 | 92 | 255 | 31 | | | 16 | 302 | | 302 | ||||||||||||||||||||||||||||||
End of 2002 |
151 | 166 | 317 | 40 | | 30 | 15 | 402 | | 402 | ||||||||||||||||||||||||||||||
End of 2003 |
141 | 188 | 329 | 26 | | 27 | 15 | 397 | | 397 | ||||||||||||||||||||||||||||||
* | Includes proved reserves of 10 million barrels attributable to a consolidated subsidiary in which there is a 13 percent minority interest. |
** | Includes proved reserves of 9 million barrels attributable to a consolidated subsidiary in which there is a 10 percent minority interest. |
159
n | Natural gas liquids reserves include estimates of natural gas liquids to be extracted from our leasehold gas at our gas processing plants or facilities. Estimates are based at the wellhead and assume full extraction. Production above differs from natural gas liquids production per day delivered for sale primarily due to: |
(1) | Natural gas consumed at the lease. | |||
(2) | Natural gas liquids production delivered for sale includes only natural gas liquids extracted from our leasehold gas and sold by our Exploration and Production (E&P) segment, whereas the production above also includes natural gas liquids extracted from our leasehold gas at equity-affiliate or third-party facilities. |
n | Purchases in 2002 were related to the merger. |
160
n | Results of Operations |
Years Ended December 31 |
Millions of Dollars |
|||||||||||||||||||||||||||||||||||||||
Consolidated Operations |
||||||||||||||||||||||||||||||||||||||||
Lower | Total | European | Asia | Other | Equity | Combined | ||||||||||||||||||||||||||||||||||
Alaska |
48 |
U.S. |
North Sea |
Pacific |
Canada |
Areas |
Total |
Affiliates |
Total |
|||||||||||||||||||||||||||||||
2003 |
||||||||||||||||||||||||||||||||||||||||
Sales |
$ | 3,564 | 2,464 | 6,028 | 3,872 | 879 | 225 | 677 | 11,681 | 423 | 12,104 | |||||||||||||||||||||||||||||
Transfers |
103 | 545 | 648 | 903 | 142 | 841 | 77 | 2,611 | 266 | 2,877 | ||||||||||||||||||||||||||||||
Other revenues |
(11 | ) | 93 | 82 | 8 | 33 | 31 | 10 | 164 | 34 | 198 | |||||||||||||||||||||||||||||
Total revenues |
3,656 | 3,102 | 6,758 | 4,783 | 1,054 | 1,097 | 764 | 14,456 | 723 | 15,179 | ||||||||||||||||||||||||||||||
Production costs |
792 | 657 | 1,449 | 645 | 175 | 271 | 170 | 2,710 | 179 | 2,889 | ||||||||||||||||||||||||||||||
Exploration expenses |
56 | 143 | 199 | 121 | 51 | 94 | 127 | 592 | 2 | 594 | ||||||||||||||||||||||||||||||
Depreciation,
depletion and
amortization |
436 | 571 | 1,007 | 954 | 163 | 326 | 40 | 2,490 | 104 | 2,594 | ||||||||||||||||||||||||||||||
Property impairments |
| 65 | 65 | 160 | | 5 | | 230 | | 230 | ||||||||||||||||||||||||||||||
Transportation costs |
666 | 188 | 854 | 266 | 40 | 40 | 23 | 1,223 | 20 | 1,243 | ||||||||||||||||||||||||||||||
Other related
expenses |
7 | 78 | 85 | 29 | 13 | 91 | 44 | 262 | 27 | 289 | ||||||||||||||||||||||||||||||
Accretion |
25 | 18 | 43 | 50 | 5 | 11 | 2 | 111 | 2 | 113 | ||||||||||||||||||||||||||||||
1,674 | 1,382 | 3,056 | 2,558 | 607 | 259 | 358 | 6,838 | 389 | 7,227 | |||||||||||||||||||||||||||||||
Provision for income
taxes |
595 | 486 | 1,081 | 1,539 | 225 | 57 | 362 | 3,264 | 83 | 3,347 | ||||||||||||||||||||||||||||||
Results of
operations for
producing activities |
1,079 | 896 | 1,975 | 1,019 | 382 | 202 | (4 | ) | 3,574 | 306 | 3,880 | |||||||||||||||||||||||||||||
Other earnings |
223 | 34 | 257 | 51 | 3 | 68 | * | (46 | ) | 333 | (51 | ) | 282 | |||||||||||||||||||||||||||
Cumulative effect of
accounting change |
143 | (1 | ) | 142 | 20 | | (8 | ) | (12 | ) | 142 | (2 | ) | 140 | ||||||||||||||||||||||||||
E&P net income (loss) |
$ | 1,445 | 929 | 2,374 | 1,090 | 385 | 262 | (62 | ) | 4,049 | 253 | 4,302 | ||||||||||||||||||||||||||||
2002 |
||||||||||||||||||||||||||||||||||||||||
Sales |
$ | 2,997 | 927 | 3,924 | 1,194 | 347 | 125 | 400 | 5,990 | 180 | 6,170 | |||||||||||||||||||||||||||||
Transfers |
102 | 401 | 503 | 1,315 | | 235 | | 2,053 | 62 | 2,115 | ||||||||||||||||||||||||||||||
Other revenues |
(2 | ) | 3 | 1 | 63 | 7 | 7 | 14 | 92 | 12 | 104 | |||||||||||||||||||||||||||||
Total revenues |
3,097 | 1,331 | 4,428 | 2,572 | 354 | 367 | 414 | 8,135 | 254 | 8,389 | ||||||||||||||||||||||||||||||
Production costs |
769 | 444 | 1,213 | 343 | 76 | 118 | 114 | 1,864 | 57 | 1,921 | ||||||||||||||||||||||||||||||
Exploration expenses |
101 | 108 | 209 | 67 | 45 | 32 | 231 | 584 | | 584 | ||||||||||||||||||||||||||||||
Depreciation,
depletion and
amortization |
552 | 334 | 886 | 480 | 59 | 105 | 26 | 1,556 | 30 | 1,586 | ||||||||||||||||||||||||||||||
Property impairments |
4 | 8 | 12 | 41 | | | | 53 | | 53 | ||||||||||||||||||||||||||||||
Transportation costs |
681 | 87 | 768 | 125 | 10 | | 5 | 908 | 8 | 916 | ||||||||||||||||||||||||||||||
Other related
expenses |
23 | 16 | 39 | 75 | 1 | 14 | 11 | 140 | 12 | 152 | ||||||||||||||||||||||||||||||
967 | 334 | 1,301 | 1,441 | 163 | 98 | 27 | 3,030 | 147 | 3,177 | |||||||||||||||||||||||||||||||
Provision for income
taxes |
294 | 66 | 360 | 981 | 79 | 49 | 196 | 1,665 | (18 | ) | 1,647 | |||||||||||||||||||||||||||||
Results of
operations for
producing activities |
673 | 268 | 941 | 460 | 84 | 49 | (169 | ) | 1,365 | 165 | 1,530 | |||||||||||||||||||||||||||||
Other earnings |
197 | 18 | 215 | 10 | (2 | ) | 24 | * | (4 | ) | 243 | (24 | ) | 219 | ||||||||||||||||||||||||||
E&P net income (loss) |
$ | 870 | 286 | 1,156 | 470 | 82 | 73 | (173 | ) | 1,608 | 141 | 1,749 | ||||||||||||||||||||||||||||
2001 |
||||||||||||||||||||||||||||||||||||||||
Sales |
$ | 3,020 | 1,178 | 4,198 | 546 | 154 | 31 | 324 | 5,253 | 8 | 5,261 | |||||||||||||||||||||||||||||
Transfers |
119 | 119 | 238 | 1,039 | | | | 1,277 | | 1,277 | ||||||||||||||||||||||||||||||
Other revenues |
34 | 26 | 60 | 23 | (4 | ) | 5 | | 84 | 1 | 85 | |||||||||||||||||||||||||||||
Total revenues |
3,173 | 1,323 | 4,496 | 1,608 | 150 | 36 | 324 | 6,614 | 9 | 6,623 | ||||||||||||||||||||||||||||||
Production costs |
784 | 328 | 1,112 | 165 | 37 | 6 | 55 | 1,375 | 2 | 1,377 | ||||||||||||||||||||||||||||||
Exploration expenses |
61 | 69 | 130 | 31 | 33 | | 121 | 315 | | 315 | ||||||||||||||||||||||||||||||
Depreciation,
depletion and
amortization |
531 | 203 | 734 | 233 | 22 | 4 | 27 | 1,020 | 2 | 1,022 | ||||||||||||||||||||||||||||||
Property impairments |
| | | | | | 23 | 23 | | 23 | ||||||||||||||||||||||||||||||
Transportation costs |
726 | 77 | 803 | 60 | | 3 | 6 | 872 | | 872 | ||||||||||||||||||||||||||||||
Other related
expenses |
2 | 5 | 7 | (8 | ) | 5 | 1 | 23 | 28 | 2 | 30 | |||||||||||||||||||||||||||||
1,069 | 641 | 1,710 | 1,127 | 53 | 22 | 69 | 2,981 | 3 | 2,984 | |||||||||||||||||||||||||||||||
Provision for income
taxes |
392 | 173 | 565 | 779 | 22 | 7 | 117 | 1,490 | | 1,490 | ||||||||||||||||||||||||||||||
Results of
operations for
producing activities |
677 | 468 | 1,145 | 348 | 31 | 15 | (48 | ) | 1,491 | 3 | 1,494 | |||||||||||||||||||||||||||||
Other earnings |
189 | 8 | 197 | 17 | | | (9 | ) | 205 | | 205 | |||||||||||||||||||||||||||||
E&P net income (loss) |
$ | 866 | 476 | 1,342 | 365 | 31 | 15 | (57 | ) | 1,696 | 3 | 1,699 | ||||||||||||||||||||||||||||
* | Includes $63 million and $27 million in 2003 and 2002, respectively, for a Syncrude oil project in Canada that is defined as a mining operation by U.S. Securities and Exchange Commission regulations. |
161
n | Results of operations for producing activities consist of all the activities within the E&P organization, except for pipeline and marine operations, liquefied natural gas operations, a Canadian Syncrude operation, and crude oil and gas marketing activities, which are included in Other earnings. Also excluded are non-E&P activities, including our Midstream segment, downstream petroleum and chemical activities, as well as general corporate administrative expenses and interest. |
n | Transfers are valued at prices that approximate market. | |||
n | Other revenues include gains and losses from asset sales, including net gains of approximately $165 million in 2003; certain amounts resulting from the purchase and sale of hydrocarbons; and other miscellaneous income. | |||
n | Production costs consist of costs incurred to operate and maintain wells and related equipment and facilities used in the production of petroleum liquids and natural gas. These costs also include taxes other than income taxes, depreciation of support equipment and administrative expenses related to the production activity. Excluded are transportation costs, fees for processing natural gas to natural gas liquids, depreciation, depletion and amortization of capitalized acquisition, exploration and development costs. | |||
n | Exploration expenses include dry hole, leasehold impairment, geological and geophysical expenses, the cost of retaining undeveloped leaseholds, and depreciation of support equipment and administrative expenses related to the exploration activity. | |||
Exploration expenses for Other Areas in 2002 included $77 million for the impairment of a substantial portion of the companys investment in deepwater Block 34, offshore Angola. Initial results released in early May 2002 indicated that the first exploratory well drilled in Block 34 was a dry hole, resulting in our reassessment of the fair value of the remainder of the block. In December 2003, a second exploration well was drilled, which encountered non-commercial gas and was plugged and abandoned. As a result, additional exploration expenses in 2003 included $34 million related to the impairment of the remaining value of this block. | ||||
n | Depreciation, depletion and amortization (DD&A) in Results of Operations differs from that shown for total E&P in Note 28Segment Disclosures and Related Information in the Notes to Consolidated Financial Statements, mainly due to depreciation of support equipment being reclassified to production or exploration expenses, as applicable, in Results of Operations. In addition, Other earnings include certain E&P activities, including their related DD&A charges. | |||
n | Property impairments for the European North Sea in 2003 included a charge of $94 million related to the repeal of the Norway Removal Grant Act. | |||
n | Transportation costs include costs to transport our produced oil, natural gas or natural gas liquids to their points of sale, as well as, processing fees paid to process natural gas to natural gas liquids. The profit element of transportation operations in which we have an ownership interest are deemed to be outside the oil and gas producing activity. The net income of the transportation operations is included in Other earnings. | |||
n | Other related expenses include foreign currency gains and losses, and other miscellaneous expenses. |
162
n | The provision for income taxes is computed by adjusting each countrys income before income taxes for permanent differences related to the oil and gas producing activities that are reflected in our consolidated income tax expense for the period, multiplying the result by the countrys statutory tax rate and adjusting for applicable tax credits. In 2003, this included a $105 million benefit related to the repeal of the Norway Removal Grant Act, a $95 million benefit related to the reduction in the Canada and Alberta provincial tax rates, a $46 million benefit related to the impairment of Angola Block 34, and a $27 million benefit related to the re-alignment agreement of the Bayu-Undan project in the Timor Sea. | |||
n | Other earnings consist of activities within the E&P segment that are not a part of the Results of operations for producing activities. These non-producing activities include pipeline and marine operations, liquefied natural gas operations, a Canadian Syncrude operation, and crude oil and gas marketing activities. |
163
n | Statistics |
Net Production |
2003 | 2002 | 2001 | |||||||||
Thousands of Barrels Daily |
||||||||||||
Crude Oil |
||||||||||||
Alaska |
325 | 331 | 339 | |||||||||
Lower 48 |
54 | 40 | 34 | |||||||||
United States |
379 | 371 | 373 | |||||||||
European North Sea |
290 | 196 | 136 | |||||||||
Asia Pacific |
61 | 24 | 17 | |||||||||
Canada |
30 | 13 | 1 | |||||||||
Other areas |
72 | 43 | 34 | |||||||||
Total consolidated |
832 | 647 | 561 | |||||||||
Equity affiliates |
102 | 35 | 2 | |||||||||
934 | 682 | 563 | ||||||||||
Natural Gas
Liquids* |
||||||||||||
Alaska |
23 | 24 | 25 | |||||||||
Lower 48 |
25 | 8 | 1 | |||||||||
United States |
48 | 32 | 26 | |||||||||
European North Sea |
9 | 8 | 7 | |||||||||
Canada |
10 | 4 | | |||||||||
Other areas |
2 | 2 | 2 | |||||||||
69 | 46 | 35 | ||||||||||
* | Represents amounts extracted attributable to E&P operations (see natural gas liquids reserves for further discussion). Includes for 2003, 2002 and 2001, 15,000, 14,000, and 15,000 barrels daily in Alaska, respectively, that were sold from the Prudhoe Bay lease to the Kuparuk lease for reinjection to enhance crude oil production. |
Millions of Cubic Feet Daily |
||||||||||||
Natural Gas* |
||||||||||||
Alaska |
184 | 175 | 177 | |||||||||
Lower 48 |
1,295 | 928 | 740 | |||||||||
United States |
1,479 | 1,103 | 917 | |||||||||
European North Sea |
1,215 | 595 | 308 | |||||||||
Asia Pacific |
318 | 137 | 51 | |||||||||
Canada |
435 | 165 | 18 | |||||||||
Other areas |
63 | 43 | 41 | |||||||||
Total consolidated |
3,510 | 2,043 | 1,335 | |||||||||
Equity affiliates |
12 | 4 | | |||||||||
3,522 | 2,047 | 1,335 | ||||||||||
* | Represents quantities available for sale. Excludes gas equivalent of natural gas liquids shown above. |
164
2003 | 2002 | 2001 | ||||||||||
Average
Sales Price Crude Oil Per Barrel |
||||||||||||
Alaska |
$ | 28.87 | 23.75 | 23.60 | ||||||||
Lower 48 |
28.76 | 24.48 | 23.27 | |||||||||
United States |
28.85 | 23.83 | 23.57 | |||||||||
European North Sea |
28.83 | 25.24 | 24.09 | |||||||||
Asia Pacific |
27.87 | 26.33 | 24.27 | |||||||||
Canada |
25.06 | 22.87 | 26.96 | |||||||||
Other areas |
27.68 | 24.76 | 24.32 | |||||||||
Total international |
28.27 | 25.14 | 24.16 | |||||||||
Total consolidated |
28.54 | 24.38 | 23.77 | |||||||||
Equity affiliates |
18.58 | 18.41 | 12.36 | |||||||||
Worldwide |
27.47 | 24.07 | 23.74 | |||||||||
Average Sales Price Natural Gas Liquids Per Barrel |
||||||||||||
Alaska |
$ | 29.04 | 23.48 | 23.61 | ||||||||
Lower 48 |
20.02 | 15.66 | 22.47 | |||||||||
United States |
22.30 | 20.00 | 23.49 | |||||||||
European North Sea |
21.34 | 17.38 | 17.12 | |||||||||
Canada |
23.93 | 20.39 | 18.77 | |||||||||
Other areas |
7.24 | 7.23 | 7.22 | |||||||||
Total international |
21.39 | 17.47 | 14.61 | |||||||||
Worldwide |
21.95 | 18.93 | 19.74 | |||||||||
Average Sales Price Natural Gas (Lease) Per Thousand Cubic Feet |
||||||||||||
Alaska |
$ | 1.76 | 1.85 | 1.75 | ||||||||
Lower 48 |
4.76 | 2.79 | 3.68 | |||||||||
United States |
4.62 | 2.75 | 3.56 | |||||||||
European North Sea |
3.63 | 3.00 | 3.16 | |||||||||
Asia Pacific |
3.56 | 2.34 | .43 | |||||||||
Canada |
4.48 | 3.03 | 3.80 | |||||||||
Other areas |
.58 | .48 | .57 | |||||||||
Total international |
3.71 | 2.79 | 2.60 | |||||||||
Total consolidated |
4.07 | 2.77 | 3.23 | |||||||||
Equity affiliates |
4.44 | 2.71 | | |||||||||
Worldwide |
4.07 | 2.77 | 3.23 | |||||||||
Average
Production Costs Per Barrel of Oil
Equivalent |
||||||||||||
Alaska |
$ | 5.73 | 5.48 | 5.46 | ||||||||
Lower 48 |
6.10 | 6.00 | 5.67 | |||||||||
United States |
5.89 | 5.66 | 5.52 | |||||||||
European North Sea |
3.52 | 3.10 | 2.33 | |||||||||
Asia Pacific |
4.20 | 4.45 | 3.98 | |||||||||
Canada |
6.60 | 7.26 | 4.08 | |||||||||
Other areas |
5.51 | 5.99 | 3.52 | |||||||||
Total international |
4.25 | 3.99 | 2.70 | |||||||||
Total consolidated |
5.00 | 4.94 | 4.60 | |||||||||
Equity affiliates |
4.72 | 4.38 | 2.74 | |||||||||
Worldwide |
4.98 | 4.92 | 4.60 | |||||||||
165
2003 | 2002 | 2001 | ||||||||||
Depreciation, Depletion and Amortization
Per Barrel of Oil Equivalent |
||||||||||||
Alaska |
$ | 3.15 | 3.94 | 3.70 | ||||||||
Lower 48 |
5.31 | 4.52 | 3.51 | |||||||||
United States |
4.10 | 4.14 | 3.64 | |||||||||
European North Sea |
5.21 | 4.34 | 3.28 | |||||||||
Asia Pacific |
3.92 | 3.46 | 2.37 | |||||||||
Canada |
7.94 | 6.46 | 2.72 | |||||||||
Other areas |
1.30 | 1.37 | 1.73 | |||||||||
Total international |
5.00 | 4.11 | 2.94 | |||||||||
Total consolidated |
4.59 | 4.13 | 3.41 | |||||||||
Equity
affiliates |
2.74 | 2.30 | 2.74 | |||||||||
Worldwide |
4.47 | 4.06 | 3.41 | |||||||||
Net Wells Completed* | Productive |
Dry |
||||||||||||||||||||||
2003 | 2002 | 2001 | 2003 | 2002 | 2001 | |||||||||||||||||||
Exploratory |
||||||||||||||||||||||||
Alaska |
| | 1 | 1 | 4 | 1 | ||||||||||||||||||
Lower 48 |
35 | 29 | 63 | 23 | 6 | 3 | ||||||||||||||||||
United States |
35 | 29 | 64 | 24 | 10 | 4 | ||||||||||||||||||
European North Sea |
1 | ** | ** | 2 | 2 | 1 | ||||||||||||||||||
Asia Pacific |
| ** | 2 | 2 | 7 | 1 | ||||||||||||||||||
Canada |
72 | 19 | | 16 | 2 | | ||||||||||||||||||
Other areas |
| 2 | | ** | ** | | ||||||||||||||||||
Total consolidated |
108 | 50 | 66 | 44 | 21 | 6 | ||||||||||||||||||
Equity affiliates |
23 | 3 | | 6 | 1 | | ||||||||||||||||||
131 | 53 | 66 | 50 | 22 | 6 | |||||||||||||||||||
Development |
||||||||||||||||||||||||
Alaska |
39 | 48 | 47 | 1 | 1 | 2 | ||||||||||||||||||
Lower 48 |
283 | 283 | 333 | 7 | 14 | 11 | ||||||||||||||||||
United States |
322 | 331 | 380 | 8 | 15 | 13 | ||||||||||||||||||
European North Sea |
12 | 11 | 4 | | | | ||||||||||||||||||
Asia Pacific |
19 | 9 | 1 | 2 | | | ||||||||||||||||||
Canada |
114 | 20 | 5 | 5 | 1 | | ||||||||||||||||||
Other areas |
11 | 4 | 1 | | ** | | ||||||||||||||||||
Total consolidated |
478 | 375 | 391 | 15 | 16 | 13 | ||||||||||||||||||
Equity affiliates |
98 | 49 | 20 | 3 | 1 | | ||||||||||||||||||
576 | 424 | 411 | 18 | 17 | 13 | |||||||||||||||||||
* | Includes wildcat and production step-out wells. Excludes farmout arrangements. |
** | Our total proportionate interest was less than one. |
166
Wells at Year-End 2003
|
Productive** |
|
||||||||||||||||||||||
In Progress* |
Oil |
Gas |
||||||||||||||||||||||
Gross |
|
Net |
Gross |
|
Net |
Gross |
|
Net |
||||||||||||||||
Alaska |
16 | 10 | 1,460 | 662 | 27 | 18 | ||||||||||||||||||
Lower 48 |
118 | 80 | 9,343 | 4,412 | 14,772 | 8,545 | ||||||||||||||||||
United States |
134 | 90 | 10,803 | 5,074 | 14,799 | 8,563 | ||||||||||||||||||
European North Sea |
20 | 5 | 584 | 98 | 253 | 85 | ||||||||||||||||||
Asia Pacific |
41 | 24 | 381 | 177 | 55 | 28 | ||||||||||||||||||
Canada |
73 | 53 | 2,153 | 1,419 | 4,754 | 3,061 | ||||||||||||||||||
Other areas |
18 | 3 | 506 | 135 | 13 | 3 | ||||||||||||||||||
Total consolidated |
286 | 175 | 14,427 | 6,903 | 19,874 | 11,740 | ||||||||||||||||||
Equity affiliates |
7 | 3 | 2,198 | 919 | 212 | 75 | ||||||||||||||||||
293 | 178 | 16,625 | 7,822 | 20,086 | 11,815 | |||||||||||||||||||
* | Includes wells that have been temporarily suspended. |
** | Includes 3,274 gross and 1,970 net multiple completion wells. |
Acreage at December 31, 2003 | Thousands of Acres |
|||||||
Gross |
|
Net |
||||||
Developed |
||||||||
Alaska |
1,021 | 568 | ||||||
Lower 48 |
5,347 | 3,085 | ||||||
United States |
6,368 | 3,653 | ||||||
European North Sea |
1,154 | 336 | ||||||
Asia Pacific |
4,538 | 1,993 | ||||||
Canada |
4,705 | 2,328 | ||||||
Other areas |
544 | 104 | ||||||
Total consolidated |
17,309 | 8,414 | ||||||
Equity affiliates |
695 | 239 | ||||||
18,004 | 8,653 | |||||||
Undeveloped |
||||||||
Alaska |
2,164 | 1,406 | ||||||
Lower 48 |
2,883 | 1,681 | ||||||
United States |
5,047 | 3,087 | ||||||
European North Sea |
6,056 | 1,783 | ||||||
Asia Pacific |
27,223 | 17,473 | ||||||
Canada |
12,604 | 8,076 | ||||||
Other areas |
34,163 | 12,748 | ||||||
Total consolidated |
85,093 | 43,167 | ||||||
Equity affiliates |
1,826 | 806 | ||||||
86,919 | 43,973 | |||||||
167
n | Costs Incurred |
Millions of Dollars |
||||||||||||||||||||||||||||||||||||||||
Consolidated Operations |
||||||||||||||||||||||||||||||||||||||||
Lower | Total | European | Asia | Other | Equity | Combined | ||||||||||||||||||||||||||||||||||
Alaska |
48 |
U.S. |
North Sea |
Pacific |
Canada |
Areas |
Total |
Affiliates |
Total |
|||||||||||||||||||||||||||||||
2003 |
||||||||||||||||||||||||||||||||||||||||
Unproved property
acquisition |
$ | 10 | 7 | 17 | | 3 | | 64 | 84 | | 84 | |||||||||||||||||||||||||||||
Proved property
acquisition |
| 6 | 6 | (92 | ) | 27 | 20 | (43 | ) | (82 | ) | (10 | ) | (92 | ) | |||||||||||||||||||||||||
10 | 13 | 23 | (92 | ) | 30 | 20 | 21 | 2 | (10 | ) | (8 | ) | ||||||||||||||||||||||||||||
Exploration |
65 | 164 | 229 | 105 | 101 | 152 | 167 | 754 | 12 | 766 | ||||||||||||||||||||||||||||||
Development |
386 | 693 | 1,079 | 1,075 | 844 | 197 | 194 | 3,389 | 333 | 3,722 | ||||||||||||||||||||||||||||||
$ | 461 | 870 | 1,331 | 1,088 | 975 | 369 | 382 | 4,145 | 335 | 4,480 | ||||||||||||||||||||||||||||||
2002 |
||||||||||||||||||||||||||||||||||||||||
Unproved
property acquisition |
$ | 9 | 315 | 324 | 679 | 388 | 559 | 194 | 2,144 | | 2,144 | |||||||||||||||||||||||||||||
Proved property
acquisition |
| 3,420 | 3,420 | 3,719 | 1,385 | 2,003 | 97 | 10,624 | 1,671 | 12,295 | ||||||||||||||||||||||||||||||
9 | 3,735 | 3,744 | 4,398 | 1,773 | 2,562 | 291 | 12,768 | 1,671 | 14,439 | |||||||||||||||||||||||||||||||
Exploration |
93 | 112 | 205 | 61 | 55 | 58 | 202 | 581 | 1 | 582 | ||||||||||||||||||||||||||||||
Development |
434 | 409 | 843 | 406 | 787 | 46 | 122 | 2,204 | 467 | 2,671 | ||||||||||||||||||||||||||||||
$ | 536 | 4,256 | 4,792 | 4,865 | 2,615 | 2,666 | 615 | 15,553 | 2,139 | 17,692 | ||||||||||||||||||||||||||||||
2001 |
||||||||||||||||||||||||||||||||||||||||
Unproved
property acquisition |
$ | 17 | 24 | 41 | | | | 165 | 206 | | 206 | |||||||||||||||||||||||||||||
Proved property
acquisition |
| 13 | 13 | | 63 | | | 76 | | 76 | ||||||||||||||||||||||||||||||
17 | 37 | 54 | | 63 | | 165 | 282 | | 282 | |||||||||||||||||||||||||||||||
Exploration |
91 | 57 | 148 | 44 | 38 | | 185 | 415 | | 415 | ||||||||||||||||||||||||||||||
Development |
612 | 312 | 924 | 169 | 349 | 3 | 52 | 1,497 | 420 | 1,917 | ||||||||||||||||||||||||||||||
$ | 720 | 406 | 1,126 | 213 | 450 | 3 | 402 | 2,194 | 420 | 2,614 | ||||||||||||||||||||||||||||||
n | Costs incurred include capitalized and expensed items. | |||
n | Acquisition costs include the costs of acquiring proved and unproved oil and gas properties. Proved property acquisition costs in 2003 included net negative merger-related adjustments totaling $178 million. Acquisition costs in 2002 related primarily to the merger. | |||
n | Exploration costs include geological and geophysical expenses, the cost of retaining undeveloped leaseholds, and exploratory drilling costs. | |||
n | Development costs include the cost of drilling and equipping development wells and building related production facilities for extracting, treating, gathering and storing petroleum liquids and natural gas. | |||
n | Approximately $1,211 million of properties, plants and equipment adjustments related to the cumulative effect of accounting changes in connection with the implementation of SFAS No. 143, Accounting for Asset Retirement Obligations, has been excluded from the 2003 costs incurred. | |||
n | Costs incurred for the European North Sea in 2003 included approximately $430 million of increased properties, plants and equipment related to the repeal of the Norway Removal Grant Act. |
168
n Capitalized Costs
At December 31 | Millions of Dollars |
|||||||||||||||||||||||||||||||||||||||
Consolidated Operations |
||||||||||||||||||||||||||||||||||||||||
Lower | Total | European | Asia | Other | Equity | Combined | ||||||||||||||||||||||||||||||||||
Alaska |
48 |
U.S. |
North Sea |
Pacific |
Canada |
Areas |
Total |
Affiliates |
Total |
|||||||||||||||||||||||||||||||
2003 |
||||||||||||||||||||||||||||||||||||||||
Proved properties |
$ | 7,664 | 7,388 | 15,052 | 11,534 | 3,835 | 2,700 | 918 | 34,039 | 3,252 | 37,291 | |||||||||||||||||||||||||||||
Unproved properties |
936 | 458 | 1,394 | 509 | 642 | 658 | 1,059 | 4,262 | | 4,262 | ||||||||||||||||||||||||||||||
8,600 | 7,846 | 16,446 | 12,043 | 4,477 | 3,358 | 1,977 | 38,301 | 3,252 | 41,553 | |||||||||||||||||||||||||||||||
Accumulated
depreciation,
depletion and
amortization |
2,166 | 2,481 | 4,647 | 4,261 | 421 | 561 | 602 | 10,492 | 161 | 10,653 | ||||||||||||||||||||||||||||||
$ | 6,434 | 5,365 | 11,799 | 7,782 | 4,056 | 2,797 | 1,375 | 27,809 | 3,091 | 30,900 | ||||||||||||||||||||||||||||||
2002 |
||||||||||||||||||||||||||||||||||||||||
Proved properties |
$ | 7,037 | 7,737 | 14,774 | 9,600 | 3,140 | 2,023 | 692 | 30,229 | 2,847 | 33,076 | |||||||||||||||||||||||||||||
Unproved properties |
849 | 489 | 1,338 | 764 | 582 | 546 | 974 | 4,204 | | 4,204 | ||||||||||||||||||||||||||||||
7,886 | 8,226 | 16,112 | 10,364 | 3,722 | 2,569 | 1,666 | 34,433 | 2,847 | 37,280 | |||||||||||||||||||||||||||||||
Accumulated
depreciation,
depletion and
amortization |
1,636 | 2,891 | 4,527 | 3,257 | 205 | 182 | 456 | 8,627 | 37 | 8,664 | ||||||||||||||||||||||||||||||
$ | 6,250 | 5,335 | 11,585 | 7,107 | 3,517 | 2,387 | 1,210 | 25,806 | 2,810 | 28,616 | ||||||||||||||||||||||||||||||
n | Capitalized costs include the cost of equipment and facilities for oil and gas producing activities. These costs include the activities of our E&P organization, excluding pipeline and marine operations, liquefied natural gas operations, a Canadian Syncrude operation, and crude oil and natural gas marketing activities. | |||
n | Proved properties include capitalized costs for oil and gas leaseholds holding proved reserves; development wells and related equipment and facilities (including uncompleted development well costs); and support equipment. | |||
n | Unproved properties include capitalized costs for oil and gas leaseholds under exploration (including where petroleum liquids and natural gas were found but determination of the economic viability of the required infrastructure is dependent upon further exploratory work under way or firmly planned) and for uncompleted exploratory well costs, including exploratory wells under evaluation. |
169
n | Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserve Quantities |
Amounts are computed using year-end prices and costs (adjusted only for existing contractual changes), appropriate statutory tax rates and a prescribed 10 percent discount factor. Continuation of year-end economic conditions also is assumed. The calculation is based on estimates of proved reserves, which are revised over time as new data become available. Probable or possible reserves, which may become proved in the future, are not considered. The calculation also requires assumptions as to the timing of future production of proved reserves, and the timing and amount of future development, including dismantlement, and production costs.
While due care was taken in its preparation, we do not represent that this data is the fair value of our oil and gas properties, or a fair estimate of the present value of cash flows to be obtained from their development and production.
170
Discounted Future Net Cash Flows
Millions of Dollars |
||||||||||||||||||||||||||||||||||||||||
Consolidated Operations |
||||||||||||||||||||||||||||||||||||||||
Lower | Total | European | Asia | Other | Equity | Combined | ||||||||||||||||||||||||||||||||||
Alaska |
48 |
U.S. |
North Sea |
Pacific |
Canada |
Areas |
Total |
Affiliates |
Total |
|||||||||||||||||||||||||||||||
2003 |
||||||||||||||||||||||||||||||||||||||||
Future cash inflows |
$ | 54,351 | 29,865 | 84,216 | 41,125 | 18,277 | 10,107 | 5,075 | 158,800 | 32,622 | 191,422 | |||||||||||||||||||||||||||||
Less: |
||||||||||||||||||||||||||||||||||||||||
Future production
and transportation
costs |
21,557 | 7,559 | 29,116 | 10,429 | 4,480 | 3,974 | 2,068 | 50,067 | 5,823 | 55,890 | ||||||||||||||||||||||||||||||
Future development
costs |
4,104 | 1,404 | 5,508 | 5,358 | 1,163 | 1,111 | 283 | 13,423 | 1,510 | 14,933 | ||||||||||||||||||||||||||||||
Future income tax
provisions |
9,879 | 5,162 | 15,041 | 15,616 | 4,487 | 1,084 | 2,176 | 38,404 | 8,049 | 46,453 | ||||||||||||||||||||||||||||||
Future net cash
flows |
18,811 | 15,740 | 34,551 | 9,722 | 8,147 | 3,938 | 548 | 56,906 | 17,240 | 74,146 | ||||||||||||||||||||||||||||||
10 percent annual
discount |
9,323 | 8,084 | 17,407 | 3,234 | 3,348 | 1,703 | 152 | 25,844 | 11,061 | 36,905 | ||||||||||||||||||||||||||||||
Discounted future
net cash flows |
$ | 9,488 | 7,656 | 17,144 | 6,488 | 4,799 | 2,235 | 396 | 31,062 | 6,179 | 37,241 | |||||||||||||||||||||||||||||
2002 |
||||||||||||||||||||||||||||||||||||||||
Future cash inflows |
$ | 54,497 | 28,679 | 83,176 | 41,280 | 16,581 | 8,076 | 6,073 | 155,186 | 32,983 | 188,169 | |||||||||||||||||||||||||||||
Less: |
||||||||||||||||||||||||||||||||||||||||
Future production
and transportation
costs |
26,035 | 7,763 | 33,798 | 7,974 | 3,764 | 1,885 | 1,639 | 49,060 | 4,992 | 54,052 | ||||||||||||||||||||||||||||||
Future development
costs |
2,927 | 1,168 | 4,095 | 2,989 | 1,821 | 617 | 428 | 9,950 | 1,698 | 11,648 | ||||||||||||||||||||||||||||||
Future income tax
provisions |
7,665 | 5,349 | 13,014 | 20,075 | 3,917 | 2,361 | 2,995 | 42,362 | 8,501 | 50,863 | ||||||||||||||||||||||||||||||
Future net cash
flows |
17,870 | 14,399 | 32,269 | 10,242 | 7,079 | 3,213 | 1,011 | 53,814 | 17,792 | 71,606 | ||||||||||||||||||||||||||||||
10 percent annual
discount |
9,097 | 7,405 | 16,502 | 3,998 | 3,272 | 1,422 | 458 | 25,652 | 11,585 | 37,237 | ||||||||||||||||||||||||||||||
Discounted future
net cash flows |
$ | 8,773 | 6,994 | 15,767 | 6,244 | 3,807 | * | 1,791 | 553 | 28,162 | 6,207 | 34,369 | ||||||||||||||||||||||||||||
2001 |
||||||||||||||||||||||||||||||||||||||||
Future cash inflows |
$ | 33,138 | 9,441 | 42,579 | 16,421 | 4,258 | 174 | 2,454 | 65,886 | 11,581 | 77,467 | |||||||||||||||||||||||||||||
Less: |
||||||||||||||||||||||||||||||||||||||||
Future production
and transportation
costs |
20,541 | 4,241 | 24,782 | 2,474 | 843 | 52 | 583 | 28,734 | 3,483 | 32,217 | ||||||||||||||||||||||||||||||
Future development
costs |
3,071 | 530 | 3,601 | 875 | 918 | 9 | 161 | 5,564 | 1,282 | 6,846 | ||||||||||||||||||||||||||||||
Future income tax
provisions |
1,797 | 1,253 | 3,050 | 9,151 | 1,409 | 8 | 1,187 | 14,805 | 2,133 | 16,938 | ||||||||||||||||||||||||||||||
Future net cash
flows |
7,729 | 3,417 | 11,146 | 3,921 | 1,088 | 105 | 523 | 16,783 | 4,683 | 21,466 | ||||||||||||||||||||||||||||||
10 percent annual
discount |
3,297 | 1,821 | 5,118 | 1,607 | 760 | 44 | 259 | 7,788 | 3,687 | 11,475 | ||||||||||||||||||||||||||||||
Discounted
future net cash flows |
$ | 4,432 | 1,596 | 6,028 | 2,314 | 328 | ** | 61 | 264 | 8,995 | 996 | 9,991 | ||||||||||||||||||||||||||||
* | Includes $139 million attributable to a consolidated subsidiary in which there is a 10 percent minority interest. |
** | Includes $17 million attributable to a consolidated subsidiary in which there is a 13 percent minority interest. Excludes discounted future net cash flows from Canadian Syncrude of $1,048 million in 2003 and $869 million in 2002. |
171
Sources of Change in Discounted Future Net Cash Flows
Millions of Dollars |
|||||||||||||||||||||||||||||||||||||||
Consolidated Operations |
Equity Affiliates |
Total |
|||||||||||||||||||||||||||||||||||||
2003 | 2002 | 2001 | 2003 | 2002 | 2001 | 2003 | 2002 | 2001 | |||||||||||||||||||||||||||||||
Discounted future net cash
flows at the beginning of the
year |
$ | 28,162 | 8,995 | 18,782 | 6,207 | 996 | 1,635 | 34,369 | 9,991 | 20,417 | |||||||||||||||||||||||||||||
Changes during the year |
|||||||||||||||||||||||||||||||||||||||
Revenues less production and
transportation costs for the
year |
(10,359 | ) | (5,271 | ) | (4,283 | ) | (490 | ) | (177 | ) | (6 | ) | (10,849 | ) | (5,448 | ) | (4,289 | ) | |||||||||||||||||||||
Net change in prices, and
production and transportation
costs |
4,388 | 15,566 | (14,668 | ) | (862 | ) | 2,734 | (1,552 | ) | 3,526 | 18,300 | (16,220 | ) | ||||||||||||||||||||||||||
Extensions, discoveries and
improved recovery, less
estimated future costs |
3,237 | 1,284 | 757 | 31 | 22 | | 3,268 | 1,306 | 757 | ||||||||||||||||||||||||||||||
Development costs for the year |
3,389 | 2,204 | 1,497 | 333 | 467 | 420 | 3,722 | 2,671 | 1,917 | ||||||||||||||||||||||||||||||
Changes in estimated future
development costs |
(3,151 | ) | (1,843 | ) | (1,013 | ) | (193 | ) | (108 | ) | (17 | ) | (3,344 | ) | (1,951 | ) | (1,030 | ) | |||||||||||||||||||||
Purchases of reserves in
place, less estimated future
costs |
203 | 22,161 | 130 | 4 | 4,781 | | 207 | 26,942 | 130 | ||||||||||||||||||||||||||||||
Sales of reserves in place,
less estimated future costs |
(1,722 | ) | (563 | ) | (9 | ) | | (16 | ) | | (1,722 | ) | (579 | ) | (9 | ) | |||||||||||||||||||||||
Revisions of previous
quantity estimates* |
83 | (185 | ) | 15 | 202 | (712 | ) | 38 | 285 | (897 | ) | 53 | |||||||||||||||||||||||||||
Accretion of discount |
4,738 | 1,540 | 2,877 | 852 | 177 | 260 | 5,590 | 1,717 | 3,137 | ||||||||||||||||||||||||||||||
Net change in income taxes |
2,094 | (15,726 | ) | 4,909 | 95 | (1,957 | ) | 218 | 2,189 | (17,683 | ) | 5,127 | |||||||||||||||||||||||||||
Other |
| | 1 | | | | | | 1 | ||||||||||||||||||||||||||||||
Total changes |
2,900 | 19,167 | (9,787 | ) | (28 | ) | 5,211 | (639 | ) | 2,872 | 24,378 | (10,426 | ) | ||||||||||||||||||||||||||
Discounted future net cash
flows at year-end |
$ | 31,062 | 28,162 | 8,995 | 6,179 | 6,207 | 996 | 37,241 | 34,369 | 9,991 | |||||||||||||||||||||||||||||
* | Includes amounts resulting from changes in the timing of production. |
n
|
The net change in prices, and production and transportation costs is the beginning-of-the-year reserve-production forecast multiplied by the net annual change in the per-unit sales price, and production and transportation cost, discounted at 10 percent. | |
n
|
Purchases and sales of reserves in place, along with extensions, discoveries and improved recovery, are calculated using production forecasts of the applicable reserve quantities for the year multiplied by the end-of-the-year sales prices, less future estimated costs, discounted at 10 percent. | |
n
|
The accretion of discount is 10 percent of the prior years discounted future cash inflows, less future production, transportation and development costs. | |
n
|
The net change in income taxes is the annual change in the discounted future income tax provisions. |
172
Millions of Dollars |
Per Shares of Common Stock |
|||||||||||||||||||||||||||||||
Income (Loss) Before | ||||||||||||||||||||||||||||||||
Income from | Cumulative Effect | |||||||||||||||||||||||||||||||
Sales and | Continuing | Income (Loss) Before | of Changes in | |||||||||||||||||||||||||||||
Other Operating |
Operations Before Income |
Cumulative Effect of Changes in |
Net Income |
Accounting Principles |
Net Income(Loss) |
|||||||||||||||||||||||||||
Revenues* |
Taxes |
Accounting Principles |
(Loss) |
Basic |
Diluted |
Basic |
Diluted |
|||||||||||||||||||||||||
2003 |
||||||||||||||||||||||||||||||||
First** |
$ | 26,940 | 2,569 | 1,316 | 1,221 | 1.94 | 1.93 | 1.80 | 1.79 | |||||||||||||||||||||||
Second** |
25,321 | 1,781 | 1,187 | 1,187 | 1.75 | 1.73 | 1.75 | 1.73 | ||||||||||||||||||||||||
Third |
26,105 | 2,310 | 1,306 | 1,306 | 1.92 | 1.90 | 1.92 | 1.90 | ||||||||||||||||||||||||
Fourth |
25,830 | 1,677 | 1,021 | 1,021 | 1.50 | 1.48 | 1.50 | 1.48 | ||||||||||||||||||||||||
2002 |
||||||||||||||||||||||||||||||||
First |
$ | 8,431 | 51 | (102 | ) | (102 | ) | (.27 | ) | (.27 | ) | (.27 | ) | (.27 | ) | |||||||||||||||||
Second |
10,414 | 657 | 351 | 351 | .91 | .91 | .91 | .91 | ||||||||||||||||||||||||
Third |
14,557 | 312 | (116 | ) | (116 | ) | (.24 | ) | (.24 | ) | (.24 | ) | (.24 | ) | ||||||||||||||||||
Fourth |
23,346 | 1,121 | (428 | ) | (428 | ) | (.63 | ) | (.63 | ) | (.63 | ) | (.63 | ) | ||||||||||||||||||
* |
Includes excise taxes on petroleum products sales. |
** |
During the fourth quarter, in connection with the consolidation requirements of FASB Interpretation No. 46 for certain variable interest entities created before February 1, 2003, we made an additional adjustment of $18 million, or 3 cents per share, both on a basic and diluted basis, to Cumulative Effect of Changes in Accounting Principles. This adjustment was effective as of January 1, 2003, and as a result, the first and second quarter results have been restated from those disclosed in Note 2Changes in Accounting Principles, in the Notes to Consolidated Financial Statements, in our third quarter 2003 Form 10-Q. |
173
Condensed Consolidating Financial Information
In connection with the merger of ConocoPhillips Holding Company (formerly named Conoco Inc.) and ConocoPhillips Company (formerly named Phillips Petroleum Company) with wholly owned subsidiaries of ConocoPhillips, and to simplify our credit structure, the companies have established various cross guarantees. With the new organizational structure, ConocoPhillips Company is the direct or indirect parent of former Conoco and Phillips subsidiaries and is wholly owned by ConocoPhillips Holding Company, which is wholly owned by ConocoPhillips. ConocoPhillips and ConocoPhillips Holding Company have fully and unconditionally guaranteed the payment obligations of ConocoPhillips Company with respect to its publicly held debt securities. Similarly, ConocoPhillips and ConocoPhillips Company have fully and unconditionally guaranteed the payment obligations of ConocoPhillips Holding Company with respect to the publicly held debt securities of ConocoPhillips Holding Company. In addition, ConocoPhillips Company and ConocoPhillips Holding Company have fully and unconditionally guaranteed the payment obligations of ConocoPhillips with respect to its publicly held debt securities. All guarantees are joint and several. The following condensed consolidating financial statements present the results of operations, financial position and cash flows for:
| ConocoPhillips, ConocoPhillips Holding Company, ConocoPhillips Company, (in each case, reflecting investments in subsidiaries utilizing the equity method of accounting); | |||
| All other non-guarantor subsidiaries of ConocoPhillips Holding Company and ConocoPhillips Company; and | |||
| The consolidating adjustments necessary to present ConocoPhillips results on a consolidated basis. |
During 2003, Tosco Corporation, Bayway Refining Company and Marcus Hook Refining Company were merged into ConocoPhillips Company. Previously reported prior period information has been restated to reflect this reorganization of companies under common control.
This condensed consolidating financial information should be read in conjunction with our accompanying consolidated financial statements.
174
Millions of Dollars |
||||||||||||||||||||||||
Year Ended December 31,
2003 |
||||||||||||||||||||||||
ConocoPhillips | ConocoPhillips | All Other | Consolidating | Total | ||||||||||||||||||||
Income Statement |
ConocoPhillips |
Holding Company |
Company |
Subsidiaries |
Adjustments |
Consolidated |
||||||||||||||||||
Revenues |
||||||||||||||||||||||||
Sales and other operating revenues |
$ | | | 68,412 | 35,784 | | 104,196 | |||||||||||||||||
Equity in earnings (losses) of
affiliates |
4,646 | 4,462 | 3,497 | 524 | (12,587 | ) | 542 | |||||||||||||||||
Other income |
| | 621 | (262 | ) | | 359 | |||||||||||||||||
Intercompany revenues |
28 | 600 | 3,014 | 4,843 | (8,485 | ) | | |||||||||||||||||
Total revenues |
4,674 | 5,062 | 75,544 | 40,889 | (21,072 | ) | 105,097 | |||||||||||||||||
Costs and Expenses
Purchased crude oil and products |
| | 57,331 | 17,559 | (7,466 | ) | 67,424 | |||||||||||||||||
Production and operating expenses |
| | 3,900 | 3,368 | (60 | ) | 7,208 | |||||||||||||||||
Selling, general and
administrative expenses |
18 | | 1,554 | 608 | (14 | ) | 2,166 | |||||||||||||||||
Exploration expenses |
| | 170 | 431 | | 601 | ||||||||||||||||||
Depreciation, depletion and
amortization |
| | 1,264 | 2,221 | | 3,485 | ||||||||||||||||||
Property impairments |
| | 43 | 209 | | 252 | ||||||||||||||||||
Taxes other than income taxes |
| | 5,114 | 9,565 | | 14,679 | ||||||||||||||||||
Accretion on discounted
liabilities |
| | 37 | 108 | | 145 | ||||||||||||||||||
Interest and debt expense |
117 | 316 | 1,159 | 197 | (945 | ) | 844 | |||||||||||||||||
Foreign currency transaction
(gains) losses |
| | (41 | ) | 5 | | (36 | ) | ||||||||||||||||
Minority interests and preferred
dividend requirements of capital
trusts |
| | | 20 | | 20 | ||||||||||||||||||
Total Costs and Expenses |
135 | 316 | 70,531 | 34,291 | (8,485 | ) | 96,788 | |||||||||||||||||
Income from continuing operations
before income taxes and
subsidiary equity transactions |
4,539 | 4,746 | 5,013 | 6,598 | (12,587 | ) | 8,309 | |||||||||||||||||
Gain on subsidiary equity
transactions |
| | | 28 | | 28 | ||||||||||||||||||
Income from continuing operations
before income taxes |
4,539 | 4,746 | 5,013 | 6,626 | (12,587 | ) | 8,337 | |||||||||||||||||
Provision for income taxes |
(54 | ) | 100 | 629 | 3,069 | | 3,744 | |||||||||||||||||
Income from continuing operations |
4,593 | 4,646 | 4,384 | 3,557 | (12,587 | ) | 4,593 | |||||||||||||||||
Income (loss) from discontinued
operations |
237 | 237 | 237 | 228 | (702 | ) | 237 | |||||||||||||||||
Income (loss) before cumulative
effect of changes in accounting
principles |
4,830 | 4,883 | 4,621 | 3,785 | (13,289 | ) | 4,830 | |||||||||||||||||
Cumulative effect of changes in
accounting principles |
(95 | ) | (95 | ) | (95 | ) | 52 | 138 | (95 | ) | ||||||||||||||
Net Income (Loss) |
$ | 4,735 | 4,788 | 4,526 | 3,837 | (13,151 | ) | 4,735 | ||||||||||||||||
175
Millions of Dollars |
||||||||||||||||||||||||
Year Ended December 31, 2002 |
||||||||||||||||||||||||
ConocoPhillips | ConocoPhillips | All Other | Consolidating | Total | ||||||||||||||||||||
Income Statement |
ConocoPhillips |
Holding Company |
Company |
Subsidiaries |
Adjustments |
Consolidated |
||||||||||||||||||
Revenues |
||||||||||||||||||||||||
Sales and other operating revenues |
$ | | | 38,860 | 17,888 | | 56,748 | |||||||||||||||||
Equity in earnings (losses) of
affiliates |
463 | 426 | 1,631 | 254 | (2,513 | ) | 261 | |||||||||||||||||
Other income |
| | (31 | ) | 223 | | 192 | |||||||||||||||||
Intercompany revenues |
| 191 | 2,926 | 3,883 | (7,000 | ) | | |||||||||||||||||
Total revenues |
463 | 617 | 43,386 | 22,248 | (9,513 | ) | 57,201 | |||||||||||||||||
Costs and Expenses |
||||||||||||||||||||||||
Purchased crude oil and products |
| | 35,196 | 8,964 | (6,337 | ) | 37,823 | |||||||||||||||||
Production and operating expenses |
| 9 | 2,466 | 2,308 | (85 | ) | 4,698 | |||||||||||||||||
Selling, general and
administrative expenses |
2 | | 1,782 | 170 | (4 | ) | 1,950 | |||||||||||||||||
Exploration expenses |
| | 130 | 462 | | 592 | ||||||||||||||||||
Depreciation, depletion and
amortization |
| | 1,099 | 1,124 | | 2,223 | ||||||||||||||||||
Property impairments |
| | | 177 | | 177 | ||||||||||||||||||
Taxes other than income taxes |
| | 1,464 | 5,473 | | 6,937 | ||||||||||||||||||
Accretion on discounted
liabilities |
| | 13 | 9 | | 22 | ||||||||||||||||||
Interest and debt expense |
29 | 119 | 857 | 135 | (574 | ) | 566 | |||||||||||||||||
Foreign currency transaction
(gains) losses |
| | 8 | 16 | | 24 | ||||||||||||||||||
Minority interests and preferred
dividend requirements of capital
trusts |
| | | 48 | | 48 | ||||||||||||||||||
Total Costs and Expenses |
31 | 128 | 43,015 | 18,886 | (7,000 | ) | 55,060 | |||||||||||||||||
Income from continuing operations
before income taxes and
subsidiary equity transactions |
432 | 489 | 371 | 3,362 | (2,513 | ) | 2,141 | |||||||||||||||||
Gain on subsidiary equity
transactions |
| | | | | | ||||||||||||||||||
Income from continuing operations
before income taxes |
432 | 489 | 371 | 3,362 | (2,513 | ) | 2,141 | |||||||||||||||||
Provision for income taxes |
(11 | ) | 26 | (290 | ) | 1,718 | | 1,443 | ||||||||||||||||
Income from continuing operations |
443 | 463 | 661 | 1,644 | (2,513 | ) | 698 | |||||||||||||||||
Income (loss) from discontinued
operations |
(1,043 | ) | (1,043 | ) | (993 | ) | (917 | ) | 3,003 | (993 | ) | |||||||||||||
Income (loss) before cumulative
effect of changes in accounting
principles |
(600 | ) | (580 | ) | (332 | ) | 727 | 490 | (295 | ) | ||||||||||||||
Cumulative effect of changes in
accounting principles |
| | | | | | ||||||||||||||||||
Net Income (Loss) |
$ | (600 | ) | (580 | ) | (332 | ) | 727 | 490 | (295 | ) | |||||||||||||
176
Millions of Dollars |
||||||||||||||||||||||||
Year Ended December 31, 2001 |
||||||||||||||||||||||||
ConocoPhillips | ConocoPhillips | All Other | Consolidating | Total | ||||||||||||||||||||
Income Statement |
ConocoPhillips |
Holding Company |
Company |
Subsidiaries |
Adjustments |
Consolidated |
||||||||||||||||||
Revenues |
||||||||||||||||||||||||
Sales and other operating revenues |
$ | | | 18,182 | 6,710 | | 24,892 | |||||||||||||||||
Equity in earnings (losses) of
affiliates |
| | 1,533 | 221 | (1,713 | ) | 41 | |||||||||||||||||
Other income |
| | (13 | ) | 110 | | 97 | |||||||||||||||||
Intercompany revenues |
| | 1,560 | 1,933 | (3,493 | ) | | |||||||||||||||||
Total revenues |
| | 21,262 | 8,974 | (5,206 | ) | 25,030 | |||||||||||||||||
Costs and Expenses |
||||||||||||||||||||||||
Purchased crude oil and products |
| | 14,549 | 2,189 | (3,030 | ) | 13,708 | |||||||||||||||||
Production and operating expenses |
| | 1,348 | 1,335 | (40 | ) | 2,643 | |||||||||||||||||
Selling, general and
administrative expenses |
| | 627 | 5 | (19 | ) | 613 | |||||||||||||||||
Exploration expenses |
| | 132 | 229 | (55 | ) | 306 | |||||||||||||||||
Depreciation, depletion and
amortization |
| | 429 | 915 | | 1,344 | ||||||||||||||||||
Property impairments |
| | | 26 | | 26 | ||||||||||||||||||
Taxes other than income taxes |
| | 1,911 | 829 | | 2,740 | ||||||||||||||||||
Accretion on discounted
liabilities |
| | 4 | 3 | | 7 | ||||||||||||||||||
Interest and debt expense |
| | 591 | 96 | (349 | ) | 338 | |||||||||||||||||
Foreign currency transaction
(gains) losses |
| | (1 | ) | 12 | | 11 | |||||||||||||||||
Minority interests and preferred
dividend requirements of capital
trusts |
| | | 53 | | 53 | ||||||||||||||||||
Total Costs and Expenses |
| | 19,590 | 5,692 | (3,493 | ) | 21,789 | |||||||||||||||||
Income from continuing operations
before income taxes and
subsidiary equity transactions |
| | 1,672 | 3,282 | (1,713 | ) | 3,241 | |||||||||||||||||
Gain on subsidiary equity
transactions |
| | | | | | ||||||||||||||||||
Income from continuing operations
before income taxes |
| | 1,672 | 3,282 | (1,713 | ) | 3,241 | |||||||||||||||||
Provision for income taxes |
| | 71 | 1,569 | | 1,640 | ||||||||||||||||||
Income from continuing operations |
| | 1,601 | 1,713 | (1,713 | ) | 1,601 | |||||||||||||||||
Income (loss) from discontinued
operations |
| | 32 | 21 | (21 | ) | 32 | |||||||||||||||||
Income before cumulative effect
of changes in accounting
principles |
| | 1,633 | 1,734 | (1,734 | ) | 1,633 | |||||||||||||||||
Cumulative effect of changes in
accounting principles |
| | 28 | | | 28 | ||||||||||||||||||
Net Income (Loss) |
$ | | | 1,661 | 1,734 | (1,734 | ) | 1,661 | ||||||||||||||||
177
Millions of Dollars |
||||||||||||||||||||||||
At December 31, 2003 |
||||||||||||||||||||||||
ConocoPhillips | ConocoPhillips | All Other | Consolidating | Total | ||||||||||||||||||||
Balance Sheet |
ConocoPhillips |
Holding Company |
Company |
Subsidiaries |
Adjustments |
Consolidated |
||||||||||||||||||
Assets |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | | | 268 | 222 | | 490 | |||||||||||||||||
Accounts and notes receivable |
| 564 | 22,065 | 14,051 | (31,675 | ) | 5,005 | |||||||||||||||||
Inventories |
| | 2,579 | 1,378 | | 3,957 | ||||||||||||||||||
Prepaid expenses and other current
assets |
8 | 7 | 388 | 473 | | 876 | ||||||||||||||||||
Assets of discontinued operations
held for sale |
| | | 864 | | 864 | ||||||||||||||||||
Total Current Assets |
8 | 571 | 25,300 | 16,988 | (31,675 | ) | 11,192 | |||||||||||||||||
Investments and long-term
receivables |
40,882 | 37,410 | 37,655 | 17,501 | (126,190 | ) | 7,258 | |||||||||||||||||
Net properties, plants and
equipment |
| | 17,102 | 30,326 | | 47,428 | ||||||||||||||||||
Goodwill |
| | 15,046 | 38 | | 15,084 | ||||||||||||||||||
Intangibles |
| | 721 | 364 | | 1,085 | ||||||||||||||||||
Other assets |
20 | | 99 | 289 | | 408 | ||||||||||||||||||
Total Assets |
$ | 40,910 | 37,981 | 95,923 | 65,506 | (157,865 | ) | 82,455 | ||||||||||||||||
Liabilities and Stockholders
Equity |
||||||||||||||||||||||||
Accounts payable |
$ | 10,096 | 2 | 19,263 | 9,213 | (31,675 | ) | 6,899 | ||||||||||||||||
Notes payable and long-term debt
due
within one year |
| 1,350 | 70 | 20 | | 1,440 | ||||||||||||||||||
Accrued income and other taxes |
| 96 | 663 | 1,917 | | 2,676 | ||||||||||||||||||
Other accruals |
20 | 45 | 1,229 | 1,523 | | 2,817 | ||||||||||||||||||
Liabilities of discontinued
operations held for sale |
| | 1 | 178 | | 179 | ||||||||||||||||||
Total Current Liabilities |
10,116 | 1,493 | 21,226 | 12,851 | (31,675 | ) | 14,011 | |||||||||||||||||
Long-term debt |
2,704 | 2,938 | 6,394 | 4,304 | | 16,340 | ||||||||||||||||||
Asset retirement obligation and
accrued environmental costs |
| | 930 | 2,673 | | 3,603 | ||||||||||||||||||
Deferred income taxes |
| (33 | ) | 2,752 | 5,854 | (8 | ) | 8,565 | ||||||||||||||||
Employee benefit obligations |
| | 1,828 | 617 | | 2,445 | ||||||||||||||||||
Other liabilities and deferred
credits |
| 5,961 | 36,462 | 21,460 | (61,600 | ) | 2,283 | |||||||||||||||||
Total Liabilities |
12,820 | 10,359 | 69,592 | 47,759 | (93,283 | ) | 47,247 | |||||||||||||||||
Trust preferred securities and
other
minority interests |
| (12 | ) | 5 | 849 | | 842 | |||||||||||||||||
Retained earnings |
2,695 | 1,451 | 9,487 | 10,879 | (15,278 | ) | 9,234 | |||||||||||||||||
Other stockholders equity |
25,395 | 26,183 | 16,839 | 6,019 | (49,304 | ) | 25,132 | |||||||||||||||||
Total |
$ | 40,910 | 37,981 | 95,923 | 65,506 | (157,865 | ) | 82,455 | ||||||||||||||||
178
Millions of Dollars |
||||||||||||||||||||||||
At December 31, 2002 |
||||||||||||||||||||||||
ConocoPhillips | ConocoPhillips | All Other | Consolidating | Total | ||||||||||||||||||||
Balance Sheet |
ConocoPhillips |
Holding Company |
Company |
Subsidiaries |
Adjustments |
Consolidated |
||||||||||||||||||
Assets |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | | | 116 | 191 | | 307 | |||||||||||||||||
Accounts and notes receivable |
8 | | 21,652 | 13,504 | (30,784 | ) | 4,380 | |||||||||||||||||
Inventories |
| | 2,811 | 1,034 | | 3,845 | ||||||||||||||||||
Prepaid expenses and other current
assets |
5 | | 186 | 511 | 64 | 766 | ||||||||||||||||||
Assets of discontinued operations
held for sale |
| | 264 | 1,341 | | 1,605 | ||||||||||||||||||
Total Current Assets |
13 | | 25,029 | 16,581 | (30,720 | ) | 10,903 | |||||||||||||||||
Investments and long-term
receivables |
32,301 | 35,538 | 40,654 | 21,897 | (123,569 | ) | 6,821 | |||||||||||||||||
Net properties, plants and
equipment |
| | 15,407 | 27,623 | | 43,030 | ||||||||||||||||||
Goodwill* |
| | 2,350 | 12,094 | | 14,444 | ||||||||||||||||||
Intangibles |
| | 457 | 662 | | 1,119 | ||||||||||||||||||
Other assets |
14 | 19 | 113 | 373 | | 519 | ||||||||||||||||||
Total Assets |
$ | 32,328 | 35,557 | 84,010 | 79,230 | (154,289 | ) | 76,836 | ||||||||||||||||
Liabilities and Stockholders
Equity |
||||||||||||||||||||||||
Accounts payable |
$ | 5,840 | 3,291 | 15,200 | 12,705 | (30,784 | ) | 6,252 | ||||||||||||||||
Notes payable and long-term debt
due
within one year |
| 526 | 314 | 9 | | 849 | ||||||||||||||||||
Accrued income and other taxes |
(1 | ) | 53 | 518 | 1,421 | | 1,991 | |||||||||||||||||
Other accruals |
21 | 58 | 1,421 | 1,575 | | 3,075 | ||||||||||||||||||
Liabilities of discontinued
operations held for sale |
| | 124 | 525 | | 649 | ||||||||||||||||||
Total Current Liabilities |
5,860 | 3,928 | 17,577 | 16,235 | (30,784 | ) | 12,816 | |||||||||||||||||
Long-term debt |
3,509 | 4,054 | 7,105 | 4,249 | | 18,917 | ||||||||||||||||||
Asset retirement obligation and
accrued environmental costs |
| | 452 | 1,214 | | 1,666 | ||||||||||||||||||
Deferred income taxes |
| (41 | ) | 2,560 | 5,850 | (8 | ) | 8,361 | ||||||||||||||||
Employee benefit obligations |
| | 1,401 | 1,354 | | 2,755 | ||||||||||||||||||
Other liabilities and deferred
credits |
| 3,729 | 33,260 | 24,997 | (60,183 | ) | 1,803 | |||||||||||||||||
Total Liabilities |
9,369 | 11,670 | 62,355 | 53,899 | (90,975 | ) | 46,318 | |||||||||||||||||
Trust preferred securities and
other
minority interests |
| (12 | ) | | 1,013 | | 1,001 | |||||||||||||||||
Retained earnings |
(937 | ) | (2,549 | ) | 5,746 | 8,613 | (5,252 | ) | 5,621 | |||||||||||||||
Other stockholders equity |
23,896 | 26,448 | 15,909 | 15,705 | (58,062 | ) | 23,896 | |||||||||||||||||
Total |
$ | 32,328 | 35,557 | 84,010 | 79,230 | (154,289 | ) | 76,836 | ||||||||||||||||
* | At December 31, 2002, we had not yet determined the assignment of Conoco goodwill to specific reporting units and related subsidiaries. Conoco goodwill was reported as part of the Corporate and Other reporting segment in All Other Subsidiaries. |
179
Millions of Dollars |
||||||||||||||||||||||||
Year Ended December 31, 2003 |
||||||||||||||||||||||||
ConocoPhillips | ConocoPhillips | All Other | Consolidating | Total | ||||||||||||||||||||
Statement of Cash Flows |
ConocoPhillips |
Holding Company |
Company |
Subsidiaries |
Adjustments |
Consolidated |
||||||||||||||||||
Cash Flows From Operating Activities |
||||||||||||||||||||||||
Net cash
provided by (used in) continuing operations |
$ | 7,757 | (977 | ) | 6,209 | (678 | ) | (3,144 | ) | 9,167 | ||||||||||||||
Net cash provided by (used in)
discontinued operations |
| | (532 | ) | 721 | | 189 | |||||||||||||||||
Net Cash Provided by (Used in)
Operating Activities |
7,757 | (977 | ) | 5,677 | 43 | (3,144 | ) | 9,356 | ||||||||||||||||
Cash Flows From Investing Activities |
||||||||||||||||||||||||
Acquisitions, net of cash acquired |
| | | | | | ||||||||||||||||||
Cash consolidated from adoption of FIN 46 |
| | | 225 | | 225 | ||||||||||||||||||
Capital expenditures and investments,
including dry holes |
| (44 | ) | (5,497 | ) | (3,021 | ) | 2,393 | (6,169 | ) | ||||||||||||||
Proceeds from asset dispositions |
3 | | 1,508 | 1,151 | (3 | ) | 2,659 | |||||||||||||||||
Long-term advances to affiliates and
other investments |
(5,950 | ) | 72 | (2,272 | ) | 31 | 8,142 | 23 | ||||||||||||||||
Net cash used in continuing
operations |
(5,947 | ) | 28 | (6,261 | ) | (1,614 | ) | 10,532 | (3,262 | ) | ||||||||||||||
Net cash used in discontinued
operations |
| | (58 | ) | (178 | ) | | (236 | ) | |||||||||||||||
Net Cash Used in Investing
Activities |
(5,947 | ) | 28 | (6,319 | ) | (1,792 | ) | 10,532 | (3,498 | ) | ||||||||||||||
Cash
Flows From Financing Activities |
||||||||||||||||||||||||
Issuance of debt |
| 2,238 | 2,603 | 3,649 | (8,142 | ) | 348 | |||||||||||||||||
Repayment of debt |
(809 | ) | (500 | ) | (1,057 | ) | (2,793 | ) | | (5,159 | ) | |||||||||||||
Redemption of preferred stock of
subsidiaries |
| | | | | | ||||||||||||||||||
Issuance of company common stock |
108 | | | | | 108 | ||||||||||||||||||
Dividends paid on common stock |
(1,107 | ) | (789 | ) | (789 | ) | (1,566 | ) | 3,144 | (1,107 | ) | |||||||||||||
Other |
(2 | ) | | 31 | 2,472 | (2,390 | ) | 111 | ||||||||||||||||
Net Cash Provided by (Used in)
Financing Activities |
(1,810 | ) | 949 | 788 | 1,762 | (7,388 | ) | (5,699 | ) | |||||||||||||||
Effect of Exchange Rate Changes on
Cash and Cash Equivalents |
| | 6 | 18 | | 24 | ||||||||||||||||||
Net Change in Cash and Cash
Equivalents |
| | 152 | 31 | | 183 | ||||||||||||||||||
Cash and cash equivalents at beginning
of year |
| | 113 | 194 | | 307 | ||||||||||||||||||
Cash and Cash Equivalents at End of
Year |
$ | | | 265 | 225 | | 490 | |||||||||||||||||
180
Millions of Dollars |
||||||||||||||||||||||||
Year Ended December 31, 2002 |
||||||||||||||||||||||||
ConocoPhillips | ConocoPhillips | All Other | Consolidating | Total | ||||||||||||||||||||
Statement of Cash Flows |
ConocoPhillips |
Holding Company |
Company |
Subsidiaries |
Adjustments |
Consolidated |
||||||||||||||||||
Cash Flows From Operating Activities |
||||||||||||||||||||||||
Net cash provided by (used in)
continuing operations |
$ | 1,120 | 2,859 | (2,428 | ) | 5,426 | (2,201 | ) | 4,776 | |||||||||||||||
Net cash provided by (used in)
discontinued operations |
| | 247 | (45 | ) | | 202 | |||||||||||||||||
Net Cash Provided by (Used in)
Operating Activities |
1,120 | 2,859 | (2,181 | ) | 5,381 | (2,201 | ) | 4,978 | ||||||||||||||||
Cash Flows From Investing Activities |
||||||||||||||||||||||||
Acquisitions, net of cash acquired |
| | (81 | ) | 1,261 | | 1,180 | |||||||||||||||||
Cash consolidated from adoption of FIN 46 |
| | | | | | ||||||||||||||||||
Capital expenditures and
investments, including dry holes |
| (346 | ) | (779 | ) | (3,736 | ) | 473 | (4,388 | ) | ||||||||||||||
Proceeds from asset dispositions |
| | (175 | ) | 790 | 200 | 815 | |||||||||||||||||
Long-term advances to affiliates
and other investments |
(4,344 | ) | (1,200 | ) | (5,190 | ) | (5,461 | ) | 16,103 | (92 | ) | |||||||||||||
Net cash used in continuing
operations |
(4,344 | ) | (1,546 | ) | (6,225 | ) | (7,146 | ) | 16,776 | (2,485 | ) | |||||||||||||
Net cash used in discontinued
operations |
| | (6 | ) | (93 | ) | | (99 | ) | |||||||||||||||
Net Cash Used in Investing
Activities |
(4,344 | ) | (1,546 | ) | (6,231 | ) | (7,239 | ) | 16,776 | (2,584 | ) | |||||||||||||
Cash Flows From Financing Activities |
||||||||||||||||||||||||
Issuance of debt |
3,502 | 3,012 | 11,817 | 1,274 | (16,103 | ) | 3,502 | |||||||||||||||||
Repayment of debt |
| (3,006 | ) | (1,717 | ) | (178 | ) | 309 | (4,592 | ) | ||||||||||||||
Redemption of preferred stock of
subsidiaries |
| | | (300 | ) | | (300 | ) | ||||||||||||||||
Issuance of company common stock |
7 | | 37 | | | 44 | ||||||||||||||||||
Dividends paid on common stock |
(271 | ) | (1,200 | ) | (1,622 | ) | 1,190 | 1,219 | (684 | ) | ||||||||||||||
Other |
(14 | ) | (119 | ) | (7 | ) | (50 | ) | | (190 | ) | |||||||||||||
Net Cash Provided by (Used in)
Financing Activities |
3,224 | (1,313 | ) | 8,508 | 1,936 | (14,575 | ) | (2,220 | ) | |||||||||||||||
Effect of Exchange Rate Changes on
Cash and Cash Equivalents |
| | (2 | ) | (7 | ) | | (9 | ) | |||||||||||||||
Net Change in Cash and Cash Equivalents |
| | 94 | 71 | | 165 | ||||||||||||||||||
Cash and cash equivalents at beginning
of year |
| | 19 | 123 | | 142 | ||||||||||||||||||
Cash and Cash Equivalents at End of
Year |
$ | | | 113 | 194 | | 307 | |||||||||||||||||
181
Millions of Dollars |
||||||||||||||||||||||||
Year Ended December 31,
2001 |
||||||||||||||||||||||||
ConocoPhillips | ConocoPhillips | All Other | Consolidating | Total | ||||||||||||||||||||
Statement of Cash Flows |
ConocoPhillips |
Holding Company |
Company |
Subsidiaries |
Adjustments |
Consolidated |
||||||||||||||||||
Cash Flows From Operating Activities |
||||||||||||||||||||||||
Net cash provided by (used in)
continuing operations |
$ | | | 2,712 | 1,215 | (401 | ) | 3,526 | ||||||||||||||||
Net cash provided by discontinued
operations |
| | 25 | 8 | | 33 | ||||||||||||||||||
Net Cash Provided by (Used in) |
||||||||||||||||||||||||
Operating Activities |
| | 2,737 | 1,223 | (401 | ) | 3,559 | |||||||||||||||||
Cash Flows From Investing Activities |
||||||||||||||||||||||||
Acquisitions, net of cash acquired |
| | 5 | 75 | | 80 | ||||||||||||||||||
Cash consolidated from adoption of FIN 46 |
| | | | | | ||||||||||||||||||
Capital expenditures and
investments, including dry holes |
| | (976 | ) | (2,181 | ) | 141 | (3,016 | ) | |||||||||||||||
Proceeds from asset dispositions |
| | 12 | 250 | | 262 | ||||||||||||||||||
Long-term advances to affiliates
and other investments |
| | (601 | ) | 446 | 127 | (28 | ) | ||||||||||||||||
Net cash used in continuing
operations |
| | (1,560 | ) | (1,410 | ) | 268 | (2,702 | ) | |||||||||||||||
Net cash used in discontinued
operations |
| | (8 | ) | (60 | ) | | (68 | ) | |||||||||||||||
Net Cash Used in Investing
Activities |
| | (1,568 | ) | (1,470 | ) | 268 | (2,770 | ) | |||||||||||||||
Cash Flows From Financing Activities |
||||||||||||||||||||||||
Issuance of debt |
| | 566 | 573 | (573 | ) | 566 | |||||||||||||||||
Repayment of debt |
| | (1,390 | ) | (1 | ) | 446 | (945 | ) | |||||||||||||||
Issuance of company common stock |
| | 51 | | | 51 | ||||||||||||||||||
Dividends paid on common stock |
| | (403 | ) | (259 | ) | 259 | (403 | ) | |||||||||||||||
Other |
| | (13 | ) | (56 | ) | 1 | (68 | ) | |||||||||||||||
Net Cash Provided by (Used in) |
||||||||||||||||||||||||
Financing Activities |
| | (1,189 | ) | 257 | 133 | (799 | ) | ||||||||||||||||
Effect of Exchange Rate Changes on
Cash and Cash Equivalents |
| | | 3 | | 3 | ||||||||||||||||||
Net Change in Cash and Cash Equivalents |
| | (20 | ) | 13 | | (7 | ) | ||||||||||||||||
Cash and cash equivalents at beginning
of year |
| | 39 | 110 | | 149 | ||||||||||||||||||
Cash and Cash Equivalents at End of
Year |
$ | | | 19 | 123 | | 142 | |||||||||||||||||
182
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
As of December 31, 2003, with the participation of our management, our President and Chief Executive Officer and our Executive Vice President, Finance, and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our President and Chief Executive Officer and our Executive Vice President, Finance, and Chief Financial Officer concluded that our disclosure controls and procedures were operating effectively as of December 31, 2003.
There have been no changes in our internal control over financial reporting, as defined in Rule 13a-15(f) of the Securities Exchange Act, that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
183
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information presented under the headings Election of Directors and Director Biographies and Stock Ownership-Section 16(a) Beneficial Ownership Reporting Compliance in our definitive proxy statement for the Annual Meeting of Stockholders on May 5, 2004 (2004 Proxy Statement), is incorporated herein by reference.* Information regarding the executive officers appears in Part I of this report on pages 35 and 36.
Code of Business Conduct and Ethics for Directors and Employees
We have adopted a Code of Business Conduct and Ethics for Directors and Employees (Code of Ethics), including our principal executive officer, principal financial officer, principal accounting officer and persons performing similar functions. We have posted a copy of our Code of Ethics on the Corporate Governance section of our Internet website at www.conocophillips.com. Any waivers of the Code of Ethics must be approved, in advance, by our full Board of Directors. Any amendments to, or waivers from the Code of Ethics that apply to our executive officers and directors will be posted on the Corporate Governance section of our Internet website located at www.conocophillips.com.
Item 11. EXECUTIVE COMPENSATION
Information presented under the following headings in the 2004 Proxy Statement is incorporated herein by reference:
Board of Directors Information-How are Directors Compensated? |
Executive Compensation-Compensation Tables |
Executive Compensation-Employment Agreements |
Executive Compensation-Severance Arrangements |
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information presented under the headings Stock Ownership-Holdings of Major Stockholders, -Holdings of Officers and Directors and Executive Compensation-Compensation Tables-Equity Compensation Plan Information in the 2004 Proxy Statement is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information presented under the heading Certain Relationships and Related Transactions in the 2004 Proxy Statement is incorporated herein by reference.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information presented under the heading Proposal To Ratify the Appointment of Ernst & Young LLP in the 2004 Proxy Statement is incorporated herein by reference.
*Except for information or data specifically incorporated herein by reference under Items 10 through 14, other information and data appearing in the 2004 Proxy Statement are not deemed to be a part of this Annual Report on Form 10-K or deemed to be filed with the Commission as a part of this report.
184
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)
|
1. | Financial Statements and Financial Statement Schedules | ||||
The financial statements and schedule listed in the Index to Financial Statements and Financial Statement Schedules, which appears on page 89 are filed as part of this annual report. | ||||||
2. | Exhibits | |||||
The exhibits listed in the Index to Exhibits, which appears on pages 187 through 191, are filed as a part of this annual report. | ||||||
(b)
|
Reports on Form 8-K | |||||
During the three months ended December 31, 2003, we furnished the following Current Reports on Form 8-K: |
| Current Report furnished October 2, 2003, reporting Item 7 and Item 12. | |||
| Current Report furnished October 29, 2003, reporting Item 7 and Item 12. |
185
CONOCOPHILLIPS
(Consolidated)
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
Millions of Dollars |
||||||||||||||||||||
Additions |
||||||||||||||||||||
Balance | Charged | |||||||||||||||||||
At | to | Balance At | ||||||||||||||||||
Description |
January 1 |
Expense |
Other |
Deductions |
December 31 |
|||||||||||||||
(a) | ||||||||||||||||||||
2003 |
||||||||||||||||||||
Deducted from asset accounts: |
||||||||||||||||||||
Allowance for doubtful accounts and notes
receivable |
$ | 48 | 29 | | 34 | (b) | 43 | |||||||||||||
Deferred tax asset valuation allowance |
608 | 498 | | 200 | 906 | |||||||||||||||
Included in other liabilities: |
||||||||||||||||||||
Employee termination benefits |
375 | 122 | 110 | (d) | 360 | (e) | 247 | |||||||||||||
2002 |
||||||||||||||||||||
Deducted from asset accounts: |
||||||||||||||||||||
Allowance for doubtful accounts and notes
receivable |
$ | 33 | 21 | 13 | (d) | 19 | (b) | 48 | ||||||||||||
Deferred tax asset valuation allowance |
263 | 102 | 251 | (d) | 8 | 608 | ||||||||||||||
Included in other liabilities: |
||||||||||||||||||||
Employee termination benefits |
| 301 | 297 | (d) | 223 | (e) | 375 | |||||||||||||
2001 |
||||||||||||||||||||
Deducted from asset accounts: |
||||||||||||||||||||
Allowance for doubtful accounts and notes
receivable |
$ | 18 | 13 | 18 | 16 | (b) | 33 | |||||||||||||
Deferred tax asset valuation allowance |
315 | 14 | (47 | ) | 19 | 263 | ||||||||||||||
Included in other liabilities: |
||||||||||||||||||||
Reserve for maintenance turnarounds |
47 | | | 47 | (c) | | ||||||||||||||
(a) | Represents acquisitions/dispositions and the effect of translating foreign financial statements. | |
(b) | Amounts charged off less recoveries of amounts previously charged off. | |
(c) | Effective January 1, 2001, we changed our method of accounting for the costs of major maintenance turnarounds from the accrue-in-advance method to the expenseasincurred method. | |
(d) | Included in the merger purchase price allocation. | |
(e) | Benefit payments. |
186
CONOCOPHILLIPS
INDEX TO EXHIBITS
Exhibit | ||
Number |
Description |
|
2
|
Agreement and Plan of Merger, dated as of November 18, 2001, by and among ConocoPhillips Company (formerly named Phillips Petroleum Company), ConocoPhillips (formerly named CorvettePorsche Corp.), P Merger Corp. (formerly named Porsche Merger Corp.), C Merger Corp. (formerly named Corvette Merger Corp.) and ConocoPhillips Holding Company (formerly named Conoco Inc.) (Holding) (incorporated by reference to Annex A to the Joint Proxy Statement/Prospectus included in ConocoPhillips Registration Statement on Form S-4; Registration No. 333-74798 (the Form S-4)). | |
3.1
|
Restated Certificate of Incorporation of ConocoPhillips (incorporated by reference to Exhibit 3.1 to the Current Report of ConocoPhillips on Form 8-K filed on August 30, 2002; File No. 000-49987 (the Form 8-K)). | |
3.2
|
Certificate of Designations of Series A Junior Participating Preferred Stock of ConocoPhillips (incorporated by reference to Exhibit 3.2 to the Form 8-K). | |
3.3
|
By-Laws of ConocoPhillips, as amended on February 9, 2004. | |
4.1
|
Rights agreement, dated as of June 30, 2002, between ConocoPhillips and Mellon Investor Services LLC, as rights agent, which includes as Exhibit A the form of Certificate of Designations of Series A Junior Participating Preferred Stock, as Exhibit B the form of Rights Certificate and as Exhibit C the Summary of Rights to Purchase Preferred Stock (incorporated by reference to Exhibit 4.1 to the Form 8-K). | |
ConocoPhillips and its subsidiaries are parties to several debt instruments under which the total amount of securities authorized does not exceed 10% of the total assets of ConocoPhillips and its subsidiaries on a consolidated basis. Pursuant to paragraph 4(iii)(A) of Item 601(b) of Regulation S-K, ConocoPhillips agrees to furnish a copy of such instruments to the SEC upon request. |
Material Contracts
10.1
|
Trust Agreement dated June 23, 1995, between ConocoPhillips Company and WestStar Bank, as Trustee of the Deferred Compensation Plan for Non-Employee Directors of Phillips Petroleum Company Trust (incorporated by reference to Exhibit 10.1 to the Annual Report of ConocoPhillips on Form 10-K for the year ended December 31, 2002; File No. 000-49987). | |
10.2
|
Trust Agreement dated December 12, 1995, between ConocoPhillips Company and Vanguard Fiduciary Trust Company, as Trustee of the Phillips Petroleum Company Compensation and Benefits Arrangements Stock Trust (incorporated by reference to Exhibit 10(c) to the Annual Report of ConocoPhillips Company on Form 10-K for the year ended December 31, 1995; File No. 1-720). |
187
Exhibit | ||
Number |
Description |
|
10.3
|
Contribution Agreement, dated as of December 16, 1999, by and among ConocoPhillips Company, Duke Energy Corporation and Duke Energy Field Services, LLC (incorporated by reference to Exhibit 99.1 to the Current Report of ConocoPhillips Company on Form 8-K, filed December 22, 1999; File No. 1-720). | |
10.4
|
Governance Agreement, dated as of December 16, 1999, by and among ConocoPhillips Company, Duke Energy Corporation and Duke Energy Field Services, LLC (incorporated by reference to Exhibit 99.2 to the Current Report of ConocoPhillips Company on Form 8-K, filed December 22, 1999; File No. 1-720). | |
10.5
|
Amended and Restated Limited Liability Company Agreement of Duke Energy Field Services, LLC, dated as of March 31, 2000, by and between Phillips Gas Company and Duke Energy Field Services Corporation (incorporated by reference to Exhibit 99.1 to the Current Report of ConocoPhillips Company on Form 8-K, filed April 13, 2000; File No. 1-720). | |
10.6
|
Parent Company Agreement, dated as of March 31, 2000, by and among ConocoPhillips Company, Duke Energy Corporation, Duke Energy Field Services, LLC, and Duke Energy Field Services Corporation (incorporated by reference to Exhibit 99.2 to the Current Report of ConocoPhillips Company on Form 8-K, filed April 13, 2000; File No. 1-720). | |
10.7
|
Contribution Agreement, dated as of May 23, 2000, by and among ConocoPhillips Company, Chevron Corporation and Chevron Phillips Chemical Company LLC (incorporated by reference to Exhibit 2.1 to the Current Report of ConocoPhillips Company on Form 8-K, filed June 1, 2000; File No. 1-720). | |
10.8
|
Amended and Restated Limited Liability Company Agreement of Chevron Phillips Chemical Company LLC, dated as of July 1, 2000, by and between ConocoPhillips Company, Chevron Corporation, Chevron U.S.A. Inc., Chevron Overseas Petroleum Inc., Chevron Pipe Line Company, Drilling Specialties Co., WesTTex 66 Pipeline Co., and Phillips Petroleum International Corporation (incorporated by reference to Exhibit 99.1 to the Current Report of ConocoPhillips Company on Form 8-K filed July 14, 2000; File No. 1-720). | |
10.9
|
Master Purchase and Sale Agreement dated as of March 15, 2000, as amended as of April 6, 2000, among Atlantic Richfield Company, CH-Twenty, Inc., BP Amoco p.l.c. and ConocoPhillips Company (incorporated by reference to Exhibit 2 to the Current Report of ConocoPhillips Company on Form 8-K, filed April 18, 2000; File No. 1-720). | |
10.10
|
Trust Agreement dated June 1, 1998, between ConocoPhillips Company and Wachovia Bank, N.A., as Trustee of the Phillips Petroleum Company Grantor Trust (incorporated by reference to Exhibit 10.10 to the Annual Report of ConocoPhillips on Form 10-K for the year ended December 31, 2002; File No. 000-49987). |
Management Contracts and Compensatory Plans or Arrangements
10.11
|
1986 Stock Plan of Phillips Petroleum Company (incorporated by reference to Exhibit 10.11 to the Annual Report of ConocoPhillips on Form 10-K for the year ended December 31, 2002; File No. 000-49987). |
188
Exhibit | ||
Number |
Description |
|
10.12
|
1990 Stock Plan of Phillips Petroleum Company (incorporated by reference to Exhibit 10.12 to the Annual Report of ConocoPhillips on Form 10-K for the year ended December 31, 2002; File No. 000-49987). | |
10.13
|
Annual Incentive Compensation Plan of Phillips Petroleum Company (incorporated by reference to Exhibit 10.13 to the Annual Report of ConocoPhillips on Form 10-K for the year ended December 31, 2002; File No. 000-49987). | |
10.14
|
Incentive Compensation Plan of Phillips Petroleum Company (incorporated by reference to Exhibit 10(g) to the Annual Report of ConocoPhillips Company on Form 10-K for the year ended December 31, 1999; File No. 1-720). | |
10.15
|
Principal Corporate Officers Supplemental Retirement Plan of Phillips Petroleum Company (incorporated by reference to Exhibit 10(h) to the Annual Report of ConocoPhillips Company on Form 10-K for the year ended December 31, 1995; File No. 1-720) | |
10.16
|
Phillips Petroleum Company Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10(n) to the Annual Report of ConocoPhillips Company on Form 10-K for the year ended December 31, 2000; File No. 1-720). | |
10.17
|
Key Employee Deferred Compensation Plan of Phillips Petroleum Company (incorporated by reference to Exhibit 10.17 to the Annual Report of ConocoPhillips on Form 10-K for the year ended December 31, 2002; File No. 000-49987). | |
10.18
|
Non-Employee Director Retirement Plan of Phillips Petroleum Company (incorporated by reference to Exhibit 10.18 to the Annual Report of ConocoPhillips on Form 10-K for the year ended December 31, 2002; File No. 000-49987). | |
10.19
|
Omnibus Securities Plan of Phillips Petroleum Company (incorporated by reference to Exhibit 10.19 to the Annual Report of ConocoPhillips on Form 10-K for the year ended December 31, 2002; File No. 000-49987). | |
10.20
|
Deferred Compensation Plan for Non-Employee Directors of Phillips Petroleum Company (incorporated by reference to Exhibit 10.20 to the Annual Report of ConocoPhillips on Form 10-K for the year ended December 31, 2002; File No. 000-49987). | |
10.21
|
Key Employee Missed Credited Service Retirement Plan of Phillips Petroleum Company (incorporated by reference to Exhibit 10(s) to the Annual Report of ConocoPhillips Company on Form 10-K for the year ended December 31, 2000; File No. 1-720). | |
10.22
|
Phillips Petroleum Company Stock Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.22 to the Annual Report of ConocoPhillips on Form 10-K for the year ended December 31, 2002; File No. 000-49987). | |
10.23
|
Key Employee Supplemental Retirement Plan of Phillips Petroleum Company (incorporated by reference to Exhibit 10.23 to the Annual Report of ConocoPhillips on Form 10-K for the year ended December 31, 2002; File No. 000-49987). |
189
Exhibit | ||
Number |
Description |
|
10.24
|
Defined Contribution Makeup Plan of ConocoPhillips (incorporated by reference to Exhibit 10.24 to the Annual Report of ConocoPhillips on Form 10-K for the year ended December 31, 2002; File No. 000-49987). | |
10.25
|
Phillips Petroleum Company Executive Severance Plan (incorporated by reference to Exhibit 10(a) to the Quarterly Report of ConocoPhillips Company on Form 10-Q for the quarter ended June 30, 1999; File No. 1-720). | |
10.26
|
2002 Omnibus Securities Plan of Phillips Petroleum Company (incorporated by reference to Exhibit 10.26 to the Annual Report of ConocoPhillips on Form 10-K for the year ended December 31, 2002; File No. 000-49987). | |
10.27
|
1998 Stock and Performance Incentive Plan of ConocoPhillips (incorporated by reference to Exhibit 10.27 to the Annual Report of ConocoPhillips on Form 10-K for the year ended December 31, 2002; File No. 000-49987). | |
10.28
|
1998 Key Employee Stock Performance Plan of ConocoPhillips (incorporated by reference to Exhibit 10.28 to the Annual Report of ConocoPhillips on Form 10-K for the year ended December 31, 2002; File No. 000-49987). | |
10.29
|
Deferred Compensation Plan for Non-Employee Directors of ConocoPhillips (incorporated by reference to Exhibit 10.29 to the Annual Report of ConocoPhillips on Form 10-K for the year ended December 31, 2002; File No. 000-49987). | |
10.30
|
Conoco Inc. Key Employee Severance Plan (incorporated by reference to Exhibit 10.6 to the Annual Report of Holding on Form 10-K for the year ended December 31, 2001; File No. 1-14521). | |
10.31
|
Conoco Inc. Salary Deferral & Savings Restoration Plan (incorporated by reference to Exhibit 10.31 to the Annual Report of ConocoPhillips on Form 10-K for the year ended December 31, 2002; File No. 000-49987). | |
10.32
|
Conoco Inc. Directors Charitable Gift Plan (incorporated by reference to Exhibit 10.32 to the Annual Report of ConocoPhillips on Form 10-K for the year ended December 31, 2002; File No. 000-49987). | |
10.33
|
Phillips Petroleum Company Director Charitable Contribution Plan (incorporated by reference to Exhibit 10.33 to the Annual Report of ConocoPhillips on Form 10-K for the year ended December 31, 2002; File No. 000-49987). | |
10.34
|
ConocoPhillips Form Indemnity Agreement with Directors (incorporated by reference to Exhibit 10.34 to the Annual Report of ConocoPhillips on Form 10-K for the year ended December 31, 2002; File No. 000-49987). | |
10.35
|
Employment Agreement, dated as of November 18, 2001, by and among ConocoPhillips, ConocoPhillips Company and J. J. Mulva (incorporated by reference to Exhibit 10.1 to the Form S-4). |
190
Exhibit | ||
Number |
Description |
|
10.36
|
Employment Agreement, dated as of November 18, 2001, by and among ConocoPhillips, Holding and Archie W. Dunham (incorporated by reference to Exhibit 10.2 to the Form S-4). | |
10.36.1
|
Letter Agreement, dated as of July 22, 2002, by and among Holding and Archie W. Dunham (incorporated by reference to Exhibit 10.36.1 to the Annual Report of ConocoPhillips on Form 10-K for the year ended December 31, 2002; File No. 000-49987). | |
10.37
|
Letter Agreement, dated as of April 12, 2002, between Holding and Robert E. McKee III (incorporated by reference to Exhibit 10.1 to the Quarterly Report of ConocoPhillips on Form 10-Q for the quarterly period ended September 30, 2002; File No. 000-49987 (the Form 10-Q)). | |
10.38
|
Letter Agreement, dated as of April 12, 2002, between Holding and Jim W. Nokes (incorporated by reference to Exhibit 10.2 to the Form 10-Q). | |
10.39
|
Rabbi Trust Agreement dated December 17, 1999 (incorporated by reference to Exhibit 10.11 of Holdings Form 10-K for the year ended December 31, 1999, File No. 001-14521). | |
10.39.1
|
Amendment to Rabbi Trust Agreement dated February 25, 2002 (incorporated by reference to Exhibit 10.39.1 to the Annual Report of ConocoPhillips on Form 10-K for the year ended December 31, 2002; File No. 000-49987). | |
10.40
|
ConocoPhillips Directors Charitable Gift Program. | |
10.41
|
ConocoPhillips Matching Gift Plan for Directors and Executives. | |
10.42
|
Key Employee Deferred Compensation Plan of ConocoPhillips. | |
12
|
Computation of Ratio of Earnings to Fixed Charges. | |
21
|
List of Principal Subsidiaries of ConocoPhillips. | |
23
|
Consent of Independent Auditors. | |
31.1
|
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. | |
31.2
|
Certification of the Chief Financial Officer pursuant to Rule 13A-14(a) under the Securities Exchange Act of 1934. | |
32
|
Certifications pursuant to 18 U.S.C. Section 1350. |
191
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
CONOCOPHILLIPS |
||||
February 25, 2004 | /s/ J. J. Mulva | |||
J. J. Mulva | ||||
President and Chief Executive Officer | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed, as of February 25, 2004, on behalf of the registrant by the following officers in the capacity indicated and by a majority of directors.
Signature |
Title |
|
/s/ Archie W. Dunham Archie W. Dunham |
Chairman of the Board of Directors | |
/s/ J. J. Mulva J. J. Mulva |
President and Chief Executive Officer (Principal executive officer) |
|
/s/ John A. Carrig John A. Carrig |
Executive Vice President, Finance, and Chief Financial Officer (Principal financial officer) |
|
/s/ Rand C. Berney Rand C. Berney |
Vice President and Controller (Principal accounting officer) |
192
/s/ Richard H. Auchinleck Richard H. Auchinleck |
Director | |
/s/ Norman R. Augustine Norman R. Augustine |
Director | |
/s/ David L. Boren David L. Boren |
Director | |
/s/ James E. Copeland, Jr. James E. Copeland, Jr. |
Director | |
/s/ Kenneth M. Duberstein Kenneth M. Duberstein |
Director | |
/s/ Ruth R. Harkin Ruth R. Harkin |
Director | |
/s/ Larry D. Horner Larry D. Horner |
Director | |
/s/ Charles C. Krulak Charles C. Krulak |
Director | |
/s/ Frank A. McPherson Frank A. McPherson |
Director | |
/s/ William K. Reilly William K. Reilly |
Director | |
/s/ William R. Rhodes William R. Rhodes |
Director | |
/s/ J. Stapleton Roy J. Stapleton Roy |
Director | |
/s/ Victoria J. Tschinkel Victoria J. Tschinkel |
Director | |
/s/ Kathryn C. Turner Kathryn C. Turner |
Director |
193
CONOCOPHILLIPS
INDEX TO EXHIBITS
Exhibit | ||
Number |
Description |
|
2
|
Agreement and Plan of Merger, dated as of November 18, 2001, by and among ConocoPhillips Company (formerly named Phillips Petroleum Company), ConocoPhillips (formerly named CorvettePorsche Corp.), P Merger Corp. (formerly named Porsche Merger Corp.), C Merger Corp. (formerly named Corvette Merger Corp.) and ConocoPhillips Holding Company (formerly named Conoco Inc.) (Holding) (incorporated by reference to Annex A to the Joint Proxy Statement/Prospectus included in ConocoPhillips Registration Statement on Form S-4; Registration No. 333-74798 (the Form S-4)). | |
3.1
|
Restated Certificate of Incorporation of ConocoPhillips (incorporated by reference to Exhibit 3.1 to the Current Report of ConocoPhillips on Form 8-K filed on August 30, 2002; File No. 000-49987 (the Form 8-K)). | |
3.2
|
Certificate of Designations of Series A Junior Participating Preferred Stock of ConocoPhillips (incorporated by reference to Exhibit 3.2 to the Form 8-K). | |
3.3
|
By-Laws of ConocoPhillips, as amended on February 9, 2004. | |
4.1
|
Rights agreement, dated as of June 30, 2002, between ConocoPhillips and Mellon Investor Services LLC, as rights agent, which includes as Exhibit A the form of Certificate of Designations of Series A Junior Participating Preferred Stock, as Exhibit B the form of Rights Certificate and as Exhibit C the Summary of Rights to Purchase Preferred Stock (incorporated by reference to Exhibit 4.1 to the Form 8-K). | |
ConocoPhillips and its subsidiaries are parties to several debt instruments under which the total amount of securities authorized does not exceed 10% of the total assets of ConocoPhillips and its subsidiaries on a consolidated basis. Pursuant to paragraph 4(iii)(A) of Item 601(b) of Regulation S-K, ConocoPhillips agrees to furnish a copy of such instruments to the SEC upon request. |
Material Contracts
10.1
|
Trust Agreement dated June 23, 1995, between ConocoPhillips Company and WestStar Bank, as Trustee of the Deferred Compensation Plan for Non-Employee Directors of Phillips Petroleum Company Trust (incorporated by reference to Exhibit 10.1 to the Annual Report of ConocoPhillips on Form 10-K for the year ended December 31, 2002; File No. 000-49987). | |
10.2
|
Trust Agreement dated December 12, 1995, between ConocoPhillips Company and Vanguard Fiduciary Trust Company, as Trustee of the Phillips Petroleum Company Compensation and Benefits Arrangements Stock Trust (incorporated by reference to Exhibit 10(c) to the Annual Report of ConocoPhillips Company on Form 10-K for the year ended December 31, 1995; File No. 1-720). |
Exhibit | ||
Number |
Description |
|
10.3
|
Contribution Agreement, dated as of December 16, 1999, by and among ConocoPhillips Company, Duke Energy Corporation and Duke Energy Field Services, LLC (incorporated by reference to Exhibit 99.1 to the Current Report of ConocoPhillips Company on Form 8-K, filed December 22, 1999; File No. 1-720). | |
10.4
|
Governance Agreement, dated as of December 16, 1999, by and among ConocoPhillips Company, Duke Energy Corporation and Duke Energy Field Services, LLC (incorporated by reference to Exhibit 99.2 to the Current Report of ConocoPhillips Company on Form 8-K, filed December 22, 1999; File No. 1-720). | |
10.5
|
Amended and Restated Limited Liability Company Agreement of Duke Energy Field Services, LLC, dated as of March 31, 2000, by and between Phillips Gas Company and Duke Energy Field Services Corporation (incorporated by reference to Exhibit 99.1 to the Current Report of ConocoPhillips Company on Form 8-K, filed April 13, 2000; File No. 1-720). | |
10.6
|
Parent Company Agreement, dated as of March 31, 2000, by and among ConocoPhillips Company, Duke Energy Corporation, Duke Energy Field Services, LLC, and Duke Energy Field Services Corporation (incorporated by reference to Exhibit 99.2 to the Current Report of ConocoPhillips Company on Form 8-K, filed April 13, 2000; File No. 1-720). | |
10.7
|
Contribution Agreement, dated as of May 23, 2000, by and among ConocoPhillips Company, Chevron Corporation and Chevron Phillips Chemical Company LLC (incorporated by reference to Exhibit 2.1 to the Current Report of ConocoPhillips Company on Form 8-K, filed June 1, 2000; File No. 1-720). | |
10.8
|
Amended and Restated Limited Liability Company Agreement of Chevron Phillips Chemical Company LLC, dated as of July 1, 2000, by and between ConocoPhillips Company, Chevron Corporation, Chevron U.S.A. Inc., Chevron Overseas Petroleum Inc., Chevron Pipe Line Company, Drilling Specialties Co., WesTTex 66 Pipeline Co., and Phillips Petroleum International Corporation (incorporated by reference to Exhibit 99.1 to the Current Report of ConocoPhillips Company on Form 8-K filed July 14, 2000; File No. 1-720). | |
10.9
|
Master Purchase and Sale Agreement dated as of March 15, 2000, as amended as of April 6, 2000, among Atlantic Richfield Company, CH-Twenty, Inc., BP Amoco p.l.c. and ConocoPhillips Company (incorporated by reference to Exhibit 2 to the Current Report of ConocoPhillips Company on Form 8-K, filed April 18, 2000; File No. 1-720). | |
10.10
|
Trust Agreement dated June 1, 1998, between ConocoPhillips Company and Wachovia Bank, N.A., as Trustee of the Phillips Petroleum Company Grantor Trust (incorporated by reference to Exhibit 10.10 to the Annual Report of ConocoPhillips on Form 10-K for the year ended December 31, 2002; File No. 000-49987). |
Management Contracts and Compensatory Plans or Arrangements
10.11
|
1986 Stock Plan of Phillips Petroleum Company (incorporated by reference to Exhibit 10.11 to the Annual Report of ConocoPhillips on Form 10-K for the year ended December 31, 2002; File No. 000-49987). |
Exhibit | ||
Number |
Description |
|
10.12
|
1990 Stock Plan of Phillips Petroleum Company (incorporated by reference to Exhibit 10.12 to the Annual Report of ConocoPhillips on Form 10-K for the year ended December 31, 2002; File No. 000-49987). | |
10.13
|
Annual Incentive Compensation Plan of Phillips Petroleum Company (incorporated by reference to Exhibit 10.13 to the Annual Report of ConocoPhillips on Form 10-K for the year ended December 31, 2002; File No. 000-49987). | |
10.14
|
Incentive Compensation Plan of Phillips Petroleum Company (incorporated by reference to Exhibit 10(g) to the Annual Report of ConocoPhillips Company on Form 10-K for the year ended December 31, 1999; File No. 1-720). | |
10.15
|
Principal Corporate Officers Supplemental Retirement Plan of Phillips Petroleum Company (incorporated by reference to Exhibit 10(h) to the Annual Report of ConocoPhillips Company on Form 10-K for the year ended December 31, 1995; File No. 1-720) | |
10.16
|
Phillips Petroleum Company Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10(n) to the Annual Report of ConocoPhillips Company on Form 10-K for the year ended December 31, 2000; File No. 1-720). | |
10.17
|
Key Employee Deferred Compensation Plan of Phillips Petroleum Company (incorporated by reference to Exhibit 10.17 to the Annual Report of ConocoPhillips on Form 10-K for the year ended December 31, 2002; File No. 000-49987). | |
10.18
|
Non-Employee Director Retirement Plan of Phillips Petroleum Company (incorporated by reference to Exhibit 10.18 to the Annual Report of ConocoPhillips on Form 10-K for the year ended December 31, 2002; File No. 000-49987). | |
10.19
|
Omnibus Securities Plan of Phillips Petroleum Company (incorporated by reference to Exhibit 10.19 to the Annual Report of ConocoPhillips on Form 10-K for the year ended December 31, 2002; File No. 000-49987). | |
10.20
|
Deferred Compensation Plan for Non-Employee Directors of Phillips Petroleum Company (incorporated by reference to Exhibit 10.20 to the Annual Report of ConocoPhillips on Form 10-K for the year ended December 31, 2002; File No. 000-49987). | |
10.21
|
Key Employee Missed Credited Service Retirement Plan of Phillips Petroleum Company (incorporated by reference to Exhibit 10(s) to the Annual Report of ConocoPhillips Company on Form 10-K for the year ended December 31, 2000; File No. 1-720). | |
10.22
|
Phillips Petroleum Company Stock Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.22 to the Annual Report of ConocoPhillips on Form 10-K for the year ended December 31, 2002; File No. 000-49987). | |
10.23
|
Key Employee Supplemental Retirement Plan of Phillips Petroleum Company (incorporated by reference to Exhibit 10.23 to the Annual Report of ConocoPhillips on Form 10-K for the year ended December 31, 2002; File No. 000-49987). |
Exhibit | ||
Number |
Description |
|
10.24
|
Defined Contribution Makeup Plan of ConocoPhillips (incorporated by reference to Exhibit 10.24 to the Annual Report of ConocoPhillips on Form 10-K for the year ended December 31, 2002; File No. 000-49987). | |
10.25
|
Phillips Petroleum Company Executive Severance Plan (incorporated by reference to Exhibit 10(a) to the Quarterly Report of ConocoPhillips Company on Form 10-Q for the quarter ended June 30, 1999; File No. 1-720). | |
10.26
|
2002 Omnibus Securities Plan of Phillips Petroleum Company (incorporated by reference to Exhibit 10.26 to the Annual Report of ConocoPhillips on Form 10-K for the year ended December 31, 2002; File No. 000-49987). | |
10.27
|
1998 Stock and Performance Incentive Plan of ConocoPhillips (incorporated by reference to Exhibit 10.27 to the Annual Report of ConocoPhillips on Form 10-K for the year ended December 31, 2002; File No. 000-49987). | |
10.28
|
1998 Key Employee Stock Performance Plan of ConocoPhillips (incorporated by reference to Exhibit 10.28 to the Annual Report of ConocoPhillips on Form 10-K for the year ended December 31, 2002; File No. 000-49987). | |
10.29
|
Deferred Compensation Plan for Non-Employee Directors of ConocoPhillips (incorporated by reference to Exhibit 10.29 to the Annual Report of ConocoPhillips on Form 10-K for the year ended December 31, 2002; File No. 000-49987). | |
10.30
|
Conoco Inc. Key Employee Severance Plan (incorporated by reference to Exhibit 10.6 to the Annual Report of Holding on Form 10-K for the year ended December 31, 2001; File No. 1-14521). | |
10.31
|
Conoco Inc. Salary Deferral & Savings Restoration Plan (incorporated by reference to Exhibit 10.31 to the Annual Report of ConocoPhillips on Form 10-K for the year ended December 31, 2002; File No. 000-49987). | |
10.32
|
Conoco Inc. Directors Charitable Gift Plan (incorporated by reference to Exhibit 10.32 to the Annual Report of ConocoPhillips on Form 10-K for the year ended December 31, 2002; File No. 000-49987). | |
10.33
|
Phillips Petroleum Company Director Charitable Contribution Plan (incorporated by reference to Exhibit 10.33 to the Annual Report of ConocoPhillips on Form 10-K for the year ended December 31, 2002; File No. 000-49987). | |
10.34
|
ConocoPhillips Form Indemnity Agreement with Directors (incorporated by reference to Exhibit 10.34 to the Annual Report of ConocoPhillips on Form 10-K for the year ended December 31, 2002; File No. 000-49987). | |
10.35
|
Employment Agreement, dated as of November 18, 2001, by and among ConocoPhillips, ConocoPhillips Company and J. J. Mulva (incorporated by reference to Exhibit 10.1 to the Form S-4). |
Exhibit | ||
Number |
Description |
|
10.36
|
Employment Agreement, dated as of November 18, 2001, by and among ConocoPhillips, Holding and Archie W. Dunham (incorporated by reference to Exhibit 10.2 to the Form S-4). | |
10.36.1
|
Letter Agreement, dated as of July 22, 2002, by and among Holding and Archie W. Dunham (incorporated by reference to Exhibit 10.36.1 to the Annual Report of ConocoPhillips on Form 10-K for the year ended December 31, 2002; File No. 000-49987). | |
10.37
|
Letter Agreement, dated as of April 12, 2002, between Holding and Robert E. McKee III (incorporated by reference to Exhibit 10.1 to the Quarterly Report of ConocoPhillips on Form 10-Q for the quarterly period ended September 30, 2002; File No. 000-49987 (the Form 10-Q)). | |
10.38
|
Letter Agreement, dated as of April 12, 2002, between Holding and Jim W. Nokes (incorporated by reference to Exhibit 10.2 to the Form 10-Q). | |
10.39
|
Rabbi Trust Agreement dated December 17, 1999 (incorporated by reference to Exhibit 10.11 of Holdings Form 10-K for the year ended December 31, 1999, File No. 001-14521). | |
10.39.1
|
Amendment to Rabbi Trust Agreement dated February 25, 2002 (incorporated by reference to Exhibit 10.39.1 to the Annual Report of ConocoPhillips on Form 10-K for the year ended December 31, 2002; File No. 000-49987). | |
10.40
|
ConocoPhillips Directors Charitable Gift Program. | |
10.41
|
ConocoPhillips Matching Gift Plan for Directors and Executives. | |
10.42
|
Key Employee Deferred Compensation Plan of ConocoPhillips. | |
12
|
Computation of Ratio of Earnings to Fixed Charges. | |
21
|
List of Principal Subsidiaries of ConocoPhillips. | |
23
|
Consent of Independent Auditors. | |
31.1
|
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. | |
31.2
|
Certification of the Chief Financial Officer pursuant to Rule 13A-14(a) under the Securities Exchange Act of 1934. | |
32
|
Certifications pursuant to 18 U.S.C. Section 1350. |
Exhibit 3.3
BY-LAWS
OF
CONOCOPHILLIPS
(hereinafter called the Corporation)
ARTICLE I
Offices
Section 1. Registered Office. The registered office of the Corporation shall be in the City of Wilmington, County of New Castle, State of Delaware.
Section 2. Other Offices. The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine.
ARTICLE II
Meetings of Stockholders
Section 1. Place and Time of Meetings. Meetings of the stockholders for the election of directors or for any other purpose shall be held at such time and place, either within or without the State of Delaware, as shall be designated from time to time by the Board of Directors. Subject to applicable law, the Board of Directors may elect to postpone any previously scheduled meeting of stockholders.
Section 2. Annual Meetings. The annual meetings of stockholders for the election of directors shall be held on such date and at such time as shall be designated from time to time by the Board of Directors. Any other proper business may be transacted at the annual meeting of stockholders.
Section 3. Special Meetings. Unless otherwise required by law or by the certificate of incorporation of the Corporation, as amended and restated from time to time (including any certificates of designation with respect to any Preferred Stock, the Certificate of Incorporation), special meetings of stockholders, for any purpose or purposes, may only be called by the Board of Directors pursuant to a resolution stating the purpose or purposes thereof or by the Chairman, if there be one, and any power of stockholders to call a special meeting is specifically denied. Written notice of a special meeting stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting. Only such business shall be conducted at a special meeting as shall be specified in the notice of meeting (or any supplement thereto).
Section 4. Adjournments. Any meeting of the stockholders may be adjourned by the chairman of the meeting or by the stockholders or their proxies in attendance, from time to time, to reconvene at the same or some other place, and notice need not be given of any such adjourned meeting if
the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting.
Section 5. Quorum. Unless otherwise required by law or the Certificate of Incorporation, the presence in person or by proxy of the holders of shares of capital stock entitled to cast a majority of the votes which could be cast at such meeting by the holders of all the outstanding shares of capital stock entitled to vote at such meeting shall constitute a quorum at all meetings of the stockholders for the transaction of business. A quorum, once established, shall not be broken by the withdrawal of enough votes to leave less than a quorum. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, in the manner provided in Section 4, until a quorum shall be present or represented.
Section 6 Voting. Unless otherwise provided by law, the Certificate of Incorporation or these By-Laws or any rule or regulation of any stock exchange or regulatory body applicable to the Corporation, any question brought before any meeting of stockholders, other than the election of directors, shall be decided by the affirmative vote of the holders of a majority of the votes of shares of capital stock present in person or represented by proxy at the meeting and entitled to vote on the question, voting as a single class. Every reference in these By-Laws to a majority or other proportion of shares, or a majority or other proportion of the votes of shares, of capital stock shall refer to such majority or other proportion of the votes to which such shares of capital stock are entitled as provided in the Certificate of Incorporation. Votes of stockholders entitled to vote at a meeting of stockholders may be cast in person or by proxy but no proxy shall be voted on or after three years from its date, unless such proxy provides for a longer period. The Board of Directors, in its discretion, or the officer of the Corporation presiding at a meeting of stockholders, in such officers discretion, may require that any votes cast at such meeting shall be cast by written ballot.
Section 7. No Action by Consent of Stockholders in Lieu of Meeting. Any action required or permitted to be taken by the stockholders of the Corporation may be effected only at a duly called annual or special meeting of such holders and may not be effected by a consent in writing by such holders in lieu of such a meeting.
Section 8. List of Stockholders Entitled to Vote. The officer of the Corporation who has charge of the stock ledger of the Corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder for any purpose germane to the meeting for a period of at least ten (10) days prior to the meeting, as required by applicable law. Subject to applicable law, the list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder of the Corporation who is present.
Section 9. Stock Ledger. The stock ledger of the Corporation shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by Section 8 of this Article II or the books of the Corporation, or to vote in person or by proxy at any meeting of stockholders.
Section 10. Nomination of Directors. Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors of the Corporation,
except as may be otherwise provided in the Certificate of Incorporation of the Corporation with respect to the right of holders of Preferred Stock of the Corporation to nominate and elect a specified number of directors in certain circumstances. Nominations of persons for election to the Board of Directors may be made at any annual meeting of stockholders (a) by or at the direction of the Board of Directors (or any duly authorized committee thereof) or (b) by any stockholder of the Corporation (i) who is a stockholder of record on the date of the giving of the notice provided for in this Section 10 and on the record date for the determination of stockholders entitled to vote at such annual meeting and (ii) who complies with the notice procedures set forth in this Section 10.
In addition to any other applicable requirements, for a nomination to be made by a stockholder, such stockholder must have given timely notice thereof in proper written form to the Secretary of the Corporation.
To be timely, a stockholders notice to the Secretary must be delivered to or mailed and received at the principal executive offices of the Corporation not less than ninety (90) days nor more than one hundred and twenty (120) days prior to the anniversary date of the immediately preceding annual meeting of stockholders; provided, however, that in the event that the annual meeting is called for a date that is not within thirty (30) days before or after such anniversary date, notice by the stockholder in order to be timely must be so received not later than the later of (i) ninety (90) days prior to the anniversary date of the immediately preceding annual meeting of stockholders and (ii) the close of business on the tenth (10th) day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting was made, whichever first occurs.
To be in proper written form, a stockholders notice to the Secretary must set forth (a) as to each person whom the stockholder proposes to nominate for election as a director (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by the person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Securities Exchange Act of 1934, as amended (the Exchange Act), and the rules and regulations promulgated thereunder; and (b) as to the stockholder giving the notice (i) the name and record address of such stockholder, (ii) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by such stockholder, (iii) a description of all arrangements or understandings between such stockholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination (s) are to be made by such stockholder, (iv) a representation that such stockholder intends to appear in person or by proxy at the annual meeting to nominate the persons named in its notice and (v) any other information relating to such stockholder that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder. Such notice must be accompanied by a written consent of each proposed nominee to being named as a nominee and to serve as a director if elected.
No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 10. If the chairman of the annual meeting determines that a nomination was not made in accordance with the foregoing procedures, the chairman shall declare to the meeting that the nomination was defective and such defective nomination shall be disregarded.
Section 11. Business at Annual Meetings. No business may be transacted at an annual meeting of stockholders, other than business that is either (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors (or any duly authorized
committee thereof), (b) otherwise properly brought before the annual meeting by or at the direction of the Board of Directors (or any duly authorized committee thereof) or (c) otherwise properly brought before the annual meeting by any stockholder of the Corporation (i) who is a stockholder of record on the date of the giving of the notice provided for in this Section 11 and on the record date for the determination of stockholders entitled to vote at such annual meeting and (ii) who complies with the notice procedures set forth in this Section 11.
In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a stockholder, such stockholder must have given timely notice thereof in proper written form to the Secretary of the Corporation.
To be timely, a stockholders notice to the Secretary must be delivered to or mailed and received at the principal executive offices of the Corporation not less than ninety (90) days nor more than one hundred and twenty (120) days prior to the anniversary date of the immediately preceding annual meeting of stockholders; provided, however, that in the event that the annual meeting is called for a date that is not within thirty (30) days before or after such anniversary date, notice by the stockholder in order to be timely must be so received not later than the later of (i) ninety (90) days prior to the anniversary date of the immediately preceding annual meeting of stockholders and (ii) the close of business on the tenth (10th) day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting was made, whichever first occurs.
To be in proper written form, a stockholders notice to the Secretary must set forth as to each matter such stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of such stockholder, (iii) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by such stockholder, (iv) a description of all arrangements or understandings between such stockholder and any other person or persons (including their names) in connection with the proposal of such business by such stockholder and any material interest of such stockholder in such business and (v) a representation that such stockholder intends to appear in person or by proxy at the annual meeting to bring such business before the meeting.
No business shall be conducted at the annual meeting of stockholders except business brought before the annual meeting in accordance with the procedures set forth in this Section 11; provided, however, that, once business has been properly brought before the annual meeting in accordance with such procedures, nothing in this Section 11 shall be deemed to preclude discussion by any stockholder of any such business. If the chairman of an annual meeting determines that business was not properly brought before the annual meeting in accordance with the foregoing procedures, the chairman shall declare to the meeting that the business was not properly brought before the meeting and such business shall not be transacted.
Section 12. Conduct of Meetings. The Board of Directors of the Corporation may adopt by resolution such rules and regulations for the conduct of the meetings of the stockholders as it shall deem appropriate. Except to the extent inconsistent with such rules and regulations as adopted by the Board of Directors, the chairman of any meeting of the stockholders shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are appropriate for the proper conduct of the meeting. Such rules, regulations or procedures, whether adopted by the Board of Directors or prescribed by the chairman of the meeting, may include, without limitation, the following: (i) the establishment of an agenda or order of business for the meeting; (ii) the determination of when the polls shall open and close for any given matter to be voted on at the meeting; (iii) rules and procedures for maintaining order at the meeting and the safety of those present; (iv) limitations on attendance at or participation in the meeting to stockholders of record of the
corporation, their duly authorized and constituted proxies or such other persons as the chairman of the meeting shall determine; (v) restrictions on entry to the meeting after the time fixed for the commencement thereof; (vi) limitations on the time allotted to questions or comments by participants; and (vii) policies and procedures with respect to the adjournment of such meeting.
ARTICLE III
Directors
Section 1. Number, Classification and Qualification of Directors. (a) The Board of Directors shall consist initially of 16 members with the exact number of directors to be determined from time to time by the Board of Directors. The directors shall be divided into three (3) classes, designated Class I, Class II and Class III, as provided in the Certificate of Incorporation. Any director may resign at any time upon written notice to the Corporation. Directors need not be stockholders. Subject to applicable law, any person shall be eligible for election as a director; provided that (i) in the case of a director who is also an employee of the Corporation, subject to Section 12 of Article IV and the employment agreements referred to therein, any person (A) who shall have attained the age of 65 shall be ineligible for election or appointment as a director and (B) who ceases to be an employee of the Corporation shall be disqualified from continued service as a director and such persons term of office as a director shall automatically terminate and (ii) in the case of any director, (A) any person who shall have attained the age of 70 shall be ineligible for election or appointment as a director and (B) any person who shall have attained the age of 70 shall be disqualified from continued service as a director and such persons term of office as a director shall automatically terminate as of the date such director attains the age of 70; provided that this clause (ii)(B) shall not apply during a directors initial term of office if such director was elected to the Board of Directors effective as of the effective time of the merger of P Merger Corp. with and into Phillips Petroleum Company and the merger of C Merger Corp. with and into Conoco Inc.
(b) There shall be no limitation on the qualification of any person to be a director or on the ability of any director to vote on any matter brought before the Board or any Board committee, except (i) as required by applicable law, (ii) as set forth in the Certificate of Incorporation or (iii) as set forth in the foregoing Section 1(a) of this Article III or (iv) in any By-Law adopted by the Board of Directors with respect to the eligibility for election as a director upon reaching a specified age or, in the case of employee directors, with respect to the qualification for continuing service of directors upon cessation of employment with the Corporation.
Section 2. Vacancies. Unless otherwise required by law or the Certificate of Incorporation, vacancies arising through death, resignation, removal, an increase in the number of directors or otherwise may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, or by the stockholders if such vacancy resulted from the action of stockholders (in which event such vacancy may not be filled by the directors or a majority thereof), and the directors so chosen shall hold office until the next election for such class and until their successors are duly elected and qualified, or until their earlier death, resignation or removal.
Section 3. Duties and Powers. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these By-Laws required to be exercised or done by the stockholders.
Section 4. Meetings. The Board of Directors may hold meetings, both regular and special, either within or without the State of Delaware. Regular meetings of the Board of Directors may be held without notice at such time and at such place as may from time to time be determined by the Board of Directors. Special meetings of the Board of Directors may be called by the Chairman, if there
be one, the President, or by any director. Notice thereof stating the place, date and hour of the meeting shall be given to each director either by mail not less than forty-eight (48) hours before the time of the meeting, by telephone, telegram, facsimile transmission or other electronic transmission not less than twenty-four (24) hours before the time of the meeting, or on such shorter notice as the person or persons calling such meeting may deem necessary or appropriate in the circumstances.
Section 5. Quorum. Except as otherwise required by law or the Certificate of Incorporation, at all meetings of the Board of Directors, a majority of the entire Board of Directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting of the time and place of the adjourned meeting, until a quorum shall be present.
Section 6. Actions by Written Consent of the Board. Unless otherwise provided in the Certificate of Incorporation or these By-Laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all the members of the Board of Directors or committee, as the case may be, consent thereto in writing or by electronic transmission, and the writing or writings or electronic transmission or transmissions as are filed with the minutes of proceedings of the Board of Directors or committee.
Section 7. Meetings by Means of Conference Telephone. Unless otherwise provided in the Certificate of Incorporation, members of the Board of Directors of the Corporation, or any committee thereof, may participate in a meeting of the Board of Directors or such committee by means of a conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 7 shall constitute presence in person at such meeting.
Section 8. Standing Committees. (a) The Board of Directors, by resolution adopted by a majority of the entire Board, shall appoint from among its members (i) an Executive Committee, (ii) an Audit and Compliance Committee, (iii) a Compensation Committee, (iv) a Committee on Directors Affairs and (v) a Public Policy Committee (together, the Standing Committees) each consisting of three (3) (or such greater number as the Board of Directors may designate) directors, to perform the functions traditionally performed by such Board committees.
(b) The Executive Committee shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation and may authorize the seal of the Corporation to be affixed to all papers which may require it, in each case, to the fullest extent permitted by applicable law.
(c) The Committee on Directors Affairs shall meet at the discretion of the Committee Chairman and have the following powers and duties: (i) evaluating and recommending director candidates to the Board of Directors, (ii) recommending committee assignments to the Board of Directors, (iii) assessing the performance of the Board of Directors, (iv) recommending director compensation and benefits policy for the Corporation, and (v) periodically reviewing the Corporations corporate governance profile. Only persons recommended by the Committee on Directors Affairs shall be eligible for nomination by the Board of Directors for election as directors or to fill a vacancy, but if the Board of Directors does not approve of one or more of the persons recommended by the Committee on Directors Affairs, the Committee shall submit a recommendation of other persons by the date specified by the Board of Directors.
Section 9. Committees. The Board of Directors may designate one or more other committees (in addition to the Standing Committees), each such other committee to consist of one or
more of the directors of the Corporation. With respect to all Board committees, the Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of any such committee. With respect to all Board committees, in the absence or disqualification of a member of a committee, and in the absence of a designation by the Board of Directors of an alternate member to replace the absent or disqualified member, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any absent or disqualified member. Any Board committee, to the extent permitted by law and provided in the resolution establishing such committee, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it. Each Board committee shall keep regular minutes and report to the Board of Directors when required.
Section 10. Compensation. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and shall receive such compensation for their services as directors as shall be determined by the Board of Directors. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of Board committees may be allowed like compensation for attending committee meetings.
Section 11. Removal. A director may only be removed for cause, such removal to be by the affirmative vote of the shares representing a majority of the votes entitled to be cast by the Voting Stock. For purposes of these By-Laws, Voting Stock shall mean the then outstanding shares of capital stock entitled to vote generally in the election of directors and shall exclude any class or series of capital stock only entitled to vote in the event of dividend arrearages thereon, whether or not at the time of determination there are any dividend arrearages. Unless the Board of Directors has made a determination that removal is in the best interests of the Corporation (in which case the following definition shall not apply), cause for removal of a director shall be deemed to exist only if (i) the director whose removal is proposed has been convicted, or when a director is granted immunity to testify when another has been convicted, of a felony by a court of competent jurisdiction and such conviction is no longer subject to direct appeal; (ii) such director has been found by the affirmative vote of a majority of the directors then in office at any regular or special meeting of the Board of Directors called for that purpose, or by a court of competent jurisdiction to have been guilty of willful misconduct in the performance of his duties to the Corporation in a matter of substantial importance to the Corporation; or (iii) such director has been adjudicated by a court of competent jurisdiction to be mentally incompetent, which mental incompetency directly affects his ability as a director of the Corporation. Notwithstanding the foregoing, whenever holders of outstanding shares of one or more series of Preferred Stock are entitled to elect directors of the Corporation pursuant to the provisions applicable in the case of arrearages in the payment of dividends or other defaults contained in the resolution or resolutions of the Board of Directors providing for the establishment of any such series, any such director of the Corporation so elected may be removed in accordance with the provisions of such resolution or resolutions.
ARTICLE IV
Officers
Section 1. General. The officers of the Corporation shall be chosen by the Board of Directors and shall be a Chief Executive Officer; President, a Secretary and a Treasurer. The Board of Directors, in its discretion, also may choose a Chairman of the Board (who must be a director) and one or more Vice Presidents, Assistant Secretaries, Assistant Treasurers and other officers; provided that for so long as the Employment Agreements are in effect, the Board of Directors, subject to their fiduciary duties, shall elect the Chairman of the Board as specified therein. Any number of offices may be held by the
same person, unless otherwise prohibited by law or the Certificate of Incorporation. The officers of the Corporation need not be stockholders of the Corporation nor, except in the case of the Chairman of the Board, need such officers be directors of the Corporation.
Section 2. Election. The Board of Directors, at its first meeting held after each annual meeting of stockholders, shall elect the officers of the Corporation who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors; and all officers of the Corporation shall hold office until their successors are chosen and qualified, or until their earlier death, resignation or removal. Subject to Section 12 of this Article IV, any officer elected by the Board of Directors may be removed at any time by the affirmative vote of the Board of Directors. Any vacancy occurring in any office of the Corporation shall be filled by the Board of Directors.
Section 3. Voting Securities Owned by the Corporation. Powers of attorney, proxies, waivers of notice of meeting, consents and other instruments relating to securities owned by the Corporation may be executed in the name of and on behalf of the Corporation by the President or any Vice President or any other officer authorized to do so by the Board of Directors and any such officer may, in the name of and on behalf of the Corporation, take all such action as any such officer may deem advisable to vote in person or by proxy at any meeting of security holders of any corporation in which the Corporation may own securities and at any such meeting shall possess and may exercise any and all rights and power incident to the ownership of such securities and which, as the owner thereof, the Corporation might have exercised and possessed if present. The Board of Directors may, by resolution, from time to time confer like powers upon any other person or persons.
Section 4. Chairman of the Board of Directors. The Chairman of the Board of Directors shall preside at meetings of the Board and of the Corporations stockholders. The Chairman shall work with the Chief Executive Officer on external stakeholder relations (community, state, federal and foreign governments), business development (growth) initiatives, and the creation of an outstanding and cohesive Board of Directors; and shall have such other executive responsibilities as the Chairman and the Chief Executive Officer may agree. The Chairman and the Chief Executive Officer shall jointly recommend to the Board of Directors the long-range strategic plan for the Corporation, major acquisitions and divestitures, and major changes to the Corporations capital structure. With respect to all other matters, the Chief Executive Officer shall, in consultation with the Chairman, arrange the agenda for meetings of the Board, and shall report to the Board and arrange for other executives and advisors to report to the Board.
Section 5. Chief Executive Officer; President. The Chief Executive Officer shall have general responsibility for the management of the Corporation as provided in these By-laws, reporting directly to the Board of Directors. The Chief Executive Officer shall have all the customary duties and responsibilities of such office, and all of the Corporations executive officers shall report directly to him or indirectly to him through another such executive officer who reports to him. The Chief Executive Officer shall also be the President. While Archie Dunham is serving as Chairman of the Board, the Chief Executive Officer shall work with the Chairman on external stakeholder relations (community, state, federal and foreign governments), business development (growth) initiatives, and the creation of an outstanding and cohesive Board of Directors. Furthermore, while Archie Dunham is Chairman of the Board, the Chief Executive Officer and the Chairman shall jointly recommend to the Board of Directors the long-range strategic plan for the Corporation, major acquisitions and divestitures, and major changes to the Corporations capital structure. With respect to all other matters, the Chief Executive Officer shall, in consultation with the Chairman, arrange the agenda for meetings of the Board, and shall report to the Board and arrange for other executives and advisors to report to the Board.
Section 6. Vice Presidents. At the request of the Chief Executive Officer or in the Chief Executive Officers absence or in the event of the Chief Executive Officers inability or refusal to act (and if there be no Chairman of the Board), the Vice President, or the Vice Presidents if there is more than one, to the extent expressly authorized at such time by the Board of Directors, shall perform the duties of the Chief Executive Officer, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Chief Executive Officer. Each Vice President shall perform such other duties and have such other powers as the Board of Directors from time to time may prescribe. If there be no Chairman of the Board and no Vice President, the Board of Directors shall designate the officer of the Corporation who, in the absence of the Chief Executive Officer or in the event of the inability or refusal of the Chief Executive Officer to act, shall perform the duties of the Chief Executive Officer, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Chief Executive Officer.
Section 7. Secretary. The Secretary shall attend all meetings of the Board of Directors and all meetings of stockholders and record all the proceedings thereat in a book or books to be kept for that purpose; the Secretary shall also perform like duties for committees of the Board of Directors when required. The Secretary shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors, the Chairman of the Board or the Chief Executive Officer, under whose supervision the Secretary shall be. If the Secretary shall be unable or shall refuse to cause to be given notice of all meetings of the stockholders and special meetings of the Board of Directors, and if there be no Assistant Secretary, then either the Board of Directors or the President may choose another officer to cause such notice to be given. The Secretary shall have custody of the seal of the Corporation and the Secretary or any Assistant Secretary, if there be one, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by the signature of the Secretary or by the signature of any such Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest to the affixing by such officers signature. The Secretary shall see that all books, reports, statements, certificates and other documents and records required by law to be kept or filed are properly kept or filed, as the case may be.
Section 8. Treasurer. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. The Treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the President and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all transactions as Treasurer and of the financial condition of the Corporation. If required by the Board of Directors, the Treasurer shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of the office of the Treasurer and for the restoration to the Corporation, in case of the Treasurers death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in the Treasurers possession or under the Treasurers control belonging to the Corporation.
Section 9. Assistant Secretaries. Assistant Secretaries, if there be any, shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors, the President, any Vice President, if there be one, or the Secretary, and in the absence of the Secretary or in the event of the Secretarys disability or refusal to act, shall perform the duties of the Secretary, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Secretary.
Section 10. Assistant Treasurers. Assistant Treasurers, if there be any, shall perform such duties and have such powers as from time to time may be assigned to them by the Board of
Directors, the President, any Vice President, if there be one, or the Treasurer, and in the absence of the Treasurer or in the event of the Treasurers disability or refusal to act, shall perform the duties of the Treasurer, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Treasurer. If required by the Board of Directors, an Assistant Treasurer shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of the office of Assistant Treasurer and for the restoration to the Corporation, in case of the Assistant Treasurers death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in the Assistant Treasurers possession or under the Assistant Treasurers control belonging to the Corporation.
Section 11. Other Officers. Such other officers as the Board of Directors may choose shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors. The Board of Directors may delegate to any other officer of the Corporation the power to choose such other officers and to prescribe their respective duties and powers.
Section 12. Succession Arrangements.
(a) Notwithstanding any other provision of these By-Laws, the election of individuals to the positions of Chairman of the Board and Chief Executive Officer shall be as specifically provided for in the Employment Agreements between the Corporation and Archie Dunham and James J. Mulva, dated as of November 18, 2001 (the Employment Agreements), and (1) the election of any other individual to such positions, or (2) the removal or replacement of Archie Dunham or James J. Mulva from one or more of those positions, shall require a two-thirds vote of the entire Board of Directors.
(b) Any amendment to, modification or termination by the Company of, either of the Employment Agreements by the Corporation and any amendment, alteration or repeal of, or the adoption of any provision inconsistent with, Section 4, 5 or 12 of this Article IV by the Board of Directors, shall require a two-thirds vote of the entire Board of Directors.
(c) This Section 12 will terminate at the earlier of (1) the first date on which neither Archie Dunham nor James J. Mulva remains employed under the relevant Employment Agreement and (2) the later of (A) the second anniversary of the closing date of the merger contemplated by the Agreement and Plan of Merger dated as of November 18, 2001, by and among Phillips Petroleum Company, CorvettePorsche Corp., Porsche Merger Corp., Corvette Merger Corp. and Conoco Inc. and (B) October 1, 2004.
ARTICLE V
Stock
Section 1. Uncertificated and Certificated Shares; Form of Certificates. Effective at such time as the President or any Vice President or the Treasurer of the Corporation, if so authorized by resolution of the Board of Directors, designates in writing to the Corporate Secretary and any transfer agents of the Corporation with respect to any class of stock of the Corporation, the shares of such class shall be uncertificated shares, provided that the foregoing shall not apply to shares represented by a certificate until such certificate is surrendered to the Corporation, and provided further that upon request every holder of uncertificated shares shall be entitled, to the extent provided in Section 158 of the Delaware General Corporation Law, to have a certificate signed, in the name of the Corporation by the Chairman of the Board of Directors, President or a Vice President and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the Corporation, certifying the number of shares owned by such stockholder in the Corporation.
Section 2. Signatures. Any or all of the signatures on a certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue.
Section 3. Lost Certificates. The Board of Directors may direct a new certificate to be issued in place of any certificate theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate, or the owners legal representative, to advertise the same in such manner as the Board of Directors shall require and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed or the issuance of such new certificate.
Section 4. Transfers. Stock of the Corporation shall be transferable in the manner prescribed by law and in these By-Laws. Transfers of stock shall be made on the books of the Corporation only by the person named as the holder thereof on the stock records of the Corporation by such persons attorney lawfully constituted in writing, and in the case of shares represented by a certificate upon the surrender of the certificate therefor, which shall be canceled before a new certificate shall be issued. No transfer of stock shall be valid as against the Corporation for any purpose until it shall have been entered in the stock records of the Corporation by an entry showing from and to whom transferred. To the extent designated by the President or any Vice President or the Treasurer of the Corporation, the Corporation may recognize the transfer of fractional uncertificated shares, but shall not otherwise be required to recognize the transfer of fractional shares.
Section 5. Record Date.
(a) In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.
(b) In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty (60) days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto.
Section 6. Record Owners. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote
as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise required by law.
ARTICLE VI
Notices
Section 1. Notices. Whenever written notice is required by law, the Certificate of Incorporation or these By-Laws, to be given to any director, member of a committee or stockholder, such notice may be given by mail, addressed to such director, member of a committee or stockholder, at such persons address as it appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Written notice may also be given personally, or by telegram, telex, cable, internet or other electronic communication.
Section 2. Waivers of Notice. Whenever any notice is required by law, the Certificate of Incorporation or these By-Laws, to be given to any director, member of a committee or stockholder, a waiver thereof in writing, signed by the person or persons entitled to said notice or by electronic transmission, whether before or after the time stated therein, shall be deemed equivalent thereto. Attendance of a person at a meeting, present in person or represented by proxy, shall constitute a waiver of notice of such meeting, except where the person attends the meeting for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened.
ARTICLE VII
General Provisions
Section 1. Dividends. Dividends upon the capital stock of the Corporation, subject to the requirements of the Delaware General Corporation Law and the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting of the Board of Directors (or any action by written consent in lieu thereof in accordance with Section 6 of Article III hereof), and may be paid in cash, in property, or in shares of the Corporations capital stock. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors from time to time, in its absolute discretion, deems proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for any proper purpose, and the Board of Directors may modify or abolish any such reserve.
Section 2. Disbursements. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate.
Section 3. Fiscal Year. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors.
Section 4. Corporate Seal. The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words Corporate Seal, Delaware. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise.
ARTICLE VIII
Indemnification
Section 1. Power to Indemnify in Actions, Suits or Proceedings other than Those by or in the Right of the Corporation. Subject to Section 3 of this Article VIII, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that such person is or was a director or officer of the Corporation, or is or was a director or officer of the Corporation serving at the request of the Corporation as a director or officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including attorneys fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe such persons conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that such persons conduct was unlawful.
Section 2. Power to Indemnify in Actions, Suits or Proceedings by or in the Right of the Corporation. Subject to Section 3 of this Article VIII, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that such person is or was a director or officer of the Corporation, or is or was a director or officer of the Corporation serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against expenses (including attorneys fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation; except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper.
Section 3. Authorization of Indemnification. Any indemnification under this Article VIII (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director or officer is proper in the circumstances because such person has met the applicable standard of conduct set forth in Section 1 or Section 2 of this Article VIII, as the case may be. Such determination shall be made, with respect to a person who is a director or officer at the time of such determination, (i) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (ii) by a committee of such directors designated by a majority vote of such directors, even though less than a quorum, or (iii) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion or (iv) by the stockholders. Such determination shall be made, with respect to former directors and officers, by any person or persons having the authority to act on the matter on behalf of the Corporation. To the extent, however, that a present or former director or officer of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding described above, or
in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys fees) actually and reasonably incurred by such person in connection therewith, without the necessity of authorization in the specific case.
Section 4. Good Faith Defined. For purposes of any determination under Section 3 of this Article VIII, a person shall be deemed to have acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation, or, with respect to any criminal action or proceeding, to have had no reasonable cause to believe such persons conduct was unlawful, if such persons action is based on good faith reliance on the records or books of account of the Corporation or another enterprise, or on information supplied to such person by the officers of the Corporation or another enterprise in the course of their duties, or on the advice of legal counsel for the Corporation or another enterprise or on information or records given or reports made to the Corporation or another enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Corporation or another enterprise. The term another enterprise as used in this Section 4 shall mean any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise of which such person is or was serving at the request of the Corporation as a director, officer, employee or agent. The provisions of this Section 4 shall not be deemed to be exclusive or to limit in any way the circumstances in which a person may be deemed to have met the applicable standard of conduct set forth in Section 1 or 2 of this Article VIII, as the case may be.
Section 5. Indemnification by a Court. Notwithstanding any contrary determination in the specific case under Section 3 of this Article VIII, and notwithstanding the absence of any determination thereunder, any director or officer may apply to the Court of Chancery in the State of Delaware for indemnification to the extent otherwise permissible under Sections 1 and 2 of this Article VIII. The basis of such indemnification by a court shall be a determination by such court that indemnification of the director or officer is proper in the circumstances because such person has met the applicable standards of conduct set forth in Section 1 or 2 of this Article VIII, as the case may be. Neither a contrary determination in the specific case under Section 3 of this Article VIII nor the absence of any determination thereunder shall be a defense to such application or create a presumption that the director or officer seeking indemnification has not met any applicable standard of conduct. Notice of any application for indemnification pursuant to this Section 5 shall be given to the Corporation promptly upon the filing of such application. If successful, in whole or in part, the director or officer seeking indemnification shall also be entitled to be paid the expense of prosecuting such application.
Section 6. Expenses Payable in Advance. Expenses incurred by a director or officer in defending any civil, criminal, administrative or investigative action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation as authorized in this Article VIII.
Section 7. Nonexclusivity of Indemnification and Advancement of Expenses. The indemnification and advancement of expenses provided by or granted pursuant to this Article VIII shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under the Certificate of Incorporation, any By-Law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such persons official capacity and as to action in another capacity while holding such office, it being the policy of the Corporation that indemnification of the persons specified in Sections 1 and 2 of this Article VIII shall be made to the fullest extent permitted by law. The provisions of this Article VIII shall not be deemed to preclude the indemnification of any person who is not specified in Section 1 or 2 of this Article VIII but whom the Corporation has the power or obligation to indemnify under the provisions of the Delaware General Corporation Law, or otherwise.
Section 8. Insurance. The Corporation may purchase and maintain insurance on behalf of any person who is or was a director or officer of the Corporation, or is or was a director or officer of the Corporation serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such persons status as such, whether or not the Corporation would have the power or the obligation to indemnify such person against such liability under the provisions of this Article VIII.
Section 9. Certain Definitions. For purposes of this Article VIII, references to the Corporation shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors or officers, so that any person who is or was a director or officer of such constituent corporation, or is or was a director or officer of such constituent corporation serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, shall stand in the same position under the provisions of this Article VIII with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued. For purposes of this Article VIII, references to fines shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to serving at the request of the Corporation shall include any service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director or officer with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner such person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner not opposed to the best interests of the Corporation as referred to in this Article VIII.
Section 10. Survival of Indemnification and Advancement of Expenses. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article VIII shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such a person.
Section 11. Limitation on Indemnification. Notwithstanding anything contained in this Article VIII to the contrary, except for proceedings to enforce rights to indemnification (which shall be governed by Section 5 of this Article VIII), the Corporation shall not be obligated to indemnify any director or officer in connection with a proceeding (or part thereof) initiated by such person unless such proceeding (or part thereof) was authorized or consented to by the Board of Directors of the Corporation.
Section 12. Indemnification of Employees and Agents. The Corporation may, to the extent authorized from time to time by the Board of Directors, provide rights to indemnification and to the advancement of expenses to employees and agents of the Corporation similar to those conferred in this Article VIII to directors and officers of the Corporation.
ARTICLE IX
Amendments
Section 1. Amendments. These By-Laws may be altered, amended or repealed, in whole or in part, and new By-Laws may be adopted (i) by the affirmative vote of the shares representing a majority of the votes entitled to be cast by the Voting Stock; provided, however, that any proposed alteration, amendment or repeal of, or the adoption of any By-Law inconsistent with, Section 3, 7, 10 or 11 of Article II of these By-Laws or Section 1, 2 or 11 of Article III of these By-Laws or Section 4, 5 or 12 of Article IV of these By-Laws or this sentence, by the stockholders shall require the affirmative vote
of shares representing not less than 80% of the votes entitled to be cast by the Voting Stock; and provided further, however, that in the case of any such stockholder action at a meeting of stockholders, notice of the proposed alteration, amendment, repeal or adoption of the new By-Law or By-Laws must be contained in the notice of such meeting, or (ii) by action of the Board of Directors of the Corporation. The provisions of this Section 1 are subject to any contrary provisions and any provisions requiring a greater vote that are set forth in the Certificate of Incorporation and in Section 12 of Article IV of these By-Laws.
Section 2. Entire Board of Directors. As used in these By-Laws generally, the term entire Board of Directors means the total number of directors the Corporation would have if there were no vacancies.
Exhibit 10.40
CONOCOPHILLIPS
DIRECTORS CHARITABLE GIFT PROGRAM
1. | PURPOSE OF THE PROGRAM |
The purpose of the Directors Charitable Gift Program (the Program) is to acknowledge the service of members of the Board of Directors (the Board) of ConocoPhillips (the Company); recognize the mutual interest of the Company and its Directors in support of eligible educational and charitable organizations; and enhance the Directors total compensation package. | ||||
With regard to members of the Board or other persons who previously served as members of the Board of Directors of either Phillips Petroleum Company or Conoco Inc. (the Predecessor Companies), this Program represents a continuation of the similar programs maintained by the Predecessor Companies, respectively the Phillips Petroleum Company Director Charitable Contribution Program and the Conoco Inc. Directors Charitable Gift Plan (the Predecessor Programs). Donations made under the Predecessor Programs shall be honored through and completed under this Program, but limitations imposed by this Program shall apply to the aggregate of donations under this Program and the Predecessor Programs. This Program shall be considered an amendment, restatement, merger, and consolidation of the Predecessor Programs. | ||||
Each eligible Director of the Company will recommend that the Company make a donation of up to $1,000,000 to the eligible tax-exempt organization(s) (the Organization(s)) designated by the Director. The donation will be made in the Directors name in five equal annual installments, with the first installment to be made as soon as practicable after the death of the Director or former Director. |
2. | ELIGIBILITY |
Each member of the Board of Directors who serves for a minimum of one year shall be eligible to participate in the Program. Service as a member of the Board of Directors of either of the Predecessor Companies shall count as service for this purpose. The Program will not be effective for a Director until he or she completes all required enrollment procedures for the Program. |
3. | DIRECTORS RECOMMENDATION |
Each eligible Director shall make a written recommendation to the Company, on a form approved by the Company for this purpose, designating the Organization(s) that he or she intends to be the recipient(s) of the Companys donation to be made in the Directors name. A Director may revise or revoke such recommendation prior to his or her death by signing a new recommendation form and submitting it to the Company. | ||||
Subject to Section 4, donations to the charities designated by a Director and requested to be irrevocable, will become irrevocable upon the earliest of (a), (b), or (c) below, and donations to all charities designated by a Director will become irrevocable upon the earlier of (a) or (b) below: |
(a) | The election by the Company, in its sole discretion, within one year of the date of the request by the Director that the Company make an irrevocable commitment of a future donation to the designated charity, |
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(b) | The death of the Director, or | |||
(c) | With regard to a former member of the Board of Phillips Petroleum Company who participated in the Phillips Petroleum Company Director Charitable Contribution Program, the occurrence of any of the events listed in the definition of Coverage Date under the Workforce Stabilization Plan of Phillips Petroleum Company. |
4. | ORGANIZATIONS |
In order to be eligible to a receive a donation, an Organization must at the time of its designation by a Director, and at the time a donation is to be made in whole or in part, qualify for tax-exempt status under section 501(c)(3) of the Internal Revenue Code and be reviewed and approved by the Company. An Organization will be approved by the Company if the Company determines, in the exercise of good faith judgment, that the donation will be deductible from taxable income for purposes of federal and other income taxes payable by the Company and unless the Company determines, in the exercise of good faith judgment, that a donation to the Organization would be detrimental to the best interests of the Company. Private foundations are not eligible to receive donations under the Program. | ||||
Non-U.S. Directors may designate qualified educational and charitable organizations in their countries of citizenship, provided that each designated organization has a tax-exempt status that is similar to comparable U.S.-based organizations under section 501(c)(3) of the Internal Revenue Code. |
5. | AMOUNT AND TIMING OF DONATION |
Each Director may recommend one Organization to receive a Company donation of $1,000,000, or two or more Organizations to receive donations aggregating $1,000,000. Each Organization must be recommended to receive a donation of at least $100,000. The donation will be made by the Company in five equal annual installments, with the first installment to be made as soon as practicable after the death of the Director or former Director. If a Director recommends more than one Organization to receive a donation, each will receive a prorated portion of each annual installment. Each annual installment payment will be divided among the Organizations in the same proportion as the total donation amount has been allocated among the Organizations by the Director. |
6. | VESTING |
Each Director will be fully vested in the Program upon completion of one year of service as a Director. | ||||
The Board has authority not to make a donation if it determines that a Former Director has willfully engaged in activity that is harmful to the Companys interest. |
7. | FUNDING AND PROGRAM ASSETS |
The Company may fund the Program, or it may choose not to fund the Program. If the Company elects to fund the Program in any manner, neither the Directors nor their recommended Organization(s) shall have any rights or interests in any assets of the Company identified for such purpose. Nothing contained in the Program shall create, or be deemed to create, a trust, actual or constructive, for the benefit of a Director or any organization recommended by a Director to receive a donation, or shall give, or be deemed to give, any Director or recommended Organization any interest in any assets of the Program or the Company. If the Company elects to fund the Program through life insurance policies, a participating Director agrees to cooperate and |
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fulfill the enrollment requirements necessary to obtain insurance on his or her life. The Company may elect to insure certain Directors and not others, may use single life, joint life, second-to-die, or other policies, and may insure a Director for an amount greater than the donation to be made on behalf of the Director. The Company, or one or more of its subsidiaries, shall be the owner and the beneficiary of any insurance policies obtained under the Program. |
8. | AMENDMENT OR TERMINATION |
The Board of Directors may amend, suspend, or terminate this Program at any time without the consent of the Directors or former Directors participating in the Program. |
9. | ADMINISTRATION |
Except as otherwise specifically provided, the Program shall be administered by the individual serving as the officer of the Company with primary responsibility for Human Resources (the Administrator). The Administrator may use such resources and personnel of the Company as may be considered by the Administrator necessary or desirable to administer the Program. The Administrators determination with respect to any questions arising as to interpretation of the Program shall be final, conclusive, and binding on all interested parties. |
Pursuant to Board Resolution
July 1, 2003
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Exhibit 10.41
ConocoPhillips
Matching Gift Plan
Terms and Conditions
Eligible Donors
§ | Current executive employees (grade level and higher; paid in U.S. dollars) of ConocoPhillips, or its U.S. subsidiaries in which the company ownership is at least 50 percent. | |||
§ | Current or past members of Heritage-Phillips, Heritage-Conoco or ConocoPhillips boards of directors. |
Eligible Recipients
§ | Private or public, nonprofit K-12 schools with appropriate regional or professional accreditation. | |||
§ | Private or public, nonprofit schools of higher education (includes four-year colleges, graduate and professional schools, junior colleges, technical institutes and community colleges) as accredited by the American Council on Education. | |||
§ | Charitable organizations or political subdivisions (cities, counties, states, school districts, etc.) with tax-exempt status (U.S. Internal Revenue Code, Section 501(c)(3)). |
Matching Rates
§ | Current members of the Board of Directors and current company executives are matched $1 for $1 to an annual maximum of $15,000. | |||
§ | Retired directors and executives are matched $1 for $1 to an annual maximum of $7,500. |
If an individuals gift(s) exceeds the maximum match amount, the gifts will be matched up to the annual maximum in date-of-gift order.
Match Qualifications
($50.00 minimum contribution)
§ | Cash. Gifts made from the eligible donors personal or joint account, or credit card account. | |||
§ | Marketable securities. The value of the securities under this plan will be the average price (between the high and low quotations) on the date the gift was made. |
Matching Gift forms must have gift documentation attached (copy of check, credit card or securities transaction, etc.) to be eligible for a match.
Guidelines on Ineligible Gifts
§ | Any contribution that results in a personal benefit or privilege to the donor, the donors family or anyone designated by the donor. | |||
§ | Educational gifts to fraternities or sororities. | |||
§ | Educational gifts to athletics: funds, foundations, facilities or scholarships. | |||
§ | Donations to alumni association dues or activities. |
§ | Contributions made in lieu of tuition, fees or school loans. | |||
§ | United Way campaign pledges. | |||
§ | Gifts to political organizations. | |||
§ | Gifts to religious organizations (except accredited schools). | |||
§ | Gifts intended to fulfill a church-related financial obligation, e.g., tithing. | |||
§ | Multiple gifts submitted on one application form. | |||
§ | Deferred gifts (e.g., charitable remainder trusts or annuity trusts). | |||
§ | Accumulated or pooled monies raised by a group of donors and submitted by one donor. | |||
§ | Gifts for admission tickets. | |||
§ | Gifts for subscription or membership fees. | |||
§ | Gifts of real estate or personal property. | |||
§ | Gifts made from business accounts or non-employee/retiree spouses account. | |||
§ | Gifts with incomplete matching gift forms. |
Completing Gift Forms
§ | Donor. Fills out Form A and sends the entire document to the organization receiving the donation, along with the gift. | |||
§ | Recipient. An authorized official of the educational institution or charitable organization completes Form B and mails completed form along with documentation of gift (copy of check, credit card or securities transaction) to: |
ConocoPhillips
Matching Gift Administrator
600 N. Dairy Ashford (MA 3131)
Houston, Texas 77079
§ | Contributions will be matched twice annually. | |||
§ | Contributions made the first half of the year will be matched the second half of the year. Forms and proof of the gift must be received by this office by July 31, or the gift will not be matched until the first half of the following year. | |||
§ | Contributions made the second half of the calendar year will be matched the first half of the following year. Forms and proof of the gift must be received by this office by January 31 of the following year, or eligibility will lapse and the gift will not be matched. | |||
§ | Forms are to be completed in full. | |||
§ | Upon determination of eligibility, ConocoPhillips management will authorize payment. |
Other Administrative Conditions
ConocoPhillips may modify, suspend or terminate the Matching Gift Plan at any time. The interpretation, application and administration of the plan shall be determined by the management of corporate contributions, whose decision shall be final.
Exhibit 10.42
Amended by Corporate Approval
May 13, 2003
KEY EMPLOYEE DEFERRED COMPENSATION PLAN OF
CONOCOPHILLIPS
PURPOSE
The purpose of the Key Employee Deferred Compensation Plan of ConocoPhillips (the Plan) is to attract and retain key employees by providing them with an opportunity to defer receipt of cash amounts which otherwise would be paid to them under various compensation programs or plans by the Company. This Plan is the continuation of the Key Employee Deferred Compensation Plan of Phillips Petroleum Company, and all deferrals made thereunder shall continue under their terms and the terms of this Plan.
SECTION 1. Definitions.
(a) | Affiliated Group shall mean the Company plus other subsidiaries and affiliates in which it owns, directly or through a subsidiary or affiliate, a 5% or more equity interest. | |||
(b) | Award shall mean the United States cash dollar amount (i) allotted to an Employee under the terms of an Incentive Compensation Plan or a Long Term Incentive Plan, or (ii) required to be credited to an Employees Deferred Compensation Account pursuant to an Incentive Compensation Plan, the Long Term Incentive Compensation Plan, the Strategic Incentive Plan, a Long Term Incentive Plan, or any similar plans, or any administrative procedure adopted pursuant thereto, or (iii) credited as a result |
of a Participants deferral of the receipt of the value of the Stock which would otherwise be delivered to an Employee in the event restrictions lapse on Restricted Stock or Restricted Stock Units or the settlement of Restricted Stock Units previously awarded or which may be awarded to the Participant pursuant to an Incentive Compensation Plan, the Long Term Incentive Compensation Plan, the Strategic Incentive Plan, a Long Term Incentive Plan, an Omnibus Securities Plan, or any similar plans, or any administrative procedure adopted pursuant thereto, or (iv) credited resulting from a lump sum distribution from any of the Companys non-qualified retirement plans and/or plans which provide for a retirement supplement, or (v) resulting from the forfeiture of Restricted Stock, required by Phillips Petroleum Company, of key employees who became employees of GPM Gas Corporation, or (vi) credited as a result of an Employees deferral of the receipt of the lump sum cash payment from the Employees account in the Defined Contribution Makeup Plan, or (vii) credited as a result of an Employees voluntary reduction of Salary, or (viii) credited as a result of an Employees deferral of a Performance Based Incentive Award, or (ix) any other amount determined by the Committee to be an Award under the Plan. Sections 2 and 3 of this Plan shall not apply with respect to Awards included under (ii), (v), and (ix) above and a participant receiving such an Award shall be deemed, with respect thereto, to have elected a Section 5(b)(i) payment option 10 annual installments commencing about one year after retirement at age 55 or above, but subject to revision under the terms of this Plan. | ||||
(c) | Board of Directors shall mean the board of directors of the Company. | |||
(d) | Chief Executive Officer or CEO shall mean the Chief Executive Officer of the Company. | |||
(e) | Committee shall mean the Compensation Committee of the Board of Directors. | |||
(f) | Company shall mean ConocoPhillips. |
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(g) | Deferred Compensation Account shall mean an account established and maintained for each Participant in which is recorded the amounts of Awards deferred by a Participant, the deemed gains, losses and earnings accrued thereon and payments made therefrom all in accordance with the terms of the Plan. | |||
(h) | Defined Contribution Makeup Plan shall mean the Defined Contribution Makeup Plan of ConocoPhillips, or any similar plan or successor plans. | |||
(i) | Disability shall mean the inability, in the opinion of the Companys Medical Director, of a Participant, because of an injury or sickness, to work at a reasonable occupation that is available with the Company, a Participating Subsidiary, or another subsidiary of the Company. | |||
(j) | Employee shall mean any individual or Rehired Participant who satisfies the conditions of Section 5(j) who is a salaried employee of the Company or of a Participating Subsidiary who is eligible to receive an Award from an Incentive Compensation Plan, has Restricted Stock and/or Restricted Stock Units, and is classified as a ConocoPhillips salary grade 19 or above or any equivalent salary grade at a Participating Subsidiary. Employee shall also include Participants who are employed by a member of the Affiliated Group and former employees of a member of the Affiliated Group who Retire or are Laid Off and are eligible to receive a lump sum distribution from non-qualified retirement plans. Employee shall also include any individual or Rehired Participant who is hired as a salaried employee of ConocoPhillips Services Inc. on or after January 1, 2003 and is classified as a ConocoPhillips salary grade 19 or above or any equivalent salary grade at a Participating Subsidiary. Notwithstanding the foregoing, Employee shall not include anyone who is classified as a Heritage Conoco Employee. | |||
(k) | ERISA shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, or any successor statute. |
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(l) | Exchange Act shall mean the Securities Exchange Act of 1934, as amended and in effect from time to time, or any successor statute. | |||
(m) | Heritage Conoco Employee shall mean an individual employed by Conoco Inc., Conoco Pipe Line Company, or Louisiana Gas Systems Inc. prior to January 1, 2003; provided, however, that an individual who has been terminated from employment with a member of the Affiliated Group at any time and rehired by a member of the Affiliated Group after January 1, 2003, shall not be considered a Heritage Conoco Employee for purposes of this Plan. | |||
(n) | Incentive Compensation Plan shall mean the ConocoPhillips Variable Cash Incentive Program, the Incentive Compensation Plan of Phillips Petroleum Company, or the Annual Incentive Compensation Plan of Phillips Petroleum Company, the Special Incentive Plan for Former Tosco Executives, or similar plan of a Participating Subsidiary, or any similar or successor plans, or all, as the context may require. | |||
(o) | Layoff or Laid Off shall mean an applicable termination of employment by reason of layoff under the Phillips Layoff Plan or the Phillips Work Force Stabilization Plan, an applicable Qualifying Event (without there being a Disqualifying Event) under the Conoco Severance Pay Plan, or layoff or redundancy under any other layoff or redundancy plan which the Company, any Participating Subsidiary, or any other member of the Affiliated Group may adopt from time to time. If all or any portion of the benefits under the layoff or redundancy plan are contingent on the employees signing a general release of liability, such termination shall not be considered as a Layoff for purposes of this Plan unless the employee executes and does not revoke a general release of liability, acceptable to the Company, under the terms of such layoff or redundancy plan. | |||
(p) | Long-Term Incentive Compensation Plan shall mean the Long-Term Incentive Compensation Plan of Phillips Petroleum Company, which was terminated December 31, 1985. |
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(q) | Long-Term Incentive Plan shall mean the ConocoPhillips Performance Share Program, the Phillips Petroleum Company Long-Term Incentive Plan, or a similar or successor plan of either of them, established under an Omnibus Securities Plan. | |||
(r) | Newhire Employee shall mean any Employee who is hired or rehired during a calendar year. | |||
(s) | Omnibus Securities Plan shall mean the Omnibus Securities Plan of Phillips Petroleum Company, the 2002 Omnibus Securities Plan of Phillips Petroleum Company, the 1998 Stock and Performance Incentive Plan of ConocoPhillips, the 1998 Key Employee Stock Plan of ConocoPhillips, or a similar or successor plan of any of them. | |||
(t) | Participant shall mean a person for whom a Deferred Compensation Account is maintained. | |||
(u) | Participating Subsidiary shall mean a subsidiary of the Company, of which the Company beneficially owns, directly or indirectly, more than 50% of the aggregate voting power of all outstanding classes and series of stock, where such subsidiary has adopted one or more plans making participants eligible for participation in this Plan and one or more Employees of which are Potential Participants. | |||
(v) | Plan Administrator shall mean the Vice President Human Resources of the Company, or his successor. | |||
(w) | Potential Participant shall mean a person who has received a notice specified in Section 2 or in Section 5 (h). | |||
(x) | Rehired Participant shall mean a Participant who, subsequent to Retirement or Layoff, is rehired by the Company, or any subsidiary of the Company, and whose employment status is classified as regular full-time or its equivalent. |
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(y) | Restricted Stock and Restricted Stock Units shall mean respectively shares of Stock and units each of which shall represent a hypothetical share of Stock, which have certain restrictions attached to the ownership thereof or the delivery of shares pursuant thereto. | |||
(z) | Retirement or Retire or Retiring shall mean termination of employment with the Company or any subsidiary of the Company on or after the earliest early retirement date at age 55 or above as defined in the ConocoPhillips Retirement Plan or of the applicable retirement plan of a member of the Affiliated Group. | |||
(aa) | Retirement Income Plan shall mean the ConocoPhillips Retirement Plan or a similar retirement plan of the Participating Subsidiary pursuant to the terms of which the Participant retires. | |||
(bb) | Settlement Date shall mean the date on which all acts under an Incentive Compensation Plan or the Long-Term Incentive Compensation Plan or actions directed by the Committee, as the case may be, have been taken which are necessary to make an Award payable to the Participant. | |||
(cc) | Salary shall mean the monthly equivalent rate of pay for an Employee before adjustments for any before-tax voluntary reductions. | |||
(dd) | Stock means shares of common stock of ConocoPhillips, par value $.01. | |||
(ee) | Strategic Incentive Plan shall mean the Strategic Incentive Plan portion of the 1986 Stock Plan of Phillips Petroleum Company, of the 1990 Stock Plan of Phillips Petroleum Company, of the Phillips Petroleum Company Omnibus Securities Plan, and of any successor plans of similar nature. |
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(ff) | Trustee shall mean the trustee of the grantor trust established by the Trust Agreement between the Company and Wachovia Bank, N.A. dated as of June 1, 1998, or any successor trustee. |
SECTION 2. Notification of Potential Participants.
(a) | Incentive Compensation Plan. Each year, during October, Employees who are eligible to receive an Award in the immediately following calendar year under an Incentive Compensation Plan will be notified and given the opportunity, in a manner prescribed by the Plan Administrator, to indicate a preference concerning deferral of all or part of such Award. | |||
(b) | Restricted Stock and Restricted Stock Units Lapsing. (i) Each year during October, Employees who are or will be 55 years of age or older prior to the end of the calendar year will be notified and given the opportunity, in a manner prescribed by the Plan Administrator to indicate a preference to delay the lapsing of the restrictions on part or all of the shares of Restricted Stock and/or Restricted Stock Units previously awarded or which may be awarded to the Employee under an Incentive Compensation Plan, the Long Term Incentive Compensation Plan, a Long-Term Incentive Plan, or the Strategic Incentive Plan in the event the Compensation Committee takes action in the following calendar year to lapse restrictions on Restricted Stock and/or Restricted Stock Units and/or settle Restricted Stock Units. | |||
(ii) Each year during October, Employees who have been granted a special Restricted Stock Award and/or Restricted Stock Unit Award will be notified and given the opportunity, in a manner prescribed by the Plan Administrator to indicate a preference to delay the lapsing of the restrictions on part or all of the shares of Restricted Stock and/or Restricted Stock Units when the restrictions lapse on the Special Restricted Stock and/or Restricted Stock Units or the Restricted Stock Units are settled based on the terms of the Special Restricted Stock and/or Restricted Stock Unit Awards in the following year. |
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(iii) Such indication of preference as outlined in (i) above may be made within 60 days of the amendment of this Plan providing for the notice; provided, however, that such indication of preference must be made no later than June 6, 2003 for such Awards that would otherwise be lapsed or settled later in 2003. | ||||
(c) | Restricted Stock and Restricted Stock Unit Awards Deferral. (i) Each year, during October, Employees who are or will be 55 years of age or older prior to the end of the calendar year will be notified and given the opportunity, in a manner prescribed by the Plan Administrator, to indicate a preference concerning the deferral of the receipt of the value of all or part of the Stock which would otherwise be delivered to the Employees in the event, during the following calendar year, the Compensation Committee takes action to lapse restrictions on Restricted Stock and/or Restricted Stock Units and/or settle Restricted Stock Units previously awarded or which may be awarded to the Employees under an Incentive Compensation Plan, the Long Term Incentive Compensation Plan, a Long Term Incentive Plan, or the Strategic Incentive Plan. | |||
(ii) Employees who have been granted a special Restricted Stock Award and/or Restricted Stock Units Award may, in the year preceding the year in which the restrictions are scheduled to lapse or the Restricted Stock Units are to be settled, indicate a preference concerning the deferral of the value of all or part of the stock which would otherwise be delivered to the Employees in the next calendar year when the restrictions lapse on the special Restricted Stock and /or Restricted Stock Units or the Restricted Stock Units are settled based on the terms of the special Restricted Stock Awards and/or Restricted Stock Units Awards. | ||||
(iii) Employees who are Laid Off during or after the year they reach age 50 may no later than 30 days after being notified of Layoff, in the manner prescribed by the Plan |
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Administrator, indicate a preference concerning the deferral of the receipt of the value of all or part of the Stock which would be otherwise be delivered to the Employees in the event Restricted Stock Units, which have been granted in exchange for Restricted Stock pursuant to the Exchange offer initiated by the Company on December 17, 2001, are settled. | ||||
(iv) Such indication of preference as outlined in (i) above may be made within 60 days of the amendment of this Plan providing for the notice; provided, however, that such indication of preference must be made no later than June 6, 2003 for such Awards that would otherwise be lapsed or settled later in 2003. | ||||
(d) | Lump Sum Distribution from Non-Qualified Retirement Plans. With respect to the lump sum distribution permitted from the Companys non-qualified retirement plans and/or plans which provide for a retirement supplement, Employees may indicate, in a manner prescribed by the Plan Administrator, a preference concerning deferral of all or part of such lump sum distribution. | |||
(e) | Lump Sum from Defined Contribution Makeup Plan. Employees who will receive a lump sum cash payment from their account under the Defined Contribution Makeup Plan, may indicate, in a manner prescribed by the Plan Administrator, a preference concerning deferral of all or part of such payment. | |||
(f) | Salary Reduction. Annually, Employees and Newhire Employees on the U.S. dollar payroll may elect, in a manner prescribed by the Plan Administrator, a voluntary reduction of Salary for each pay period of the following calendar year, or for Newhire Employees the remainder of the calendar year in which they are hired, in which case the Company will credit a like amount as an Award hereunder, provided that the amount of such voluntary reduction shall not be less than 2% nor more than a percentage of the Employees Salary per pay period such that the resulting salary that is paid is sufficient to satisfy all benefit plan deductions, tax deductions, elective deductions, and other deductions required to be withheld by the Company. |
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(g) | Performance Based Incentive Award. Each year, during October, Employees who are eligible to receive a Performance Based Incentive Award in the immediately following calendar year will be notified and given the opportunity, in a manner prescribed by the Plan Administrator, to indicate a preference for the award to be paid as cash, deferred to their KEDCP account or issued as Restricted Stock or a combination of cash, deferred compensation and Restricted Stock. |
SECTION 3. Indication of Preference or Election to Defer Award.
(a) | Incentive Compensation Plan. If a Potential Participant prefers to defer under this Plan all or any part of the Award to which a notice received under Section 2(a) pertains, the Potential Participant must indicate such preference, in a manner prescribed by the Plan Administrator, (i) if the Potential Participant is subject to Section 16 of the Exchange Act, to the Committee, or (ii) if the Potential Participant is not subject to Section 16 of the Exchange Act, to the CEO. The Potential Participants preference must be received on or before October 31 of the year in which said Section 2(a) notice was received. Such indication must state the portion of the Award the Potential Participant desires to be deferred. If an indication is not received by October 31, the Potential Participant will be deemed to have elected to receive and not to defer any such Incentive Compensation Plan award. | |||
Such indication of preference, if accepted, becomes irrevocable on November 1 of the year in which the indication is submitted to the Committee or CEO, except that, in the event of any of the following: |
i) | the Employee is demoted to a job classification/grade that is no longer eligible to receive an Award from an Incentive Compensation Plan, | |||
ii) | the Employees employment status is classified to a status other than regular full-time or its equivalent, or | |||
iii) | the Employee is receiving Unavoidable Absence Benefits (UAB) pay such that the pay received is less than his/her pay had been prior to being on UAB, |
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the Employee can request, subject to approval by the Plan Administrator, that his/her indication of preference to defer, whether approved or not, be revoked for that Incentive Compensation Plan Award. | ||||
The Committee or CEO, as applicable, shall consider such indication of preference as submitted and shall decide whether to accept or reject the preference expressed. | ||||
(b) | Restricted Stock and Restricted Stock Unit Awards Lapsing. If a Potential Participant prefers to delay the lapsing of the restrictions on part or all of the shares of Restricted Stock and/or Restricted Stock Units to which a notice received under Section 2(b) pertains, the Potential Participant must indicate such preference in a manner prescribed by the Plan Administrator, (i) if the Potential Participant is subject to Section 16 of the Exchange Act, to the Committee, or (ii) if the Potential Participant is not subject to Section 16 of the Exchange Act, to the CEO. The Potential Participants preference must state the percentage of the shares and/or units on which the lapsing is to be delayed. If an indication is not received by October 31, the Potential Participant will be deemed to have elected to have the restrictions lapsed if the Compensation Committee takes action to lapse restrictions or as specified under the terms of the Special Restricted Stock and/or Restricted Stock Unit Awards. If the Potential Participant prefers to delay the lapsing of the restrictions on part or all of the shares of Restricted Stock or Restricted Stock Units awarded under an Incentive Compensation Plan, the Long Term Incentive Compensation Plan, a Long Term Incentive Plan, or Strategic Incentive Plan, those shares and/or units will be subject to another indication of preference in the following year. If the Potential Participant prefers to delay the lapsing of the restrictions on part or all of the shares of Restricted Stock or Restricted Stock Units from Special Stock Awards, those shares and/or units will remain restricted and the Employee will receive a notice to indicate a preference for such shares when the Employee is or will be 55 years of age or older prior to the end of the calendar year as specified in Section 2(b)(i). |
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(c) | Restricted Stock or Restricted Stock Unit Deferral. If a Potential Participant prefers to defer under this Plan the value of all or any part of the Restricted Stock or Restricted Stock Units to which a notice received under Section 2(c) pertains, the Potential Participant must indicate such preference, in a manner prescribed by the Plan Administrator, (i) if the Potential Participant is subject to Section 16 of the Exchange Act, to the Committee, or (ii) if the Potential Participant is not subject to Section 16 of the Exchange Act, to the CEO. The Potential Participants preference must be received on or before October 31 of the year in which said Section 2(c) notice was received. Such indication must state the portion of the value of the Restricted Stock or Restricted Stock Units the Potential Participant desires to be deferred. If an indication is not received by October 31, the Potential Participant will be deemed to have elected to receive any shares or units for which the restrictions are lapsed. Such indication of preference becomes irrevocable on November 1 of the year in which the indication is submitted to the Committee or CEO. The Committee or CEO, as applicable, shall consider such indication of preference as submitted and shall decide whether to accept or reject the preference expressed. A deferral of the value of the Restricted Stock or Restricted Stock Units will be paid under the terms of Section 5(b)(i) hereof 10 annual installments commencing about one year after Retirement at age 55 or above, but subject to revision under the terms of this Plan. Such approved indication of preference shall also apply to any Restricted Stock Units granted in exchange for shares of Restricted Stock pursuant to the Exchange offer initiated by the Company on December 17, 2001. | |||
(d) | Lump Sum Distribution from Non-Qualified Retirement Plans. If a Potential Participant prefers to defer under this Plan all or part of the lump sum distribution to which Section 2(d) pertains, the Potential Participant must indicate such preference, in a manner prescribed by the Plan Administrator, (i) if the Potential Participant is subject to Section 16 of the Exchange Act, to the Committee or (ii) if the Potential Participant is not subject to Section 16 of the Exchange Act, to the CEO. The Potential Participants preference must be received in the period beginning 90 days prior to and ending no less than 30 days prior to the date of commencement of |
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retirement benefits under such plans. Such indication must state the portion of the lump sum distribution the Potential Participant desires to be deferred. The Committee or CEO, as applicable, shall consider such indication of preference as submitted and shall decide whether to accept or reject the preference expressed as soon as practicable. Such indication of preference, if accepted, becomes irrevocable on the date of such acceptance. | ||||
(e) | Lump Sum from Defined Contribution Makeup Plan. If a Potential Participant prefers to defer under this Plan all or part of the lump sum cash payment to which Section 2(e) pertains, the Potential Participant must indicate such preference, in a manner prescribed by the Plan Administrator, (i) if the Potential Participant is subject to Section 16 of the Exchange Act, to the Committee or (ii) if the Potential Participant is not subject to Section 16 of the Exchange Act, to the CEO. The Potential Participants preference must be received in the period beginning 365 days prior to and ending no less than 90 days prior to the Participants retirement date at age 55 or above except that if a Potential Participant is notified of layoff during or after the year in which the Potential Participant reaches age 50, the Potential Participants preference must be received no later than 30 days after being notified of layoff. Such indication must state the portion of the lump sum payment the Potential Participant desires to be deferred. The Committee or CEO, as applicable, shall consider such indication of preference as submitted and shall decide whether to accept or reject the preference expressed as soon as practicable. Such indication of preference, if accepted, becomes irrevocable on the date of such acceptance. A deferral of the lump sum from the Defined Contribution Makeup Plan will be paid under the terms of Section 5(b)(i) hereof 10 annual installments commencing about one year after retirement at age 55 or above, but subject to revision under the terms of the Plan. | |||
(f) | Salary Reduction. If a Potential Participant elects to voluntarily reduce Salary and receive an Award hereunder in lieu thereof, the Potential Participant must make an election, in the manner prescribed by the Plan Administrator, which must be received on or before October 31 prior to the beginning of the calendar year of the elected |
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deferral or for Newhire Employees as soon as practicable within a 30-day period after their first day of employment or reemployment. Such election must be in writing signed by the Potential Participant, and must state the amount of the salary reduction the Potential Participant elects. Such election becomes irrevocable on October 31 prior to the beginning of the calendar year or for Newhire Employees after the 30-day period after their first day of employment or reemployment, except that in the event of any of the following: |
i) | the Employee is demoted to a job classification/grade that is no longer eligible to receive an Award from an Incentive Compensation Plan, | |||
ii) | the Employees employment status is classified to a status other than regular full-time or its equivalent, or | |||
iii) | the Employee is receiving Unavoidable Absence Benefits (UAB) pay such that the pay received is less than his/her pay had been prior to being on UAB, |
the Employee can request, subject to approval by the Plan Benefits Administrator, that his/her election to voluntarily reduce his/her salary be revoked for the remainder of the calendar year. | ||||
An Award in lieu of voluntarily reduced salary will be paid under the terms of Section 5(b)(i) hereof 10 annual installments commencing about one year after retirement at age 55 or above, but subject to revision under the terms of the Plan. | ||||
(g) | Performance Based Incentive Award. The Potential Participant who is eligible to receive a Performance Based Incentive Award in the immediately following calendar year, must indicate a preference, in a manner prescribed by the Plan Administrator, (i) if the Potential Participant is subject to Section 16 of the Exchange Act, to the Committee, or (ii) if the Potential Participant is not subject to Section 16 of the Exchange Act, to the CEO. The Potential Participants preference must be received on or before October 31 of the year in which said Section 2(g) notice was received. Such indication must state the portion of the award the Potential Participant desires to be in cash, the portion to be deferred and the portion to be in Restricted Stock. If an |
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indication is not received by October 31 the Potential Participant will be deemed to have elected to receive the award as cash. Such indication of preference becomes irrevocable on November 1 of the year in which the indication is submitted to the Committee or CEO. The Committee or CEO, as applicable, shall consider such indication of preference as submitted and shall decide whether to accept or reject the preference expressed. |
SECTION 4. Deferred Compensation Accounts.
(a) | Credit for Deferral. Amounts deferred pursuant to Section 3(a) and Section 5(h)(1) will be credited to the Participants Deferred Compensation Account as soon as practicable, but not less than 30 days after the Settlement Date of the Incentive Compensation Plan. Amounts deferred pursuant to Section 3(c) and Section 5(h)(2) will be credited, as applicable, as soon as practicable, but not later than 30 days after the date as of which the restrictions lapse at the market value of the underlying Restricted Stock or the shares represented by the Restricted Stock Units awarded under an Incentive Compensation Plan, the Long Term Incentive Compensation Plan, a Long Term Incentive Plan or a Strategic Incentive Plan Performance Period which began prior to January 1, 2003. For this purpose, the market value of the underlying Restricted Stock or the shares represented by the Restricted Stock Units, as applicable, shall be based on the higher of (i) the average of the high and low selling prices of the Stock on the date the restrictions lapse or the last trading day before the day the restrictions lapse if such date is not a trading day or (ii) the average of the high three monthly Fair Market Values of the Stock during the twelve calendar months preceding the month in which the restrictions lapse. The monthly Fair Market Value of the Stock is the average of the daily Fair Market Value of the Stock for each trading day of the month. | |||
The market value of the underlying Restricted Stock or the shares represented by the Restricted Stock Units awarded under a Long Term Incentive Plan Performance Period or an Incentive Compensation Plan that began on or after January 1, 2003 and for the Special Stock Awards issued on October 22, 2002 shall be the monthly |
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average Fair Market Value of the Stock during the calendar month preceding the month in which the restrictions lapse or shares are to be delivered as applicable. The monthly average Fair Market Value of the Stock is the average of the daily Fair Market Value of the Stock for each trading day of the month. | ||||
The daily Fair Market Value of the Stock shall be deemed equal to the average of the high and low selling prices of the Stock on the New York Stock Exchange. | ||||
Amounts deferred pursuant to Section 3(e) and 3(f) and Section 5(h)(3) will be credited to the Participants Deferred Compensation Account as soon as practicable, but not later than 30 days after the cash payment would have been made had it not been deferred. Amounts deferred pursuant to other provisions of this Plan shall be credited as soon as practicable but not later than 30 days after the date the Award would otherwise be payable. | ||||
(b) | Designation of Investments. The amount in each Participants Deferred Compensation Account shall be deemed to have been invested and reinvested from time to time, in such eligible securities as the Participant shall designate. Prior to or in the absence of a Participants designation, the Company shall designate an eligible security in which the Participants Deferred Compensation Account shall be deemed to have been invested until designation instructions are received from the Participant. Eligible securities are those securities designated by the Chief Financial Officer of the Company, or his successor. The Chief Financial Officer of the Company may include as eligible securities, stocks listed on a national securities exchange, and bonds, notes, debentures, corporate or governmental, either listed on a national securities exchange or for which price quotations are published in The Wall Street Journal and shares issued by investment companies commonly known as mutual funds. The Participants Deferred Compensation Account will be adjusted to reflect the deemed gains, losses, and earnings as though the amount deferred was actually invested and reinvested in the eligible securities for the Participants Deferred Compensation Account. |
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Notwithstanding anything to the contrary in this section 4(b), in the event the Company (or any trust maintained for this purpose) actually purchases or sells such securities in the quantities and at the times the securities are deemed to be purchased or sold for a Participants Deferred Compensation Account, the Account shall be adjusted accordingly to reflect the price actually paid or received by the Company for such securities after adjustment for all transaction expenses incurred (including without limitation brokerage fees and stock transfer taxes). | ||||
In the case of any deemed purchase not actually made by the Company, the Deferred Compensation Account shall be charged with a dollar amount equal to the quantity and kind of securities deemed to have been purchased multiplied by the fair market value of such security on the date of reference and shall be credited with the quantity and kind of securities so deemed to have been purchased. In the case of any deemed sale not actually made by the Company, the account shall be charged with the quantity and kind of securities deemed to have been sold, and shall be credited with a dollar amount equal to the quantity and kind of securities deemed to have been sold multiplied by the fair market value of such security on the date of reference. As used in this paragraph fair market value means in the case of a listed security the closing price on the date of reference, or if there were no sales on such date, then the closing price on the nearest preceding day on which there were such sales, and in the case of an unlisted security the mean between the bid and asked prices on the date of reference, or if no such prices are available for such date, then the mean between the bid and asked prices to the nearest preceding day for which such prices are available. | ||||
The Chief Financial Officer of the Company may also designate a third party to provide services that may include record keeping, Participant accounting, Participant communication, payment of installments to the Participant, tax reporting, and any other services specified by the Company in agreement with such third party. |
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(c) | Payments. A Participants Deferred Compensation Account shall be debited with respect to payments made from the account pursuant to this Plan as of the date such payments are made from the account. The payment shall be made as soon as practicable, but no later than 30 days, after the installment payment date. | |||
If any person to whom a payment is due hereunder is under legal disability as determined in the sole discretion of the Plan Administrator, the Plan Administrator shall have the power to cause the payment due such person to be made to such persons guardian or other legal representative for the persons benefit, and such payment shall constitute a full release and discharge of the Company, the Plan Administrator, and any fiduciary of the Plan. | ||||
(d) | Statements. At least one time per year the Company or the Companys designee will furnish each Participant a written statement setting forth the current balance in the Participants Deferred Compensation Account, the amounts credited or debited to such account since the last statement and the payment schedule of deferred Awards and deemed gains, losses, and earnings accrued thereon as provided by the deferred payment option selected by the Participant. |
SECTION 5. Payments from Deferred Compensation Accounts.
(a) | Election of Method of Payment for an Incentive Compensation Plan Award. At the time a Potential Participant submits an indication of preference to defer all or any part of an Award under an Incentive Compensation Plan as provided in Section 3(a) above, the Potential Participant shall also elect in a manner prescribed by the Plan Administrator, which of the payment options, provided for in Paragraph (b) of this Section, shall apply to the deferred portion of said Award adjusted for any deemed gains, losses and earnings accrued thereon credited to the (b) Participants Deferred Compensation Account under this Plan. Subject to Paragraphs (e), (g), and (h) of this Section, if the Committee or CEO, as appropriate, accepts the |
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Potential Participants indication of preference, the election of the method of payment of the amount deferred shall become irrevocable. |
(b) | Payment Options. A Potential Participant may elect to have the deferred portion of an Incentive Compensation Plan Award adjusted for any deemed gains, losses, and earnings accrued thereon paid: |
(i) | (Post-Retirement) in 10 annual installments, the payment of the first of such installments to commence on the first day of the first calendar quarter which is on or after the first anniversary of the Potential Participants first day of Retirement at age 55 or above, or | |||
(ii) | (Pre-Retirement) in annual installments of not less than 5 nor more than 10, in semi-annual installments of not less than 10 nor more than 20, or in quarterly installments of not less than 20 nor more than 40. The first of such installments to commence, as soon as practicable after any date specified by the Potential Participant, so long as such date is the first day of a calendar quarter, is on or after the Settlement Date, is at least one year from the date the payout option was elected, and is prior to the date the Potential Participant will attain the Participants Normal Retirement Date under the terms of the Retirement Income Plan. |
(c) | Election of Method of Payment of the Value of Restricted Stock and Restricted Stock Units. As provided in Section 3(c) above, a deferral of the value of all or part of the Restricted Stock or Restricted Stock Units will be considered payment option (b)(i) of this Section subject to Paragraphs (e) and (g) of this Section. | |||
(d) | Election of Method of Payment of a Lump Sum Distribution from Non-Qualified Retirement Plans. At the time a Potential Participant submits an indication of preference to defer all or part of the lump sum distribution as provided in Section 3(d) above, the Potential Participant shall also elect in a manner prescribed by the Plan |
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Administrator which payment option shall apply to the deferred lump sum adjusted for any gains, losses and earnings to be accrued thereon credited to the Participants Deferred Compensation Account under this Plan. The payment options are annual installments of not less than 1 nor more than 15, semi-annual installments of not less than 2 nor more than 30, or quarterly installments of not less than 4 nor more than 60. The first installment to commence as soon as practicable after any date specified by the Potential Participant, so long as such date is the first day of a calendar quarter and is at least one year and not later than five years from the date the payout option was elected. Subject to Paragraph (g) of this Section, if the Committee or CEO, as appropriate, accepts the Potential Participants indication of preference, the election of the method of payment of the amount deferred shall become irrevocable. | ||||
(e) | Payment Option Revisions. If a Section 5(b)(i) payment option applies to any part of the balance of a Participants Deferred Compensation Account, the Participant may revise such payment option as follows: |
(i) | Prior to Retirement. The Participant at any time during a period beginning 365 days prior to and ending 90 days prior to the date the Participant Retires at age 55 or above may, with respect to the total of all amounts subject to such payment option at the time of the Participants retirement at age 55 or above, in the manner prescribed by the Plan Administrator, revise such payment option and elect one of the payment options specified in (e)(iv) of this Section to apply to such total amount in place of such payment option. | |||
(ii) | Upon Layoff. If a Participant who is eligible to Retire or who is Laid Off during or after the year in which the Participant reaches age 50 is notified of Layoff, the Participant may, no later than 30 days after being notified of Layoff, in the manner prescribed by the Plan Administrator, revise such payment option and elect one of the payment options specified in (e)(iv) of this Section to apply to such total amount in place of such payment option. |
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(iii) | If Disabled. The Participant may at any time during a period from the date of the beginning of the qualifying period for the Companys Long Term Disability Plan or similar plan to no later than 90 days prior to the end of such period, or within 30 days of the amendment of this Plan providing for such election, in the manner prescribed by the Plan Administrator, revise such payment option and elect one of the payment options specified in (e)(iv) of this Section to apply to the total of all amounts subject to such payment option; provided, however, that after the payments have begun, such payments may be made in a different manner if, the Participant due to an unanticipated emergency caused by an event beyond the control of the Participant results in financial hardship to the Participant, so request and the CEO gives written consent to the method of payment requested. | |||
(iv) | Payment Options After Revision. If a Participant revises a Section 5(b)(i) payment option as specified in (e)(i), (e)(ii) or (e)(iii) of this Section, the Participant may select payments in annual installments of not less than 1 nor more than 15, in semi-annual installments of not less than 2 nor more than 30, or in quarterly installments of not less than 4 nor more than 60 with the first installment to commence, as soon as practicable following any date specified by the Participant so long as such date is the first day of a calendar quarter, is on or after the Participants first day of Retirement at age 55 or above or the first day the Participant is no longer an Employee following Layoff, is at least one year and no more than five years from the date the payment option was revised. |
(f) | Installment Amount. The amount of each installment shall be determined by dividing the balance in the Participants Deferred Compensation Account as of the date the installment is to be paid, by the number of installments remaining to be paid (inclusive of the current installment). |
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(g) | Death of Participant. Upon the death of a Participant, the Participants beneficiary or beneficiaries designated in accordance with Section 6, or in the absence of an effective beneficiary designation, the surviving spouse, surviving children (natural or adopted) in equal shares, or the Estate of the deceased Participant, in that order of priority, shall receive payments in accordance with the payment option selected by the Participant, if death occurred after such payments had commenced; or if death occurred before payments have commenced, the beneficiary may select payments in annual installments of not less than 1 nor more than 15, in semi-annual installments of not less than 2 nor more than 30, or in quarterly installments of not less than 4 nor more than 60 with the first installment to commence, as soon as practicable following any date specified by the beneficiary so long as such date is the first day of a calendar quarter and is at least one year and no more than five years from the date the payment option is selected and is not later than the date the deceased Participant would have been age 65; provided, however, such payments may be made in a different manner if the beneficiary or beneficiaries entitled to receive or receiving such payments, due to an unanticipated emergency caused by an event beyond the control of the beneficiary or beneficiaries that results in financial hardship to the beneficiary or beneficiaries, so requests and the CEO gives written consent to the method of payment requested. | |||
(h) | Disability of Participant. In the event a Participant or Employee becomes disabled, the individual may, in the period from the date of the beginning of the qualifying period for the Companys Long Term Disability Plan to no later than 90 days prior to the end of such period, or within 30 days of the amendment of this Plan providing for such election, indicate a preference, in a manner prescribed by the Plan Administrator, for any of the following: |
1) | to defer part or all of any Incentive Compensation Plan Award the Employee is eligible to receive in the immediately following calendar year, |
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2) | to defer part or all of the value of the Stock which would otherwise be delivered to the Employee when the restrictions lapse on any Restricted Stock or Restricted Stock Units or Restricted Stock Units are settled, | |||
3) | to defer part or all of the value from their account under the Defined Contribution Makeup Plan which would otherwise be paid as a lump sum to the Participant. |
Such indications of preference shall be subject to approval by the Committee if the Potential Participant is subject to Section 16 of the Exchange Act or by the CEO if the Potential Participant is not subject to Section 16 of the Exchange Act. The Committee or CEO, as applicable, shall consider such indication or preference as submitted and shall decide whether to accept or reject the preference expressed. | ||||
Such indications of preference, if accepted, become irrevocable on the date of such acceptance. A deferral of any amount will be paid under the terms of Section 5(b)(i) hereof ten (10) annual installments, but subject to revision as specified under the terms of this Plan. | ||||
(i) | Termination of Employment. In the event a Participants employment with the Company, any Participating Subsidiary, or any other subsidiary of the Company terminates for any reason other than death, Retirement at age 55 or above, Disability, or Layoff during or after the year in which the Participant reaches age 50, the entire balance of the Participants Deferred Compensation Account shall be paid to the Participant in one lump sum as soon as practicable after the date the Participant terminates employment, except that a Participant who becomes employed by a member of the Affiliated Group immediately after terminating employment with the Company or Participating Subsidiary shall not receive their benefit under the Plan until the Participant terminates employment from the Affiliated Group; provided, however, the Committee, in its sole discretion, may elect to make such payments in the amounts and on such schedule as it may determine. |
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(j) | Rehire of Participant. In the event a Participant is a Rehired Participant, he/she will be eligible to receive notifications as specified in Section 2 and will be eligible to submit an Indication of Preference or Election to Defer as specified in Section 3, if the Participant agrees to the suspension of payments from his/her Deferred Compensation Account during the period of reemployment by the Company. Upon termination of reemployment, such payments shall resume on the same schedule as was in effect at the time the Participant previously Retired or was Laid Off. |
SECTION 6. Special Provisions for Former ARCO Alaska Employees.
Notwithstanding any provisions to the contrary, in order to comply with the terms of the Master Purchase and Sale Agreement (Sale Agreement) by which the Company acquired certain Alaskan assets of Atlantic Richfield Company (ARCO), a Participant who was eligible to participate in the ARCO employee benefit plans immediately prior to becoming an Employee and who was not employed by ARCO Marine, Inc. (a former ARCO Alaska employee) may, in a manner prescribed by the Plan Administrator, indicate a preference or make an election to:
a) | voluntarily reduce salary and receive an Award in the amount of the reduction credited to, at the Employees election, (i) an account under this Plan, or (ii) for so long as the ARCO Executive Deferral Plan will accept such deferrals of salary, but not beyond December 31, 2001, an account under the ARCO Executive Deferral Plan. | |||
b) | defer any Award payable to a former ARCO employee who is involuntarily terminated prior to April 18, 2002 in lieu of a target ARCO Annual Incentive Plan (AIP) award, and at the Employees election credit the Award to (i) an account under this Plan, or (ii) to the ARCO Executive Deferral Plan. |
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c) | defer the Final ARCO Supplemental Executive Retirement Plan (SERP) benefit that will be calculated as of the earlier of April 17, 2002 or the date the former ARCO employee voluntarily or involuntarily terminates employment from the Company or any Participating Subsidiary to the ARCO Executive Deferral Plan. | |||
d) | defer the value of the restricted stock granted on July 31, 2000 to an account under this Plan when the restrictions lapse on July 31, 2001, July 31, 2002 and July 31, 2002. Such indications of preference shall be made in July of the year preceding the calendar year when the restrictions are scheduled to lapse or as soon as practicable after July 31, 2000 for the restrictions on the shares that are to be lapsed on July 31, 2001. | |||
e) | all indications of preference in Section 6(a), (b) and (c) are subject to approval by the Compensation Committee if the Employee is subject to Section 16 of the Exchange Act and by the CEO if the Employee is not subject to Section 16 of the Exchange Act. | |||
f) | for a former ARCO Alaska employee who was classified as a grade 7 or 8 under ARCOs job classification system and was eligible under ARCOs Executive Deferral Plan to voluntarily reduce salary and defer the amount of the voluntary salary reduction and who was classified as a grade 31 or below at that time under Phillips Petroleum Companys job classification system, make an annual election to voluntarily reduce salary and defer the amount of the voluntary salary reduction for salary received from July 31, 2000 through December 31, 2000 and for the five years from 2001 through 2005 and receive a salary deferral credit under this Plan. |
SECTION 7. Designation of Beneficiary.
Each Participant shall designate a beneficiary or beneficiaries to receive the entire balance of the Participants Deferred Compensation Account by giving signed written notice of such designation to the Plan Administrator. The Participant may from time to time change or
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cancel any previous beneficiary designation in the same manner. The last beneficiary designation received by the Plan Administrator shall be controlling over any prior designation and over any testamentary or other disposition. After acceptance by the Plan Administrator of such written designation, it shall take effect as of the date on which it was signed by the Participant, whether the Participant is living at the time of such receipt, but without prejudice to the Company or the CEO on account of any payment made under this Plan before receipt of such designation.
SECTION 8. Nonassignability.
The right of a Participant, or beneficiary, or other person who becomes entitled to receive payments under this Plan, shall not be assignable or subject to garnishment, attachment or any other legal process by the creditors of, or other claimants against, the Participant, beneficiary, or other such person.
SECTION 9. Administration.
(a) | The Plan Administrator may adopt such rules, regulations, and forms as deemed desirable for administration of the Plan and shall have the discretionary authority to allocate responsibilities under the Plan to such other persons as may be designated. | |||
(b) | Any claim for benefits hereunder shall be presented in writing to the Plan Administrator for consideration, grant or denial. In the event that a claim is denied in whole or in part by the Plan Administrator, the claimant, within ninety days of receipt of said claim by the Plan Administrator, shall receive written notice of denial. Such notice shall contain: |
(1) | a statement of the specific reason or reasons for the denial; | |||
(2) | specific references to the pertinent provisions hereunder on which such denial is based; |
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(3) | a description of any additional material or information necessary to perfect the claim and an explanation of why such material or information is necessary; and | |||
(4) | an explanation of the following claims review procedure set forth in paragraph (c) below. |
(c) | Any claimant who feels that a claim has been improperly denied in whole or in part by the Plan Administrator may request a review of the denial by making written application to the Trustee. The claimant shall have the right to review all pertinent documents relating to said claim and to submit issues and comments in writing to the Trustee. Any person filing an appeal from the denial of a claim must do so in writing within sixty days after receipt of written notice of denial. The Trustee shall render a decision regarding the claim within sixty days after receipt of a request for review, unless special circumstances require an extension of time for processing, in which case a decision shall be rendered within a reasonable time, but not later than 120 days after receipt of the request for review. The decision of the Trustee shall be in writing and, in the case of the denial of a claim in whole or in part, shall set forth the same information as is required in an initial notice of denial by the Plan Administrator, other than an explanation of this claims review procedure. The Trustee shall have absolute discretion in carrying out its responsibilities to make its decision of an appeal, including the authority to interpret and construe the terms hereunder, and all interpretations, findings of fact, and the decision of the Trustee regarding the appeal shall be final, conclusive and binding on all parties. | |||
(d) | Compliance with the procedures described in paragraphs (b) and (c) shall be a condition precedent to the filing of any action to obtain any benefit or enforce any right which any individual may claim hereunder. Notwithstanding anything to the contrary in the Plan, these paragraphs (b), (c) and (d) may not be amended without the written consent of a seventy-five percent (75%) majority of Participants and Beneficiaries and such paragraphs shall survive the termination of this Plan until all benefits accrued hereunder have been paid. |
-27-
SECTION 10. Employment not Affected by Plan.
Participation or nonparticipation in this Plan shall neither adversely affect any persons employment status, or confer any special rights on any person other than those expressly stated in the Plan. Participation in the Plan by an Employee of the Company or of a Participating Subsidiary shall not affect the Companys or the Participating Subsidiarys right to terminate the Employees employment or to change the Employees compensation or position.
SECTION 11. Determination of Recipients of Awards.
The determination of those persons who are entitled to Awards under an Incentive Compensation Plan and any other such plans shall be governed solely by the terms and provisions of the applicable plan, and the selection of an Employee as a Potential Participant or the acceptance of an indication of preference to defer an Award hereunder shall not in any way entitle such Potential Participant to an Award.
SECTION 12. Method of Providing Payments.
(a) | Nonsegregation. Amounts deferred pursuant to this Plan and the crediting of amounts to a Participants Deferred Compensation Account shall represent the Companys unfunded and unsecured promise to pay compensation in the future. With respect to said amounts, the relationship of the Company and a Participant shall be that of debtor and general unsecured creditor. While the Company may make investments for the purpose of measuring and meeting its obligations under this Plan such investments shall remain the sole property of the Company subject to claims of its creditors generally, and shall not be deemed to form or be included in any part of the Deferred Compensation Account. | |||
(b) | Funding. It is the intention of the Company that this Plan shall be unfunded for federal tax purposes and for purposes of Title I of ERISA; provided, however, that the |
-28-
Company may establish a grantor trust to satisfy part or all of its Plan payment obligations so long as the Plan remains unfunded for federal tax purposes and for purposes of Title I of ERISA. |
SECTION 13. Amendment or Termination of Plan.
Subject to Paragraph 9(d), the Company reserves the right to amend this Plan from time to time or to terminate the Plan entirely, provided, however, that no amendment may affect the balance in a Participants account on the effective date of the amendment. No Participant shall participate in a decision to amend or terminate this Plan. In the event of termination of the Plan, the Chief Executive Officer, in his sole discretion, may elect to pay to the Participant in one lump sum as soon as practicable after termination of the Plan, the balance then in the Participants account.
SECTION 14. Miscellaneous Provisions.
(a) | Except as otherwise provided herein, the Plan shall be binding upon the Company, its successors and assigns, including but not limited to any corporation which may acquire all or substantially all of the Companys assets and business or with or into which the Company may be consolidated or merged. | |||
(b) | This Plan shall be construed, regulated, and administered in accordance with the laws of the State of Texas except to the extent that said laws have been preempted by the laws of the United States. |
SECTION 15. Effective Date of the Plan.
This Plan is amended and restated effective as of April 1, 2003.
-29-
Exhibit 12
CONOCOPHILLIPS AND CONSOLIDATED SUBSIDIARIES
TOTAL ENTERPRISE
Computation of Ratio of Earnings to Fixed Charges
Millions of Dollars |
||||||||||||||||||||
Years Ended December 31 |
||||||||||||||||||||
2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||
Earnings Available for Fixed Charges |
||||||||||||||||||||
Income from continuing operations before
income taxes |
$ | 8,337 | 2,141 | 3,241 | 3,748 | 1,178 | ||||||||||||||
Distributions less than equity in earnings
of fifty-percent-or-less-owned companies |
(52 | ) | 3 | 58 | (30 | ) | (7 | ) | ||||||||||||
Fixed charges, excluding capitalized
interest* |
1,018 | 850 | 501 | 481 | 396 | |||||||||||||||
$ | 9,303 | 2,994 | 3,800 | 4,199 | 1,567 | |||||||||||||||
Fixed Charges |
||||||||||||||||||||
Interest and expense on indebtedness,
excluding capitalized interest |
$ | 844 | 566 | 338 | 369 | 279 | ||||||||||||||
Capitalized interest |
327 | 232 | 231 | 174 | 49 | |||||||||||||||
Preferred dividend requirements of
subsidiary and capital trusts |
| 38 | 53 | 53 | 53 | |||||||||||||||
Interest portion of rental expense |
149 | 181 | 90 | 42 | 47 | |||||||||||||||
Interest expense relating to guaranteed debt
of fifty-percent-or-less-owned companies |
1 | 16 | | | | |||||||||||||||
Interest expense relating to guaranteed debt
of greater than fifty-percent-owned
companies |
| 3 | | | | |||||||||||||||
$ | 1,321 | 1,036 | 712 | 638 | 428 | |||||||||||||||
Ration of Earnings to Fixed Charges |
7.0 | 2.9 | 5.3 | 6.6 | 3.7 | |||||||||||||||
* | Includes amortization of capitalized interest totaling approximately $25 million in 2003, $46 million in 2002, $20 million in 2001, and $17 million each in 2000 and 1999. |
Earnings available for fixed charges include, if any, the companys equity in losses of companies owned less than fifty percent and having debt for which the company is contingently liable. Fixed charges include the companys proportionate share, if any, of interest relating to the contingent debt.
Earnings available for fixed charges include, if any, 100 percent of the losses of companies owned greater than fifty percent that have debt for which the company is contingently liable. Fixed charges include 100 percent of interest and capitalized interest, if any, relating to the contingent debt.
Exhibit 21
SUBSIDIARY LISTING OF CONOCOPHILLIPS
Incorporation | |||||
Company Name | Location | ||||
Alpine Pipeline Company
|
Delaware | ||||
Arizona-Florida Land & Cattle Company
|
Florida | ||||
Asamera Algeria Limited
|
Alberta | ||||
Asamera Minerals (U.S.) Inc.
|
Colorado | ||||
Asamera Oil (U.S.) Inc.
|
Montana | ||||
Asamera Resources Inc.
|
Nevada | ||||
Ashford Energy Capital S.A.
|
Luxembourg | ||||
Australian Hydrocarbons Inc.
|
Delaware | ||||
AZL Resources, Inc.
|
Arizona | ||||
Aztec Catalyst Company
|
Delaware | ||||
Bantry Terminal Ltd
|
Ireland | ||||
Border Resources Ltd.
|
England | ||||
Brandywine Industrial Gas, Inc.
|
Delaware | ||||
BVLC, Inc.
|
California | ||||
C.S. Land, Inc.
|
California | ||||
Cajun Cogen LLC
|
Delaware | ||||
Calcasieu Properties L.L.C.
|
Delaware | ||||
Calcasieu Shipping Corporation
|
Delaware | ||||
Catoire S.A.
|
Belgium | ||||
CGP Developments Cajun Cogen LLC
|
Delaware | ||||
CGP Servicios Energeticos de Altamira, S. de R. L. de C. V.
|
Mexico | ||||
Clearwater Ltd.
|
Bermuda | ||||
Cliffe Storage Limited
|
England | ||||
Clyde Netherlands B.V.
|
The Netherlands | ||||
Clyde Petroleum (E&P) B.V.
|
The Netherlands | ||||
Clyde Petroleum (Exploration) Ltd.
|
England | ||||
Clyde Petroleum (Investments) Limited
|
England | ||||
Clyde Petroleum (Management) Limited
|
England | ||||
Clyde Petroleum Exploratie B.V.
|
The Netherlands | ||||
Clyde Petroleum Limited
|
Scotland | ||||
COMAP, Inc.
|
Delaware | ||||
Conoco (Thailand) Company, Limited
|
Thailand | ||||
Conoco A.G.
|
Switzerland | ||||
Conoco Africa Inc.
|
Delaware | ||||
Conoco Arabia Holding Ltd.
|
British Virgin Islands | ||||
Conoco Arabia Ltd.
|
Bermuda | ||||
Conoco Asia Ltd.
|
Bermuda | ||||
Conoco Asia Pacific Ltd.
|
Delaware | ||||
Conoco Asia Pacific Sdn. Bhd.
|
Malaysia | ||||
Conoco Asia Ventures Pte. Ltd.
|
Singapore | ||||
Conoco Capital Inc.
|
Delaware | ||||
Conoco Carbon and Minerals, Inc.
|
Delaware | ||||
1
Incorporation | |||||
Company Name | Location | ||||
Conoco Carbon Fibers Japan, KK
|
Japan | ||||
Conoco Center Inc.
|
Delaware | ||||
Conoco Central Europe Inc.
|
Delaware | ||||
Conoco Cevolution Europe B.V.
|
The Netherlands | ||||
Conoco Cevolution Germany GmbH
|
Germany | ||||
Conoco Colombia Ltd
|
Bermuda | ||||
Conoco Coral Inc.
|
Delaware | ||||
Conoco Corporate Holdings L.P.
|
Delaware | ||||
Conoco Deepwater Construction LLC
|
Delaware | ||||
Conoco Denmark Inc.
|
Delaware | ||||
Conoco Development Company
|
Delaware | ||||
Conoco Development II Inc.
|
Delaware | ||||
Conoco Development Services Inc.
|
Delaware | ||||
Conoco do Brasil Ltda.
|
Brazil | ||||
Conoco Drilling Inc.
|
Delaware | ||||
Conoco Egypt Inc.
|
Delaware | ||||
Conoco Energy Holdings Ltd.
|
Bermuda | ||||
Conoco Energy Holdings Nigeria Ltd.
|
Bermuda | ||||
Conoco Energy Nigeria Limited
|
Nigeria | ||||
Conoco Energy Services Company
|
Delaware | ||||
Conoco Energy Ventures Inc.
|
Delaware | ||||
Conoco Enterprise Funding LLC
|
Delaware | ||||
Conoco Equity Investments Inc.
|
Delaware | ||||
Conoco Este Pipeline Company
|
Delaware | ||||
Conoco EurAsia Inc.
|
Delaware | ||||
Conoco Exploration & Production B.V.
|
The Netherlands | ||||
Conoco Exploration & Production Nigeria Limited
|
Nigeria | ||||
Conoco Finance Inc.
|
Delaware | ||||
Conoco Foreign Sales Corporation
|
Barbados | ||||
Conoco Frontier Ltd.
|
Bermuda | ||||
Conoco Funding Company
|
Nova Scotia | ||||
Conoco Geisum Inc.
|
Delaware | ||||
Conoco Global Energy Company
|
Delaware | ||||
Conoco Global Power (U.K.) Limited
|
England | ||||
Conoco Global Power Assets Inc.
|
Delaware | ||||
Conoco Global Power Assets Sabine Inc.
|
Delaware | ||||
Conoco Global Power de Mexico, S. de R. L. de C. V.
|
Mexico | ||||
Conoco Global Power Developments Espana SRL
|
Spain | ||||
Conoco Global Power Developments Inc.
|
Delaware | ||||
Conoco Global Power Development-Sabine Inc.
|
Delaware | ||||
Conoco Global Power Europe Limited
|
Delaware | ||||
Conoco Global Power Inc.
|
Delaware | ||||
Conoco Guanare Ltd.
|
Bermuda | ||||
Conoco Holdings Ltd.
|
Bermuda | ||||
Conoco International Holding Ltd.
|
British Virgin Islands | ||||
Conoco Investment AG
|
Switzerland | ||||
2
Incorporation | |||||
Company Name | Location | ||||
Conoco Jet (Malaysia) Sdn. Bhd.
|
Malaysia | ||||
Conoco Khazar Ltd.
|
Bermuda | ||||
Conoco Kuwait Services Inc.
|
Delaware | ||||
Conoco Lagia Offshore, Inc.
|
Delaware | ||||
Conoco Lubricant (India) Private Limited
|
India | ||||
Conoco Lubricants (Malaysia) Sdn. Bhd.
|
Malaysia | ||||
Conoco Mexico Ltd.
|
Bermuda | ||||
Conoco Mexico Servicios, S.A. de C.V.
|
Mexico | ||||
Conoco Mexico, S.A. de C.V.
|
Mexico | ||||
Conoco Middle East Ltd.
|
Delaware | ||||
Conoco Mont Belvieu Holdings Inc.
|
Delaware | ||||
Conoco Nila Holding Ltd.
|
British Virgin Islands | ||||
Conoco Nordic Holding LLC
|
Delaware | ||||
Conoco Nordic Holdings AB
|
Sweden | ||||
Conoco Nordic Investment LP
|
Delaware | ||||
Conoco Nordic Limited
|
Bermuda | ||||
Conoco Northern Inc.
|
Canada | ||||
Conoco Northland Ltd.
|
Bermuda | ||||
Conoco Norway Properties Inc.
|
Delaware | ||||
Conoco NW Natuna Exploration & Production Ltd.
|
Bermuda | ||||
Conoco NW Natuna Holding Ltd.
|
British Virgin Islands | ||||
Conoco Offshore Pipe Line Company
|
Delaware | ||||
Conoco Orinoco Inc.
|
Delaware | ||||
Conoco Pakistan Exploration and Production B.V.
|
The Netherlands | ||||
Conoco Peru Ltd.
|
Bermuda | ||||
Conoco PETCOKE Far East Ltd.
|
Delaware | ||||
Conoco Petroleum Nigeria Limited
|
Nigeria | ||||
Conoco Petroleum Operations Inc.
|
Delaware | ||||
Conoco Pipe Line Company
|
Delaware | ||||
Conoco Power Marketing Inc
|
Delaware | ||||
Conoco Resources Holding B.V.
|
The Netherlands | ||||
Conoco Services Ltd.
|
Bermuda | ||||
Conoco Shale Oil Inc.
|
Delaware | ||||
Conoco Shipping & Marine Development L.L.C.
|
Marshall Islands | ||||
Conoco Shipping Company
|
Liberia | ||||
Conoco Shipping Norge Nr. 3 AS
|
Norway | ||||
Conoco Singapore Operations Pte. Limited
|
Singapore | ||||
Conoco South Sokang Natuna B.V.
|
The Netherlands | ||||
Conoco Specialty Products Limited
|
England | ||||
Conoco Syria DEZ Gas Ltd.
|
Bermuda | ||||
Conoco Syria Ltd.
|
Bermuda | ||||
Conoco Taiwan Exploration and Production B.V.
|
The Netherlands | ||||
Conoco Tobong Natuna B.V.
|
The Netherlands | ||||
Conoco Trading Company
|
Delaware | ||||
Conoco Trinidad (4a) B.V.
|
The Netherlands | ||||
Conoco Trinidad (4b) B.V.
|
The Netherlands | ||||
3
Incorporation | |||||
Company Name | Location | ||||
Conoco Trinidad Inc.
|
Delaware | ||||
Conoco U.K. Properties Inc.
|
Delaware | ||||
Conoco Venezuela B.V.
|
The Netherlands | ||||
Conoco Venezuela C.A.
|
Venezuela | ||||
Conoco Venezuela E&P Ltd.
|
Bermuda | ||||
Conoco Venezuela Holding C.A.
|
Venezuela | ||||
Conoco Venezuela Ltd.
|
Bermuda | ||||
Conoco Venezuela Services B.V.
|
The Netherlands | ||||
Conoco Warim B.V.
|
The Netherlands | ||||
ConocoPhillips (00-21) Pty Ltd
|
Western Australia | ||||
ConocoPhillips (91-12) Pty Ltd
|
Victoria, Australia | ||||
ConocoPhillips (91-13) Pty Ltd
|
Western Australia | ||||
ConocoPhillips (95-19) Pty Ltd
|
Victoria, Australia | ||||
ConocoPhillips (96-16) Pty Ltd
|
Western Australia | ||||
ConocoPhillips (96-20) Pty Ltd
|
Western Australia | ||||
ConocoPhillips (Aceh) Ltd.
|
Bermuda | ||||
ConocoPhillips (AIB) Ltd.
|
Bermuda | ||||
ConocoPhillips (Banyumas) Ltd.
|
Bermuda | ||||
ConocoPhillips (BTC) Ltd.
|
Cayman Islands | ||||
ConocoPhillips (GIB) Ltd.
|
Bermuda | ||||
ConocoPhillips (Glen) Limited
|
England | ||||
ConocoPhillips (Grissik) Ltd.
|
Bermuda | ||||
ConocoPhillips (Kakap) Ltd.
|
Bermuda | ||||
ConocoPhillips (Ketapang) Ltd.
|
Bermuda | ||||
ConocoPhillips (Palmerah) Ltd.
|
Bermuda | ||||
ConocoPhillips (Pangkah) Ltd.
|
Bermuda | ||||
ConocoPhillips (Ramba) Ltd.
|
Bermuda | ||||
ConocoPhillips (Sakakemang) Ltd.
|
Bermuda | ||||
ConocoPhillips (South Jambi) Ltd.
|
Bermuda | ||||
ConocoPhillips (Tungkal) Ltd.
|
Bermuda | ||||
ConocoPhillips (U.K.) Alpha Limited
|
England | ||||
ConocoPhillips (U.K.) Beta Limited
|
England | ||||
ConocoPhillips (U.K.) Cuu Long Limited
|
United Kingdom | ||||
ConocoPhillips (U.K.) Epsilom Limited
|
England | ||||
ConocoPhillips (U.K.) Eta Limited
|
England | ||||
ConocoPhillips (U.K.) Finance Limited
|
England | ||||
ConocoPhillips (U.K.) Gama Limited
|
England | ||||
ConocoPhillips (U.K.) Lambda Limited
|
Eire | ||||
ConocoPhillips (U.K.) Limited
|
England | ||||
ConocoPhillips (U.K.) Technology Limited
|
England | ||||
ConocoPhillips (U.K.) Theta Limited
|
England | ||||
ConocoPhillips (U.K.) Zeta Limited
|
England | ||||
ConocoPhillips 2000-E Company LLC
|
Delaware | ||||
ConocoPhillips Africa New Ventures Ltd.
|
Cayman Islands | ||||
ConocoPhillips Alaska, Inc.
|
Delaware | ||||
ConocoPhillips Alaska Natural Gas Corporation
|
Delaware | ||||
4
Incorporation | |||||
Company Name | Location | ||||
ConocoPhillips Arabia Inc.
|
Delaware | ||||
ConocoPhillips Arabia Limited
|
Cayman Islands | ||||
ConocoPhillips Arctic Inc.
|
Delaware | ||||
ConocoPhillips Australia WA-248 Company Pty. Ltd.
|
Australia | ||||
ConocoPhillips Australia Gas Holdings Pty Ltd
|
Western Australia | ||||
ConocoPhillips Australia Pty Ltd
|
Western Australia | ||||
ConocoPhillips Austria GmbH
|
Austria | ||||
ConocoPhillips Aviation Services LLC
|
Texas | ||||
ConocoPhillips Banyumas Holding Ltd.
|
British Virgin Islands | ||||
ConocoPhillips Bao Vang Ltd.
|
Cayman Islands | ||||
ConocoPhillips Belgium SA
|
Belgium | ||||
ConocoPhillips Block 204 UK Exploration Ltd.
|
Cayman Islands | ||||
ConocoPhillips Bohai Limited
|
Bahamas | ||||
ConocoPhillips Canada (East) Limited
|
Canada | ||||
ConocoPhillips Canada (North) Limited
|
Canada | ||||
ConocoPhillips Canada Energy Partnership
|
Alberta | ||||
ConocoPhillips Canada Limited
|
Nova Scotia | ||||
ConocoPhillips Canada Resources Corp.
|
Nova Scotia | ||||
ConocoPhillips Central and Eastern Europe Holdings B.V.
|
The Netherlands | ||||
ConocoPhillips China Inc.
|
Liberia | ||||
ConocoPhillips Communications Inc.
|
Delaware | ||||
ConocoPhillips Company
|
Delaware | ||||
ConocoPhillips Continental Holding GmbH
|
Germany | ||||
ConocoPhillips Czech Republic s.r.o.
|
Czech Republic | ||||
ConocoPhillips Danmark A/S
|
Denmark | ||||
ConocoPhillips Developments Limited
|
England | ||||
ConocoPhillips Eastern Hemisphere New Ventures Ltd.
|
Cayman Islands | ||||
ConocoPhillips Eastern Venezuela Gas Ltd.
|
Cayman Islands | ||||
ConocoPhillips Energy Asia Inc.
|
Delaware | ||||
ConocoPhillips Energy Marketing Corp.
|
Delaware | ||||
ConocoPhillips Enterprises Inc.
|
Delaware | ||||
ConocoPhillips European Gas and Power Limited
|
England | ||||
ConocoPhillips European Power Limited
|
England | ||||
ConocoPhillips Exploration Azerbaijan Ltd.
|
Cayman Islands | ||||
ConocoPhillips Exploration Investment, Ltd.
|
Cayman Islands | ||||
ConocoPhillips Exploration Kazakhstan Ltd.
|
Cayman Islands | ||||
ConocoPhillips Exploration Production Europe Limited
|
England | ||||
ConocoPhillips Finland Oy
|
Finland | ||||
ConocoPhillips Funding Ltd.
|
Bermuda | ||||
ConocoPhillips Germany GmbH
|
Germany | ||||
ConocoPhillips Global Funding S.a.r.l.
|
Luxembourg | ||||
ConocoPhillips Holding Company
|
Delaware | ||||
ConocoPhillips Holdings Limited
|
England | ||||
ConocoPhillips Hungary Kft. (Conoco Magyarorszag Kft)
|
Hungary | ||||
ConocoPhillips ICHP Limited
|
England | ||||
ConocoPhillips Indonesia Inc. Ltd.
|
Bermuda | ||||
5
Incorporation | |||||
Company Name | Location | ||||
ConocoPhillips Indonesia Ventures Ltd.
|
Cayman Islands | ||||
ConocoPhillips International Holding Ltd.
|
British Virgin Islands | ||||
ConocoPhillips International Inc.
|
Delaware | ||||
ConocoPhillips Investments Limited
|
England | ||||
ConocoPhillips Investments Norge AS
|
Norway | ||||
ConocoPhillips Japan Ltd.
|
Japan | ||||
ConocoPhillips Jet AS
|
Norway | ||||
ConocoPhillips JPDA Pty Ltd
|
Western Australia | ||||
ConocoPhillips Latin America New Ventures Ltd.
|
Cayman Islands | ||||
ConocoPhillips Limited
|
England | ||||
ConocoPhillips LNG Ltd.
|
Cayman Islands | ||||
ConocoPhillips Lubricants Australia Pty. Ltd.
|
Australia | ||||
ConocoPhillips Maroc Ltd.
|
Cayman Islands | ||||
ConocoPhillips MEA Ltd.
|
Cayman Islands | ||||
ConocoPhillips Middle East New Ventures Ltd.
|
Cayman Islands | ||||
ConocoPhillips New Ventures Ltd.
|
Cayman Islands | ||||
ConocoPhillips Nila Ltd.
|
Bermuda | ||||
ConocoPhillips Nordic AB
|
Sweden | ||||
ConocoPhillips Norge
|
Delaware | ||||
ConocoPhillips NZ Exploration Limited
|
Cayman Islands | ||||
ConocoPhillips Oil (GB) Limited
|
England & Wales | ||||
ConocoPhillips Oil Trading Limited
|
United Kingdom | ||||
ConocoPhillips Oilsands Partnership II
|
Alberta | ||||
ConocoPhillips Pacific LNG Ltd.
|
Cayman Islands | ||||
ConocoPhillips Pension Plan Trustees Limited
|
United Kingdom | ||||
ConocoPhillips Petroleum Chemicals U.K. Limited
|
United Kingdom | ||||
ConocoPhillips Petroleum Company U.K. Limited
|
United Kingdom | ||||
ConocoPhillips Petroleum Exploration Q, Ltd.
|
Cayman Islands | ||||
ConocoPhillips Petroleum Exploration R, Ltd.
|
Cayman Islands | ||||
ConocoPhillips Petroleum Exploration S, Ltd.
|
Cayman Islands | ||||
ConocoPhillips Petroleum Exploration T, Ltd.
|
Cayman Islands | ||||
ConocoPhillips Petroleum Exploration U, Ltd.
|
Cayman Islands | ||||
ConocoPhillips Petroleum International Corporation Denmark
|
Cayman Islands | ||||
ConocoPhillips Petroleum Limited
|
England | ||||
ConocoPhillips Petroleum U.K. Investment Corporation
|
Delaware | ||||
ConocoPhillips Pipeline Australia Pty Ltd
|
Western Australia | ||||
ConocoPhillips Poland Sp. z o.o.
|
Poland | ||||
ConocoPhillips Power Operations Limited
|
England | ||||
ConocoPhillips Qatar LNG Inc.
|
Delaware | ||||
ConocoPhillips Qatar Ltd.
|
Cayman Islands | ||||
ConocoPhillips Russia Inc.
|
Delaware | ||||
ConocoPhillips Russia Ventures Ltd.
|
Cayman Islands | ||||
ConocoPhillips Sabah Ltd.
|
Bermuda | ||||
ConocoPhillips Sakakemang Holding Ltd.
|
British Virgin Islands | ||||
ConocoPhillips Services Inc.
|
Delaware | ||||
ConocoPhillips Shipping Norge A/S
|
Norway | ||||
6
Incorporation | |||||
Company Name | Location | ||||
ConocoPhillips Shipping Norge Nr. 2 AS
|
Norway | ||||
ConocoPhillips Shtokman Inc.
|
Delaware | ||||
ConocoPhillips Skandinavia AS
|
Norway | ||||
ConocoPhillips Skandinavia AS Emden Branch
|
Norway | ||||
ConocoPhillips Slovakia s.r.o.
|
Slovak Republic | ||||
ConocoPhillips South Sokang Holding Ltd.
|
British Virgin Islands | ||||
ConocoPhillips South Sokang Ltd.
|
Bermuda | ||||
ConocoPhillips Specialty Products Inc.
|
Delaware | ||||
ConocoPhillips Specialty Products Inc.-CIS
|
Delaware | ||||
ConocoPhillips STL Pty Ltd.
|
Western Australia | ||||
ConocoPhillips Surmont Partnership
|
Alberta | ||||
ConocoPhillips Timan-Pechora Inc.
|
Delaware | ||||
ConocoPhillips Tobong Holding Ltd.
|
British Virgin Islands | ||||
ConocoPhillips Tobong Ltd.
|
Bermuda | ||||
ConocoPhillips Treasury Limited
|
England | ||||
ConocoPhillips Vietnam AS
|
Norway | ||||
ConocoPhillips Warim Ltd.
|
Bermuda | ||||
ConocoPhillips Western Canada Partnership
|
Alberta | ||||
ConocoPhillips Worldwide LNG, Ltd.
|
Cayman Islands | ||||
ConocoPhillips Z&M Ltd.
|
Cayman Islands | ||||
Cono-Services Inc.
|
Delaware | ||||
Conoven Holding Ltd.
|
British Virgin Islands | ||||
Continental Mid Delta Petroleum Company
|
Delaware | ||||
Continental Netherlands Oil Company B.V.
|
The Netherlands | ||||
Continental Oil Company
|
Delaware | ||||
Continental Oil Company (Nederland) B.V.
|
The Netherlands | ||||
Continental Oil Company Inc.
|
Canada | ||||
Continental Oil Company Limited
|
England | ||||
Continental Oil Company of Libya
|
Delaware | ||||
Continental Oil Company of Niger
|
Delaware | ||||
Continental Oil Company of Nigeria
|
Delaware | ||||
Continental Pipe Line Company
|
Delaware | ||||
COP Holdings Limited
|
England | ||||
Crestar Energy Holdings Ltd.
|
Bermuda | ||||
CRS Resources (Ecuador) LDC
|
Cayman Islands | ||||
Crusader (Ireland) Pty. Ltd.
|
Australia | ||||
Crusader Inc.
|
Delaware | ||||
CSPL Holdings Limited
|
England | ||||
Danube Insurance Ltd.
|
Bermuda | ||||
Darwin LNG Pty Ltd
|
Western Australia | ||||
Davis Point Pipeline Company
|
California | ||||
Diablo Service Corporation
|
California | ||||
Douglas Oil Company of California
|
California | ||||
Douglas Stations, Inc.
|
Delaware | ||||
Du Pont E&P No. 1 B.V.
|
The Netherlands | ||||
Du Pont E&P No. 12 B.V.
|
The Netherlands | ||||
7
Incorporation | |||||
Company Name | Location | ||||
Du Pont E&P No. 13 B.V.
|
The Netherlands | ||||
Dubai Marketing Company Ltd.
|
Delaware | ||||
Dubai Petroleum Company
|
Delaware | ||||
Eagle Sun Company Limited
|
Liberia | ||||
Emerald Shipping Corporation
|
Delaware | ||||
Emet Pty Ltd
|
Victoria, Australia | ||||
F.P.S.O. Development Ltd.
|
Bermuda | ||||
Fas-Gas Retail Services Co. of Texas
|
Texas | ||||
Four Star Beverage Company Inc.
|
Texas | ||||
Four Star Holding Company, Inc.
|
Texas | ||||
Frontier Deepwater Drilling Inc.
|
Delaware | ||||
Gas Natural del Guasare Ltd
|
Liberia | ||||
GCF Midstream Holdings, LLC
|
Delaware | ||||
GCRL Energy Ltd.
|
Colorado | ||||
GCRL Holdings Inc.
|
Delaware | ||||
GCRL International Limited
|
Alberta | ||||
Glen Petroleum Limited
|
England | ||||
Gulf Alberta Pipe Line Company Limited
|
Alberta | ||||
Gulf Canada Hibernia Ltd.
|
Canada | ||||
Gulf Canada Limited
|
Canada | ||||
Gulf Canada Properties Limited
|
Canada | ||||
Gulf Canada Tunisia Ltd.
|
Alberta | ||||
Gulf Energy Asia Pte Ltd.
|
Singapore | ||||
Gulf Expro Limited
|
Scotland | ||||
Gulf of Mexico Oil and Gas Properties LLC
|
Delaware | ||||
Gulf Petroleum (Australia) Pty Ltd.
|
Australia | ||||
Gulf Resources (Calik) Ltd.
|
Alberta | ||||
Gulf Resources (Halmahera) Ltd.
|
Alberta | ||||
Gulf Resources (Merangin) Ltd.
|
Alberta | ||||
Gulf Resources (NW Natuna) Ltd.
|
Alberta | ||||
Gulf Resources (Sakala Timur) Ltd.
|
Alberta | ||||
Gulf Resources (West Natuna) Ltd.
|
Alberta | ||||
Gulf Transasia Ltd.
|
Barbados | ||||
Hotel Phillips Management Company
|
Oklahoma | ||||
Immingham CHP LLP
|
England | ||||
Immingham Energy Limited
|
England | ||||
Interkraft Handel GmbH
|
Germany | ||||
International Energy Insurance Limited
|
Bermuda | ||||
International Energy Limited
|
Bahamas | ||||
International Petroleum Sales Inc.
|
Panama | ||||
IRC Pension Trust Limited
|
Ireland | ||||
Irish Petroleum Company Limited
|
Ireland | ||||
Irish Refining Limited
|
Ireland | ||||
JET Petrol Limited
|
Northern Ireland | ||||
Jet Petroleum Limited
|
England | ||||
Jet Tankstellen-Betriebs-GmbH
|
Germany | ||||
8
Incorporation | |||||
Company Name | Location | ||||
Jet/Jiffy Shops Limited
|
Thailand | ||||
Jiffy Limited
|
England | ||||
Kayo Oil Company
|
Delaware | ||||
Kenai LNG Corporation
|
Delaware | ||||
Kenai Tankers LLC
|
Delaware | ||||
Koala Smokeless Fuels Ltd.
|
Australia | ||||
Kuparuk Pipeline Company
|
Delaware | ||||
Lantri Investments B.V.
|
The Netherlands | ||||
Leland Energy Partnership
|
Alberta | ||||
Linden Urban Renewal Limited Partnership
|
New Jersey | ||||
Lobo Inc.
|
Delaware | ||||
Lobo Pipeline Company L.P.
|
Delaware | ||||
Longhorn Pipeline Company
|
Delaware | ||||
Louisiana Gas System Inc.
|
Delaware | ||||
Lubricantes 76 Mexico, S.A. de C.V.
|
Mexico | ||||
Maspher Investments B.V.
|
The Netherlands | ||||
McKinneys Gas Services, Inc.
|
Delaware | ||||
Morgan Hydrocarbons Inc.
|
Canada | ||||
Morgan Hydrocarbons International Inc.
|
Canada | ||||
Norske ConocoPhillips AS
|
Norway | ||||
North Gillette Coal Company
|
Nevada | ||||
Oliktok Pipeline Company
|
Delaware | ||||
Pacific Northwest Energy Company
|
Washington | ||||
Pacific Pipelines, Inc
|
Delaware | ||||
Peerless Insurance Company Limited
|
Barbados | ||||
Petco Enterprises Ltd.
|
Japan | ||||
Petrex S.A.
|
Belgium | ||||
Petroleum Transmission Company
|
Canada | ||||
Petroz (International) Pty Ltd
|
Queensland, Australia | ||||
Petroz (Timor Sea) Pty Ltd
|
Western Australia | ||||
Petroz (ZOCA 91-08) Pty Ltd
|
Queensland, Australia | ||||
Petroz Bentu LDC
|
Cayman Islands | ||||
Petroz Korinci Baru LDC
|
Cayman Islands | ||||
Petroz LNG Pty Ltd
|
Western Australia | ||||
Petroz N.L.
|
Australia | ||||
Phillips (Brass) Limited
|
Cayman Islands | ||||
Phillips 66 Capital I
|
Delaware | ||||
Phillips 66 Capital III
|
Delaware | ||||
Phillips 66 Capital IV
|
Delaware | ||||
Phillips 66 Capital V
|
Delaware | ||||
Phillips 66 Capital VI
|
Delaware | ||||
Phillips Africa Exploration, Ltd.
|
Liberia | ||||
Phillips Alaska Holdings, Inc.
|
Delaware | ||||
Phillips Alaska Receivables Company, LLC
|
Delaware | ||||
Phillips Alpine Alaska, Inc.
|
Delaware | ||||
Phillips Alpine Alaska, LLC
|
Delaware | ||||
9
Incorporation | |||||
Company Name | Location | ||||
Phillips Angola Offshore Ltd.
|
Cayman Islands | ||||
Phillips Australasia Exploration Co.
|
Liberia | ||||
Phillips Caspian, Ltd.
|
Liberia | ||||
Phillips Chemical Holdings Company
|
Delaware | ||||
Phillips Coal Company
|
Nevada | ||||
Phillips Deepwater Africa Exploration, Ltd.
|
Cayman Islands | ||||
Phillips Deepwater Exploration Nigeria Limited
|
Nigeria | ||||
Phillips Expatriate Services Company
|
Delaware | ||||
Phillips Exploration Angola, Ltd.
|
Liberia | ||||
Phillips Exploration Azerbaijan, Ltd.
|
Cayman Islands | ||||
Phillips Exploration Nigeria Limited
|
Nigeria | ||||
Phillips Gas Company
|
Delaware | ||||
Phillips Gas Company Shareholder, Inc.
|
Delaware | ||||
Phillips Gas Investment Company
|
Delaware | ||||
Phillips Gas Pipeline Company
|
Delaware | ||||
Phillips Gas Supply Corporation
|
Delaware | ||||
Phillips Indonesia Inc.
|
Delaware | ||||
Phillips Internacional Quimicos Ltda.
|
Brazil | ||||
Phillips International Investments, Inc.
|
Delaware | ||||
Phillips Investment Company
|
Nevada | ||||
Phillips LNG Middle East Ltd.
|
Cayman Islands | ||||
Phillips LNG Technology Services Company
|
Delaware | ||||
Phillips LNG Ventures Limited
|
Liberia | ||||
Phillips Mexico LNG, LLC
|
Delaware | ||||
Phillips-New Mexico Partners, L.P.
|
Delaware | ||||
Phillips New Ventures, Ltd.
|
Cayman Islands | ||||
Phillips Oil Company (Nigeria) Ltd.
|
Nigeria | ||||
Phillips Oil Company Australia
|
Liberia | ||||
Phillips Petroleum Africa, Ltd.
|
Liberia | ||||
Phillips Petroleum Algeria, Ltd.
|
Cayman Islands | ||||
Phillips Petroleum Arabia, Ltd.
|
Liberia | ||||
Phillips Petroleum Argentina S.A.
|
Argentina | ||||
Phillips Petroleum Asia Ventures, Ltd.
|
Liberia | ||||
Phillips Petroleum Borneo, Ltd.
|
Liberia | ||||
Phillips Petroleum Canada Ltd.
|
New Brunswick | ||||
Phillips Petroleum Company Algeria
|
Delaware | ||||
Phillips Petroleum Company Andes
|
Delaware | ||||
Phillips Petroleum Company Cameroon
|
Delaware | ||||
Phillips Petroleum Company Indonesia
|
Delaware | ||||
Phillips Petroleum Company Ireland
|
Delaware | ||||
Phillips Petroleum Company Kuwait
|
Cayman Islands | ||||
Phillips Petroleum Company Niugini
|
Delaware | ||||
Phillips Petroleum Company Western Hemisphere
|
Delaware | ||||
Phillips Petroleum Company ZOC Pty. Ltd.
|
Australia | ||||
Phillips Petroleum Do Brasil Ltda.
|
Brazil | ||||
Phillips Petroleum Eurasia, Ltd.
|
Liberia | ||||
10
Incorporation | |||||
Company Name | Location | ||||
Phillips Petroleum Europe Exploration Ltd.
|
Liberia | ||||
Phillips Petroleum Greenland A/S
|
Greenland | ||||
Phillips Petroleum International Corporation
|
Delaware | ||||
Phillips Petroleum International Corporation Italy
|
Liberia | ||||
Phillips Petroleum International Corporation Somalia
|
Liberia | ||||
Phillips Petroleum International Corporation Venezuela
|
Liberia | ||||
Phillips Petroleum International Investment Company
|
Delaware | ||||
Phillips Petroleum International Ventures Corporation
|
Panama | ||||
Phillips Petroleum Kazakhstan, Ltd.
|
Liberia | ||||
Phillips Petroleum Kuwait, Ltd.
|
Liberia | ||||
Phillips Petroleum Latin America, Ltd.
|
Liberia | ||||
Phillips Petroleum Management Corporation
|
Panama | ||||
Phillips Petroleum Middle East, Ltd.
|
Liberia | ||||
Phillips Petroleum Mudayy, Ltd.
|
Liberia | ||||
Phillips Petroleum Oman, Ltd.
|
Liberia | ||||
Phillips Petroleum Peru Ltd.
|
Liberia | ||||
Phillips Petroleum Resources, Ltd.
|
Delaware | ||||
Phillips Petroleum Russia, Ltd.
|
Delaware | ||||
Phillips Petroleum Sisimiut A/S
|
Greenland | ||||
Phillips Petroleum South Africa, Ltd.
|
Liberia | ||||
Phillips Petroleum T&T, Ltd.
|
Liberia | ||||
Phillips Pipe Line Company
|
Delaware | ||||
Phillips Pt. Arguello Production Company
|
Delaware | ||||
Phillips Receivables Company II, LLC
|
Delaware | ||||
Phillips Receivables Company, LLC
|
Oklahoma | ||||
Phillips Retail Marketing Company
|
Delaware | ||||
Phillips-San Juan Partners, L.P.
|
Delaware | ||||
Phillips Singapore Private Limited
|
Singapore | ||||
Phillips STL Ventures Inc.
|
Delaware | ||||
Phillips Texas Pipeline Company, Ltd.
|
Texas | ||||
Phillips Transportation Alaska, Inc.
|
Delaware | ||||
Phillips Utility Gas Corporation
|
Delaware | ||||
Pioneer Investments Corporation
|
Delaware | ||||
Pioneer Pipeline Company
|
Delaware | ||||
Polar Tankers Spill Response Company
|
Delaware | ||||
Polar Tankers, Inc
|
Delaware | ||||
Pontoon (Timor Sea) Pty Ltd
|
Western Australia | ||||
Pontoon N.L.
|
Western Australia | ||||
Power Tex Joint Venture
|
Delaware | ||||
Projet Malaysia Sdn. Bhd.
|
Malaysia | ||||
Proteina Brasileira Ltda.
|
Brazil | ||||
PT. ConocoPhillips Downstream Indonesia
|
Indonesia | ||||
R.A.Z. Properties, Inc.
|
California | ||||
Raptor Facilities Inc.
|
Delaware | ||||
Raptor Gas Transmission LLC
|
Delaware | ||||
Raptor Natural Pipeline LLC
|
New Mexico | ||||
11
Incorporation | |||||
Company Name | Location | ||||
Raptor Natural Plains Marketing LLC
|
Delaware | ||||
Rocky Mountain Investment & Antique Company
|
Wyoming | ||||
Salt Lake Terminal Company
|
Delaware | ||||
San Jacinto Eastern Corp.
|
Delaware | ||||
San Jacinto Service Company
|
Delaware | ||||
San Pablo Bay Pipeline Company
|
Delaware | ||||
San Pablo Bay Pipeline Company LLC
|
Delaware | ||||
Seagas Pipeline Company
|
Delaware | ||||
Seahorse Shuttling and Technology L.L.C.
|
Delaware | ||||
Seminole Fertilizer Corporation
|
Delaware | ||||
Smartshop NV
|
Belgium | ||||
Smile Loyalty Limited
|
England | ||||
Sooner Insurance Brokers Limited
|
Bermuda | ||||
Sooner Insurance Company
|
Vermont | ||||
Southern Energy UK Generation Limited
|
England | ||||
Spirit Enterprises, Inc.
|
Delaware | ||||
SRW Cogeneration Limited Partnership
|
Delaware | ||||
Stampeder Acquisition (No. 2) Ltd.
|
Canada | ||||
Stampeder Acquisition Ltd.
|
Alberta | ||||
Stampeder Energy (U.S.) Inc.
|
Delaware | ||||
Stampeder Exploration Ltd.
|
Alberta | ||||
Sweeny Coker Investor Sub, Inc.
|
Delaware | ||||
Terminal de Gas Natural Licuado de Rosarito TGNLR, S. de R.L. de C.V.
|
Mexico | ||||
The Largo Company
|
Delaware | ||||
The Standard Shale Products Company
|
Colorado | ||||
Tosco Canada Ltd.
|
Yukon Territory | ||||
Tosco Europe Limited
|
United Kingdom | ||||
Tosco Trading, Transportation and Supply, Inc.
|
Delaware | ||||
Trilogy France Corporation
|
Novia Scotia | ||||
TS, Inc.
|
Georgia | ||||
Union Pipeline Company (California)
|
California | ||||
Unocal Expresslube, Inc.
|
Illinois | ||||
Wabiskaw Explorations Ltd.
|
Canada | ||||
WesTTex 66 Pipeline Company
|
Delaware | ||||
World Wide Transport, Inc.
|
Liberia | ||||
3072496 Nova Scotia Company
|
Nova Scotia | ||||
349910 Alberta Inc.
|
Alberta | ||||
362084 Alberta Inc.
|
Alberta | ||||
3793885 Canada Ltd.
|
Canada | ||||
534404 Alberta Ltd.
|
Alberta | ||||
625894 Alberta Inc.
|
Alberta | ||||
66 Pipe Line Company
|
Delaware | ||||
942819 Alberta Ltd.
|
Alberta | ||||
Certain subsidiaries are omitted since such subsidiaries considered in the aggregate do not constitute a significant subsidiary.
12
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference of our report dated February 25, 2004, with respect to the consolidated financial statements, condensed consolidating financial information and schedule of ConocoPhillips included in the Annual Report (Form 10-K) for the year ended December 31, 2003, in the following registration statements and related prospectus.
ConocoPhillips Form S-3 File No. 333-101187
ConocoPhillips Form S-8 File No. 333-98681
/s/ Ernst & Young LLP
Ernst & Young LLP
Houston, Texas
February 25, 2004
Exhibit 31.1
CERTIFICATION
I, J. J. Mulva, certify that:
1. | I have reviewed this annual report on Form 10-K of ConocoPhillips; | |||
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |||
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |||
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |||
(b) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |||
(c) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and | |||
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date:
|
February 23, 2004 | |||
/s/ J. J. Mulva | ||
J. J. Mulva | ||
President and Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
I, John A. Carrig, certify that:
1. | I have reviewed this annual report on Form 10-K of ConocoPhillips; | |||
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |||
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |||
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |||
(b) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |||
(c) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and | |||
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date:
|
February 23, 2004 | |||
/s/ John A. Carrig | ||
John A. Carrig | ||
Executive Vice President, Finance, | ||
and Chief Financial Officer |
Exhibit 32
CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the Annual Report of ConocoPhillips (the company) on Form 10-K for the period ending December 31, 2003, as filed with the U.S. Securities and Exchange Commission on the date hereof (the Report), each of the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to their knowledge:
(1) | The Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and | |||
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the company. |
Date:
|
February 23, 2004 | |||
/s/ J. J. Mulva | ||
J. J. Mulva | ||
President and Chief Executive Officer | ||
/s/ John A. Carrig | ||
John A. Carrig | ||
Executive Vice President, Finance, | ||
and Chief Financial Officer |