-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, BtCL8W7op/x7DULrhI2EP9/J9JcIlWUgHNFVSzzF6OzQNR+ZJydsUJdtr+4kvzje AJGSq0kHKRGE6iwds/f6pQ== 0000078214-95-000005.txt : 19950615 0000078214-95-000005.hdr.sgml : 19950615 ACCESSION NUMBER: 0000078214-95-000005 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950316 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHILLIPS PETROLEUM CO CENTRAL INDEX KEY: 0000078214 STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911] IRS NUMBER: 730400345 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-00720 FILM NUMBER: 95521139 BUSINESS ADDRESS: STREET 1: PHILLIPS BUILDING STREET 2: 800 PLAZA OFFICE BUILDING CITY: BARTLESVILLE STATE: OK ZIP: 74004 BUSINESS PHONE: 9186616600 10-K405 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1994 -------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to ------------ ------------ Commission file number 1-720 ------------------------------------ PHILLIPS PETROLEUM COMPANY (Exact name of registrant as specified in its charter) Delaware 73-0400345 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) PHILLIPS BUILDING, BARTLESVILLE, OKLAHOMA 74004 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 918-661-6600 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ---------------------------------- ------------------------ Common Stock, $1.25 Par Value New York, Pacific and Toronto Stock Exchanges Preferred Share Purchase Rights Expiring July 31, 1999 New York Stock Exchange 6.65% Notes Due March 1, 2003 New York Stock Exchange 7.20% Notes Due November 1, 2023 New York Stock Exchange 7.92% Notes Due April 15, 2023 New York Stock Exchange 8.49% Notes Due January 1, 2023 New York Stock Exchange 8.86% Notes Due May 15, 2022 New York Stock Exchange 9% Notes Due 2001 New York Stock Exchange 9.18% Notes Due September 15, 2021 New York Stock Exchange 9 3/8% Notes Due 2011 New York Stock Exchange 9 1/2% Notes Due 1997 New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] The registrant had 261,663,753 shares of Common Stock, $1.25 Par Value, outstanding at February 28, 1995. The aggregate market value of voting stock held by non-affiliates of the registrant was $8,710,521,893 as of February 28, 1995. The registrant, solely for the purpose of this required presentation, has deemed its Board of Directors to be affiliates, and deducted from its outstanding shares in determining the aggregate market value, their beneficial stockholdings of 674,333 shares. Documents incorporated by reference: Proxy Statement for the Annual Meeting of Stockholders on May 8, 1995 (Part III) TABLE OF CONTENTS PART I Item Page ---- ---- 1. and 2. Business and Properties........................... 1 Corporate Structure and Current Developments.... 1 Segment and Geographic Information.............. 2 Exploration and Production (E&P).............. 2 Gas Gathering, Processing and Marketing (GPM). 9 Refining, Marketing and Transportation (RM&T). 10 Chemicals..................................... 13 Other......................................... 16 Competition..................................... 17 General......................................... 18 3. Legal Proceedings................................. 19 4. Submission of Matters to a Vote of Security Holders................................ 19 -------------------- Executive Officers of the Registrant.............. 20 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters..................... 22 6. Selected Financial Data........................... 23 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................... 24 8. Financial Statements and Supplementary Data....... 52 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 105 PART III 10. Directors and Executive Officers of the Registrant...................................... 106 11. Executive Compensation............................ 106 12. Security Ownership of Certain Beneficial Owners and Management........................... 106 13. Certain Relationships and Related Transactions.... 106 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................... 107 PART I (Unless otherwise indicated, "the company" and "Phillips" are used in this report to refer to the business of Phillips Petroleum Company and its consolidated subsidiaries.) Items 1 and 2. BUSINESS AND PROPERTIES CORPORATE STRUCTURE AND CURRENT DEVELOPMENTS Phillips Petroleum Company was incorporated in the state of Delaware on June 13, 1917. The company is headquartered where it was founded in Bartlesville, Oklahoma. Phillips is engaged in petroleum exploration and production on a worldwide basis, natural gas gathering, processing and marketing, and petroleum refining and marketing, primarily in the United States. The company also produces and distributes chemicals in the United States and overseas. The company has four business segments-- Exploration and Production (E&P), Gas Gathering, Processing and Marketing (GPM), Refining, Marketing and Transportation (RM&T) and Chemicals. Support staffs provide technical, professional and other services to the business segments. At December 31, 1994, Phillips employed 18,400 people, 5 percent less than the previous year. On November 9, 1994, the Norwegian Parliament approved the agreement reached in June 1994 between Phillips Petroleum Company Norway, as operator for the Phillips Norway Group, and the Norwegian Ministry of Industry and Energy regarding the redevelopment of Ekofisk. The plan, named Ekofisk II, will allow for the long-term recovery of Ekofisk field reserves. Completion of the Judy platform in the J-Block area of the U.K. North Sea is anticipated in 1995, with production start-up scheduled for early 1996. In the South China Sea, the first of two production platforms was set in 1994, and production began in November. Peak production is expected in 1996. The company and its co-venturers continued to conduct exploratory and appraisal drilling and evaluate subsalt prospects in the Gulf of Mexico. In the Cook Inlet of Alaska, potential development of the Sunfish prospect remains under study. The company's GPM operations continued to focus on strategic expansion and growth of raw gas throughput and natural gas liquids (NGL) production. An acquisition late in the year added an NGL plant and 765 miles of gathering pipelines. The company's domestic crude oil refineries exhibited sustained operating consistency in 1994, running at 99 percent of restated rated crude oil capacity. In addition, cost control measures and new management techniques resulted in reduced operating costs. 1 A stronger economy and industry supply-side disruptions resulted in sharply increased demand in the company's chemicals business, leading to higher production and sales volumes across most key product lines. Expansion projects in several product lines continued in 1994. SEGMENT AND GEOGRAPHIC INFORMATION Segment information concerning sales and other operating revenues, earnings, total assets and additional information for certain operations of the company in Note 17--Segment and Geographic Information in the Notes to Financial Statements on pages 82 through 85 is incorporated herein by reference. Products which contributed more than 10 percent of consolidated sales and other operating revenues follow: 1994 1993 1992 ------------------------ Crude Oil United States 17% 19 20 - ---------------------------------------------------------------- Foreign 6 5 5 - ---------------------------------------------------------------- Automotive Gasoline United States 22 23 23 - ---------------------------------------------------------------- Natural Gas United States 11 11 9 - ---------------------------------------------------------------- Foreign 3 3 4 - ---------------------------------------------------------------- E&P - --- The company's E&P segment explores for and produces crude oil, natural gas and natural gas liquids on a worldwide basis and produces coal in the United States. Producing areas include the United States (which includes the Gulf of Mexico), the Norwegian and U.K. sectors of the North Sea, Canada, Nigeria and offshore China. The information listed below appears in the oil and gas operations disclosures on pages 86 through 103 and is incorporated herein by reference. o Proved worldwide crude oil, natural gas, and natural gas liquids reserves. o Net production of crude oil, natural gas liquids and natural gas. o Average sales prices of crude oil, natural gas liquids and natural gas. o Average production costs per equivalent barrel of oil. o Developed and undeveloped acreage at year-end 1994. 2 o Net wells completed, and wells in progress and productive wells at year-end 1994. In 1994, Phillips' net worldwide crude oil production averaged 206,000 barrels per day, compared with 203,000 barrels per day in 1993. In 1994, 90,000 barrels per day of worldwide crude oil production was from the United States, down from 93,000 barrels per day in 1993. The lower U.S. production was due to asset sales and normal declines from mature fields, partly offset by increased production in the Gulf of Mexico from the company's Ship Shoal blocks 149/130. Foreign crude oil production was up 5 percent in 1994, due primarily to increased production from Norway. Approximately half of the crude oil production increase for E&P's Norway operations was from the Embla field, which started production in mid-year 1993, and approximately half was due to increased water injection rates, horizontal drilling, and well recompletions in the Ekofisk and Eldfisk fields. Net E&P production satisfied 58 percent of Phillips' crude oil requirements in 1994, which consisted primarily of refinery crude oil runs (317,000 barrels per day) and contractual supply obligations (40,000 barrels per day). The deficiency between the company's requirements and production was covered mainly by crude oil purchases in the United States, from Saudi Arabia, and, to a lesser extent, from Kuwait, Mexico and Venezuela. The ratio of net crude oil production to requirements for 1995 is estimated at 59 percent, based on production forecasts of 219,000 barrels per day and crude oil requirements of 370,000 barrels per day. As in 1994, purchases in the United States, from Saudi Arabia, and, to a lesser degree, from Kuwait, Mexico and Venezuela are expected to be the major sources for covering the shortage. E&P's worldwide production of natural gas liquids averaged 14,000 barrels per day in 1994, up slightly from 1993. U.S. production accounted for 5,000 barrels per day, while foreign production added 9,000 barrels per day. The U.S. produced liquids are generally used as feedstocks for the company's refining and chemicals operations. The company's worldwide production of natural gas averaged 1,414 million cubic feet per day in 1994, up 4 percent from 1993. U.S. natural gas production was up 6 percent in 1994, to 1,035 million cubic feet per day. Higher production from the San Juan Basin, New Mexico, and the South Marsh Island field, Gulf of Mexico, contributed to the increased production. Foreign natural gas production was down marginally in 1994, to 379 million cubic feet per day. Loss of production due to asset sales was offset by production from the Ann field in the U.K. North Sea. Phillips' worldwide annual average crude oil sales price declined 7 percent in 1994, to $14.73 per barrel. Both U.S. and foreign average prices were lower. E&P's average annual natural gas sales prices were also lower, with average worldwide prices down 9 percent as a result of lower prices in both the United States and abroad. 3 The company's finding and development costs in 1994 were $2.88 per barrel-of-oil-equivalent (BOE), with a five-year average of $3.14 per BOE. At December 31, 1994, Phillips held 22.8 million net developed and undeveloped acres, a 23 percent decrease from year-end 1993's 29.5 million acres. The decrease in net acres is primarily attributable to the release of acreage in Papua New Guinea, Paraguay and Bolivia, partly offset by new acreage offshore China. The company holds acreage in 15 nations, and produces in six. E&P - UNITED STATES In September 1993, Phillips and its co-venturers announced an oil discovery on the subsalt Mahogany prospect (Ship Shoal blocks 349/359) in the Gulf of Mexico, 80 miles offshore Louisiana. An appraisal well, the Mahogany #2, was drilled during 1994. The well tested at approximately 4,400 barrels of oil per day, along with 5.3 million cubic feet per day of natural gas. Additional appraisal drilling is under way. If continued appraisal drilling is successful, production could begin in late 1996 or early 1997. Phillips holds a 37.5 working interest in the Mahogany prospect. Subsalt refers to hydrocarbon-bearing rock formations lying beneath layers of salt. Phillips applied a new seismic data interpretation method in 1993--three-dimensional (3-D) seismic post-stack depth migration--that allows the study and meaningful interpretation of subsalt formations. In 1994, the company continued to improve this technology and added pre-stack capabilities. During the year, the company completed an exploratory well in another subsalt prospect, the Teak prospect, located 50 miles northeast of Mahogany in South Timbalier blocks 259, 260 and 283. Further evaluation is under way on this prospect. The company holds a 50 percent working interest in the Teak prospect. Early in 1994, Phillips and co-venturers acquired interests in nine additional subsalt blocks in the Gulf of Mexico, allowing the company to continue to focus its exploration drilling on subsalt prospects. Phillips also purchased a 37.5 percent interest in the Alexandrite prospect, adjacent to the Mahogany discovery. Approximately half of the company's North America capital spending program for exploration is budgeted for subsalt drilling. Production is scheduled to begin in early 1995 from the Seastar natural gas field, in the Garden Banks area of the Gulf of Mexico, offshore Louisiana. A development plan using subsea well completions is being implemented in this 100 percent owned field. The company expects initial natural gas production to be 50 million cubic feet per day. 4 Phillips continues to assess the reserves potential, development costs and commercial potential of the Sunfish prospect, located in the Cook Inlet of Alaska. Although the company's co-venturer in the prospect announced that its analysis of well and seismic data indicated that the prospect was not commercial on a stand- alone basis, Phillips is proceeding with its current assessment based on the assumption that development would occur from its existing 100 percent owned Tyonek gas production platform. Discussions are under way with the co-venturer concerning its future intentions with respect to Sunfish, including possible joint exploration and production activity from the Tyonek platform, or the acquisition of the co-venturer's lease position by Phillips. The assessments of the reserves and commercial potential need to be completed, and the discussions with the co-venturer need to be resolved, before any additional exploration drilling can proceed. Liquefied natural gas (LNG) sales from the company's Kenai, Alaska, plant were up 12 percent in 1994, compared with 1993. Through refrigeration and pressure techniques, the company liquefies natural gas produced from the Cook Inlet field, and transports the liquefied gas to Japan utilizing two LNG tankers. The increased sales in 1994 are attributable to optimization of the plant and the utilization of two new, larger capacity LNG tankers that completed their first full year of service in 1994. In early 1995, Phillips and a partner announced their intention to form a jointly controlled partnership to transport crude oil through pipelines from the Houston Gulf Coast area to refineries and other markets in Texas and Oklahoma. The company and the co- venturer will contribute assets to the partnership. Phillips will contribute its Seagas natural gas pipeline to the partnership, along with its Freeport II Dock facility and a portion of its Jones Creek Tank Farm. A prerequisite for the pipeline contribution will be the receipt of regulatory approval to abandon gas service in the Seagas pipeline. This regulatory approval is expected to be received in late 1995 or early 1996, at which time the responsibility for this operation will be transferred to the company's RM&T segment. Net production from the company's three jointly owned coal mines reached 3.26 million tons in 1994. The mines are located in Louisiana, Texas and Wyoming. Phillips has a 50 percent interest in each of these mines, and is pursuing the development of additional mines. E&P - NORWAY On November 9, 1994, the Norwegian Parliament approved the agreement reached in June 1994 between Phillips Petroleum Company Norway, as operator for the Phillips Norway Group, and the Norwegian Ministry of Industry and Energy regarding the redevelopment of the Ekofisk field production facility in the 5 Norwegian North Sea. The plan projects significantly reduced operating costs and will allow long-term recovery of Ekofisk field reserves. Additional information included in Management's Discussion and Analysis on pages 42 and 43 concerning the Ekofisk redevelopment is incorporated herein by reference. E&P - UNITED KINGDOM The Judy platform, in the J-Block area of the U.K. North Sea, is expected to be installed in mid-1995. Production from the J-Block development, which includes the Joanne field, is expected to start in early 1996. The Joanne field will be developed using subsea well completions, tied to the Judy platform. The Judy platform will have capacity to provide processing for nearby developments. Phillips' interest in the Judy and Joanne fields is 36.5 percent. The Maria well discovered oil in early 1994, six miles south of the company's Maureen platform, about 160 miles offshore Scotland in the U.K. North Sea. The well tested at rates of up to 7,700 barrels of oil per day and over 16 million cubic feet of natural gas per day. A 3-D seismic survey was undertaken to further evaluate the discovery and other prospects nearby. Phillips holds a 33.8 percent interest. Subsea well completions are planned for discovery wells in the Dawn and Alison fields. Production is expected in late 1995 from both fields. The Dawn well is estimated to produce at a net rate of 6 million cubic feet per day, while the Alison well is projected to produce at a net rate of 11 million cubic feet per day. Phillips holds a 19 percent interest in the Dawn field and a 42 percent interest in Alison. The company has an 11.5 percent interest in the Armada project, scheduled to begin production in 1997. Net production is expected to be 2,300 barrels per day of liquids and 40 million cubic feet of natural gas per day. Late in 1994, Phillips increased its equity interest in the Britannia field from 2 percent to 5 percent. Production is expected in 1998, with the company's share estimated at 37 million cubic feet per day of natural gas and 3,500 barrels per day of liquids. 6 E&P - OTHER In the South China Sea, 80 miles southeast of Hong Kong, the first of two platforms in the Xijiang fields was completed and set during the year, and initial production began in November. Additional production is scheduled to begin in late 1995, after completion of the second platform which is currently under construction. Peak net production from both platforms is expected to reach 12,000 barrels of oil per day in 1996. In the first quarter of 1994, the company and its co-venturer announced that geophysical agreements had been signed with the China National Offshore Oil Corporation for exploration of two blocks in the East China Sea, 120 miles southeast of Shanghai. The agreements are for two years and consist of reprocessing existing seismic data and acquiring new seismic data. Late in the year, Phillips received approval to explore the 2.3 million acre Bozhong block in the Gulf of Bohai. In Nigeria, the company's interest in 24 fields yielded net average oil production of 22,800 barrels per day in 1994, up slightly from 1993. A new natural gas liquids extraction plant was completed during the year, resulting in a change in classification of 32 billion cubic feet of natural gas reserves and 21 million barrels of natural gas liquids reserves from proved undeveloped to proved developed. Phillips, as operator, announced a gas and condensate discovery in early 1995 in the Zone of Cooperation, an offshore area jointly administered by Australia and Indonesia. The well flowed at a combined rate of 90 million cubic feet of natural gas per day, and 5,300 barrels of condensate per day. Future plans for the discovery have not yet been finalized, pending the interpretation of the drilling and test results. Phillips holds a 37.5 percent interest. A natural gas discovery in the British Columbia foothills, Canada, began production in 1994, with net natural gas production of 11 million cubic feet per day. Three additional wells in the foothills region are scheduled to begin production in 1995 to 1997, which is expected to increase net production of natural gas by 23 million cubic feet per day. The 1995 exploratory budget includes funds for exploratory drilling in the United States, Norway, the United Kingdom, Nigeria, Tunisia, Papua New Guinea, Algeria, Cameroon and the Timor Sea Zone of Cooperation. 7 E&P - RESERVES In 1994, on a BOE basis, Phillips replaced 149 percent of the reserves it produced during the year. The total includes replacement of 315 percent of foreign production and 39 percent of U.S. production. U.S. reserves decreased 6 percent while foreign reserves increased 17 percent. Total worldwide proved reserves on a BOE basis were 2.1 billion barrels at year-end. Crude oil reserves increased 4 percent, natural gas liquids reserves increased slightly, and natural gas reserves increased 5 percent. Natural gas comprises 50 percent of proved hydrocarbon reserves and 63 percent of U.S. reserves. Ninety- four percent of Phillips' proved reserves base is located in North America and the North Sea. From 1990 through 1994, Phillips' five-year-average BOE production replacement equaled 127 percent. Estimates of proved reserves are based upon reservoir information, technology and economics available at the time the estimates are made. Adjustments are made to reflect changes in economic conditions, results of drilling and production and the technical reevaluation of reservoirs. The company has not filed any figures with any other federal authority or agency with respect to its estimated total proved reserves at December 31, 1994. No difference exists between the company's estimated total proved reserves for year-end 1993 and year-end 1992, which are shown in this filing, and estimates of these reserves shown in a filing with another federal agency in 1994. DELIVERY COMMITMENTS Phillips has a commitment to deliver a fixed and determinable quantity of liquefied natural gas in the future to two utility customers in Japan. The company is obligated over the next three years to supply a total of 140.6 billion cubic feet of liquefied natural gas. Production from one field in Alaska, with estimated proved reserves greater than the company's obligation and with an estimated production level sufficient to meet the required delivery amount, will be used to fulfill the obligation. The company sells gas in the U.S. from its producing operations under a variety of contractual arrangements. Most contracts generally commit the company to sell quantities based on production from specified properties, but certain gas sales contracts specify delivery of fixed and determinable quantities. The quantities of natural gas the company is obligated to deliver in the U.S. in the future, under existing contracts, are not significant in relation to the quantities available from production of the company's proved developed U.S. natural gas reserves. 8 GPM - --- GPM processes both natural gas purchased from others and natural gas produced from the company's E&P reserves. The natural gas liquids--ethane, propane, butanes and pentanes--are extracted and sold primarily to the company's RM&T and Chemicals operations, where they are used as feedstock or processed and sold to outside customers. The residue gas is sold to others or used as fuel in company operations. GPM wholly owns 18 natural gas liquids extraction plants, and controls or has an interest in 3 more. The plants are located in Texas (13), Oklahoma (4), and New Mexico (4). In addition, GPM controls gas gathering systems with approximately 22,000 miles of gathering pipe, with some 16,200 active meter connections to producing wells. GPM continued to emphasize focused growth and rationalization of assets in 1994. In the fourth quarter, GPM acquired a company that owned a plant and related supply-backed gathering system in New Mexico. Along with the addition of the Linam Ranch plant, this acquisition added 765 miles of gathering pipelines, provided opportunities for integration with existing gathering systems and yielded other processing efficiencies. One of these efficiencies was the ability to shut down the Lee plant in Lea County, New Mexico, as the gas formerly going to Lee was rerouted to the Linam Ranch plant. Also, planning commenced in 1994 to convert the Linam Ranch plant from an oil absorption plant to a cryogenic plant to improve operational efficiencies. In November 1994, GPM Gas Corporation signed definitive agreements to acquire gathering systems located in the Texas and Oklahoma panhandles. These acquisitions, which are subject to Federal Energy Regulatory Commission approval and Hart Scott Rodino review, would add more than 4,000 miles of gathering pipe and 33 compressor stations. Finalization of the approval and review processes is not expected until early 1996. Work began during the year to reroute gas processed at the Gray plant in Gray County, Texas, to the newer, more efficient Rock Creek plant, which is located about 20 miles away. This will allow the Gray plant to be shut down. Modernization in 1994 at the Goldsmith plant in Ector County, Texas, will yield an approximate 33 percent increase in natural gas processing capacity. Two modern, turbine-powered compressors will replace 29 older, piston-engine models. Also planned in the modernization project is a new central control room. At GPM's Eunice plant in Lea County, New Mexico, similar modernization is under way. In December 1993, GPM sold a portion of its gas gathering assets in the West Texas region of the Permian Basin to GPM Gas Gathering L.L.C. (GGG). GPM owns a 50 percent equity interest in GGG. GPM operates the gathering assets sold to GGG, and retains priority access to this gas gathering capacity through a long- term contract. 9 GPM's raw gas throughput averaged 1.5 billion cubic feet per day in 1994, reflecting the acquisitions and expansions discussed above. Raw gas throughput purchased from Phillips represented approximately 13 percent of the 1994 total. GPM continued to be a significant U.S. producer of natural gas liquids. GPM's net natural gas liquids production was as follows: Thousands of Barrels Daily -------------------------- 1994 1993 1992 -------------------------- From Phillips E&P leasehold gas 21 22 23 From gas purchased outside 130 124 122 - ----------------------------------------------------------------- 151 146 145 ================================================================= Residue gas sales were 949 million cubic feet per day in 1994, compared with 867 million cubic feet per day in 1993. Residue gas sales made directly to end-users, such as utilities or local gas distribution companies, were approximately 69 percent of total sales during 1994, compared with 73 percent in 1993. The company's average sales price for unfractionated natural gas liquids decreased to $9.77 per barrel, down 9 percent from 1993. During 1994, average residue gas prices decreased to $1.79 per thousand cubic feet, from $2.03 in 1993. At year-end 1994, gross raw natural gas supplies available for processing through GPM-operated plants were estimated at 5.8 trillion cubic feet, versus 5.5 trillion cubic feet at year-end 1993. At year-end 1994 and 1993, respectively, these supplies included about 655 million and 617 million barrels of natural gas liquids, assuming full ethane extraction. RM&T - ---- REFINING The company currently owns and operates three refineries in the United States having an aggregate rated capacity of 320,000 barrels per day of crude oil and has part-ownership of a refinery in Teesside, England. The U.S. refineries are located at Borger and Sweeny, Texas, and Woods Cross, Utah. Incremental debottlenecking changes over the past several years were tested and validated during 1994. As a result, the company revised its total U.S. crude oil refining rated capacity from 305,000 to 320,000 barrels of oil per day, effective January 1, 1994. Even with the higher rated capacity, the company's refineries ran at 99 percent of capacity in 1994, up from 91 percent in 1993 and 87 percent in 1992, and higher than the 1994 industry average of 93 percent. The cost per barrel of crude oil delivered to the U.S. refineries was 5 percent lower than in 1993, reflecting lower crude prices in 1994. 10 High-sulfur crude accounted for 67 percent of the crude processed during 1994, up from 64 percent in 1993. Approximately 36 percent of the crude oil processed by Phillips' refineries in 1994 came from the United States, with the remainder provided primarily by purchases from the Middle East, Mexico and Venezuela. Refinery feedstocks in 1994 consisted of 34 percent domestic crude oil, 60 percent imported crude oil and 6 percent miscellaneous hydrocarbons. Output from refining operations--automotive gasoline, distillates, aviation fuels, chemical feedstocks and other products--averaged 364,000 barrels per day, up from 320,000 barrels per day in 1993. The Borger and Sweeny refineries continued to implement two key safety efforts in 1994. One is Process Safety Management, a program aimed at improving safety at major manufacturing facilities. The other is an employee-driven safety process that is based on peer review and positive reinforcement. At the Woods Cross refinery, Process Safety Management is being implemented and the employee-driven safety process will begin later in 1995. The Sweeny and Woods Cross refinery operations were reorganized in 1994, adopting a new team management structure. Borger began the change to team management in 1993. The team approach reduces organizational layers and eliminates traditional divisions between operating and maintenance personnel. Employees work together in teams with responsibility for operating, inspecting, and maintaining major processing units. Other teams manage key business functions. This new management approach contributed to lower operating costs in 1994. The company's U.S. refineries continued to focus on cost control during 1994. As a result, controllable costs were down 5 percent in 1994, even with a higher utilization rate compared with a year ago. Plans are under way to improve automation at the domestic refineries. These plans include the use of centralized control rooms and advanced process controls to improve safety, operating efficiency and product yields. In 1994, the company began a modernization of the Borger refinery which will continue over the next several years. The first step will be the completion of a new, centralized control room in 1995. This facility will include advanced process-control equipment, and will eventually control all manufacturing processes at the Borger refinery. At the Sweeny complex, a similar modernization project has been approved for development, and at the Woods Cross refinery, process control upgrades will continue in 1995. 11 Phillips entered into an agreement with a subsidiary of Dallas- based Central and South West Corporation (CSW) in 1994 to pursue the development of a cogeneration plant. The plant will produce electricity from natural gas powered turbines. The waste heat exhausted from the turbines will produce steam, supplying the Sweeny complex's needs, and offering cost benefits for both Phillips and CSW. Plant construction will begin in 1996, with completion expected in 1997. The Borger refinery is in the initial planning stage for a rate-based cogeneration project with Southwestern Public Service Company, a public utility in the Texas panhandle. MARKETING In the United States, the company markets refined products in 26 states under the Phillips 66 trademark. Market concentration is highest in the Midwest. Gasoline and other products are distributed in the United States through approximately 8,500 service stations, bulk distributing plants, airport dealers and marinas. Of these, Phillips owns 269 service stations and leases an additional 35 more. The company plans to increase the number of company-operated retail stations over the next several years. Excluding spot sales, RM&T gasoline sales volumes in the United States were up 5 percent during the year. Company-operated outlets generated 16 percent of these sales, although they accounted for only 4 percent of Phillips 66 branded stations. Total distillates sales volumes in RM&T increased 22 percent in 1994. In total, RM&T petroleum product sales in the United States during 1994, from both Phillips' refinery output and purchased products, averaged 493,000 barrels per day, compared with 456,000 barrels per day in 1993. Effective January 1, 1995, the Clean Air Act of 1990 required cleaner-burning, oxygenated gasoline in nine cities. The company sells reformulated gasoline in three of these markets--Chicago, Houston and Milwaukee. The company also sells gasoline in Dallas, which voluntarily adopted the requirement. The company has contracted to purchase all of the reformulated gasoline that Phillips needs to supply these markets, but produces reformulated gasoline at the Sweeny refinery when market conditions make this a more profitable alternative. The company continues to market its UltraClean propane, an alternate fuel for fleet vehicles, in Colorado, Missouri and Wyoming. Another alternate fuel, compressed natural gas, is sold at two Phillips service stations in Oklahoma. Although alternative fuels account for only a small part of Phillips' RM&T business, the company considers that the experience gained by participating in the alternative fuels market will be beneficial as this market grows. 12 TRANSPORTATION Phillips' RM&T and Chemicals segments own or have an interest in 6,900 miles of common carrier crude oil and products pipeline systems, of which 6,000 miles are company-operated. The largest segment of the total system consists of 2,000 miles of products line extending from the Texas Panhandle to East Chicago, Indiana. The pipeline mileage above excludes the company's 1.36 percent interest in the 800 mile Trans-Alaska Pipeline System, which is a part of E&P operations. In addition to the two leased LNG tankers discussed in the Exploration and Production section, the company has a U.S.-flag tanker of 37,000 tons under charter. Phillips also owns or leases barges, tank cars, hopper cars, corporate aircraft and trucks. Regulations under the Oil Pollution Act of 1990 (OPA 90) require all vessel owners carrying certain substances, including crude oil, to have a certificate of financial responsibility (COFR) issued by the U.S. Coast Guard on board the vessel. A vessel is not permitted to enter U.S. waters without a COFR. The company currently relies on waterborne foreign crude oil as feedstock for about 60 percent of its U.S. refining capacity. This oil is transported by vessels owned by third parties and chartered by the company. Phillips anticipates no effect on its chartering program as a result of shipowners complying with OPA 90. When the Seagas natural gas pipeline is converted into a crude oil transportation pipeline, as discussed in the E&P segment, it will become the responsibility of the RM&T segment. Through membership and participation in the Marine Preservation Association, Phillips has the ability to call upon the assistance of the Marine Spill Response Corporation in the event of a major oil spill at any of the domestic offshore oil production or marine related transportation facilities operated by the company, except the company's portion of the Trans-Alaska Pipeline, which is covered by the Alyeska Pipeline Service Company. Chemicals - --------- The Chemicals segment is divided into three vertically integrated operations: 1) Natural gas liquids (NGL). Processed (fractionated) natural gas liquids are sold to third parties or used as feedstocks by the company at its refineries or for producing chemicals. Processing facilities are located at the Sweeny complex, the Borger refinery in Texas and at a plant in Conway, Kansas. 13 2) Intermediate chemical products. Primary products in this operation include olefins (ethylene and propylene) and aromatics (paraxylene and cyclohexane). Major production facilities are located at the Sweeny complex, the Borger refinery and in Puerto Rico. 3) Plastics products. Primary products in this operation include polyethylene, polypropylene and K-Resin. Major production facilities are located at the Houston Chemical Complex, near Houston, Texas, and the Borger refinery. In addition, the company owns an equity interest in a polyethylene plant in Singapore and a polypropylene plant at the Houston Chemical Complex. NGL The NGL business operated at 91 percent of rated capacity for the year, compared with 87 percent in 1993 and 81 percent in 1992. Total NGL processing capacity is 227,000 barrels per day. The higher capacity utilization in 1994 resulted in higher sales volumes of liquefied petroleum gas. INTERMEDIATE CHEMICALS As a result of an improved economy and industry supply-side disruptions, demand for the company's olefins increased sharply during 1994. This led to higher sales volumes for ethylene and propylene chemicals products. Ethylene is the primary feedstock for polyethylene and other plastics and petrochemicals. Work has begun to restart a 400 million pound ethylene unit at the Sweeny complex that has been out of service for several years. Completion is scheduled for 1996. Phillips has a 50 percent interest in the Sweeny Olefins Limited Partnership (SOLP), where debottlenecking of an ethylene unit will increase capacity by 400 million pounds in 1996. After the SOLP debottlenecking, total capacity at the Sweeny complex would be 4.4 billion pounds, with Phillips' share at 3.5 billion pounds. Subject to the terms of various contracts, SOLP is contractually obligated to deliver approximately 1.26 billion pounds of ethylene annually until the year 2000. The Sweeny complex's annual propylene capacity is 1.1 billion pounds. Propylene is used as a feedstock for polypropylene, a plastic used to manufacture a variety of products. As with ethylene, higher demand resulted in higher sales volumes in 1994. 14 At the company's Puerto Rico petrochemical facility, a paraxylene expansion begun during 1994 will increase paraxylene annual production capacity from 525 million pounds to 818 million pounds by late 1995. An additional expansion that could bring paraxylene capacity to 1.1 billion pounds in 1997 is now under study. The installation of the Aromax catalytic reforming technology will broaden the range of hydrocarbon feedstocks that can be used at the facility. Completion of this projects is expected in the second quarter of 1995. PLASTICS Production of polyethylene, including Phillips' share in equity companies, reached 1.9 billion pounds in 1994, the highest level ever. A strong economy pushed demand higher, but higher ethylene feedstock prices resulted in continued pressure on margins. At the Houston Chemical Complex, capacity to produce an additional 400 million pounds of polyethylene annually is being added through debottlenecking. This will increase annual production capacity by 22 percent, from the current level of 1.8 billion pounds to 2.2 billion pounds by project completion in 1997. Production of polyethylene will not be affected during debottlenecking, as work will occur during normally scheduled maintenance procedures. Phillips is increasing its participation in the plastics markets of Asia by expanding its Singapore polyethylene facility. As part of the financing for the expansion, Phillips' interest in the facility was lowered from 85.7 percent to 50 percent. The expansion will more than double the facility's annual linear polyethylene capacity to more than 800 million pounds. Completion of the project is expected in 1997. In late 1994, Phillips and Shanghai Petrochemical Company Limited signed a letter of intent to study the feasibility of entering into a joint venture to build and operate a linear polyethylene plant near Shanghai with an annual capacity of 220 million pounds. In August 1994, Phillips contributed its polypropylene assets to Phillips Sumika Polypropylene Company (PSPC), a partnership formed in 1992 between Phillips and Sumika Polymers America Corporation (Sumika). Sumika will fund the construction of a new PSPC polypropylene facility at the Houston Chemical Complex. Construction began during the fourth quarter of 1994, and is scheduled to be completed in the first half of 1996. The new facility's annual polypropylene capacity will be approximately 270 million pounds, bringing PSPC's total annual production capacity to 750 million pounds. 15 Sales volumes of K-Resin, a clear plastic used in food and medical packaging, were higher in 1994. K-Resin is produced at the Houston Chemical Complex, where a capacity expansion started during the year. After completion, expected in 1996, the project will increase K-Resin annual capacity by 8 percent. The company's plastic pipe business, Driscopipe, and its engineering plastic, Ryton, had higher sales volumes in 1994. At the company's plastic recycling business in Tulsa, Oklahoma, capacity was increased from 18 million pounds annually, to 40 million pounds. Other - ----- During 1994, Phillips combined its research and development and information technology organizations. The new Corporate Technology organization provides a more flexible, cost-effective support team for the operating segments. Examples of Corporate Technology support in 1994 included: Upstream (E&P and GPM) - Development of a new 3-D seismic technique, called 3-D pre-stack depth migration, to provide better images of geological structures below salt layers. - Development of software that provides a common computing environment for engineers and geoscientists. - Development of a new software package that provides a more accurate picture of reservoir characteristics. - Extended reservoir characterization technology. Downstream (RM&T and Chemicals) - Development of computer models that help maximize production of high-value products at the U.S. refineries. - Development of a way to triple, over conventional techniques, the production of 1-hexene, a valuable co- monomer used in plastics manufacturing. - Development of a new catalyst that offers potential for increased polyethylene production. At the end of 1994, Phillips held a total of 5,083 active patents in 65 countries worldwide, including 2,692 active U.S. patents. During 1994, the company received 150 patents in the United States, and 260 foreign patents. The profitability of any business segment is not dependent upon any single patent, trademark, license, franchise or concession. The company's products and processes were licensed in 32 countries at year-end 1994, resulting in licensing revenue of $86 million. Polypropylene-related licenses contributed over two-thirds of the total, with polyethylene-related licenses contributing 17 percent. 16 COMPETITION All phases of the businesses in which Phillips is engaged are highly competitive. Phillips competes at various levels with both petroleum and non-petroleum companies in providing energy and other products to the consumer. Several of the company's competitors are larger and have substantially greater resources. While Phillips is one of approximately 20 large integrated oil companies, and generally ranks in the middle of the group, each of the segments in which Phillips operates is highly competitive and characterized by a great number of competitors. No single competitor, or small group of competitors, dominates any of Phillips' operating segments. Upstream, the company competes with numerous other companies in the industry to locate and obtain new sources of supply and to produce oil and gas in a cost-effective and efficient manner. The principal methods of competition include geological, geophysical and engineering research and technology, experience and expertise, and economic analysis in connection with property acquisitions. Downstream, competitive methods consist of product improvement and new product development through research and technology, and efficient manufacturing and distribution systems. In the marketing phase of the business, competitive factors include product quality and reliability, price, advertising and sales promotion, and development of customer loyalty to Phillips' products. Because Phillips is a significant U.S. producer of natural gas liquids, the company has wide access to relatively low-cost feedstocks, which are upgraded into chemicals and plastics. The company's well-integrated structure--with businesses ranging from feedstocks to plastic pipe--helps ensure markets for certain products. A substantial percentage of Phillips' olefins, for example, is typically used as a raw material in plastics manufactured by the company. Phillips' Corporate Technology organization is focused on providing technical support to the company's operating segments. Corporate Technology identifies technologies that drive Phillips' core businesses, enhancing the company's competitive position in areas ranging from reservoir characterization to improved plastics manufacturing processes. 17 GENERAL Phillips had its safest year ever in 1994. The company's injury rate fell 17 percent to under 2 injuries per 100 employees. Chargeable vehicle accidents were the lowest recorded in the company's history, and property loss due to accidents decreased as well. Company-sponsored research and development activities charged against earnings were $78 million, $93 million and $96 million in 1994, 1993 and 1992, respectively. The environmental information contained in Management's Discussion and Analysis on pages 46 and 47 under the caption, "Environmental" is incorporated herein by reference. It includes information on expensed environmental costs and capitalized environmental costs for 1994 and those expected for 1995 and 1996. International and domestic political developments and government regulation are prime factors that may materially affect the company's operations. Such political developments and regulation may impact price, production, allocation and distribution of raw materials and products, including their import, export and ownership; the amount of tax and timing of payment; and environmental protection. The occurrences and effect of such events are unpredictable. 18 Item 3. LEGAL PROCEEDINGS None. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 19 EXECUTIVE OFFICERS OF THE REGISTRANT Officer Name Position Held Age* Since ---- ------------- --- ------- W. W. Allen Chairman of the Board of 58 1988 Directors and Chief Executive Officer C. L. Bowerman Executive Vice President 55 1984 Director R. G. Ceconi Vice President Corporate 52 1991 Engineering K. L. Hedrick Senior Vice President 42 1994 Refining, Marketing and Transportation J. L. Howe Senior Vice President 50 1992 NGL, Chemicals and Plastics J. C. Mihm Senior Vice President 52 1988 Corporate Technology T. C. Morris Senior Vice President, 54 1993 Treasurer and Chief Financial Officer J. J. Mulva President and Chief Operating 48 1985 Officer Director M. J. Panatier President and Chief Executive 46 1994 Officer of Phillips Gas Company William G. Paul Senior Vice President 64 1985 and General Counsel Barbara J. Price Vice President Health, 50 1992 Environment and Safety John L. Whitmire Executive Vice President 54 1988 Director - ------------------------ *On March 1, 1995 There is no family relationship among the officers named above. Each officer is elected by the Board of Directors at its first meeting after the Annual Meeting of the Stockholders and thereafter as appropriate. Each officer holds office from the date of his election until the first meeting of the directors 20 held after the next Annual Meeting of the Stockholders or until his successor is elected. The date of the next annual meeting is May 8, 1995. All of the executive officers named above have been employed by the company for more than five years. 21 PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Quarterly Common Stock Prices and Cash Dividends Per Share Stock Price ------------------- High Low Dividends ------------------- --------- 1994 First $31 1/8 25 1/2 .28 Second 34 1/4 26 .28 Third 35 1/8 30 1/4 .28 Fourth 37 1/4 31 1/2 .28 - ----------------------------------------------------------------- 1993 First 29 5/8 24 1/2 .28 Second 32 1/4 27 7/8 .28 Third 34 28 1/8 .28 Fourth 37 3/8 26 7/8 .28 - ----------------------------------------------------------------- Closing Stock Price at December 31, 1994 $32 3/4 Number of Stockholders of Record at January 31, 1995 69,537 - ----------------------------------------------------------------- Phillips' common stock is traded primarily on the New York, Pacific and Toronto stock exchanges. 22 Item 6. SELECTED FINANCIAL DATA Millions of Dollars Except Per Share Amounts -------------------------------------------- 1994 1993 1992 1991 1990 -------------------------------------------- Sales and other operating revenues $12,211 12,309 11,933 12,604 13,603 Income before extraordinary items and cumulative effect of changes in accounting principles 484 245 270 98 541 Net income 484 243 180 258 779 Per common share Income before extraordinary items and cumulative effect of changes in accounting principles 1.85 .94 1.04 .38 2.18 Net income 1.85 .93 .69 .99 3.13 Total assets 11,436 11,035 11,468 11,473 12,130 Long-term debt 3,106 3,208 3,718 3,876 3,839 Cash dividends declared per common share 1.12 1.12 1.12 1.12 1.03 - ------------------------------------------------------------------ See Management's Discussion and Analysis for a discussion of factors that will enhance an understanding of this data. 23 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS February 15, 1995 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, accounting policies, and supplemental oil and gas disclosures. RESULTS OF OPERATIONS A summary of the company's net income, by business segment and consolidated, follows: Years Ended December 31 Millions of Dollars ----------------------- 1994 1993* 1992* ----------------------- Exploration and Production (E&P) United States $ 257 253 268 Foreign 85 136 109 - ----------------------------------------------------------------- 342 389 377 Gas Gathering, Processing and Marketing (GPM) (1) 42 78 Refining, Marketing and Transportation (RM&T) 136 65 94 Chemicals 259 91 49 Corporate and Other (252) (342) (328) - ----------------------------------------------------------------- Income before Extraordinary Items and Cumulative Effect of Change in Accounting Principle 484 245 270 Extraordinary Items - (2) (46) Cumulative Effect of Change in Accounting Principle - - (44) - ----------------------------------------------------------------- Net Income $ 484 243 180 ================================================================= *Amounts restated to reflect a realignment of certain operations from RM&T to Chemicals, and from Corporate and Other to E&P. 24 Consolidated Results Consolidated net income for 1994 was $484 million, compared with $243 million in 1993 and $180 million in 1992. Earnings for the three years included the following special items, extraordinary items and accounting change on an after-tax basis: Millions of Dollars ----------------------- 1994 1993 1992 ----------------------- Net gains on asset sales $ 13 61 25 Gain on subsidiary stock transaction 20 - - Capital-loss carryforwards 50 27 - Work force reduction charges (36) (26) (62) Revisions of prior year tax accruals - - 78 Foreign currency gains (losses) 3 (2) 27 Gas imbalance accrual adjustment - - (19) Pending claims and settlements 17 (32) - Incinerator project writedown - (20) - Other items 10 20 (21) - ----------------------------------------------------------------- Total special items 77 28 28 - ----------------------------------------------------------------- Extraordinary items--early retirement of debt - (2) (46) Cumulative effect of accounting change FASB Statement No. 109 (income taxes) - - (44) - ----------------------------------------------------------------- Total $ 77 26 (62) ================================================================= Excluding the above items, net operating income was $407 million in 1994, $217 million in 1993 and $242 million in 1992. Improved operations, lower costs and resurgent chemicals demand resulted in Phillips' highest net operating income since 1990. Strong U.S. economic growth in 1994, coupled with economic recoveries in Europe and Japan, provided the impetus for a dramatic rise in demand in the commodity chemicals industry. This increase in demand fueled higher olefins margins and sales volumes in 1994. As consumer buying increased in the growing economy, so did demand for the company's plastics products, used as a feedstock for many products directly tied to consumer buying habits. As a result, U.S. outside sales volumes of polyethylene increased 27 percent during the year. With olefins margins up, and both olefins and plastics sales volumes higher than a year ago, Chemicals' net operating income almost tripled over the previous year. RM&T's refineries exhibited sustained operating consistency in 1994, operating at near crude oil capacity for the year. This contributed to higher gasoline and distillates sales volumes in 1994. In addition, RM&T's operating costs were reduced from a year ago, and net operating earnings were up 79 percent over 1993. 25 The company's E&P and GPM operating results continued to be hampered by low crude oil, natural gas liquids (NGL) and natural gas prices. Driven by oversupply, worldwide crude oil prices began to fall in mid-year 1993, and Phillips' worldwide average sales price reached a low of $12.43 per barrel in February 1994. The company's crude oil prices trended upward modestly from that point, but again fell back in the later part of the year due to poor refining margins, warmer-than-normal weather, and continued supply/demand concerns. NGL prices generally tracked crude oil price movements during the year. Natural gas and residue gas prices in the United States trended downward for most of the year as a result of supply side imbalances. Comparing 1993 with 1992, the company's net operating income declined as its average worldwide crude oil sales price fell 12 percent in 1993, compared with 1992's average price. NGL prices followed crude oil prices, with GPM's average 1993 unfractionated NGL price dropping 4 percent, compared with 1992. Lower crude oil and natural gas production also contributed to the lower net operating income. These negative factors were partly offset by higher U.S. natural gas prices in 1993-- 19 percent higher than in 1992. In the company's RM&T operations, an extended fourth quarter 1993 maintenance shutdown at the company's Sweeny, Texas, complex had a negative impact on income from operations, compared with 1992. Chemicals' earnings lagged in 1993 and 1992, as industry oversupply in the polyethylene market kept prices and margins low. Lower financing costs helped to moderate the decline in operating income. Phillips at a Glance 1994 1993 1992 ----------------------- U.S. crude oil production (MBD) 90 93 96 Worldwide crude oil production (MBD) 206 203 209 U.S. natural gas production (MMCFD) 1,035 973 1,018 Worldwide natural gas production (MMCFD) 1,414 1,355 1,429 Worldwide natural gas liquids production (MBD) 165 159 158 Liquefied natural gas sales (MMCFD) 120 107 100 Refinery utilization rate (%) 99 91 87 U.S. automotive gasoline sales (MBD) 308 305 272 U.S. distillates sales (MBD) 128 105 85 Worldwide petroleum products sales (MBD) 689 659 612 Natural gas liquids processed (MBD) 207 198 183 Ethylene production (MMlbs)* 2,590 2,381 2,408 Polyethylene production (MMlbs)* 1,885 1,786 1,301 - ----------------------------------------------------------------- *Includes equity in affiliates. 26 Segment Results E&P Millions of Dollars ----------------------- 1994 1993* 1992* ----------------------- Reported net income $342 389 377 Less special items 23 48 17 - ----------------------------------------------------------------- Net operating income $319 341 360 ================================================================= *Amounts restated to reflect a realignment of certain operations from Corporate and Other to E&P. Crude oil and natural gas prices remained at low levels in 1994, with both products' average annual worldwide selling prices ending at their lowest levels in over four years. These lower prices were the primary contributors to a 6 percent decline in E&P's net operating income in 1994. Partially offsetting the low sales prices were higher natural gas production in the United States, lower worldwide exploration expenses, and lower lifting costs in 1994. In 1993, worldwide E&P net operating income was down slightly from 1992. Although U.S. natural gas prices were higher, this did not offset the negative effect of lower worldwide crude oil sales prices. Sales prices and other statistics were: 1994 1993 1992 ---------------------------- Average Sales Prices Crude oil (per barrel) United States $13.36 14.20 16.16 Foreign 15.75 17.30 19.51 Worldwide 14.73 15.92 18.01 Natural gas--lease (per thousand cubic feet) United States 1.75 1.99 1.67 Foreign 2.31 2.36 2.61 Worldwide 1.92 2.11 1.99 - ----------------------------------------------------------------- Average Production Costs per Barrel of Oil Equivalent United States 4.58 4.86 4.78 Foreign 5.36 5.57 6.68 Worldwide 4.90 5.15 5.57 - ----------------------------------------------------------------- Finding and Development Costs per Barrel of Oil Equivalent United States 5.75 2.54 2.49 Foreign* 2.10 9.45 2.91 Worldwide* 2.88 3.94 2.74 - ----------------------------------------------------------------- *Years 1993 and 1992 were restated. See natural gas reserves, page 89. 27 1994 1993 1992 ---------------------------- Millions of Dollars ---------------------------- Worldwide Exploration Expenses Geological and geophysical $124 127 135 Leasehold impairment 27 24 30 Dry holes 68 98 81 Lease rentals 7 7 6 - ----------------------------------------------------------------- $226 256 252 ================================================================= Thousands of Barrels Daily ---------------------------- Operating Statistics Crude oil produced United States 90 93 96 Norway 82 72 71 United Kingdom 5 6 8 Africa 23 24 25 Other areas 6 8 9 - ----------------------------------------------------------------- 206 203 209 ================================================================= Natural gas liquids produced United States 5 5 5 Norway 8 8 8 Other areas 1 - - - ----------------------------------------------------------------- 14 13 13 ================================================================= Millions of Cubic Feet Daily ---------------------------- Natural gas produced United States (less gas equivalent of liquids shown above) 1,035 973 1,018 Norway* 272 272 312 United Kingdom* 58 54 49 Other areas 49 56 50 - ----------------------------------------------------------------- 1,414 1,355 1,429 ================================================================= *Dry basis. Liquefied natural gas sales 120 107 100 - ----------------------------------------------------------------- U.S. E&P Millions of Dollars ---------------------------- 1994 1993* 1992* ---------------------------- Reported net income $257 253 268 Less special items 18 9 (11) - ----------------------------------------------------------------- Net operating income $239 244 279 ================================================================= *Amounts restated to reflect a realignment of certain operations from Corporate and Other to E&P. Net operating income decreased slightly in 1994 as lower exploration expenses, lower depreciation, depletion and amortization (DD&A), and higher liquefied natural gas (LNG) revenues were more than offset by lower crude oil and natural gas 28 revenues. The company's average U.S. crude oil sales price trended upward during the first three quarters of 1994, but fell back in the fourth quarter. Although the company's average worldwide annual crude oil price in 1994 was the lowest since 1988, the average U.S. annual price was at its lowest since 1979. Natural gas prices trended downward during 1994, as supplies continued to outpace demand. Lower exploration expenses contributed positively to 1994 net operating income, as the company recorded significant dry hole charges in 1993 related to exploratory efforts in Alaska. DD&A was lower in 1994 due mainly to property dispositions. LNG revenues were higher in 1994 on increased sales volumes from a plant optimization project and the increased capacity of the new LNG tankers. Higher tax credits for producing fuel from non-conventional sources also benefited 1994 net operating income. U.S. crude oil production was lower in 1994 due to asset sales and normal declines in production from mature fields, partially offset by increased production in the Gulf of Mexico from the company's Ship Shoal blocks 149/130. U.S. natural gas production was up 6 percent from 1993, due to higher production from the San Juan Basin and South Marsh Island field. The decrease in net operating income for 1993, compared with 1992, resulted from lower crude oil sales prices and volumes, lower natural gas production, and higher exploration expenses. Partially offsetting these negative factors were 19 percent higher natural gas sales prices. U.S. crude oil and natural gas production was lower in 1993, compared with 1992, primarily due to normal declines in production from mature fields. The decline in crude production was partly offset by increased production from the Point Arguello field, offshore California. Favorable special items in 1994 included net after-tax gains of $15 million from asset sales along with favorable settlements related to the company's Alaska operations and a net profits interest. These positive special items were partially offset by contingency accruals. Special items in 1993 included a $5 million after-tax refund of windfall profit taxes. The $11 million in special items in 1992 included after-tax asset- sale gains of $19 million, which were more than offset by a natural gas imbalance accrual adjustment and other charges. 29 Foreign E&P Millions of Dollars ---------------------------- 1994 1993 1992 ---------------------------- Reported net income $85 136 109 Less special items 5 39 28 - ----------------------------------------------------------------- Net operating income $80 97 81 ================================================================= Net operating income fell 18 percent in 1994, driven by lower crude oil revenues, partially offset by lower lifting costs. Average annual foreign crude oil sales prices realized by Phillips ended the year more than $1.50 per barrel lower than a year ago, a reduction of 9 percent. Also negatively affecting foreign net operating income were lower crude oil sales volumes in the United Kingdom, Africa and other areas, due in part to asset sales. The effect of higher crude oil sales volumes in Norway partially offset the negative impact of lower volumes in other foreign areas. Foreign crude oil production was up 5 percent in 1994, due primarily to increased production from Norway as a result of increased water injection rates at the Ekofisk field, horizontal drilling, well recompletions and reperforations. In addition, approximately half of Norway's crude oil production increase was from the Embla field, which started production in mid-year 1993. New natural gas production from the Ann field in the U.K. North Sea was offset by loss of production due to asset sales, causing foreign natural gas production to be down marginally in 1994. Net operating income increased for 1993, compared with 1992, because of lower lifting costs and exploration expenses, partially offset by lower crude oil and natural gas sales prices and volumes. Foreign crude oil production was down in 1993, compared with 1992, primarily because of the sale of producing properties, as well as lower production in the U.K. North Sea. Partially offsetting the production decline was the 1993 start-up of Norway's Embla field. Natural gas production was down in 1993, due mainly to lower demand. Special items in 1994 consisted primarily of income tax items related to the company's China and Norway operations. Special items in 1993 included after-tax asset-sale gains of $26 million, while special items in 1992 included after-tax foreign currency gains of $30 million. 30 GPM Millions of Dollars ---------------------------- 1994 1993 1992 ---------------------------- Reported net income (loss) $ (1) 42 78 Less special items (6) - (4) Less minority interest--preferred dividend requirements of Phillips Gas Company (32) (32) (2) - ----------------------------------------------------------------- Net operating income $ 37 74 84 ================================================================= The company's GPM operations are conducted primarily through GPM Gas Corporation, a wholly owned subsidiary of Phillips Gas Company. In December 1992, Phillips Gas Company issued preferred stock, and the effect of the preferred dividend requirements has been excluded in determining operating income. Sales prices and operating statistics were: 1994 1993 1992 ---------------------------- Average Sales Prices U.S. residue gas (per thousand cubic feet) $1.79 2.03 1.68 U.S. natural gas liquids (per barrel--unfractionated) 9.77 10.79 11.24 - ----------------------------------------------------------------- Millions of Cubic Feet Daily ---------------------------- Operating Statistics Natural gas purchases Outside Phillips 1,164 1,063 1,046 Phillips 206 205 213 - ----------------------------------------------------------------- 1,370 1,268 1,259 ================================================================= Raw gas throughput 1,505 1,428 1,429 - ----------------------------------------------------------------- Residue gas sales Outside Phillips 853 780 757 Phillips 96 87 94 - ----------------------------------------------------------------- 949 867 851 ================================================================= Thousands of Barrels Daily ---------------------------- Natural gas liquids net production From Phillips E&P leasehold gas 21 22 23 From gas purchased outside Phillips 130 124 122 - ----------------------------------------------------------------- 151 146 145 ================================================================= As a result of acquisitions and expansions of existing facilities, GPM's average annual raw gas throughput volumes increased 5 percent in 1994. This led to higher residue gas and NGL sales volumes for the year. However, 9 percent lower NGL 31 sales prices and 12 percent lower residue gas sales prices led to a 50 percent decrease in net operating income, compared with 1993. NGL sales prices, which fell steadily throughout 1993, recovered somewhat in 1994, but still ended the year with an average annual price lower than a year ago. Residue gas prices dropped sharply during the summer and into the fall, recovering slightly during the last part of the year before declining again in early 1995. Aggressive industry storage early in the year and increased supplies drove prices down during the summer. GPM's operating costs were higher in 1994 due to gathering fees the company paid GPM Gas Gathering L.L.C., a limited liability company in which GPM Gas Corporation owns a 50 percent interest. Net operating income decreased in 1993, compared with 1992. Although revenues were up in 1993, gas purchase costs were up more, lowering GPM's feedstock margin. The increase in revenues was due primarily to higher residue gas sales prices, partly offset by lower NGL prices. Special items in 1994 were work force reduction charges and in 1992, an asset writedown. RM&T Millions of Dollars ---------------------------- 1994 1993* 1992* ---------------------------- Reported net income $136 65 94 Less special items (7) (15) 18 - ----------------------------------------------------------------- Net operating income $143 80 76 ================================================================= *Amounts restated to reflect a realignment of certain operations from RM&T to Chemicals. Sales prices and operating statistics for RM&T were: 1994 1993 1992 ---------------------------- Average Sales Prices (per gallon) Automotive gasoline $.56 .58 .64 Distillates .51 .56 .59 Propane .35 .38 .33 - ----------------------------------------------------------------- Operating Statistics Refinery crude oil capacity utilization 99% 91 87 - ----------------------------------------------------------------- 32 1994 1993 1992 ---------------------------- Thousands of Barrels Daily ---------------------------- Crude oil refined 317 278 266 - ----------------------------------------------------------------- Petroleum products outside sales* United States Automotive gasoline 290 278 256 Aviation fuels 32 31 33 Distillates 128 105 85 Propane 25 26 29 Other products 18 16 15 - ----------------------------------------------------------------- 493 456 418 Foreign 54 50 46 - ----------------------------------------------------------------- 547 506 464 ================================================================= *Amounts for 1993 and 1992 have been restated to reflect that certain operations previously a part of RM&T are now included in Chemicals. Improved refinery operations and higher gasoline margins contributed to a significant increase in RM&T net operating income in 1994. The company's refineries showed sustained operating consistency in 1994, running at a crude oil capacity utilization rate of 99 percent in 1994, up from 1993's 91 percent. Incremental debottlenecking changes over the past several years were tested and validated during 1994. As a result, the company revised upward its total crude oil refining capacity to 320,000 barrels of oil per day, effective January 1, 1994. The higher utilization rate led to higher gasoline and distillates sales volumes for the year. Earnings also benefited from higher gasoline margins in the company's marketing operations, compared with 1993. The company's ability to deliver gasoline into the Midwest during the third quarter, when several Midwestern refineries were experiencing turnarounds or operating disruptions, contributed to the higher gasoline margins. Lower operating expenses at the company's refineries also contributed to RM&T's improved earnings in 1994. The company's cost control efforts, team management approach and lower fuel costs resulted in reductions in operating costs that more than offset the higher costs associated with running at a higher utilization rate. As a result, the refineries' overall operating expenses were down 6 percent after adjusting for special items. Net operating income increased 5 percent in 1993, compared with 1992. A 5 percent increase in crude oil refinery runs contributed to an increase in the company's overall refinery capacity utilization and improved operating income. Feedstock costs in 1993 benefited from lower crude oil prices. Another positive factor for 1993's net operating income was improved margins for distillates. 33 Special items in 1994 included work force reduction charges. Special items in 1993 included an after-tax charge of $20 million for the writedown of an incinerator project. Special items in 1992 included a property settlement gain related to a 1991 fire, which damaged the atmospheric residuum desulfurization unit at the Sweeny refinery. Chemicals Millions of Dollars ---------------------------- 1994 1993* 1992* ---------------------------- Reported net income $259 91 49 Less special items 34 13 (2) - ----------------------------------------------------------------- Net operating income $225 78 51 ================================================================= *Amounts restated to reflect a realignment of certain operations from RM&T to Chemicals. Operating statistics for Chemicals were: 1994 1993 1992 ---------------------------- Millions of Pounds Except as Indicated ---------------------------- Operating Statistics Production* Ethylene 2,590 2,381 2,408 Polyethylene 1,885 1,786 1,301 Propylene 372 361 388 Polypropylene 433 251 383 Paraxylene 393 521 456 Cyclohexane (millions of gallons) 174 196 165 - ----------------------------------------------------------------- *Includes equity in affiliates. Thousands of Barrels Daily ---------------------------- U.S. petroleum products outside sales Automotive gasoline 18 27 16 Liquefied petroleum gas 84 79 78 Other products 40 47 54 - ----------------------------------------------------------------- 142 153 148 ================================================================= Natural gas liquids processing capacity 227 227 227 - ----------------------------------------------------------------- Natural gas liquids processed 207 198 183 - ----------------------------------------------------------------- Results for 1994 for the company's Chemicals segment reflected the dramatic rise in demand and improved product margins in the commodity chemicals industry. Net operating income increased to $225 million, almost triple 1993's $78 million. The strengthening economy in 1994 resulted in higher demand for the company's olefins, particularly ethylene. Ethylene is used as a feedstock to make plastics, which are subsequently used to produce both durable and non-durable goods. General economic movement directly affects ethylene consumption, and the growing 34 economy in 1994 resulted in higher demand. The industry experienced significant unscheduled downtime in 1994, which resulted in tightened supply during the year. As a result of the combination of higher demand and tighter supply, olefins margins and sales volumes were much improved from a year ago. The company's share of earnings from the Sweeny Olefins Limited Partnership (SOLP) increased from $10 million in 1993 to $30 million in 1994. In the company's plastics operations, higher demand in 1994 resulted in higher sales volumes, especially in total U.S. polyethylene sales volumes, which increased 19 percent, compared with 1993. Margins, however, remained under pressure due to rising olefins feedstock costs. Net operating income benefited $18 million from the sale of a polypropylene license in 1994. The company's natural gas liquids fractionation business benefited from higher sales volumes in 1994. Compared with 1992, 1993 net operating income benefited from an increase in ethylene margins in the company's olefins operations. However, results in both 1993 and 1992 were negatively affected by low margins in the company's polyethylene operations due to market overcapacity. Favorable special items in 1994 included an after-tax gain of $20 million from a subsidiary stock transaction, along with an income tax item related to the company's Puerto Rico Core operations and an adjustment to a 1993 pipeline abandonment accrual. These favorable items were partly offset by work force reduction charges. Special items in 1993 included net after-tax asset-sale gains of $33 million from the sale of the assets of Aztec Catalyst Company and the sale of Phillips Fibers Corporation. These gains were partly offset by a $12 million after-tax writedown of assets held for sale, resulting from the company's decision to exit the catalyst business, and a $10 million after-tax charge for the abandonment of a pipeline. Corporate and Other Millions of Dollars ----------------------- 1994 1993* 1992* ----------------------- Reported Corporate and Other $(252) (342) (328) Less special items 33 (18) (1) - ----------------------------------------------------------------- Adjusted Corporate and Other $(285) (324) (327) ================================================================= Adjusted Corporate and Other includes: Corporate general and administrative expenses $(116) (153) (147) Net interest (179) (181) (209) Other 10 10 29 - ----------------------------------------------------------------- Adjusted Corporate and Other $(285) (324) (327) ================================================================= *Amounts restated to reflect a realignment of certain operations from Corporate and Other to E&P. 35 The company's focus on cost control benefited Corporate general and administrative expenses in 1994, which declined $37 million-- 24 percent--from a year ago. Lower costs in such areas as travel, advertising, information technology, consulting and contracting fees confirmed the company's commitment to reducing expenses. Beginning in 1994, a portion of costs associated with incentive compensation plans was charged to the operating segments, which reduced costs retained at Corporate. Corporate general and administrative expenses increased 4 percent from 1992 to 1993, due primarily to allocating office space to the operating segments at cost, beginning in 1993. Net interest represents interest income and expense, net of capitalized interest. Compared with 1993, net interest declined slightly in 1994 to $179 million. The effect of higher interest rates in 1994 and charges for the early termination of various lines of credit was more than offset by the effect of lower average debt and lower interest accruals associated with taxes and other liabilities. Comparing 1993 with 1992, net interest was lower as the company benefited from refinancing high-interest rate debt, the general decline in interest rates, and lower average outstanding debt. Other, which consists primarily of the company's insurance operations, along with income tax and other items that are not directly associated with the operating segments on a stand-alone basis, was unchanged from 1993 to 1994. The decrease in 1993, compared with 1992, is due to lower net premiums charged to the operating segments by the company's captive insurance subsidiary. Favorable special items in 1994 included an after-tax benefit of $50 million from a capital-loss carryforward applied against current year gains from asset sales, along with interest applicable to various favorable settlements of claims. Partially offsetting these favorable special items were after-tax work force reduction charges of $16 million, along with losses from asset sales. Special items in 1993 included an after-tax benefit of $27 million from capital-loss carryforwards applied against the current year capital gains from asset sales, and after-tax interest income of $9 million from windfall profit tax refunds, partially offset by after-tax work force reduction charges of $26 million. In 1992, a $78 million benefit from revisions of prior year income tax accruals was offset by after-tax work force reduction charges of $62 million and other minor items. 36 Income Statement Analysis Revenues Total revenues for 1994 were $12.4 billion, compared with $12.5 billion in 1993 and $12.1 billion in 1992. Sales and other operating revenues decreased marginally in 1994. Lower crude oil revenues, due primarily to lower sales prices, and loss of revenues as a result of asset sales, were offset by higher revenues from petroleum products, olefins and plastics products. Petroleum products and plastics revenues increased in 1994 primarily as a result of volume increases, while olefins revenues benefited from both volume and sales price increases. The company's share of earnings from SOLP increased $20 million in 1994, leading to a 27 percent increase in equity in earnings of affiliated companies. Other revenues decreased in 1994 largely due to lower gains on the sale of assets, compared with 1993. Sales and other operating revenues were up 3 percent in 1993, compared with 1992, primarily due to increased overall U.S. natural gas sales prices and higher petroleum products sales volumes. Other revenues increased in 1993, compared with 1992, primarily as a result of asset sales. Total Costs and Expenses Purchase costs were down slightly in 1994. The effect of asset sales was chiefly offset by higher purchases in RM&T and Chemicals. After adjusting for special items and the effect of asset sales, production and operating expenses were down slightly in 1994. This reduction in expenses was achieved even though the company experienced higher refinery runs in its RM&T segment and increased production in its Chemicals segment. Although production increased, costs were kept low as a result of a concerted company-wide effort to control costs. In the RM&T segment, a cost control emphasis and a team management approach resulted in 6 percent lower operating costs at the refineries. In Norway, cost control and lower spending on improvements to existing facilities, in anticipation of the implementation of the Ekofisk II plan, contributed to reduced costs in 1994. These items were partly offset by higher costs in 1994 associated with GPM's expansion strategy. Exploration expenses were $30 million lower in 1994. The company recorded significant dry hole expenses in 1993 associated with exploration activities in Alaska. In 1994, dry hole expenses were incurred primarily related to exploration in the Gulf of Mexico, but to a much smaller degree than 1993's Alaska expenses. 37 Selling, general and administrative expenses (SG&A) were down 20 percent in 1994, 10 percent after adjusting for special items and the effect of asset sales. Generally lower Corporate related costs, achieved through focusing on controlling expenses, contributed to the decline in SG&A. In 1994, SG&A was also reduced by the reclassification of certain costs to production and operating expenses. Depreciation, depletion, amortization and retirements (DD&A) declined 6 percent for the year. The effect of asset sales and 1993 writedowns was partially offset by higher DD&A from Norway, due mainly to increased production, and adjustments in U.K. future dismantlement liability estimates in 1994. Taxes other than income taxes decreased 4 percent in 1994. The decrease is attributable to a favorable settlement related to production taxes in 1994, along with the effect of asset sales. Interest expense declined 10 percent in 1994, compared with 1993, due to lower interest associated with taxes and other liabilities. Total costs and expenses were up 3 percent from 1992 to 1993. Purchase costs increased primarily due to higher natural gas prices and higher crude oil purchase volumes in 1993. SG&A decreased due to lower work force reduction charges and benefits realized from cost cutting measures implemented in 1992, partially offset by the costs of the Performance Incentive Program implemented in 1993 and accruals for pending claims. DD&A increased slightly due to the writedown of certain catalyst business assets and charges associated with abandonment of a pipeline. Interest expenses were down due to debt refinancings, lower interest rates on fixed- and variable-rate debt, and lower average outstanding debt. Expenses in 1993 included a full year's effect of the preferred dividend requirements of the Phillips Gas Company preferred stock, issued in December 1992. Income Taxes The effective income tax rate was 43 percent in 1994, compared with 55 percent in 1993 and 47 percent in 1992. The lower effective tax rate in 1994, compared with 1993, was predominantly due to the increase in the proportion of domestic income, which is taxed at lower rates than foreign income, and changes in deferred tax assets. The 1992 tax provision and rate was low compared with 1993, primarily due to a $78 million benefit from revisions of prior year tax accruals. 38 CAPITAL RESOURCES AND LIQUIDITY Financial Indicators Millions of Dollars Except as Indicated ----------------------- 1994 1993 1992 ----------------------- Current ratio 1.0 1.0 .9 Long-term debt $3,106 3,208 3,718 Preferred stock of subsidiary $ 345 345 345 Stockholders' equity $2,953 2,688 2,698 Percent of long-term debt to capital* 49% 51 55 Percent of floating-rate debt to total debt 23% 25 54 - ----------------------------------------------------------------- *Capital includes long-term debt, preferred stock of subsidiary and stockholders' equity. Net income during 1994 nearly doubled, compared with 1993. However, cash provided by operating activities in 1994 was 8 percent lower. The following events that occurred during 1994 contributed significantly to this reduction in cash from operating activities: $16 million in payments for the Performance Incentive Program introduced in 1993; $142 million in payments for previously recorded legal and tax contingencies; and $52 million in domestic pension contributions. Increases in accounts and notes receivable, resulting from higher sales prices and volumes in the company's Chemicals segment, also reduced the cash provided by operating activities during 1994, compared with 1993. During 1994, cash and cash equivalents increased $74 million. The company's short-term liquidity position at December 31, 1994, was stronger than indicated because the current cost of the company's inventories was approximately $427 million greater than their last-in, first-out (LIFO) carrying value. During 1993, Phillips issued $850 million of fixed-rate debt in the public market, extending debt maturities at low interest rates and using the proceeds to refinance more costly long-term debt, to repay borrowings under its revolving bank lines of credit, and to reduce the percentage of the company's total debt that would be exposed to interest rate fluctuations. This reduction of the company's floating rate debt has also enabled Phillips to reduce the number and amount of its bank credit lines. In April 1994, the company secured more favorable commitment fees and interest rates by replacing four of its outstanding bank credit lines, totaling $1.4 billion, with one $800 million facility with similar terms and conditions. In response to upcoming capital demands resulting from an oil and gas property acquisition, this facility is being amended to allow Phillips Petroleum Company United Kingdom Limited, a wholly owned subsidiary, to directly access up to $200 million of this line of credit. 39 The company's financial position continues to improve. At December 31, 1994, Phillips' long-term debt was less than 50 percent of capital for the first time since 1984. No portion of the previously mentioned $800 million credit facility was outstanding, nor had the company issued any portion of the $500 million shelf registration of debt securities that became effective in January 1994. At December 31, 1994, $48 million remained available under the company's commercial paper program. During 1994, the company's Long-Term Stock Savings Plan (LTSSP) signed a $131 million term loan agreement that was used to refinance its outstanding notes payable issued in 1988. The notes were redeemed on May 16, 1994. The new term loan requires repayment in annual installments through the year 1998, matching the maturities of the refinanced notes, but at a reduced cost. The outstanding balance was $105 million at December 31, 1994. In 1994, the LTSSP also signed an agreement amending a second term loan under which $397 million is outstanding. The amended term loan requires repayment in annual installments beginning in 1999 and has the same maturity as the original term loan agreement entered into in 1990, but provides a lower rate of interest. The company continues to guarantee payment of the LTSSP debt. The company's wholly owned subsidiary, Phillips Petroleum Company Norway, signed a $500 million revolving credit facility with a group of international banks in November 1994, replacing a $300 million line of credit that was due to expire in 1995. No portion of the new facility was outstanding at December 31, 1994. Most of the company's foreign operations use the local currency as the functional currency. The local currency reflects the expected economic effect of exchange rate fluctuations on cash flows and equity, since cash flows of the company's foreign operations are largely denominated in the local currency. Phillips Petroleum Company and certain of its subsidiaries employ hedging programs that use financial and commodity-based derivative contracts to limit the risks inherent in foreign currency fluctuations and crude oil, natural gas and related product price changes. Derivatives used in Phillips' hedging programs relate to an offsetting physical or financial position, firm commitment or anticipated transaction. In the past the company has, on occasion, hedged interest rates, and may do so in the future should certain circumstances or transactions warrant. In 1994, the net realized and unrealized gains and losses from derivative contracts used by Phillips were not material. The company's risk management has been centralized to facilitate management's involvement in the use and control of derivative instruments by providing support to management and operating units in developing, executing, tracking and controlling hedging programs. All programs are reviewed and approved by management before implementation. 40 On September 27, 1994, Phillips completed the sale and leaseback of a substantial portion of its tank and hopper railcar fleet, its corporate aircraft, and certain of its airport refueling tank trucks, resulting in a cash inflow of $111 million. The company is considering the leasing of additional railcars, valued at approximately $20 million in 1995. Phillips anticipates entering into a one-year agreement with a bank-sponsored entity in the first quarter of 1995 for the revolving sale of up to $115 million of receivables generated by credit card sales. The agreement includes four one-year renewal options. The proceeds from the sale will be used for general corporate purposes. During 1994, the company received $250 million from institutional investors in exchange for a variable interest in the net proceeds from production of certain coal-seam gas properties. Phillips has non-contributory defined benefit retirement plans covering substantially all employees. After a restructuring of its principal retirement plan in 1986, the company was not required to fund the plan again until 1993, because of the plan's successful investment experience. In 1994, Phillips contributed approximately $23 million for plan year 1993 and $29 million for plan year 1994. The company anticipates contributing $30 million to the plan in 1995. In 1994, as part of the company's continuous improvement efforts, reductions of approximately 1,200 positions were identified, which resulted in before-tax charges totaling $59 million. Payments began in 1994 and will continue through 1995 and into 1996. Since cost control is an important part of continuous improvement, additional accruals may be necessary as further areas for improvement are identified and implemented. Capital Spending Capital Expenditures and Investments Millions of Dollars --------------------------------- Estimated 1995 1994 1993 1992 --------------------------------- E&P $ 859 707 821 585 GPM 165 172 120 73 RM&T 191 100 82 216 Chemicals 160 144 174 269 Corporate and Other 25 31 29 29 - ----------------------------------------------------------------- $1,400 1,154 1,226 1,172 ================================================================= United States $ 825 721 901 844 Foreign 575 433 325 328 - ----------------------------------------------------------------- $1,400 1,154 1,226 1,172 ================================================================= 41 Capital spending in 1994 funded oil and gas asset acquisitions, including gas gathering assets in New Mexico, leases on subsalt prospects in the Gulf of Mexico, and an increased interest in the Britannia field in the U.K. North Sea. Capital expenditures also supported major capital projects in the Ekofisk, Xijiang, and U.K. J-Block oil fields. Upstream projects--including E&P and GPM operations--continue to be the focus of Phillips' capital program, comprising about 75 percent of the proposed 1995 budget and 1994 and 1993 actual spending. Phillips' 1995 capital spending is expected to be approximately $1.4 billion, tied directly to key business line strategies, including: meeting safety and environmental needs; continuous improvement in the operating integrity of Phillips' assets; growth in oil and gas reserves; growth in GPM's NGL production; selective growth in chemicals and plastics; and increasing the profitability of RM&T. The 1995 estimated capital spending amount includes carryover commitments of $480 million. E&P Capital spending for E&P during the three-year period ended December 31, 1994, supported several major development projects, including J-Block in the U.K. North Sea, the Embla field and redevelopment of Ekofisk in Norway, and the Xijiang fields, offshore China. The 1993 and 1992 expenditures included $127 million and $54 million, respectively, for the construction of two liquefied natural gas tankers. About 50 percent of the 1995 exploratory budget will be for exploration in North America, half of which will be invested in subsalt projects in the Gulf of Mexico. Additional capital funds are being directed to exploratory drilling in Norway, the United Kingdom, Nigeria, Tunisia, Papua New Guinea, Algeria, Cameroon, and the Timor Sea Zone of Cooperation, jointly administered by Australia and Indonesia. Major projects of the 1995 capital budget include new development in the Britannia and Armada fields in the United Kingdom, continued development of J-Block and the Xijiang fields, and the redevelopment of Ekofisk. On November 9, 1994, the Norwegian Parliament approved the agreement reached in June 1994 between Phillips Petroleum Company Norway, as operator for the Phillips Norway Group (PNG), and the Norwegian Ministry of Industry and Energy (MIE) regarding the redevelopment of Ekofisk. The plan projects significantly reduced operating costs and will allow the long-term recovery of Ekofisk field reserves. In addition to extending the PNG's production license for the Ekofisk fields from its previous expiration in 2011 to the year 2028, the agreement also provides for: 42 o Elimination of the 10 percent royalty charged on oil and natural gas liquids production when the new process and transportation platform starts up, o The Norwegian State's funding of 5 percent of the Ekofisk redevelopment expenditures in exchange for a 5 percent direct interest in the production license beginning January 1, 1999, leaving Phillips with a 35 percent interest in production after that date, o Extension of the oil pipeline license held by Norpipe a.s. from the year 2005 to 2028, subject to a 40 percent Norwegian State ownership in the oil pipeline commencing in 2005, o Extension of the gas pipeline license held by Norpipe a.s. from the year 2007 to the year 2028, subject to a 40 percent Norwegian State ownership in the gas pipeline commencing in 2007, and o PNG's and Statoil's ownership of the pipelines to be reduced from 50 percent each to 30 percent each to accommodate the 40 percent Norwegian State interest. The Ekofisk redevelopment plan provides for the construction of two new platforms--a wellhead platform to be completed in 1996, and a combined processing and transportation platform to be completed in 1998, linked with the existing Ekofisk Complex. According to the plan, the Ekofisk, Eldfisk and Embla fields, and possibly the Tor field, will be connected to the Ekofisk II facilities. It is anticipated that the remaining fields in the Ekofisk area will be shut in. The estimated cost of the Ekofisk redevelopment is approximately $3 billion, with Phillips' 35 percent share of the cost being approximately $1 billion. The company expects to fund the capital costs associated with the plan within the context of its overall funding plans. This is expected to include the utilization of the new Phillips Petroleum Company Norway $500 million revolving credit line and after-tax operating cash flows. GPM Capital spending for GPM increased significantly again in 1994, up 43 percent over 1993 and more than double that of 1992 capital spending, reflecting the company's continued focus on increasing throughput volumes, processing capacity and NGL production. In the fourth quarter of 1994, GPM Gas Corporation acquired a company that owned a plant and related supply-backed gathering system in New Mexico. This added 765 miles of gathering pipelines, provided opportunities for integration with existing gathering systems, and yielded other processing efficiencies. 43 The 1995 budget provides for the modernization of assets and continued increases in natural gas liquids and raw gas throughput. GPM Gas Corporation has entered into an agreement, expected to be completed in the first half of 1995, to acquire additional gas gathering and processing assets in New Mexico, subject to certain regulatory approvals. These assets include seven gathering systems with more than 375 miles of high pressure pipeline, a gas treating facility, and a 30 million-cubic-feet- per-day processing plant. In November 1994, GPM Gas Corporation signed definitive agreements to acquire gathering systems located in the Texas and Oklahoma panhandles, which will add approximately 4,000 miles of gathering pipelines and 33 compression stations to GPM's gathering systems. The acquisitions are contingent upon the approval of the Federal Energy Regulatory Commission and subject to Hart Scott Rodino review, so are not expected to occur until early 1996. RM&T During the three-year period ended December 31, 1994, RM&T's capital spending was used to modify equipment at the Borger, Texas, refinery to produce low-sulfur diesel fuel; to upgrade the Sweeny and Borger, Texas, refineries to meet new environmental standards; and to renovate feedstock pipelines and product terminals. Increasing 91 percent over 1994 spending, the 1995 capital budget supports safety and environmental projects as well as operating requirements, but focuses on projects to enhance profitability. This includes advanced process control technology projects at the Sweeny and Borger refineries, and the construction of additional retail outlets. Chemicals Chemicals' 1994 capital spending targeted technological improvements in the company's polypropylene and aromatics business lines. Upon completion early in the second quarter of 1995, projects begun during 1994 at the Puerto Rico Core petrochemical facility will have increased paraxylene production from 525 million pounds a year to 675 million pounds a year and broadened the range of hydrocarbon feedstocks that can be used through the installation of Aromax catalytic reforming technology. Capital spending in 1993 and 1992 included $52 million and $162 million, respectively, for rebuilding the Houston Chemical Complex (HCC) facilities. On August 1, 1994, Phillips contributed its polypropylene assets to Phillips Sumika Polypropylene Company (PSPC), a partnership formed in 1992 between, and jointly controlled by, Phillips and Sumika Polymers America Corporation (Sumika). Sumika is funding the construction of a new PSPC polypropylene facility in 44 Pasadena, Texas. Construction began during the fourth quarter of 1994 and is scheduled to be completed in the first half of 1996. The new facility will utilize Sumitomo Chemical Company Ltd.'s (Sumika's parent company) proprietary gas phase process and be capable of producing approximately 270 million pounds of polypropylene a year, bringing the partnership's total production capability to 750 million pounds annually. Sharing of net cash flows, and gains and losses is dependent on the relative contributions of both partners. The company's share of net income and cash flows from the partnership will decrease as Sumika funds construction of the new facility, but the company's share will not fall below 50 percent. Phillips is increasing its participation in the growing plastics markets in Asia by expanding its Singapore polyethylene facility. The expansion is being funded partly by a $93 million project loan available to the Singapore company and partly by the Singapore company selling additional equity to other parties. The sale of additional equity reduced Phillips' equity interest in the company that owns the polyethylene facility from 85.7 percent to 50 percent. Phillips is proportionally responsible for 50 percent of cost overruns and repayment of the project loan until the completion of construction. After completion of construction, any borrowings under the project loan become non-recourse to Phillips. This expansion will more than double the Singapore facility's linear polyethylene capacity to more than 800 million pounds a year and is expected to be completed by 1997. The reduction in Phillips' equity interest is not expected to have a material impact on its operating results or liquidity. Almost half of the 1995 Chemicals capital budget is directed toward enhancing profitability, with projects slated to increase volumes and improve technology in the aromatics and olefins business lines. An additional expansion of paraxylene production at the Puerto Rico Core petrochemical facility will increase production capacity to 818 million pounds toward the end of 1995. Funds are also allocated for safety and environmental projects and other operating requirements. Contingencies Legal and Tax Matters The Internal Revenue Service has appealed to the U.S. Court of Appeals for the Tenth Circuit, the U.S. Tax Court's rulings related to the company's sales of liquefied natural gas in Japan. The Tax Court's rulings supported the company's position that more than 50 percent of the income at issue was from a foreign source. Subsequent to February 15, 1995, on March 9, 1995, the U.S. Tax Court issued a decision favorable to the company that excess Norwegian tax credits can be applied to U.S. tax on similar income earned in other countries. The Internal Revenue 45 Service will have to study this decision and consider its position, but the company considers it likely that the Internal Revenue Service will also appeal this decision. In any event, the decision will not become final and appealable until disposition of other issues. Though a final, favorable settlement of the above issues would have a material, positive effect on Phillips' net income and cash position, it remains too early to determine the outcome, when the issues will be resolved, or the final financial effect. An unfavorable result could have a material impact on cash flows in a particular quarter. The company continues to defend claims made by plaintiffs resulting from the October 23, 1989, explosion and fire at Phillips 66 Company's HCC facilities. All suits involving fatalities and most of those involving serious physical injury have been settled. Most of the approximately 25 remaining claimants seek compensatory and punitive damages, primarily for alleged psychological injury. Phillips accrues for contingencies when a loss is probable and the amounts can be reasonably estimated. Based on currently available information, the company believes that it is remote that future costs related to known contingent liability exposures will exceed current accruals by an amount that would have a material adverse impact on the company's financial statements. Environmental Most aspects of the businesses in which the company engages are subject to various federal, state, local and foreign environmental laws and regulations. Similar to other companies in the petroleum and chemical industries, the company incurs costs for preventive and corrective actions at facilities and waste disposal sites. Phillips may be obligated to take remedial action as the result of the enactment of laws, such as the federal Superfund law, the issuance of new regulations, or as a result of leaks and spills. In addition, an obligation may arise when a facility is closed or sold. Most of the expenditures to fulfill these obligations relate to facilities and sites where past operations followed practices and procedures that were considered appropriate under regulations, if any, existing at the time, but may require investigatory or remedial work to adequately protect the environment or address new regulatory requirements. At year-end 1993, Phillips reported 63 sites where it had information indicating that it might have been identified as a Potentially Responsible Party (PRP). Since then, 11 of these sites have been resolved through consent decrees, deposits into trust funds or otherwise. Four sites were also added during the year. Of the 56 sites remaining at December 31, 1994, the company believes it has a legal defense or its records indicate 46 no involvement for 11 sites. At 12 other sites, present information indicates that it is probable that the company's exposure is less than $100,000 per site. At 19 sites, Phillips has had no communication or activity with government agencies or other PRPs in more than two years. Of the 14 remaining sites, the company has provided for any probable costs that can be reasonably estimated. Phillips does not consider the number of sites at which it has been designated a PRP as a relevant measure of liability. Some companies may be involved in few sites but have much larger liabilities than companies involved in many more sites. Although the liability of a PRP is generally joint and several, the company is usually one of many companies cited as a PRP at these sites, and has, to date, been successful in sharing cleanup costs with other financially sound companies. Also, many of these sites are still under investigation by the Environmental Protection Agency (EPA) or the state agencies concerned. Prior to actual cleanup, the PRPs normally assess site conditions, apportion responsibility and determine the appropriate remediation. In some instances, Phillips may have no liability or attain a settlement of liability. Actual cleanup costs generally occur after the PRPs obtain EPA or equivalent state agency approval. At December 31, 1994, accruals of $13 million had been made for the company's PRP sites. In addition, the company has accrued $93 million for other planned remediation activities, including sites where no claims have been asserted, and $9 million for other environmental litigation, for total environmental accruals of $115 million. No one site represents more than 10 percent of the total. Expensed environmental costs were $252 million in 1994 and are expected to be approximately the same in 1995 and 1996. Capitalized environmental costs were $84 million in 1994, and are expected to be approximately $90 million per year in both 1995 and 1996. After an investigation and assessment of environmental exposures for cleanup and other costs, the company makes accruals on an undiscounted basis for planned remediation activities for sites where it is probable that future costs will be incurred and these costs can be reasonably estimated. These accruals have not been reduced for possible insurance recoveries. Based on currently available information, the company believes that it is remote that future costs related to known contingent liability exposures will exceed current accruals by an amount that would have a material adverse impact on the company's financial statements. 47 Other Phillips has deferred tax assets for the alternative minimum tax, certain accrued liabilities, and loss carryforwards. Valuation allowances have been established for certain foreign and state net operating loss carryforwards that reduce deferred tax assets to an amount that will more likely than not be realized. Uncertainties that may affect the realization of these assets include the future level of product prices, costs and tax rates. Based on the company's historical taxable income, management expects that the net deferred tax assets will be realized as offsets to reversing deferred tax liabilities and as reductions in future taxable operating income. The alternative minimum tax credit can be carried forward indefinitely to reduce the company's regular tax liability. The utilization of capital-loss carryforwards and changes in other loss carryforwards resulted in a net decrease in the valuation allowance of $39 million during 1994. New Accounting Standards In October 1994, the FASB issued Statement No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments," which specifies disclosure requirements for derivative financial instruments. Phillips has incorporated the required disclosures in the notes to the 1994 financial statements. In the first quarter of 1995, the FASB is expected to issue a new accounting standard, "Accounting for the Impairment of Long-Lived Assets," which will establish the appropriate accounting for the impairment of long-lived assets, identifiable intangibles, and goodwill related to those assets. This Standard is expected to be effective for fiscal years beginning after December 15, 1995. Based on the accounting guidelines expected in the final Standard and a preliminary study of the impact of those guidelines on the company's long-lived assets as of December 31, 1994, the net income effect of adopting the new Standard is expected to be less than $50 million. OUTLOOK In 1994, Phillips' average annual realized worldwide crude oil sales price reached its lowest level since 1988, and for the first time in industry history, more than half of the U.S. oil consumption was supplied from foreign sources. The sales price of natural gas trended downward during 1994, with the company realizing its lowest average annual worldwide sales price since 1989. Phillips expects natural gas prices to continue this trend into 1995, but expects slightly higher prices for crude oil. It is expected that increasing interest rates will decelerate the growth of the economy during 1995. 48 The Judy platform, in the J-Block area of the U.K. North Sea, is expected to be completed in mid-1995. Initial production from the J-Block development, which includes the Joanne field, is anticipated in early 1996. Phillips has increased its equity interest in the Britannia gas/condensate field to approximately 5 percent. Located in the U.K. sector of the North Sea, the field is estimated to contain reserves of 2.6 trillion cubic feet of gas and 146 million barrels of condensate. When production begins, expected by October 1998, Phillips anticipates its share of first production to yield 37 million cubic feet of gas per day. Commissioning of the first production platform in the Xijiang fields, the Xijiang 24-3, located approximately 80 miles southeast of Hong Kong in the China Sea, was completed during 1994, and the first wells began producing in November. In December, Phillips' share of production averaged 4,000 barrels of oil per day. Work is also under way on a second platform, the Xijiang 30-2, which will be set eight miles from the Xijiang 24-3 late in 1995. Production is expected to peak at 12,000 net barrels a day in 1996. The company expects industry demand for olefins to continue to outpace supply throughout most of 1995, and expects margins to remain strong. In response, the company is undertaking debottlenecking projects and the restart of an ethylene unit which has been out of service for several years, the combined results of which should yield Phillips a 600 million-pound annual increase in ethylene production by late 1996. Phillips is also using debottlenecking techniques to yield a 400 million-pound increase in polyethylene production at HCC in Pasadena, Texas. Prompted by increasing demand for polyethylene, the project is scheduled to begin in March 1995 and be completed in 1997, bringing the company's total nameplate capacity to 2.2 billion pounds a year. Current production of high-density and low-density linear polyethylene will not be affected during debottlenecking, as work on the project will occur during normally scheduled maintenance procedures. The company is expecting continued growth in demand for the next few years, but at a somewhat slower rate than realized over the last five years. In late 1994, Phillips and Shanghai Petrochemical Company Limited signed a letter of intent to study the feasibility of entering into a joint venture to build and operate a 220 million-pound- per-year linear polyethylene plant near Shanghai that would use Phillips' proprietary technology. The joint venture would market polyethylene products in both the domestic Chinese market and worldwide. If both companies approve formation of the joint venture after completion of a feasibility study, construction of the new plant would begin and would take approximately two years to complete. 49 Effective January 1, 1995, the Clean Air Act of 1990 required cleaner-burning, oxygenated gasoline in nine urban areas. The company sells reformulated gasoline in three of these markets (Chicago, Houston and Milwaukee) and in Dallas, which voluntarily adopted the requirement. Phillips has contracted to purchase all of the reformulated gasoline the company needs to supply these markets, but produces reformulated gasoline at the company's Sweeny refinery when market conditions make this a more profitable option. Phillips and a partner have announced their intention to form a partnership, Seaway Pipeline Company, to transport crude oil through pipelines from the Houston Gulf Coast area to refineries and other markets in Texas and Oklahoma. The Seaway system will be a fully integrated crude pipeline system with ultimate capacity of approximately 800,000 barrels per day, two docks on the U.S. Gulf Coast, over 7 million barrels of associated tankage and the ability to deliver and segregate a variety of crudes. Phillips plans to contribute its natural gas Seagas Pipeline to the jointly controlled partnership and the partner will contribute a crude oil pipeline it owns that is already in service. A prerequisite for the pipeline contributions is the receipt of regulatory approval by Phillips to abandon gas service in Seagas Pipeline. This approval is expected to be received in late 1995 or early 1996 and the system is expected to be fully operational in 1996. Effective December 28, 1994, regulations under the Oil Pollution Act of 1990 (OPA 90) require all vessel owners carrying certain substances, including crude oil, to have a certificate of financial responsibility (COFR) issued by the U.S. Coast Guard on board. A vessel will not be permitted to enter U.S. waters without a COFR, which serves as evidence of financial responsibility for all pollution damages within limits set by applicable law and regulation. Before this regulation took effect, COFRs were obtained for the tankers used to transport liquefied natural gas to Japan. Phillips currently relies on waterborne foreign crude oil as feedstock for approximately 60 percent of its U.S. refining capacity. This oil is transported by vessels owned by third parties and chartered by the company. Phillips anticipates no problems for its chartering program as a result of compliance by shipowners with OPA 90. Assessment of the company's subsalt prospects in the Gulf of Mexico, offshore Louisiana, continues. A second test well was completed on the Mahogany prospect during 1994 and appraisal drilling continues there. At the Teak prospect, an exploration well completed in 1994 encountered hydrocarbons, and the prospect is under evaluation. Further drilling, analysis and evaluation is needed to determine the potential of the subsalt prospects. Phillips holds a 37.5 percent working interest in the Mahogany prospect, and a 50 percent interest in the Teak. 50 Phillips continues to assess the reserves potential, development costs, and commercial potential of the Sunfish prospect in the Cook Inlet of Alaska, assuming development would occur from the existing Tyonek gas production platform, which is 100 percent owned by the company. At least one additional exploration well is considered necessary to confirm the reserves before a decision can be made on whether or not to proceed with commercial development. During the third quarter of 1994, the company's co- venturer in the Sunfish prospect announced that its analysis of well and seismic data indicated that the prospect was not commercial on a stand-alone basis and that it would not conduct further exploration activities on the prospect. The economics of utilizing an existing platform are different from those involving a new stand-alone facility. Discussions are under way with the co-venturer concerning its future intentions with respect to Sunfish, including possible joint exploration and production activity from the Tyonek platform, or alternatively, the acquisition of its lease position by Phillips. Although the next exploration well is presently included in the company's capital budget, the assessment of the reserves and commercial potential needs to be completed and the discussions with the co-venturer need to be resolved before additional exploration drilling can proceed. Phillips has demobilized the drilling rig, originally located on the Tyonek platform, which was used to drill the Sunfish 2 and 3 wells and conduct workovers related to the existing gas production. The company will procure more suitable drilling equipment for any additional exploration work. At December 31, 1994, Phillips had approximately $48 million invested in the Sunfish 1, North Foreland 1, and Sunfish 3 wells. To meet its liquidity requirements, including funding its capital program, the company will look primarily to cash generated from operations and financing. Over the next few years, the company plans to maintain its long-term debt level around $3.0 billion to $3.5 billion. Phillips recognizes that the financial performances of the businesses in the industries in which the company operates are subject to significant fluctuations, and are affected by the uncertainty of oil and natural gas prices. The company plans to continue to operate as an integrated domestic petroleum company, focusing on improving its core operations and on the pursuit of its worldwide exploration and production program. 51 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PHILLIPS PETROLEUM COMPANY INDEX TO FINANCIAL STATEMENTS Page ---- Report of Independent Auditors..................... 53 Consolidated Statement of Income for the years ended December 31, 1994, 1993 and 1992........... 54 Consolidated Balance Sheet at December 31, 1994 and 1993......................................... 55 Consolidated Statement of Cash Flows for the years ended December 31, 1994, 1993 and 1992........... 56 Consolidated Statement of Changes in Stockholders' Equity for the years ended December 31, 1994, 1993 and 1992.................................... 57 Accounting Policies................................ 58 Notes to Financial Statements...................... 61 Supplementary Information Oil and Gas Operations........................ 86 Selected Quarterly Financial Data............. 104 INDEX TO FINANCIAL STATEMENT SCHEDULES Schedule II--Valuation Accounts and Reserves....... 108 All other schedules are omitted because they are either not required, not significant, not applicable or the information is shown in another schedule, the financial statements or in the notes to financial statements. 52 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Phillips Petroleum Company We have audited the accompanying consolidated balance sheets of Phillips Petroleum Company as of December 31, 1994 and 1993, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1994. Our audits also included the financial statement schedule listed in the Index in Item 8. These financial statements and schedule are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Phillips Petroleum Company at December 31, 1994 and 1993, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 1 to the financial statements, effective January 1, 1992 the company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." /s/ ERNST & YOUNG LLP ----------------- ERNST & YOUNG LLP Tulsa, Oklahoma February 15, 1995 53 - ------------------------------------------------------------------ Consolidated Statement of Income Phillips Petroleum Company Years Ended December 31 Millions of Dollars --------------------------- 1994 1993 1992 --------------------------- Revenues Sales and other operating revenues $12,211 12,309 11,933 Business interruption insurance - 14 38 Equity in earnings of affiliated companies 84 66 65 Other revenues 72 156 104 - ------------------------------------------------------------------ Total Revenues 12,367 12,545 12,140 - ------------------------------------------------------------------ Costs and Expenses Purchased crude oil and products 7,412 7,527 7,084 Production and operating expenses 2,072 2,193 2,176 Exploration expenses 226 256 252 Selling, general and administrative expenses 478 597 609 Depreciation, depletion, amortization and retirements 794 841 820 Taxes other than income taxes 271 283 310 Interest and expense on indebtedness 250 278 376 Preferred dividend requirements of subsidiary 32 32 2 - ------------------------------------------------------------------ Total Costs and Expenses 11,535 12,007 11,629 - ------------------------------------------------------------------ Income before income taxes, subsidiary stock transaction, extraordinary items and cumulative effect of change in accounting principle 832 538 511 Gain on subsidiary stock transaction 20 - - - ------------------------------------------------------------------ Income before income taxes, extra- ordinary items and cumulative effect of change in accounting principle 852 538 511 Provision for income taxes 368 293 241 - ------------------------------------------------------------------ Income before Extraordinary Items and Cumulative Effect of Change in Accounting Principle 484 245 270 Extraordinary items - (2) (46) Cumulative effect of change in accounting principle - - (44) - ------------------------------------------------------------------ Net Income $ 484 243 180 ================================================================== Per Share of Common Stock Income before extraordinary items and cumulative effect of change in accounting principle $ 1.85 .94 1.04 Extraordinary items - (.01) (.18) Cumulative effect of change in accounting principle - - (.17) - ------------------------------------------------------------------ Net Income $ 1.85 .93 .69 ================================================================== Average Common Shares Outstanding (in thousands) 261,529 261,015 259,979 - ------------------------------------------------------------------ See Accounting Policies and Notes to Financial Statements. 54 - ----------------------------------------------------------------- Consolidated Balance Sheet Phillips Petroleum Company At December 31 Millions of Dollars ------------------- 1994 1993 ------------------- Assets Cash and cash equivalents $ 193 119 Accounts and notes receivable (less allowances: 1994--$20; 1993--$14) 1,462 1,398 Inventories 527 538 Deferred income taxes 186 170 Prepaid expenses and other current assets 97 118 - ----------------------------------------------------------------- Total Current Assets 2,465 2,343 Investments and long-term receivables 708 544 Properties, plants and equipment (net) 8,042 7,961 Deferred income taxes 122 98 Deferred charges 99 89 - ----------------------------------------------------------------- Total $11,436 11,035 ================================================================= Liabilities Accounts payable $ 1,371 1,349 Long-term debt due within one year 18 18 Accrued income and other taxes 847 858 Other accruals 205 196 - ----------------------------------------------------------------- Total Current Liabilities 2,441 2,421 Long-term debt 3,106 3,208 Accrued dismantlement, removal and environmental costs 564 528 Deferred income taxes 944 901 Employee benefit obligations 421 374 Other liabilities and deferred credits 656 553 - ----------------------------------------------------------------- Total Liabilities 8,132 7,985 - ----------------------------------------------------------------- Preferred Stock of Subsidiary and Other Minority Interests 351 362 - ----------------------------------------------------------------- Stockholders' Equity Common stock--500,000,000 shares authorized at $1.25 par value Issued (277,180,511 shares) Par value 346 346 Capital in excess of par 996 977 Treasury stock (at cost: 1994--15,542,074 shares; 1993--15,700,279 shares) (859) (885) Foreign currency translation adjustments 16 (14) Unearned employee compensation--Long-Term Stock Savings Plan (LTSSP) (451) (487) Retained earnings 2,905 2,751 - ----------------------------------------------------------------- Total Stockholders' Equity 2,953 2,688 - ----------------------------------------------------------------- Total $11,436 11,035 ================================================================= See Accounting Policies and Notes to Financial Statements. 55 - ----------------------------------------------------------------- Consolidated Statement of Cash Flows Phillips Petroleum Company Years Ended December 31 Millions of Dollars ------------------------- 1994 1993 1992 ------------------------- Cash Flows from Operating Activities Net income $ 484 243 180 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion, amortization and retirements 794 841 820 Dry hole costs and leasehold impairment 95 122 111 Deferred taxes (40) (48) (302) Cumulative effect of accounting change - - 44 Extraordinary items - 2 46 Increase in accounts and notes receivable (82) (20) (31) Decrease (increase) in inventories (10) 80 22 Decrease (increase) in prepaid expenses and other current assets 22 (11) 63 Increase in accounts payable 15 28 82 Decrease in taxes and other accruals (27) (34) (165) Other (48) 105 38 - ----------------------------------------------------------------- Net Cash Provided by Operating Activities 1,203 1,308 908 - ----------------------------------------------------------------- Cash Flows from Investing Activities Capital expenditures and investments, including dry hole costs (1,154) (1,226) (1,172) Proceeds from asset dispositions 266 821 386 Other investments (20) - (5) - ----------------------------------------------------------------- Net Cash Used for Investing Activities (908) (405) (791) - ----------------------------------------------------------------- Cash Flows from Financing Activities Issuance of debt 1,335 2,613 3,603 Repayment of debt (1,447) (3,209) (3,851) Issuance of company stock 12 19 11 Issuance of preferred stock of subsidiary - - 333 Purchase of company stock (1) (4) (4) Dividends paid (293) (292) (291) Other 173 (42) 99 - ----------------------------------------------------------------- Net Cash Used for Financing Activities (221) (915) (100) - ----------------------------------------------------------------- Increase (Decrease) in Cash and Cash Equivalents 74 (12) 17 Cash and cash equivalents at beginning of year 119 131 114 - ----------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 193 119 131 ================================================================= See Accounting Policies and Notes to Financial Statements. 56 - --------------------------------------------------------------------------- Consolidated Statement of Changes Phillips Petroleum Company in Stockholders' Equity Shares of Common Stock --------------------------- Held in Issued Treasury --------------------------- December 31, 1991 277,180,511 17,399,579 Net income Cash dividends paid on common stock Distributed under incentive compensation plans (451,380) Recognition of LTSSP unearned compensation Tax benefit of dividends on unallocated LTSSP shares Current period translation adjustment Translation adjustments recognized upon disposal of foreign investments Issuance costs for preferred stock of subsidiary Other 1,297 - --------------------------------------------------------------------------- December 31, 1992 277,180,511 16,949,496 Net income Cash dividends paid on common stock Distributed under incentive compensation plans (1,249,217) Recognition of LTSSP unearned compensation Tax benefit of dividends on unallocated LTSSP shares Current period translation adjustment Other - --------------------------------------------------------------------------- December 31, 1993 277,180,511 15,700,279 Net income Cash dividends paid on common stock Distributed under incentive compensation plans (158,205) Recognition of LTSSP unearned compensation Tax benefit of dividends on unallocated LTSSP shares Current period translation adjustment Other - --------------------------------------------------------------------------- December 31, 1994 277,180,511 15,542,074 =========================================================================== - --------------------------------------------------------------------------- Consolidated Statement of Changes Phillips Petroleum Company in Stockholders' Equity Millions of Dollars ---------------------------------- Common Stock ---------------------------------- Par Capital in Treasury Value Excess of Par Stock ---------------------------------- December 31, 1991 $346 939 (999) Net income Cash dividends paid on common stock Distributed under incentive compensation plans 9 39 Recognition of LTSSP unearned compensation Tax benefit of dividends on unallocated LTSSP shares Current period translation adjustment Translation adjustments recognized upon disposal of foreign investments Issuance costs for preferred stock of subsidiary Other 2 - --------------------------------------------------------------------------- December 31, 1992 346 950 (960) Net income Cash dividends paid on common stock Distributed under incentive compensation plans 22 75 Recognition of LTSSP unearned compensation Tax benefit of dividends on unallocated LTSSP shares Current period translation adjustment Other 5 - --------------------------------------------------------------------------- December 31, 1993 346 977 (885) Net income Cash dividends paid on common stock Distributed under incentive compensation plans 15 26 Recognition of LTSSP unearned compensation Tax benefit of dividends on unallocated LTSSP shares Current period translation adjustment Other 4 - --------------------------------------------------------------------------- December 31, 1994 $346 996 (859) =========================================================================== - --------------------------------------------------------------------------- Consolidated Statement of Changes Phillips Petroleum Company in Stockholders' Equity Millions of Dollars ------------------------------------------- Foreign Unearned Currency Employee Translation Compensation Retained Adjustments --LTSSP Earnings ------------------------------------------- December 31, 1991 7 (560) 3,024 Net income 180 Cash dividends paid on common stock (291) Distributed under incentive compensation plans (44) Recognition of LTSSP unearned compensation 37 Tax benefit of dividends on unallocated LTSSP shares 9 Current period translation adjustment 19 Translation adjustments recognized upon disposal of foreign investments (7) Issuance costs for preferred stock of subsidiary (12) Other - --------------------------------------------------------------------------- December 31, 1992 19 (523) 2,866 Net income 243 Cash dividends paid on common stock (292) Distributed under incentive compensation plans (74) Recognition of LTSSP unearned compensation 36 Tax benefit of dividends on unallocated LTSSP shares 8 Current period translation adjustment (33) Other - --------------------------------------------------------------------------- December 31, 1993 (14) (487) 2,751 Net income 484 Cash dividends paid on common stock (293) Distributed under incentive compensation plans (45) Recognition of LTSSP unearned compensation 36 Tax benefit of dividends on unallocated LTSSP shares 8 Current period translation adjustment 30 Other - --------------------------------------------------------------------------- December 31, 1994 16 (451) 2,905 =========================================================================== See Accounting Policies and Notes to Financial Statements. 57 - ----------------------------------------------------------------- Accounting Policies Phillips Petroleum Company o Consolidation Principles and Investments--Majority-owned, controlled subsidiaries are consolidated. Investments in affiliates in which the company owns 20 percent to 50 percent of voting control are generally accounted for under the equity method. Undivided interests in oil and gas joint ventures are consolidated on a pro rata basis. Other securities and investments are generally carried at cost. o Reclassification--Certain amounts in the 1993 and 1992 financial statements have been reclassified to conform with the 1994 presentation. o Use of Estimates--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosures of contingent assets and liabilities. Actual results could differ from the estimates and assumptions used. o Cash Equivalents--Cash equivalents are highly liquid short-term investments that are readily convertible to known amounts of cash and generally have original maturities within three months from their date of purchase. o Inventories--Crude oil and petroleum and chemical products are valued at cost, which is lower than market in the aggregate, primarily on the last-in, first-out (LIFO) basis. Materials and supplies are valued at, or below, average cost. o Derivative Contracts--Forward foreign currency contracts, commodity option contracts, and futures contracts are recorded at market value, either through monthly adjustments for unrealized gains and losses (forwards and options) or through daily settlements in cash (futures), and the resulting gains and losses are recognized in the same period that the gains and losses from the underlying exposures that are being hedged are recognized. Commodity swap contracts are not marked to market. Occasionally, the company will use forward contracts to hedge foreign currency exposures on firm commitments to purchase or build long-lived assets, in which case the gain or loss on the forward is deferred and reported as an adjustment to the carrying value of the long-lived asset when the firm commitment is paid. Deferred gains and losses, along with deferred premiums paid for commodity option contracts, are reported on the balance sheet with other current assets or other current liabilities. o Oil and Gas Exploration and Development--Oil and gas exploration and development costs are accounted for using the successful efforts method of accounting. 58 Property Acquisition Costs--Oil and gas leasehold acquisition costs are capitalized. Leasehold impairment is recognized based on exploratory experience. Upon discovery of commercial reserves, leasehold costs are transferred to proved properties. Exploratory Costs--Geological and geophysical costs and the costs of carrying and retaining undeveloped properties are expensed as incurred. Exploratory drilling costs are capitalized when incurred. If exploratory wells are determined to be commercially unsuccessful or dry holes, applicable costs are expensed. Development Costs--Costs incurred to drill and equip development wells, including unsuccessful development wells, are capitalized. Impairment of Proved Properties--For "ceiling test" calculations, all proved properties are evaluated in the aggregate using the estimated undiscounted cash flows of one worldwide cost center, based on end of period prices and costs. Additionally, the estimated undiscounted cash flows of high-cost proved properties, based on expected future prices and costs, are evaluated prior to start-up of commercial production and any significant impairment is recognized currently. Depletion and Amortization--Leasehold costs of producing properties are depleted using the unit-of-production method based on estimated proved oil and gas reserves. Amortization of intangible development costs is based on the unit-of-production method using the estimated proved developed oil and gas reserves. o Depreciation and Amortization--Depreciation and amortization of properties, plants and equipment are determined by the group straight-line method, the individual unit straight-line method or the unit-of-production method, applying the method considered most appropriate for each type of property. o Property Dispositions--When complete units of depreciable property are retired or sold, the asset cost and related accumulated depreciation are eliminated with any gain or loss reflected in income. When less than complete units of depreciable property are disposed of or retired, the difference between asset cost and salvage value is charged or credited to accumulated depreciation. o Dismantlement, Removal and Environmental Costs--The estimated undiscounted costs, net of salvage values, of dismantling and removing major facilities, including necessary site restoration, are accrued using either the unit-of-production or the straight-line method. 59 Environmental expenditures are expensed or capitalized as appropriate, depending upon their future economic benefit. Expenditures that relate to an existing condition caused by past operations, and that do not have future economic benefit, are expensed. Liabilities for these expenditures are recorded on an undiscounted basis when environmental assessments or cleanups are probable and the costs can be reasonably estimated. These liabilities have not been reduced for probable recoveries from third parties. o Foreign Currency Translation--Adjustments resulting from the process of translating foreign functional currency financial statements into U.S. dollars are accumulated as a separate component of stockholders' equity. Foreign currency transaction gains and losses are included in current earnings. Most of the company's foreign operations use the local currency as the functional currency. o Income Taxes--Deferred income taxes are computed using the liability method and are provided on all temporary differences between the financial reporting basis and the tax basis of the company's assets and liabilities, except for temporary differences related to investments in certain foreign subsidiaries and corporate joint ventures that are essentially permanent in duration. Allowable tax credits are applied currently as reductions of the provision for income taxes. o Income Per Share of Common Stock--Income per share of common stock is calculated based upon the daily weighted-average number of common shares outstanding during the year, including shares held by the company's Long-Term Stock Savings Plan (LTSSP). 60 - ----------------------------------------------------------------- Notes to Financial Statements Phillips Petroleum Company Note 1--Extraordinary Items and Accounting Change During 1993 and 1992, the company incurred before-tax extraordinary losses of $3 million and $71 million, respectively, attributed to call premiums paid on the early retirement of debt. The after-tax losses were $2 million and $46 million, $.01 and $.18 per share, respectively, for 1993 and 1992. Effective January 1, 1992, the company adopted FASB Statement No. 109, "Accounting for Income Taxes." The cumulative effect of adopting Statement No. 109 as of January 1, 1992, decreased 1992 net income by $44 million, $.17 per share. Note 2--Inventories Inventories at December 31 were: Millions of Dollars ------------------- 1994 1993 ------------------- Crude oil and petroleum products $228 183 Chemical products 204 252 Materials, supplies and other 95 103 - ----------------------------------------------------------------- $527 538 ================================================================= Inventories valued on a LIFO basis totaled $366 million and $362 million at December 31, 1994 and 1993, respectively, and would have been approximately $427 million and $360 million higher, respectively, had they been valued using the first-in, first-out (FIFO) method. Note 3--Investments and Long-Term Receivables Components of investments and long-term receivables at December 31 were: Millions of Dollars ------------------- 1994 1993 ------------------- Investments in and advances to affiliated companies $573 403 Long-term receivables 90 117 Other investments 45 24 - ----------------------------------------------------------------- $708 544 ================================================================= 61 Equity Investments Phillips owns investments in chemicals, oil and gas transportation, coal mining, and other industries. Summarized financial information for all entities accounted for using the equity method, follows: Millions of Dollars -------------------------- 1994 1993 1992 -------------------------- Revenues $2,603 2,280 2,294 Income before income taxes 579 586 578 Net income 360 353 387 Current assets 689 534 534 Other assets 2,994 2,639 2,371 Current liabilities 622 461 481 Other liabilities 1,439 1,480 1,365 - ----------------------------------------------------------------- At December 31, 1994, retained earnings included $57 million related to the undistributed earnings of these affiliated companies, and distributions received from them were $103 million, $88 million and $79 million in 1994, 1993 and 1992, respectively. Additional information regarding certain of these affiliated companies is discussed below. Phillips Sumika Polypropylene Company (PSPC) On August 1, 1994, Phillips contributed its polypropylene assets to PSPC, a partnership formed in 1992 between, and jointly controlled by, Phillips and Sumika Polymers America Corporation (Sumika). No financial gain or loss was recognized on the contribution. Sharing of net cash flows and gains and losses each period is dependent on the relative contributions of both partners. At December 31, 1994, Phillips' net investment in PSPC was $110 million, and the company's share of net income was 93.4 percent. The company's share of net income and cash flows from the partnership will decrease as Sumika contributes additional funds for construction of a new PSPC polypropylene facility in Pasadena, Texas, but Phillips' share will not fall below 50 percent. Revenues and cash flows generated by these transferred assets through July 31, 1994, were consolidated into the company's financial statements. In 1994, PSPC purchased $32 million in feedstocks from Phillips. Phillips Petroleum Singapore Chemicals (Private) Limited (PPSC) In the first quarter of 1994, PPSC, an affiliate that owns and operates a polyethylene plant in Singapore, completed the sale of 117,857,144 shares of common stock for $85 million in notes receivable, which will be collected as needed for plant construction, scheduled for 1995 through 1997. Phillips is 62 proportionally responsible for 50 percent of any cost overruns and repayment of a $93 million project loan until the completion of construction. After completion of construction, any borrowings under the project loan become non-recourse to Phillips. This sale reduced the company's interest in PPSC from 85.7 percent to 50 percent, and resulted in a $20 million gain. For tax purposes, this is an equity transaction and therefore not taxable. Since the sale, PPSC has been accounted for using the equity method. This deconsolidation did not have a material effect upon the company's financial position. At December 31, 1994, the company's net investment in PPSC was $78 million. Sweeny Olefins Limited Partnership (SOLP) At December 31, 1994, the company's 50 percent interest in SOLP, which owns and operates a 1.5 billion-pound-per-year ethylene plant located adjacent to the company's Sweeny, Texas, refinery, was carried at a net investment of $65 million. During construction of this facility, the company made advances to the partnership under a subordinated loan agreement (SLA) to fund certain costs related to completing the project. In 1993 and 1992, the company was required to make advances of $1 million and $19 million, respectively. No advances were required during 1994. During the fourth quarter of 1992, the company sold participating interests in the SLA to a syndicate of banks for $211 million under a participation agreement. The sale of this receivable is subject to recourse, in that the company has a contingent obligation to pay the amounts due the participating banks if SOLP fails to pay. It is not economically practicable to estimate the fair value of the company's obligations to SOLP or to the participating banks. The balance of the subordinated loan at December 31, 1994, was $195 million. SOLP has agreements with the company under which Phillips will provide specified quantities of feedstocks, which SOLP is committed to take, purchase specified quantities of finished products, and provide plant operating and marketing services. In 1994, 1993 and 1992, respectively, SOLP purchased $186 million, $205 million and $210 million in feedstocks from Phillips and sold $91 million, $114 million and $125 million of finished products to the company. SOLP made payments to Phillips for plant operating and marketing services of $20 million, $20 million and $19 million in 1994, 1993 and 1992, respectively. Receivables from and payables to SOLP were $20 million and $9 million at December 31, 1994, and $17 million and $11 million at December 31, 1993, respectively. 63 GPM Gas Gathering L.L.C. (GGG) During 1993, Phillips' GPM operating subsidiary, GPM Gas Corporation, and a group of institutional investors formed GGG, a limited liability company in which GPM Gas Corporation owns a 50 percent equity interest. GPM Gas Corporation sold a portion of its gas gathering assets in the West Texas region of the Permian Basin to GGG for $138 million. GGG provides gas gathering services to the company under a long-term contract. Because of GPM Gas Corporation's continuing involvement in the business of GGG, a $22 million gain from the sale of the assets has been deferred and will be recognized over the remaining life of the gathering facilities. At December 31, 1994, the net investment in GGG was $6 million. Gathering fees paid to GGG during 1994 were approximately $60 million. Note 4--Properties, Plants and Equipment The company's investment in properties, plants and equipment (PP&E), with accumulated depreciation, depletion and amortization (DD&A), at December 31 was: Millions of Dollars --------------------------------------------- 1994 1993* ---------------------- --------------------- Gross Net Gross Net PP&E DD&A PP&E PP&E DD&A PP&E ---------------------- --------------------- E&P $ 9,819 6,155 3,664 9,417 6,047 3,370 GPM 1,614 942 672 1,463 884 579 RM&T 3,333 1,448 1,885 3,175 1,282 1,893 Chemicals 2,535 1,100 1,435 2,943 1,255 1,688 Corporate and Other 992 606 386 1,040 609 431 - ------------------------------------------------------------------ $18,293 10,251 8,042 18,038 10,077 7,961 ================================================================== *Restated for segment realignment. See Note 17. Note 5--Accrued Dismantlement, Removal and Environmental Costs At December 31, 1994 and 1993, the company had accrued $449 million and $414 million, respectively, of dismantlement and removal costs, primarily related to worldwide offshore production facilities and to production facilities at Prudhoe Bay. Total probable dismantlement and removal costs estimated at December 31, 1994, were $854 million. These costs are accrued primarily on the unit-of-production method. Phillips had accrued environmental costs, primarily related to cleanup of ponds and pits at domestic refineries and underground storage tanks at U.S. service stations, and other various costs, of $62 million and $72 million at December 31, 1994 and 1993, respectively. Phillips had also accrued $31 million and $16 million of environmental costs associated with discontinued or sold operations at December 31, 1994 and 1993, respectively. 64 Also, $13 million was included at December 31, 1994 and 1993, for sites where the company has been named a Potentially Responsible Party. At the same dates, $9 million and $13 million, respectively, had been accrued for other environmental litigation. At December 31, 1994 and 1993, total environmental accruals were $115 million and $114 million, respectively. Note 6--Debt Long-term debt due after one year at December 31 was: Millions of Dollars --------------------- 1994 1993 --------------------- 9 1/2% Notes Due 1997 $ 299 299 9 3/8% Notes Due 20ll 349 349 9.18% Notes Due September 15, 2021 300 300 9% Notes Due 2001 250 250 8.86% Notes Due May 15, 2022 250 250 8.49% Notes Due January 1, 2023 250 250 7.92% Notes Due April 15, 2023 250 250 7.20% Notes Due November 1, 2023 250 250 6.65% Notes Due March 1, 2003 100 100 5 5/8% Marine Terminal Revenue Bonds, Series 1977 Due 2007 20 20 Revolving debt due to banks and others through 1997 at 3 3/8% - 6 1/2% 202 278 Guarantees of LTSSP bank loans payable at 2 31/32% - 6 3/8% 485 510 Medium-term notes due various years 100 100 Other obligations 1 2 - ----------------------------------------------------------------- $3,106 3,208 ================================================================= Maturities of long-term debt in 1995 through 1999 are: $18 million (included in current liabilities), $28 million, $547 million, $32 million and $111 million, respectively. During 1994, the company's LTSSP signed a $131 million term loan agreement that was used to refinance its outstanding notes payable issued in 1988. The notes were redeemed on May 16, 1994. The new term loan requires repayment in annual installments through the year 1998, matching the maturities of the refinanced notes, but at a reduced cost. The outstanding balance was $105 million at December 31, 1994. Also in 1994, the company's LTSSP signed an agreement amending a second term loan under which $397 million is outstanding. The amended 15-year term loan requires repayment in annual installments beginning in 1999 and has the same maturity as the original term loan agreement entered into in 1990, but provides a lower rate of interest. The company continues to guarantee payment of the LTSSP debt. 65 Under the LTSSP $397 million 15-year term bank loan, any participating bank in the syndicate of lenders may cease to participate on November 30, 2001, by giving not less than 180 days' prior notice to the LTSSP and the company. The company does not anticipate a cessation of participation by the lenders, and plans to commence scheduled repayments beginning in 1999. Each bank participating in the LTSSP loan has the optional right, if the current directors or their approved successors cease to be a majority of the Board, and upon not less than 90 days' notice, to cease to participate in the loan. Under the above conditions, such banks' rights and obligations under the loan agreement must be purchased by the company if not transferred to a bank of the company's choice. (See Note 13 for additional discussion of the LTSSP.) As part of its revolving debt, the company has a $250 million commercial paper program supported by a direct-pay irrevocable bank letter of credit with a scheduled expiration date of September 1997. At December 31, 1994 and 1993, respectively, $202 million and $120 million of commercial paper had been issued. The revolving debt, including the commercial paper, has been classified as non-current based on the company's ability and intent to refinance it on a long-term basis. The bank providing the irrevocable letter of credit for the commercial paper program has the optional right, if the company's current directors or their approved successors cease to be a majority of the Board, and upon not less than 90 days' notice, to terminate its obligation under the agreements pertaining to the letters of credit. During the second quarter of 1994, the company secured more favorable commitment fees and interest rates by replacing four of its bank credit facilities, totaling $1.4 billion, with one facility of $800 million. The terms of the new facility are similar to the terms of the credit facilities terminated. In November 1994, the company's wholly owned subsidiary, Phillips Petroleum Company Norway, signed a $500 million revolving credit facility with a group of international banks, replacing a $300 million line of credit that was due to expire in 1995. At December 31, 1994, all of the $1.3 billion provided by these two credit facilities was available to be drawn. Depending on the credit facility, borrowings may bear interest at a margin above rates offered by certain designated banks in the London interbank market or at margins above certificate of deposit or prime rates offered by certain designated banks in the United States. Most margins are adjusted upward at certain intervals throughout the terms of the agreements. In addition, the agreements call for commitment fees on available, but unused, amounts. Included in the agreements for these credit facilities are optional early termination rights for changes in control substantially similar to those applicable to the commercial paper program. 66 Note 7--Business Interruption Insurance The company recognized income from business interruption insurance in 1993 and 1992 related to an April 1991 fire at its Sweeny, Texas, refinery. Note 8--Contingent Liabilities Environmental--The company is subject to federal, state and local environmental laws and regulations. These may result in obligations to remove or mitigate the effects on the environment of the placement, storage, disposal or release of certain chemical, mineral and petroleum substances at various sites. The company is currently participating in environmental assessments and cleanup under these laws at federal Superfund and comparable state sites. In the future, the company may be involved in additional environmental assessments, cleanups and proceedings. HCC Litigation--The company continues to defend claims resulting from the October 23, 1989, explosion and fire at Phillips 66 Company's Houston Chemical Complex (HCC). All suits involving fatalities and most of those involving serious physical injury have been settled. Most of the approximately 25 remaining claimants seek compensatory and punitive damages, primarily for alleged psychological injury. As of March 31, 1994, all insured claims had been paid by the insurers. Other Legal Proceedings--The company is a party to a number of other legal proceedings pending in various courts or agencies for which, in some instances, no provision has been made. Other Contingencies--The company has contingent liabilities resulting from throughput agreements with pipeline and processing companies in which it holds stock interests. Under these agreements, Phillips may be required to provide any such company with additional funds through advances against future charges for the shipping or processing of petroleum liquids, natural gas and refined products. In the case of all known contingencies, the company accrues a charge for a loss when it is probable and the amount is reasonably estimable. These accruals are not discounted for delays in future payment and are not reduced for potential insurance recoveries. Based on currently available information, the company believes that it is remote that future costs related to known contingent liability exposures will exceed current accruals by an amount that would have a material adverse impact on the company's financial statements. As facts concerning contingencies become known to the company, the company reassesses its position both with respect to accrued liabilities and other potential exposures. Estimates that are particularly sensitive to future change include contingent 67 liabilities recorded for environmental remediation, tax and legal matters. Estimated future environmental remediation costs are subject to change due to such factors as the unknown magnitude of cleanup costs, the unknown time and extent of such remedial actions that may be required, and the determination of the company's liability in proportion to other responsible parties. Estimated future tax and legal costs are subject to change as events evolve and as additional information becomes available during the administrative and litigation process. Note 9--Financial Instruments and Derivative Contracts Derivative Instruments and Other Contracts Held for Purposes Other Than Trading The company and certain of its subsidiaries use financial and commodity-based derivative contracts to hedge exposures to currency fluctuations and crude oil, natural gas and related product price changes. For every derivative contract used, there is an offsetting physical or financial position, firm commitment or anticipated transaction. In 1994, the net realized and unrealized gains and losses from derivative contracts used by Phillips were not material to the company's financial statements. Derivatives used included forward exchange agreements, swaps, options, and futures. The company uses forward exchange agreements to hedge exposures to exchange rate fluctuations associated with certain assets and obligations. The hedges used in 1994 and 1993 relate primarily to intercompany financings denominated in pounds sterling and receivables from gas sales denominated in German marks. Futures, options, and swaps are used in the company's commodity hedging program to limit the risk of inventory value erosion, lock in feedstock-to-product margins at acceptable levels, and control risk created by special pricing requests from customers. In the case of certain anticipated transactions, expected product sales are hedged up to six months into the future. The volume of anticipated sales hedged, and the realized and unrealized gains and losses from those hedges, were not material to the company's financial statements in 1994. The notional amounts in the following table represent only the amounts hedged, not the net market exposure, which is significantly less. Any gains or losses from these positions will offset gains or losses on the underlying exposures. Outstanding derivative contracts in U.S. dollars at December 31, 1994, were: 68 Millions of Dollars ---------- Currency hedging--forward exchange contracts $347 - ----------------------------------------------------------------- Commodity hedging Futures 6 Swaps 1 Options 1 - ----------------------------------------------------------------- Total commodity hedges 8 - ----------------------------------------------------------------- $355 ================================================================= Credit Risk The company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash equivalents, trade receivables and over-the-counter derivative contracts. The company's cash equivalents are placed in high- quality time deposits with major international banks and financial institutions, limiting its exposure to concentrations of credit risk. The company's trade receivables result primarily from its petroleum and chemicals operations and reflect a broad customer base, both nationally and internationally. The company also routinely assesses the financial strength of its customers. The credit risk from the company's over-the-counter derivative contracts, such as forwards and swaps, derives from the counterparty to the transaction, typically a major bank or financial institution. Phillips does not anticipate non- performance by any of these counterparties, none of whom does sufficient volume with the company to create a significant concentration of credit risk. Futures contracts have a negligible credit risk because they are traded on the New York Mercantile Exchange (NYMEX) or International Petroleum Exchange of London Limited (IPE). Fair Values of Financial Instruments The following methods and assumptions were used by the company in estimating the fair value of its financial instruments: Cash and cash equivalents: The carrying amount reported in the balance sheet approximates fair value. Long-term debt: The carrying amount of the company's floating- rate debt approximates fair value. The fair value of the fixed- rate debt is estimated based on quoted market prices. Forward exchange contracts and swaps: Fair value is estimated based on quoted market prices of comparable contracts, and approximates the net gains and losses which would have been realized if the contracts had been closed out on December 31, 1994. 69 Commodity futures: Fair value is based on quoted market prices obtained from NYMEX and IPE. Options: Fair value is based on quoted market prices. Certain company financial instruments at December 31 were: Millions of Dollars ------------------------------ Carrying Amount Fair Value --------------- ------------- 1994 1993 1994 1993 --------------- ------------- Long-term debt, including current maturities $3,124 3,226 3,050 3,480 Forward exchange contracts 1 - 1 - Futures* - - - - Swaps* - - - - Options* - - - - - ----------------------------------------------------------------- *Amounts were less than $1 million. Note 10--Preferred Stock of Subsidiary In December 1992, the company's subsidiary, Phillips Gas Company (PGC), completed a $345 million public offering of 13,800,000 shares of a new Series A 9.32% Cumulative Preferred Stock. The shares are redeemable in whole, or in part, at the option of PGC, on or after December 14, 1997, at a redemption price of $25 per share, plus accrued and unpaid dividends. In connection with the offering, the company made a commitment to make equity infusions in the future, if necessary, to keep the consolidated tangible net worth of PGC at or above specified levels. Phillips also committed to make a liquidity facility available in an amount sufficient to enable PGC to meet its payment obligations, including those with respect to dividends on the Series A Preferred Stock. It has not been necessary for Phillips to make equity infusions, nor has PGC utilized the liquidity facility. Note 11--Preferred Share Purchase Rights The company has outstanding one Preferred Share Purchase Right (Right) for each outstanding share of the company's common stock. The Rights enable holders to either acquire additional shares of Phillips common stock or purchase the stock of an acquiring company at a discount, depending on specific circumstances. The Rights, which expire July 31, 1999, will be exercisable only if a person or group acquires 20 percent or more of the company's common stock or announces a tender offer that would result in ownership of 20 percent or more of the common stock. The Rights may be redeemed by the company in whole, but not in part, for one cent per Right. 70 Note 12--Non-Mineral Operating Leases The company leases ocean transport vessels, tank and hopper railcars, corporate aircraft, service stations, computers, office buildings and other facilities and equipment. At December 31, 1994, future minimum payments due under non-cancelable operating leases were: Millions of Dollars ---------- 1995 $ 87 1996 83 1997 64 1998 38 1999 20 Remaining years 197 - ----------------------------------------------------------------- $489 ================================================================= In September 1994, the company completed the sale and leaseback of a substantial portion of its tank and hopper railcar fleet, its corporate aircraft and certain of its airport refueling tank trucks, resulting in cash inflow of $111 million. The lease agreements grouped the equipment into the broad types of assets described above, with four different tranches of lease terms. The lease terms extend up to 19 years, and future minimum rental payments on these leases are included in the table above. At the expiration of the lease terms, the company has the option to renew the leases or purchase the equipment, but has no contingent liabilities for guaranteed residual values. In 1993, the company and a co-venturer agreed to sell and lease back two tankers that were under construction for use in the transport of liquefied natural gas from Kenai, Alaska, to Japan. Construction on both tankers was completed in 1993, and the tankers were placed in service. The company received $278 million for its 70 percent share of the tankers. The leases have five-year terms. Future minimum rental payments on these leases are included in the table above. The rental payments may vary, depending on movements in certain interest rate indicators. The leases do not contain a renewal option, but do contain a fixed price purchase option. Also, the company and its co- venturer have provided a limited guarantee of the residual values of the tankers at the end of the leases' terms. The company's 70 percent share of the guaranteed residual values totals $213 million. 71 Operating lease rental expense for years ended December 31 was: Millions of Dollars ------------------------ 1994 1993* 1992* ------------------------ Total rentals $102 97 119 Less sublease rentals 6 6 5 - ----------------------------------------------------------------- $ 96 91 114 ================================================================= *Restated. Note 13--Employee Benefit Plans Defined Benefit Plans The company has defined benefit retirement plans covering substantially all employees. The plans are generally non- contributory, with benefit formulas based on employee earnings and credited service. The company's funding policy for U.S. plans is to contribute at least the minimum required by the Employee Retirement Income Security Act of 1974. Contributions to foreign plans are dependent upon local laws and tax regulations. The company also sponsors non-qualified supplementary retirement plans for senior management and non- employee directors. Net pension cost was: Millions of Dollars --------------------------------------- U.S. Plans Foreign Plans ------------------ ------------------ 1994 1993 1992 1994 1993* 1992* ------------------ ------------------ Service cost $ 30 32 29 14 12 12 Interest cost 43 42 38 15 16 17 Return on assets Actual 2 4 1 (2) (41) (14) Deferred gains (losses) (30) (36) (36) (14) 24 (4) Amortization of Net asset (7) (7) (7) - - - Net losses 12 8 3 1 - 1 Prior service cost 2 2 1 - 1 1 - ----------------------------------------------------------------- Net pension cost $ 52 45 29 14 12 13 ================================================================= *Restated to reflect the company's gross pension cost before recovery from co-venturers. In determining net pension cost, Phillips has elected to amortize net gains and losses on a straight-line basis over 10 years. The company's domestic plans generally have an accumulated benefit obligation in excess of plan assets. For the foreign plans, however, the value of plan assets is generally larger than the accumulated benefit obligation. Assets include a participating annuity contract, commingled funds, real estate, 72 stocks, bonds and insurance contracts. A foreign plan also holds employee home mortgage loans. A table showing the funded status of the plans and a reconciliation with accrued pension cost and deferred gain on reversion at December 31 follows: Millions of Dollars ------------------------------ U.S. Plans Foreign Plans -------------- ------------- 1994 1993 1994 1993* -------------- ------------- Plan assets at fair value $ 261 243 246 212 - ----------------------------------------------------------------- Actuarial present value of benefit obligations Vested benefits 306 311 161 162 Non-vested benefits 18 22 - 1 - ----------------------------------------------------------------- Accumulated benefit obligation 324 333 161 163 Effect of projected future salary increases 179 211 69 55 - ----------------------------------------------------------------- Projected benefit obligation 503 544 230 218 - ----------------------------------------------------------------- Excess asset (obligation) (242) (301) 16 (6) Unrecognized net asset (41) (48) (1) (2) Unrecognized net (gains) losses 51 127 (9) 13 Unrecognized prior service cost 38 26 9 9 - ----------------------------------------------------------------- Prepaid (accrued) pension cost and deferred gain on reversion $(194) (196) 15 14 ================================================================= *Restated to reflect the company's gross interest in the plans' funded status before recovery from co-venturers. Assumptions--Weighted Average at December 31 Rate of compensation increase 4.25% 4.25 4.20 3.70 Discount rate 8.75 7.25 7.70 6.70 Long-term rate of return on assets 11.25 12.00 8.50 7.40 - ----------------------------------------------------------------- Other Postretirement Plans Company plans provide certain health care and life insurance benefits for substantially all retired U.S. employees. The health care plan is contributory, while the life insurance plan is non-contributory. Retirees covered by the health care plan essentially pay their own way, except those persons who retired prior to March 1986 and early retirees not yet eligible for Medicare. The company's policy is to fund the health care plan in amounts sufficient to cover current claims. The life insurance plan is funded based on actuarial determinations. 73 Net postretirement benefit cost was: Millions of Dollars ---------------------------------- Health Life ---------------- ---------------- 1994 1993 1992 1994 1993 1992 ---------------- ---------------- Service cost $ 2 2 2 1 1 1 Interest cost 8 9 9 4 4 4 Return on assets Actual - - - (2) (2) (2) Deferred losses - - - (1) (1) (1) Amortization of net losses - 2 3 - 1 1 - ----------------------------------------------------------------- Net postretirement benefit cost $10 13 14 2 3 3 ================================================================= In determining net postretirement benefit cost, the company has elected to amortize net gains and losses on a straight-line basis over 10 years. The following table shows the funded status of the plans and a reconciliation with accrued postretirement benefit cost at December 31. Millions of Dollars ----------------------------- Health Life ------------- ------------- 1994 1993 1994 1993 ------------- ------------- Accumulated postretirement benefit obligation (APBO) Retirees $ 53 56 35 38 Fully eligible active participants 11 12 3 5 Other active participants 10 34 2 9 - ----------------------------------------------------------------- 74 102 40 52 Plan assets at fair value, held under a reserve deposit contract - - 35 36 - ----------------------------------------------------------------- APBO in excess of plan assets (74) (102) (5) (16) Unrecognized net (gains) losses (2) 8 (2) 6 Unrecognized prior service cost (21) - (4) - - ----------------------------------------------------------------- Accrued postretirement benefit cost $(97) (94) (11) (10) ================================================================= Financial Assumptions Discount rate 8.75% 7.25 8.75 7.25 Long-term rate of return on assets (non-taxable) - - 7.00 7.00 Rate of compensation increase - - 4.25 4.25 - ----------------------------------------------------------------- At the end of 1994, certain changes were made to the company's postretirement benefit plans. To be eligible for retiree coverage in the medical and life insurance plans, employees must now have 10 years of service after age 45, except for those employees who had already attained age 45 by the end of 1994. Formerly, all retirees, regardless of service, were eligible for coverage. 74 Also, beginning in 2005, company contributions to retiree medical coverage will be capped at the amount contributed in the 2004 plan year. These plan changes resulted in a curtailment gain of $1 million, which was recognized in 1994, and unrecognized negative prior service cost of $25 million which will be recognized over future periods. At December 31, 1994, the health care cost trend rate is assumed to decrease gradually from 8 percent in 1995 to 5 percent in 2003 and 2004. No increases in medical costs are assumed for years beginning in 2005 due to the plan amendments described above. The same health care cost trend rate was used at December 31, 1993, except that costs were assumed to increase by 5 percent each year after 2004. Increasing the assumed health care cost trend rate by one percentage point in each year would increase the APBO at December 31, 1994 and 1993, by $4 million and $11 million, respectively, and the aggregate of the service and interest cost components by $1 million for both 1994 and 1993. Termination Benefits and Plan Curtailments The company recorded charges of $59 million, $40 million and $93 million for severance benefits in connection with work force reductions in 1994, 1993 and 1992, respectively, which included charges of $1 million, $3 million and $6 million, representing the curtailment effect and special termination benefits for postretirement medical and life benefits in 1994, 1993 and 1992, respectively, as well as special pension termination benefit costs of $7 million and $6 million in 1994 and 1993, respectively. In 1992, special termination benefit costs of $18 million were offset by a curtailment gain of $19 million. Defined Contribution Plans Most employees may elect to participate in the company-sponsored Thrift Plan by contributing a portion of their earnings to any of several investment funds. A percentage of the employee contribution is matched by the company. Company contributions charged to expense were $6 million each in 1994, 1993 and 1992. The company LTSSP is a leveraged employee stock ownership plan. Most employees may elect to participate in the LTSSP by contributing 1 percent of their earnings and receiving an allocation of shares of common stock proportionate to their contributions. In 1990 and 1988, the LTSSP borrowed funds that were used to purchase previously unissued shares of company common stock. Since the company guarantees the LTSSP's borrowings, the unpaid balance is reported as a liability of the company and unearned compensation is shown as a reduction of stockholders' equity. Dividends on all shares are charged against retained earnings. The debt is serviced by the LTSSP from company contributions and dividends received on certain shares of common 75 stock held by the plan. The number of shares released for allocation to participant accounts is based on the terms of the plan and is determined by debt service payments on LTSSP borrowings. The company recognizes interest expense as incurred and compensation expense based on the cost of shares released, using the shares-allocated method. The company recognized total LTSSP expense of $23 million, $18 million and $26 million in 1994, 1993 and 1992, respectively. This included compensation expense of $22 million, $17 million and $25 million in 1994, 1993 and 1992, respectively. Company contributions to the LTSSP in 1994, 1993 and 1992 were $12 million, $7 million and $15 million, respectively. Dividends used to service debt were $37 million, $39 million and $36 million in 1994, 1993 and 1992, respectively. These dividends reduce the amount of expense recognized each period. Interest incurred on the LTSSP debt in 1994, 1993 and 1992 was $24 million, $20 million and $25 million, respectively. The LTSSP shares as of December 31, 1994, were: Unallocated shares 18,273,724 Allocated shares 14,681,101 - ----------------------------------------------------------------- Total LTSSP shares 32,954,825 ================================================================= Incentive Compensation Plans The company has an Annual Incentive Compensation Plan to provide awards to key employees, and a Performance Incentive Program, which began in 1993, that provides most non-executive employees with additional compensation if key safety, operating and financial objectives are met. In anticipation of awards under both of these plans and the Omnibus Securities Plan, provisions of $45 million, $36 million and $7 million were charged against earnings in 1994, 1993 and 1992, respectively. Under the Omnibus Securities Plan (the Plan) approved by shareholders, stock options and stock awards for key employees are authorized for up to eight-tenths of 1 percent (.8 percent) of the total issued and outstanding shares as of December 31 of the year preceding the awards. Any shares not issued in the current year are available for future grant. The Plan could result in an 8.3 percent dilution of stockholders' interest if all available shares are awarded over the 10-year life of the Plan. The Plan also provides for non-stock-based awards. Stock options granted under provisions of the Plan and earlier plans permit purchase of the company's common stock at exercise prices equivalent to the average market price of the stock on the date the options were granted. The options have terms of 10 years and normally become exercisable in increments up to 25 percent on each anniversary date following the date of grant. Stock Appreciation Rights (SARs) may from time to time be affixed to the 76 options. Options exercised in the form of SARs permit the holder to receive stock, or a combination of cash and stock, subject to a declining cap on the exercise price. A comparative summary of stock options and SARs granted under the Plan and previous plans follows: 1994 1993 1992 -------------------------------- Shares under option at January 1 5,614,501 5,170,280 5,924,584 Options granted at $22.57 to $35.00 per share 1,528,200 1,671,502 195,131 Options exercised at $12.63 to $27.50 per share (672,509) (1,192,015) (803,899) Options forfeited (145,156) (35,266) (145,536) - ----------------------------------------------------------------- Shares under option at December 31 (at exercise prices from $12.63 to $35.00 per share) 6,325,036 5,614,501 5,170,280 ================================================================= Options exercisable at December 31 (at exercise prices from $12.63 to $35.00 per share) 3,330,508 2,939,548 3,134,622 - ----------------------------------------------------------------- Shares available for grant at January 1* 2,311,292 2,081,851 6,526,208 - ----------------------------------------------------------------- Shares available for grant at December 31 626,210 219,451 6,442,787 - ----------------------------------------------------------------- SARs under option at January 1 196,616 332,588 645,027 SARs forfeited (100,066) (135,972) (312,439) - ----------------------------------------------------------------- SARs under option at December 31 (at exercise prices from $12.63 to $17.13 per share) 96,550 196,616 332,588 ================================================================= SARs exercisable at December 31 (at exercise prices from $12.63 to $17.13 per share) 96,550 196,616 332,588 - ----------------------------------------------------------------- *The number of shares available for grant in 1994 and 1993 under the terms of the Omnibus Securities Plan were determined on an annual basis. Shares available for grant in 1992 were based on the total number of shares authorized for the life of the 1990 Stock Plan. 77 Note 14--Taxes Taxes charged to income before extraordinary items and cumulative effect of change in accounting principle were: Millions of Dollars ----------------------- 1994 1993 1992 ----------------------- Taxes Other Than Income Taxes Property $ 91 89 98 Production 56 65 66 Payroll 56 58 61 Environmental 57 56 65 Other 11 15 20 - ----------------------------------------------------------------- 271 283 310 - ----------------------------------------------------------------- Income Taxes Federal Current 74 60 32 Deferred (41) (105) (210) Foreign Current 340 312 398 Deferred (14) 26 10 State and local Current 6 1 46 Deferred 3 (1) (35) - ----------------------------------------------------------------- 368 293 241 - ----------------------------------------------------------------- Total taxes charged to income before extraordinary items and cumulative effect of change in accounting principle $639 576 551 ================================================================= Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Major components of deferred tax liabilities and assets at December 31 were: 78 Millions of Dollars ------------------- 1994 1993 ------------------- Deferred Tax Liabilities Depreciation, depletion and amortization $1,685 1,549 Other 39 24 - ----------------------------------------------------------------- Total deferred tax liabilities 1,724 1,573 - ----------------------------------------------------------------- Deferred Tax Assets Contingency accruals 144 166 Benefit plan accruals 208 175 Accrued dismantlement, removal and environmental costs 180 138 Other financial accruals and deferrals 108 96 Alternative minimum tax and other credit carryforwards 288 253 Loss carryforwards 247 222 Depreciation, depletion and amortization 16 33 Other 29 31 - ----------------------------------------------------------------- Total deferred tax assets 1,220 1,114 Less valuation allowance 142 181 - ----------------------------------------------------------------- Net deferred tax assets 1,078 933 - ----------------------------------------------------------------- Net deferred tax liabilities $ 646 640 ================================================================= Valuation allowances have been established for certain foreign and state net operating loss carryforwards that reduce deferred tax assets to an amount that will more likely than not be realized. Uncertainties that may affect the realization of these assets include the future level of product prices, costs and tax rates. Based on the company's historical taxable income, management expects that the net deferred tax assets will be realized as offsets to reversing deferred tax liabilities and as reductions in future taxable operating income. The alternative minimum tax credit can be carried forward indefinitely to reduce the company's regular tax liability. The utilization of capital- loss carryforwards and changes in other loss carryforwards resulted in a net decrease in the valuation allowance of $39 million during 1994. Deferred taxes have not been provided on temporary differences related to investments in certain foreign subsidiaries and corporate joint ventures that are essentially permanent in duration. At December 31, 1994 and 1993, these temporary differences were $275 million and $240 million, respectively. Determination of the amount of unrecognized deferred taxes on these temporary differences is not practicable due to foreign tax credits and exclusions. 79 The amounts of U.S. and foreign income before income taxes, extraordinary items and cumulative effect of change in accounting principle, with a reconciliation of tax at the federal statutory rate with the provision for income taxes, were: Percent of Millions of Dollars Pretax Income ------------------- -------------------- 1994 1993 1992 1994 1993 1992 ------------------- -------------------- Income (loss) before income taxes, extraordinary items and cumulative effect of change in accounting principle United States $ 346 (4) (69) 40.6% (.7) (13.5) Foreign 506 542 580 59.4 100.7 113.5 - --------------------------------------------------------------------- $ 852 538 511 100.0% 100.0 100.0 ===================================================================== Federal statutory income tax $ 298 188 174 35.0% 35.0 34.0 Foreign taxes in excess of federal statutory rate 169 171 193 19.8 31.8 37.9 Revisions of prior year tax accruals - - (78) - - (15.3) Credit for producing fuel from a non-conventional source (44) (37) (42) (5.2) (6.9) (8.2) Capital-loss carryforward (50) (27) - (5.8) (5.0) - Other (5) (2) (6) (.6) (.4) (1.2) - --------------------------------------------------------------------- $ 368 293 241 43.2% 54.5 47.2 ===================================================================== Excise taxes accrued on the sale of petroleum products were $1,121 million, $844 million and $752 million for the years ended December 31, 1994, 1993 and 1992, respectively. These taxes are excluded from reported revenues and expenses. 80 Note 15--Cash Flow Information Millions of Dollars ------------------------ 1994 1993 1992 ------------------------ Non-Cash Investing and Financing Activities Treasury stock awards issued (canceled) under incentive compensation plans $(15) 7 (4) Accrued expenditures for two liquefied natural gas tankers based on percentage of completion - - 102 Capitalized process license fee payable in installments from 1993 to 1999 - 16 - Contribution of non-cash net assets to equity-method affiliates 109 27 - - ----------------------------------------------------------------- Cash Payments Interest Debt $235 224 380 Taxes and other 48 45 119 - ----------------------------------------------------------------- $283 269 499 ================================================================= Income taxes $451 487 426 - ----------------------------------------------------------------- Note 16--Other Financial Information Millions of Dollars Except Per Share Amounts ------------------------ 1994 1993 1992 ------------------------ Interest Incurred Debt $ 237 234 311 Other 28 55 81 - ----------------------------------------------------------------- 265 289 392 Capitalized (15) (11) (16) - ----------------------------------------------------------------- Expensed $ 250 278 376 ================================================================= Maintenance and Repairs--expensed $ 441 481 537 - ----------------------------------------------------------------- Research and Development Expenditures--expensed $ 78 93 96 - ----------------------------------------------------------------- Foreign Currency Transaction Gains (Losses)--after-tax $ 3 (2) 27 - ----------------------------------------------------------------- Cash Dividends paid per common share $1.12 1.12 1.12 - ----------------------------------------------------------------- 81 Note 17--Segment and Geographic Information The company is primarily involved in four business segments: 1) Exploration and Production (E&P)--explores for and produces crude oil, natural gas and natural gas liquids on a worldwide basis; 2) Gas Gathering, Processing and Marketing (GPM)--gathers and processes both natural gas produced by others and natural gas produced from the company's own reserves; 3) Refining, Marketing and Transportation (RM&T)--refines, markets and transports crude oil and petroleum products; 4) Chemicals--fractionates natural gas liquids, manufactures and markets a broad range of petroleum- based chemical products. Corporate and Other includes general corporate overhead, net interest expense and various other operations. Sales and other operating revenues to outside customers and sales within Phillips by business segment and by geographic area are at market value. Operating profit excludes general corporate revenue and expense, interest, minority interest, equity in earnings of affiliates, and income taxes. Income taxes are allocated based upon each segment's taxable income reduced by applicable tax credits. Corporate assets include all cash and cash equivalents. 82 Analysis of Results by Business Segment Millions of Dollars -------------------------------- E&P GPM RM&T -------------------------------- 1994 Sales and Other Operating Revenues Outside customers $1,787 595 7,029 Sales within Phillips 948 596 366 - ----------------------------------------------------------------------------- Segment sales $2,735 1,191 7,395 ============================================================================= Operating Profit $ 708 45 187 Equity in earnings of affiliates 36 3 15 Minority interest (2) (32) - Corporate/non-operating items Interest expense - - - Other - - - Income taxes (400) (17) (66) - ----------------------------------------------------------------------------- Net income (loss) $ 342 (1) 136 ============================================================================= Assets Identifiable assets $4,378 829 2,704 Investments in and advances to affiliated companies 252 6 24 - ----------------------------------------------------------------------------- Total assets $4,630 835 2,728 ============================================================================= Depreciation, Depletion, Amortization and Retirements $ 446 70 128 - ----------------------------------------------------------------------------- Capital Expenditures and Investments $ 707 172 100 - ----------------------------------------------------------------------------- 1993** Sales and Other Operating Revenues Outside customers $1,741 607 7,032 Sales within Phillips 1,104 639 392 - ----------------------------------------------------------------------------- Segment sales $2,845 1,246 7,424 ============================================================================= Operating Profit $ 785 114 77 Equity in earnings of affiliates 38 - 15 Minority interest (5) (32) - Corporate/non-operating items Interest expense - - - Other - - - Income taxes (429) (40) (27) Extraordinary item - - - - ----------------------------------------------------------------------------- Net income (loss) $ 389 42 65 ============================================================================= Assets Identifiable assets $4,121 750 2,603 Investments in and advances to affiliated companies 277 5 26 - ----------------------------------------------------------------------------- Total assets $4,398 755 2,629 ============================================================================= Depreciation, Depletion, Amortization and Retirements $ 450 73 121 - ----------------------------------------------------------------------------- Capital Expenditures and Investments $ 821 120 82 - ----------------------------------------------------------------------------- Analysis of Results by Business Segment Millions of Dollars ------------------------------------ Corporate Chemicals and Other Consolidated* ------------------------------------ 1994 Sales and Other Operating Revenues Outside customers $ 2,793 7 12,211 Sales within Phillips 507 45 - - ----------------------------------------------------------------------------- Segment sales $ 3,300 52 12,211 ============================================================================= Operating Profit $ 323 (7) 1,256 Equity in earnings of affiliates 30 - 84 Minority interest - - (34) Corporate/non-operating items Interest expense - (250) (250) Other - (204) (204) Income taxes (94) 209 (368) - ----------------------------------------------------------------------------- Net income (loss) $ 259 (252) 484 ============================================================================= Assets Identifiable assets $ 2,071 881 10,863 Investments in and advances to affiliated companies 291 - 573 - ----------------------------------------------------------------------------- Total assets $ 2,362 881 11,436 ============================================================================= Depreciation, Depletion, Amortization and Retirements $ 106 44 794 - ----------------------------------------------------------------------------- Capital Expenditures and Investments $ 144 31 1,154 - ----------------------------------------------------------------------------- 1993** Sales and Other Operating Revenues Outside customers $ 2,920 9 12,309 Sales within Phillips 421 39 - - ----------------------------------------------------------------------------- Segment sales $ 3,341 48 12,309 ============================================================================= Operating Profit $ 113 (18) 1,071 Equity in earnings of affiliates 13 - 66 Minority interest 2 - (35) Corporate/non-operating items Interest expense - (278) (278) Other - (286) (286) Income taxes (37) 240 (293) Extraordinary item - (2) (2) - ----------------------------------------------------------------------------- Net income (loss) $ 91 (344) 243 ============================================================================= Assets Identifiable assets $ 2,314 844 10,632 Investments in and advances to affiliated companies 94 1 403 - ----------------------------------------------------------------------------- Total assets $ 2,408 845 11,035 ============================================================================= Depreciation, Depletion, Amortization and Retirements $ 156 41 841 - ----------------------------------------------------------------------------- Capital Expenditures and Investments $ 174 29 1,226 - ----------------------------------------------------------------------------- See next page for accompanying footnotes. 83 Millions of Dollars -------------------------------- E&P GPM RM&T -------------------------------- 1992** Sales and Other Operating Revenues Outside customers $1,685 493 6,887 Sales within Phillips 1,220 669 366 - ----------------------------------------------------------------------------- Segment sales $2,905 1,162 7,253 ============================================================================= Operating Profit $ 825 125 122 Equity in earnings of affiliates 47 - 16 Minority interest (10) (2) - Corporate/non-operating items Interest expense - - - Other - - - Income taxes (485) (45) (44) Extraordinary item - - - Cumulative effect of change in accounting principle - - - - ----------------------------------------------------------------------------- Net income (loss) $ 377 78 94 ============================================================================= Assets Identifiable assets $4,128 727 2,844 Investments in and advances to affiliated companies 300 - 30 - ----------------------------------------------------------------------------- Total assets $4,428 727 2,874 ============================================================================= Depreciation, Depletion, Amortization and Retirements $ 479 78 114 - ----------------------------------------------------------------------------- Capital Expenditures and Investments $ 585 73 216 - ----------------------------------------------------------------------------- Millions of Dollars ------------------------------------ Corporate Chemicals and Other Consolidated* ------------------------------------ 1992** Sales and Other Operating Revenues Outside customers $ 2,859 9 11,933 Sales within Phillips 476 64 - - ----------------------------------------------------------------------------- Segment sales $ 3,335 73 11,933 ============================================================================= Operating Profit $ 49 - 1,121 Equity in earnings of affiliates 2 - 65 Minority interest 1 2 (9) Corporate/non-operating items Interest expense - (376) (376) Other - (290) (290) Income taxes (3) 336 (241) Extraordinary item - (46) (46) Cumulative effect of change in accounting principle - (44) (44) - ----------------------------------------------------------------------------- Net income (loss) $ 49 (418) 180 ============================================================================= Assets Identifiable assets $ 2,455 925 11,079 Investments in and advances to affiliated companies 56 3 389 - ----------------------------------------------------------------------------- Total assets $ 2,511 928 11,468 ============================================================================= Depreciation, Depletion, Amortization and Retirements $ 110 39 820 - ----------------------------------------------------------------------------- Capital Expenditures and Investments $ 269 29 1,172 - ----------------------------------------------------------------------------- *After elimination of intersegment transactions. **Restated to reflect the transfer of the company's natural gas liquids fractionation business to the Chemicals segment from the RM&T segment. Also, the company's coal operations are now included in E&P, instead of Corporate and Other, and the company's Puerto Rico facilities are now aligned 100 percent with the Chemicals segment, instead of being allocated between Chemicals and RM&T. 84 Analysis of Results of Geographic Area Millions of Dollars ----------------------------------- United United States Norway Kingdom Africa ----------------------------------- 1994 Sales and Other Operating Revenues Outside customers $10,233 426 979 165 Sales within Phillips 141 483 2 47 - ----------------------------------------------------------------------------- Segment sales $10,374 909 981 212 ============================================================================= Operating Profit $ 784 352 16 64 - ----------------------------------------------------------------------------- Equity in Earnings of Affiliates $ 64 14 3 - - ----------------------------------------------------------------------------- Assets Identifiable assets $ 7,550 1,244 720 206 Investments in and advances to affiliated companies 362 102 24 - - ----------------------------------------------------------------------------- Total assets $ 7,912 1,346 744 206 ============================================================================= 1993 Sales and Other Operating Revenues Outside customers $10,334 466 923 117 Sales within Phillips 120 456 2 143 - ----------------------------------------------------------------------------- Segment sales $10,454 922 925 260 ============================================================================= Operating Profit $ 549 380 19 70 - ----------------------------------------------------------------------------- Equity in Earnings of Affiliates $ 48 15 3 - - ----------------------------------------------------------------------------- Assets Identifiable assets $ 7,752 1,162 521 200 Investments in and advances to affiliated companies 269 105 24 - - ----------------------------------------------------------------------------- Total assets $ 8,021 1,267 545 200 ============================================================================= 1992 Sales and Other Operating Revenues Outside customers $ 9,885 721 779 58 Sales within Phillips 147 343 2 192 - ----------------------------------------------------------------------------- Segment sales $10,032 1,064 781 250 ============================================================================= Operating Profit $ 558 449 30 89 - ----------------------------------------------------------------------------- Equity in Earnings of Affiliates $ 49 17 4 - - ----------------------------------------------------------------------------- Assets Identifiable assets $ 8,141 1,195 358 199 Investments in and advances to affiliated companies 258 106 22 - - ----------------------------------------------------------------------------- Total assets $ 8,399 1,301 380 199 ============================================================================= Analysis of Results by Geographic Area Millions of Dollars -------------------------------- Other Worldwide Areas Corporate Consolidated* --------------------------------- 1994 Sales and Other Operating Revenues Outside customers $ 408 - 12,211 Sales within Phillips 35 - - - ----------------------------------------------------------------------------- Segment sales $ 443 - 12,211 ============================================================================= Operating Profit $ 40 - 1,256 - ----------------------------------------------------------------------------- Equity in Earnings of Affiliates $ 3 - 84 - ----------------------------------------------------------------------------- Assets Identifiable assets $ 445 698 10,863 Investments in and advances to affiliated companies 85 - 573 - ----------------------------------------------------------------------------- Total assets $ 530 698 11,436 ============================================================================= 1993 Sales and Other Operating Revenues Outside customers $ 469 - 12,309 Sales within Phillips 35 - - - ----------------------------------------------------------------------------- Segment sales $ 504 - 12,309 ============================================================================= Operating Profit $ 53 - 1,071 - ----------------------------------------------------------------------------- Equity in Earnings of Affiliates $ - - 66 - ----------------------------------------------------------------------------- Assets Identifiable assets $ 455 542 10,632 Investments in and advances to affiliated companies 5 - 403 - ----------------------------------------------------------------------------- Total assets $ 460 542 11,035 ============================================================================= 1992 Sales and Other Operating Revenues Outside customers $ 490 - 11,933 Sales within Phillips 29 - - - ----------------------------------------------------------------------------- Segment sales $ 519 - 11,933 ============================================================================= Operating Profit $ (5) - 1,121 - ----------------------------------------------------------------------------- Equity in Earnings of Affiliates $ (5) - 65 - ----------------------------------------------------------------------------- Assets Identifiable assets $ 498 688 11,079 Investments in and advances to affiliated companies 2 1 389 - ----------------------------------------------------------------------------- Total assets $ 500 689 11,468 ============================================================================= *After elimination of intergeographic transactions. Export sales totaled $382 million, $346 million and $333 million for 1994, 1993 and 1992, respectively. 85 - ----------------------------------------------------------------- Oil and Gas Operations In accordance with Financial Accounting Standards Board (FASB) Statement No. 69, "Disclosures about Oil and Gas Producing Activities," and regulations of the Securities and Exchange Commission (SEC), the company is making certain disclosures about its oil and gas exploration and production operations. While this information was developed with reasonable care and disclosed in good faith, it is emphasized that some of the data are necessarily imprecise and represent only approximate amounts because of the subjective judgments involved in developing such information. Accordingly, this information may not necessarily represent the present financial condition of the company or its expected future results. Contents--Oil and Gas Operations - ----------------------------------------------------------------- Proved Reserves Worldwide 87 Results of Operations 93 Statistics 95 Costs Incurred 99 Capitalized Costs 100 Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserve Quantities 101 86 Proved Reserves Worldwide Crude Oil Years Ended --------------------------------------------- December 31 Millions of Barrels --------------------------------------------- United United Other Total States Norway Kingdom Africa Areas --------------------------------------------- Developed and Undeveloped End of 1991 829 326 340 11 98 54 Revisions of previous estimates 32 3 31 - (3) 1 Improved recovery 10 4 5 - 1 - Purchases of reserves in place 2 2 - - - - Extensions and discoveries 64 19 - 31 13 1 Production (76) (34) (26) (3) (9) (4) Sales of reserves in place (5) (5) - - - - - ------------------------------------------------------------------ End of 1992 856 315 350 39 100 52 Revisions of previous estimates (19) (16) (7) (1) (1) 6 Improved recovery 58 7 44 - 5 2 Purchases of reserves in place 7 6 - 1 - - Extensions and discoveries 25 19 - - 4 2 Production (73) (34) (26) (2) (9) (2) Sales of reserves in place (12) (4) - - (2) (6) - ------------------------------------------------------------------ End of 1993 842 293 361 37 97 54 Revisions of previous estimates 68 (1) 74 (5) - - Improved recovery 17 5 12 - - - Purchases of reserves in place 6 2 - 4 - - Extensions and discoveries 23 11 - 8 3 1 Production (76) (33) (31) (2) (8) (2) Sales of reserves in place (3) (3) - - - - - ------------------------------------------------------------------ End of 1994 877 274 416 42 92 53 ================================================================== Developed End of 1991 715 268 310 9 93 35 End of 1992 714 259 326 7 90 32 End of 1993 680 245 314 4 83 34 End of 1994 703 226 350 4 89 34 - ------------------------------------------------------------------ 87 o Proved reserves are those quantities of crude oil, natural gas and natural gas liquids (NGL) that, upon analysis of geological and engineering data, appear with reasonable certainty to be recoverable in the future from known oil and gas reservoirs under existing economic and operating conditions. As additional information becomes available or conditions change, estimates must be revised. o Developed reserves are those portions of proved reserves that are recoverable through existing well bores, and production equipment and facilities. o Revisions of previous estimates in Norway in 1994 are mainly due to a license extension and redevelopment plan. 88 Proved Reserves Worldwide Natural Gas Years Ended ---------------------------------------------- December 31 Billions of Cubic Feet ---------------------------------------------- United United Other Total States Norway* Kingdom Africa Areas ---------------------------------------------- Developed and Undeveloped End of 1991 5,639 3,817 1,333 176 32 281 Revisions of previous estimates 60 (8) 93 7 - (32) Improved recovery 108 107 - - - 1 Purchases of reserves in place 20 15 - 5 - - Extensions and discoveries 538 228 - 297 - 13 Production (509) (350) (121) (18) - (20) Sales of reserves in place (40) (40) - - - - - ------------------------------------------------------------------ End of 1992 5,816 3,769 1,305 467 32 243 Revisions of previous estimates 452 579 (122) 2 - (7) Improved recovery 12 8 4 - - - Purchases of reserves in place 27 19 - 7 - 1 Extensions and discoveries 339 281 - - - 58 Production (493) (345) (107) (20) - (21) Sales of reserves in place (84) (35) - - - (49) - ------------------------------------------------------------------ End of 1993 6,069 4,276 1,080 456 32 225 Revisions of previous estimates 262 92 172 (8) - 6 Improved recovery 95 5 83 5 - 2 Purchases of reserves in place 84 5 - 79 - - Extensions and discoveries 473 132 - 233 - 108 Production (519) (370) (106) (23) - (20) Sales of reserves in place (88) (88) - - - - - ------------------------------------------------------------------ End of 1994 6,376 4,052 1,229 742 32 321 ================================================================== Developed End of 1991 4,969 3,366 1,274 115 - 214 End of 1992 4,839 3,279 1,246 108 - 206 End of 1993 5,194 3,827 1,068 148 - 151 End of 1994 5,030 3,694 989 129 32 186 - ------------------------------------------------------------------ *Certain amounts in Norway were restated for production and revisions of previous estimates for 1992 and 1993. 89 o Natural gas production may differ from gas production (delivered for sale) on page 95, primarily because the quantities above omit the gas equivalent of the liquids, where applicable, but include gas consumed at the lease. o Revisions of previous estimates in the United States in 1994 are mainly for the San Juan Basin in New Mexico. Amounts in Norway are primarily due to a license extension and redevelopment plan. o Amounts for improved recovery in Norway in 1994 are mainly for the Eldfisk and Ekofisk fields. o Purchases of reserves in place in the United Kingdom in 1994 are for an additional interest in the Britannia field. o Extensions and discoveries in the United Kingdom in 1994 are mainly for the Armada, Britannia and Alison fields. Amounts in Other Areas are in Canada. o Sales of reserves in place in the United States in 1994 were mainly from the San Juan Basin in New Mexico. o Natural gas reserves are computed at 14.65 pounds per square inch absolute and 60 degrees Fahrenheit. 90 Proved Reserves Worldwide Natural Gas Liquids Years Ended --------------------------------------------- December 31 Millions of Barrels --------------------------------------------- United United Other Total States Norway Kingdom Africa Areas --------------------------------------------- Developed and Undeveloped End of 1991 227 158 46 - 21 2 Revisions of previous estimates (4) 3 (6) - - (1) Purchases of reserves in place 3 3 - - - - Extensions and discoveries 10 6 - 3 - 1 Production (19) (16) (3) - - - Sales of reserves in place (1) (1) - - - - - ------------------------------------------------------------------ End of 1992 216 153 37 3 21 2 Revisions of previous estimates (10) (6) (3) - - (1) Improved recovery 1 1 - - - - Purchases of reserves in place 1 1 - - - - Extensions and discoveries 4 4 - - - - Production (16) (13) (3) - - - Sales of reserves in place (1) (1) - - - - - ------------------------------------------------------------------ End of 1993 195 139 31 3 21 1 Revisions of previous estimates 8 1 7 - - - Improved recovery 2 - 2 - - - Extensions and discoveries 7 4 - 3 - - Production (15) (12) (3) - - - Sales of reserves in place (1) (1) - - - - - ------------------------------------------------------------------ End of 1994 196 131 37 6 21 1 ================================================================== Developed End of 1991 195 150 43 - - 2 End of 1992 181 146 33 - - 2 End of 1993 162 132 29 - - 1 End of 1994 178 125 31 - 21 1 - ------------------------------------------------------------------ 91 o NGL reserves include estimates of NGL to be extracted from Phillips leasehold gas at gas processing plants and facilities. Estimates are based at the wellhead and assume full extraction. NGL extraction is attributable to Phillips' E&P operations and GPM operations. NGL production above differs from NGL production per day delivered for sale by E&P and GPM due to gas consumed at the lease and the difference between assumed full extraction and the actual amount of liquids extracted and sold. 92 RESULTS OF OPERATIONS Millions of Dollars ---------------------------- United Total States Norway ---------------------------- 1994 Sales $1,166 640 261 Transfers 944 450 478 Other revenues 111 72 29 - -------------------------------------------------------------------------- Total revenues 2,221 1,162 768 Production costs 815 449 269 Exploration expenses 228 106 32 Depreciation, depletion, amortization and retirements 423 258 103 Other related expenses 61 59 (1) - -------------------------------------------------------------------------- 694 290 365 Provision for income taxes 366 47 280 - -------------------------------------------------------------------------- Results of operations for producing activities 328 243 85 Other earnings 14 14 - - -------------------------------------------------------------------------- E&P net income $ 342 257 85 ========================================================================== 1993 Sales $1,148 703 261 Transfers 1,065 476 455 Other revenues 139 35 61 - -------------------------------------------------------------------------- Total revenues 2,352 1,214 777 Production costs 831 463 266 Exploration expenses 256 140 16 Depreciation, depletion, amortization and retirements 424 267 95 Other related expenses 60 47 5 - -------------------------------------------------------------------------- 781 297 395 Provision for income taxes 414 66 288 - -------------------------------------------------------------------------- Results of operations for producing activities 367 231 107 Other earnings 22 22 - - -------------------------------------------------------------------------- E&P net income $ 389 253 107 ========================================================================== 1992 Sales $1,209 658 345 Transfers 1,208 538 502 Other revenues 48 (11) 57 - -------------------------------------------------------------------------- Total revenues 2,465 1,185 904 Production costs 940 475 346 Exploration expenses 250 92 23 Depreciation, depletion, amortization and retirements 442 292 81 Other related expenses 29 45 (10) - -------------------------------------------------------------------------- 804 281 464 Provision for income taxes 465 51 337 - -------------------------------------------------------------------------- Results of operations for producing activities 339 230 127 Other earnings 38 38 - - -------------------------------------------------------------------------- E&P net income $ 377 268 127 ========================================================================== RESULTS OF OPERATIONS Millions of Dollars ----------------------------- United Other Kingdom Africa Areas ----------------------------- 1994 Sales $ 89 124 52 Transfers - 16 - Other revenues 1 1 8 - -------------------------------------------------------------------------- Total revenues 90 141 60 Production costs 33 38 26 Exploration expenses 25 28 37 Depreciation, depletion, amortization and retirements 35 10 17 Other related expenses (1) 3 1 - -------------------------------------------------------------------------- (2) 62 (21) Provision for income taxes (2) 56 (15) - -------------------------------------------------------------------------- Results of operations for producing activities - 6 (6) Other earnings - - - - -------------------------------------------------------------------------- E&P net income $ - 6 (6) ========================================================================== 1993 Sales $ 88 23 73 Transfers - 134 - Other revenues 2 (8) 49 - -------------------------------------------------------------------------- Total revenues 90 149 122 Production costs 31 41 30 Exploration expenses 32 21 47 Depreciation, depletion, amortization and retirements 26 13 23 Other related expenses 1 3 4 - -------------------------------------------------------------------------- - 71 18 Provision for income taxes (19) 68 11 - -------------------------------------------------------------------------- Results of operations for producing activities 19 3 7 Other earnings - - - - -------------------------------------------------------------------------- E&P net income $ 19 3 7 ========================================================================== 1992 Sales $109 10 87 Transfers - 168 - Other revenues 1 1 - - -------------------------------------------------------------------------- Total revenues 110 179 87 Production costs 35 47 37 Exploration expenses 36 42 57 Depreciation, depletion, amortization and retirements 24 11 34 Other related expenses (7) 1 - - -------------------------------------------------------------------------- 22 78 (41) Provision for income taxes - 74 3 - -------------------------------------------------------------------------- Results of operations for producing activities 22 4 (44) Other earnings - - - - -------------------------------------------------------------------------- E&P net income $ 22 4 (44) ========================================================================== 93 o Results of operations for producing activities consist of all the activities within the E&P organization except for a liquefied natural gas (LNG) operation, minerals operations, a gas marketing company, and a U.S. natural gas pipeline operation, which are included in other earnings. Also excluded are non-E&P activities, including NGL extraction facilities in Phillips' GPM organization, as well as downstream petroleum and chemical activities. In addition, there is no deduction for general corporate administrative expenses or interest. o Transfers are valued at prices that approximate market. o Other revenues include gains and losses from asset sales, equity in earnings from certain transportation and processing operations that directly support the company's producing operations, some revenue resulting from the purchase and sale of hydrocarbons and other miscellaneous income. o Production costs consist of costs incurred to operate and maintain wells and related equipment and facilities used in the production of petroleum liquids and natural gas. These costs also include taxes other than income taxes, depreciation of support equipment, cost of retirements, and administrative expenses related to the production activity. Excluded are depreciation, depletion and amortization of capitalized acquisition, exploration and development costs. o Exploration expenses include dry hole, leasehold impairment, geological and geophysical expenses and the cost of retaining undeveloped leaseholds. Also included are taxes other than income taxes, depreciation of support equipment and administrative expenses related to the exploration activity. o Depreciation, depletion, amortization and retirements differ from that shown in Analysis of Results by Business Segment on pages 83 and 84, as cost of retirements and depreciation of support equipment are included with production or exploration expenses, as applicable, in Results of Operations. o Other related expenses are primarily third party transportation expense, foreign currency gains and losses and other miscellaneous expenses. o The provision for income taxes is computed by adjusting each country's income before income taxes for permanent differences related to the oil and gas producing activities that are reflected in the company's consolidated income tax expense for the period, multiplying the result by the country's statutory tax rate and adjusting for applicable tax credits. 94 STATISTICS Net Production 1994 1993 1992 --------------------------- Thousands of Barrels Daily --------------------------- Crude Oil United States 90 93 96 Norway 82 72 71 United Kingdom 5 6 8 Africa 23 24 25 Other areas 6 8 9 - ----------------------------------------------------------------- 206 203 209 ================================================================= Natural Gas Liquids United States* 5 5 5 Norway 8 8 8 Other areas 1 - - - ----------------------------------------------------------------- 14 13 13 ================================================================= *Represents amounts extracted attributable to E&P operations. Additional quantities of NGL are extracted at GPM gas processing plants (see NGL reserves page 92 for further discussion). Millions of Cubic Feet Daily Natural Gas ---------------------------- United States (less gas equivalent of liquids shown above)* 1,035 973 1,018 Norway (dry basis) 272 272 312 United Kingdom (dry basis) 58 54 49 Other areas 49 56 50 - ----------------------------------------------------------------- 1,414 1,355 1,429 ================================================================= *Represents quantities available for sale. Natural gas sold from the lease to third parties and to the company's GPM organization is on a wet basis. Quantities of gas from which NGL have been extracted, attributable to E&P operations, are included on a dry basis. Average Sales Prices 1994 1993 1992 ---------------------------- Crude Oil--Per Barrel United States $13.36 14.20 16.16 Norway 15.77 17.33 19.57 United Kingdom 16.06 17.53 19.77 Africa 16.10 17.75 19.94 Other areas 12.92 15.16 17.58 Total Foreign 15.75 17.30 19.51 Worldwide 14.73 15.92 18.01 - ----------------------------------------------------------------- Natural Gas Liquids--Per Barrel United States 11.60 12.18 12.80 Norway 8.59 8.55 11.13 - ----------------------------------------------------------------- Natural Gas (Lease)--Per Thousand Cubic Feet United States 1.75 1.99 1.67 Norway 2.34 2.49 2.75 United Kingdom 2.75 2.44 2.72 Other areas 1.54 1.38 1.27 Total Foreign 2.31 2.36 2.61 Worldwide 1.92 2.11 1.99 - ----------------------------------------------------------------- 95 Statistics 1994 1993 1992 ------------------------- Average Production Costs*-- Per Equivalent Barrel of Oil United States $4.58 4.86 4.78 Norway 5.46 5.86 7.25 United Kingdom 5.98 5.64 5.73 Africa 4.55 4.62 5.16 Other areas 5.00 4.74 5.58 Worldwide 4.90 5.15 5.57 - ----------------------------------------------------------------- *Production costs consist of costs incurred to operate and maintain wells and related equipment and facilities used in the production of petroleum liquids and natural gas. These costs also include taxes other than income taxes, depreciation of support equipment, cost of retirements, and administrative expenses associated with the production activity. Excluded are depreciation, depletion and amortization of capitalized acquisition, exploration and development costs. o Per unit costs in 1994, compared with 1993, were lower in the United States, Norway and Africa. The United States had higher production volumes and lower costs, Norway had higher production volumes, partly offset by higher costs and Africa had lower costs, partly offset by lower production. Unit costs were higher in the United Kingdom as higher production volumes were more than offset by higher costs. The increase in Other areas was mainly due to lower Canadian production volumes and the start-up of production in China. 96 Thousands of Acres Acreage at December 31, 1994 ------------------ Gross Net ------------------ Developed United States 1,742 1,251 Norway 45 17 United Kingdom 165 56 Africa 81 16 Other areas 284 96 - ----------------------------------------------------------------- 2,317 1,436 ================================================================= Undeveloped United States 2,990 2,031 Norway 1,291 264 United Kingdom 1,108 450 Africa* 26,710 10,947 Canada 1,487 301 Other areas 11,732 7,356 - ----------------------------------------------------------------- 45,318 21,349 ================================================================= *Includes two Somalia concessions where operations have been suspended by declarations of force majeure totaling 21,865 gross and 8,135 net acres. 97 Statistics Productive Dry Net Wells Completed* ---------------- ---------------- 1994 1993 1992 1994 1993 1992 ---------------- ---------------- Exploratory United States 6 8 7 11 10 7 Norway - ** - ** ** ** United Kingdom 2 - 5 1 1 ** Africa - - ** ** 1 4 Other areas 1 3 - 2 3 7 - ------------------------------------------------------------------ 9 11 12 14 15 18 ================================================================== Development United States 88 115 98 7 10 9 Norway - 1 1 - - - United Kingdom ** 2 1 - ** - Africa 1 1 1 - ** - Other areas 3 23 6 1 1 1 - ------------------------------------------------------------------ 92 142 107 8 11 10 ================================================================== *Excludes farmout arrangements. **Phillips' total proportionate interest was less than one. Wells at Year-End 1994 Productive** ---------------------------- In Progress* Oil Gas ------------ ------------- ------------ Gross Net Gross Net Gross Net ------------ ------------- ------------ United States 44 18 17,085 4,449 5,387 2,904 Norway - - 135 49 38 10 United Kingdom 20 7 26 8 67 10 Africa 4 1 184 37 10 2 Other areas 10 5 826 322 240 82 - ------------------------------------------------------------------ 78 31 18,256 4,865 5,742 3,008 ================================================================== *Includes wells that have been temporarily suspended. **Includes 1,391 gross and 462 net multiple completion wells. 98 COSTS INCURRED Millions of Dollars -------------------------------------------------- United United Other Total States Norway Kingdom Africa Areas -------------------------------------------------- 1994 Acquisition $ 99 48 - 48 - 3 Exploration 202 95 18 25 31 33 Development 515 207 67 166 17 58 - ------------------------------------------------------------------ $816 350 85 239 48 94 ================================================================== 1993 Acquisition $ 51 45 - 4 - 2 Exploration 275 158 16 34 22 45 Development 482 213 58 123 38 50 - ------------------------------------------------------------------ $808 416 74 161 60 97 ================================================================== 1992 Acquisition $ 16 8 - 6 - 2 Exploration 241 88 27 43 32 51 Development 395 146 122 43 48 36 - ------------------------------------------------------------------ $652 242 149 92 80 89 ================================================================== o Costs incurred include capitalized and expensed items. o Acquisition costs include the costs of acquiring undeveloped oil and gas leaseholds. It includes proved properties of $2 million and $8 million in the United States for 1994 and 1993, respectively, and $48 million and $4 million in the United Kingdom for 1994 and 1993, respectively. o Exploration costs include geological and geophysical expenses, the cost of retaining undeveloped leaseholds, and exploratory drilling costs. o Development costs include the cost of drilling and equipping development wells and building related production facilities for extracting, treating, gathering and storing petroleum liquids and natural gas. 99 CAPITALIZED COSTS At December 31 Millions of Dollars ---------------------------------------------- United United Other Total States Norway Kingdom Africa Areas ---------------------------------------------- 1994 Proved properties $9,314 5,350 2,284 971 384 325 Unproved properties 369 297 - 39 9 24 - ------------------------------------------------------------------ 9,683 5,647 2,284 1,010 393 349 Accumulated depreciation, depletion and amortization 6,017 4,001 1,214 485 199 118 - ------------------------------------------------------------------ $3,666 1,646 1,070 525 194 231 ================================================================== 1993* Proved properties $8,814 5,458 2,003 708 364 281 Unproved properties 482 388 13 47 6 28 - ------------------------------------------------------------------ 9,296 5,846 2,016 755 370 309 Accumulated depreciation, depletion and amortization 5,915 4,174 1,006 437 188 110 - ------------------------------------------------------------------ $3,381 1,672 1,010 318 182 199 ================================================================== *Restated. o Capitalized costs include the cost of equipment and facilities for oil and gas producing activities. These costs include the activities of Phillips' E&P organization, excluding the Kenai LNG operation, minerals operations, a gas marketing company, and a U.S. natural gas pipeline operation. o Proved properties include capitalized costs for oil and gas leaseholds holding proved reserves, development wells and related equipment and facilities (including uncompleted development well costs) and support equipment. o Unproved properties include capitalized costs for oil and gas leaseholds under exploration (even where petroleum liquids and natural gas were found but not in sufficient quantities to be considered proved reserves) and uncompleted exploratory well costs, including exploratory wells under evaluation. 100 STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVE QUANTITIES Amounts are computed using year-end prices and costs (adjusted only for existing contractual changes), appropriate statutory tax rates and a prescribed 10 percent discount factor. Continuation of year-end economic conditions also is assumed. The calculation is based on estimates of proved reserves, which are revised over time as new data becomes available. Probable or possible reserves, which may become proved in the future, are not considered. The calculation also requires assumptions as to the timing of future production of proved reserves, and the timing and amount of future development and production costs. While due care was taken in its preparation, the company does not represent that this data is the fair value of the company's oil and gas properties, or a fair estimate of the present value of cash flows to be obtained from their development and production. 101 Discounted Future Net Cash Flows Millions of Dollars ---------------------------------------------------- United United Other Total States Norway Kingdom Africa Areas ---------------------------------------------------- 1994 Future cash inflows $25,219 10,532 9,594 2,282 1,634 1,177 Less: Future production costs 9,079 4,290 3,229 620 436 504 Future development costs 2,694 839 1,126 559 42 128 Future income tax provisions 6,429 1,319 3,951 233 897 29 - ------------------------------------------------------------------------------ Future net cash flows 7,017 4,084 1,288 870 259 516 10% annual discount 3,204 1,811 628 427 121 217 - ------------------------------------------------------------------------------ Discounted future net cash flows $ 3,813 2,273 660 443 138 299 ============================================================================== 1993 Future cash inflows $23,693 11,661 7,940 1,485 1,513 1,094 Less: Future production costs 9,048 4,713 3,096 345 468 426 Future development costs 2,818 1,008 1,175 457 50 128 Future income tax provisions 5,025 1,375 2,668 159 763 60 - ------------------------------------------------------------------------------ Future net cash flows 6,802 4,565 1,001 524 232 480 10% annual discount 3,227 2,198 437 257 107 228 - ------------------------------------------------------------------------------ Discounted future net cash flows $ 3,575 2,367 564 267 125 252 ============================================================================== 1992 Future cash inflows $27,070 11,845 10,103 1,883 2,022 1,217 Less: Future production costs 10,288 4,538 4,345 402 519 484 Future development costs 2,317 1,062 350 679 56 170 Future income tax provisions 6,854 1,469 3,980 223 1,130 52 - ------------------------------------------------------------------------------ Future net cash flows 7,611 4,776 1,428 579 317 511 10% annual discount 3,590 2,243 627 322 147 251 - ------------------------------------------------------------------------------ Discounted future net cash flows $ 4,021 2,533 801 257 170 260 ============================================================================== 102 Sources of Change in Discounted Future Net Cash Flows Millions of Dollars --------------------------- 1994 1993 1992 --------------------------- Discounted future net cash flows at the beginning of the year $ 3,575 4,021 3,322 - ------------------------------------------------------------------ Changes during the year Revenues less production costs for the year (1,295) (1,382) (1,477) Net change in prices and production costs 786 (1,183) 92 Extensions, discoveries and improved recovery, less estimated future costs 345 537 511 Development costs for the year 515 482 395 Changes in estimated future development costs (49) (574) (16) Purchases of reserves in place, less estimated future costs 19 44 30 Sales of reserves in place, less estimated future costs (55) (98) (56) Revisions of previous quantity estimates 10 13 190 Accretion of discount 592 722 685 Net change in income taxes (630) 996 346 Other - (3) (1) - ------------------------------------------------------------------ Total changes 238 (446) 699 - ------------------------------------------------------------------ Discounted future net cash flows at year-end $ 3,813 3,575 4,021 ================================================================== o The net change in prices and production costs is the beginning of the year reserve production forecast multiplied by the net annual change in the per unit sales price and production cost, discounted at 10 percent. o Purchases and sales of reserves in place, and extensions, discoveries and improved recovery are production forecasts of the applicable reserve quantities for the year multiplied by the end of the year sales price, less future estimated costs, discounted at 10 percent. o The accretion of discount is 10 percent of the prior year's discounted future cash inflows, less future production and development costs. o The net change in income taxes is the annual change in the discounted future income tax provisions. 103 - ------------------------------------------------------------------------------- Selected Quarterly Financial Data Per Share of Millions of Dollars Common Stock ----------------------------------------------- --------------------- Income Before Income Taxes, Subsidiary Stock Sales Transaction and Other and Income Before Income Before Operating Extraordinary Extraordinary Net Extraordinary Net Revenues Items Items Income Items Income ----------------------------------------------- --------------------- 1994 First $2,884 208 127 127 .49 .49 Second 2,995 161 76 76 .29 .29 Third 3,315 234 119 119 .45 .45 Fourth 3,017 229 162 162 .62 .62 - ------------------------------------------------------------------------------ 1993 First $3,029 183 61 61 .23 .23 Second 3,230 224 123 121 .47 .46 Third 3,170 122 41 41 .16 .16 Fourth 2,880 9 20 20 .08 .08 - ------------------------------------------------------------------------------ During the first quarter of 1994, Phillips realized a gain of $20 million, $.08 per share, from a subsidiary stock transaction. Work force reduction charges of $5 million, $22 million and $9 million, or $.02, $.08 and $.03 per share, were incurred during the first, third and fourth quarters of 1994, respectively. Capital-loss carryforwards and changes in deferred tax assets added $50 million and $28 million to income, respectively, during the last quarter of 1994--an increase of $.19 and $.11 per share, respectively. Net income decreased $2 million, $.01 per share, in the third quarter, but increased $15 million, $.06 per share, in the fourth quarter due to net gains and losses on asset dispositions. Net income was also increased in the second and third quarters by $14 million, $.05 per share, and $7 million, $.03 per share, due to pending claims, but pending claims decreased income in the fourth quarter by $7 million, $.03 per share. All of the amounts appearing in this paragraph are presented on an after-tax basis. During the first and second quarters of 1993, the company incurred after-tax charges of $22 million, $.08 per share, and $4 million, $.02 per share, respectively, for the estimated cost of work force reductions. In the second quarter of 1993, the company incurred a before-tax extraordinary loss of $3 million attributed to call premiums paid on the early redemption of debt. The after-tax loss was $2 million, $.01 per share. During the second and fourth quarters of 1993, the company incurred after-tax accruals for pending claims of $13 million, $.05 per share, and $19 million, $.07 per share, respectively. During the first and fourth quarters of 1993, results included after-tax net asset-sale gains of $20 million, $.08 per share, and $39 million, $.15 per share, respectively. In addition, fourth quarter 1993 results included a $24 million, $.09 per share, tax benefit from the utilization of a capital-loss carryforward and a $12 million, $.05 per share, after-tax writedown associated with exiting the catalyst business. 104 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 105 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information presented under the heading "Nominees for Election as Directors" in the company's definitive proxy statement for the Annual Meeting of Stockholders on May 8, 1995, is incorporated herein by reference.* Information regarding the executive officers appears in Part I of this report on pages 20 and 21. Item 11. EXECUTIVE COMPENSATION Information presented under the following headings in the company's definitive proxy statement for the Annual Meeting of Stockholders on May 8, 1995, is incorporated herein by reference: Compensation Committee Interlocks and Insider Participation Executive Compensation Options/SAR Grants in Last Fiscal Year Aggregated Option/SAR Exercises in Last Fiscal Year, and Fiscal Year-end Option/SAR Value Long-Term Incentive Plan Awards in Last Fiscal Year Pension Plan Table Termination of Employment and Change-in-Control Arrangements Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information presented under the headings "Voting Securities and Principal Holders," "Nominees for Election as Directors," "Security Ownership of Certain Beneficial Owners," and "Security Ownership of Management" in the company's definitive proxy statement for the Annual Meeting of Stockholders on May 8, 1995, is incorporated herein by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. - --------------------- *Except for information or data specifically incorporated herein by reference under Items 10 through 13, other information and data appearing in the company's definitive proxy statement for the Annual Meeting of Stockholders on May 8, 1995, are not deemed to be a part of this Annual Report on Form 10-K or deemed to be filed with the Commission as a part of this report. 106 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements and Financial Statement Schedules ------------------------------------------------------ The financial statements and schedules listed in the Index to Financial Statements and Financial Statement Schedules, which appears on page 52, are filed as part of this annual report. 2. Exhibits -------- The exhibits listed in the Index to Exhibits, which appears on pages 109 through 112, are filed as a part of this annual report. (b) Reports on Form 8-K ------------------- During the three months ended December 31, 1994, the registrant has not filed any reports on Form 8-K. 107 PHILLIPS PETROLEUM COMPANY (Consolidated) SCHEDULE II--VALUATION ACCOUNTS AND RESERVES Millions of Dollars ----------------------------------------------------- Additions Balance ----------------- Balance at Charged to at Description January 1 Expense Other Deductions December 31 - ------------------------------------------------------------------------------ (a) (b) 1994 Deducted from asset accounts: Allowance for doubtful accounts and notes receivable $ 14 11 - 5 (c) 20 Deferred tax asset valuation allowance 181 (39) (4) (4)(d) 142 - ------------------------------------------------------------------------------ l993 Deducted from asset accounts: Allowance for doubtful accounts and notes receivable $ 16 4 - 6(c) 14 Deferred tax asset valuation allowance 219 18 (3) 53(d) 181 - ------------------------------------------------------------------------------ 1992 Deducted from asset accounts: Allowance for doubtful accounts and notes receivable $ 18 8 - 10(c) 16 Deferred tax asset valuation allowance - 225* (6) - 219 - ------------------------------------------------------------------------------ *Includes a $198 million allowance established as part of the cumulative effect of a change in accounting principle under the provisions of FASB Statement No. 109, "Accounting for Income Taxes," adopted by the company effective January 1, 1992. (a) Accounts charged to income less reversal of amounts previously charged to income. (b) Represents effect of translating foreign financial statements. (c) Accounts charged off less recoveries of accounts previously charged off. (d) Adjustment in valuation allowance for net operating losses. 108 PHILLIPS PETROLEUM COMPANY INDEX TO EXHIBITS Exhibit Number Description - ------- ----------- 3(i) Restated Certificate of Incorporation, as filed with the State of Delaware July 17, 1989 (incorporated by reference to Exhibit 4(a) to Quarterly Report on Form 10-Q for the quarter ended June 30, 1989). (ii) Bylaws of Phillips Petroleum Company, as amended effective February 13, 1995. 4(a) Indenture dated as of September 15, 1990, between Phillips Petroleum Company and Bank of America Illinois (formerly Continental Bank, National Association), relating to the 9 1/2% Notes due 1997 and the 9 3/8% Notes due 2011 (incorporated by reference to Exhibit 4(c) to Annual Report on Form 10-K for the year ended December 31, 1990). (b) Indenture dated as of September 15, 1990, as supplemented by Supplemental Indenture No. 1 dated May 23, 1991, between Phillips Petroleum Company and Bank of America Illinois (formerly Continental Bank, National Association), relating to the 9.18% Notes due September 15, 2021, the 9% Notes due 2001, the 8.86% Notes due May 15, 2022, the 8.49% Notes due January 1, 2023, the 7.92% Notes due April 15, 2023, the 7.20% Notes due November 1, 2023 and the 6.65% Notes due March 1, 2003 (incorporated by reference to Exhibit 4(d) to Annual Report on Form 10-K for the year ended December 31, 1991). (c) Preferred Share Purchase Rights as described in the Rights Agreement dated as of July 10, 1989, between Phillips Petroleum Company and Chemical Bank (formerly Manufacturers Hanover Trust Company) (incorporated by reference to Exhibit 1 to Current Report on Form 8-K dated July 10, 1989). (d) Amendment dated May 16, 1990, to the Rights Agreement dated July 10, 1989, between Phillips Petroleum Company and Chemical Bank (formerly Manufacturers Hanover Trust Company) (incorporated by reference to Exhibit 1 to Current Report on Form 8-K dated May 16, 1990). The company incurred during 1994 certain long-term debt not registered pursuant to the Securities Exchange Act of 1934. No instrument with respect to such debt is being filed since the total amount of the securities authorized under any such instrument 109 PHILLIPS PETROLEUM COMPANY INDEX TO EXHIBITS (Continued) Exhibit Number Description - ------- ----------- did not exceed 10 percent of the total assets of the company on a consolidated basis. The company hereby agrees to furnish to the Securities and Exchange Commission upon its request a copy of such instrument defining the rights of the holders of such debt. 10(a) Agreement dated December 23, 1984, among Mesa Partners and related entities and Phillips Petroleum Company and the schedules, annexes and exhibit thereto (incorporated by reference to Exhibit 10(a) to Annual Report on Form 10-K for the year ended December 31, 1989). (b) Letter Agreement dated December 23, 1984, among Mesa Partners and related entities and Phillips Petroleum Company (incorporated by reference to Exhibit 10(b) to Annual Report on Form 10-K for the year ended December 31, 1989). (c) Deferred Compensation Plan for Non-Employee Directors of Phillips Petroleum Company (incorporated by reference to Exhibit 10(d) to Annual Report on Form 10-K for the year ended December 31, 1990). (d) 1986 Stock Plan of Phillips Petroleum Company (incorporated by reference to Exhibit 10(d) to Annual Report on Form 10-K for the year ended December 31, 1992). (e) 1990 Stock Plan of Phillips Petroleum Company (incorporated by reference to Exhibit 10(f) to Annual Report on Form 10-K for the year ended December 31, 1989). (f) Annual Incentive Compensation Plan of Phillips Petroleum Company (incorporated by reference to Exhibit 10(f) to Annual Report on Form 10-K for the year ended December 31, 1992). (g) Incentive Compensation Plan of Phillips Petroleum Company. (h) Principal Corporate Officers Supplemental Retirement Plan of Phillips Petroleum Company (incorporated by reference to Exhibit 10(h) to Annual Report on Form 10-K for the year ended December 31, 1989). 110 PHILLIPS PETROLEUM COMPANY INDEX TO EXHIBITS (Continued) Exhibit Number Description - ------- ----------- 10(i) Phillips Petroleum Company Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10(i) to Annual Report on Form 10-K for year ended December 31, 1993). (j) Key Employee Deferred Compensation Plan of Phillips Petroleum Company. (k) Non-Employee Director Retirement Plan of Phillips Petroleum Company (incorporated by reference to Exhibit 10(k) to Annual Report on Form 10-K for the year ended December 31, 1992). (l) Omnibus Securities Plan of Phillips Petroleum Company (incorporated by reference to Exhibit 10 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 12 Computation of Ratio of Earnings to Fixed Charges. 21 List of Subsidiaries of Phillips Petroleum Company. 23 Consent of Independent Auditors. 27 Financial Data Schedule. 99(a) Form 11-K, Annual Report, of the Thrift Plan of Phillips Petroleum Company for the fiscal year ended December 31, 1994 (to be filed by amendment pursuant to Rule 15d-21). (b) Form 11-K, Annual Report, of the Long-Term Stock Savings Plan of Phillips Petroleum Company for the fiscal year ended December 31, 1994 (to be filed by amendment pursuant to Rule 15d-21). (c) Form 11-K, Annual Report, of the Retirement Savings Plan of Phillips Petroleum Company Subsidiaries for the fiscal year ended December 31, 1994 (to be filed by amendment pursuant to Rule 15d-21). 111 Copies of the exhibits listed in this Index to Exhibits are available upon request for a fee of $3.00 per document. Such request should be addressed to: Secretary Phillips Petroleum Company 1234 Adams Building Bartlesville, OK 74004 112 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PHILLIPS PETROLEUM COMPANY March 13, 1995 /s/ W. W. Allen ---------------------------------- W. W. Allen Chairman of the Board of Directors and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on behalf of the registrant by the following officers in the capacity indicated and by a majority of directors in response to Instruction D to Form 10-K on March 13, 1995. Signature Title --------- ----- /s/ W. W. Allen - --------------------------- Chairman of the Board of Directors W. W. Allen and Chief Executive Officer (Principal executive officer) /s/ T. C. Morris - --------------------------- Senior Vice President, Treasurer T. C. Morris and Chief Financial Officer (Principal financial officer) /s/ L. F. Francis - --------------------------- Controller and General Tax Officer L. F. Francis (Principal accounting officer) /s/ J. J. Mulva - --------------------------- President and Chief Operating J. J. Mulva Officer and Director /s/ C. L. Bowerman - --------------------------- Executive Vice President C. L. Bowerman and Director /s/ J. L. Whitmire - --------------------------- Executive Vice President J. L. Whitmire and Director 113 Signature Title --------- ----- /s/ Norman R. Augustine - --------------------------- Director Norman R. Augustine /s/ David L. Boren - --------------------------- Director David L. Boren /s/ Robert E. Chappell, Jr. - --------------------------- Director Robert E. Chappell, Jr. /s/ Lawrence S. Eagleburger - --------------------------- Director Lawrence S. Eagleburger /s/ Larry D. Horner - --------------------------- Director Larry D. Horner /s/ Randall L. Tobias - --------------------------- Director Randall L. Tobias /s/ Kathryn C. Turner - --------------------- Director Kathryn C. Turner 114 EX-3 2 Exhibit 3 (ii) BYLAWS PHILLIPS PETROLEUM COMPANY (INCORPORATED UNDER THE LAWS OF DELAWARE) FEBRUARY 13, 1995 TABLE OF CONTENTS ARTICLE I LOCATION OF OFFICES SECTION 1. LOCATION: . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II STOCKHOLDERS MEETINGS SECTION 1. ANNUAL MEETING: NOTICE: . . . . . . . . . . . . . . 1 SECTION 2. SPECIAL MEETINGS: NOTICE: . . . . . . . . . . . . . 1 SECTION 3. QUORUM: . . . . . . . . . . . . . . . . . . . . . . 2 SECTION 4. VOTING RIGHTS: PROXIES: RECORD DATE: LIST OF STOCKHOLDERS: . . . . . . . . 2 SECTION 5. CHAIRMAN AND SECRETARY OF MEETINGS: . . . . . . . . 3 SECTION 6. ELECTION OF DIRECTORS: . . . . . . . . . . . . . . 3 SECTION 7. INSPECTORS: . . . . . . . . . . . . . . . . . . . . 4 SECTION 8. INDEPENDENT PUBLIC ACCOUNTANTS: . . . . . . . . . . 5 SECTION 9. STOCKHOLDER ACTION: . . . . . . . . . . . . . . . . 5 SECTION 10. NOMINATIONS AND STOCKHOLDER BUSINESS: . . . . . . . 5 -i- ARTICLE III DIRECTORS SECTION 1. POWERS: . . . . . . . . . . . . . . . . . . . . . . 8 SECTION 2. FIRST MEETING OF NEWLY ELECTED BOARD OF DIRECTORS: . . . . . . . . . . . . . . . . 8 SECTION 3. REGULAR MEETINGS: . . . . . . . . . . . . . . . . . 8 SECTION 4. SPECIAL MEETINGS: NOTICE: . . . . . . . . . . . . . 9 SECTION 5. QUORUM AND VOTING: . . . . . . . . . . . . . . . . 9 SECTION 6. VACANCIES: . . . . . . . . . . . . . . . . . . . .10 SECTION 7. COMMITTEES, APPOINTMENT AND LIMITATION OF POWERS: . . . . . . . . . . . . . . .10 SECTION 8. AUDITING OF ACCOUNTS: . . . . . . . . . . . . . . .11 SECTION 9. CHANGE IN NUMBER OF DIRECTORS: . . . . . . . . . .11 SECTION 10. OTHER INTERESTS OF DIRECTORS: . . . . . . . . . . .11 SECTION 11. SUBMISSION OF ACTS TO STOCKHOLDERS: . . . . . . . .11 SECTION 12. COMPENSATION TO DIRECTORS: . . . . . . . . . . . .12 SECTION 13. ELIGIBILITY OF DIRECTORS: . . . . . . . . . . . . .12 SECTION 14. INDEMNIFICATION: . . . . . . . . . . . . . . . . .12 -ii- ARTICLE IV EXECUTIVE COMMITTEE SECTION 1. MEMBERS: . . . . . . . . . . . . . . . . . . . . .15 SECTION 2. POWERS: . . . . . . . . . . . . . . . . . . . . . .15 SECTION 3. MEETINGS: . . . . . . . . . . . . . . . . . . . . .15 SECTION 4. QUORUM: . . . . . . . . . . . . . . . . . . . . . .15 SECTION 5. OFFICERS: SUBCOMMITTEES: . . . . . . . . . . . . .16 SECTION 6. VACANCIES: . . . . . . . . . . . . . . . . . . . .16 ARTICLE V COMMITTEE ON DIRECTORS' AFFAIRS SECTION 1. MEMBERS: . . . . . . . . . . . . . . . . . . . . .16 SECTION 2. POWERS: . . . . . . . . . . . . . . . . . . . . . .16 SECTION 3. MEETINGS: . . . . . . . . . . . . . . . . . . . . .17 SECTION 4. QUORUM AND VOTING: . . . . . . . . . . . . . . . .17 SECTION 5. FAILURE TO ACT: . . . . . . . . . . . . . . . . . .17 SECTION 6. RIGHTS OF STOCKHOLDERS: . . . . . . . . . . . . . .17 -iii- ARTICLE VI AUDIT COMMITTEE SECTION 1. MEMBERS: . . . . . . . . . . . . . . . . . . . . .18 SECTION 2. POWERS: . . . . . . . . . . . . . . . . . . . . . .18 SECTION 3. DEFINITION: . . . . . . . . . . . . . . . . . . . .19 SECTION 4. MEETINGS: . . . . . . . . . . . . . . . . . . . . .20 SECTION 5. STAFF: . . . . . . . . . . . . . . . . . . . . . .20 ARTICLE VII COMPENSATION COMMITTEE SECTION 1. MEMBERS: . . . . . . . . . . . . . . . . . . . . .20 SECTION 2. POWERS: . . . . . . . . . . . . . . . . . . . . . .20 SECTION 3. MEETINGS: . . . . . . . . . . . . . . . . . . . . .21 SECTION 4. STAFF: . . . . . . . . . . . . . . . . . . . . . .21 ARTICLE VIII PUBLIC POLICY COMMITTEE SECTION 1. MEMBERS: . . . . . . . . . . . . . . . . . . . . .21 SECTION 2. POWERS: . . . . . . . . . . . . . . . . . . . . .22 SECTION 3. MEETINGS: . . . . . . . . . . . . . . . . . . . .23 SECTION 4. STAFF: . . . . . . . . . . . . . . . . . . . . . .23 -iv- ARTICLE IX OFFICERS SECTION 1. DESIGNATION: . . . . . . . . . . . . . . . . . . .23 SECTION 2. ELECTION: TERM OF OFFICE: . . . . . . . . . . . . .24 SECTION 3. REMOVAL FROM OFFICE: FAILURE TO PERFORM DUTIES: . . . . . . . . . . . .24 SECTION 4. CHAIRMAN OF THE BOARD OF DIRECTORS: VICE CHAIRMAN: PRESIDENT: . . . . . . . . . . . . .24 SECTION 5. CHIEF EXECUTIVE OFFICER: . . . . . . . . . . . . .25 SECTION 6. EXECUTIVE VICE PRESIDENTS: VICE PRESIDENTS: . . . . . . . . . . . . . . . . .25 SECTION 7. SECRETARY: . . . . . . . . . . . . . . . . . . . .25 SECTION 8. TREASURER: . . . . . . . . . . . . . . . . . . . .26 SECTION 9. CONTROLLER: . . . . . . . . . . . . . . . . . . . .26 SECTION 10. GENERAL: . . . . . . . . . . . . . . . . . . . . .27 ARTICLE X CAPITAL STOCK SECTION 1. CERTIFICATES: FACSIMILE SIGNATURES: LOST STOCK: . . . . . . . . . . . . . . . . . . . .27 SECTION 2. TRANSFERS: PRESERVATION OF CANCELED CERTIFICATES: FRACTIONAL SHARES: TRANSFER AGENTS: . . . . . . . . . . . . . . . . .28 SECTION 3. DATE FOR DETERMINATION OF STOCKHOLDERS: . . . . . . . . . . . . . . . . .28 SECTION 4. ADDITIONAL REGULATIONS: . . . . . . . . . . . . . .29 -v- ARTICLE XI POLITICAL ACTIVITIES SECTION 1. COMPLIANCE WITH LAWS CONCERNING POLITICAL CONTRIBUTIONS: . . . . . . . . . . . . .29 SECTION 2. POLITICAL CONTRIBUTIONS: . . . . . . . . . . . . .29 SECTION 3. POLITICAL COMMITTEE AUTHORIZED BY FEDERAL LAW: . . . . . . . . . . . .30 SECTION 4. NONFEDERAL POLITICAL COMMITTEES: . . . . . . . . .30 SECTION 5. OTHER POLITICAL ACTIVITIES: . . . . . . . . . . . .31 ARTICLE XII MISCELLANEOUS SECTION 1. CHECKS, NOTES AND DRAFTS: . . . . . . . . . . . . .31 SECTION 2. SEAL: . . . . . . . . . . . . . . . . . . . . . . .31 SECTION 3. DIVIDENDS AND RESERVES: . . . . . . . . . . . . . .32 SECTION 4. WAIVER OF NOTICE: . . . . . . . . . . . . . . . . .32 SECTION 5. CHAIRMAN OF THE BOARD EMERITUS: . . . . . . . . . .32 SECTION 6. AMENDMENTS: . . . . . . . . . . . . . . . . . . . .32 -vi- BYLAWS OF PHILLIPS PETROLEUM COMPANY ARTICLE I LOCATION OF OFFICES ARTICLE I. SECTION 1. LOCATION: The statutory registered office shall be in Dover, Delaware, and the principal operating offices shall be in Bartlesville, Oklahoma. The company may also have offices or agencies in New York, New York, and in such other places as the Board of Directors or the Executive Committee may designate. ARTICLE II STOCKHOLDERS MEETINGS ARTICLE II. SECTION 1. ANNUAL MEETING: NOTICE: An annual meeting of the stockholders of the company for the election of directors and the transaction of such other business as may properly come before the meeting shall be held, at such place, on such date and at such time, as shall be determined by the Board. Notice of the place, date and time of the meeting shall be given by mailing at least 10 days, but not more than 60 days, previous to such meeting, postage prepaid, a copy of such notice addressed to each stockholder at his post office address as recorded on the books of the company. The Board of Directors may postpone or reschedule any previously scheduled annual meeting. ARTICLE II. SECTION 2. SPECIAL MEETINGS: NOTICE: Special meetings of the stockholders, other than those required by statute, may be called at any time by the Chairman of the Board of Directors, the Vice Chairman, or the President, or by the Board of Directors pursuant to a resolution approved by a majority of the entire Board of Directors. Notice of every special meeting, stating the time, place and purpose, shall be given by mailing, postage prepaid, at least 10 but not more than 60 days before each such meeting, a copy of such notice addressed to each stockholder of the company at his post office address as recorded on the books of the company. The Board of Directors may postpone, reschedule or cancel any previously scheduled special meeting. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the company's notice of meeting. ARTICLE II. SECTION 3. QUORUM: At any meeting of the stockholders the holders of a majority of the issued and outstanding shares of the common stock, present in person or by proxy, shall constitute a quorum for all purposes unless otherwise provided by law. If the holders of the amount of stock necessary to constitute a quorum shall fail to attend in person or by proxy at the time and place fixed for an annual or special meeting, the person serving as chairman of the meeting may adjourn the meeting, without notice other than by announcement of the time and place at the meeting; provided, however, that if the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given in conformity with the notice requirements for the meeting being adjourned. At any such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the original meeting. ARTICLE II. SECTION 4. VOTING RIGHTS: PROXIES: RECORD DATE: LIST OF STOCKHOLDERS: At each stockholders meeting every stockholder shall be entitled to vote in person or by proxy appointed in accordance with Delaware law. The votes for directors shall be by ballot. All questions shall be determined by a majority vote of the stock represented at the meeting, unless a different vote is required by law or by the Certificate of Incorporation of the company. For a period of at least 10 days prior to each meeting of the stockholders, and during such meeting, there shall be maintained a complete list, in alphabetical order, of all of the stockholders entitled to vote at such meeting, -2- indicating the address of and number of shares held by each, which list shall be certified by the person in charge of the stock ledger of the company. Only the persons in whose names shares of stock are registered on the books of the company on the record date for such meeting shall be entitled to vote. Subsequent to the record date for any meeting, and prior to such meeting, any proxy may submit his power of attorney to the Secretary for examination. The certificate of the Secretary as to the regularity of such power of attorney, and as to the number of shares held by the stockholder who executed such power of attorney, shall be received as prima facie evidence of the number of shares represented by the holder of such power of attorney for the purpose of establishing the presence of a quorum at such meeting and of organizing the same, and for all other purposes. ARTICLE II. SECTION 5. CHAIRMAN AND SECRETARY OF MEETINGS: The Chairman of the Board of Directors, and in his absence, the Vice Chairman, and in the absence of both the Chairman and the Vice Chairman, the President, shall act as chairman of and preside at all meetings of stockholders. The Board of Directors may appoint any stockholder to act as chairman of any such meeting in the absence of the Chairman of the Board of Directors, the Vice Chairman and the President. The chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including the determination of the date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at such meeting and such other regulation of the manner of voting and the conduct of discussion as he determines to be reasonably in order. The chairman may adjourn any meeting of stockholders, whether pursuant to Section 3 of this Article II or otherwise, and notice of such adjournment need be given only if required by law. The Secretary shall act at all meetings of the stockholders, but, in the absence of the Secretary at any such meeting, an Assistant Secretary of the company shall act in his stead, or the presiding officer may appoint any other person to act as secretary of the meeting. ARTICLE II. SECTION 6. ELECTION OF DIRECTORS: The stockholders shall at each annual meeting select by ballot a Board of Directors consisting of not less than eleven nor more than twenty-one members, with the exact number to be fixed from time to time by resolution of the Board. A majority of the total number of directors elected shall be persons who are -3- independent outside directors, as defined in this Section. The persons receiving votes of a majority of the stock represented at the meeting shall be directors for the ensuing year or until their successors shall be elected. As used in these Bylaws, the term "independent outside directors" means any person who, on the date of his election, (i) is not an officer or employee of this company; (ii) is not an officer or employee of, or does not own directly or indirectly in excess of 1% of the shares of, a corporation (A) which has received payments from this company for property or services in excess of 1% of its gross receipts during any one of the four calendar years immediately preceding such date, as determined by its financial statement for the year in question, or (B) which is proposed to receive during the following year such payments in excess of 1% of its gross receipts as determined by its financial statement for the immediately preceding year; (iii) is not a member, officer, or employee of any business or professional organization (other than a corporation) which (A) has received payments from this company for property or services in excess of $250,000 during any one of the four calendar years immediately preceding such date, or (B) is proposed to receive such payments in excess of $250,000 in the following year; (iv) is not a person who individually (as a share partner or otherwise) has received payments, directly or indirectly, from this company in excess of $25,000 (other than fees as a director) for property or services sold or provided by him during any one of the four calendar years immediately preceding such date, and is not proposed to receive such payments in excess of $25,000 in the following year; and (v) is not a member of or associate in a law firm which is proposed to be or in the preceding four calendar years has been engaged by this company. Notwithstanding the foregoing definition, any person elected a director at this company's l975 annual meeting of stockholders, who was not an officer or employee of this company when so elected and is not such an officer or employee on the date on which his status is determined, shall be considered within the definition of "independent outside director." As used in this Section, the term "this company" means Phillips Petroleum Company or any company which is controlled directly or indirectly by it; and the term "officer or employee" shall not include any director of a corporation who is not otherwise an officer or employee of such corporation. ARTICLE II. SECTION 7. INSPECTORS: The company shall, in advance of any meeting of stockholders, appoint one or more inspectors to act at the meeting and make a written report thereof. The company may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering -4- upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his ability. ARTICLE II. SECTION 8. INDEPENDENT PUBLIC ACCOUNTANTS: Independent public accountants ("accountants") designated by the Board of Directors require approval by the stockholders. At each annual meeting a vote of stockholders shall be taken to ascertain their approval or disapproval of the accountants designated by the Board as the accountants to audit the books, records, and accounts of the company for the current fiscal year. If the accountants designated by the Board are disapproved by the stockholders, the Board shall determine whether to replace such accountants for the current fiscal year, but in any case shall not designate such accountants for the next fiscal year. If the accountants designated by the Board are approved by the stockholders, they shall not be discharged or removed by the Board prior to the beginning of the next fiscal year, except with the concurrence of the stockholders acting at a special meeting called for that purpose. The accountants shall have access at reasonable times to all records, documents, accounts, and information of the company, and shall be entitled to require from directors, officers, and employees of the company such information and explanation as, in their opinion, are necessary to enable them to make their certification or render their report or opinion, or to pursue any inquiry which the Audit Committee has directed them to conduct. ARTICLE II. SECTION 9. STOCKHOLDER ACTION: Any action required or permitted to be taken by the stockholders of the company must be effected at a duly called annual or special meeting of such holders and may not be effected by any consent in writing by such holders. ARTICLE II. SECTION 10. NOMINATIONS AND STOCKHOLDER BUSINESS: Nominations of persons for election to the Board of Directors of the company and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (a) pursuant to the company's notice of meeting, (b) by or at the direction of the Board of Directors, or (c) by any stockholder of the company who was a stockholder of record at the time of giving of notice provided for in this Section, who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Section. -5- For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to this Section, the stockholder must have given timely notice thereof in writing to the Secretary of the company, and such business must be a proper subject for stockholder action under the Delaware General Corporation Law. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the company not less than 60 days nor more than 90 days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the company's books, and of such beneficial owner, and (ii) the class and number of shares of the company which are owned beneficially and of record by such stockholder and such beneficial owner. Notwithstanding anything in this Section to the contrary, in the event that the number of directors to be elected to the Board of Directors of the company is increased and there is no public announcement specifying the size of the increased Board of Directors made by the company at least 70 days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this Section shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the company not later than the close of business on the 10th day following the day on which such public announcement is first made by the company. -6- Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the company's notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the company's notice of meeting (a) by or at the direction of the Board of Directors or (b) by any stockholder of the company who is a stockholder of record at the time of giving of notice provided for in this Section, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this Section. Nominations by stockholders of persons for election to the Board of Directors may be made at such a special meeting of stockholders if the stockholder's notice required by this Section shall be delivered to the Secretary at the principal executive offices of the company not earlier than the 90th day prior to such special meeting and not later than the close of business on the later of the 60th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. Only such persons who are nominated in accordance with the procedures set forth in this Section shall be eligible for election as directors at any meeting of stockholders. Only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section. The chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made in accordance with the procedures set forth in this Section and, if any proposed nomination or business is not in compliance with this Section, to declare that such defective proposal shall be disregarded. For purposes of this Section, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the company with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. Notwithstanding the foregoing provisions of this Section, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section. Nothing in this Section shall be deemed to affect any rights of stockholders to request inclusion of proposals in the company's proxy statement pursuant to Rule 14a-8 under the Exchange Act. -7- ARTICLE III DIRECTORS ARTICLE III. SECTION 1. POWERS: The Board of Directors shall have all the powers of the company and all the management of its business, except as otherwise provided by law. It shall appoint and remove all officers, employees, and agents of the company except as hereinafter stated, prescribe their duties, fix their compensation except as hereinafter stated, and require, when deemed advisable, security for their faithful service. It may make rules and regulations not inconsistent with law and these Bylaws for the guidance of the company's officers, employees, and agents. Each director shall have full access to any and all company records and shall have the right to interview any company officer or employee with respect to any aspect of the company's business. It shall cause a report to be made to the annual meeting of the stockholders showing the business operations and financial position of the company. It shall generally possess all the powers and perform all the duties usually exercised by or imposed upon boards of directors of similar corporations. Directors who do not qualify as independent outside directors, as defined in Section 6, Article II of these Bylaws, shall not vote on the selection or retention of independent public accountants. Although resignation, death, or removal of one or more independent outside directors, as defined in Section 6, Article II, may result in the Board's being composed of less than the proportion of independent outside directors required by that Section, the Board shall nevertheless have the same powers as otherwise, but shall fill each such vacancy with an independent outside director within a reasonable period of time. ARTICLE III. SECTION 2. FIRST MEETING OF NEWLY ELECTED BOARD OF DIRECTORS: Immediately after each annual meeting of stockholders, the newly elected directors shall meet at the place where the annual meeting of stockholders was held, for the purpose of electing officers and transacting any other business that shall come before the meeting. ARTICLE III. SECTION 3. REGULAR MEETINGS: Regular meetings of the Board of Directors shall be held at the offices of the company in Bartlesville, Oklahoma, at 8:30 a.m. on the second Monday of each month unless otherwise designated by the Board, except (i) the meeting for which provisions have been made in Section 2 of this Article III shall count as the regular meeting for the month of May, and (ii) no regular meeting shall be held -8- in the months of March, June, August and November. No notice of any regular meeting shall be necessary. Regular meetings may be adjourned to be held at any place within or without the States of Oklahoma and Delaware at the time and place specified in the resolution of adjournment. No notice of any adjourned meeting of any regular meeting shall be necessary. ARTICLE III. SECTION 4. SPECIAL MEETINGS: NOTICE: Special meetings of the Board of Directors may be called by the Chairman of the Board of Directors, the Vice Chairman, the President, the Secretary, or an Assistant Secretary, and shall be called by any of said officers upon the request of at least three directors. Any such meeting shall be held at the time and place, within or without the States of Oklahoma and Delaware, specified in the notice thereof. One day's notice of the time and place of special meetings shall be given to each director by letter or telegram sent to the residence or usual place of business of such director. No notice of any adjourned meeting of any special meeting shall be necessary. ARTICLE III. SECTION 5. QUORUM AND VOTING: A majority of the total number of directors then in office shall constitute a quorum for the transaction of business, but less than a quorum may adjourn from time to time and from place to place. The affirmative votes of a majority of the total number of directors then in office shall be required to constitute action by the Board of Directors, unless the vote of a greater number shall be required by law and except as may be otherwise provided in the Certificate of Incorporation of the company; except that (i) only the affirmative votes of a majority of the total number of independent outside directors then in office shall be required on the question of the selection or retention of independent public accountants, and (ii) only the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum, shall be required on any question involving the compensation of directors other than those who are employees of the company. -9- ARTICLE III. SECTION 6. VACANCIES: A vacancy occurring in the Board of Directors shall be filled by a person elected by the remaining members of the Board, though less than a quorum, to serve until the next annual election by the stockholders. ARTICLE III. SECTION 7. COMMITTEES, APPOINTMENT AND LIMITATION OF POWERS: All committees shall be appointed by the Board of Directors, except to the extent otherwise authorized by Section 5, Article IX of these Bylaws, and except further, that the Executive Committee may appoint subcommittees, as provided in Section 5, Article IV of these Bylaws. No committee, whether or not appointed by the Board, shall have authority to: (a) declare dividends or distributions; (b) approve or recommend to stockholders action or proposals required by law to be approved by stockholders; (c) designate candidates for the office of director, for purposes of proxy solicitation or otherwise, or fill vacancies on the Board or any committee thereof; (d) amend the Bylaws; (e) reduce earned or capital surplus; (f) authorize or approve the reacquisition of shares unless pursuant to a general formula or method specified by the Board; or (g) authorize or approve the issuance or sale of, or any contract to issue or sell, shares or designate the terms of a series of a class of shares, provided that the Board, having acted regarding general authorization for the issuance or sale of shares, or any contract therefor, and, in the case of a series, the designation thereof, may, pursuant to a general formula or method specified by the Board by resolution or by adoption of a stock option or other plan, authorize a committee to fix the terms upon which such shares may be issued or sold, including, without limitation, the price, the dividend rate, provisions for redemption, sinking fund, -10- conversion, preferential rights, and provisions for other features of a class of shares, or a such committee to adopt any final resolution setting forth all the terms thereof and to authorize the statement of the terms of a series for filing with the Secretary of State of Delaware. Nothing contained in this Section is intended to prohibit a committee from submitting recommendations to the Board regarding any matter. ARTICLE III. SECTION 8. AUDITING OF ACCOUNTS: It shall be the duty of the Board of Directors to cause the books and accounts of the company and vouchers and papers relating thereto to be audited at least once a year. ARTICLE III. SECTION 9. CHANGE IN NUMBER OF DIRECTORS: The Board of Directors may increase or decrease the number of directors from time to time without approval of the stockholders, provided that the proportion of independent outside directors shall conform to the provisions of Section 6, Article II of these Bylaws. Where the number of directors is increased, the Board shall elect a person to fill each vacancy thus created, to serve until the next annual election by the stockholders. ARTICLE III. SECTION 10. OTHER INTERESTS OF DIRECTORS: No transaction between this company and any director or officer or any corporation, partnership, association, or other organization shall be affected by any personal interest in such transaction of any director of this company except to the extent provided by law. ARTICLE III. SECTION 11. SUBMISSION OF ACTS TO STOCKHOLDERS: The Board of Directors may submit any transaction for approval or ratification at any meeting of the stockholders. -11- ARTICLE III. SECTION 12. COMPENSATION TO DIRECTORS: Directors, other than those who are employees of the company, shall be compensated for their services as members of the Board of Directors and of any committee thereof in such manners and in such amounts as may be fixed from time to time by the Board. In fixing such compensation, the Board shall take into account not only the time required for attendance at meetings of the Board and committees thereof, but also the time spent in preparation for such meetings. Upon request, the company shall furnish to any stockholder, without charge, a statement of the total annual compensation of any director who is not an employee of the company, showing the method by which such compensation was computed. In addition to such compensation any director may be reimbursed by the company for all reasonable expenses incurred in attending meetings of the Board and its committees. Subject to the provisions of Section 6, Article II, nothing herein shall be construed to preclude any director from serving the company in any other capacity and receiving compensation therefor. ARTICLE III. SECTION 13. ELIGIBILITY OF DIRECTORS: Any person shall be eligible for election as a director unless his seventieth birthday will occur or has occurred on or before the date of his election. Any employee who is also a director, including the Chairman of the Board of Directors, shall resign as a director upon his retirement as an employee. ARTICLE III. SECTION 14. INDEMNIFICATION: Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he is or was a director, officer or employee of the company or is or was serving at the request of the company as a director, officer employee of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (hereinafter an "indemnitee"), whether the basis of such proceeding is alleged action in an official capacity as a director, officer employee or in any other capacity while serving as a director, officer employee, shall be indemnified and held harmless by the company to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the company to provide broader indemnification rights than such law permitted -12- the company to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, Employee Retirement Income Security Act of 1974 excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such indemnitee in connection therewith; provided, however, that, except as provided in this Section with respect to proceedings to enforce rights to indemnification, the company shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the Board of Directors of the company. The right to indemnification conferred in this Section shall include the right to be paid by the company the expenses incurred in defending any such proceeding in advance of its final disposition (hereinafter an "advancement of expenses"); provided, however, that, if the Delaware General Corporation Law requires, an advancement of expenses incurred by an indemnitee in his capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the company of an undertaking, by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (hereinafter a "final adjudication") that such indemnitee is not entitled to be indemnified for such expenses under this Section or otherwise. The rights to indemnification and to the advancement of expenses conferred in this Section shall be contract rights and such rights shall continue as to an indemnitee who has ceased to be a director, officer or employee and shall inure to the benefit of the indemnitee's heirs, executors and administrators. If a claim under this Section is not paid in full by the company within 60 days after written claim had been received by the company, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be 20 days, the indemnitee may at any time thereafter bring suit against the company to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the company to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) in any suit by the company to recover an advancement of expenses pursuant to the terms of an undertaking the company shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met any applicable standard for indemnification set forth in the Delaware General Corporation Law. Neither the failure of the company (including its Board of -13- Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the company (including its Board of Directors, independent legal counsel, or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or by the company to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this Section or otherwise shall be on the company. The rights to indemnification and to the advancement of expenses conferred in this Section shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, the company's Certificate of Incorporation, Bylaws, agreement, vote of stockholders or disinterested directors or otherwise. The company may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the company or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the company would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. The company may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification, and rights to be paid by the company the expenses incurred in defending any proceeding in advance of its final disposition, to any agent of the company or to any agent of another corporation or of a partnership, joint venture, trust or other enterprise, including any employee benefit plan, serving as such agent at the request of the company, to the fullest extent of the provisions of this Section with respect to the indemnification and advancement of expenses of directors, officers and employees of the company. -14- ARTICLE IV EXECUTIVE COMMITTEE ARTICLE IV. SECTION 1. MEMBERS: The Board of Directors, by resolution adopted by a majority of the whole Board, may establish an Executive Committee, the members of which shall consist of the Chairman of the Board of Directors, the President and three independent outside directors of the Board, as defined in Section 6, Article II of these Bylaws, designated by the Board. In addition, the Board may from time to time designate one or more other directors to serve as members of the Committee, provided that a majority of the members of the Committee shall be independent outside directors. ARTICLE IV. SECTION 2. POWERS: Subject to the limitations stated in Sections 1 and 7 of Article III and Sections 2 and 3 of Article XI of these Bylaws and to any limitations imposed by law or imposed by the Board of Directors, the Executive Committee may exercise all the powers of the Board in the management of specified matters where such authority is delegated to it by the Board, and also, subject to the same limitations, when the Board is not in session, the Committee shall have, and may exercise, all the powers and authority of the Board in the management and business of the company (including the power to authorize the seal of the company to be affixed to all papers which may require it). ARTICLE IV. SECTION 3. MEETINGS: The Executive Committee shall adopt such rules and regulations for the calling and holding of its meetings and for the transaction of business at such meetings as to the Committee shall seem appropriate and not inconsistent with the law or these Bylaws. As provided by law, the Committee is authorized to hold meetings by conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation shall constitute presence in person at such meeting. ARTICLE IV. SECTION 4. QUORUM: Three members of the Executive Committee shall constitute a quorum for the transaction of business, but less than a quorum may adjourn from time to time and from place to place. The vote of the majority of the members present -15- at a meeting at which a quorum is present or of three members present at such meeting, whichever is greater, shall be required to constitute action by the Committee, unless the vote of a greater number shall be required by law. ARTICLE IV. SECTION 5. OFFICERS: SUBCOMMITTEES: The Chairman of the Board, and in his absence the President, shall preside at the meetings of the Executive Committee but, in the absence of both the Chairman of the Board and the President, the majority of the members of the Committee present at a meeting shall appoint a member to preside at such meeting. The Secretary of the company shall serve as secretary of the Committee, but in the absence of the Secretary, the presiding officer at a meeting shall appoint any other director or officer of the company to act as secretary of such meeting. The Secretary shall keep the records of the Committee. The Committee shall also have power to appoint such subcommittees as it may deem necessary. ARTICLE IV. SECTION 6. VACANCIES: Vacancies occurring in the Executive Committee shall be filled by the Board of Directors. ARTICLE V COMMITTEE ON DIRECTORS' AFFAIRS ARTICLE V. SECTION 1. MEMBERS: At the first meeting of each newly elected Board of Directors, the Board shall appoint a Committee on Directors' Affairs of the Board containing at least three members and consisting entirely of independent outside directors of the Board, as defined in Section 6, Article II of these Bylaws, and shall designate its chairman. The Board may from time to time designate one or more independent outside directors as alternate members of the Committee. ARTICLE V. SECTION 2. POWERS: By such date as may be specified by the Board of Directors each year, the Committee on Directors' Affairs shall recommend and submit to the Board for its approval a list of persons proposed for nominations by the Board for election as directors at the next annual stockholders meeting. If for any reason a vacancy -16- occurs in any slate of persons nominated by the Board for election as directors, or a vacancy occurs on the Board between annual meetings, the Committee shall, by the date specified by the Board, submit to the Board for approval a recommendation of a person to fill each such vacancy. Except as otherwise provided in Section 5 of this Article V, only persons recommended by the Committee shall be eligible for nomination by the Board for election as directors or to fill a vacancy, but if the Board does not approve of one or more of the persons recommended by the Committee, the Committee shall submit a recommendation of other persons by the date specified by the Board. ARTICLE V. SECTION 3. MEETINGS: The Committee on Directors' Affairs shall adopt such rules and regulations for the calling and holding of its meetings and for the transaction of business at such meetings as to the Committee shall seem meet and consistent with law and these Bylaws. ARTICLE V. SECTION 4. QUORUM AND VOTING: Three members or a majority of the Committee on Directors' Affairs, whichever is greater, shall constitute a quorum for the transaction of business, but less than a quorum may adjourn from time to time and from place to place. The vote of the majority of the members present at a meeting at which a quorum is present or of three members present at such meeting, whichever is greater, shall be required to constitute action by the Committee, unless the vote of a greater number shall be required by law. ARTICLE V. SECTION 5. FAILURE TO ACT: If for any reason the Committee shall fail or determine not to make a recommendation of director nominees with respect to any annual stockholders meeting or with respect to any vacancy on the Board by the date specified by the Board, the Board shall select such nominees or fill such vacancy in such manner as it deems appropriate. ARTICLE V. SECTION 6. RIGHTS OF STOCKHOLDERS: Nothing in this Article V shall affect or restrict the right of any stockholder to nominate any person for election as a director where such nomination is -17- otherwise authorized by law and made in accordance with Section 10, Article II of these Bylaws. ARTICLE VI AUDIT COMMITTEE ARTICLE VI. SECTION 1. MEMBERS: At the first meeting of each newly elected Board of Directors, the Board shall appoint an Audit Committee of at least three members, consisting entirely of independent outside directors of the Board, as defined in Section 6, Article II of these Bylaws, and shall designate its chairman. From time to time the Board may designate one or more independent outside directors as alternate members of the Committee. ARTICLE VI. SECTION 2. POWERS: The Audit Committee shall have the following powers and duties: (a) The Committee shall recommend annually to the Board of Directors the independent public accountants to be engaged to audit the books, records, and accounts of the company for the ensuing fiscal year. Only accountants recommended by the Committee and approved by the Board shall be engaged. In case of a vacancy in the position of independent public accountants, the Committee shall recommend and the Board shall approve the engagement of other independent public accountants to fill the vacancy until the next annual stockholders meeting; (b) The Committee shall arrange the details of the engagement of the independent public accountants, including the remuneration to be paid; (c) The Committee shall review with the company's independent public accountants, as well as the company's Controller and other appropriate company personnel, the following matters: (i) the company's general policies and procedures with respect to audits and accounting and financial controls; and (ii) the general accounting and reporting principles and practices which should be applied in preparing the company's financial statements and conducting financial audits of its affairs; -18- (d) The Committee shall meet with the independent public accountants as required, but at least twice a year, and shall review with them the company's interim and year- end financial statements, any certification, report, or opinion which the independent public accountants propose to render in connection with such statements, and any other appropriate matter; (e) The Committee shall meet with the company's internal audit staff as required, but at least twice a year, and shall review with that staff the company's interim and year-end financial statements, and the extent to which the company's accounting staff has implemented any reforms suggested by the independent public accountants or the Committee; (f) The Committee shall have power to direct the independent public accountants and the company's internal audit staff to inquire into and report to it on any corporate contract, transaction, or procedure; the conduct of any corporate office, division, profit center, subsidiary, or other unit; or any other matter having to do with the company's business and affairs; (g) The Committee shall become and remain apprised of those matters relating to the payment by the company of finders', promoters' or consultants' commissions or fees, or any similar commissions or fees, as shall be necessary to permit the Committee to recommend to the Board the policies which the Board should adopt and the action which the Board should take to prevent any use of company funds or other assets which is unlawful or contrary to Board policy; and (h) The Committee shall make such reports and recommendations to the Board in connection with the foregoing functions as it shall deem appropriate or as the Board may request, and shall take such action thereon as the Board may direct it to take. ARTICLE VI. SECTION 3. DEFINITION: The term "independent public accountants" shall include individuals, companies, or firms serving as the independent outside auditors or independent outside public accountants for the company. -19- ARTICLE VI. SECTION 4. MEETINGS: The Committee may adopt such rules and regulations for the calling and holding of its meetings and for the transaction of business at such meetings as shall be considered by the Committee to be necessary or desirable; provided, that two members of the Committee shall constitute a quorum for the transaction of the business and the affirmative vote of a majority of the whole Committee shall be required to constitute action by the Committee. ARTICLE VI. SECTION 5. STAFF: The Committee may select and appoint such full-time or part- time staff assistants, as the Committee deems necessary or desirable, who shall perform such duties and responsibilities as the Committee shall assign. The compensation of its staff shall be fixed by the Committee in accordance with general company policy, and any member of its staff may be discharged only by the Committee. ARTICLE VII COMPENSATION COMMITTEE ARTICLE VII. SECTION 1. MEMBERS: At the first meeting of each newly elected Board of Directors, the Board shall appoint a Compensation Committee of at least three members, consisting entirely of independent outside directors of the Board, as defined in Section 6, Article II of these Bylaws, and shall designate its chairman. From time to time the Board may designate one or more independent outside directors as alternate members of the Compensation Committee. ARTICLE VII. SECTION 2. POWERS: The Compensation Committee shall have the following powers and duties: (a) The Compensation Committee shall review and recommend to the Board of Directors for its consideration and determination the salaries of the Chairman of the Board of Directors and the President, and to determine on its own initiative the salaries of all other employees who are members of the Board of Directors or who have annual salaries of $200,000 or more; -20- (b) The Compensation Committee shall consider and make recommendations to the Board of Directors with respect to (i) any proposals for the application of new benefits and incentive compensation plans or programs to officers who are also directors, and (ii) the application to such officers of amendments to any then existing such plans or programs which would significantly increase the compensation of such officers; and (c) The Compensation Committee shall perform such other duties as may, from time to time, be delegated to the Compensation Committee under any compensation or benefit plans. ARTICLE VII. SECTION 3. MEETINGS: The Compensation Committee shall adopt such rules and regulations for the calling and holding of its meetings and for the transaction of business at such meetings as shall be considered by the Compensation Committee to be necessary or desirable; provided, that two members of the Compensation Committee shall constitute a quorum for the transaction of business and the affirmative vote of a majority of the whole Compensation Committee shall be required to constitute action by the Compensation Committee. ARTICLE VII. SECTION 4. STAFF: The Compensation Committee shall be assisted by appropriate corporate staffs, and in addition, the Compensation Committee may obtain assistance from such other persons, who need not be employees of the company, or organizations as it may deem advisable, with the expenses incurred thereby to be borne by the company. ARTICLE VIII PUBLIC POLICY COMMITTEE ARTICLE VIII. SECTION 1. MEMBERS: At the first meeting of each newly elected Board of Directors, the Board shall appoint a Public Policy Committee of at least three members, consisting entirely of independent outside directors of the Board, as defined in Section 6, Article II of these Bylaws, and shall designate its chairman. From time to time the Board may designate one or more directors as alternate members of the Public Policy Committee, provided that those members and alternates from time to time -21- serving as the Public Policy Committee shall at all times consist entirely of independent outside directors. ARTICLE VIII. SECTION 2. POWERS: The Public Policy Committee shall have the following powers and duties: (a) The Public Policy Committee shall act in an advisory capacity to the Board of Directors and the management of the company in response to current and emerging public policy issues and in development and review of policies and budgets in respect of contributions, including but not limited to contributions to organizations whose primary purpose is charitable, civic, cultural or educational; (b) The Public Policy Committee shall identify, evaluate and monitor the social, political, environmental, occupational safety and health trends, issues and concerns, domestic and foreign, which affect or could affect the company's business activities and performance; (c) The Public Policy Committee shall review information from company management and approve recommendations to assist in the formulation and adoption of policies, programs and practices concerning the matters set forth in subparagraph (b) above, including but not limited to ecological and environmental protection, employee safety, ethical business conduct, consumer affairs, alcohol and drug abuse, equal opportunity matters and government relations; (d) The Public Policy Committee shall exercise the powers with respect to political activities conferred upon it by the provisions of Article XI of these Bylaws; and (e) The Public Policy Committee shall monitor and evaluate on an ongoing basis the company's compliance with the policies, programs and practices established under the Public Policy Committee's oversight. -22- ARTICLE VIII. SECTION 3. MEETINGS: The Public Policy Committee shall adopt such rules and regulations for the calling and holding of its meetings and for the transaction of business at such meetings as shall be considered by the Public Policy Committee to be necessary or desirable; provided that three members or a majority of the Public Policy Committee, whichever is greater, shall constitute a quorum for the transaction of business and the affirmative vote of a majority of the whole Public Policy Committee shall be required to constitute action by the Public Policy Committee. ARTICLE VIII. SECTION 4. STAFF: The Public Policy Committee shall be assisted by appropriate corporate staffs, and in addition, the Public Policy Committee may obtain assistance from such other persons, who need not be employees of the company, or organizations as it may deem advisable, with the expenses incurred thereby to be borne by the company. ARTICLE IX OFFICERS ARTICLE IX. SECTION 1. DESIGNATION: The officers of the Company shall consist of a Chairman of the Board of Directors and a President, each of whom shall be a director, one or more Executive Vice Presidents, one or more Vice Presidents, a Secretary, a Treasurer, and a Controller, who need not be but may be directors, and such other officers, including a Vice Chairman of the Board of Directors who shall be a director, as may be elected or appointed by the Board of Directors. Except for the offices of Chairman of the Board of Directors, Vice Chairman, President, and Executive Vice President, any two offices may be held by the same person. -23- ARTICLE IX. SECTION 2. ELECTION: TERM OF OFFICE: The officers of the company shall be elected by the Board of Directors at its first meeting after the annual meeting of the stockholders and thereafter as appropriate. Each officer shall hold office from the date of his election until the first meeting of the directors held after the next annual meeting of the stockholders, or until his successor is elected. ARTICLE IX. SECTION 3. REMOVAL FROM OFFICE: FAILURE TO PERFORM DUTIES: Any officer of the company may be removed with or without cause by the Board of Directors. If any officer shall be unable or refuse or fail to perform any of the duties of his office, the officer of the company which has been designated the chief executive officer pursuant to Section 5 of this Article may designate any other person or persons to perform such duties until such time as the Board may act with respect thereto. ARTICLE IX. SECTION 4. CHAIRMAN OF THE BOARD OF DIRECTORS: VICE CHAIRMAN: PRESIDENT: The Chairman of the Board of Directors shall preside at all meetings of the Board of Directors and of the stockholders. In the absence of the Chairman, the Vice Chairman, and in the absence of both the Chairman and the Vice Chairman, the President shall preside at all such meetings. The Chairman, Vice Chairman, or the President is empowered to sign any contract, deed, certificate, or other instrument or document authorized by the Board or the Executive Committee, or required by law to be signed by such officer or officers. -24- ARTICLE IX. SECTION 5. CHIEF EXECUTIVE OFFICER: The Chairman of the Board of Directors shall be the chief executive officer of the company. The Chairman of the Board of Directors may designate the Vice Chairman or the President to act as chief executive officer during the Chairman's absence. The chief executive officer of the company shall have general and active supervision over the business, affairs and operations of the company and over its several officers, agents and employees, subject, however, to the control of the Board and the Executive Committee. The chief executive officer shall see that all orders and resolutions of the Board and the Executive Committee are carried into effect, and, in general, shall perform all duties incident to the position of chief executive officer and such other duties as may from time to time be assigned by the Board or the Executive Committee. The chief executive officer may delegate and assign to other officers, employees and agents of the company or to committees appointed by him such duties as the chief executive officer considers proper and not inconsistent with these Bylaws or any delegations and assignments made by the Board or the Executive Committee. ARTICLE IX. SECTION 6. EXECUTIVE VICE PRESIDENTS: VICE PRESIDENTS: The Executive Vice Presidents and the Vice Presidents shall have such authority and shall perform such duties as may be delegated to them pursuant to these Bylaws. The power of the Executive Vice Presidents and the Vice Presidents to sign on behalf of the company any contract, deed, certificate, or other instrument or document authorized by the Board of Directors or the Executive Committee shall be coordinate with like powers of the Chairman of the Board of Directors, the Vice Chairman, and the President and shall have the same effect as if signed by the Chairman or the President. ARTICLE IX. SECTION 7. SECRETARY: The Secretary shall attend to the giving of all notices of all meetings of the Board of Directors and stockholders, shall attend all such meetings and shall record the minutes of such meetings in books provided for that purpose. He shall be the custodian of all papers brought before the Board for action or ordered on file. He shall have the custody of the corporate seal, and shall, as necessary or appropriate, affix and attest the same on all documents authorized by the Board or the Executive Committee. He shall make or cause to be made the necessary or appropriate determinations as to the owners of stock pursuant to the establishment of a record date, as provided in Section 3, Article X of these -25- Bylaws, and shall prepare or cause to be prepared the required or appropriate stockholder lists or records reflecting these determinations. Such list shall be certified by the Secretary or other person in charge of the stock ledger of the company. The Secretary shall have such other authority and duties as may be assigned to him in accordance with these Bylaws. The Board may appoint one or more Assistant Secretaries who shall assist the Secretary in the performance of his duties and shall perform all the duties of the Secretary in his absence. ARTICLE IX. SECTION 8. TREASURER: The Treasurer shall keep full and accurate accounts of all receipts and disbursements. With the approval of the Board of Directors he shall deposit all moneys and other valuable effects in the name and to the credit of the company in such depositories as he may select and, under direction of the Board, he shall disburse the same. He shall have authority to receive and give receipts for all moneys due and payable to the company from any source whatsoever and to give full discharge for the same, and to endorse for deposit on behalf of the company all checks, drafts, notes, warrants, orders and other papers requiring endorsement. He may be required to give a bond in any amount satisfactory to the Board for the faithful performance of the duties of his office and for the restoration to the company in case of his death, resignation or removal from office, of all books, papers, vouchers, money or other property of whatever kind in his possession, belonging to the company. The Treasurer shall have such other authority and duties as may be assigned to him in accordance with these Bylaws. The Board may appoint one or more Assistant Treasurers who shall assist the Treasurer in the performance of his duties and shall perform all the duties of the Treasurer in his absence. ARTICLE IX. SECTION 9. CONTROLLER: The Controller shall be the officer principally in charge of the accounts of the company, and shall have such other authority and duties as may be assigned to him in accordance with these Bylaws. -26- The Board of Directors may appoint one or more Deputy Controllers and Assistant Controllers who shall assist the perform all the duties of the Controller in his absence. ARTICLE IX. SECTION 10. GENERAL: All other officers of the company shall have such powers and duties as may be assigned in accordance with these Bylaws. ARTICLE X CAPITAL STOCK ARTICLE X. SECTION 1. CERTIFICATES: FACSIMILE SIGNATURES: LOST STOCK: Certificates of stock shall be issued in numerical order, and every holder of stock in the company shall be entitled to a certificate or certificates signed by, or in the name of, the company, by the Chairman of the Board of Directors, the Vice Chairman, the President, an Executive Vice President, or a Vice President, or by two or more of them, and by the Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer, of the company, certifying the number of shares owned by him in the company. If such certificate is countersigned by a transfer agent other than the company or its employee, or by a registrar other than the company or its employee, any other signature on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the company with the same effect as if he were such officer, transfer agent or registrar at the date of issue. The seal of the company, or a facsimile thereof, may, but shall not be required to be affixed to certificates for shares of stock. The name of each person to whom a certificate of stock shall be issued, together with the number of shares and the date of issue, shall be entered upon the books of the company. If any certificate of stock shall be lost, stolen, mutilated or destroyed, the Board of Directors shall cause a new certificate of stock to be issued in the place -27- of such certificate and may, in its discretion, require the owner of the replaced certificate, or his legal representatives, to give the company a bond, in such form and amount as the Board may direct, sufficient to indemnify the company and other interested persons against any loss on account of the issuance or any action in connection with the issuance of any such new certificate. ARTICLE X. SECTION 2. TRANSFERS: PRESERVATION OF CANCELED CERTIFICATES: FRACTIONAL SHARES: TRANSFER AGENTS: Transfer of shares of the common stock of the company shall be made upon its books by the holder thereof, in person or by attorney duly authorized, upon the surrender of a certificate or certificates, properly endorsed, for a like number of shares. No new certificate shall be issued until the former certificate or certificates for the same number of shares shall have been surrendered and canceled, except in the case of a certificate issued in replacement as provided in Section 1 of this Article X. All certificates surrendered to the company for transfer shall be canceled and each certificate canceled shall be preserved for a period of 10 years after cancellation, or for such shorter or longer period as the Chairman of the Board of Directors, the Vice Chairman, or the President, with the approval of the General Counsel of the company, may direct from time to time. No certificate for less than one share of the common stock shall be issued; however, scrip for fractional shares may be issued on such terms and conditions as the Board of Directors may prescribe. The Board of Directors may appoint such stock transfer agents and assistant transfer agents, and stock registrars, as it shall deem proper and may require all stock certificates to bear the signature or facsimile signature of a transfer agent, and of a registrar, or either of them. ARTICLE X. SECTION 3. DATE FOR DETERMINATION OF STOCKHOLDERS: For the purpose of enabling the company to determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 60 -28- days prior to any other action. In such case, only such persons in whose names shares of stock are registered on the books of the company on the date so fixed shall be considered stockholders for the purpose or purposes for which such determination was made, notwithstanding any transfer of any stock on the books of the company after any such record date. ARTICLE X. SECTION 4. ADDITIONAL REGULATIONS: The Board of Directors may at any time adopt such additional and further rules and regulations relating to common stock and stock certificates as it deems appropriate and not inconsistent with the law or these Bylaws. ARTICLE XI POLITICAL ACTIVITIES ARTICLE XI. SECTION 1. COMPLIANCE WITH LAWS CONCERNING POLITICAL CONTRIBUTIONS: Any officer or employee of the company who fails to comply with all federal, state, and local laws regarding corporate contributions and expenditures in connection with election of public officials shall be subject to appropriate disciplinary action, which may include discharge from employment. The Audit Committee of the Board of Directors shall be responsible for monitoring compliance with those laws and shall require written annual assurances by principal corporate officers of their compliance with these laws and policies adopted by the Board. In performing that responsibility, the Committee shall utilize the services of the company's independent public accountants, its internal audit staff, and its General Counsel. ARTICLE XI. SECTION 2. POLITICAL CONTRIBUTIONS: Except as otherwise provided in the succeeding paragraph, the Board of Directors shall have the sole and non-delegable power and authority to authorize the use of company funds and facilities to make political contributions and expenditures, if and to the extent permitted by applicable law, to or in support of political candidates, political committees (including but not limited to political committees established by the company pursuant to Section 4 of this Article XI), and political parties, in connection with nomination and election of candidates for state or local office. -29- The Public Policy Committee (subject to any rules or restrictions which the Board may establish) shall have and may exercise the power and authority of the Board to authorize such contributions, expenditures, and use of company funds and facilities, if and to the extent permitted by applicable law. The Public Policy Committee may delegate such power and authority, in whole or in part, to the Senior Vice President Corporate Relations and Services, subject to such further rules and restrictions as the Committee may specify. All contributions made pursuant to the authority granted by this paragraph shall be reported quarterly to the Board. ARTICLE XI. SECTION 3. POLITICAL COMMITTEE AUTHORIZED BY FEDERAL LAW: The Board of Directors shall have the sole and non-delegable power and authority to authorize the establishment, administration, and solicitation of contributions to a separate segregated fund to be utilized for political purposes by the company as authorized by Section 441b of Title 2 of the United States Code. No such separate segregated fund shall be established or administered by the company, except through a political committee, organized as provided in Section 432 of Title 2 of the United States Code, registered as provided in Section 433 of such Title, and otherwise operated in compliance with law. Any decision of the Board authorizing the establishment of a political committee permitted by Section 441b of Title 2 shall be noted in its minutes. The minutes shall include an estimate of the annual cost to the company of establishing, administering, and soliciting for such committee. Any such committee which is established shall report in writing to the Board on its activities not later than March 15 of each year. Such report shall include a summary of any reports filed with the Federal Election Commission or any other government agency, together with a statement of the costs incurred by the company in connection with such a committee during the preceding year. ARTICLE XI. SECTION 4. NONFEDERAL POLITICAL COMMITTEES: The Board of Directors or the Public Policy Committee or the Senior Vice President Corporate Relations and Services (subject to any rules and regulations which the Public Policy Committee may establish), and each of them shall have the power and authority to authorize the establishment, administration, and solicitation of contributions to one or more political committees, and to authorize use of corporate funds to pay or bear all costs associated with such establishment, administration, and solicitation, and to authorize use of such political committees by the company to make political contributions and expenditures or otherwise support candidates for state or local office, authorized -30- committees of such candidates, and other political committees supporting state or local candidates; provided, however, that the foregoing authorizations may be granted and committees so established may be so used only if permitted by applicable state law and only to the extent, if any, permitted by such law. Such political committees as may be established by the company shall be registered if required by applicable state law and shall otherwise be operated in compliance with law. Any decision of the Board authorizing establishment of such a committee shall be noted in its minutes. By March 15 following the calendar year in which such a committee is otherwise established, such establishment shall be reported to the Board and noted in its minutes. Any such committee shall report in writing to the Board on its activities not later than March 15 of each year. Such report shall include a summary of any reports filed by the committee with any government agency, together with a statement of costs incurred by the company in connection with such committee during the preceding year. ARTICLE XI. SECTION 5. OTHER POLITICAL ACTIVITIES: Nothing contained in these Bylaws shall be deemed to prohibit any officer or employee from engaging in political activities in an individual capacity at his own expense or from making political contributions or expenditures of his personal funds or from expressing views and taking appropriate action as a company officer or employee with respect to legislative or political matters affecting the company and not pertaining to election of public officials. ARTICLE XII MISCELLANEOUS ARTICLE XII. SECTION 1. CHECKS, NOTES AND DRAFTS: All checks, notes, drafts, warrants, or orders for the payment of money, shall be executed on behalf of the company by such person or persons, and in such manner by such method as the Board of Directors may from time to time specify. ARTICLE XII. SECTION 2. SEAL: The seal of the company shall be in the form of a circle and shall bear the name of the company, the name of the state under the laws of which it is incorporated, and the year of its incorporation. -31- ARTICLE XII. SECTION 3. DIVIDENDS AND RESERVES: The Board of Directors may declare dividends to the full extent permitted by the law, provided the Board from time to time may set apart out of any funds available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve. ARTICLE XII. SECTION 4. WAIVER OF NOTICE: Whenever notice is required to be given under any provision of these Bylaws, the Certificate of Incorporation or the Delaware General Corporation Law, a written waiver thereof signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. ARTICLE XII. SECTION 5. CHAIRMAN OF THE BOARD EMERITUS: The Board of Directors may, from time to time, at its discretion, create the honorary position of Chairman of the Board Emeritus, without executive functions, and elect a person to fill the position so created. ARTICLE XII. SECTION 6. AMENDMENTS: Subject to the provisions of the Certificate of Incorporation, these Bylaws may be altered, amended or repealed in whole or in part by the stockholders at any annual meeting or at any special meeting provided that the notice of such special meeting shall contain a statement of the contemplated alteration, amendment or repeal. Subject to the laws of the State of Delaware, the Certificate of Incorporation, and these Bylaws, the Board of Directors shall have power to make, alter, amend and repeal these Bylaws in whole or in part, except those Bylaws adopted by stockholders of the company or those Bylaws as to which power to make, alter, amend or repeal is reserved to stockholders of the company. -32- EX-10 3 Exhibit 10(g) 4-26-88 INCENTIVE COMPENSATION PLAN OF PHILLIPS PETROLEUM COMPANY ARTICLE I - PURPOSE ------------------- The purpose of the Incentive Compensation Plan is to attract and retain desirable personnel and provide greater incentive to and stimulate the efforts of key employees of the Company and certain of its subsidiaries by granting suitable recognition for outstanding individual contributions to the Company's success. ARTICLE II - DEFINITIONS ------------------------ The following terms, when used in this Plan, have the following meanings unless the context clearly indicates otherwise: 1. "Plan" shall mean the Incentive Compensation Plan, the terms and provisions of which are herein set forth, together with such amendments thereto as may hereafter from time to time be adopted. 2. "Company" shall mean Phillips Petroleum Company. 3. "Employee" shall mean any person who, on the last day of the Year for which an allotment is made, was a regular full-time employee of the Company or of a company more than 95% of whose voting stock is owned directly or indirectly by the Company. 1 4. "Shares" or "Shares of Stock" shall mean shares of the Company's authorized but unissued or previously issued and reacquired common stock, but shall not refer herein to Restricted Shares or Restricted Shares of stock. 5. "Restricted Shares" or "Restricted Shares of Stock" shall mean Shares which may not be sold, assigned, transferred, pledged or otherwise disposed of, without prior approval of the Board or its designee, during a period specified by the Board in connection with the allotment of such Shares hereunder and which are evidenced by a certificate or certificates upon the face of which such restriction has been appropriately and conspicuously noted. 6. "Reserve" shall mean the Incentive Compensation Reserve described in Article IV hereof. 7. "Year" shall mean calendar year. 8. "Board" shall mean the Board of Directors of the Company. ARTICLE III - ELIGIBILITY ------------------------- Any regular full-time Employee who is in a managerial, professional or other key position, including officers or directors who are Employees, shall be eligible to participate in the Plan. ARTICLE IV - INCENTIVE COMPENSATION RESERVE ------------------------------------------- 1. For the calendar year 1965 and for each year thereafter, the Board may cause to be credited to an Incentive Compensation Reserve ("Reserve") up to 3% of the amount by which net income for that year exceeds 6% of borrowed and invested capital as of the end of the previous year. In determining the maximum amount creditable to the Reserve for each year as above provided: (a) "Net income" shall mean the amount reported as net income for that year in the consolidated statement of income included in the 2 Company's Annual Report to Stockholders plus (i) interest on long-term debt and (ii) amounts credited to the Reserve during that year; and (b) "borrowed and invested capital" shall mean the amount, as reported in the consolidated financial statements included in theCompany's Annual Report to Stockholders as of the end of the previous year, of (i) the total stockholders' equity (including capital stock, capital in excess of par value, and earnings employed in the business, less treasury stock) plus (ii) long-term debt due after one year and (iii) an appropriate adjustment for any significant change during the current year in the amounts of items (i) or (ii). 2. No amount may be credited to the Reserve unless and until any amount previously credited thereto and not allotted by the Board to participants as hereinafter authorized shall have been restored to net income. 3. As soon as practicable after the end of each year the Company's independent public accountants shall determine and report to the Board the maximum amount creditable to the Reserve for that year under the provisions of the Plan. ARTICLE V - ALLOTMENTS FROM RESERVE ----------------------------------- Subject to the provisions hereof, the Board may make such allotments from the Reserve to such eligible Employees in such manner and amount as the Board shall in its sole discretion determine. Total allotments from the Reserve to all participants in any one year shall not exceed the amount credited to the Reserve available for that year. Total allotments in any one year to members of 3 the Board as a group shall not exceed 20% of the total allotments to all Employees in that year. The allotment in any one year to an individual shall not exceed a maximum amount to be determined by the Board by means of a vote in which at least a majority of the total number of nonemployee directors then in office vote in favor of the action taken. ARTICLE VI - FORMS OF ALLOTMENTS -------------------------------- The Board has sole discretion to approve allotments under this Plan. From time to time it may delegate through an Administrative Procedure or otherwise, the right to determine settlement modes chosen from cash, shares or restricted shares. ARTICLE VII - SETTLEMENT OF ALLOTMENTS -------------------------------------- 1. Subject to the provisions of Article VIII, allotments shall be settled, (a) as to allotments in cash or in Shares, by payment of cash or delivery of Shares, or both, as the case may be, at or promptly following the date of allotment; and (b) as to allotments in Restricted Shares, by the issuance to and registration in the name of the participant, at or promptly following the date of allotment, of the entire number of the Restricted Shares covered by the allotment, which Restricted Shares, or a portion or portions thereof, shall not, without the 4 prior written consent of the Board or its designee, be sold, assigned, transferred, pledged or otherwise disposed of during such period or periods commencing with the date of allotment as determined by the Board; provided, each certificate evidencing Restricted Shares shall be accepted by the participant and placed by him in escrow held by the Company for the account of the participant during the period of restriction applicable thereto and, upon the termination of such period, such certificate shall be exchanged for a certificate for a corresponding number of Shares and the latter certificate shall be delivered forthwith to the participant, such delivery being considered for the purposes hereof as the settlement of the allotment or part thereof to which such certificate relates. 2. Subject to the provisions of Article VIII and to the restrictions relating to the sale, assignment, transfer, pledge or other disposition of Restricted Shares, Restricted Shares held in escrow shall have all the rights and benefits of Shares and such rights and benefits, including those with respect to voting, dividends and other distributions, shall be enjoyed by the participant to whom allotted, as the registered owner, to the same extent as if such Restricted Shares were not being held in escrow, including the use of the Restricted Shares in the exercise of a stock option granted by the 5 Company provided, to the extent that any distribution made with respect to Restricted Shares consists of securities of the Company, or securities of the Company are received under a stock option by use of Restricted Shares, such securities shall be subject to the same restrictions and handled in the same manner as the Restricted Shares to which such securities are attributable. ARTICLE VIII - FORFEITURES -------------------------- 1. Without prejudice to any other rights of the Company, all allotments to participants, whether in cash or in Shares, or in Restricted Shares, shall, prior to settlement, be deemed to be conditional and contingent and subject to forfeiture at the discretion of the Board if for any reason other than death, disability or retirement at normal retirement age, a participant's employment with the Company or a subsidiary of the Company is terminated. 2. Without prejudice to any other right of the Company, all allotments made in Restricted Shares and stock derived therefrom, shall be deemed to be conditional and contingent and subject to forfeiture during the escrow period upon such terms and conditions as the Board may specify on or before the allotment date for such Restricted Shares. 3. Any amount forfeited as above provided (in the case of forfeiture involving Shares or Restricted Shares or stock derived therefrom, such amount to 6 be equal to the amount attributed thereto at time of allotment) shall be restored to net income of the Company in the year of forfeiture. ARTICLE IX - DEATH OR INCAPACITY -------------------------------- In case of death or incapacity of a participant, whether before or after termination of employment, prior to the time an allotment has been settled, the amount thereof shall be settled with the participant's legal representative(s) at the time and in the manner and amount originally provided or otherwise as determined by the Board in individual cases. ARTICLE X - ADMINISTRATION -------------------------- 1. The Board shall have the exclusive right to interpret and construe the Plan and to administer its provisions, and, without limitation of the generality of the foregoing, shall solely be empowered to promulgate, amend and rescind rules and regulations for administration of the Plan, to decide any questions or disputes which may arise under the Plan and to make all other determinations and to take or cause to be taken all such other actions as may be necessary or desirable for operation of the Plan. Subject to the provisions hereof, the selection of eligible Employees for participation in the Plan and the manner and amount of such participation in each individual case shall be determined in the sole and absolute discretion of the Board. 2. The action of the Board pursuant to paragraph 1 of this Article shall be binding and conclusive on all persons. 7 ARTICLE XI - AMENDMENTS AND TERMINATION OF THE PLAN --------------------------------------------------- Although it is contemplated that the Plan will continue indefinitely, nevertheless the Board in its discretion may at any time and from time to time amend the Plan or any provision thereof or may terminate the Plan, except that: (i) The Board shall not, without prior approval of the stockholders of the Company, amend the Plan to increase the maximum amount which may be credited to the Reserve for any year, or to increase the maximum amounts which may be allotted in any year to the members of the Board as a group, except as may be necessary or permitted so as to achieve or maintain a favorable tax position for the Company or participants under the Internal Revenue Code, as the same may be amended; and (ii) Neither an allotment made prior to the effective date of any amendment or termination of the Plan, nor any payment provided for under the terms of such an allotment, may be adversely affected by such amendment or termination without the consent of the participant to whom such allotment was made. ARTICLE XII - LEGAL REQUIREMENTS -------------------------------- The operation of the Plan and all rights and obligations resulting at any time therefrom shall be subject to compliance with all state and federal laws and regulations (whether now or hereafter becoming applicable) at such time or times and in such manner as the Board shall consider necessary or appropriate. 2DP-1/002 8 EX-10 4 Exhibit 10(j) BOARD OF DIRECTORS APPROVED - SEPTEMBER 12, 1994 KEY EMPLOYEE DEFERRED COMPENSATION PLAN OF PHILLIPS PETROLEUM COMPANY PURPOSE The purpose of the Key Employee Deferred Compensation Plan of Phillips Petroleum Company (the "Plan") is to attract and retain key employees by providing them with an opportunity to defer receipt of cash amounts which otherwise would be paid to them under various compensation programs or plans by the Company. SECTION 1. Definitions. (a) "Award" shall mean the United States cash dollar amount (i) allotted to an Employee under the terms of an Incentive Compensation Plan or the Long Term Incentive Compensation Plan, or (ii) required to be credited to an Employee's Deferred Compensation Account pursuant to the Incentive Compensation Plan, the Long Term Incentive Compensation Plan, the Strategic Incentive Plan, the Long Term Incentive Plan, or any similar plans, or any administrative procedure adopted pursuant thereto, (iii) credited as a result of a Participant's deferral of the receipt of the value of the Stock which would otherwise be delivered to an Employee by the Committee acting, in its sole discretion, to lapse restrictions on Restricted Stock previously awarded or which may be awarded to the Participant pursuant to the Incentive Compensation Plan, the Long Term Incentive Compensation Plan, the 1 Strategic Incentive Plan, the Long Term Incentive Plan, the Omnibus Securities Plan, or any similar plans, or any administrative procedure adopted pursuant thereto, (iv) credited resulting from a lump sum distribution from any of the Company's non-qualified retirement plans and/or plans which provide for a retirement supplement, (v) resulting from the forfeiture of Restricted Stock, required by the Company, of key employees who become employees of GPM Gas Corporation, (vi) credited as a result of an Employee's deferral of the receipt of the lump sum cash payment from the Employee's account in the Defined Contribution Makeup Plan, (vii) credited as a result of an Employee's voluntary reduction of Salary or (viii) any other amount determined by the Committee to be an Award under the Plan. Sections 2 and 3 of this Plan shall not apply with respect to Awards included under (ii), (v), and (vii) above and a participant receiving such an Award shall be deemed, with respect thereto, to have elected a Section 5(b)(i) payment option - 10 annual installments commencing about one year after retirement, but subject to revision under the terms of this Plan. (b) "Board of Directors" shall mean the board of directors of the Company. (c) "Chief Executive Officer (CEO)" shall mean the Chief Executive Officer of the Company. (d) "Committee" shall mean the Compensation Committee of the Board of Directors. 2 (e) "Company" shall mean Phillips Petroleum Company. (f) "Deferred Compensation Account" shall mean an account established and maintained for each Participant in which is recorded the amounts of Awards deferred by a Participant, the deemed gains, losses and earnings accrued thereon and payments made therefrom all in accordance with the terms of the Plan. (g) "Defined Contribution Makeup Plan" shall mean the Defined Contribu- tion Makeup Plan of Phillips Petroleum Company or any similar plan or successor plans. (h) "Disability" shall mean the inability, in the opinion of the Company's group life insurance carrier or the Company's Medical Director, of a Participant, because of an injury or sickness, to work at a reasonable occupation which is available with the Company or at any gainful occupation which the Participant is or may become fitted. (i) "Employee" shall mean any individual who is a salaried employee of the Company or of a Participating Subsidiary who is eligible to receive an Award from an Incentive Compensation Plan or has Restricted Stock and is not subject to taxation in countries other than the United States of America either at the time of any preference election pursuant to Section 3 of the Plan or on the date that an Award would be deferred and credited to a Deferred Compensation Account pursuant to Section 4, generally classified as a U.S. Domestic Employee; provided, however, that the Plan Administrator may approve 3 exceptions to allow individuals generally classified as Expatriates and Nationals who have Restricted Stock, but who are not subject to the reporting requirements under Section 16 of the Exchange, to be regarded as Employees. (j) "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time or any successor statute. (k) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended and in effect from time to time, or any successor statute. (l) "Incentive Compensation Plan" shall mean the Incentive Compensation Plan of the Company, or the Annual Incentive Compensation Plan of Phillips Petroleum Company, or similar plan of a Participating Subsidiary, or any similar or successor plans, or all, as the context may require. (m) "Long-Term Incentive Compensation Plan" shall mean the Long-Term Incentive Compensation Plan of the Company which was terminated December 31, 1985. (n) "Long-Term Incentive Plan" shall mean the Long-Term Incentive Plan, or similar or successor plan, established under the Omnibus Securi- ties Plan of Phillips Petroleum Company. (o) "Participant" shall mean a person for whom a Deferred Compensation Account is maintained. 4 (p) "Participating Subsidiary" shall mean a subsidiary of the Company, of which the Company beneficially owns, directly or indirectly, more than 50% of the aggregate voting power of all outstanding classes and series of stock, where such subsidiary has adopted one or more plans making participants eligible for participation in this Plan and one or more Employees of which are Potential Participants. (q) "Plan Administrator" shall mean the person designated by the Chief Executive Officer to carry out ministerial duties related to the Plan. (r) "Potential Participant" shall mean a person who has received a notice specified in Section 2. (s) "Restricted Stock" shall mean shares of Stock which have certain restrictions attached to the ownership thereof. (t) "Retirement Income Plan" shall mean the Retirement Income Plan of the Company or a similar retirement plan of the Participating Subsidiary pursuant to the terms of which the Participant retires. (u) "Settlement Date" shall mean the date on which all acts under the Incentive Compensation Plan or the Long-Term Incentive Compensation Plan or actions directed by the Committee, as the case may be, have been taken which are necessary to make an Award payable to the Participant. 5 (v) "Salary" shall mean the monthly equivalent rate of pay for an Employee before adjustments for any before-tax voluntary reductions. (w) "Stock" means shares of common stock of the Company, par value $1.25. (x) "Strategic Incentive Plan" shall mean the Strategic Incentive Plan portion of the 1986 Stock Plan of the Company, of the 1990 Stock Plan of the Company, and of any successor plans of similar nature. SECTION 2. Notification of Potential Participants. (a) Incentive Compensation Plan. Each year, during September, Employees who are eligible to receive an Award in the immediately following calendar year under the Company's or a Participating Subsidiary's Incentive Compensation Plan will be notified and given the opportunity, in a manner prescribed by the Plan Administrator, to indicate a preference concerning deferral of all or part of such Award. (b) Restricted Stock Awards. Each year Employees who are or will become 55 years of age prior to the end of the calendar year or who are over 55 years old and have not previously been notified will be notified and given the opportunity, in a manner prescribed by the Plan Administrator, to indicate a preference concerning the deferral of the receipt of the value of all or part of the Stock which would otherwise be delivered to the Employees in the event the Committee acting, in its sole discretion, lapses restrictions on Restricted Stock previously awarded or which may be awarded to the Employees. 6 (c) Lump Sum Distribution from Non-Qualified Retirement Plans. With respect to the lump sum distribution permitted from the Company's non-qualified retirement plans and/or plans which provide for a retirement supplement, Employees may indicate, in a manner prescribed by the Plan Administrator, a preference for all or part of the lump sum distribution, if any, to be considered an Award under this Plan. (d) Lump Sum from Defined Contribution Makeup Plan. Employees who will receive a lump sum cash payment from their account under the Defined Contribution Makeup Plan, may indicate, in a manner prescribed by the Plan Administrator, a preference concerning deferral of all of part of such payment. (e) Salary Reduction. Annually, Employees on the U.S. dollar payroll may elect, in a manner prescribed by the Plan Administrator, a voluntary reduction of Salary for each pay period of the following calendar year, in which case the Company will credit a like amount as an Award hereunder, provided that the amount of such reduction shall be not less than $100 per month nor more than 50% of the Employee's Salary in effect as of the date of the election. SECTION 3. Indication of Preference or Election to Defer Award. (a) Incentive Compensation Plan. If a Potential Participant prefers to defer under this Plan all or any part of the Award to which a notice received under Section 2(a) pertains, the Potential Participant must indicate such preference (i) if the Potential Participant is subject 7 to Section 16 of the Exchange Act, to the Committee, or (ii) if the Potential Participant is not subject to Section 16 of the Exchange Act, to the CEO. The Potential Participant's preference must be received on or before October 1 of the year in which said Section 2(a) notice was received. Such indication must be in writing signed by the Potential Participant, and, must state the portion of the Award the Potential Participant desires to be deferred. If an indication is not received by October 1, the Potential Participant will be deemed to have elected to receive any ICP award awarded by the Committee. Such indication of preference, if accepted, becomes irrevocable on October 1 of the year in which the indication is submitted to the Committee or CEO. The Committee or CEO, as applicable, shall consider such indication of preference as submitted and shall decide whether to accept or reject the preference expressed on or before December 15 of the year in which the Potential Participant has submitted the indication of preference to it for Awards under Section 2(a). The Potential Participant shall be notified in writing of the decision. (b) Restricted Stock. If a Potential Participant prefers to defer under this Plan the value of all or any part of the Restricted Stock to which a notice received under Section 2(b) pertains, the Potential Participant must indicate such preference (i) if the Potential Participant is subject to Section 16 of the Exchange Act, to the Committee, or (ii) if the Potential Participant is not subject to Section 16 of the Exchange Act, to the CEO. The Potential Participant's preference must be received on or before October 1 of 8 the year in which said Section 2(b) notice was received. Such indication must be in writing signed by the Potential Participant, and, must state the portion of the value of the Restricted Stock the Potential Participant desires to be deferred. If an indication is not received by October 1, the Potential Participant will be deemed to have elected to receive any shares for which the restrictions have been lapsed by the Committee. Such indication of preference becomes irrevocable on October 1 of the year in which the indication is submitted to the Committee or CEO. The Committee or CEO, as applicable, shall consider such indication of preference as submitted and shall decide whether to accept or reject the preference expressed. The Potential Participant shall be notified in writing of the decision. A deferral of the value of the Restricted Stock will be paid under the terms of Section 5(b)(i) hereof - 10 annual installments commencing about one year after retirement, but subject to revision under the terms of this Plan. (c) Lump Sum Distribution from Non-Qualified Retirement Plans. If a Potential Participant prefers to defer under this Plan all or part of the lump sum distribution to which Section 2(c) pertains, the Potential Participant must indicate such preference (i) if the Potential Participant is subject to Section 16 of the Exchange Act, to the Committee or (ii) if the Potential Participant is not subject to Section 16 of the Exchange Act, to the CEO. The Potential Participant's preference must be received in the period beginning 90 days prior to and ending no less than 30 days prior to the date of commencement of retirement benefits under such plans. Such 9 indication must be in writing signed by the Potential Participant, and must state the portion of the lump sum distribution the Potential Participant desires to be deferred. The Committee or CEO, as applicable, shall consider such indication of preference as submitted and shall decide whether to accept or reject the preference expressed as soon as practicable. Such indication of preference, if accepted, becomes irrevocable on the date of such acceptance. (d) Lump Sum from Defined Contribution Makeup Plan. If a Potential Participant prefers to defer under this Plan all or part of the lump sum cash payment to which Section 2(d) pertains, the Potential Participant must indicate such preference (i) if the Potential Participant is subject to Section 16 of the Exchange Act, to the Committee or (ii) if the Potential Participant is not subject to Section 16 of the Exchange Act, to the CEO. The Potential Participant's preference must be received in the period beginning 365 days prior to and ending no less than 90 days prior to the Participant's retirement date except that if a Potential Participant is notified of layoff during or after the year in which the Potential Participant reaches age 50 and if there is not at least 120 days between the date the Potential Participant is notified of layoff and the Potential Participant's termination date, the Potential Participant's preference must be received within 30 days of being notified of layoff. Such indication must be in writing signed by the Potential Participant, and must state the portion of the lump sum payment the Potential Participant desires to be deferred. The Committee or CEO, as applicable, shall consider such indication of preference as 10 submitted and shall decide whether to accept or reject the preference expressed as soon as practicable. Such indication of preference, if accepted, becomes irrevocable on the date of such acceptance. A deferral of the lump sum from the Defined Contribution Makeup Plan will be paid under the terms of Section 5(b)(i) hereof - 10 annual installments commencing about one year after retirement, but subject to revision under the terms of the Plan. (e) Salary Reduction. If a Potential Participant elects to voluntarily reduce Salary and receive an Award hereunder in lieu thereof, the Potential Participant's election must be received on or before November 30 prior to the beginning of the calendar year of the elected deferral. Such election must be in writing signed by the Potential Participant, and must state the amount of the salary reduction the Potential Participant elects. Such election becomes irrevocable on November 30 prior to the beginning of the calendar year. An Award in lieu of voluntarily reduced salary will be paid under the terms of Section 5(b)(i) hereof - 10 annual installments commencing about one year after retirement, but subject to revision under the terms of the Plan. SECTION 4. Deferred Compensation Accounts. (a) Credit for Deferral. Amounts deferred pursuant to Section 3(a) will be credited to the Participant's Deferred Compensation Account as soon as practicable, but not less than 30 days after the Settlement Date of the Incentive Compensation Plan. Amounts deferred pursuant 11 to Section 3(b) will be credited at market value of the underlying Restricted Stock as soon as practicable, but not later than 30 days after the date as of which the Committee elects to lapse the restrictions. Amounts deferred pursuant to Section 3(d) and 3(e) will be credited to the Participant's Deferred Compensation Account as soon as practicable, but not later than 30 days after the cash payment would have been made had it not been deferred. Amounts deferred pursuant to other provisions of this plan shall be credited as soon as practicable after the date assigned to the deferral by the Company or by the Committee. (b) Designation of Investments. The amount in each Participant's Deferred Compensation Account shall be deemed to have been invested and reinvested from time to time, in such "eligible securities" as the Participant shall designate. Prior to or in the absence of a Participant's designation, the Company shall designate an "eligible security" in which the Participant's Deferred Compensation Account shall be deemed to have been invested until designation instructions are received from the Participant. Eligible securities are those securities designated by the Treasurer of the Company. The Treasurer of the Company may include as eligible securities, stocks listed on a national securities exchange, and bonds, notes, debentures, corporate or governmental, either listed on a national securities exchange or for which price quotations are published in The Wall Street Journal and shares issued by investment companies commonly known as "mutual funds". The Participant's Deferred Compensation Account will be adjusted to reflect the deemed gains, losses and earnings as though 12 the amount deferred was actually invested and reinvested in the eligible securities for the Participant's Deferred Compensation Account. Notwithstanding anything to the contrary in this section 4(b), in the event the Company actually purchases or sells such securities in the quantities and at the times the securities are deemed to be purchased or sold for a Participant's Deferred Compensation Account, the Account shall be adjusted accordingly to reflect the price actually paid or received by the Company for such securities after adjustment for all transaction expenses incurred (including without limitation brokerage fees and stock transfer taxes). In the case of any deemed purchase not actually made by the Company, the Deferred Compensation Account shall be charged with a dollar amount equal to the quantity and kind of securities deemed to have been purchased multiplied by the fair market value of such security on the date of reference and shall be credited with the quantity and kind of securities so deemed to have been purchased. In the case of any deemed sale not actually made by the Company, the account shall be charged with the quantity and kind of securities deemed to have been sold, and shall be credited with a dollar amount equal to the quantity and kind of securities deemed to have been sold multiplied by the fair market value of such security on the date of reference. As used herein "fair market value" means in the case of a listed security the closing price on the date of reference, or if there were no sales on such date, then the closing price on the nearest 13 preceding day on which there were such sales, and in the case of an unlisted security the mean between the bid and asked prices on the date of reference, or if no such prices are available for such date, then the mean between the bid and asked prices to the nearest preceding day for which such prices are available. The Treasurer of the Company may also designate a Fund Manager to provide services which may include recordkeeping, Participant ac- counting, Participant communication, payment of installments to the Participant, tax reporting and any other services specified by the Company in agreement with the Fund Manager. (c) Payments. A Participant's Deferred Compensation Account shall be debited with respect to payments made from the account pursuant to this Plan as of the date such payments are made from the account. The payment shall be made as soon as practicable, but no later than 30 days, after the installment payment date. If any person to whom a payment is due hereunder is under legal disability as determined in the sole discretion of the Plan Administrator, the Plan Administrator shall have the power to cause the payment due such person to be made to such person's guardian or other legal representative for the person's benefit, and such payment shall constitute a full release and discharge of the Company, the Plan Administrator and any fiduciary of the Plan. 14 (d) Statements. At least one time per year the Company or the Company's designee will furnish each Participant a written statement setting forth the current balance in the Participant's Deferred Compensation Account, the amounts credited or debited to such account since the last statement and the payment schedule of deferred Awards and deemed gains, losses and earnings accrued thereon as provided by the deferred payment option selected by the Participant. SECTION 5. Payments from Deferred Compensation Accounts. (a) Election of Method of Payment for an Incentive Compensation Plan Award. At the time a Potential Participant submits an indication of preference to defer all or any part of an Award under an Incentive Compensation Plan as provided in Section 3(a) above, the Potential Participant shall also elect in a manner prescribed by the Plan Administrator, which of the payment options, provided for in Paragraph (b) of this Section, shall apply to the deferred portion of said Award adjusted for any deemed gains, losses and earnings accrued thereon credited to the Participant's Deferred Compensation Account under this Plan. Subject to Paragraphs (e), (g) and (h) of this Section, if the Committee or CEO, as appropriate, accepts the Potential Participant's indication of preference, the election of the method of payment of the amount deferred shall become irrevocable. (b) Payment Options. A Potential Participant may elect to have the deferred portion of an Incentive Compensation Plan Award adjusted for any deemed gains, losses and earnings accrued thereon paid: 15 (i) (Post-Retirement) in 10 annual installments, the payment of the first of such installments to commence on the first day of the first calendar quarter which is on or after the first anniversary of the Potential Participant's first day of retirement under the terms of the Retirement Income Plan, or (ii) (Pre-Retirement) in annual installments of not less than 5 nor more than 10, in semi-annual installments of not less than 10 nor more than 20, or in quarterly installments of not less than 20 nor more than 40. The first of such installments to commence, as soon as practicable after any date specified by the Potential Participant, so long as such date is the first day of a calendar quarter, is on or after the Settlement Date, is at least one year from the date the payout option was elected, and is prior to the date the Potential Participant will attain the Participant's Normal Retirement Date under the terms of the Retirement Income Plan. (c) Election of Method of Payment of the Value of Restricted Stock. As provided in Section 3(b) above, a deferral of the value of all or part of the Restricted Stock will be considered payment option (b)(i) of this Section subject to Paragraphs (e) and (g) of this Section. (d) Election of Method of Payment of a Lump Sum Distribution from Non- Qualified Retirement Plans. At the time a Potential Participant submits an indication of preference to defer all or part of the lump sum distribution as provided in Section 3(c) above, the Potential 16 Participant shall also elect in a manner prescribed by the Plan Administrator which payment option shall apply to the deferred lump sum adjusted for any gains, losses and earnings to be accrued thereon credited to the Participant's Deferred Compensation Account under this Plan. The payment options are annual installments of not less than 5 nor more than 10, semi-annual installments of not less than 10 nor more than 20, or quarterly installments of not less than 20 nor more than 40. The first installment to commence as soon as practicable after any date specified by the Potential Participant, so long as such date is the first day of a calendar quarter and is at least one year from the date the payout option was elected. Subject to Paragraph (g) of this Section, if the Committee or CEO, as appropriate, accepts the Potential Participant's indication of preference, the election of the method of payment of the amount deferred shall become irrevocable. (e) Payment Option Revisions. If a Section 5(b)(i) payment option applies to any part of the balance of a Participant's Deferred Compensation Account, the Participant may revise such payment option as follows: (i) Prior to Retirement. The Participant at any time during a period beginning 365 days prior to and ending 90 days prior to the date the Participant retires under the terms of the Retirement Income Plan, may, with respect to the total of all amounts subject to such payment option at the time of the Participant's retirement, in the manner prescribed by the Plan Administrator, 17 revise such payment option and elect one of the payment options specified in (e)(iii) of this Section to apply to such total amount in place of such payment option. (ii) Upon Layoff. If a Participant who is eligible to retire under the terms of the Retirement Income Plan or who is laid off during or after the year in which the Participant reaches age 50 is notified of layoff and if there is not at least 120 days between the date the Participant is notified of layoff and the Participant's termination date, the Participant may, within 30 days of being notified of layoff, in the manner prescribed by the Plan Administrator, revise such payment option and elect one of the payment options specified in (e)(iii) of this Section to apply to such total amount in place of the such payment option. (iii) Payment Options After Revision. If a Participant revises a Section 5(b)(i) payment option as specified in (c)(i) or (c)(ii) of this Section, the Participant, subject to the exception in (e)(iv) of this Section, may select payments in annual installments of not less than 5 nor more than 10, in semi-annual installments of not less than 10 nor more than 20, or in quarterly installments of not less than 20 nor more than 40 with the first installment to commence, as soon as practicable following any date specified by the Participant so long as such date is the first day of a calendar quarter, is on or after the Participant's first day of retirement or the first 18 day the Participant is no longer an Employee following layoff, is at least one year from the date the payment option was revised and is not more than two calendar quarters after the Participant's 70th birthday. (iv) Payment Option After Revision Exception. If a Participant elected a Section 5(b)(i) payment option for amounts deferred prior to January 1, 1994, the Participant may select payments in one lump sum or annual installments of not less than 5 nor more than 20 in addition to the payment options specified in (e)(iii) of this Section, provided that the commencement date specified by the Participant would be permitted under paragraph (e)(iii) of this Section. (f) Installment Amount. The amount of each installment shall be deter- mined by dividing the balance in the Participant's Deferred Compensation Account as of the date the installment is to be paid, by the number of installments remaining to be paid (inclusive of the current installment). (g) Death of Participant. Upon the death of a Participant, the Participant's beneficiary or beneficiaries designated in accordance with Section 6, or in the absence of an effective beneficiary designation, the spouse, children (natural or adopted), or the legal representative of the deceased Participant, in that order of priority, shall receive payments in accordance with the payment options selected by the Participant, whether death occurred before or after such payments 19 have commenced; provided, however, such payments may be made in a different manner if the beneficiary or beneficiaries entitled to receive such payments, due to an unanticipated emergency caused by an event beyond the control of the beneficiary or beneficiaries that results in financial hardship to the beneficiary or beneficiaries, so requests and the CEO gives written consent to the method of payment requested. (h) Termination of Employment. In the event a Participant's employment with the Company or a Participating Subsidiary terminates for any reason other than death, retirement under the Retirement Income Plan, Disability, or by layoff during or after the year in which the Participant reaches age 50, the entire balance of the Participant's Deferred Compensation Account shall be paid to the Participant in one lump sum as soon as practicable after the date the Participant terminates employment, provided however, the Committee, in its sole discretion, may elect to make such payments in the amounts and on such schedule as it may determine. SECTION 6. Designation of Beneficiary Each Participant shall designate a beneficiary or beneficiaries to receive the entire balance of the Participant's Deferred Compensation Account by giving signed written notice of such designation to the Plan Administrator. The Participant may from time to time change or cancel any previous beneficiary designation in the same manner. The last beneficiary 20 designation received by the Plan Administrator shall be controlling over any prior designation and over any testamentary or other disposition. After acceptance by the Plan Administrator of such written designation, it shall take effect as of the date on which it was signed by the Participant, whether the Participant is living at the time of such receipt, but without prejudice to the Company or the CEO on account of any payment made under this Plan before receipt of such designation. SECTION 7. Nonassignability The right of a Participant, or beneficiary, or other person who becomes entitled to receive payments under this Plan, shall not be assignable or subject to garnishment, attachment or any other legal process by the creditors of, or other claimants against, the Participant, beneficiary, or other such person. SECTION 8. Administration. The Chief Executive Officer may adopt such rules, regulations and forms as deemed desirable for administration of the Plan and shall have the discretionary authority to allocate responsibilities under the Plan to such other persons as may be designated, whether or not employee members of the Board of Directors, including the appointment of a person to be the Plan Administrator. The decision of the Chief Executive Officer with respect to any questions arising as to the interpretation of the Plan shall be final, conclusive and binding; provided, however that all such decisions, interpretations and actions which affect or have the potential 21 to affect the benefits hereunder of any person who is, at the time of such decision, interpretation or action, subject to the provisions of Section 16 of the Exchange Act shall be referred by the CEO to the Committee, which shall in such case have sole power to make such decision or interpretation or to take or cause to be taken such action. SECTION 9. Employment not Affected by Plan. Participation or nonparticipation in this Plan shall neither adversely affect any person's employment status, or confer any special rights on any person other than those expressly stated in the Plan. Participation in the Plan by an Employee of the Company or of a Participating Subsidiary shall not affect the Company's or the Participating Subsidiary's right to terminate the Employee's employment or to change the Employee's compensation or position. SECTION 10. Determination of Recipients of Awards. The determination of those persons who are entitled to Awards under the Incentive Compensation Plan and any other such plans shall be governed solely by the terms and provisions of the applicable plan, and the selection of an Employee as a Potential Participant or the acceptance of an indication of preference to defer an Award hereunder shall not in any way entitle such Potential Participant to an Award. 22 SECTION 11. Method of Providing Payments. (a) Nonsegregation. Amounts deferred pursuant to this Plan and the crediting of amounts to a Participant's Deferred Compensation Account shall represent the Company's unfunded and unsecured promise to pay compensation in the future. With respect to said amounts, the relationship of the Company and a Participant shall be that of debtor and general unsecured creditor. While the Company may make investments for the purpose of measuring and meeting its obligations under this Plan such investments shall remain the sole property of the Company subject to claims of its creditors generally, and shall not be deemed to form or be included in any part of the Deferred Compensation Account. (b) Funding. It is the intention of the Company that this Plan shall be unfunded for federal tax purposes and for purposes of Title I of ERISA; provided, however, that the Company may establish a grantor trust to satisfy part or all of its Plan payment obligations so long as the Plan remains unfunded for federal tax purposes and for purposes of Title I of ERISA. SECTION 12. Amendment or Termination of Plan. The Company reserves the right to amend this Plan from time to time or to terminate the Plan entirely, provided, however, that no amendment may affect the balance in a Participant's account on the effective date of the amendment. No Participant shall participate in a decision to amend or 23 terminate this Plan. In the event of termination of the Plan, the Chief Executive Officer, in his sole discretion, may elect to pay to the participant in one lump sum as soon as practicable after termination of the Plan, the balance then in the Participant's account. SECTION 13. Miscellaneous Provisions. (a) Except as otherwise provided herein, the Plan shall be binding upon the Company, its successors and assigns, including but not limited to any corporation which may acquire all or substantially all of the Company's assets and business or with or into which the Company may be consolidated or merged. (b) This Plan shall be construed, regulated, and administered in accor- dance with the laws of the State of Oklahoma except to the extent that said laws have been preempted by the laws of the United States. 2DP/001 09-08-94 24 EX-12 5 Exhibit 12 PHILLIPS PETROLEUM COMPANY AND CONSOLIDATED SUBSIDIARIES TOTAL ENTERPRISE Computation of Ratio of Earnings to Fixed Charges Millions of Dollars -------------------------------------- Years Ended December 31 -------------------------------------- 1994 1993 1992 1991 1990 -------------------------------------- (Unaudited) Earnings Available for Fixed Charges Income before income taxes, extraordinary items and cumulative effect of changes in accounting principles $ 852 538 511 451 1,187 Distributions in excess of (less than) equity in earnings of less-than- fifty-percent-owned companies 2 9 (3) 1 7 Fixed charges, excluding capitalized interest and the portion of the preferred dividend requirements of a subsidiary not previously deducted from income* 340 363 442 631 665 - ----------------------------------------------------------------------------- $1,194 910 950 1,083 1,859 ============================================================================= Fixed Charges Interest and expense on indebtedness, excluding capitalized interest $ 266 290 392 460 622 Capitalized interest 15 11 16 37 17 Preferred dividend requirements of a subsidiary 56 71 3 - - One-third of rental expense, net of subleasing income, for operating leases 32 30 38 34 29 - ----------------------------------------------------------------------------- $ 369 402 449 531 668 ============================================================================= Ratio of Earnings to Fixed Charges 3.2 2.3 2.1 2.0 2.8 - ----------------------------------------------------------------------------- *Includes amortization of capitalized interest totaling approximately $10 million, $11 million, $10 million, $137 million and $14 million in 1994, 1993, 1992, 1991 and 1990, respectively. For 1991, the amount includes approximately $120 million of capitalized interest associated with the writedown of offshore California investments. Earnings available for fixed charges include, if any, the company's equity in losses of companies owned less than fifty percent and having debt for which the company is contingently liable. Fixed charges include the company's proportionate share, if any, of interest relating to the contingent debt. In 1990 and 1988, respectively, the company guaranteed a $400 million bank loan and $250 million of notes payable for the Long-Term Stock Savings Plan (LTSSP), an employee benefit plan. In 1994, the notes payable were refinanced with a $131 million term loan, and the $400 million loan was amended. Consolidated interest expense includes interest attributable to the LTSSP borrowings of $1 million, $1 million, $1 million, $13 million and $10 million in 1994, 1993, 1992, 1991 and 1990, respectively. EX-21 6 Exhibit 21 LIST OF SUBSIDIARIES OF PHILLIPS PETROLEUM COMPANY Listed below are subsidiaries of the registrant at December 31, 1994. Certain subsidiaries are omitted since such companies considered in the aggregate do not constitute a significant subsidiary. State or Jurisdiction in Which Subsidiary was Incorporated Name of Company or Organized --------------- --------------------- American Olefins, Inc. Delaware GPM Gas Corporation Delaware Phillips Alaska Natural Gas Corporation Delaware Phillips Coal Company Nevada Phillips Gas Company Delaware Phillips Investment Company Nevada Phillips Natural Gas Company Delaware Phillips Oil Company (Nigeria) Limited Nigeria Phillips Petroleum Canada Ltd. Canada Phillips Petroleum Chemicals Belgium Phillips Petroleum Company Cote d'Ivoire Delaware Phillips Petroleum Company Europe-Africa Delaware Phillips Petroleum Company Ghana Delaware Phillips Petroleum Company Indonesia Delaware Phillips Petroleum Company Norway Delaware Phillips Petroleum Company United Kingdom Limited England Phillips Petroleum Company Western Hemisphere Delaware Phillips Petroleum International Corporation Panama Phillips Petroleum International Corporation Asia Liberia Phillips Petroleum International Corporation Denmark Caymen Islands Phillips Petroleum International Investment Company Delaware Phillips Petroleum Resources, Ltd. Delaware Phillips Petroleum UK Investment Corporation Delaware Phillips Pipe Line Company Delaware Phillips Protein Company Delaware Phillips Puerto Rico Core Inc. Delaware Phillips-San Juan Partners, L.P. Delaware Seagas Pipeline Company Delaware Sooner Insurance Company Vermont The Largo Company Delaware WesTTex 66 Pipeline Company Delaware EX-23 7 Exhibit 23 ERNST & YOUNG LLP CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference of our report dated February 15, 1995, with respect to the consolidated financial statements and schedule of Phillips Petroleum Company included in this Annual Report (Form 10-K) for the year ended December 31, 1994, in the following registration statements and related prospectuses. Phillips Petroleum Company Form S-3 File No. 33-51559 Thrift Plan of Phillips Petroleum Company Form S-8 File No. 33-50134 Long-Term Stock Savings Plan of Phillips Petroleum Company Form S-8 File No. 33-50283 Retirement Savings Plan of Phillips Petroleum Company Subsidiaries Form S-8 File No. 33-28669 /s/ ERNST & YOUNG LLP ----------------- ERNST & YOUNG LLP Tulsa, Oklahoma March 13, 1995 EX-27 8
5 This schedule contains summary financial information extracted from the consolidated balance sheet of Phillips Petroleum Company as of December 31, 1994, and the related consolidated statement of income for the year ended December 31, 1994, and is qualified in its entirety by reference to such financial statements. 1,000,000 YEAR DEC-31-1994 DEC-31-1994 193 0 1,482 20 527 2,465 18,293 10,251 11,436 2,441 3,106 483 0 0 2,470 11,436 12,211 12,367 10,504 11,253 12 0 250 852 368 484 0 0 0 484 1.85 1.85 Purchased crude oil and products + Production and operating expenses + Exploration expenses + Depreciation, depletion, amortization and retirements. CGS + Selling, general and administrative expenses + Taxes other than income taxes. Preferred dividend requirements of subsidiary + Gain on subsidiary stock transaction.
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