HOUSTON - The proposed $15.2 billion merger of Phillips Petroleum Co. and Conoco Inc. will saddle the resulting third-biggest U.S. oil company with two underfunded pension plans and the growing likelihood of increased contributions.
The Phillips defined benefit plan had about $1 billion in assets at the end of 2000, according to its annual report. At the same time, the company reported accumulated benefit obligations of $1.1 billion. Unlike many large plan sponsors that reported pension income last year, Bartlesville, Okla.-based Phillips reported pension expenses of $31 million for the year 2000.
Conoco, Houston, had pension expense for 2000 of $19 million, according to its annual report to shareholders. In its annual report, Conoco listed defined benefit plan assets of $798 million and benefit obligations at the end of the year of $855 million. However, according to information submitted to Pensions & Investments for its survey of the top 1,000 pension/employee benefit plans, Conoco reported defined benefit plan assets of $678 million as of Sept. 30, 2001, which would further erode the plan's funded status, according to actuarial consultants. Conoco was spun off from E.I. du Pont de Nemours & Co., Wilmington, Del., in late 1998. It was not clear if the unfunded liability was included in the spinoff.
Officials at Phillips and Conoco did not return repeated calls for comment. A source in the Conoco defined contribution department said it is "too early in the process" to state what will happen with the two companies' plans. The source said there have been no transition committees formed as yet.
According to several pension actuaries, officials at the new company could be facing a growing pension liability at a time when oil prices are on the skids.
A pension actuary who reviewed both companies' annual report data said, given the current interest rate environment and asset deterioration in general, "they are both likely to become even more underfunded. Things will get worse from a funding standpoint."
"Companies entering into a merger usually look at the (pension fund) assets, but from the pension fund standpoint, there are no synergies here," said the actuary, who wished to remain anonymous. "Their business plan may support the merger, but there are no benefits from a (pension) funding standpoint."
To cut costs, he suggested merging the two companies' plans, rather than running them separately.
"I would look at redesigning the plans and combining them using a single benefit criteria," he said. "But it depends on their business strategy. Some companies leave their plans alone. Others unify the plans and offer a single benefits package."
Another pension actuary said that in all probability, the Phillips and Conoco plans eventually would be merged into a single plan. "In corporate mergers, in the long term usually they come together," she said. "You try to find out which plan design best meets the needs of the new company.
"I've never seen a corporate merger where one company has a slam-dunk saying, `You are coming into our plan immediately,"' she said. "Usually it takes a couple of years."
Sometimes, overfunded pension plans can be a deal sweetener during merger and acquisition talks; other times, underfunded plans can be a deal-breaker.
Tina Vital, oil industry analyst at Standard & Poor's Inc., New York, said the issue of pension liabilities should have been examined carefully by executives at both companies and by analysts.
"Looking at pension funding has historically been a motivation in corporate mergers," she said. "In this case it wasn't a motivation. This (merger) is being done for survival. In a low commodity-price environment, the concern is to achieve synergies," she said.
She said the new ConocoPhillips should be in a better position to manage pension liabilities, since the estimated $750 million savings resulting from the merger "could easily be double that amount" within the first full year after the merger. In addition, she said, the new company is expected to be profitable in 2002, its first year, and have estimated cash flow from operations of nearly $7.8 billion.
The deal is being called a merger of equals. However, once the merger is completed, estimated during the second half of 2002, Phillips shareholders will own about 56.6% of ConocoPhillips. The company will be based in Conoco's hometown.
According to the P&I top 1,000 questionnaire, the Conoco plan has 33% domestic equities, 33% domestic fixed income, 16% international equities, 5% international fixed income, 8% private equity, and 5% real estate. The Phillips plan was 54% domestic equities, 28% domestic fixed income; 17% international equities and 1% cash, according to the 2001 Money Market Directory.
Both companies also have defined contribution plans. The Vanguard Group, Valley Forge, Pa., manages the $2.6 billion Phillips plan, according to MMD. The $2.9 billion Conoco 401(k) plan is managed by J.P. Morgan/American Century, Kansas City, Mo.