UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

ý                                 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2006

 

or

 

o                                 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                                               to                                              

 

Commission file number: 001-32395

 

ConocoPhillips

(Exact name of registrant as specified in its charter)

 

Delaware

 

01-0562944

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

600 North Dairy Ashford, Houston, TX 77079

(Address of principal executive offices) (Zip Code)

 

281-293-1000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ý

 

Accelerated filer o

Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No ý

 

The registrant had 1,650,644,278 shares of common stock, $.01 par value, outstanding at March 31, 2006.

 

 



 

CONOCOPHILLIPS

 

TABLE OF CONTENTS

 

 

 

Page

Part I – Financial Information

 

 

Item 1. Financial Statements

 

 

Consolidated Income Statement

1

 

Consolidated Balance Sheet

2

 

Consolidated Statement of Cash Flows

3

 

Notes to Consolidated Financial Statements

4

 

Supplementary Information—Condensed Consolidating Financial Information

26

 

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

33

 

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

56

 

 

 

 

Item 4. Controls and Procedures

56

 

 

 

 

Part II – Other Information

 

 

 

 

 

Item 1. Legal Proceedings

58

 

 

 

 

Item 1A. Risk Factors

59

 

 

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

59

 

 

 

 

Item 6. Exhibits

59

 

 

 

 

Signature

60

 

 



 

PART I. FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

 

Consolidated Income Statement

 

ConocoPhillips

 

 

 

 

Millions of Dollars

 

 

 

Three Months Ended
March 31

 

 

 

2006

 

2005

 

Revenues and Other Income

 

 

 

 

 

Sales and other operating revenues (1)

 

$

46,906

 

37,631

 

Equity in earnings of affiliates

 

960

 

1,053

 

Other income

 

61

 

234

 

Total Revenues and Other Income

 

47,927

 

38,918

 

 

 

 

 

 

 

Costs and Expenses

 

 

 

 

 

Purchased crude oil, natural gas and products

 

33,455

 

25,572

 

Production and operating expenses

 

2,215

 

1,952

 

Selling, general and administrative expenses

 

566

 

539

 

Exploration expenses

 

112

 

171

 

Depreciation, depletion and amortization

 

1,180

 

1,041

 

Property impairments

 

 

22

 

Taxes other than income taxes (1)

 

4,387

 

4,488

 

Accretion on discounted liabilities

 

60

 

48

 

Interest and debt expense

 

115

 

138

 

Foreign currency transaction losses (gains)

 

22

 

(3

)

Minority interests

 

18

 

10

 

Total Costs and Expenses

 

42,130

 

33,978

 

Income from continuing operations before income taxes

 

5,797

 

4,940

 

Provision for income taxes

 

2,506

 

2,017

 

Income From Continuing Operations

 

3,291

 

2,923

 

Loss from discontinued operations

 

 

(11

)

Net Income

 

$

3,291

 

2,912

 

 

 

 

 

 

 

Income (Loss) Per Share of Common Stock (dollars) (2)

 

 

 

 

 

Basic

 

 

 

 

 

Continuing operations

 

$

2.38

 

2.09

 

Discontinued operations

 

 

(.01

)

Net Income

 

$

2.38

 

2.08

 

 

 

 

 

 

 

Diluted

 

 

 

 

 

Continuing operations

 

$

2.34

 

2.06

 

Discontinued operations

 

 

(.01

)

Net Income

 

$

2.34

 

2.05

 

 

 

 

 

 

 

Dividends Paid Per Share of Common Stock (dollars) (2)

 

$

.36

 

.25

 

 

 

 

 

 

 

Average Common Shares Outstanding (in thousands) (2)

 

 

 

 

 

Basic

 

1,382,925

 

1,397,893

 

Diluted

 

1,404,704

 

1,420,372

 

(1) Includes excise taxes on petroleum products sales:

 

$

3,990

 

4,155

 

(2) Per-share amounts and average number of shares outstanding in the 2005 quarter reflect a two-for-one stock split effected as a 100 percent stock dividend on June 1, 2005.

 

 

 

 

 

See Notes to Consolidated Financial Statements.

 

 

 

 

 

 

1

 



 

Consolidated Balance Sheet

 

ConocoPhillips

 

 

 

 

Millions of Dollars

 

 

 

March 31

 

December 31

 

 

 

2006

 

2005

 

Assets

 

 

 

 

 

Cash and cash equivalents

 

$

3,008

 

2,214

 

Accounts and notes receivable (net of allowance of $76 million in 2006 and $72 million in 2005)

 

12,050

 

11,168

 

Accounts and notes receivable—related parties

 

707

 

772

 

Inventories

 

5,507

 

3,724

 

Prepaid expenses and other current assets

 

1,665

 

1,734

 

Total Current Assets

 

22,937

 

19,612

 

Investments and long-term receivables

 

16,777

 

15,726

 

Net properties, plants and equipment

 

85,960

 

54,669

 

Goodwill

 

32,232

 

15,323

 

Intangibles

 

1,125

 

1,116

 

Other assets

 

621

 

553

 

Total Assets

 

$

159,652

 

106,999

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Accounts payable

 

$

13,434

 

11,732

 

Accounts payable—related parties

 

563

 

535

 

Notes payable and long-term debt due within one year

 

6,127

 

1,758

 

Accrued income and other taxes

 

5,385

 

3,516

 

Employee benefit obligations

 

1,114

 

1,212

 

Other accruals

 

2,400

 

2,606

 

Total Current Liabilities

 

29,023

 

21,359

 

Long-term debt

 

26,066

 

10,758

 

Asset retirement obligations and accrued environmental costs

 

5,539

 

4,591

 

Deferred income taxes

 

20,422

 

11,439

 

Employee benefit obligations

 

2,669

 

2,463

 

Other liabilities and deferred credits

 

2,503

 

2,449

 

Total Liabilities

 

86,222

 

53,059

 

 

 

 

 

 

 

Minority Interests

 

1,237

 

1,209

 

 

 

 

 

 

 

Common Stockholders’ Equity

 

 

 

 

 

Common stock (2,500,000,000 shares authorized at $.01 par value)
Issued (2006—1,697,466,551 shares; 2005—1,455,861,340 shares)

 

 

 

 

 

Par value

 

17

 

14

 

Capital in excess of par

 

41,371

 

26,754

 

Grantor trusts (at cost: 2006—46,822,273 shares; 2005—45,932,093 shares)

 

(831

)

(778

)

Treasury stock (at cost: 2006—0 shares; 2005—32,080,000 shares)

 

 

(1,924

)

Accumulated other comprehensive income

 

986

 

814

 

Unearned employee compensation

 

(163

)

(167

)

Retained earnings

 

30,813

 

28,018

 

Total Common Stockholders’ Equity

 

72,193

 

52,731

 

Total

 

$

159,652

 

106,999

 

See Notes to Consolidated Financial Statements.

 

 

 

 

 

 

2

 



 

Consolidated Statement of Cash Flows

 

ConocoPhillips

 

 

 

 

Millions of Dollars

 

 

 

Three Months Ended
March 31

 

 

 

2006

 

2005

 

Cash Flows From Operating Activities

 

 

 

 

 

Income from continuing operations

 

$

3,291

 

2,923

 

Adjustments to reconcile income from continuing operations to net cash provided by continuing operations

 

 

 

 

 

Non-working capital adjustments

 

 

 

 

 

Depreciation, depletion and amortization

 

1,180

 

1,041

 

Property impairments

 

 

22

 

Dry hole costs and leasehold impairments

 

38

 

109

 

Accretion on discounted liabilities

 

60

 

48

 

Deferred taxes

 

168

 

123

 

Undistributed equity earnings

 

(67

)

(805

)

Gain on asset dispositions

 

(3

)

(177

)

Other

 

(203

)

(78

)

Working capital adjustments

 

 

 

 

 

Decrease in aggregate balance of accounts receivable sold

 

 

(480

)

Increase (decrease) in other accounts and notes receivable

 

550

 

(474

)

Increase in inventories

 

(1,304

)

(903

)

Increase in prepaid expenses and other current assets

 

 

(177

)

Increase in accounts payable

 

108

 

1,744

 

Increase in taxes and other accruals

 

982

 

1,178

 

Net cash provided by continuing operations

 

4,800

 

4,094

 

Net cash used in discontinued operations

 

 

(5

)

Net Cash Provided by Operating Activities

 

4,800

 

4,089

 

 

 

 

 

 

 

Cash Flows From Investing Activities

 

 

 

 

 

Acquisition of Burlington Resources Inc.*

 

(14,190

)

 

Capital expenditures and investments, including dry hole costs*

 

(4,514

)

(1,822

)

Proceeds from asset dispositions

 

5

 

87

 

Long-term advances/loans to affiliates and other

 

(126

)

(38

)

Collection of advances/loans to affiliates and other

 

11

 

63

 

Net cash used in continuing operations

 

(18,814

)

(1,710

)

Net cash used in discontinued operations

 

 

 

Net Cash Used in Investing Activities

 

(18,814

)

(1,710

)

 

 

 

 

 

 

Cash Flows From Financing Activities

 

 

 

 

 

Issuance of debt

 

15,340

 

333

 

Repayment of debt

 

(16

)

(1,319

)

Issuance of company common stock

 

40

 

155

 

Repurchase of company common stock

 

 

(194

)

Dividends paid on company common stock

 

(496

)

(348

)

Other

 

(27

)

64

 

Net cash used in continuing operations

 

14,841

 

(1,309

)

Net Cash Used in Financing Activities

 

14,841

 

(1,309

)

 

 

 

 

 

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

 

(33

)

(36

)

 

 

 

 

 

 

Net Change in Cash and Cash Equivalents

 

794

 

1,034

 

Cash and cash equivalents at beginning of period

 

2,214

 

1,387

 

Cash and Cash Equivalents at End of Period

 

$

3,008

 

2,421

 

*Net of cash acquired.

See Notes to Consolidated Financial Statements.

 

 

 

 

 

 

3

 



 

Notes to Consolidated Financial Statements

 

ConocoPhillips

 

 

Note 1—Interim Financial Information

 

The interim-period financial information presented in the financial statements included in this report is unaudited and includes all known accruals and adjustments that, in the opinion of management, are necessary for a fair presentation of the consolidated financial position of ConocoPhillips and its results of operations and cash flows for such periods. All such adjustments are of a normal and recurring nature. The acquisition of Burlington Resources Inc. is reflected in our March 31, 2006, balance sheet, and it will be reflected in our results of operations beginning in the second quarter of 2006. To enhance your understanding of these interim financial statements, see the consolidated financial statements and notes included in our 2005 Annual Report on Form 10-K.

 

Note 2—Accounting Policies

 

Revenue Recognition—Revenues associated with sales of crude oil, natural gas, natural gas liquids, petroleum and chemical products, and other items are recognized when title passes to the customer, which is when the risk of ownership passes to the purchaser and physical delivery of goods occurs, either immediately or within a fixed delivery schedule that is reasonable and customary in the industry. Revenues include the sales portion of transactions commonly called buy/sell contracts, in which physical commodity purchases and sales are simultaneously contracted with the same counterparty to either obtain a different quality or grade of refinery feedstock supply, reposition a commodity (for example, where we enter into a contract with a counterparty to sell refined products or natural gas volumes at one location and purchase similar volumes at another location closer to our wholesale customer), or both.

 

Buy/sell transactions have the same general terms and conditions as typical commercial contracts including: separate title transfer, transfer of risk of loss, separate billing and cash settlement for both the buy and sell sides of the transaction, and non-performance by one party does not relieve the other party of its obligation to perform, except in events of force majeure. Because buy/sell contracts have similar terms and conditions, we and many other companies in our industry account for these purchase and sale transactions separately as a purchase and a sale in the consolidated income statement.

 

In September 2005, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 04-13, “Accounting for Purchases and Sales of Inventory with the Same Counterparty.” Issue No. 04-13 requires purchases and sales of inventory with the same counterparty entered into “in contemplation” of one another to be combined and reported net (i.e. on the same income statement line). Exceptions to this are exchanges of finished goods for raw materials or work-in-progress within the same line of business, which are only reported net if the transaction lacks economic substance.

 

The guidance provided by EITF No. 04-13 is effective for new arrangements entered into after March 31, 2006, and for modifications or renewals of existing arrangements made after that date. Any impact to income from continuing operations and net income would result from changes in last-in, first-out (LIFO) inventory valuations, and is not expected to be material.

 

4

 



 

Had this new guidance been effective for the periods included in this report, the pro forma sales and other operating revenues, and purchased crude oil, natural gas and products would have been as follows:

 

 

 

Millions of Dollars

 

 

 

Three Months Ended
March 31

 

 

 

2006

 

2005

 

Pro Forma—EITF No. 04-13

 

 

 

 

 

Sales and other operating revenues

 

$

40,822

 

33,062

 

Purchased crude oil, natural gas and products

 

27,371

 

21,003

 

 

Our Commercial organization uses commodity derivative contracts (such as futures and options) in various markets to optimize the value of our supply chain and to 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.

 

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 to be non-recoverable through remaining production, are recognized as accounts receivable or accounts payable, as appropriate. Cumulative differences between volumes sold and entitlement volumes are generally 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.

 

Stock-Based Compensation—Effective January 1, 2003, we voluntarily adopted the fair-value accounting method prescribed by Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation.”  We used the prospective transition method, 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 were accounted for under Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations; however, by the end of 2005, all of these awards had vested. Because the exercise price of our employee stock options equals the market price of the underlying stock on the date of grant, generally no compensation expense was recognized under APB Opinion No. 25. The following table displays 2005 pro forma information as if provisions of SFAS No. 123 had been applied to all employee stock options granted:

 

5

 



 

 

 

Millions of
Dollars

 

Three Months Ended March 31, 2005*

 

 

 

Net income, as reported

 

$

2,912

 

Add: Stock-based employee compensation expense included in reported net income, net of related tax effects

 

39

 

Deduct: Total stock-based employee compensation expense determined under fair-value-based method for all awards, net of related tax effects

 

(40

)

Pro forma net income

 

$

2,911

 

 

 

 

 

Earnings per share:

 

 

 

Basic—as reported

 

$

2.08

 

Basic—pro forma

 

2.08

 

Diluted—as reported

 

2.05

 

Diluted—pro forma

 

2.05

 

*Per-share amounts restated to reflect a two-for-one stock split effected as a 100 percent stock dividend on June 1, 2005.

 

Effective January 1, 2006, we adopted SFAS No. 123 (revised 2004), “Share-Based Payment,” (SFAS No. 123(R)). For information about our adoption of this new accounting standard, see Note 3—Changes in Accounting Principles.

 

Note 3—Changes in Accounting Principles

 

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R), which supercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and replaces SFAS No. 123, “Accounting for Stock-Based Compensation.”  SFAS No. 123(R), which was effective January 1, 2006, prescribes the accounting for a wide range of share-based compensation arrangements, including options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans, and generally requires the fair value of share-based awards to be expensed. We adopted the provisions of this Statement on January 1, 2006, using the modified-prospective transition method.

 

SFAS No. 123(R) permits the use of either the accelerated method or the straight-line method to recognize expense for share-based awards subject to graded vesting (i.e., when portions of the award vest at different dates throughout the vesting period). In the past, we have used the accelerated recognition method for these awards, but concurrent with our adoption of SFAS No. 123(R), we elected to use the straight-line recognition method to account for new awards granted with graded vesting provisions.

 

Generally, our stock-based compensation programs provide accelerated vesting (i.e., a waiver of the remaining period of service required to earn an award) for awards held by employees at the time of their retirement. For awards granted prior to January 1, 2006, we recognize expense over the period of time during which the employee earns the award, accelerating the recognition of expense only when an employee actually retires.

 

For stock-based compensation awards granted after December 31, 2005, our adoption of SFAS No. 123(R) requires us to recognize expense over the shorter of: 1) the service period (i.e., the stated period of time required to earn the award); or 2) the period beginning at the start of the service period and ending when an employee first becomes eligible for retirement. This change in recognition method will shorten the

 

6

 



 

period over which we recognize expense for most of our stock-based awards granted to our employees who are already age 55 or older.

 

During the first quarter of 2006, the company granted 3,057,505 restricted stock units, with an average fair value of $58.44 per unit, under the 2004 Omnibus Stock and Performance Incentive Plan and lifted restrictions on 41,102 restricted stock units granted in prior years.

 

Also during the first quarter of 2006, the company granted 1,734,100 stock options under the 2004 Omnibus Stock and Performance Incentive Plan with an average exercise price of $59.08 and an average fair value of $16.11 per option. This value was calculated using the Black-Scholes option-pricing model, assuming a risk-free interest rate of 4.62 percent, an expected dividend yield of 2.50 percent, a volatility factor of 26.1 percent and an expected life of 7.2 years. None of these stock options were exercisable as of March 31, 2006. During the first quarter of 2006, 1,848,948 stock options were exercised with an average exercise price of $24.06 per option, and 5,999,645 options became eligible for exercise.

 

In addition to the above stock option activity, on March 31, 2006, in exchange for outstanding Burlington Resources Inc. stock options, the company granted approximately 3.6 million vested stock options, with an average exercise price of $23.40 per share, and approximately 1.3 million non-vested stock options with an average exercise price of $62.99 per share. The aggregate fair value of these options, as calculated with the Black-Scholes option-pricing model, was approximately $140 million.

 

Due in part to our having fully adopted the fair-value accounting method prescribed by SFAS No. 123 on January 1, 2003, the adoption of SFAS No. 123(R) did not have a material impact on our first-quarter 2006 financial statements, nor do we expect it to have a material impact on our future financial statements.

 

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4.”  This Statement clarifies that items such as abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) be recognized as current-period charges. In addition, the Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. We adopted this Statement in the first quarter of 2006. The adoption of this Statement did not have a material impact on our financial statements.

 

Note 4—Common Stock Split

 

On April 7, 2005, our Board of Directors declared a two-for-one common stock split effected in the form of a 100 percent stock dividend, payable June 1, 2005, to stockholders of record as of May 16, 2005. The total number of authorized common shares and associated par value per share were unchanged by this action. Shares and per-share information in the Consolidated Income Statement and Balance Sheet are on an after-split basis for all periods presented.

 

Note 5—Acquisition of Burlington Resources Inc.

 

On March 31, 2006, ConocoPhillips completed the $33.8 billion acquisition of Burlington Resources Inc., an independent exploration and production company that held a substantial position in North American natural gas proved reserves, production and exploratory acreage. We issued approximately 270.4 million shares of our common stock and paid approximately $17.4 billion in cash. We acquired $3.2 billion in cash from Burlington Resources in the acquisition, resulting in a net cash acquisition amount of

 

7

 



 

$14.2 billion. Results of operations attributable to Burlington Resources will be included in ConocoPhillips’ consolidated income statement beginning in the second quarter of 2006.

 

The acquisition of Burlington Resources added approximately 2 billion barrels of oil equivalent to our proved reserves.

 

The primary reasons for the acquisition and the principal factors contributing to a purchase price resulting in the recognition of goodwill were expanded growth opportunities in North American natural gas exploration and development, cost savings from the elimination of duplicate activities, and the sharing of best practices in the operations of both companies.

 

The $33.8 billion purchase price was based on Burlington Resources shareholders receiving $46.50 in cash and 0.7214 shares of ConocoPhillips common stock for each Burlington Resources share owned. ConocoPhillips issued approximately 270.4 million shares of common stock and approximately 3.6 million of vested employee stock options in exchange for 374.8 million shares of Burlington Resources common stock and 2.5 million Burlington Resources vested stock options. The ConocoPhillips common stock was valued at $59.85 per share, which was the weighted-average price of ConocoPhillips common stock for a five-day period beginning two available trading days before the public announcement of the transaction on the evening of December 12, 2005. The Burlington Resources vested stock options, whose fair value was determined using the Black-Scholes option-pricing model, were exchanged for ConocoPhillips stock options valued at $127 million. Estimated transaction-related costs were $35 million.

 

Also included in the acquisition was the replacement of 0.9 million non-vested Burlington Resources stock options and 0.4 million shares of non-vested restricted stock with 1.3 million non-vested ConocoPhillips stock options and 0.5 million non-vested ConocoPhillips restricted stock. In addition, 1.2 million Burlington Resources shares of common stock held by a consolidated grantor trust, related to a deferred compensation plan, were converted into 0.9 million ConocoPhillips common shares and were recorded as a reduction of stockholders’ equity at March 31, 2006.

 

The preliminary allocation of the purchase price to specific assets and liabilities was based, in part, upon a preliminary outside appraisal of the fair value of Burlington Resources assets. Over the next few months, ConocoPhillips expects to receive the final outside appraisal of the long-lived assets and conclude the fair value determination of all other Burlington Resources assets and liabilities. The following table summarizes, based on the preliminary purchase price allocation described above, the fair values of the assets acquired and liabilities assumed as of March 31, 2006:

 

8

 



 

 

 

Millions of
Dollars

 

 

 

 

 

Cash and cash equivalents

 

$

3,238

 

Accounts and notes receivable

 

1,371

 

Inventories

 

232

 

Prepaid expenses and other current assets

 

98

 

Investments and long-term receivables

 

203

 

Properties, plants and equipment

 

28,933

 

Goodwill

 

16,466

 

Other assets

 

46

 

Total Assets

 

$

50,587

 

 

 

 

 

Accounts payable

 

$

1,345

 

Notes payable and long-term debt due within one year

 

1,044

 

Accrued income and other taxes

 

946

 

Employee benefit obligations—current

 

200

 

Other accruals

 

169

 

Long-term debt

 

3,294

 

Asset retirement obligations

 

864

 

Accrued environmental costs

 

19

 

Deferred income taxes

 

8,207

 

Employee benefit obligations

 

357

 

Other liabilities and deferred credits

 

329

 

Common stockholders’ equity

 

33,813

 

Total Liabilities and Equity

 

$

50,587

 

 

Goodwill recorded in the acquisition is not subject to amortization, but will be tested periodically for impairment as required by SFAS No. 142, “Goodwill and Other Intangible Assets.”

 

ConocoPhillips assigned all of the Burlington Resources goodwill to the Worldwide Exploration and Production reporting unit. Of the $16,466 million of goodwill, $8,481 million relates to net deferred tax liabilities arising from differences between the allocated financial bases and deductible tax bases of the acquired assets. None of the goodwill is deductible for tax purposes.

 

9

 



 

The following table presents unaudited pro forma summary information as if the acquisition had occurred at the beginning of each period presented.

 

 

 

Millions of Dollars

 

 

 

Three Months Ended
March 31

 

 

 

2006

 

2005

 

Pro Forma Information

 

 

 

 

 

Sales and other operating revenues

 

$

48,811

 

39,014

 

Income from continuing operations

 

3,746

 

3,062

 

Net income

 

3,746

 

3,051

 

Income from continuing operations per share of common stock

 

 

 

 

 

Basic

 

2.27

 

1.84

 

Diluted

 

2.23

 

1.81

 

Net income per share of common stock

 

 

 

 

 

Basic

 

2.27

 

1.83

 

Diluted

 

2.23

 

1.80

 

 

The unaudited 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 if the companies had been combined during the periods presented, nor is it intended to be indicative of the results of operations that may be achieved by ConocoPhillips in the future.

 

The pro forma adjustments include estimates and assumptions based on currently available information. Management believes the estimates and assumptions are reasonable, and the significant effects of the transactions are properly reflected. However, actual results may differ materially from this pro forma financial information.

 

Note 6—Restructuring

 

As a result of the acquisition of Burlington Resources Inc., we implemented a restructuring program in March 2006 to capture the synergies of combining the two companies. Under this program, which is expected to be completed by the end of March 2008, we recorded accruals totaling $172 million for employee severance payments, incremental pension benefit costs associated with the workforce reductions, and Burlington Resources employee relocations. Approximately 585 positions have been identified for elimination, most of which are in the United States. Of the total accrual, $165 million is reflected in the Burlington Resources purchase price allocation as an assumed liability, and $7 million ($4 million after-tax) related to ConocoPhillips is reflected in selling, general and administrative expense. Included in the total accruals of $172 million is $5 million related to pension benefits to be paid in conjunction with other retirement benefits over a number of future years. Benefit payments of $8 million related to the non-pension accrual of $167 million were made in March 2006, resulting in an ending liability balance of $159 million. The ending accrual balance is expected to be extinguished within one year, except for $63 million, which is classified as long-term.

 

10

 



 

Note 7—Consolidation of Variable Interest Entities (VIEs)

 

In 2004, we finalized a transaction with Freeport LNG Development, L.P. (Freeport LNG) to participate in a liquefied natural gas (LNG) receiving terminal in Quintana, Texas. We have no ownership in the facility, but we do have a 50 percent interest in the general partnership managing the venture, along with contractual rights to regasification capacity of the terminal. We entered into a credit agreement with Freeport LNG, whereby we will provide loan financing of approximately $630 million for the construction of the terminal. Through March 31, 2006, we had provided $283 million in financing, including accrued interest. We determined Freeport LNG was a VIE and we were not the primary beneficiary. We account for our loan to Freeport LNG as a financial asset.

 

In June 2005, ConocoPhillips and OAO LUKOIL (LUKOIL) created the OOO Naryanmarneftegaz (NMNG) joint venture to develop resources in the Timan-Pechora region of Russia. We determined NMNG is a VIE because we and our related party, LUKOIL, have disproportionate interests. We have a 30 percent ownership interest with a 50 percent governance interest in the joint venture. We determined we were not the primary beneficiary and we use the equity method of accounting for this investment. The acquisition cost for the 30 percent ownership interest in NMNG was $528 million. This amount was comprised of $512 million paid at the June 2005 closing and a subsequent payment of $16 million in February 2006, primarily related to working capital. At March 31, 2006, the book value of our investment in the venture was $670 million.

 

Production from the NMNG joint-venture fields is transported via pipeline to LUKOIL’s existing terminal at Varandey Bay on the Barents Sea and then shipped via tanker to international markets. LUKOIL intends to complete an expansion of the terminal’s capacity in late 2007, with ConocoPhillips participating in the design and financing of the expansion. We determined the terminal entity, Varandey Terminal Company, is also a VIE because we and our related party, LUKOIL, have disproportionate interests. We have an obligation to fund, through loans, 30 percent of the terminal’s costs, but we will have no governance or ownership interest in the terminal. We have determined we were not the primary beneficiary and account for our loan to Varandey Terminal Company as a financial asset. Through March 31, 2006, we had provided $76 million in loan financing.

 

In 2003, we entered into two 20-year agreements establishing separate guarantee facilities of $50 million each for two LNG ships then under construction. Subject to the terms of the facilities, we will be required to make payments should the charter revenue generated by the ships fall below a certain specified minimum threshold, and we will receive payments to the extent such revenues exceed those thresholds. To the extent we receive any such payments, our actual gross payments over the 20 years could exceed $100 million. In September 2003, the first ship was delivered to its owner and in July 2005, the second ship was delivered to its owner. We determined both agreements represented a VIE, but we were not the primary beneficiary and, therefore, we did not consolidate these entities. The amount drawn under the guarantee facilities at March 31, 2006, was approximately $5 million for both ships. We currently account for these agreements as guarantees and contingent liabilities. See Note 15—Guarantees, for additional information.

 

11

 



 

Note 8—Inventories

 

Inventories consisted of the following:

 

 

 

Millions of Dollars

 

 

 

March 31

 

December 31

 

 

 

2006

 

2005

 

 

 

 

 

 

 

Crude oil and petroleum products

 

$

4,765

 

3,183

 

Materials, supplies and other

 

742

 

541

 

 

 

$

5,507

 

3,724

 

 

Inventories valued on a LIFO basis totaled $4,559 million and $3,019 million at March 31, 2006, and December 31, 2005, respectively. The remainder of our inventories is valued under various methods, including first-in, first-out and weighted average. The excess of current replacement cost over LIFO cost of inventories amounted to $4,618 million and $4,271 million at March 31, 2006, and December 31, 2005, respectively.

 

Note 9—Investments and Long-Term Receivables

 

LUKOIL

 

We increased our ownership interest in LUKOIL to 17.1 percent at March 31, 2006, from 16.1 percent at December 31, 2005.

 

At March 31, 2006, the book value of our ordinary share investment in LUKOIL was $6,453 million. Our share of the net assets of LUKOIL was estimated to be $4,700 million. This basis difference of $1,753 million is primarily being amortized on a unit-of-production basis. On March 31, 2006, the closing price of LUKOIL shares on the London Stock Exchange was $83.40 per share, making the aggregate total market value of our LUKOIL investment $12,109 million.

 

Loans to Affiliated Companies

 

As part of our normal ongoing business operations and consistent with normal industry practice, we invest 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. Included in such activity are loans made to certain affiliated companies. Significant loans to affiliated companies at March 31, 2006, include the following:

 

                  $283 million in loan financing, including accrued interest, to Freeport LNG for the construction of an LNG facility. We expect to provide loan financing of approximately $630 million for the construction of the facility.

 

                  $76 million in loan financing to Varandey Terminal Company associated with the costs of a terminal expansion. We expect our total obligation for the terminal expansion to be approximately $340 million at current exchange rates.

 

                  $78 million of project financing to Qatargas 3, an integrated project to produce and liquefy natural gas from Qatar’s North field. Our maximum exposure to this financing structure is $1.2 billion.

 

12

 



 

Note 10—Properties, Plants and Equipment

 

Properties, plants and equipment included the following:

 

 

 

Millions of Dollars

 

 

 

March 31, 2006

 

December 31, 2005

 

 

 

Gross
PP&E

 

Accum.
DD&A

 

Net
PP&E

 

Gross
PP&E

 

Accum.
DD&A

 

Net
PP&E

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exploration and Production (E&P)

 

$

84,608

 

17,280

 

67,328

 

53,907

 

16,200

 

37,707

 

Midstream

 

327

 

136

 

191

 

322

 

128

 

194

 

Refining and Marketing (R&M)

 

21,797

 

4,981

 

16,816

 

20,046

 

4,777

 

15,269

 

LUKOIL Investment

 

 

 

 

 

 

 

Chemicals

 

 

 

 

 

 

 

Emerging Businesses

 

873

 

69

 

804

 

865

 

61

 

804

 

Corporate and Other

 

1,332

 

511

 

821

 

1,192

 

497

 

695

 

 

 

$

108,937

 

22,977

 

85,960

 

76,332

 

21,663

 

54,669

 

 

Suspended Wells

 

The following table reflects the net changes in suspended exploratory well costs during the first quarter of 2006:

 

 

 

Millions of Dollars

 

 

 

Three Months Ended
March 31, 2006

 

 

 

 

 

Beginning balance at January 1

 

$

339

 

Additions pending the determination of proved reserves

 

65

 

Reclassifications to proved properties

 

(6

)

Charged to dry hole expense

 

(3

)

Ending balance at March 31

 

$

395

 

 

The following table provides an aging of suspended well balances at March 31, 2006, and December 31, 2005:

 

 

 

Millions of Dollars

 

 

 

March 31

 

December 31

 

 

 

2006

 

2005

 

Exploratory well costs capitalized for a period of one year or less

 

$

206

 

183

 

Exploratory well costs capitalized for a period greater than one year

 

189

 

156

 

Ending balance

 

$

395

 

339

 

Number of projects that have exploratory well costs that have been capitalized for a period greater than one year

 

16

 

15

 

 

13

 



 

The following table provides a further aging of those exploratory well costs that have been capitalized for more than one year since the completion of drilling, as of March 31, 2006:

 

 

 

Millions of Dollars

 

 

 

Suspended Since

 

Project

 

Total

 

2005

 

2004

 

2003

 

2002

 

2001

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Alpine satellite—Alaska (1)

 

$

21

 

 

 

 

21

 

 

Kashagan—Republic of Kazakhstan (2)

 

18

 

 

 

9

 

 

9

 

Kairan—Republic of Kazakhstan (2)

 

13

 

 

13

 

 

 

 

Aktote—Republic of Kazakhstan (3)

 

19

 

 

7

 

12

 

 

 

Gumusut—Malaysia (3)

 

28

 

6

 

11

 

11

 

 

 

Malikai—Malaysia (2)

 

10

 

 

10

 

 

 

 

Plataforma Deltana—Venezuela (3)

 

21

 

6

 

15

 

 

 

 

Hejre—Denmark (3)

 

22

 

14

 

 

 

 

8

 

Eight projects of less than $10 million each (2)(3)

 

37

 

8

 

1

 

19

 

9

 

 

Total of 16 projects

 

$

189

 

34

 

57

 

51

 

30

 

17

 

(1)  Development decisions pending infrastructure west of Alpine and construction authorization.

(2)  Additional appraisal wells planned.

(3)  Appraisal drilling complete; costs being incurred to assess development.

 

Note 11—Goodwill

 

Changes in the carrying amount of goodwill were as follows:

 

 

 

Millions of Dollars

 

 

 

E&P

 

R&M

 

Total

 

 

 

 

 

 

 

 

 

Balance at December 31, 2005

 

$

11,423

 

3,900

 

15,323

 

Acquired (Burlington Resources)

 

16,466

 

 

16,466

 

Acquired (Wilhelmshaven refinery)

 

 

459

 

459

 

Tax and other adjustments

 

(16

)

 

(16

)

Balance at March 31, 2006

 

$

27,873

 

4,359

*

32,232

 

*Consists of two reporting units: Worldwide Refining ($2,459) and Worldwide Marketing ($1,900).

 

 

On March 31, 2006, we closed on the acquisition of Burlington Resources Inc., an independent exploration and production company. As a result of this acquisition, we recorded goodwill of $16,466 million, all of which was aligned with our E&P segment. See Note 5—Acquisition of Burlington Resources Inc., for additional information.

 

On February 28, 2006, we closed on the acquisition of the Wilhelmshaven refinery, located in Wilhelmshaven, Germany. The purchase included the refinery, a marine terminal, rail and truck loading facilities and a tank farm, as well as another entity that provides commercial and administrative support to the refinery. As a result of this acquisition, we recorded goodwill of $459 million, all of which was aligned with our R&M segment. This preliminary allocation of the purchase price to specific assets and liabilities was based on our internal estimate of the fair values of the various assets and liabilities acquired. An outside appraiser has been engaged to assist us in the finalization of the purchase price allocation. Over the next few months, the company expects to receive the outside appraisal of the long-lived assets acquired, and will then finalize the allocation of the purchase price to the specific assets and liabilities acquired and the calculations of deferred tax liabilities and goodwill.

 

14

 



 

Note 12—Property Impairments

 

In the first quarter of 2005, we recorded property impairments related to planned asset dispositions. The property impairments by segment were:

 

 

 

Millions of Dollars

 

 

 

Three Months Ended
March 31

 

 

 

2006

 

2005

 

 

 

 

 

 

 

Midstream

 

$

 

21

 

R&M

 

 

1

 

 

 

$

 

22

 

 

Note 13—Debt

 

Our balance sheet debt at March 31, 2006, was $32.2 billion, compared with a debt balance of $12.5 billion at year-end 2005. The increase reflects debt issuances of approximately $15.3 billion during the first quarter of 2006 related to the acquisition of Burlington Resources Inc. In addition, we assumed $3.9 billion of Burlington Resources debt and recognized an incremental debt increase of $405 million to record Burlington Resources debt at its fair value.

 

At March 31, 2006, we had two revolving credit facilities totaling $5 billion. These facilities may be used as direct bank borrowings, as support for the ConocoPhillips $5 billion commercial paper program, as support for the ConocoPhillips Qatar Funding Ltd. $1.5 billion commercial paper program, or as support for issuances of letters of credit totaling up to $750 million. The facilities were broadly syndicated among financial institutions and did not contain any material adverse change provisions or any covenants requiring maintenance of specified financial ratios or ratings. The credit agreements contain a cross-default provision relating to our, or any of our consolidated subsidiaries’, failure to pay principal or interest on other debt obligations of $200 million or more. At March 31, 2006, and December 31, 2005, we had no outstanding borrowings under these credit facilities, but $312 million and $62 million, respectively, in letters of credit had been issued. Under both commercial paper programs there was $375 million of commercial paper outstanding at March 31, 2006, compared with $32 million at December 31, 2005.

 

In March 2006, we closed on two $7.5 billion bridge facilities with a group of five banks to help fund the Burlington Resources acquisition. These bridge financings are both 364-day loan facilities with pricing and terms similar to our existing revolving credit facilities. These facilities were fully drawn at March 31, 2006.

 

In April 2006, we entered into and funded a $5 billion five-year term loan, closed a $2.5 billion five-year revolving credit agreement, increased the ConocoPhillips commercial paper program to $7.5 billion, and issued $3 billion of debt securities. The term loan and new credit agreement were executed with a group of 36 banks and have terms and pricing provisions similar to our existing revolving credit facilities. The proceeds from the term loan, debt securities and issuances of commercial paper, together with our cash balances, allowed us to reduce the balance outstanding under the $15 billion bridge facilities to $2 billion at April 30, 2006.

 

The $3 billion of debt securities were issued under a new shelf registration statement filed with the U.S. Securities and Exchange Commission in early April 2006, allowing for the issuance of various types of

 

15

 



 

debt and equity securities. Of this issuance, $1 billion of Floating Rate Notes due April 11, 2007, were issued by ConocoPhillips, and $1.25 billion of Floating Rate Notes due April 9, 2009, and $750 million of 5.50% Notes due 2013, were issued by ConocoPhillips Australia Funding Company, a wholly owned subsidiary. ConocoPhillips guaranteed the obligations of ConocoPhillips Australia Funding Company.

 

Burlington Resources debt assumed in the acquisition, including increases to record Burlington Resources debt at its fair value (see Note 5—Acquisition of Burlington Resources Inc., for additional information about the acquisition), had the following balances at March 31, 2006:

 

 

 

Millions of
Dollars

 

 

 

 

 

5.60% Notes due 2006

 

$

500

 

6.60% Notes due 2007 (1)

 

129

 

5.70% Notes due 2007

 

350

 

9 7/8% Debentures due 2010

 

150

 

6.50% Notes due 2011

 

500

 

6.68% Notes due 2011

 

400

 

6.40% Notes due 2011

 

178

 

7 5/8% Debentures due 2013

 

100

 

9 1/8% Debentures due 2021

 

150

 

7.65% Debentures due 2023

 

88

 

8.20% Debentures due 2025

 

150

 

6 7/8% Debentures due 2026

 

67

 

7 3/8% Debentures due 2029

 

92

 

7.20% Notes due 2031

 

575

 

7.40% Notes due 2031

 

500

 

Capital lease

 

4

 

Unamortized premiums and discounts

 

405

 

Total debt assumed

 

4,338

 

Notes payable and long-term debt due within one year

 

(1,044

)

Long-term debt assumed

 

$

3,294

 

(1) Notes are denominated in Canadian dollars and reported in U.S. dollars.

 

 

 

 

Maturities inclusive of net unamortized premiums and discounts on Burlington Resources debt assumed for the remainder of 2006 through 2010 are:  $680 million, $411 million, $59 million, $58 million and $206 million, respectively.

 

The amortization of the fair-value adjustment will result in the above fixed-rate notes having a weighted-average effective interest rate of 5.64 percent.

 

In April 2006, we gave notice to repay in May 2006, the $129 million of 6.60% Notes due in 2007 that we assumed from Burlington Resources in the acquisition.

 

16

 



 

Note 14—Contingencies and Commitments

 

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 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 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.

 

Environmental—We 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 management’s 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 also consider unasserted claims in our determination of environmental liabilities and we accrue them in the period that they become 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’, results of 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 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 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.

 

17

 



 

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 for those assumed in a purchase business combination, which we record 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. At March 31, 2006, our balance sheet included a total environmental accrual of $1,009 million, compared with $989 million at December 31, 2005. We expect to incur the majority of these expenditures within the next 30 years. We have not reduced these accruals for possible insurance recoveries. In the future, we may be involved in additional environmental assessments, cleanups and proceedings.

 

Legal Proceedings—We apply our knowledge, experience, and professional judgment to the specific characteristics of our cases, employing a litigation management process to manage and monitor the legal proceedings against us. Our process facilitates the early evaluation and quantification of potential exposures in individual cases. This process also enables us to track trial settings, as well as the status and pace of settlement discussions in individual matters. Based on our professional judgment and experience in using these litigation management tools and available information about current developments in all our cases, we believe there is only a remote likelihood 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.

 

Other Contingencies—We have contingent liabilities resulting from throughput agreements with pipeline and processing companies not associated with financing arrangements. 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. In addition, at March 31, 2006, we had performance obligations secured by letters of credit of $1,150 million (of which $312 million was issued under the provisions of our revolving credit facilities, and the remainder was issued as direct bank letters of credit) and various purchase commitments for materials, supplies, services and items of permanent investment incident to the ordinary conduct of business.

 

Note 15—Guarantees

 

At March 31, 2006, we were liable for certain contingent obligations under various contractual arrangements as described below. We recognize a liability, at inception, for the fair value of our obligation as a guarantor for newly issued or modified guarantees. 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

 

                  In December 2005, we issued a construction completion guarantee for 30 percent of the $4.0 billion in loan facilities of Qatargas 3, which will be used to construct an LNG train in Qatar. Of the $4.0 billion in loan facilities, ConocoPhillips has committed to provide $1.2 billion. The maximum potential amount of future payments to third-party lenders under the guarantee is estimated to be $850 million, which could become payable if the full debt financing is utilized and completion of the Qatargas 3 project is not achieved. The project financing will be non-recourse upon certified completion, which is expected by December 31, 2009. At March 31, 2006, the carrying value of the guarantee to the third-party lenders was $11 million. For additional information, see Note 9—Investments and Long-Term Receivables.

 

18

 



 

Guarantees of Joint-Venture Debt

 

                  At March 31, 2006, we had guarantees outstanding for our portion of joint-venture debt obligations, which have terms of up to 12 years.  The maximum potential amount of future payments under the guarantees is approximately $160 million.  Payment would be required if a joint venture defaults on its debt obligations.

 

Other Guarantees

 

                  The Merey Sweeny, L.P. (MSLP) joint-venture project agreement requires the partners in the venture to pay cash calls to cover operating expenses in the event that the venture does not have enough cash to cover operating expenses after setting aside the amount required for debt service over the next 19 years.  Although there is no maximum limit stated in the agreement, the intent is to cover short-term cash deficiencies should they occur.  Our maximum potential future payments under the agreement are currently estimated to be $100 million, assuming such a shortfall exists at some point in the future due to an extended operational disruption.

 

                  In February 2003, we entered into two agreements establishing separate guarantee facilities of $50 million each for two liquefied natural gas ships.  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.  To the extent we receive any such payments, our actual gross payments over the 20 years could exceed that amount.  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 guarantee facilities.  See Note 7—Consolidation of Variable Interest Entities, for additional information.

 

                  We have other guarantees with maximum future potential payment amounts totaling $260 million, which consist primarily of dealer and jobber loan guarantees to support our marketing business, a guarantee to fund the short-term cash liquidity deficits of a lubricants joint venture, three small construction completion guarantees, a guarantee supporting a lease assignment on a corporate aircraft, a guarantee associated with a pending lawsuit and guarantees of the lease payment obligations of a joint venture.  The carrying amount recorded for these other guarantees, as of March 31, 2006, was $50 million.  These guarantees generally extend up to 15 years and payment would be required only if the dealer, jobber or lessee goes into default, if the lubricants joint venture has cash liquidity issues, if construction projects are not completed, if guaranteed parties default on lease payments, 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 and sold several assets, including 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, permits and licenses, employee claims, real estate indemnity against tenant defaults, and litigation.  The terms of these indemnifications vary greatly.  The majority of these indemnifications are related to environmental issues, the term is generally indefinite and the maximum amount of future payments is generally unlimited.  The carrying amount recorded for these indemnifications, as of March 31, 2006, was $461 million. We amortize the indemnification liability over the relevant time period, if one exists, based on the facts and circumstances surrounding each type of indemnity.  In cases where the indemnification term is indefinite, we will reverse the liability when we have information that the liability is essentially relieved or amortize the liability over an appropriate time

 

19

 



 

period as the fair value of our indemnification exposure declines.  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 were $338 million of environmental accruals for known contamination that is included in asset retirement obligations and accrued environmental costs at March 31, 2006.  For additional information about environmental liabilities, see Note 14—Contingencies and Commitments.

 

Note 16—Financial Instruments and Derivative Contracts

 

Derivative assets and liabilities were:

 

 

 

Millions of Dollars

 

 

 

March 31

 

December 31

 

 

 

2006

 

2005

 

Derivative Assets

 

 

 

 

 

Current

 

$

594

 

674

 

Long-term

 

139

 

193

 

 

 

$

733

 

867

 

Derivative Liabilities

 

 

 

 

 

Current

 

$

873

 

1,002

 

Long-term

 

279

 

443

 

 

 

$

1,152

 

1,445

 

 

These derivative assets and liabilities appear as prepaid expenses and other current assets, other assets, other accruals, or other liabilities and deferred credits on the balance sheet.

 

Note 17—Comprehensive Income

 

ConocoPhillips’ comprehensive income was as follows:

 

 

 

Millions of Dollars

 

 

 

Three Months Ended
March 31

 

 

 

2006

 

2005

 

 

 

 

 

 

 

Net income

 

$

3,291

 

2,912

 

After-tax changes in:

 

 

 

 

 

Minimum pension liability adjustment

 

 

(1

)

Foreign currency translation adjustments

 

171

 

(256

)

Unrealized loss on securities

 

 

(1

)

Hedging activities

 

1

 

 

Comprehensive income

 

$

3,463

 

2,654

 

 

20

 



 

Accumulated other comprehensive income in the equity section of the balance sheet included:

 

 

 

Millions of Dollars

 

 

 

March 31
2006

 

December 31
2005

 

 

 

 

 

 

 

Minimum pension liability adjustment

 

$

(123

)

(123

)

Foreign currency translation adjustments

 

1,116

 

945

 

Deferred net hedging loss

 

(7

)

(8

)

Accumulated other comprehensive income

 

$

986

 

814

 

 

Note 18—Supplemental Cash Flow Information

 

 

 

Millions of Dollars

 

 

 

Three Months Ended
March 31

 

 

 

2006

 

2005

 

Non-Cash Investing and Financing Activities

 

 

 

 

 

Acquisition of Burlington Resources Inc. by issuances of stock and purchase-related accruals

 

$

16,386

 

 

Fair market value of properties, plants and equipment received in a nonmonetary exchange transaction

 

 

138

 

Cash Payments

 

 

 

 

 

Interest

 

$

12

 

42

 

Income taxes

 

1,393

 

682

 

 

Note 19—Employee Benefit Plans

 

Pension and Postretirement Plans

 

 

 

Millions of Dollars

 

 

 

Pension Benefits

 

Other Benefits

 

Three Months Ended

 

March 31

 

March 31

 

 

 

2006

 

2005

 

2006

 

2005

 

 

 

U.S.

 

Int’l.

 

U.S.

 

Int’l.

 

 

 

 

 

Components of Net Periodic Benefit Cost

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

42

 

21

 

38

 

18

 

4

 

5

 

Interest cost

 

50

 

31

 

43

 

32

 

11

 

13

 

Expected return on plan assets

 

(40

)

(29

)

(31

)

(28

)

 

 

Amortization of prior service cost

 

2

 

2

 

1

 

2

 

5

 

5

 

Recognized net actuarial loss (gain)

 

22

 

10

 

14

 

9

 

(4

)

(1

)

Net periodic benefit costs

 

$

76

 

35

 

65

 

33

 

16

 

22

 

 

During the first quarter of 2006, we contributed $102 million to our domestic qualified and non-qualified benefit plans and $31 million to international qualified and non-qualified benefit plans.

 

21

 



 

At the end of 2005, we estimated that, during 2006, we would contribute approximately $415 million to our domestic qualified and non-qualified benefit plans and $115 million to our international benefit plans.  We still expect to contribute these amounts to the heritage ConocoPhillips plans.  For the heritage Burlington Resources plans, we expect to contribute $30 million during the period April through December 2006.

 

The projected benefit obligation and asset value of the pension plans acquired from Burlington Resources were $304 million and $245 million, respectively.  The accumulated postretirement benefit obligation of the postretirement medical plans acquired from Burlington Resources was $38 million.

 

Note 20—Related Party Transactions

 

Significant transactions with related parties were:

 

 

 

Millions of Dollars

 

 

 

Three Months Ended
March 31

 

 

 

2006

 

2005

*

 

 

 

 

 

 

Operating revenues (a)

 

$

1,768

 

1,645

 

Purchases (b)

 

1,495

 

1,319

 

Operating expenses and selling, general and administrative expenses (c)

 

80

 

98

 

Net interest expense (d)

 

14

 

10

 

*Certain amounts reclassified to conform to current year presentation.

 

(a)                                  We sell natural gas to Duke Energy Field Services, LLC (DEFS) and crude oil to the Malaysian Refining Company Sdn. Bhd (MRC), among others, for processing and marketing.  Natural gas liquids, solvents and petrochemical feedstocks are sold to Chevron Phillips Chemical Company LLC (CPChem), gas oil and hydrogen feedstocks are sold to Excel Paralubes, and refined products are sold primarily to CFJ Properties and Getty Petroleum Marketing, Inc. (a subsidiary of LUKOIL).  Also, we charge several of our affiliates, including CPChem, MSLP, and Hamaca Holding LLC, for the use of common facilities, such as steam generators, waste and water treaters, and warehouse facilities.

 

(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 upgraded crude oil from Petrozuata C.A. and refined products from MRC.  We also pay fees to various pipeline equity companies for transporting finished refined products and a price upgrade to MSLP for heavy crude processing.  We purchase base oils and fuel products from Excel Paralubes for use in our refinery and specialty businesses.

 

(c)                                  We pay processing fees to various affiliates.  Additionally, we pay crude oil transportation fees to pipeline equity companies.

 

(d)                                 We pay and/or receive interest to/from various affiliates, including the Phillips Capital Trust II.

 

Elimination amounts related to our equity percentage share of profit or loss on the above transactions were not material.

 

22

 



 

Note 21—Segment Disclosures and Related Information

 

We have organized our reporting structure based on the grouping of similar products and services, resulting in six operating segments:

 

1)              E&P—This segment primarily explores for, produces and markets crude oil, natural gas and natural gas liquids on a worldwide basis.  At March 31, 2006, our E&P operations were producing in the United States, Norway, the United Kingdom, Canada, Nigeria, Venezuela, offshore Timor Leste in the Timor Sea, Australia, China, Indonesia, the United Arab Emirates, Vietnam, and Russia.  The E&P segment’s U.S. and international operations are disclosed separately for reporting purposes.

 

2)              Midstream—Through 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 primarily consists of our equity investment in DEFS.  Through June 30, 2005, our equity ownership in DEFS was 30.3 percent.  In July 2005, we increased our ownership interest to 50 percent.

 

3)              R&M—This segment purchases, refines, markets and transports crude oil and petroleum products, mainly in the United States, Europe and Asia.  At March 31, 2006, we owned 12 refineries in the United States, one in the United Kingdom, one in Ireland, one in Germany, and had equity interests in one refinery in Germany, two in the Czech Republic, and one in Malaysia.  The R&M segment’s U.S. and international operations are disclosed separately for reporting purposes.

 

4)              LUKOIL Investment—This segment represents our investment in the ordinary shares of LUKOIL, an international, integrated oil and gas company headquartered in Russia.  At March 31, 2006, our ownership interest was 17.1 percent.

 

5)              Chemicals—This segment manufactures and markets petrochemicals and plastics on a worldwide basis.  The Chemicals segment consists of our 50 percent equity investment in CPChem.

 

6)              Emerging Businesses—This 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.

 

Corporate and Other includes general corporate overhead; interest income and expense; discontinued operations; 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.  Intersegment sales are at prices that approximate market.

 

23

 



 

Analysis of Results by Operating Segment

 

 

 

Millions of Dollars

 

 

 

Three Months Ended
March 31

 

 

 

2006

 

2005

 

Sales and Other Operating Revenues

 

 

 

 

 

E&P

 

 

 

 

 

United States

 

$

9,319

 

7,032

 

International

 

7,444

 

4,907

 

Intersegment eliminations—U.S.

 

(1,205

)

(912

)

Intersegment eliminations—international

 

(1,254

)

(997

)

E&P

 

14,304

 

10,030

 

Midstream

 

 

 

 

 

Total sales

 

1,021

 

1,021

 

Intersegment eliminations

 

(284

)

(230

)

Midstream

 

737

 

791

 

R&M

 

 

 

 

 

United States

 

23,541

 

19,955

 

International

 

8,356

 

6,859

 

Intersegment eliminations—U.S.

 

(200

)

(87

)

Intersegment eliminations—international

 

(4

)

(2

)

R&M

 

31,693

 

26,725

 

LUKOIL Investment

 

 

 

Chemicals

 

3

 

3

 

Emerging Businesses

 

169

 

81

 

Corporate and Other

 

 

1

 

Consolidated sales and other operating revenues

 

$

46,906

 

37,631

 

 

 

 

 

 

 

Net Income (Loss)

 

 

 

 

 

E&P

 

 

 

 

 

United States

 

$

1,181

 

892

 

International

 

1,372

 

895

 

Total E&P

 

2,553

 

1,787

 

Midstream

 

110

 

385

 

R&M

 

 

 

 

 

United States

 

297

 

570

 

International

 

93

 

130

 

Total R&M

 

390

 

700

 

LUKOIL Investment

 

249

 

110

 

Chemicals

 

149

 

133

 

Emerging Businesses

 

8

 

(8

)

Corporate and Other

 

(168

)

(195

)

Consolidated net income

 

$

3,291

 

2,912

 

 

24

 



 

 

 

Millions of Dollars

 

 

 

March 31

 

December 31

 

 

 

2006

 

2005

 

Total Assets

 

 

 

 

 

E&P

 

 

 

 

 

United States

 

$

34,889

 

18,434

 

International

 

45,513

 

31,662

 

Goodwill

 

27,873

 

11,423

 

Total E&P

 

108,275

 

61,519

 

Midstream

 

2,141

 

2,109

 

R&M

 

 

 

 

 

United States

 

21,728

 

20,693

 

International

 

8,529

 

6,096

 

Goodwill

 

4,359

 

3,900

 

Total R&M

 

34,616

 

30,689

 

LUKOIL Investment

 

6,453

 

5,549

 

Chemicals

 

2,381

 

2,324

 

Emerging Businesses

 

856

 

858

 

Corporate and Other

 

4,930

 

3,951

 

Consolidated total assets

 

$

159,652

 

106,999

 

 

Note 22—Income Taxes

 

Our effective tax rates for the first quarters of 2006 and 2005 were 43 percent and 41 percent, respectively. The change in the effective tax rate for the first quarter of 2006, versus the same period of 2005 was due to a higher proportion of income in higher tax rate jurisdictions.  In addition, the first quarter of 2005 included a benefit from the utilization of capital loss carryforwards that previously had a full valuation allowance in the restructuring of ConocoPhillips’ ownership in Duke Energy Field Services, LLC.  The effective tax rate in excess of the domestic federal statutory rate of 35 percent was primarily due to foreign taxes.

 

Note 23—New Accounting Standards

 

At its September 2005 meeting, the EITF reached a consensus on Issue No. 04-13, “Accounting for Purchases and Sales of Inventory with the Same Counterparty,” which addresses accounting issues that arise when one company both sells inventory to, and buys inventory from, another company in the same line of business.  We adopted Issue No. 04-13 effective April 1, 2006.  For additional information, see the Revenue Recognition section of Note 2—Accounting Policies.

 

25

 



 

Supplementary Information—Condensed Consolidating Financial Information

 

We have various cross guarantees between ConocoPhillips and ConocoPhillips Company with respect to publicly held debt securities.  ConocoPhillips Company is wholly owned by ConocoPhillips.  ConocoPhillips has fully and unconditionally guaranteed the payment obligations of ConocoPhillips Company with respect to its publicly held debt securities.  Similarly, ConocoPhillips Company has 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 information presents the results of operations, financial position and cash flows for:

 

                  ConocoPhillips and ConocoPhillips Company (in each case, reflecting investments in subsidiaries utilizing the equity method of accounting).

 

                  All other non-guarantor subsidiaries of ConocoPhillips Company.

 

                  The consolidating adjustments necessary to present ConocoPhillips’ results on a consolidated basis.

 

This condensed consolidating financial information should be read in conjunction with the accompanying consolidated financial statements and notes.

 

26

 



 

 

 

Millions of Dollars

 

 

 

Three Months Ended March 31, 2006

 

Income Statement

 

ConocoPhillips

 

ConocoPhillips
Company

 

All Other
Subsidiaries

 

Consolidating
Adjustments

 

Total
Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues and Other Income

 

 

 

 

 

 

 

 

 

 

 

Sales and other operating revenues

 

$

 

29,802

 

17,104

 

 

46,906

 

Equity in earnings of affiliates

 

3,323

 

2,811

 

735

 

(5,909

)

960

 

Other income

 

 

44

 

17

 

 

61

 

Intercompany revenues

 

 

562

 

2,462

 

(3,024

)

 

Total Revenues and Other Income

 

3,323

 

33,219

 

20,318

 

(8,933

)

47,927

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and Expenses

 

 

 

 

 

 

 

 

 

 

 

Purchased crude oil, natural gas and products

 

 

25,812

 

10,377

 

(2,734

)

33,455

 

Production and operating expenses

 

 

1,192

 

1,049

 

(26

)

2,215

 

Selling, general and administrative expenses

 

5

 

366

 

211

 

(16

)

566

 

Exploration expenses

 

 

14

 

98

 

 

112

 

Depreciation, depletion and amortization

 

 

415

 

765

 

 

1,180

 

Property impairments

 

 

 

 

 

 

Taxes other than income taxes

 

 

1,448

 

3,003

 

(64

)

4,387

 

Accretion on discounted liabilities

 

 

14

 

46

 

 

60

 

Interest and debt expense

 

44

 

145

 

110

 

(184

)

115

 

Foreign currency transaction losses

 

 

 

22

 

 

22

 

Minority interests

 

 

 

18

 

 

18

 

Total Costs and Expenses

 

49

 

29,406

 

15,699

 

(3,024

)

42,130

 

Income from continuing operations before income taxes

 

3,274

 

3,813

 

4,619

 

(5,909

)

5,797

 

Provision for income taxes

 

(17

)

490

 

2,033

 

 

2,506

 

Income from continuing operations

 

3,291

 

3,323

 

2,586

 

(5,909

)

3,291

 

Loss from discontinued operations

 

 

 

 

 

 

Net Income

 

$

3,291

 

3,323

 

2,586

 

(5,909

)

3,291

 

 

27

 



 

 

 

Millions of Dollars

 

 

 

Three Months Ended March 31, 2005

 

Income Statement

 

ConocoPhillips

 

ConocoPhillips
Company

 

All Other
Subsidiaries

 

Consolidating
Adjustments

 

Total
Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues and Other Income

 

 

 

 

 

 

 

 

 

 

 

Sales and other operating revenues

 

$

 

24,626

 

13,005

 

 

37,631

 

Equity in earnings of affiliates

 

2,936

 

2,380

 

835

 

(5,098

)

1,053

 

Other income

 

(9

)

138

 

105

 

 

234

 

Intercompany revenues

 

10

 

494

 

2,020

 

(2,524

)

 

Total Revenues and Other Income

 

2,937

 

27,638

 

15,965

 

(7,622

)

38,918

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and Expenses

 

 

 

 

 

 

 

 

 

 

 

Purchased crude oil, natural gas and products

 

 

20,758

 

7,142

 

(2,328

)

25,572

 

Production and operating expenses

 

 

1,024

 

940

 

(12

)

1,952

 

Selling, general and administrative expenses

 

4

 

341

 

203

 

(9

)

539

 

Exploration expenses

 

 

13

 

158

 

 

171

 

Depreciation, depletion and amortization

 

 

362

 

679

 

 

1,041

 

Property impairments

 

 

2

 

20

 

 

22

 

Taxes other than income taxes

 

 

1,548

 

2,940

 

 

4,488

 

Accretion on discounted liabilities

 

 

9

 

39

 

 

48

 

Interest and debt expense

 

24

 

204

 

85

 

(175

)

138

 

Foreign currency transaction gains

 

 

(1

)

(2

)

 

(3

)

Minority interests

 

 

 

10

 

 

10

 

Total Costs and Expenses

 

28

 

24,260

 

12,214

 

(2,524

)

33,978

 

Income from continuing operations before income taxes

 

2,909

 

3,378

 

3,751

 

(5,098

)

4,940

 

Provision for income taxes

 

(14

)

442

 

1,589

 

 

2,017

 

Income from continuing operations

 

2,923

 

2,936

 

2,162

 

(5,098

)

2,923

 

Loss from discontinued operations

 

(11

)

(11

)

 

11

 

(11

)

Net Income

 

$

2,912

 

2,925

 

2,162

 

(5,087

)

2,912

 

 

28

 



 

 

 

Millions of Dollars

 

 

 

At March 31, 2006

 

Balance Sheet

 

ConocoPhillips

 

ConocoPhillips
Company

 

All Other
Subsidiaries

 

Consolidating
Adjustments

 

Total
Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

85

 

2,923

 

 

3,008

 

Accounts and notes receivable

 

858

 

10,731

 

16,182

 

(15,014

)

12,757

 

Inventories

 

 

3,219

 

2,288

 

 

5,507

 

Prepaid expenses and other current assets

 

7

 

787

 

871

 

 

1,665

 

Total Current Assets

 

865

 

14,822

 

22,264

 

(15,014

)

22,937

 

Investments and long-term receivables

 

81,867

 

49,681