10-Q 1 d526569d10q.htm FORM 10-Q Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

(Mark One)   
[X]   

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended            March 31, 2013                                                                                                  
or
[    ]   

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 [x] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [x] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [x]    Accelerated filer [ ]    Non-accelerated filer [ ]    Smaller reporting company [ ]

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

The registrant had 1,222,661,180 shares of common stock, $.01 par value, outstanding at March 31, 2013.


Table of Contents

CONOCOPHILLIPS

TABLE OF CONTENTS

 

     Page  

Part I – Financial Information

  

Item 1. Financial Statements

  

Consolidated Income Statement

     1   

Consolidated Statement of Comprehensive Income

     2   

Consolidated Balance Sheet

     3   

Consolidated Statement of Cash Flows

     4   

Notes to Consolidated Financial Statements

     5   

Supplementary Information—Condensed Consolidating Financial Information

     25   

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

     29   

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

     48   

Item 4.  Controls and Procedures

     48   

Part II – Other Information

  

Item 1.  Legal Proceedings

     49   

Item 1A.  Risk Factors

     49   

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

     49   

Item 6.  Exhibits

     50   

Signature

     51   


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

 

Consolidated Income Statement    ConocoPhillips

 

      Millions of Dollars  
      Three Months Ended
March 31
 
      2013      2012   
  

 

 

 

Revenues and Other Income

     

Sales and other operating revenues

   $ 14,166        14,593   

Equity in earnings of affiliates

     362        490   

Gain on dispositions

     58        940   

Other income

     65        60   

 

 

Total Revenues and Other Income

     14,651        16,083   

 

 

Costs and Expenses

     

Purchased commodities

     5,834        6,078   

Production and operating expenses

     1,687        1,559   

Selling, general and administrative expenses

     165        326   

Exploration expenses

     277        675   

Depreciation, depletion and amortization

     1,807        1,571   

Impairments

     2        214   

Taxes other than income taxes

     892        1,095   

Accretion on discounted liabilities

     106        105   

Interest and debt expense

     130        190   

Foreign currency transaction (gains) losses

     (36)          

 

 

Total Costs and Expenses

     10,864        11,818   

 

 

Income from continuing operations before income taxes

     3,787        4,265   

Provision for income taxes

     1,763        2,086   

 

 

Income From Continuing Operations

     2,024        2,179   

Income from discontinued operations*

     129        776   

 

 

Net income

     2,153        2,955   

Less: net income attributable to noncontrolling interests

     (14)         (18)   

 

 

Net Income Attributable to ConocoPhillips

   $ 2,139        2,937   

 

 

Amounts Attributable to ConocoPhillips Common Shareholders:

     

Income from continuing operations

   $ 2,010        2,163   

Income from discontinued operations

     129        774   

 

 

Net Income

   $ 2,139        2,937   

 

 

Net Income Attributable to ConocoPhillips Per Share
of Common Stock
(dollars)

     

Basic

     

Continuing operations

   $ 1.64        1.69   

Discontinued operations

     0.10        0.60   

 

 

Net Income Attributable to ConocoPhillips Per Share of Common Stock

   $ 1.74        2.29   

 

 

Diluted

     

Continuing operations

   $ 1.63        1.67   

Discontinued operations

     0.10        0.60   

 

 

Net Income Attributable to ConocoPhillips Per Share of Common Stock

   $ 1.73        2.27   

 

 

Dividends Paid Per Share of Common Stock (dollars)

   $ 0.66        0.66   

 

 

Average Common Shares Outstanding (in thousands)

     

Basic

         1,229,232        1,283,493   

Diluted

     1,235,907        1,293,104   

 

 

*Net of provision for income taxes on discontinued operations of:

   $ (9)         434  

See Notes to Consolidated Financial Statements.

 

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Consolidated Statement of Comprehensive Income    ConocoPhillips

 

                                             
      Millions of Dollars  
      Three Months Ended
March 31
 
      2013       2012   
  

 

 

 

Net Income

   $     2,153             2,955   

Other comprehensive income (loss)

     

Defined benefit plans

     

Prior service cost arising during the period

             

Reclassification adjustment for amortization of prior service credit included in net income

     (1)         (1)   

 

 

Net change

     (1)         (1)   

 

 

Net actuarial loss arising during the period

             

Reclassification adjustment for amortization of net actuarial losses included in net income

     57          78   

 

 

Net change

     57         78   

Nonsponsored plans*

             

Income taxes on defined benefit plans

     (22)         (29)   

 

 

Defined benefit plans, net of tax

     35         51   

 

 

Foreign currency translation adjustments

     (644)         852   

Reclassification adjustment for gain (loss) included in net income

     (4)          

Income taxes on foreign currency translation adjustments

            (19)   

 

 

Foreign currency translation adjustments, net of tax

     (644)         834   

 

 

Hedging activities

             

Income taxes on hedging activities

             

 

 

Hedging activities, net of tax

             

 

 

Other Comprehensive Income (Loss), Net of Tax

     (609)         886   

 

 

Comprehensive Income

     1,544         3,841   

Less: comprehensive income attributable to noncontrolling interests

     (14)         (18)   

 

 

Comprehensive Income Attributable to ConocoPhillips

   $ 1,530         3,823   

 

 

  *Plans for which ConocoPhillips is not the primary obligor—primarily those administered by equity affiliates.

See Notes to Consolidated Financial Statements.

 

2


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Consolidated Balance Sheet    ConocoPhillips

 

                                             
     Millions of Dollars  
     March 31
2013
     December 31
2012
 

Assets

     

Cash and cash equivalents

   $ 5,422         3,618   

Short-term investments*

     23          

Restricted cash

            748   

Accounts and notes receivable (net of allowance of $10 million in 2013 and $10 million in 2012)

     8,703         8,929   

Accounts and notes receivable—related parties

     195         253   

Inventories

     1,133         965   

Prepaid expenses and other current assets

     8,759         9,476   

 

 

Total Current Assets

     24,235         23,989   

Investments and long-term receivables

     23,315         23,489   

Loans and advances—related parties

     1,455         1,517   

Net properties, plants and equipment (net of accumulated depreciation, depletion and amortization of $59,518 million in 2013 and $58,916 million in 2012)

     67,890         67,263   

Other assets

     885         886   

 

 

Total Assets

   $ 117,780         117,144   

 

 

Liabilities

     

Accounts payable

   $ 9,554         9,154   

Accounts payable—related parties

     867         859   

Short-term debt

     1,351         955   

Accrued income and other taxes

     3,658         3,366   

Employee benefit obligations

     432         742   

Other accruals

     2,453         2,367   

 

 

Total Current Liabilities

     18,315         17,443   

Long-term debt

     20,319         20,770   

Asset retirement obligations and accrued environmental costs

     8,650         8,947   

Joint venture acquisition obligation—related party

     2,610         2,810   

Deferred income taxes

     13,607         13,185   

Employee benefit obligations

     3,271         3,346   

Other liabilities and deferred credits

     1,768         2,216   

 

 

Total Liabilities

     68,540         68,717   

 

 

Equity

     

Common stock (2,500,000,000 shares authorized at $.01 par value)

     

Issued (2013—1,764,891,853 shares; 2012—1,762,247,949 shares)

     

Par value

     18         18   

Capital in excess of par

     45,425         45,324   

Treasury stock (at cost: 2013—542,230,673 shares; 2012—542,230,673 shares)

     (36,780)         (36,780)   

Accumulated other comprehensive income

     3,478         4,087   

Retained earnings

     36,662         35,338   

 

 

Total Common Stockholders’ Equity

     48,803         47,987   

Noncontrolling interests

     437         440   

 

 

Total Equity

     49,240         48,427   

 

 

Total Liabilities and Equity

   $ 117,780         117,144   

 

 

*Marketable securities.

See Notes to Consolidated Financial Statements.

 

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Table of Contents
Consolidated Statement of Cash Flows    ConocoPhillips

 

                                             
     Millions of Dollars  
     Three Months Ended
March 31
 
     2013      2012   
  

 

 

 

Cash Flows From Operating Activities

     

Net income

   $ 2,153         2,955   

Adjustments to reconcile net income to net cash provided by operating activities

     

Depreciation, depletion and amortization

     1,807         1,571   

Impairments

            214   

Dry hole costs and leasehold impairments

     36         518   

Accretion on discounted liabilities

     106         105   

Deferred taxes

     241         131   

Undistributed equity earnings

     (29)         (77)   

Gain on dispositions

     (58)         (940)   

Income from discontinued operations

     (129)         (776)   

Other

     (503)         173   

Working capital adjustments

     

Decrease in accounts and notes receivable

     249         166   

Decrease (increase) in inventories

     (177)         83   

Decrease (increase) in prepaid expenses and other current assets

     (131)         79   

Increase (decrease) in accounts payable

     528         (55)   

Increase (decrease) in taxes and other accruals

     513         (77)   

 

 

Net cash provided by continuing operating activities

     4,608         4,070   

Net cash provided by discontinued operations

     122         112   

 

 

Net Cash Provided by Operating Activities

     4,730         4,182   

 

 

Cash Flows From Investing Activities

     

Capital expenditures and investments

     (3,391)         (3,818)   

Proceeds from asset dispositions

     1,134         1,102   

Net sales (purchases) of short-term investments

     (23)         92   

Collection of advances/loans—related parties

     57         38   

Other

     (21)          

 

 

Net cash used in continuing investing activities

     (2,244)         (2,579)   

Net cash used in discontinued operations

     (189)         (431)   

 

 

Net Cash Used in Investing Activities

     (2,433)         (3,010)   

 

 

Cash Flows From Financing Activities

     

Repayment of debt

     (48)         (47)   

Change in restricted cash

     748          

Issuance of company common stock

     (10)         36   

Repurchase of company common stock

            (1,899)   

Dividends paid

     (815)         (843)   

Other

     (205)         (199)   

 

 

Net cash used in continuing financing activities

     (330)         (2,952)   

Net cash used in discontinued operations

            (318)   

 

 

Net Cash Used in Financing Activities

     (330)         (3,270)   

 

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

     (163)         25   

 

 

Net Change in Cash and Cash Equivalents

     1,804         (2,073)   

Cash and cash equivalents at beginning of period

     3,618         5,780   

 

 

Cash and Cash Equivalents at End of Period

   $ 5,422         3,707   

 

 

See Notes to Consolidated Financial Statements.

 

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Notes to Consolidated Financial Statements    ConocoPhillips

Note 1—Basis of Presentation

The interim-period financial information presented in the financial statements included in this report is unaudited and, in the opinion of management, includes all known accruals and adjustments 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 unless otherwise disclosed. Certain notes and other information have been condensed or omitted from the interim financial statements included in this report. Therefore, these financial statements should be read in conjunction with the consolidated financial statements and notes included in our 2012 Annual Report on Form 10-K.

As a result of our separation of Phillips 66 on April 30, 2012, the results of operations for our former refining, marketing and transportation businesses; most of our former Midstream segment; our former Chemicals segment; and our power generation and certain technology operations included in our former Emerging Businesses segment (collectively, our “Downstream business”), have been classified as discontinued operations for the period ended March 31, 2012. In addition, the results of operations for our interest in the North Caspian Sea Production Sharing Agreement (Kashagan) and our Algerian and Nigerian businesses have been classified as discontinued operations for all periods presented. See Note 3—Discontinued Operations, for additional information. Unless indicated otherwise, the information in the Notes to the Consolidated Financial Statements relates to our continuing operations.

Note 2—Change in Accounting Principles

Effective January 1, 2013, we early adopted, on a prospective basis, Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2013-05, “Parent’s Accounting for the Cumulative Translation Adjustment (CTA) upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.” This ASU resolves the diversity in practice about whether FASB Accounting Standards Codification (ASC) Subtopic 810-10, “Consolidation—Overall,” or Subtopic 830-30, “Foreign Currency Matters—Translation of Financial Statements,” applies to the release of the CTA into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity. This ASU clarifies that ASC Subtopic 830-30 applies to sales within a foreign entity and thus the CTA should not be released into net income unless those sales represent the complete or substantially complete liquidation of the reporting parent’s investment in the broader foreign entity. This ASU also requires the release of all the related CTA into net income upon gaining control in a step acquisition of an equity method investment that is considered to be a standalone foreign entity, and a pro rata release of the related CTA into net income upon a partial sale of an interest in an equity method investment that is considered to be a standalone foreign entity.

 

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Note 3—Discontinued Operations

Separation of Downstream Business

On April 30, 2012, the separation of our Downstream business was completed, creating two independent energy companies: ConocoPhillips and Phillips 66. In connection with the separation, Phillips 66 distributed approximately $7.8 billion to us in a special cash distribution. The principal funds from the special cash distribution were designated solely to pay dividends, repurchase common stock, repay debt, or a combination of the foregoing, within twelve months following the distribution. The cash was included in the “Restricted cash” line on our consolidated balance sheet. No balance remained from the cash distribution as of March 31, 2013. We also entered into several agreements with Phillips 66 in order to effect the separation and govern our relationship with Phillips 66.

Sales and other operating revenues and income from discontinued operations related to Phillips 66 for the three-month period ended March 31, 2012, were as follows:

 

         Millions  of
Dollars
 

Sales and other operating revenues from discontinued operations

   $ 45,498   

 

 

Income from discontinued operations before-tax

   $ 1,008   

Income tax expense

     294   

 

 

Income from discontinued operations

   $ 714   

 

 

Income from discontinued operations after-tax includes transaction, information systems and other costs incurred to effect the separation of $44 million for the three-month period ended March 31, 2012. No separation costs were incurred during the first three months of 2013.

Prior to the separation, commodity sales to Phillips 66 were $4,054 million and commodity purchases from Phillips 66 were $160 million for the three-month period ended March 31, 2012. Prior to May 1, 2012, commodity sales and related costs were eliminated in consolidation between ConocoPhillips and Phillips 66. Beginning May 1, 2012, these revenues and costs represent third-party transactions with Phillips 66.

Other Discontinued Operations

As part of our ongoing strategic asset disposition program, we agreed to sell our interest in the North Caspian Sea Production Sharing Agreement (Kashagan) and our Algerian and Nigerian businesses (collectively, the “Disposition Group”). The Disposition Group was previously part of the Other International operating segment.

On November 26, 2012, we notified government authorities in Kazakhstan and co-ventures of our intent to sell the Company’s 8.4 percent interest in Kashagan to ONGC Videsh Limited. Expected proceeds are approximately $5.0 billion, which represents the purchase price plus expected working capital and customary adjustments at closing. The transaction is expected to close in 2013. We recorded pre-tax impairments of $606 million and $43 million in the fourth quarter of 2012 and first quarter of 2013, respectively. At March 31, 2013, the carrying value of the net assets related to our interest in Kashagan was $5.1 billion, net of impairments.

On December 18, 2012, we entered into an agreement with Pertamina to sell our wholly owned subsidiary, ConocoPhillips Algeria Ltd., for a total of $1.75 billion plus customary adjustments. The transaction is anticipated to close in 2013. We received a deposit of $175 million in December 2012. The deposit is refundable in the event our co-venturer exercises its preemptive rights, which have been waived, or government approval is not received. At March 31, 2013, the net carrying value of our Algerian assets was $698 million.

 

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On December 20, 2012, we entered into agreements with affiliates of Oando PLC to sell our Nigerian business unit for a total of $1.79 billion plus customary adjustments. The transaction is anticipated to close in 2013, following appropriate consultations with stakeholders. We received a deposit of $435 million in December 2012. The deposit is only refundable in the event of default by us. At March 31, 2013, the net carrying value of our Nigerian assets was $317 million.

At March 31, 2013, the Disposition Group met the criteria to be classified as held for sale. Accordingly, we classified $22 million of loans and advances to related parties in the “Accounts and notes receivable—related parties” line and $7,058 million of noncurrent assets in the “Prepaid expenses and other current assets” line of our consolidated balance sheet. In addition, we classified $777 million of noncurrent liabilities in the “Accrued income and other taxes” line and $133 million of asset retirement obligations in the “Other accruals” line of our consolidated balance sheet. The carrying amounts of the major classes of assets and liabilities associated with the Disposition Group were as follows:

 

             Millions of Dollars           
    

 

        March 31

2013

  

 

    

 

December 31 

2012 

  

 

  

 

 

 

Assets

     

Accounts and notes receivable

   $ 302        268   

Accounts and notes receivable—related parties

     2         

Inventories

     48        44   

Prepaid expenses and other current assets

     154        220   

 

 

Total current assets of discontinued operations

     506        533   

Investments and long-term receivables

     281        272   

Loans and advances—related parties

     22        29   

Net properties, plants and equipment

     6,775        6,629   

Other assets

     2         

 

 

Total assets of discontinued operations

   $ 7,586        7,467   

 

 

Liabilities

     

Accounts payable

   $ 437        471   

Accrued income and other taxes

     154        125   

 

 

Total current liabilities of discontinued operations

     591        596   

Asset retirement obligations and accrued environmental costs

     133        131   

Deferred income taxes

     777        759   

 

 

Total liabilities of discontinued operations

   $ 1,501        1,486   

 

 

Sales and other operating revenues and income from discontinued operations related to the Disposition Group were as follows:

 

          Millions of Dollars       
         Three Months Ended    
March 31
 
     2013       2012   
  

 

 

 

Sales and other operating revenues from discontinued operations

   $ 329       391   

 

 

Income from discontinued operations before-tax

   $ 120       202   

Income tax expense (benefit)

     (9     140   

 

 

Income from discontinued operations

   $ 129       62   

 

 

 

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Note 4—Variable Interest Entities (VIEs)

We hold variable interests in VIEs that have not been consolidated because we are not considered the primary beneficiary. Information on our significant VIEs follows:

Freeport LNG Development, L.P. (Freeport LNG)

We have an agreement with Freeport LNG to participate in a liquefied natural gas (LNG) receiving terminal in Quintana, Texas. We have no ownership in Freeport LNG; however, we own a 50 percent interest in Freeport LNG GP, Inc. (Freeport GP), which serves as the general partner managing the venture. We entered into a credit agreement with Freeport LNG, whereby we agreed to provide loan financing for the construction of the terminal. We also entered into a long-term agreement with Freeport LNG to use 0.9 billion cubic feet per day of regasification capacity, which expires in 2033. The terminal became operational in June 2008, and we began making payments under the terminal use agreement. At March 31, 2013, the prepaid balance of the terminal use agreement was $244 million, which is primarily reflected in the “Other assets” line on our consolidated balance sheet. Freeport LNG began making loan repayments in September 2008, and the loan balance outstanding was $551 million at March 31, 2013, and $565 million at December 31, 2012.

Freeport LNG is a VIE because Freeport GP holds no equity in Freeport LNG, and the limited partners of Freeport LNG do not have any substantive decision making ability. Since we do not have the unilateral power to direct the key activities which most significantly impact its economic performance, we are not the primary beneficiary of Freeport LNG. These key activities primarily involve or relate to operating and maintaining the terminal. We also performed an analysis of the expected losses and determined we are not the primary beneficiary. This expected loss analysis took into account that the credit support arrangement requires Freeport LNG to maintain sufficient commercial insurance to mitigate any loan losses. The loan to Freeport LNG is accounted for as a financial asset, and our investment in Freeport GP is accounted for as an equity investment.

Australia Pacific LNG (APLNG)

APLNG is considered a VIE, as it has entered into certain contractual arrangements that provide it with additional forms of subordinated financial support. We are not the primary beneficiary of APLNG because we share with Origin Energy and China Petrochemical Corporation (Sinopec) the power to direct the key activities of APLNG that most significantly impact its economic performance, which involve activities related to the production and commercialization of coalbed methane, as well as LNG processing and export marketing. As a result, we do not consolidate APLNG, and it is accounted for as an equity method investment.

As of March 31, 2013, we have not provided, nor do we expect to provide in the future, any financial support to APLNG other than amounts previously contractually required. In addition, unless we elect otherwise, we have no requirement to provide liquidity or purchase the assets of APLNG. See Note 7—Investments, Loans and Long-Term Receivables, and Note 13—Guarantees, for additional information.

Note 5—Inventories

Inventories consisted of the following:

 

                                 
             Millions of Dollars           
    
 
March 31
2013
  
 
    
 
December 31 
2012 
  
 
  

 

 

 

Crude oil and petroleum products

   $ 396        244   

Materials, supplies and other

     737        721   

 

 
   $ 1,133        965   

 

 

Inventories valued on the last-in, first-out (LIFO) basis totaled $293 million and $147 million at March 31, 2013, and December 31, 2012, respectively. The estimated excess of current replacement cost over LIFO cost of inventories was approximately $200 million at both March 31, 2013, and December 31, 2012.

 

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Note 6—Assets Held for Sale or Sold

Our interest in Kashagan and the Algerian and Nigerian business units were considered held for sale at March 31, 2013. These assets are classified as discontinued operations. See Note 3—Discontinued Operations, for additional information.

In March 2013, we sold the majority of our properties in the Cedar Creek Anticline for $989 million and recognized a before-tax loss on disposition of $62 million, which was included in the “Gain on dispositions” line on our consolidated income statement. At the time of the disposition, the carrying value of our interest, which was included in the Lower 48 and Latin America segment, was $1,051 million, which included $1,079 million of properties, plants and equipment (PP&E) and $28 million of asset retirement obligations.

Note 7—Investments, Loans and Long-Term Receivables

APLNG

In the fourth quarter of 2012, APLNG satisfied all conditions precedent to drawdown from the $8.5 billion project finance facility. The facility is comprised of financing agreements executed by APLNG with the Export-Import Bank of the United States for approximately $2.9 billion, the Export-Import Bank of China for approximately $2.7 billion, and a syndicate of Australian and international commercial banks for approximately $2.9 billion. In connection with the execution of the project financing, we provided a completion guarantee for our pro-rata share of the project finance facility until the project achieves financial completion. See Note 13—Guarantees, for additional information.

APLNG is considered a VIE, as it has entered into certain contractual arrangements that provide it with additional forms of subordinated financial support. See Note 4—Variable Interest Entities (VIEs), for additional information.

At March 31, 2013, the book value of our equity method investment in APLNG was $10,402 million, which included $2,595 million of cumulative translation effects due to strengthening of the Australian dollar relative to the U.S. dollar over time, and is included in the “Investments and long-term receivables” line on our consolidated balance sheet.

Loans and Long-Term Receivables

As part of our normal ongoing business operations and consistent with industry practice, we enter into numerous agreements with other parties to pursue business opportunities. Included in such activity are loans made to certain affiliated and non-affiliated companies. Significant loans to affiliated companies at March 31, 2013, included the following:

 

   

$551 million in loan financing to Freeport LNG.

   

$1,050 million in project financing to Qatar Liquefied Gas Company Limited (3) (QG3).

The long-term portion of these loans is included in the “Loans and advances—related parties” line on our consolidated balance sheet, while the short-term portion is in “Accounts and notes receivable—related parties.”

Note 8—Suspended Wells

The capitalized cost of suspended wells at March 31, 2013, was $1,239 million, an increase of $201 million from $1,038 million at year-end 2012. No suspended wells were charged to dry hole expense during the first three months of 2013 relating to exploratory well costs capitalized for a period greater than one year as of December 31, 2012.

 

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Note 9—Impairments

During the three-month periods of 2013 and 2012, we recognized the following before-tax impairment charges:

 

             Millions of Dollars           
     Three Months Ended
March 31
 
     2013        2012   
  

 

 

 

Canada

   $ -        213   

Europe

     -         

Asia Pacific and Middle East

     2         

 

 
   $ 2        214   

 

 

The first quarter of 2012 included a $213 million property impairment in our Canada segment for the carrying value of capitalized project development costs associated with our Mackenzie Gas Project. Advancement of the project was suspended indefinitely in the first quarter of 2012 due to a continued decline in market conditions and the lack of acceptable commercial terms. We also recorded a $481 million impairment for the undeveloped leasehold costs associated with the project, which was included in the “Exploration expenses” line on our consolidated income statement.

Note 10—Debt

We have two commercial paper programs supported by our $7.5 billion revolving credit facility: the ConocoPhillips $6.35 billion program, primarily a funding source for short-term working capital needs, and the ConocoPhillips Qatar Funding Ltd. $1.15 billion commercial paper program, which is used to fund commitments relating to QG3. Commercial paper maturities are generally limited to 90 days.

At March 31, 2013 and December 31, 2012, we had no direct outstanding borrowings or letters of credit issued under our revolving credit facilities. In addition, under the ConocoPhillips Qatar Funding Ltd. commercial paper program, there was $1,008 million of commercial paper outstanding at March 31, 2013, compared with $1,055 million at December 31, 2012. Since we had $1,008 million of commercial paper outstanding and had issued no letters of credit, we had access to $6.5 billion in borrowing capacity under our revolving credit facilities at March 31, 2013.

At March 31, 2013, we classified $920 million of short-term debt as long-term debt, based on our ability and intent to refinance the obligation on a long-term basis under our revolving credit facilities.

In April 2013, we repaid the following debt instruments at maturity:

 

   

The $100 million 7.625% Debentures due 2013.

   

The $750 million 5.50% Notes due 2013.

Note 11—Joint Venture Acquisition Obligation

We are obligated to contribute $7.5 billion, plus interest, over a 10-year period that began in 2007, to FCCL Partnership. Quarterly principal and interest payments of $237 million began in the second quarter of 2007, and will continue until the balance is paid. Of the principal obligation amount, approximately $782 million was short-term and was included in the “Accounts payable—related parties” line on our March 31, 2013, consolidated balance sheet. The principal portion of these payments, which totaled $189 million in the first three months of 2013, is included in the “Other” line in the financing activities section on our consolidated

 

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statement of cash flows. Interest accrues at a fixed annual rate of 5.3 percent on the unpaid principal balance. Fifty percent of the quarterly interest payment is reflected as a capital contribution and is included in the “Capital expenditures and investments” line on our consolidated statement of cash flows.

Note 12—Noncontrolling Interests

Activity attributable to common stockholders’ equity and noncontrolling interests for the first three months of 2013 and 2012 was as follows:

 

     Millions of Dollars  
     2013      2012  
    
 
 
Common
Stockholders’
Equity
  
  
  
    

 
 

Non-

Controlling
Interest

  

  
  

    
 
Total
Equity
  
  
    
 
 
Common
Stockholders’
Equity
  
  
  
    

 
 

Non-

Controlling
Interest

  

  
  

    
 
Total 
Equity 
  
  
  

 

 

    

 

 

 

Balance at January 1

   $ 47,987         440         48,427         65,239         510         65,749   

Net income

     2,139         14         2,153         2,937         18         2,955   

Dividends

     (815)                (815)         (843)                (843)   

Repurchase of company common stock

                          (1,899)                (1,899)   

Distributions to noncontrolling interests

            (17)         (17)                (19)         (19)   

Other changes, net*

     (508)                (508)         1,115                1,115   

 

 

Balance at March 31

   $ 48,803         437         49,240         66,549         509         67,058   

 

 

* Includes components of other comprehensive income, which are disclosed separately in the Consolidated Statement of Comprehensive Income.

Note 13—Guarantees

At March 31, 2013, 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 below, 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. In addition, unless otherwise stated, we are not currently performing with any significance under the guarantee and expect future performance to be either immaterial or have only a remote chance of occurrence.

APLNG Guarantees

At March 31, 2013, we have outstanding multiple guarantees in connection with our 37.5 percent ownership interest in APLNG. The following is a description of the guarantees with values calculated utilizing March 2013 exchange rates:

 

   

We have guaranteed APLNG’s performance with regard to a construction contract executed in connection with APLNG’s issuance of the Train 1 and Train 2 Notices to Proceed. We estimate the remaining term of this guarantee is 4 years. Our maximum potential amount of future payments related to this guarantee is approximately $110 million and would become payable if APLNG cancels the applicable construction contract and does not perform with respect to the amounts owed to the contractor.

 

   

We have issued a construction completion guarantee related to the third-party project financing secured by APLNG. Our maximum potential amount of future payments under the guarantee is estimated to be $3.2 billion, which could be payable if the full debt financing capacity is utilized and completion of the project is not achieved. Our guarantee of the project financing will be released upon meeting certain completion milestones, which we estimate would occur beginning in 2016. Our maximum exposure at March 31, 2013, is $1.7 billion based upon our pro-rata share of the facility used at that date. At March 31, 2013, the carrying value of this guarantee is approximately $114 million.

 

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In conjunction with our original purchase of an ownership interest in APLNG from Origin Energy in October 2008, we agreed to guarantee an existing obligation of APLNG to deliver natural gas under several sales agreements with remaining terms of 4 to 19 years. Our maximum potential amount of future payments, or cost of volume delivery, under these guarantees is estimated to be $1.0 billion ($2.4 billion in the event of intentional or reckless breach), and would become payable if APLNG fails to meet its obligations under these agreements and the obligations cannot otherwise be mitigated. Future payments are considered unlikely, as the payments, or cost of volume delivery, would only be triggered if APLNG does not have enough natural gas to meet these sales commitments and if the co-venturers do not make necessary equity contributions into APLNG.

 

   

We have guaranteed the performance of APLNG with regard to certain other contracts executed in connection with the project’s continued development. The guarantees have remaining terms of up to 33 years or the life of the venture. Our maximum potential amount of future payments related to these guarantees is approximately $180 million and would become payable if APLNG does not perform.

Other Guarantees

We have other guarantees with maximum future potential payment amounts totaling approximately $280 million, which consist primarily of guarantees of the residual value of leased corporate aircraft, guarantees to fund the short-term cash liquidity deficit of two joint ventures, a guarantee for our portion of a joint venture’s debt obligations and a guarantee of minimum charter revenue for an LNG vessel. These guarantees have remaining terms of up to 11 years or the life of the venture and would become payable, if upon sale, certain asset values are lower than guaranteed amounts, business conditions decline at guaranteed entities or as a result of non-performance of contractual terms by guaranteed parties.

Indemnifications

Over the years, we have entered into various lease agreements or agreements to sell ownership interests in certain corporations, joint ventures and assets that gave rise to qualifying indemnifications. Agreements associated with these leases and 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 at March 31, 2013, was approximately $70 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 the liability is essentially relieved or amortize the liability over an appropriate time period as the fair value of our indemnification exposure declines. Although it is reasonably possible 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 recorded carrying amount were approximately $50 million of environmental accruals for known contamination that are included in the “Asset retirement obligations and accrued environmental costs” line on our consolidated balance sheet. For additional information about environmental liabilities, see Note 14—Contingencies and Commitments.

In connection with the separation of the Downstream business, the Company entered into an Indemnification and Release Agreement with Phillips 66. See Note 3—Discontinued Operations, for additional information. This agreement provided for cross-indemnities between Phillips 66 and ConocoPhillips and established procedures for handling claims subject to indemnification and related matters. We evaluated the impact of the indemnifications given and the Phillips 66 indemnifications received as of the separation date and concluded those fair values were immaterial.

 

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Note 14—Contingencies and Commitments

A number of lawsuits involving a variety of claims arising in the ordinary course of business have been made against ConocoPhillips. We also may be required 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 active and inactive sites. We regularly assess the need for accounting recognition or disclosure of these contingencies. In the case of all known contingencies (other than those related to income taxes), we accrue a liability when the loss is probable and the amount is reasonably estimable. If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. 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. With respect to income-tax-related contingencies, we use a cumulative probability-weighted loss accrual in cases where sustaining a tax position is less than certain.

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 consolidated financial statements. As we learn new facts concerning contingencies, we reassess our position both with respect to accrued liabilities and other potential exposures. Estimates 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 international, federal, state and local environmental laws and regulations. When we prepare our consolidated 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 account stakeholder and business considerations. 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 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 cleanup costs related to any site at which we have been designated as a potentially responsible party. 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 and time limits.

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 in respect of sites acquired in a purchase business combination, which we record on a discounted basis) for planned investigation and remediation activities for sites where it is probable future costs will be incurred and these costs can be reasonably estimated. At March 31, 2013, our

 

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balance sheet included a total environmental accrual of $350 million, compared with $364 million at December 31, 2012. We expect to incur a substantial amount 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

Our legal organization applies its 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 those cases that have been scheduled for trial and/or mediation. Based on professional judgment and experience in using these litigation management tools and available information about current developments in all our cases, our legal organization regularly assesses the adequacy of current accruals and determines if adjustment of existing accruals, or establishment of new accruals, are required.

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, 2013, we had performance obligations secured by letters of credit of $782 million (issued as direct bank letters of credit) related to various purchase commitments for materials, supplies, commercial activities and services incident to the ordinary conduct of business.

In 2007, we announced we had been unable to reach agreement with respect to our migration to an empresa mixta structure mandated by the Venezuelan government’s Nationalization Decree. As a result, Venezuela’s national oil company, Petróleos de Venezuela S.A. (PDVSA), or its affiliates, directly assumed control over ConocoPhillips’ interests in the Petrozuata and Hamaca heavy oil ventures and the offshore Corocoro development project. In response to this expropriation, we filed a request for international arbitration on November 2, 2007, with the World Bank’s International Centre for Settlement of Investment Disputes (ICSID). An arbitration hearing was held before an ICSID tribunal during the summer of 2010, and we anticipate an interim decision on key legal and factual issues in 2013.

In 2008, Burlington Resources, Inc., a wholly owned subsidiary of ConocoPhillips, initiated arbitration before ICSID against The Republic of Ecuador, as a result of the newly enacted Windfall Profits Tax Law and government-mandated renegotiation of our production sharing contracts. Despite a restraining order issued by the ICSID tribunal, Ecuador confiscated the crude oil production of Burlington and its co-venturer and sold the seized crude oil. In 2009, Ecuador took over operations in Blocks 7 and 21, fully expropriating our assets. In June 2010, the ICSID tribunal concluded it has jurisdiction to hear the expropriation claim. On April 24, 2012, Ecuador filed a supplemental counterclaim asserting environmental damages, which we believe are not material. The ICSID tribunal issued a decision on liability on December 14, 2012, in favor of Burlington, finding that Ecuador’s seizure of Blocks 7 and 21 was an unlawful expropriation in violation of the Ecuador-U.S. Bilateral Investment Treaty. An additional arbitration phase is now proceeding to determine the damages owed to ConocoPhillips for Ecuador’s actions.

ConocoPhillips served a Notice of Arbitration on the Timor-Leste Minister of Finance in October 2012 for outstanding disputes related to a series of tax assessments. Between 2010 and 2012, ConocoPhillips has paid, under protest, tax assessments totaling approximately $227 million, which are primarily recorded in the “Investments and long-term receivables” line on our consolidated balance sheet. The arbitration will be conducted in Singapore under the United Nations Commission on International Trade Laws (UNCITRAL) arbitration rules, pursuant to the terms of the Tax Stability Agreement with the Timor-Leste government. The arbitration process is currently underway. Future impacts on our business are not known at this time.

 

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Note 15—Derivative and Financial Instruments

Derivative Instruments

We use futures, forwards, swaps and options in various markets to meet our customer needs and capture market opportunities. Our commodity business primarily consists of natural gas, crude oil, bitumen, LNG and natural gas liquids. Under our current business model, we are not required to register as a Swap Dealer or Major Swap Participant.

Our derivative instruments are held at fair value on our consolidated balance sheet. Where these balances have the right of setoff, they are presented net. Related cash flows are recorded as operating activities on the consolidated statement of cash flows. On the consolidated income statement, realized and unrealized gains and losses are recognized either on a gross basis if directly related to our physical business or a net basis if held for trading. Gains and losses related to contracts that meet and are designated with the normal purchase normal sale exception are recognized upon settlement. We generally apply this exception to eligible crude contracts. We do not use hedge accounting for our commodity derivatives.

The following table presents the gross fair values of our commodity derivatives, excluding collateral, and the line items where they appear on our consolidated balance sheet:

 

                                                 
     Millions of Dollars  
    

March 31

2013

    

December 31 

2012 

 
  

 

 

 

Assets

     

Prepaid expenses and other current assets

   $ 1,402        1,538   

Other assets

     98        105   

Liabilities

     

Other accruals

     1,461        1,509   

Other liabilities and deferred credits

     94        99   

 

 

The gains (losses) from commodity derivatives incurred, and the line items where they appear on our consolidated income statement were:

 

                                     
     Millions of Dollars  
     Three Months Ended
March  31
 
     2013      2012  
  

 

 

 

Sales and other operating revenues

   $ (208)         (403)   

Other income

            (6)   

Purchased commodities

     185         398   

 

 

The table below summarizes our material net exposures resulting from outstanding commodity derivative contracts.

 

                                             
     Open Position
Long/(Short)
 
    

March 31

2013

    

December 31

2012

 
  

 

 

 

Natural gas and power (billions of cubic feet equivalent)

     

Fixed price

     (22)         (48)   

Basis

     (1)         125   

 

 

 

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Foreign Currency Exchange Derivatives

We have foreign currency exchange rate risk resulting from international operations. Our foreign currency exchange derivative activity primarily consists of transactions designed to mitigate our cash-related and foreign currency exchange rate exposures, such as firm commitments for capital projects or local currency tax payments, dividends, and cash returns from net investments in foreign affiliates. We do not elect hedge accounting on our foreign currency exchange derivatives.

The following table presents the gross fair values of our foreign currency exchange derivatives, excluding collateral, and the line items where they appear on our consolidated balance sheet:

 

                                             
     Millions of Dollars  
    

March 31

2013

    

December 31 

2012 

 
  

 

 

 

Assets

     

Prepaid expenses and other current assets

   $ 12        32   

Liabilities

     

Other accruals

     5         

Other liabilities and deferred credits

     -         

 

 

The (gains) losses from foreign currency exchange derivatives incurred, and the line items where they appear on our consolidated income statement were:

 

                                 
     Millions of Dollars  
     Three Months Ended
March  31
 
     2013      2012   
  

 

 

 

Foreign currency transaction (gains) losses

    $ 22        (15)   

 

 

We had the following net notional position of outstanding foreign currency exchange derivatives:

 

                                                             
     In Millions
Notional Currency
 
    

March 31

2013

    

December 31 

2012 

 
  

 

 

 

Sell U.S. dollar, buy other currencies*

   USD -        2,573   

Buy U.S. dollar, sell other currencies**

   USD 842        140   

Buy British pound, sell euro

   GBP 11         

Buy euro, sell British pound

   EUR -        96   

 

 

  *Primarily euro, Canadian dollar, Norwegian krone and British pound.

**Primarily euro, Canadian dollar and Norwegian krone.

Financial Instruments

We have certain financial instruments on the consolidated balance sheet related to interest bearing time deposits and commercial paper. These held-to-maturity financial instruments are included in “Cash and cash equivalents” on our consolidated balance sheet if the maturities at the time we made the investments were 90 days or less; otherwise, these investments are included in “Short-term investments” on our consolidated balance sheet.

 

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These balances consisted of the following:

 

                                                                           
     Millions of Dollars  
     Carrying Amount  
     Cash and Cash Equivalents      Short-Term Investments  
    

March 31

2013

    

December 31 

2012 

    

March 31

2013

    

December 31 

2012 

 
  

 

 

    

 

 

 

Cash

    $ 681        829         -         

Time Deposits

     4,741        2,789         -         

Commercial Paper

     -               23         

 

 
    $ 5,422        3,618         23         

 

 

In conjunction with the separation of our Downstream business, we received a special cash distribution from Phillips 66. See Note 3—Discontinued Operations, for additional information. The balance of the special cash distribution was zero at March 31, 2013, and $748 million at December 31, 2012, and was included in “Restricted cash” on our consolidated balance sheet. At December 31, 2012, the funds in the restricted cash account were invested in money market funds with maturities within 90 days from December 31, 2012.

Credit Risk

Financial instruments potentially exposed to concentrations of credit risk consist primarily of cash equivalents, over-the-counter (OTC) derivative contracts and trade receivables. Our cash equivalents and short-term investments are placed in high-quality commercial paper, money market funds, government debt securities and time deposits with major international banks and financial institutions.

The credit risk from our OTC derivative contracts, such as forwards and swaps, derives from the counterparty to the transaction. Individual counterparty exposure is managed within predetermined credit limits and includes the use of cash-call margins when appropriate, thereby reducing the risk of significant nonperformance. We also use futures, swaps and option contracts that have a negligible credit risk because these trades are cleared with an exchange clearinghouse and subject to mandatory margin requirements until settled; however, we are exposed to the credit risk of those exchange brokers for receivables arising from daily margin cash calls, as well as for cash deposited to meet initial margin requirements.

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.

Certain of our derivative instruments contain provisions that require us to post collateral if the derivative exposure exceeds a threshold amount. We have contracts with fixed threshold amounts and other contracts with variable threshold amounts that are contingent on our credit rating. The variable threshold amounts typically decline for lower credit ratings, while both the variable and fixed threshold amounts typically revert to zero if we fall below investment grade. Cash is the primary collateral in all contracts; however, many also permit us to post letters of credit as collateral, such as certain transactions administered through the New York Mercantile Exchange or the IntercontinentalExchange.

The aggregate fair value of all derivative instruments with such credit-risk-related contingent features that were in a liability position on March 31, 2013, and December 31, 2012, was $143 million and $130 million, respectively. For these instruments, no collateral was posted as of March 31, 2013 or December 31, 2012. If our credit rating had been lowered one level from its “A” rating (per Standard and Poor’s) on March 31, 2013, we would be required to post no additional collateral to our counterparties. If we had been downgraded below investment grade, we would be required to post $143 million of additional collateral, either with cash or letters of credit.

 

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Note 16—Fair Value Measurement

We carry a portion of our assets and liabilities at fair value that are measured at a reporting date using an exit price (i.e., the price that would be received to sell an asset or paid to transfer a liability) and disclosed according to the quality of valuation inputs under the following hierarchy:

 

   

Level 1: Quoted prices (unadjusted) in an active market for identical assets or liabilities.

   

Level 2: Inputs other than quoted prices which are directly or indirectly observable.

   

Level 3: Unobservable inputs that are significant to the fair value of assets or liabilities.

The classification of an asset or liability is based on the lowest level of input significant to its fair value. Those that are initially classified as Level 3 are subsequently reported as Level 2 when the fair value derived from unobservable inputs is inconsequential to the overall fair value, or if corroborated market data becomes available. Assets and liabilities that are initially reported as Level 2 are subsequently reported as Level 3 if corroborated market data is no longer available. Transfers occur at the end of the reporting period. There were no material transfers in or out of Level 1.

Recurring Fair Value Measurement

Financial assets and liabilities reported at fair value on a recurring basis primarily include commodity derivatives and certain investments to support nonqualified deferred compensation plans. The deferred compensation investments are measured at fair value using unadjusted prices available from national securities exchanges; therefore, these assets are categorized as Level 1 in the fair value hierarchy. Level 1 derivative assets and liabilities primarily represent exchange-traded futures and options that are valued using unadjusted prices available from the underlying exchange. Level 2 derivative assets and liabilities primarily represent OTC swaps, options and forward purchase and sale contracts that are valued using adjusted exchange prices, prices provided by brokers or pricing service companies that are all corroborated by market data. Level 3 derivative assets and liabilities consist of OTC swaps, options and forward purchase and sale contracts that are long term in nature and where a significant portion of fair value is calculated from underlying market data that is not readily available. The derived value uses industry standard methodologies that may consider the historical relationships among various commodities, modeled market prices, time value, volatility factors and other relevant economic measures. The use of these inputs results in management’s best estimate of fair value. Level 3 activity was not material.

 

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The following table summarizes the fair value hierarchy for gross financial assets and liabilities (i.e., unadjusted where the right of setoff exists for commodity derivatives accounted for at fair value on a recurring basis):

 

                                                                                                       
     Millions of Dollars  
     March 31, 2013      December 31, 2012  
     Level 1      Level 2      Level 3      Total      Level 1      Level 2      Level 3      Total  
  

 

 

    

 

 

 

Assets

                       

Deferred compensation investments

   $ 309        -        -        309         305        -        -        305   

Commodity derivatives

     972        512        13        1,497         1,052        567        18        1,637   

 

 

Total assets

   $ 1,281        512        13        1,806         1,357        567        18        1,942   

 

 

Liabilities

                       

Commodity derivatives

   $ 990        561        1        1,552         1,031        567        4        1,602   

 

 

Total liabilities

   $ 990        561        1        1,552         1,031        567        4        1,602   

 

 

The following table summarizes those commodity derivative balances subject to the right of setoff as presented on our consolidated balance sheet:

 

                                                                                                                            
     Millions of Dollars  
    

Gross

Amounts

Recognized

    

Gross

Amounts

Offset

    

Net Amounts

Excluding

Collateral

    

Cash

Collateral

    

Net Amounts

Subject

to Setoff

 
  

 

 

 

March 31, 2013

              

Assets

   $ 1,475        1,304        171        29        142   

Liabilities

     1,523        1,304        219        56        163   

 

 

December 31, 2012

              

Assets

   $ 1,621        1,403        218        29        189   

Liabilities

     1,588        1,403        185        16        169   

 

 

At March 31, 2013 and December 31, 2012, we did not present any amounts gross on our consolidated balance sheet where we had the right of setoff.

Non-Recurring Fair Value Measurement

We recorded a pre-tax loss of $43 million to reduce net PP&E (held for sale) to fair value. As of March 31, 2013, the fair value less costs to sell was $5,070 million. Since the fair value was determined by the negotiated selling price, it is classified as Level 1 in the fair value hierarchy. See Note 3—Discontinued Operations, for additional information.

Reported Fair Values of Financial Instruments

We used the following methods and assumptions to estimate the fair value of financial instruments:

 

   

Cash and cash equivalents, restricted cash and short-term investments: The carrying amount reported on the balance sheet approximates fair value.

   

Accounts and notes receivable (including long-term and related parties): The carrying amount reported on the balance sheet approximates fair value. The valuation technique and methods used to estimate the fair value of the current portion of fixed-rate related party loans is consistent with Loans and advances—related parties.

   

Loans and advances—related parties: The carrying amount of floating-rate loans approximates fair value. The fair value of fixed-rate loan activity is measured using market observable data and is categorized as Level 2 in the fair value hierarchy. See Note 7—Investments, Loans and Long-Term Receivables, for additional information.

 

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Accounts payable (including related parties) and floating-rate debt: The carrying amount of accounts payable and floating-rate debt reported on the balance sheet approximates fair value. The valuation technique and methods used to estimate the fair value of the current portion of the joint venture acquisition obligation is consistent with the methodology below.

   

Fixed-rate debt: The estimated fair value of fixed-rate debt is measured using prices available from a pricing service that is corroborated by market data; therefore, these liabilities are categorized as Level 2 in the fair value hierarchy.

   

Joint venture acquisition obligation—related party: Fair value is estimated based on the net present value of the future cash flows as a Level 2 fair value. At March 31, 2013 and December 31, 2012, effective yield rates were 0.66 percent and 0.7 percent, respectively, based on yields of U.S. Treasury securities of similar average duration adjusted for our average credit risk spread and the amortizing nature of the obligation principal. See Note 11—Joint Venture Acquisition Obligation, for additional information.

The following table summarizes the net fair value of financial instruments (i.e., adjusted where the right of setoff exists for commodity derivatives):

 

                                                                                   
     Millions of Dollars  
     Carrying Amount      Fair Value  
    

March 31

2013

    

December 31

2012 

    

March 31

2013

    

December 31

2012 

 
  

 

 

    

 

 

 

Financial assets

           

Deferred compensation investments

    $ 309        305         309        305   

Commodity derivatives

     181        221         181        221   

Total loans and advances—related parties

     1,629        1,697         1,820        1,916   

Financial liabilities

           

Total debt, excluding capital leases

     21,654        21,709         25,855        26,349   

Total joint venture acquisition obligation

     3,392        3,582         3,740        3,968   

Commodity derivatives

     209        199         209        199   

 

 

Note 17—Accumulated Other Comprehensive Income

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

 

     Millions of Dollars  
    

Defined

Benefit Plans

    

Foreign

Currency

Translation

    

Accumulated

Other

Comprehensive

Income (Loss)

 
  

 

 

 

December 31, 2012

   $ (1,425)         5,512         4,087   

Other comprehensive income (loss)

     35         (644)         (609)   

 

 

March 31, 2013

   $ (1,390)         4,868         3,478   

 

 

At March 31, 2013, $35 million of accumulated other comprehensive income, net of $22 million of income tax expense, related to our defined benefit plans was amortized. The components of the employee benefit plan-related other comprehensive income items are included in the computation of net periodic pension cost. See Note 19—Employee Benefit Plans, for additional information.

There were no items within accumulated other comprehensive income related to noncontrolling interests.

 

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Note 18—Cash Flow Information

 

         Millions of Dollars      
     Three Months Ended
March  31
 
     2013       2012  
  

 

 

 

Cash Payments

    

Interest

   $ 157       228  

Income taxes

     1,199       1,308  

 

 

Net Sales (Purchases) of Short-Term Investments

    

Short-term investments purchased

   $ (23     (497

Short-term investments sold

           589  

 

 
   $ (23     92  

 

 

Note 19—Employee Benefit Plans

Pension and Postretirement Plans

 

                                                                             
     Millions of Dollars  
     Pension Benefits     Other Benefits  
Three Months Ended    March 31     March 31  
     2013     2012     2013     2012  
     U.S.     Int’l.     U.S.     Int’l.              

Components of Net Periodic Benefit Cost

            

Service cost

   $ 35       26       58       28       1        

Interest cost

     36       37       63       43       6       10   

Expected return on plan assets

     (47     (41     (74     (43     -       -  

Amortization of prior service cost (credit)

     1       (2     2       (2     (1     (1

Recognized net actuarial loss (gain)

     38       19       59       18       1       (1

 

 

Net periodic benefit cost

   $ 63       39       108       44       7       10   

 

 

In connection with the separation of the Downstream business on April 30, 2012, ConocoPhillips entered into an Employee Matters Agreement with Phillips 66 which provides that employees of Phillips 66 will no longer participate in benefit plans sponsored or maintained by ConocoPhillips upon separation. As such, changes in net periodic benefit cost included in the table above primarily relate to the employees of Phillips 66 no longer participating in the ConocoPhillips benefit plans for the three-month period ended March 31, 2013.

During the first three months of 2013, we contributed $52 million to our domestic benefit plans and $50 million to our international benefit plans.

 

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Table of Contents

Note 20—Related Party Transactions

We consider our equity-method investments to be related parties. Significant transactions with related parties were:

 

         Millions of Dollars      
     Three Months Ended
March  31
 
     2013        2012  
  

 

 

 

Operating revenues and other income

   $ 8        23   

Purchases

     41        43   

Operating expenses and selling, general and administrative expenses

     46        40   

Net interest expense*

     9        11   

 

 
* We paid interest to, or received interest from, various affiliates, including FCCL Partnership. See Note 7—Investments, Loans and Long-Term Receivables, for additional information on loans to affiliated companies.

Note 21—Segment Disclosures and Related Information

We explore for, produce, transport and market crude oil, bitumen, natural gas, LNG and natural gas liquids on a worldwide basis. We manage our operations through six operating segments, which are defined by geographic region: Alaska, Lower 48 and Latin America, Canada, Europe, Asia Pacific and Middle East, and Other International.

On April 30, 2012, our Downstream business was separated into a stand-alone, publicly traded corporation, Phillips 66. Results of operations for Phillips 66 for the period ended March 31, 2012, have been reported as discontinued operations. Commodity sales to Phillips 66, which were previously eliminated in consolidation prior to the separation, are now reported as third-party sales. In 2012, we also agreed to sell our Nigerian and Algerian businesses and our interest in Kashagan. Results of operations for Nigeria, Algeria and Kashagan have been reported as discontinued operations for all periods presented. For additional information, see Note 3—Discontinued Operations.

Corporate and Other represents costs not directly associated with an operating segment, such as most interest expense, corporate overhead, costs associated with the separation and certain technology activities, net of licensing revenues. Corporate assets include all cash and cash equivalents, short-term investments and restricted cash.

We evaluate performance and allocate resources based on net income attributable to ConocoPhillips. Intersegment sales are at prices that approximate market.

 

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Table of Contents

Analysis of Results by Operating Segment

 

         Millions of Dollars      
     Three Months Ended
March  31
 
     2013        2012   
  

 

 

 

Sales and Other Operating Revenues

     

Alaska

   $ 2,104         2,737   

 

 

Lower 48 and Latin America

     4,822         5,131   

Intersegment eliminations

     (29)         (115)   

 

 

Lower 48 and Latin America

     4,793         5,016   

 

 

Canada

     1,255         1,218   

Intersegment eliminations

     (158)         (136)   

 

 

Canada

     1,097         1,082   

 

 

Europe

     3,453         3,602   

Intersegment eliminations

            (72)   

 

 

Europe

     3,453         3,530   

 

 

Asia Pacific and Middle East

     2,218         1,896   

Other International

     483         310   

Corporate and Other

     18         22   

 

 

Consolidated sales and other operating revenues

   $ 14,166         14,593   

 

 

Net Income Attributable to ConocoPhillips

     

Alaska

   $ 543         620   

Lower 48 and Latin America

     133         255   

Canada

     133         (549)   

Europe

     431         389   

Asia Pacific and Middle East

     918         1,738   

Other International

     14         21   

Corporate and Other

     (162)         (311)   

Discontinued operations

     129         774   

 

 

Consolidated net income attributable to ConocoPhillips

   $ 2,139         2,937   

 

 

 

     Millions of Dollars  
    
 
    March 31
2013
  
 
    
 
December 31
2012 
  
 
  

 

 

 

Total Assets

     

Alaska

   $ 11,241        10,950   

Lower 48 and Latin America

     28,250        28,895   

Canada

     22,306        22,308   

Europe

     15,071        15,562   

Asia Pacific and Middle East

     24,038        23,721   

Other International

     1,462        1,418   

Corporate and Other

     7,826        6,823   

Discontinued operations

     7,586        7,467   

 

 

Consolidated total assets

   $ 117,780        117,144   

 

 

 

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Table of Contents

Note 22—Income Taxes

Our effective tax rate from continuing operations for the first quarter of 2013 was 47 percent compared with 49 percent for the first quarter of 2012. The decrease was primarily due to a smaller proportion of income in higher tax jurisdictions in 2013. Additionally, the tax rate for the first quarter of 2013 reflected a favorable tax resolution associated with the sale of certain western Canada properties which occurred in a prior year, and the tax rate for the first quarter of 2012 reflected a benefit from asset dispositions in 2012.

The effective tax rate in excess of the domestic federal statutory rate of 35 percent was primarily due to foreign taxes.

During the first quarter of 2013, unrecognized tax benefits decreased $235 million to $637 million at March 31, 2013, mainly due to the favorable tax resolution noted above. Included in this balance is $411 million which, if recognized, would impact our effective tax rate.

 

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Table of Contents

Supplementary Information—Condensed Consolidating Financial Information

We have various cross guarantees among ConocoPhillips, ConocoPhillips Company, ConocoPhillips Australia Funding Company, ConocoPhillips Canada Funding Company I, and ConocoPhillips Canada Funding Company II, with respect to publicly held debt securities. ConocoPhillips Company is 100 percent owned by ConocoPhillips. ConocoPhillips Australia Funding Company, ConocoPhillips Canada Funding Company I and ConocoPhillips Canada Funding Company II are indirect, 100 percent owned subsidiaries of ConocoPhillips Company. ConocoPhillips and ConocoPhillips Company have fully and unconditionally guaranteed the payment obligations of ConocoPhillips Australia Funding Company, ConocoPhillips Canada Funding Company I, and ConocoPhillips Canada Funding Company II, with respect to their publicly held debt securities. Similarly, ConocoPhillips has fully and unconditionally guaranteed the payment obligations of ConocoPhillips Company with respect to its publicly held debt securities. In addition, 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, ConocoPhillips Company, ConocoPhillips Australia Funding Company, ConocoPhillips Canada Funding Company I, and ConocoPhillips Canada Funding Company II (in each case, reflecting investments in subsidiaries utilizing the equity method of accounting).

   

All other nonguarantor subsidiaries of ConocoPhillips.

   

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.

 

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Table of Contents
                                                                                                                       
      Millions of Dollars  
      Three Months Ended March 31, 2013  
Income Statement    ConocoPhillips     ConocoPhillips
Company
    ConocoPhillips
Australia Funding
Company
     ConocoPhillips
Canada Funding
Company I
    ConocoPhillips
Canada Funding
Company II
    All Other
Subsidiaries
    Consolidating
Adjustments
    Total
Consolidated
 

Revenues and Other Income

                 

Sales and other operating revenues

   $ -        4,464       -         -        -        9,702       -        14,166  

Equity in earnings of affiliates

     2,391       2,874       -         -        -        405       (5,308     362  

Gain (loss) on dispositions

     -        (2     -         -        -        60       -        58  

Other income

     1       45       -         -        -        19       -        65  

Intercompany revenues

     20       51       11        22       8       1,653       (1,765     -   

 

 

Total Revenues and Other Income

     2,412       7,432       11        22       8       11,839       (7,073     14,651  

 

 

Costs and Expenses

                 

Purchased commodities

     -        3,929       -         -        -        3,064       (1,159     5,834  

Production and operating expenses

     -        310       -         -        -        1,379       (2     1,687  

Selling, general and administrative expenses

     4       122       -         -        -        56       (17     165  

Exploration expenses

     -        143       -         -        -        134       -        277  

Depreciation, depletion and amortization

     -        208       -         -        -        1,599       -        1,807  

Impairments

     -        -        -         -        -        2       -        2  

Taxes other than income taxes

     -        77       -         -        -        815       -        892  

Accretion on discounted liabilities

     -        14       -         -        -        92       -        106  

Interest and debt expense

     586       83       10        19       8       11       (587     130  

Foreign currency transaction (gains) losses

     17       8       -         (22     (14     (25     -        (36

 

 

Total Costs and Expenses

     607       4,894       10        (3     (6     7,127       (1,765     10,864  

 

 

Income from continuing operations before income taxes

     1,805       2,538       1        25       14       4,712       (5,308     3,787  

Provision for income taxes

     (205     147       -         (1     1       1,821       -        1,763  

 

 

Income From Continuing Operations

     2,010       2,391       1        26       13       2,891       (5,308     2,024  

Income from discontinued operations

     129       129       -         -        -        129       (258     129  

 

 

Net income

     2,139       2,520       1        26       13       3,020       (5,566     2,153  

Less: net income attributable to noncontrolling interests

     -        -        -         -        -        (14     -        (14

 

 

Net Income Attributable to ConocoPhillips

   $ 2,139       2,520       1        26       13       3,006       (5,566     2,139  

 

 

Comprehensive Income Attributable to ConocoPhillips

   $ 1,530       1,911       1        (4     1       2,392       (4,301     1,530  

 

 
Income Statement    Three Months Ended March 31, 2012  

Revenues and Other Income

                 

Sales and other operating revenues

   $ -        4,292       -         -        -        10,301       -        14,593  

Equity in earnings of affiliates

     2,514       2,701       -         -        -        462       (5,187     490  

Gain on dispositions

     -        -        -         -        -        940       -        940  

Other income

     1       31       -         -        -        28       -        60  

Intercompany revenues

     1       440       11        22       8       825       (1,307     -   

 

 

Total Revenues and Other Income

     2,516       7,464       11        22       8       12,556       (6,494     16,083  

 

 

Costs and Expenses

                 

Purchased commodities

     -        3,807       -         -        -        2,975       (704     6,078  

Production and operating expenses

     -        267       -         -        -        1,307       (15     1,559  

Selling, general and administrative expenses

     5       263       -         -        -        66       (8     326  

Exploration expenses

     -        90       -         -        -        585       -        675  

Depreciation, depletion and amortization

     -        204       -         -        -        1,367       -        1,571  

Impairments

     -        -        -         -        -        214       -        214  

Taxes other than income taxes

     -        82       -         -        -        1,013       -        1,095  

Accretion on discounted liabilities

     -        13       -         -        -        92       -        105  

Interest and debt expense

     540       81       10        19       8       112       (580     190  

Foreign currency transaction (gains) losses

     -        (28     -         11       16       6       -        5  

 

 

Total Costs and Expenses

     545       4,779       10        30       24       7,737       (1,307     11,818  

 

 

Income (loss) from continuing operations before income taxes

     1,971       2,685       1        (8     (16     4,819       (5,187     4,265  

Provision for income taxes

     (190     171       -         6       (1     2,100       -        2,086  

 

 

Income (Loss) From Continuing Operations

     2,161       2,514       1        (14     (15     2,719       (5,187     2,179  

Income from discontinued operations

     776       776       -         -        -        777       (1,553     776  

 

 

Net income (loss)

     2,937       3,290       1        (14     (15     3,496       (6,740     2,955  

Less: net income attributable to noncontrolling interests

     -        -        -         -        -        (18     -        (18

 

 

Net Income (Loss) Attributable to ConocoPhillips

   $ 2,937       3,290       1        (14     (15     3,478       (6,740     2,937  

 

 

Comprehensive Income (Loss) Attributable to ConocoPhillips

   $ 3,823       4,176       1        19       (2     4,283       (8,477     3,823  

 

 

 

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Table of Contents
    Millions of Dollars  
    March 31, 2013  
Balance Sheet   ConocoPhillips     ConocoPhillips
Company
    ConocoPhillips
Australia  Funding
Company
    ConocoPhillips
Canada  Funding
Company I
    ConocoPhillips
Canada Funding
Company II
    All Other
Subsidiaries
    Consolidating
Adjustments
    Total
Consolidated
 

Assets

               

Cash and cash equivalents

  $ -        279       6       48       2       5,087       -        5,422   

Short-term investments

    -        -        -        -        -        23       -        23   

Accounts and notes receivable

    62       6,273       -        -        -        7,544       (4,981     8,898   

Inventories

    -        87       -        -        -        1,046       -        1,133   

Prepaid expenses and other current assets

    18       592       -        1       -        8,148       -        8,759   

 

 

Total Current Assets

    80       7,231       6       49       2       21,848       (4,981     24,235   

Investments, loans and long-term receivables*

    82,784       118,108       771       1,443       573       43,986       (222,895     24,770   

Net properties, plants and equipment

    -        8,849       -        -        -        59,041       -        67,890   

Other assets

    48       219       -        2       3       613       -        885   

 

 

Total Assets

  $ 82,912       134,407       777       1,494       578       125,488       (227,876     117,780   

 

 

Liabilities and Stockholders’ Equity

               

Accounts payable

  $ -        8,710       1       3       1       6,687       (4,981     10,421   

Short-term debt

    395       4       750       -        -        202       -        1,351   

Accrued income and other taxes

    -        158       -        4       -        3,496       -        3,658   

Employee benefit obligations

    -        294       -        -        -        138       -        432   

Other accruals

    119       655       19       32       13       1,615       -        2,453   

 

 

Total Current Liabilities

    514       9,821       770       39       14       12,138       (4,981     18,315   

Long-term debt

    9,051       5,213       -        1,250       499       4,306       -        20,319   

Asset retirement obligations and accrued environmental costs

    -        1,253       -        -        -        7,397       -        8,650   

Joint venture acquisition obligation

    -        -        -        -        -        2,610       -        2,610   

Deferred income taxes

    54       292       -        14       8       13,239       -        13,607   

Employee benefit obligations

    -        2,446       -        -        -        825       -        3,271   

Other liabilities and deferred credits*

    31,327       22,689       -        95       36       18,580       (70,959     1,768   

 

 

Total Liabilities

    40,946       41,714       770       1,398       557       59,095       (75,940     68,540   

Retained earnings

    30,100       26,618       5       (54     (62     33,419       (53,364     36,662   

Other common stockholders’ equity

    11,866       66,075       2       150       83       32,537       (98,572     12,141   

Noncontrolling interests

    -        -        -        -        -        437       -        437   

 

 

Total Liabilities and Stockholders’ Equity

  $ 82,912       134,407       777       1,494       578       125,488       (227,876     117,780   

 

 
Balance Sheet   December 31, 2012  

Assets

               

Cash and cash equivalents

  $ 2       12       6       50       2       3,546       -        3,618   

Restricted cash

    748       -        -        -        -        -        -        748   

Accounts and notes receivable

    64       6,247       -        -        -        7,958       (5,087     9,182   

Inventories

    -        57       -        -        -        908       -        965   

Prepaid expenses and other current assets

    19       847       -        1       -        8,609       -        9,476   

 

 

Total Current Assets

    833       7,163       6       51       2       21,021       (5,087     23,989   

Investments, loans and long-term receivables*

    80,910       114,314       759       1,455       578       44,739       (217,749     25,006   

Net properties, plants and equipment

    -        8,771       -        -        -        58,492       -        67,263   

Other assets

    55       216       -        2       3       610       -        886   

 

 

Total Assets

  $ 81,798       130,464       765       1,508       583       124,862       (222,836     117,144   

 

 

Liabilities and Stockholders’ Equity

               

Accounts payable

  $ -        9,067       -        4       1       6,028       (5,087     10,013   

Short-term debt

    (5     4       750       -        -        206       -        955   

Accrued income and other taxes

    -        104       -        3       -        3,259       -        3,366   

Employee benefit obligations

    -        485       -        -        -        257       -        742   

Other accruals

    209       636       9       15       4       1,494       -        2,367   

 

 

Total Current Liabilities

    204       10,296       759       22       5       11,244       (5,087     17,443   

Long-term debt

    9,453       5,215       -        1,250       499       4,353       -        20,770   

Asset retirement obligations and accrued environmental costs

    -        1,250       -        -        -        7,697       -        8,947   

Joint venture acquisition obligation

    -        -        -        -        -        2,810       -        2,810   

Deferred income taxes

    15       598       -        16       7       12,549       -        13,185   

Employee benefit obligations

    -        2,464       -        -        -        882       -        3,346   

Other liabilities and deferred credits*

    30,938       19,916       -        117       50       21,174       (69,979     2,216   

 

 

Total Liabilities

    40,610       39,739       759       1,405       561       60,709       (75,066     68,717   

Retained earnings

    28,815       24,041       4       (78     (73     30,778       (48,149     35,338   

Other common stockholders’ equity

    12,373       66,684       2       181       95       32,935       (99,621     12,649   

Noncontrolling interests

    -        -        -        -        -        440       -        440   

 

 

Total Liabilities and Stockholders’ Equity

  $ 81,798       130,464       765       1,508       583       124,862       (222,836     117,144   

 

 

* Includes intercompany loans.

 

27


Table of Contents
                                                                                                                       
     Millions of Dollars  
Statement of Cash Flows    Three Months Ended March 31, 2013  
     ConocoPhillips     ConocoPhillips
Company
    ConocoPhillips
Australia Funding
Company
     ConocoPhillips
Canada Funding
Company I
    ConocoPhillips
Canada Funding
Company II
     All Other
Subsidiaries
    Consolidating
Adjustments
    Total
Consolidated
 

Cash Flows From Operating Activities

                  

Net cash provided by (used in) continuing operating activities

   $ 74       2,261       -        (2     -        2,618       (343     4,608  

Net cash provided by discontinued operations

     -        -        -        -       -        172       (50     122  

 

 

Net Cash Provided by (Used in) Operating Activities

     74       2,261       -        (2     -        2,790       (393     4,730  

 

 

Cash Flows From Investing Activities

                  

Capital expenditures and investments

     -        (448     -        -       -        (2,943     -        (3,391

Proceeds from asset dispositions

     -        4       -        -       -        1,130       -        1,134  

Net sales of short-term investments

     -        -        -        -       -        (23     -        (23

Long-term advances/loans—related parties

     -        2       -        -       -        (7     5       -   

Collection of advances/loans—related parties

     -        14       -        -       -        1,609       (1,566     57  

Other

     -        -        -        -       -        (21     -        (21

 

 

Net cash used in continuing investing activities

     -        (428     -        -       -        (255     (1,561     (2,244

Net cash used in discontinued operations

     -        -        -        -       -        (189     -        (189

 

 

Net Cash Used in Investing Activities

     -        (428     -        -       -        (444     (1,561     (2,433

 

 

Cash Flows From Financing Activities

                  

Issuance of debt

     -        -        -        -       -        5       (5     -   

Repayment of debt

     -        (1,566     -        -       -        (48     1,566       (48

Change in restricted cash

     748       -        -        -       -        -        -        748  

Issuance of company common stock

     (10     -        -        -       -        -        -        (10

Dividends paid

     (815     -        -        -       -        (343     343       (815

Other

     1       -        -        -       -        (206     -        (205

 

 

Net cash used in continuing financing activities

     (76     (1,566     -        -       -        (592     1,904       (330

Net cash used in discontinued operations

     -        -        -        -       -        (50     50       -   

 

 

Net Cash Used in Financing Activities

     (76     (1,566     -        -       -        (642     1,954       (330

 

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

     -        -        -        -       -        (163     -        (163

 

 

Net Change in Cash and Cash Equivalents

     (2     267       -        (2     -        1,541       -        1,804  

Cash and cash equivalents at beginning of period

     2       12       6        50       2        3,546       -        3,618  

 

 

Cash and Cash Equivalents at End of Period

   $ -        279       6        48       2        5,087       -        5,422  

 

 
Statement of Cash Flows    Three Months Ended March 31, 2012  

Cash Flows From Operating Activities

                  

Net cash provided by (used in) continuing operating activities

   $ 3,011       3,737       -        (1     -        (257     (2,420     4,070  

Net cash provided by (used in) discontinued operations

     -        167       -        -       -        (56     1       112  

 

 

Net Cash Provided by (Used in) Operating Activities

     3,011       3,904       -        (1     -        (313     (2,419     4,182  

 

 

Cash Flows From Investing Activities

                  

Capital expenditures and investments

     (303     (470     -        -       -        (3,348     303       (3,818

Proceeds from asset dispositions

     -        -        -        -       -        1,102       -        1,102  

Net purchases of short-term investments

     -        -        -        -       -        92       -        92  

Long-term advances/loans—related parties

     -        (2     -        -       -        (3,004     3,006       -   

Collection of advances/loans—related parties

     -        92       -        -       -        28       (82     38  

Other

     -        -        -        -       -        7       -        7  

 

 

Net cash used in continuing investing activities

     (303     (380     -        -       -        (5,123     3,227       (2,579

Net cash provided by (used in) discontinued operations

     -        (163     -        -       -        7,932       (8,200     (431

 

 

Net Cash Provided by (Used in) Investing Activities

     (303     (543     -        -       -        2,809       (4,973     (3,010

 

 

Cash Flows From Financing Activities

                  

Issuance of debt

     -        3,000       -        -       -        6       (3,006     -   

Repayment of debt

     -        (8,215     -        -       -        (114     8,282       (47

Issuance of company common stock

     36       -        -        -       -        -        -        36  

Repurchase of company common stock

     (1,899     -        -        -       -        -        -        (1,899

Dividends paid

     (843     -        -        -       -        (2,308     2,308       (843

Other

     (2     -        -        -       -        (198     1       (199

 

 

Net cash used in continuing financing activities

     (2,708     (5,215     -        -       -        (2,614     7,585       (2,952

Net cash used in discontinued operations

     -        (5     -        -       -        (120     (193     (318

 

 

Net Cash Used in Financing Activities

     (2,708     (5,220     -        -       -        (2,734     7,392       (3,270

 

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

     -        -        -        -       -        25       -        25  

 

 

Net Change in Cash and Cash Equivalents

     -        (1,859     -        (1     -        (213     -        (2,073

Cash and cash equivalents at beginning of period

     -        2,028       1        38       1        3,712       -        5,780  

 

 

Cash and Cash Equivalents at End of Period

   $ -        169       1        37       1        3,499       -        3,707  

 

 

 

28


Table of Contents
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis is the Company’s 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. It contains forward-looking statements including, without limitation, statements relating to the Company’s plans, strategies, objectives, expectations and intentions that are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. The words “anticipate,” “estimate,” “believe,” “budget,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “seek,” “should,” “will,” “would,” “expect,” “objective,” “projection,” “forecast,” “goal,” “guidance,” “outlook,” “effort,” “target” 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 Company’s 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 47.

Due to the separation of our downstream businesses in 2012 and our intention to sell our interest in the North Caspian Sea Production Sharing Agreement (Kashagan) and our Nigerian and Algerian businesses, which are reported as discontinued operations, income (loss) from continuing operations is more representative of ConocoPhillips as an independent exploration and production company. The terms “earnings” and “loss” as used in Management’s Discussion and Analysis refer to income (loss) from continuing operations.

BUSINESS ENVIRONMENT AND EXECUTIVE OVERVIEW

ConocoPhillips is the world’s largest independent exploration and production (E&P) company, based on production and proved reserves. Headquartered in Houston, Texas, we have operations and activities in 30 countries. At March 31, 2013, we had approximately 17,100 employees worldwide and total assets of $118 billion.

Discontinued Operations

On April 30, 2012, we completed the separation of our downstream businesses into an independent, publicly traded company, Phillips 66. Our refining, marketing and transportation businesses, most of our Midstream segment, our Chemicals segment, as well as our power generation and certain technology operations included in our Emerging Businesses segment (collectively, our “Downstream business”), were transferred to Phillips 66. Results of operations related to Phillips 66 for the period ended March 31, 2012, have been classified as discontinued operations. As part of our strategic asset disposition program, in the fourth quarter of 2012, we agreed to sell our interest in Kashagan and our Nigerian and Algerian businesses. Results of operations related to Kashagan, Nigeria and Algeria have been classified as discontinued operations in all periods presented in this Form 10-Q. For additional information, see Note 3—Discontinued Operations, in the Notes to Consolidated Financial Statements.

Overview

As an independent E&P company, we are solely focused on exploring for, developing and producing crude oil and natural gas globally. Our portfolio primarily includes legacy assets in North America, Europe, Asia and Australia; growing North American shale and oil sands businesses; several major international developments; and a global exploration program. Our value proposition to our shareholders is to deliver production and cash margin growth, competitive returns on capital, and a compelling dividend, while keeping our fundamental commitment to safety, operating excellence and environmental stewardship. We expect to achieve our value proposition through portfolio optimization, investments in high-margin developments, applying technical capability and maintaining financial flexibility.

 

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Table of Contents

In the first quarter of 2013, we achieved production of 1,596 thousand barrels of oil equivalent per day (MBOED), including production from discontinued operations of 41 MBOED. Additionally, we generated $4.6 billion in cash from continuing operations, paid dividends on our common stock of $0.8 billion, funded a $3.6 billion capital program and continued to progress the asset disposition program. For the first quarter of 2013, we have generated proceeds from dispositions of approximately $1.1 billion, which mainly included the sale of certain properties in the Cedar Creek Anticline, located in North Dakota and Montana; our 24.5 percent interest in the N Block, located offshore Kazakhstan; and our 10 percent interest in the Interconnector Pipeline, located in Europe. The previously announced sales of Kashagan, Nigeria and Algeria are anticipated to close in 2013 and generate approximately $8.5 billion in expected proceeds.

Because we participate in a capital-intensive industry, we make significant investments to acquire acreage, explore for new oil and gas fields, develop newly discovered fields, maintain existing fields, and construct pipelines and liquefied natural gas (LNG) facilities. We use a disciplined approach to select the appropriate projects which will provide the most attractive investment opportunities, with a continued focus on higher-margin liquids plays and limited investment in North American conventional natural gas. As investments bring more liquids production online, we expect a corresponding shift in our production mix. However, there are often long lead times from the time we make an investment to the time the investment is operational and begins generating financial returns. In the near-term, we will fund a portion of our capital program with the proceeds from strategic asset dispositions. Over the next five years, our investment in high-margin developments should position us to deliver 3 to 5 percent annual production volume and margin growth, enabling us to fund our capital program organically.

Business Environment

In recent years, the business environment for the energy industry has experienced many challenges which have influenced our operations and profitability, largely due to factors beyond our control, such as the recent financial crisis, geopolitical events or fears thereof, environmental laws, tax regulations, governmental policies, and weather-related disruptions. These factors generally influence the supply and demand of crude oil and natural gas. The most significant factor impacting our profitability and related reinvestment of our operating cash flows into our business is commodity prices. The prices for commodity products are supply- and demand-based and can be very volatile; therefore, to navigate through the volatility, our strategy is to maintain a core portfolio of low-risk, high-return development programs associated with legacy assets, coupled with a portfolio of development opportunities which offer high-margin growth, such as unconventional plays, deepwater exploration and LNG.

The following table depicts the average benchmark prices for West Texas Intermediate (WTI) crude oil, Dated Brent crude oil and U.S. Henry Hub natural gas:

 

     Dollars Per Unit  
         Three Months Ended      
   March 31  
      2013      2012   
  

 

 

 

Market Indicators

     

WTI (per barrel)

   $ 94.29        102.99   

Dated Brent (per barrel)

         112.55        118.49   

U.S. Henry Hub first of month (per million British thermal units)

     3.34        2.72   

Industry crude prices for WTI decreased 8 percent in the first quarter of 2013, compared with the same period in 2012, while Brent prices decreased 5 percent in the first quarter of 2013. Global oil prices weakened during the first quarter of 2013, mainly as a result of weak global economic growth and increasing North American oil supply.

 

30


Table of Contents

Henry Hub natural gas prices increased 23 percent in the first quarter of 2013, compared with the same period in 2012. The increase was due to a colder winter in 2013 compared to 2012, which increased U.S. natural gas consumption by over 5 billion cubic feet per day in the first quarter of 2013 versus the first quarter of 2012.

The expansion in shale production has also helped boost supplies of natural gas liquids, resulting in downward pressure on natural gas liquids prices in the United States. As a result, our domestic realized natural gas liquids price declined 34 percent in the first quarter of 2013, compared with the same period of 2012. Our realized bitumen price was $39.23 in the first quarter of 2013, compared with $60.66 in the first quarter of 2012 and $48.32 in the fourth quarter of 2012, decreases of 35 percent and 19 percent, respectively. We expect bitumen prices to strengthen in the second quarter of 2013, compared to the first quarter of 2013.

Key Operating and Financial Highlights

Significant highlights during the first quarter of 2013 included the following:

 

   

Achieved first quarter total production of 1,596 MBOED, including continuing operations of 1,555 MBOED and discontinued operations of 41 MBOED.

   

Eagle Ford, Bakken and Permian combined production increased by 42 percent compared to the first quarter of 2012.

   

Oil sands production averaged 109 MBOED, up 30 percent compared to the first quarter of 2012.

   

Major projects on schedule for fourth-quarter startup.

   

Realized the first sale of oil from the deepwater Gumusut Field.

   

Announced Coronado and Shenandoah discoveries in the deepwater Gulf of Mexico.

   

Continued building the Gulf of Mexico exploration portfolio.

   

Entered Colombia to explore La Luna Shale.

   

Completed the sale of Cedar Creek Anticline properties for $989 million.

Outlook

Consistent with prior guidance, second quarter 2013 production from continuing operations is expected to be 1,440 to 1,470 MBOED, reflecting previously announced planned downtime and turnaround activity. Production from discontinued operations is expected to be approximately 40 MBOED in the second quarter of 2013. Full-year 2013 production from continuing operations is expected to be 1,485 to 1,520 MBOED.

 

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Table of Contents

RESULTS OF OPERATIONS

Unless otherwise indicated, discussion of results for the three-month period ended March 31, 2013, is based on a comparison with the corresponding period of 2012.

A summary of income (loss) from continuing operations by business segment follows:

 

     Millions of Dollars  
         Three Months Ended      
   March 31  
      2013     2012   
  

 

 

 

Alaska

   $ 543       620   

Lower 48 and Latin America

     133       255   

Canada

     133       (549)   

Europe

     431       389   

Asia Pacific and Middle East

     932       1,754   

Other International

     14       21   

Corporate and Other

     (162     (311)   

 

 

Income from continuing operations

   $     2,024       2,179   

 

 

Earnings for ConocoPhillips decreased 7 percent in the first quarter of 2013. The decrease primarily resulted from:

 

   

Lower gains from asset sales. Earnings for the first quarter of 2013 included a $270 million after-tax benefit associated with asset dispositions, compared with gains of $938 million after-tax in the first quarter of 2012.

   

Lower crude oil, bitumen and natural gas liquids prices.

   

Higher depreciation, depletion and amortization (DD&A) expenses, mainly due to higher volumes in the Lower 48 and China.

These items were partially offset by:

 

   

Lower impairments. Non-cash impairments in the first quarter of 2013 totaled $1 million after-tax, compared with impairments in the first quarter of 2012 of $520 million after-tax.

   

Higher natural gas prices.

   

Lower production taxes, primarily as a result of lower production volumes and prices in Alaska.

   

Higher sales, largely due to higher bitumen and LNG sales.

See the “Segment Results” section for additional information on our segment results.

 

32


Table of Contents

Income Statement Analysis

Sales and other operating revenues decreased 3 percent in the first quarter of 2013, mainly due to lower crude oil, natural gas liquids and bitumen prices, partly offset by higher natural gas prices.

Equity in earnings of affiliates decreased 26 percent in the first quarter of 2013. The decrease primarily resulted from:

 

   

Lower earnings from FCCL Partnership, mainly as a result of lower bitumen prices, partly offset by higher bitumen volumes.

   

Lower earnings from Lane Energy Poland Sp.z o.o., primarily due to expenses related to a dry hole.

   

Lower earnings from Phoenix Park Gas Processors Limited, mostly due to lower natural gas liquids prices.

These decreases in equity earnings were partially offset by higher earnings from Qatar Liquefied Gas Company Limited (3) (QG3), largely due to higher LNG prices and volumes.

Gain on dispositions decreased $882 million in the first quarter of 2013. Gains in the first quarter of 2013 primarily resulted from the disposition of our interest in the Interconnector Pipeline in Europe, partly offset by a loss on the disposition of certain properties located in the Cedar Creek Anticline in the Lower 48. Gains in the first quarter of 2012 mainly reflected the $937 million gain on sale of our Vietnam business.

Purchased commodities decreased 4 percent in the first quarter of 2013, largely as a result of lower purchased natural gas volumes, partly offset by higher natural gas prices.

Production and operating expenses increased 8 percent in the first quarter of 2013, mostly due to higher operating expenses in the Lower 48 and Canada.

Selling, general and administrative expenses decreased 49 percent in the first quarter of 2013, mainly as a result of lower costs related to compensation and benefit plans and the absence of costs associated with the separation of Phillips 66.

Exploration expenses decreased 59 percent in the first quarter of 2013, mostly due to the absence of the first quarter 2012 impairment of undeveloped leasehold costs associated with the Mackenzie Gas Project as a result of the indefinite suspension of the project. This decrease was partly offset by higher geological and geophysical expenses in the Lower 48 and expenses associated with the deferral of the Chukchi Sea exploration program in Alaska.

DD&A increased 15 percent in the first quarter of 2013. The increase was mostly associated with higher production volumes in the Lower 48 and China, as well as higher unit-of-production rates associated with year-end 2012 price-related reserve revisions.

Impairments decreased $212 million in the first quarter of 2013. The first quarter of 2012 included a $213 million impairment of capitalized project development costs associated with the Mackenzie Gas Project. For additional information, see Note 9—Impairments, in the Notes to Consolidated Financial Statements.

Taxes other than income taxes decreased 19 percent in the first quarter of 2013, mainly as a result of lower production taxes due to lower crude oil production volumes and prices in Alaska.

Interest and debt expense decreased 32 percent in the first quarter of 2013, primarily due to lower interest expense from lower average debt levels and higher cap