-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JbMZlbYjMyEcPwEM5BsD7LPZSr4LzTCNPgqfKkwUwpie+uQQJycQSYLSm/QhUIQp ZA5z7VArtOyc28WF0Ijvxw== 0000078214-97-000002.txt : 19970227 0000078214-97-000002.hdr.sgml : 19970227 ACCESSION NUMBER: 0000078214-97-000002 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970226 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: 97544517 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, 1996 -------------------------------- 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 8.24% Trust Originated Preferred SecuritiesSM (and the guarantees with respect thereto) 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] Excluding shares held by affiliates, the registrant had 263,118,381 shares of Common Stock $1.25 Par Value, outstanding at January 31, 1997. The aggregate market value of voting stock held by non-affiliates of the registrant was $11,610,098,562 as of January 31, 1997. The registrant, solely for the purpose of this required presentation, has deemed its Board of Directors and the Compensation and Benefits Trust to be affiliates, and deducted their stockholdings of 362,684 and 29,200,000 shares, respectively, in determining the aggregate market value. Documents incorporated by reference: Proxy Statement for the Annual Meeting of Stockholders May 12, 1997 (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).............. 3 Gas Gathering, Processing and Marketing (GPM). 10 Refining, Marketing and Transportation (RM&T). 12 Chemicals..................................... 15 Other......................................... 19 Competition..................................... 20 General......................................... 21 3. Legal Proceedings................................. 23 4. Submission of Matters to a Vote of Security Holders................................ 23 -------------------- Executive Officers of the Registrant.............. 24 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters..................... 26 6. Selected Financial Data........................... 27 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................... 28 8. Financial Statements and Supplementary Data....... 63 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 121 PART III 10. Directors and Executive Officers of the Registrant...................................... 122 11. Executive Compensation............................ 122 12. Security Ownership of Certain Beneficial Owners and Management........................... 122 13. Certain Relationships and Related Transactions.... 122 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................... 123 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, contain forward-looking statements including, without limitation, statements relating to the company's plans, strategies, objectives, expectations, intentions, and adequate resources, and are made pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. The words "forecasts," "intends," "possible," "potential," "targeted," "believe," "expect," "plan," or "plans," "scheduled," "perceives," "anticipate," "estimate," "begin," and similar expressions identify forward-looking statements. The company does not undertake to update, revise or correct any of the forward-looking information. Readers are cautioned that such forward-looking statements should be read in conjunction with the company's disclosures under the heading: "CAUTIONARY STATEMENT FOR THE PURPOSES OF THE 'SAFE HARBOR' PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995" beginning on page 61. Items 1 and 2. BUSINESS AND PROPERTIES CORPORATE STRUCTURE AND CURRENT DEVELOPMENTS Phillips Petroleum Company was incorporated in Delaware on June 13, 1917. The company is headquartered where it was founded, in Bartlesville, Oklahoma. The company operates 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, primarily in Oklahoma, Texas and New Mexico; 3) Refining, Marketing and Transportation (RM&T)--refines, markets and transports crude oil and petroleum products, primarily in the United States; 4) Chemicals--fractionates natural gas liquids and manufactures and markets a broad range of petroleum-based chemical products on a worldwide basis. Support staffs provide technical, professional and other services to the business segments. At December 31, 1996, Phillips employed 17,200 people, slightly less than the previous year. 1 Phillips continued to focus on growth opportunities and operating excellence in 1996. Current developments include the following: o Platform construction and installation were completed in 1996 at the Mahogany field, the first commercial subsalt oil development in the Gulf of Mexico. Initial production commenced in late December. o Phillips and Mobil Corporation established an alliance in 1996, combining 107 prospects for deep-water exploration in the Gulf of Mexico. Phillips will hold a one-third ownership interest in the prospects. Drilling could begin as early as late 1997. o Work continued on the Ekofisk II redevelopment in 1996. The new wellhead platform was installed in October 1996 and production from the first well began in early 1997. Construction continued on the new processing/transportation platform, which is scheduled for start-up in 1998. o Phillips continued a successful appraisal drilling program at the Bayu-Undan field in the Timor Sea. Phillips increased its interest in one of the field's two blocks to 60 percent in 1996. Possible development options are being evaluated. o GPM continued to grow its business through acquisitions, acquiring assets in northwest Oklahoma in late 1996 and in the Permian Basin of West Texas in January 1997. Implementation of technology has contributed towards an improved cost structure for GPM. o A new program began in 1996 to increase the number of company-operated retail service stations. The company plans to add about 30 new outlets annually over the next five years. The new outlets will feature larger convenience stores with improved designs. By year-end 1996, 24 new outlets were under construction or had been completed. o Expansion or debottlenecking projects are under development for most of the Chemicals segment's product lines, including ethylene, paraxylene, polyethylene, polypropylene, K-Resin, specialty chemicals and polyethylene pipe. 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 2 Geographic Information in the Notes to Financial Statements on pages 98 through 100 is incorporated herein by reference. Products which contributed more than 10 percent of consolidated sales and other operating revenues follow: 1996 1995 1994 ------------------------ Crude Oil 26% 26 23 Petroleum Products 42 41 43 Natural Gas 14 12 14 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 are the United States (including 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 101 through 118 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 and natural gas liquids. o Average sales prices of crude oil, natural gas and natural gas liquids. o Average production costs per barrel-of-oil-equivalent (BOE). o Developed and undeveloped acreage. o Net wells completed, wells in progress and productive wells. In 1996, Phillips' worldwide crude oil production averaged 219,000 barrels per day, compared with 222,000 barrels per day in 1995. In 1996, 69,000 barrels per day of worldwide crude oil production was from the United States, down from 79,000 barrels per day in 1995. Lower U.S. production was due to property dispositions and general production declines, primarily from the Prudhoe Bay and Point Arguello fields. Foreign crude oil production was up 5 percent in 1996, due primarily to higher production offshore China and in the U.K. sector of the North Sea. 3 Net E&P production satisfied 59 percent of Phillips' 1996 crude oil requirements, which consisted of U.S. refinery crude oil runs (329,000 barrels per day) and crude oil supplied to a 50 percent joint-venture refinery in Teesside, England (41,000 barrels per day). The difference between the company's requirements and production was covered mainly by crude oil purchases in the United States, from Saudi Arabia, Venezuela, and, to a lesser extent, from the North Sea and West Africa. The ratio of net crude oil production to requirements for 1997 is estimated at 61 percent, based on production forecasts of 228,000 barrels per day and estimated crude oil requirements of 374,000 barrels per day. As in 1996, purchases in the United States, from Saudi Arabia, Venezuela, and, to a lesser degree, from the North Sea and West Africa are expected to be the major sources for covering the difference. E&P's worldwide production of natural gas liquids averaged 15,000 barrels per day in 1996, the same as 1995. U.S. production accounted for 4,000 barrels per day in 1996, down from 5,000 barrels per day in 1995. The company's worldwide production of natural gas averaged 1,527 million cubic feet per day in 1996, up 3 percent from 1995. U.S. natural gas production increased 2 percent in 1996, to 1,102 million cubic feet per day. New production from the Garden Banks (Seastar) field, Gulf of Mexico, along with property acquisitions in south Louisiana, contributed to the increased production. Higher production from the U.K. sector of the North Sea contributed to a 5 percent increase in foreign natural gas production in 1996. Phillips' worldwide annual average crude oil sales price increased 23 percent in 1996, to $20.28 per barrel. Both U.S. and foreign average prices were higher. E&P's annual average worldwide natural gas sales price increased 27 percent, primarily as a result of higher sales prices in the United States. The company's finding and development costs in 1996 were $7.52 per BOE, compared with $3.52 in 1995. Over the last five years, however, Phillips' finding and development costs averaged $3.79 per BOE. At December 31, 1996, Phillips held a combined 26.8 million net developed and undeveloped acres, an 8 percent increase from 24.8 million net acres at year-end 1995. The increase in net acreage is primarily attributable to new acreage in Oman, partially offset by release of acreage in Paraguay and Papua New Guinea. At year-end, the company held acreage in 18 nations, and produced hydrocarbons in six. 4 E&P - U.S. OPERATIONS Platform construction and installation were completed in 1996 at the Mahogany field in the Gulf of Mexico, with initial production commencing in late December. Mahogany is the first commercial subsalt oil development in the Gulf, and is located 80 miles offshore Louisiana, on Ship Shoal Blocks 349/359. Further appraisal and development drilling continues. Phillips holds a 37.5 percent interest in the Mahogany field. Evaluation of drilling results continue at the Agate and Monazite subsalt prospects. An exploratory well on the Alexandrite prospect was unsuccessful, plugged and abandoned. The Sunfish prospect, located in the Cook Inlet of Alaska, has been renamed the Tyonek Deep prospect. The company's co-venturer in Tyonek Deep converted its 60 percent working interest into a sliding-scale, overriding royalty interest on any future production, giving Phillips a 100 percent working interest. Phillips plans to drill a well from its existing Tyonek platform in the summer of 1997. Liquefied natural gas (LNG) sales volumes from the company's Kenai, Alaska, plant were up 4 percent in 1996, compared with 1995. Through refrigeration and compression techniques, and utilization of the company's proprietary Optimized Cascade LNG technology, the company liquefies natural gas produced from its North Cook Inlet field, and transports the LNG to Japan, where it is reconverted into dry gas at the receiving terminal. Phillips and Mobil Corporation established an alliance in 1996 for deep-water exploration in the Gulf of Mexico. The alliance covers 61 blocks previously owned 100 percent by Mobil, and 46 blocks acquired jointly in two separate lease sales during 1996. Ownership interests in the prospects are two-thirds Mobil and one-third Phillips. Drilling could begin as early as late 1997. Net production from the company's three jointly owned coal mines was 2.9 million tons in 1996, compared with 3.2 million tons in 1995. The mines are located in Louisiana, Texas and Wyoming. Phillips has a 50 percent equity interest in each. The company plans to develop a 3.2 million-tons-per-year lignite mine to provide fuel for a 440-megawatt power plant to be constructed in northeast Mississippi. Phillips will own 75 percent of the mine, and CRSS, Inc. will own the power plant. 5 E&P - NORWEGIAN OPERATIONS Work continued on the Ekofisk II redevelopment in 1996. The new wellhead platform was completed during the year. Construction continued on the new processing/transportation platform, which is scheduled for start-up in 1998. The new wellhead platform will utilize computerized drilling equipment with remote control systems, thus improving safety and operating consistency, while also reducing operating costs. The Ekofisk II project led to the extension of the production license to the year 2028. Under Ekofisk II, the Ekofisk, Eldfisk, Embla and Tor fields will be connected to the Ekofisk II facilities. Some third-party fields will also be connected. It is anticipated that the remaining fields in the Ekofisk area will be shut-in by the end of 1998. The company was awarded a 30 percent operating interest in four new blocks in the Norwegian sector of the North Sea, near the Troll gas field, where an exploration well was drilled in late 1996. Although this well was a dry hole, Phillips is evaluating the remaining potential of the blocks. Phillips was also awarded a 20 percent interest in a block near the Norne field, where an exploratory well is planned for 1997. As part of its Norwegian operations in the North Sea, Phillips acquired interests in two licenses offshore Denmark. On one license, the company participated in the discovery of a field named Siri in December 1995. A 1996 appraisal well was also successful. The operator is preparing for development, with first production expected in 1998. Phillips holds a 12.5 percent interest in the Siri license. A successful exploratory well was drilled late in 1996 on the Siri East, a separate prospect on the same license. Phillips also holds and is the operator in a 35 percent interest in a license located in the westernmost part of the Danish shelf immediately south of the Ekofisk area. Offshore western Greenland, Phillips was awarded 38 percent interest in a license covering 2.3 million acres, effective January 1, 1997. The first exploration well is planned for 1998. E&P - U.K. OPERATIONS Initial production from J-Block, originally scheduled for early 1996, has been delayed as a result of the sole purchaser of natural gas from J-Block making a non-binding election not to take any natural gas volumes under its take-or-pay contract through September 1999. Since natural gas and liquids are produced in association with each other, liquids production is dependent on the amount of natural gas produced. The company is 6 installing gas injection facilities, which allows for the production of liquids while the natural gas produced is reinjected for later delivery. The facilities are expected to begin operation in the spring of 1997. In order to maximize the value of its J-Block infrastructure, the company has also initiated an active drilling program to explore and appraise several satellite fields, where the company drilled a number of exploratory or appraisal wells during 1996. Phillips is also planning to use its J-Block infrastructure to provide services to other producers. In early 1997, the company announced a discovery at the Jade field in Block 30/2c, located about 12 miles north of the J-Block area. The Jade accumulation is situated in a different license block from those in which the J-Block fields are located, thus it is not directly connected with the disputes and litigation involving the J-Block gas sales contracts. Phillips is operator of the block and holds a 32.5 percent interest. Phillips has an interest in two fields being developed in the U.K. North Sea--Armada and Britannia. Armada is scheduled to begin production in late 1997, averaging a net rate of 2,800 barrels of liquids per day and 39 million cubic feet of natural gas per day over the first 12 months of production. Britannia is scheduled to begin production in late 1998, averaging net production of 2,750 barrels of liquids per day and 37 million cubic feet of natural gas per day over the first 12 months of production. The company has an 11.5 percent interest in Armada and a 6.8 percent interest in Britannia. Phillips holds a 33.3 percent interest in seven deep-water blocks, and has entered into an agreement to obtain a 25 percent interest in four additional blocks, located in a frontier area west of Ireland. Drilling is expected to begin in 1997. In addition, Phillips holds a 40 percent interest in two blocks east of the Isle of Man, where an exploratory well was plugged and abandoned as a dry hole in 1996. E&P - OTHER OPERATIONS In the South China Sea, start-up of crude oil production from the second platform in the Xijiang project commenced in the fourth quarter of 1995. The initial Xijiang field began producing in 1994. The crude oil produced from both Xijiang fields flows through subsea pipelines to a floating storage and offloading vessel, and is then transported to market by tankers. Phillips' combined net production of crude oil from both fields averaged 15,000 barrels per day in 1996, compared with 11,000 barrels per 7 day in 1995. The company plans to drill a five-mile extended- reach well from the Xijiang facilities to an adjacent field. Phillips tested its first exploratory well on the Bozhong Block, Bohai Bay, along China's northern coast. Although the well did not find commercial quantities of oil and gas, Phillips increased its knowledge of the geology of the area, and plans to drill two additional exploratory wells in 1997. Marking Phillips' first opportunity to explore onshore for hydrocarbons in China, the company signed an agreement giving Phillips the majority interest, and operatorship, of a joint venture coalbed methane concession in Shanxi Province, located approximately 260 miles southwest of Beijing. The Hedong concession covers 781,000 acres, and Phillips has acquired a 65 percent interest. Seismic and drilling operations are scheduled to commence in 1997. The company plans to utilize its technology and experience in coal-seam gas production gained from its operations in the San Juan Basin of New Mexico. In Nigeria, the company's non-operating interests in 23 fields yielded net average crude oil production of 25,000 barrels per day, 4 percent higher than 1995. Phillips continued a successful appraisal drilling program at the Bayu-Undan field in the Timor Sea, located northwest of Australia in the Zone of Cooperation. By acquiring another company's interest in 1996, Phillips increased its interest in one of the field's two blocks to 60 percent. During 1996 and into early 1997, the company completed its fourth and fifth successful appraisal wells. Phillips is working with the owners of the adjacent block to evaluate development options, including the possible use of an onshore LNG facility using the company's proprietary technology. A decision on the field's commerciality is expected by late 1997 or early 1998. In 1997, an exploration well is planned for offshore western Australia at the Athena prospect, in which Phillips holds a 50 percent interest. The Athena well will test an extension of a field recently discovered by an adjacent operator. In the same area, an exploratory well is planned on the Andromeda prospect, where the company also holds a 50 percent interest. Phillips will continue its exploration program on a 100 percent- owned block in the Borj Messouda area of eastern Algeria. The first exploratory well, drilled in late 1995 and early 1996, was unsuccessful. A second well is planned for 1997. 8 In other exploration activity: o Phillips signed an exploration and production-sharing contract with the Sultanate of Oman, which will allow Phillips to explore 4.5 million acres in southern Oman. The company has committed to drill five wells over the nine-year exploratory phase of the agreement. o In early 1997, Phillips signed a seven-year license agreement with Peru's state-owned oil company, which will enable Phillips to explore 3 million acres in southeastern Peru. o In South Africa, a technical cooperation agreement with the state-owned oil company gives Phillips exclusive rights to evaluate two blocks along the eastern coast of Africa, an area covering 15 million acres in the Indian Ocean. During the eight-month agreement, Phillips will re-process and re-evaluate all existing geophysical and geochemical borehole data, with the possibility of applying for exploration rights in these two blocks. Phillips entered into an agreement with a subsidiary of Venezuela's state oil company, along with two other co-venturers, to study the development of extra-heavy oil reserves from the Hamaca region of the Orinoco Oil Belt in eastern Venezuela, and to consider the establishment of an association to undertake the project. Subject to satisfactory resolution of contract and fiscal issues, Phillips' interest in the joint venture would be 20 percent. Engineering studies are scheduled to begin in 1997. With the goal of expanding its role in the worldwide LNG markets, Phillips agreed to establish an alliance with Bechtel Corp. in 1996. The alliance seeks to position Phillips as an owner and participant in worldwide LNG projects, and Bechtel as an equity participant in these projects, as well as the builder of the LNG facilities. E&P - RESERVES In 1996, on a BOE basis, Phillips replaced 71 percent of the reserves it produced during the year, compared with 139 percent in 1995. The 1996 total includes replacement of 106 percent of foreign production and 41 percent of U.S. production. U.S. reserves decreased 6 percent, while foreign reserves increased slightly. Total worldwide proved reserves on a BOE basis were 2.15 billion barrels at year-end. Crude oil reserves and natural gas liquids reserves remained about the same, and natural gas reserves decreased 5 percent. Natural gas comprises 49 percent 9 of proved worldwide hydrocarbon reserves and 63 percent of U.S. reserves. Ninety-two percent of Phillips' proved reserves base is located in North America and the North Sea. From 1992 through 1996, Phillips' five-year-average BOE production replacement equaled 118 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, 1996. No difference exists between the company's estimated total proved reserves for year-end 1995 and year-end 1994, which are shown in this filing, and estimates of these reserves shown in a filing with another federal agency in 1996. 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 142 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 natural gas in the United States from its producing operations under a variety of contractual arrangements. Certain contracts generally commit the company to sell quantities based on production from specified properties. Other gas sales contracts specify delivery of fixed and determinable quantities. The quantities of natural gas the company is obligated to deliver in the future in the United States, 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. GPM - --- GPM gathers and 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 Chemicals 10 operations, where they are used as feedstock or sold to outside customers. The residue gas is sold to outside customers or used as fuel in company operations. GPM owns 13 natural gas liquids extraction plants, and operates or has an interest in three more. The plants are located in Texas (10), Oklahoma (3), and New Mexico (3). In addition, GPM operates gas gathering systems with approximately 27,000 miles of gathering pipelines, with some 19,400 active meter connections to producing wells. GPM completed its largest acquisition to date in late 1995, acquiring gathering assets located in the Anadarko Basin of Texas and Oklahoma. As a result, GPM's raw gas throughput volumes increased 18 percent in 1996, compared with 1995. In late 1996, GPM obtained regulatory approval to acquire gas gathering assets primarily located in northwest Oklahoma from ANR Pipeline Company. These systems gather approximately 165 million cubic feet of natural gas per day, through 1,570 miles of pipeline and 12 compressor stations. In January 1997, GPM also purchased gathering assets in the Permian Basin of West Texas from Amoco Production Company. These systems gather approximately 40 million cubic feet of natural gas per day, and are anticipated to increase GPM's natural gas liquids production by approximately 8,500 barrels per day. Technology has played a significant role in improving GPM's cost structure and operating efficiency: o Electronic flow measurement and radio telemetry equipment allow wellhead data, which was once collected manually, to be transmitted electronically--saving both time and money. o Remote monitoring and control equipment is being installed at each compression site, with completion scheduled for 1997. o Operating systems are being installed at GPM's processing plants that allow the operation of an entire facility to be managed from one central control room, improving plant operations and efficiency. GPM's raw gas throughput averaged 1.9 billion cubic feet per day in 1996, compared with 1.6 billion cubic feet per day in 1995, reflecting the acquisitions and expansions discussed above. Raw gas purchased from Phillips E&P represented approximately 9 percent of GPM's total 1996 throughput, compared with 12 percent in 1995. 11 GPM continued to be a significant U.S. producer of natural gas liquids. GPM's natural gas liquids production was as follows: Thousands of Barrels Daily -------------------------- 1996 1995 1994 -------------------------- From Phillips E&P leasehold gas 17 19 21 From gas purchased outside Phillips 131 125 130 - ----------------------------------------------------------------- 148 144 151 ================================================================= Residue gas sales were 1,076 million cubic feet per day in 1996, compared with 1,017 million cubic feet per day in 1995. GPM sells residue gas under index-based contracts. Approximately 64 percent of the residue gas sales volumes were sold under contracts with a term of one year or longer in 1996, compared with 61 percent in 1995. The remaining residue gas sales volumes were either sold on a daily or monthly basis. The company's average sales price for unfractionated natural gas liquids increased to $14.49 per barrel, up 44 percent from 1995. During 1996, the average residue gas price increased to $2.20 per thousand cubic feet, from $1.49 in 1995. At year-end 1996, gross raw natural gas supplies available for processing through GPM-operated plants were estimated at 7.1 trillion cubic feet, versus 6.7 trillion cubic feet at year-end 1995. At year-end 1996 and 1995, respectively, these supplies included about 651 million and 644 million barrels of natural gas liquids, assuming full ethane extraction. RM&T - ---- REFINING The company owns and operates three refineries in the United States having an aggregate rated crude oil capacity of 345,000 barrels per day and has 50 percent ownership of a refinery in Teesside, England. The U.S. refineries are located at Borger and Sweeny, Texas, and Woods Cross, Utah. The company's U.S. refineries ran at 95 percent of capacity in 1996, compared with 97 percent in 1995. The lower utilization rate was the result of maintenance turnarounds in the first half of 1996. The average purchase cost of a barrel of crude oil delivered to the U.S. refineries in 1996 was $21.95 per barrel, 21 percent higher than in 1995. 12 High-sulfur crude accounted for 64 percent of the crude processed during 1996, compared with 61 percent in 1995. Forty-two percent of the crude oil processed by Phillips' U.S. refineries in 1996 came from the United States, with the remainder provided primarily by purchases from Saudi Arabia, Venezuela, the North Sea and West Africa. In 1995, 40 percent of the crude oil processed came from the United States. Output from refining operations--automotive gasoline, distillates, aviation fuels, chemical feedstocks and other products--averaged 384,000 barrels per day, compared with 392,000 barrels per day in 1995. The decrease is attributable to the lower capacity utilization rate. Phillips continued an extensive process control modernization of the Borger and Sweeny facilities in 1996. The modernization project is intended to improve safety and product yields, while reducing operating costs. Process units were connected to advanced controls at Borger's new central control center in 1996, while construction of a central control center at Sweeny continued. When the project is completed, all manufacturing processes at the Borger and Sweeny facilities will be managed from these control centers. At the Woods Cross refinery, installation of a fluid catalytic cracker was completed in 1996. The unit provides both economic and environmental advantages. Also at Woods Cross, the company is installing a new proprietary technology, called Reduced Volatility Alkylation Process (ReVAP). The technology, used in the production of unleaded gasoline, lessens the chance that airborne hydrogen fluoride emissions will escape a refinery in the event of an accidental release. Phillips and a subsidiary of Central and South West Corporation (CSW) are developing and installing a cogeneration plant at the Sweeny Complex that will produce electricity from natural gas- powered turbines. The heat exhausted from the turbines will produce steam, supplying the Sweeny Complex's needs and offering cost benefits for both CSW and Phillips. Plant construction began in 1996, with completion expected in the first quarter of 1998. Regulatory approvals for a similar project at the Borger Complex are being sought. In 1995, the company introduced the Process for Safety Excellence. The process integrates well-defined safety procedures into every aspect of day-to-day operations. In 1996, the first full year of implementation, the process helped Phillips' three U.S. refineries reduce recordable injuries/illnesses by 17 percent, compared with 1995. 13 Phillips is evaluating a possible joint venture with Corpoven, a subsidiary of the state oil company of Venezuela, to install a coker at the Sweeny refinery. The coker would allow the facility to process less-expensive heavy crude oil. In addition, the company plans to install a continuous catalytic reformer to convert a higher percentage of plant yield to higher-valued petrochemical feedstock products. MARKETING In the United States, the company's wholesale and retail operations sell refined products in 26 states under the Phillips 66 trademark. Gasoline and other products are distributed in the United States through approximately 7,900 retail outlets, bulk distributing plants, airport dealers and marinas. Of these, Phillips operates 317 retail outlets, 47 of which are on leased property. Excluding spot sales, RM&T gasoline sales volumes in the United States were up 5 percent during the year. Total distillates sales volumes in RM&T increased 2 percent in 1996. In total, RM&T petroleum products sales in the United States during 1996, from both Phillips' refinery output and purchased products, averaged 532,000 barrels per day, compared with 526,000 barrels per day in 1995. Phillips announced plans in 1996 to increase the number of company-operated retail service stations. The company plans to add about 30 new outlets annually over the next five years. The new outlets will feature larger convenience stores with improved designs, fast-food offerings and a new brand name-- Kicks 66, which will be displayed along with the Phillips shield. In early 1996, Phillips opened the first new retail outlet with a Kicks 66 store in Albuquerque, New Mexico. By year-end, 24 new outlets were under construction or had been completed. In addition, some existing outlets are being razed and rebuilt, Phillips is acquiring some stations from independent marketers, and approximately 40 stations are being offered for sale. The majority of the additional retail units will be in markets where Phillips perceives it has a business or supply advantage. The Borger refinery and a network of pipelines and terminals aids Phillips in supplying the Southwest and Rocky Mountain regions. In addition, the Woods Cross refinery is positioned to supply the Salt Lake City area. 14 In August 1996, the company sold its retail propane marketing subsidiary, Phillips 66 Propane Company. This business supplied propane to retail customers and as an alternative fuel for fleet vehicles. Retail propane sales accounted for approximately 3 percent of Phillips' total annual propane sales. 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 does not include 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 two leased LNG tankers utilized in the company's E&P operations, 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. In 1996, Phillips and a co-venturer converted the Seaway pipeline from natural gas service to crude oil transportation. In addition, the co-venturer contributed a major crude oil pipeline to the partnership. Crude oil shipments began in the spring of 1996 from the Houston Gulf Coast area to refineries and other markets in the mid-continent area. Phillips and its co-venturer plan to convert a portion of Seaway's capacity to refined products service. The converted portion, which currently ends in Oklahoma, would be extended to Kansas, where it would be connected with Phillips' products pipeline that runs to Chicago. The project is scheduled to be completed in early 1998. Work has commenced to expand the capacity of a major refined products pipeline that runs from West Texas to New Mexico. This expansion will help Phillips supply its new retail service stations in the Southwest, including 12 outlets acquired in New Mexico during the year. Chemicals - --------- The Chemicals segment is composed of 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. 15 The company owns and operates processing facilities at the Sweeny and Borger Complexes and has an equity interest in a plant in Conway, Kansas. 2) Intermediate petrochemical products. Primary products manufactured in this operation include ethylene, propylene, paraxylene and cyclohexane. Major production facilities are located at the Sweeny Complex in Texas and in Puerto Rico. 3) Plastics products. Products manufactured in this operation include polyethylene, polypropylene, K-Resin, plastic pipe and Ryton. The major production facility is the Houston Chemical Complex (HCC), near Houston, Texas. The company owns an equity interest in a polyethylene plant in Singapore and a polypropylene plant at HCC. Ryton is produced at the Borger Complex and plastic pipe is manufactured at five regionally located U.S. plants, as well as at a plant in Argentina. NGL The NGL business operated at 82 percent of rated fresh-feed capacity for the year, compared with 88 percent in 1995. Total NGL fresh-feed processing capacity increased to 250,000 barrels per day from 227,000 barrels per day, effective January 1, 1996. Capacity increased at the Sweeny Complex, due in part to debottlenecking during a turnaround late in 1995. NGL is used as a feedstock to manufacture higher-value chemicals, such as ethylene. INTERMEDIATE PETROCHEMICALS Phillips' ethylene and propylene are produced at the Sweeny Complex. In addition to 100 percent-owned ethylene and propylene facilities, the 50 percent-owned Sweeny Olefins Limited Partnership (SOLP) is also located there. A significant volume of ethylene is used within Phillips as a feedstock for manufacturing polyethylene. Propylene is used as a feedstock for manufacturing polypropylene. The Sweeny Complex's total current annual ethylene and propylene capacities are 4.1 billion and 1.3 billion pounds, respectively. Phillips' share is 3.1 billion pounds per year and 950 million pounds per year, respectively. At SOLP, an incremental debottlenecking project was completed in 1996, increasing the partnership's total ethylene capacity to 2 billion pounds per year. In addition, the company is restarting a 100 percent-owned ethylene unit that has been idle since 1992. This project, scheduled to be completed in the 16 spring of 1997, will add an additional 400 million pounds per year of ethylene capacity. Once completed, this project will increase the total Sweeny Complex's ethylene capacity to 4.5 billion pounds per year, with Phillips' share at 3.5 billion pounds. Paraxylene and cyclohexane are produced at the company's Puerto Rico Core facility in Guayama, Puerto Rico, and cyclohexane is also produced at the Sweeny Complex. Paraxylene is a feedstock for polyester resin, used to produce fibers and plastic soft drink bottles, while cyclohexane is a feedstock for nylon. In 1995, the company completed the first phase of a paraxylene expansion at Puerto Rico Core, increasing design capacity from 525 million pounds per year to 675 million pounds per year. The company intends to increase capacity further, reaching 880 million pounds per year by the second quarter of 1997. As part of the company's growth strategy for its specialty chemicals business, Phillips plans to construct a 100 million- pounds-per-year methyl mercaptan plant at its Borger Complex. Construction should begin in mid-1997, with first production expected in late 1998. Methyl mercaptan is a sulfur-based chemical used in the production of methionine, a feed supplement for poultry. Methyl mercaptan is also a raw ingredient for agricultural chemicals. The new facility will use hydrogen sulfide produced at the Borger Complex as feedstock. PLASTICS At HCC, capacity to produce an additional 100 million pounds of polyethylene annually was added through debottlenecking in 1996. Additional debottlenecking work will increase capacity to 2.2 billion pounds by project completion in 1998. In 1996, HCC produced 1,836 million pounds of polyethylene, its highest annual output of polyethylene ever. Polyethylene is used to manufacture a wide variety of plastic products. The expansion of Phillips' 50 percent-owned Singapore polyethylene facility continued in 1996. The expansion will more than double the facility's total annual linear polyethylene capacity to 870 million pounds. Completion of the project is expected in 1997. The plant will supply polyethylene to markets in Asia and the Pacific Rim. In late 1995, Phillips and Shanghai Petrochemical Company Limited (SPC) formed a joint venture to build and operate a linear polyethylene plant near Shanghai, China, with an annual capacity of 220 million pounds. Construction began in 1996 and is scheduled for completion in 1998. Phillips will own a 17 40 percent equity interest in the plant, which will use Phillips' proprietary polyethylene technology. The plant will be located near a petrochemical complex owned by SPC, which will provide ethylene feedstock to the new plant. This project marks Phillips' first downstream investment in China, and will strengthen the company's position in the polyethylene market in Asia. Phillips also signed a letter of intent with China Petrochemical Corporation, the state-owned petrochemical company, to cooperate in developing new chemicals and plastics projects in China. Under the letter of intent, the two parties agreed to share their expertise, technology and financial resources to pursue projects of mutual benefit and strategic value. Also in the letter of intent, Phillips and SPC agreed to study the feasibility of expanding the polyethylene plant currently under construction by an additional 440 million to 550 million pounds a year, with Phillips holding a 40 to 50 percent interest in the additional capacity. In late 1996, Phillips and the Egyptian General Petroleum Corporation (EGPC) signed a letter of intent regarding the construction and operation of a 330 million-pounds-per-year high-density polyethylene facility near Alexandria, Egypt. If the project goes forward, Phillips would be the majority owner of the facility and construction would begin in 1998, with first production in 2000. Ethylene feedstock will be provided by an ethylene unit to be built by an EGPC subsidiary at the same site. In 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 funded the construction of a new PSPC polypropylene facility at HCC. Construction began during the fourth quarter of 1994, and was completed in late 1996. The new gas-phase polypropylene facility's annual capacity is 270 million pounds, bringing PSPC's total annual production capacity to 750 million pounds. Phillips will eventually hold a 50 percent interest in PSPC. K-Resin, a clear plastic used in food and medical packaging, is produced at HCC. A new copolymer reactor began operation in the fall of 1995, enhancing performance and increasing annual capacity to 270 million pounds. Phillips is planning to construct a new plant next to existing facilities that will increase capacity to 370 million pounds per year. If approved by the company's Board of Directors, construction could begin in late 1997, with initial production in 1999. 18 Phillips' Driscopipe division manufactures polyethylene pipe, utilizing five U.S. manufacturing facilities. Polyethylene pipe is used in a variety of ways, including municipal water and telecommunications applications. Construction began in 1996 on a new manufacturing facility to be leased in Hagerstown, Maryland, with first production scheduled for the summer of 1997. In its first foreign venture, the Driscopipe division began manufacturing polyethylene pipe in Argentina in 1996, for use in South American markets. Also, the Driscopipe division plans to form a joint venture to manufacture polyethylene pipe in Mexico, which will also serve as its principal market. Other - ----- The Corporate Technology organization provides a flexible, cost-effective support team for the operating segments. Examples of Corporate Technology support in 1996 included: o Upstream (E&P and GPM) - Geophysical and computer specialists created a new computer program system that extends the capabilities of commercial software used by geoscientists. With the new technology, seismic images can be converted into three-dimensional pictures of hydrocarbon reservoirs, thus assisting in determining the best locations to drill for and exploit oil and natural gas. - Continued development of three-dimensional pre-stack depth migration seismic technology, utilized to provide better imaging of rock formations below the earth's surface. Because of this technology, which provides clearer seismic images of subsalt oil and gas reservoirs, Phillips is now producing oil from a reservoir beneath the salt. o Downstream (RM&T and Chemicals) - Phillips is installing new proprietary technology called Reduced Volatility Alkylation Process (ReVAP) at its Woods Cross, Utah, refinery. This technology was commended by the Environmental Protection Agency. - Researchers assisted the refineries in achieving savings in their crude oil and catalyst purchases by developing improved computer models of refining processes. These models are used to select the best crude oil and catalyst combinations. - A Phillips-developed antifoulant technology was tested at the Sweeny Complex. The technology reduces the production of contaminants, allowing furnaces used in ethylene production to operate more consistently. 19 - Researchers and operations employees successfully tested metallocene catalysts in a commercial reactor at HCC. Metallocenes are "precision" catalysts that provide more control over the molecular structure and properties of polyethylene. The ability to produce more versatile polyethylene offers the company opportunities to expand into higher-value markets. Success in the commercial reactor means Phillips can produce the improved resins with existing facilities. Corporate Technology is also involved in a company-wide, long- range effort to replace various legacy computer systems, such as plant maintenance, materials management and financial systems, based on software from SAP America, Inc. and, for E&P operations, Oracle Corporation. The goal is improved access to business information by implementing common, integrated computing systems across the company. Phase-in of the new client-server technology began January 1, 1997. At the end of 1996, Phillips held a total of 4,266 active patents in 52 countries worldwide, including 2,072 active U.S. patents. During 1996, the company received 93 patents in the United States, and 319 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 37 countries at year-end 1996, resulting in licensing revenues of $93 million. Polypropylene-related licenses contributed about two-thirds of the total, with polyethylene-related licenses contributing 16 percent. Phillips has recently agreed to license to other manufacturers its proprietary loop reactor technology, used in the manufacture of polyethylene, in North America. This is the first time in more than 20 years that the company has agreed to license its polyethylene technology in the United States, marking a major shift in the company's U.S. licensing strategy. 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, chemicals and other products to the consumer. Several of the company's competitors are larger and have substantially greater resources. 20 While Phillips is one of approximately 20 large public 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' branded 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 structure is well-integrated vertically--with businesses ranging from feedstocks to plastic pipe--which helps ensure markets for certain products. A substantial percentage of Phillips' olefins, for example, are typically used as a raw material in plastic resins 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. GENERAL The company's injury rate decreased slightly to 1.52 injuries per 100 employees. Chargeable vehicle accidents were the lowest recorded in the company's history. Company-sponsored research and development activities charged against earnings were $59 million, $51 million and $71 million in 1996, 1995 and 1994, respectively. 21 The environmental information contained in Management's Discussion and Analysis on pages 55 and 56 under the caption, "Environmental" is incorporated herein by reference. It includes information on expensed and capitalized environmental costs for 1996 and those expected for 1997 and 1998. 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 not always predictable. 22 Item 3. LEGAL PROCEEDINGS None. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 23 EXECUTIVE OFFICERS OF THE REGISTRANT Officer Name Position Held Age* Since ---- ------------- --- ------- W. W. Allen Chairman of the Board of 60 1988 Directors and Chief Executive Officer Knut Am Senior Vice President 53 1996 Exploration and Production C. L. Bowerman Executive Vice President 57 1984 Director R. G. Ceconi Senior Vice President 54 1991 Corporate Engineering K. L. Hedrick Senior Vice President 44 1994 Refining, Marketing and Transportation J. L. Howe Senior Vice President 52 1992 NGL, Chemicals and Plastics J. C. Mihm Senior Vice President 54 1988 Corporate Technology T. C. Morris Senior Vice President and 56 1993 Chief Financial Officer J. J. Mulva President and Chief Operating 50 1985 Officer Director M. J. Panatier** President and Chief Executive 48 1994 Officer of Phillips Gas Company Barbara J. Price Vice President Health, 52 1992 Environment and Safety J. Bryan Whitworth Senior Vice President 58 1981 and General Counsel - ------------------------ *On February 1, 1997. **Executive Officers of the Registrant is defined under the rules of the Securities and Exchange Commission so as to include in certain cases persons who are not officers of the company. Mr. Panatier, while an "Executive Officer" as so defined, is not an officer of the company. 24 There is no family relationship among the officers named above. Each officer of the company is elected by the Board of Directors at its first meeting after the Annual Meeting of Stockholders and thereafter as appropriate. Each officer of the company holds office from date of election until the first meeting of the directors held after the next Annual Meeting of Stockholders or until a successor is elected. The date of the next annual meeting is May 12, 1997. All of the executive officers named above have been employed by the company for more than five years. 25 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 ------------------- --------- 1996 First $40 1/8 31 1/8 .305 Second 43 1/8 37 3/4 .305 Third 44 1/8 38 7/8 .32 Fourth 45 7/8 39 1/4 .32 - ----------------------------------------------------------------- 1995 First 36 5/8 29 7/8 .28 Second 37 1/8 32 1/4 .305 Third 35 1/2 31 7/8 .305 Fourth 34 7/8 30 1/2 .305 - ----------------------------------------------------------------- Closing Stock Price at December 31, 1996 $44 1/4 Number of Stockholders of Record at January 31, 1997 61,700 - ----------------------------------------------------------------- Phillips' common stock is traded primarily on the New York, Pacific and Toronto stock exchanges. 26 Item 6. SELECTED FINANCIAL DATA Millions of Dollars Except Per Share Amounts -------------------------------------------- 1996 1995 1994 1993 1992 -------------------------------------------- Sales and other operating revenues $15,731 13,368 12,211 12,309 11,933 Income before extraordinary items and cumulative effect of changes in accounting principles 1,303 469 484 245 270 Net income 1,303 469 484 243 180 Per common share Income before extraordinary items and cumulative effect of changes in accounting principles 4.96 1.79 1.85 .94 1.04 Net income 4.96 1.79 1.85 .93 .69 Total assets 13,548 11,978 11,453 11,035 11,468 Long-term debt 2,555 3,097 3,106 3,208 3,718 Cash dividends declared per common share 1.25 1.195 1.12 1.12 1.12 - ------------------------------------------------------------------ See Management's Discussion and Analysis of Financial Condition and Results of Operations for a discussion of factors that will enhance an understanding of this data. 27 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS February 21, 1997 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. It contains forward- looking statements including, without limitation, statements relating to the company's plans, strategies, objectives, expectations, intentions, and adequate resources, and are made pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. The words "forecasts," "intends," "possible," "potential," "targeted," "believe," "expect," "plan," or "plans," "scheduled," "perceives," "anticipate," "estimate," "begin," and similar expressions identify forward-looking statements. The company does not undertake to update, revise or correct any of the forward-looking information. Readers are cautioned that such forward-looking statements should be read in conjunction with the company's disclosures under the heading: "CAUTIONARY STATEMENT FOR THE PURPOSES OF THE 'SAFE HARBOR' PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995" beginning on page 61. RESULTS OF OPERATIONS Consolidated Results A summary of the company's net income, by business segment and consolidated, follows: Millions of Dollars ----------------------- Years Ended December 31 1996 1995 1994 ----------------------- Exploration and Production (E&P) $ 510 390 342 Gas Gathering, Processing and Marketing (GPM) 144 10* 31* Refining, Marketing and Transportation (RM&T) 71 40 136 Chemicals 266 386 259 Corporate and Other 312 (357)* (284)* - ----------------------------------------------------------------- Net income $1,303 469 484 ================================================================= *Preferred stock dividend requirements of subsidiary was reclassified from GPM to Corporate and Other for segment reporting. 28 Earnings for the three years included the following special items on an after-tax basis: Millions of Dollars ----------------------- 1996 1995 1994 ----------------------- Kenai liquefied natural gas (LNG) tax settlement $ 565 - - Property impairments (183) (51) - Net gains on asset sales 14 - 13 Gain on subsidiary stock transaction - - 20 Capital-loss carryforwards - - 50 Work force reduction charges (2) (31) (36) Foreign currency gains (losses) 41 (3) 3 Pending claims and settlements (18) (12) 17 Other items (5) (14) 10 - ----------------------------------------------------------------- Total special items $ 412 (111) 77 ================================================================= Net operating income, which excludes the above items, was $891 million in 1996, $580 million in 1995 and $407 million in 1994. 1996 vs. 1995 The company's E&P, GPM and RM&T segments all contributed to significantly higher net operating income in 1996. The improvement in E&P's net operating income resulted from higher worldwide crude oil and U.S. natural gas sales prices. GPM's net operating income increased almost sevenfold, due to much improved margins, lower operating expenses and higher raw gas throughput volumes. RM&T's operating earnings more than doubled those of a year ago, reflecting higher distillates and gasoline margins, along with lower operating expenses. In Chemicals, net operating income declined as a result of lower margins for ethylene, polyethylene and paraxylene. These items were partially offset by improved results from K-Resin and higher ethylene and polyethylene sales volumes. 1995 vs. 1994 The company's E&P and Chemicals operations were primarily responsible for significantly improved net operating income in 1995, compared with 1994. Higher worldwide crude oil and natural gas production, along with higher worldwide crude oil sales prices, contributed to a 41 percent improvement in E&P net operating income. Chemicals' earnings were up sharply because of 29 higher ethylene, polyethylene and paraxylene margins in a robust year for the commodity chemicals industry. GPM's results were lower, as depressed U.S. residue gas prices in 1995 negatively impacted this business line. In RM&T, the refined products marketplace did not allow for the recovery of higher crude oil feedstock costs in 1995, resulting in lower gasoline and distillates margins and a 64 percent decrease in net operating income. Phillips at a Glance 1996 1995 1994 ----------------------- U.S. crude oil production (MBD) 69 79 90 Worldwide crude oil production (MBD) 219 222 206 U.S. natural gas production (MMCFD) 1,102 1,078 1,035 Worldwide natural gas production (MMCFD) 1,527 1,481 1,414 Worldwide natural gas liquids production (MBD) 163 159 165 Liquefied natural gas sales (MMCFD) 130 125 120 Refinery utilization rate (%) 95 97 99 U.S. automotive gasoline sales (MBD) 340 331 308 U.S. distillates sales (MBD) 138 135 128 Worldwide petroleum products sales (MBD) 702 696 689 Natural gas liquids processed (MBD) 205 199 207 Ethylene production (MMlbs)* 2,587 2,465 2,590 Polyethylene production (MMlbs)* 2,048 1,797 1,885 Polypropylene production (MMlbs)* 327 418 433 Paraxylene production (MMlbs) 622 578 393 - ----------------------------------------------------------------- *Includes Phillips' share of equity affiliates' production. Income Statement Analysis 1996 vs. 1995 Sales and other operating revenues increased 18 percent in 1996, as a result of higher sales prices for crude oil, natural gas and petroleum products. These same factors also contributed to a 21 percent increase in purchase costs. The company is a net purchaser of crude oil for its refineries, and petroleum products for its wholesale and retail marketing operations. In addition, the GPM segment purchases raw natural gas. Equity earnings of affiliated companies declined significantly in 1996. Over 60 percent of the decrease is a result of impairments related to the Point Arguello field that were recorded on equity companies. The remainder of the decrease is primarily 30 attributable to lower earnings from the company's interest in Sweeny Olefins Limited Partnership (SOLP), due to lower ethylene margins. Other revenues increased $46 million in 1996, primarily as a result of higher net gains on asset sales and higher interest income. Controllable costs, composed primarily of production and operating expenses and selling, general and administrative expenses, both adjusted for special items, were 1 percent higher in 1996. Lower costs from the company's Norway, GPM and refinery operations were more than offset by higher fuel costs at manufacturing facilities and costs associated with company growth-related projects. Exploration expenses increased 28 percent in 1996 due to higher dry hole charges, primarily located in the Gulf of Mexico, Algeria, offshore China and the U.K. sector of the North Sea. Depreciation, depletion and amortization (DD&A) was 3 percent lower in 1996, compared with 1995, after adjusting both periods for property impairments. DD&A expenses were lower in the RM&T and Chemicals segments, due to new depreciation rates, and in the GPM segment, due to an accounting method change, both of which were effective January 1, 1996. In addition, Norway E&P DD&A expenses were lower, mainly due to an upward revision to recoverable reserves at year-end 1995. The effect of these decreases was partially offset by asset acquisitions and capital additions. Taxes other than income taxes changed only slightly in 1996, as the absence of Superfund tax accruals was offset by higher foreign taxes and production taxes. The Superfund tax expired December 31, 1995, and the law providing for its collection has not been extended. Interest expense was 18 percent lower in 1996, primarily due to lower accrued interest on tax contingencies, mainly as a result of the favorable resolution of the Kenai LNG tax case. 1995 vs. 1994 Sales and other operating revenues were $13.4 billion in 1995, a 10 percent increase from $12.2 billion in 1994. Revenues increased from 1994 levels as a result of higher prices for crude oil, chemicals and petroleum products, partially offset by lower U.S. natural gas sales prices. Total costs and expenses were 8 percent higher in 1995, compared with 1994, primarily as a result of higher purchase costs, due to higher crude oil and petroleum products prices. 31 Segment Results E&P 1996 1995 1994 ---------------------------- Millions of Dollars ---------------------------- Operating Income Net income $ 510 390 342 Less special items (159) (61) 23 - ----------------------------------------------------------------- Net operating income $ 669 451 319 ================================================================= Dollars Per Unit ---------------------------- Average Sales Prices Crude oil (per barrel) United States $18.96 14.98 13.37 Foreign 20.89 17.16 15.75 Worldwide 20.28 16.43 14.74 Natural gas--lease (per thousand cubic feet) United States 2.10 1.37 1.69 Foreign 2.52 2.50 2.31 Worldwide 2.25 1.77 1.92 - ----------------------------------------------------------------- Average Production Costs per Barrel-of-Oil-Equivalent United States 4.17 4.06 4.50 Foreign 4.15 4.28 5.36 Worldwide 4.16 4.16 4.85 - ----------------------------------------------------------------- Finding and Development Costs per Barrel-of-Oil-Equivalent United States 6.20 2.77 5.75 Foreign 8.31 4.21 2.10 Worldwide 7.52 3.52 2.88 - ----------------------------------------------------------------- Millions of Dollars ---------------------------- Worldwide Exploration Expenses Geological and geophysical $127 126 124 Leasehold impairment 28 30 27 Dry holes 89 36 68 Lease rentals 10 6 7 - ----------------------------------------------------------------- $254 198 226 ================================================================= 32 1996 1995 1994 ---------------------------- Thousands of Barrels Daily ---------------------------- Operating Statistics Crude oil produced United States 69 79 90 Norway 99 100 82 United Kingdom 6 3 5 Africa 25 24 23 China 15 11 1 Canada 5 5 5 - ----------------------------------------------------------------- 219 222 206 ================================================================= Natural gas liquids produced United States 4 5 5 Norway 8 8 8 Other areas 3 2 1 - ----------------------------------------------------------------- 15 15 14 ================================================================= Millions of Cubic Feet Daily ---------------------------- Natural gas produced United States (less gas equivalent of liquids shown above) 1,102 1,078 1,035 Norway* 291 299 272 United Kingdom* 81 46 58 Canada 53 58 49 - ----------------------------------------------------------------- 1,527 1,481 1,414 ================================================================= *Dry basis. Liquefied natural gas sales 130 125 120 - ----------------------------------------------------------------- 1996 vs. 1995 E&P's net operating income in 1996 was 48 percent higher than in 1995. This strong performance was driven by higher worldwide crude oil and U.S. natural gas sales prices. Phillips' worldwide average crude oil sales prices generally rose throughout 1996, as Iraqi crude oil exports remained off the market until near year-end, and the supply/demand balance tightened. Prices in the first quarter of 1996 were helped by a colder than normal winter in the United States and Europe, which left global inventories significantly lower than they have historically been. Crude oil prices in the second quarter were helped by improved gasoline margins and OPEC's decision to maintain their production ceiling, while acknowledging Iraq's eventual re-entry into the world export market. Over the second half of the year, prices increased in reaction to the often- delayed resumption of Iraqi exports, to low distillates inventories and strong margins, to rising political tension in 33 Arab-Israeli relations, and to a general containment in incremental supply from OPEC. Late in the year, prices moved higher in reaction to colder than normal temperatures. Prices finished the year at their highest level since the Gulf War in early 1991. 1995 vs. 1994 Phillips' average worldwide crude oil sales price was $16.43 per barrel in 1995, an 11 percent increase over 1994. Worldwide crude oil production averaged 222,000 barrels per day in 1995, an 8 percent increase over 1994. These two factors resulted in higher crude oil revenues and were primarily responsible for the 41 percent improvement in net operating income in 1995, compared with 1994. Also positively affecting 1995 results were higher LNG revenues, lower U.S. lifting costs and lower worldwide exploration costs. These items were partially offset by lower U.S. natural gas revenues compared with 1994, due to a 19 percent lower average natural gas sales price. U.S. E&P - -------- Millions of Dollars ---------------------------- 1996 1995 1994 ---------------------------- Operating Income Net income $ 329 249 257 Less special items (136) (44) 18 - ----------------------------------------------------------------- Net operating income $ 465 293 239 ================================================================= 1996 vs. 1995 Net operating income increased 59 percent in the company's U.S. E&P operations in 1996, compared with 1995. The higher average U.S. natural gas sales price--53 percent higher than 1995--was the main factor accounting for the sharp increase in earnings. Other positive influences on operating income included higher natural gas production, higher crude oil sales prices and higher LNG revenues. These factors were partially offset by lower crude oil production and higher exploration expenses. U.S. natural gas prices benefited in the first half of 1996 from an increase in industry demand and a reduction in natural gas storage levels caused by a cold winter in North America in 1995-1996. Higher summer cooling demand and the replenishing of industry natural gas storage supplies sustained the improved prices through the summer and into the fall. Toward year-end 1996, prices increased significantly due to the onset of winter weather and increased demand. 34 U.S. crude oil production continued to decline in 1996, as a result of continuing production declines from the Point Arguello field located offshore California, general field declines in the Gulf of Mexico and Prudhoe Bay in Alaska, and the effect of non-strategic property dispositions. U.S. natural gas production increased slightly in 1996, compared with 1995. The increase was attributable to new production from the Seastar (Garden Banks Blocks 70/71) field in the Gulf of Mexico, which came online in mid-year 1995; and property acquisitions in south Louisiana; partially offset by lower production from the South Marsh Island Blocks 146/147 field in the Gulf of Mexico. Special items in 1996 included after-tax charges of $119 million for the impairment of the Point Arguello field and associated facilities, including adjustments to abandonment accruals. Also included were various contingency accruals totaling $24 million after-tax, the most significant of which related to an unfavorable court judgment regarding producing properties in Alabama. Special items in 1995 included property impairments of $35 million after-tax associated with the adoption of Financial Accounting Standards Board (FASB) Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," along with work force reduction charges, a net loss on asset dispositions and a contingency accrual. 1995 vs. 1994 Net operating income increased 23 percent in 1995, compared with 1994, due primarily to lower costs. Production and operating costs, exploration expenses and DD&A costs were all lower in 1995, compared with 1994. Cost reduction programs, the sale of non-core properties and lower dry hole charges all contributed to lower costs in 1995. Also benefiting 1995 results were favorable natural gas imbalance settlements. Lease gas revenues were significantly lower in 1995 than 1994, as the average lease gas sales price decreased 19 percent compared with the prior year. LNG revenues were higher in 1995, due in part to 4 percent more volume being sold to the company's utility customers in Japan. U.S. crude oil production declined in 1995, compared with 1994, due to general production declines, primarily from Point Arguello and Prudhoe Bay, and the effect of property dispositions. U.S. natural gas production was 4 percent higher in 1995 than in 1994, primarily as a result of higher production from the San Juan Basin in New Mexico and new production from the Seastar field in the Gulf of Mexico. 35 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. Foreign E&P - ----------- Millions of Dollars ---------------------------- 1996 1995 1994 ---------------------------- Operating Income Net income $181 141 85 Less special items (23) (17) 5 - ----------------------------------------------------------------- Net operating income $204 158 80 ================================================================= 1996 vs. 1995 Net operating income from the company's foreign E&P operations increased 29 percent in 1996, compared with 1995. The improvement in earnings was a result of higher crude oil sales prices and, to a lesser degree, higher natural gas sales prices. In addition, tax benefits resulting from capital investments in Norway associated with the Ekofisk II redevelopment also contributed to the improved results. These items were partially offset by higher exploration expenses resulting from unsuccessful exploratory wells in Algeria, offshore China and the U.K. sector of the North Sea. Foreign crude oil production increased 5 percent in 1996, compared with 1995, with the increase primarily attributable to offshore China and the U.K. sector of the North Sea. Production from the Xijiang 30-2 field, which began producing in October 1995, resulted in the higher 1996 China production volumes. Foreign natural gas production increased 5 percent for the year, as lower demand in Norway was more than offset by higher production and increased demand in the U.K. sector of the North Sea. Special items in 1996 consisted primarily of a $25 million after-tax impairment of certain Canadian proved properties. Special items in 1995 included after-tax work force reduction charges of $8 million, after-tax property impairments of $6 million, a contract settlement and foreign currency losses. 36 1995 vs. 1994 Net operating income from the company's foreign E&P operations almost doubled in 1995, compared with 1994, to $158 million. The increase was primarily attributable to higher crude oil revenues, due to higher crude oil production and a 9 percent increase in the average crude oil sales price. The positive effect of higher crude oil revenues was partially offset by higher DD&A, as a result of higher production rates and new production from offshore China. Foreign crude oil production was 23 percent higher in 1995, compared with 1994, due to higher production in Norway, as a result of the water injection program and horizontal drilling, and the first full year's production from offshore China. Higher production in Norway and Canada led to higher foreign natural gas production. Special items in 1994 consisted primarily of income tax items related to the company's China and Norway operations. 37 GPM 1996 1995 1994 ---------------------------- Millions of Dollars ---------------------------- Operating Income Net income $144 10* 31* Less special items 3 (11) (6) - ----------------------------------------------------------------- Net operating income $141 21 37 ================================================================= *Preferred stock dividend requirements of subsidiary was reclassified from GPM to Corporate and Other for segment reporting. Dollars Per Unit ---------------------------- Average Sales Prices U.S. residue gas (per thousand cubic feet) $ 2.20 1.49 1.79 U.S. natural gas liquids (per barrel--unfractionated) 14.49 10.07 9.77 - ----------------------------------------------------------------- Millions of Cubic Feet Daily ---------------------------- Operating Statistics Natural gas purchases Outside Phillips 1,360 1,247 1,164 Phillips 178 194 206 - ----------------------------------------------------------------- 1,538 1,441 1,370 ================================================================= Raw gas throughput 1,913 1,620 1,505 - ----------------------------------------------------------------- Residue gas sales Outside Phillips 1,002 833 853 Phillips 74 184 96 - ----------------------------------------------------------------- 1,076 1,017 949 ================================================================= Thousands of Barrels Daily ---------------------------- Natural gas liquids net production From Phillips E&P leasehold gas 17 19 21 From gas purchased outside Phillips 131 125 130 - ----------------------------------------------------------------- 148 144 151 ================================================================= 1996 vs. 1995 GPM's net operating income increased substantially in 1996, compared with 1995. The $120 million improvement was a result of much improved margins, due to sharply higher natural gas liquids (NGL) and residue gas sales prices and higher raw gas throughput volumes. Earnings also benefited from significantly lower operating expenses. 38 NGL prices increased throughout 1996, with a particularly sharp increase in the fourth quarter. Low industry inventory levels, supply disruptions and increased demand in the petrochemicals industry for NGL feedstocks have all served to drive prices higher in 1996. NGL production volumes increased 3 percent, mainly due to conversion of the Linam Ranch plant in New Mexico to a cryogenic facility, which provided more efficient NGL recovery rates, and acquisitions completed at the end of 1995. Residue gas prices benefited in the first half of 1996 from an increase in industry demand and a reduction in natural gas storage levels. Higher summer cooling demand and the replenishing of industry natural gas storage supplies sustained improved prices through the summer and into the fall. Toward year-end 1996, prices increased significantly due to the onset of winter, as low industry storage levels compounded the impact of cold weather on natural gas market prices. The 6 percent increase in residue gas sales volumes in 1996 was primarily the result of acquisitions completed at the end of 1995. Controllable costs were 20 percent lower in 1996, compared with 1995, reflecting continuous cost improvement efforts, such as technology enhancements, plant modernizations, plant consolidations and reengineering efforts completed in 1995. Special items in 1996 included a gain on the sale of an NGL plant and gathering system, as well as a favorable adjustment to previously accrued work force reduction charges. Special items in 1995 consisted of work force reduction charges. 1995 vs. 1994 GPM's average annual raw gas throughput volumes in 1995 were 8 percent higher than in 1994. Acquisitions and expansions in 1995 and late 1994 contributed to the increase in raw gas throughput volumes. Higher raw gas throughput volumes led to increased residue gas sales volumes in 1995, compared with 1994. However, 17 percent lower residue gas sales prices contributed to a sharp decline in GPM's net operating income in 1995. NGL average sales prices were slightly higher in 1995 than in 1994, but the higher sales prices were more than offset by lower sales volumes, primarily as a result of lower retention rates at GPM's Linam Ranch plant, a lean oil absorption plant acquired in 1994. Operating costs were lower in 1995, compared with 1994, as GPM lowered its overall cost structure. Special items in 1994 consisted of work force reduction charges. 39 RM&T 1996 1995 1994 ---------------------------- Millions of Dollars ---------------------------- Operating Income Net income $ 71 40 136 Less special items (35) (11) (7) - ----------------------------------------------------------------- Net operating income $106 51 143 ================================================================= Dollars Per Unit ---------------------------- Average Sales Prices (per gallon) Automotive gasoline-wholesale $.67 .58 .56 Automotive gasoline-retail .83 .74 .72 Distillates .64 .52 .51 Propane .50 .38 .35 - ----------------------------------------------------------------- Thousands of Barrels Daily ---------------------------- Operating Statistics U.S. refinery crude oil Capacity 345 345 320 Crude runs 329 333 317 Capacity utilization (percent) 95% 97 99 - ----------------------------------------------------------------- Petroleum products outside sales United States Automotive gasoline-wholesale 291 286 252 Automotive gasoline-retail 37 35 38 Aviation fuels 25 29 32 Distillates 138 135 128 Propane 26 23 25 Other products 15 18 18 - ----------------------------------------------------------------- 532 526 493 Foreign 46 45 54 - ----------------------------------------------------------------- 578 571 547 ================================================================= 1996 vs. 1995 RM&T's net operating income in 1996 more than doubled that of 1995. The $55 million improvement was the result of higher distillates margins, and, to a lesser extent, higher gasoline margins and lower operating expenses. Phillips' average distillates sales price for 1996 ended the year $.12 per gallon higher, a 23 percent increase over 1995. Low industry-wide inventories created a tight supply situation in 1996, compared with 1995, supporting improved distillates prices. The company's wholesale gasoline price in 1996 averaged $.67 per gallon, 16 percent higher than in 1995. However, crude oil feedstock costs were 21 percent higher in 1996 than in 1995, 40 partially offsetting the benefit of higher distillates and gasoline sales prices. The company's U.S. refineries ran at 95 percent of capacity in 1996, averaging 329,000 barrels of crude oil daily. This was slightly lower than 1995, when a new company throughput record was set, due to maintenance turnarounds during the first half of 1996. A maintenance turnaround is scheduled for the Sweeny, Texas, refinery in 1997. Controllable costs at the U.S. refineries ended the year 2 percent lower than a year ago, despite a significant increase in fuel-gas costs. Special items in 1996 consisted primarily of a $38 million after- tax impairment of certain retail service stations that are either being razed and rebuilt in connection with the company's expansion program, or being held for sale. Special items in 1995 included an inventory writedown and work force reduction charges. 1995 vs. 1994 Net operating income decreased 64 percent in 1995, compared with 1994. Higher crude oil feedstock costs, particularly during the first six months of 1995, could not be fully recovered in the motor fuel and distillates markets. Ample supplies caused these markets to remain highly competitive in 1995, resulting in lower motor fuel and distillates margins. Continued operating efficiencies and incremental debottlenecking led the company to revise its U.S. crude oil refining capacity in 1995, from 320,000 barrels per day to 345,000 barrels per day, effective January 1, 1995. Even at the higher capacity, Phillips' U.S. refineries ran at 97 percent of capacity, while at the same time lowering controllable costs. Special items in 1994 included work force reduction charges. 41 Chemicals 1996 1995 1994 ---------------------------- Millions of Dollars ---------------------------- Operating Income Net income $266 386 259 Less special items (7) (4) 34 - ----------------------------------------------------------------- Net operating income $273 390 225 ================================================================= Millions of Pounds Except as Indicated ---------------------------- Operating Statistics Production* Ethylene 2,587 2,465 2,590 Polyethylene 2,048 1,797 1,885 Propylene 418 434 372 Polypropylene 327 418 433 Paraxylene 622 578 393 Cyclohexane (millions of gallons) 169 133 174 - ----------------------------------------------------------------- *Includes Phillips' share of equity affiliates' production. Thousands of Barrels Daily ---------------------------- U.S. petroleum products outside sales Automotive gasoline 12 10 18 Liquefied petroleum gas 75 75 84 Other products 37 40 40 - ----------------------------------------------------------------- 124 125 142 ================================================================= Natural gas liquids Processing capacity 250 227 227 Liquids processed 205 199 207 - ----------------------------------------------------------------- 1996 vs. 1995 Chemicals' net operating income declined 30 percent in 1996, compared with the strong results from 1995, when industry conditions were much more favorable. Lower margins for ethylene, polyethylene and paraxylene were primarily responsible for the decrease in operating income. Higher sales volumes for ethylene and polyethylene, along with improved results from K-Resin operations and improved NGL margins partially offset the earnings decline. Ethylene margins ended the year much lower than 1995, as rising NGL feedstock costs, particularly late in the year, could not be recovered in the marketplace. Ethylene production volumes were 5 percent higher in 1996 than in 1995, even with debottlenecking work and a major scheduled maintenance turnaround of the olefins unit at SOLP, in which the company owns a 50 percent equity interest. 42 Paraxylene margins began to decline in the second quarter of 1996, and trended downward the remainder of the year. Weakening demand, coupled with surplus industry capacity, combined to drive margins down. Paraxylene production was 8 percent higher than a year ago, as the first phase of a paraxylene expansion at the Puerto Rico Core facility was completed in mid-1995, partially offset by weather-related downtime in 1996. In the company's plastics operations, polyethylene and polypropylene margins were lower than a year ago, due to softening industry conditions. The company's Houston Chemical Complex (HCC) facility turned in an excellent operating performance in 1996, with 14 percent higher polyethylene production than a year ago, and its highest annual output ever. Phillips has an equity interest in a partnership that owns the polypropylene production facilities at HCC. While gross production was only slightly lower than 1995, Phillips' share of production in 1996 was 22 percent lower than last year, primarily as a result of a decreasing equity interest in the partnership. During the construction phase of the new facility, which was completed during 1996, the company's equity ownership interest was reduced on a sliding scale as the partner funded the construction of the new facility. Special items in 1996 represented a tax item related to the company's Puerto Rico Core operations. Special items in 1995 included property impairments on an after-tax basis of $3 million. 1995 vs. 1994 The company's Chemicals segment reported substantial earnings growth in 1995, with net operating income of $390 million, compared with $225 million in 1994. The 73 percent improvement reflects improved product margins in the commodity chemicals industry that began during 1994. Demand for olefins, which includes ethylene and propylene, was strong in the first half of 1995, before softening during the second half. Growing demand led to higher paraxylene margins in 1995. In the company's plastics operations, higher polyethylene and polypropylene margins in 1995 contributed to the higher Chemicals earnings. Polyethylene margins, although higher than 1994, slowed somewhat in 1995. Higher polypropylene margins led to higher equity earnings from the company's interest in the Phillips Sumika Polypropylene Company partnership. 43 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. Corporate and Other Millions of Dollars ----------------------- 1996 1995* 1994* ----------------------- Operating Results Corporate and Other $ 312 (357) (284) Less special items 610 (24) 33 - ----------------------------------------------------------------- Adjusted Corporate and Other $(298) (333) (317) ================================================================= Adjusted Corporate and Other includes: Corporate general and administrative expenses $(131) (131) (125) Net interest (147) (173) (179) Preferred dividend requirements (43) (32) (32) Other 23 3 19 - ----------------------------------------------------------------- Adjusted Corporate and Other $(298) (333) (317) ================================================================= *Preferred stock dividend requirements of subsidiary was reclassified from GPM to Corporate and Other for segment reporting. 1996 vs. 1995 Corporate general and administrative expenses were the same in 1996 as in 1995, due to lower salary costs being offset by higher costs for employee incentive compensation programs and other employee benefits. Net interest represents interest income and expense, net of capitalized interest. Net interest was lower in 1996, compared with 1995, due to lower interest on tax contingencies, primarily as a result of the favorable resolution of the Kenai LNG tax case. Preferred dividend requirements includes dividends on the Phillips Gas Company preferred stock and on the preferred securities of the Phillips 66 Capital Trust I (Trust). The Trust securities were issued in May 1996, leading to higher preferred dividend requirements in 1996, compared with 1995. 44 Other 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. In 1996, other benefited from lower tax accruals not directly associated with operating segments. Special items in 1996 primarily included an after-tax gain of $565 million related to the favorable settlement of the Kenai LNG tax case and favorable foreign currency gains of $40 million after-tax. Special items in 1995 included property impairments on an after-tax basis of $7 million, contingency accruals and work force reduction charges. 1995 vs. 1994 Corporate general and administrative expenses were 5 percent higher in 1995, compared with 1994, as a result of comparatively higher benefit costs, due in part to favorable accrual reversals in 1994, and lower allocations to the operating segments. Net interest declined 3 percent in 1995, compared with 1994, as a result of higher capitalized interest associated with the J-Block development in the U.K. sector of the North Sea. Other was adversely impacted in 1995 by higher tax accruals not directly associated with a specific operating segment. Favorable special items in 1994 included an after-tax benefit of $50 million from a capital-loss carryforward applied against 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. 45 CAPITAL RESOURCES AND LIQUIDITY Financial Indicators Millions of Dollars Except as Indicated ----------------------- 1996 1995 1994 ----------------------- Current ratio 1.1 .9 1.0 Total debt $3,129 3,116 3,124 Preferred stock of subsidiary $ 345 345 345 Company-obligated mandatorily redeemable preferred securities $ 300 - - Common stockholders' equity $4,251 3,188 2,953 Percent of total debt to capital* 39% 47 49 Percent of floating-rate debt to total debt 22% 22 23 - ----------------------------------------------------------------- *Capital includes total debt, preferred stock of subsidiary, company-obligated mandatorily redeemable preferred securities and common stockholders' equity. Cash from operations increased $489 million, a 31 percent increase compared with 1995. The following events that occurred during 1996 contributed to this increase: a 54 percent increase in net operating income; cash refunds from the Internal Revenue Service (IRS) of approximately $400 million as a result of the favorable resolution of the Kenai LNG tax case; and a $165 million increase in accounts payable. These increases were partially offset by a decrease in the aggregate balance of accounts receivable sold. This decrease resulted from a $200 million receivable monetization program that was fully utilized at year-end 1995, but which was not being utilized at year-end 1996. Improved operating results and the Kenai LNG settlement have strengthened the company's equity base, reducing the percentage of total debt to capital to its lowest level since 1983. An increase in cash of $548 million, combined with a decrease in accrued taxes of $439 million (another result of the favorable resolution of the Kenai LNG tax case) resulted in an improved current ratio of 1.1 for 1996, compared with .9 and 1.0 in 1995 and 1994, respectively. The company's short-term liquidity position at December 31, 1996, was stronger than indicated because the current cost of the company's inventories was approximately $604 million greater than their last-in, first-out (LIFO) carrying value. During 1996, both Standard and Poor's and Moody's Investors Service upgraded the ratings of Phillips' long-term public debt to A- and A3, respectively. The new ratings are the highest since 1985 and resulted in reductions in the company's cost of debt. 46 On July 8, 1996, Phillips' Board of Directors approved the company's second dividend rate increase in two years, raising the quarterly per share dividend to $.32, a 5 percent increase, effective August 30, 1996. The company has a $1.1 billion revolving bank credit facility, and a $250 million commercial paper program that is supported by a portion of the company's revolving credit line equal to 100 percent of commercial paper outstanding. At December 31, 1996, nothing was outstanding under this facility, while $106 million of the facility supported the commercial paper program. During 1996, the company's wholly owned subsidiary, Phillips Petroleum Company Norway, reduced its revolving credit facility from $500 million to $300 million, lowering commitment fees for having the line of credit available. At December 31, 1996, $118 million of this facility was outstanding. The company reduced the line of credit, primarily due to lower estimated Ekofisk II redevelopment costs. The total cost of the project was originally estimated at about $3 billion, with Phillips' 35 percent share of the cost being approximately $1 billion. The total cost estimate has been reduced to about $2.5 billion, of which Phillips' share is now estimated to be approximately $880 million. During first quarter 1996, the company filed with the Securities and Exchange Commission a shelf registration for $750 million of trust preferred securities and subordinated debt securities. This shelf registration became effective in May 1996. In a related transaction, the company formed four new statutory business trusts, for the sole purpose of issuing trust securities and investing the proceeds thereof in an equivalent amount of Phillips subordinated debt securities. Phillips owns all of the common stock of the trusts. In May, Phillips 66 Capital I (Trust I) completed a $300 million underwritten public offering of 8.24% Trust Originated Preferred Securities. The sole asset of Trust I is $309 million of the company's 8.24% Junior Subordinated Deferrable Interest Debentures due 2036, purchased from Phillips. In January 1997, Phillips 66 Capital II (Trust II) completed an additional $350 million underwritten public offering of 8% Capital Securities. The sole asset of Trust II is $361 million of the company's 8% Junior Subordinated Deferrable Interest Debentures due 2037. Phillips fully and unconditionally guarantees both trusts' obligations under the securities. During the second quarter of 1996, the company received $115 million from institutional investors in exchange for a variable interest in the net proceeds from production of certain coal-seam gas properties. 47 Also, during second quarter 1996, the company negotiated a master leasing arrangement under which it will lease and supervise the construction of retail outlets. An initial $50 million is expected to be financed under the arrangement through mid-1997, with the anticipation that the program will be expanded to $100 million. The term of the master leasing arrangement is seven years, with the individual leases including a fair-market- value purchase option at the end of that period and certain guaranteed residual values, if the company does not exercise the purchase option. During 1995, the company and a bank-sponsored entity entered into two one-year agreements, with options to renew, which provided for the revolving sale of credit card and trade receivables. During 1996, the agreements were amended, extending the expiration date of the liquidity facilities until November 1997. The maximum aggregate amount of receivables that can be sold and outstanding under both agreements is limited to $200 million, none of which was outstanding at December 31, 1996. The $345 million Series A 9.32% Cumulative Preferred Stock, issued in 1992 by Phillips Gas Company (PGC), a subsidiary of Phillips, becomes redeemable at the option of PGC, in whole, or in part, on or after December 14, 1997. PGC is currently reviewing its options, including the probable redemption of these securities if it is economically attractive at that time. 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. During 1996, the company recognized a $42 million after-tax, non- operating, non-cash foreign currency transaction gain, from remeasuring sterling-denominated intercompany receivables into dollars. Phillips Petroleum Company and certain of its subsidiaries use financial and commodity-based derivative contracts to limit the risks inherent in foreign currency fluctuations and crude oil, natural gas and related products price changes. In the past the company has, on occasion, hedged interest rates, and may do so in the future should certain circumstances or transactions warrant. During 1996, the company discontinued using forward exchange contracts to offset certain intercompany receivables. In 1995, Phillips' Board of Directors adopted a policy governing the use of derivative instruments, which requires every derivative used by the company to relate to an underlying, offsetting position, anticipated transaction or firm commitment, 48 and prohibits the use of speculative, highly complex or leveraged derivatives. The policy also requires review and approval by the Chief Operating Officer and Chief Executive Officer of all risk management programs using derivatives. These programs are also periodically reviewed by the Audit Committee of the company's Board of Directors. Phillips owns a 50 percent interest in SOLP, which owns and operates an ethylene plant located adjacent to the company's Sweeny, Texas, refinery. Late in 1995, First Olefins Limited Partnership (FOLP), a general partner of SOLP, filed suit in Delaware against the company and its subsidiary, American Olefins, Inc., the managing general partner of SOLP, seeking an injunction to halt construction on a debottlenecking project at SOLP. The trial court denied FOLP's application by opinion dated March 1, 1996. On April 2, 1996, the Delaware Supreme Court denied FOLP's application for interlocutory appeal, thus effectively foreclosing the effort to halt construction. Construction has been completed, but the lawsuit remains on file and may result in a trial of the issues at some future date. It is believed that the ultimate resolution of this litigation will not materially affect the operations of SOLP. The debottlenecking project raised capacity of the unit from 1.5 billion pounds per year to 2 billion pounds per year. To meet its liquidity requirements, including funding its capital program, the company will look primarily to existing cash balances, cash generated from operations and financing. Over the next few years, the company plans to maintain its total debt level in the range of $2.5 billion to $3.5 billion. 49 Capital Spending Capital Expenditures and Investments Millions of Dollars --------------------------------- Estimated 1997 1996 1995 1994 --------------------------------- E&P $ 905 981 856 707 GPM 100 85 274 172 RM&T 245 209 150 100 Chemicals 350 205 148 144 Corporate and Other 70 64 28 31 - ----------------------------------------------------------------- $1,670 1,544 1,456 1,154 ================================================================= United States $1,036 841 923 733 Foreign 634 703 533 421 - ----------------------------------------------------------------- $1,670 1,544 1,456 1,154 ================================================================= The company's improved operating results and the Kenai LNG tax settlement enhanced Phillips' financial flexibility during 1996, resulting in a 16 percent increase in the 1996 capital budget, from $1.4 billion to $1.62 billion. Actual expenditures for 1996 were $1.5 billion, the highest since 1991. Phillips' 1997 capital budget promotes the company's growth strategy by supporting its aggressive worldwide exploration program, expanding chemicals and plastics volumes, and continuing growth in retail marketing operations. More of the company's capital spending is being directed toward payout projects-- projects defined as those that generate income and increase shareholder value. Other amounts are planned for maintenance or environmental-compliance projects. The level of payout projects has increased in recent years, from 43 percent in 1993 to a targeted 76 percent in 1997. This improved level of payout projects supports Management's objective of growing the company. E&P Capital spending for E&P during the three-year period ended December 31, 1996, supported several major development projects including J-Block, Armada and Britannia in the U.K. North Sea; the Ekofisk II redevelopment in Norway; the Seastar and Mahogany developments in North America; and the Xijiang fields, offshore China. Exploratory drilling was focused on several subsalt prospects in the Gulf of Mexico; the Bozhong Block in China's Bohai Bay; eastern Algeria; the Norwegian, Danish, and U.K. sectors of the North Sea; Nigeria; Tunisia; Papua New Guinea; Cameroon; and the Timor Sea Zone of Cooperation. Acquisition of 50 an additional interest in the Britannia development in the U.K. North Sea was a significant portion of capital spending in 1994 and 1995. When the budget was increased in 1996, E&P received the largest increase of all the business units. This increase was primarily used for the company's worldwide exploration program, for additional development drilling in North America, and for the acquisition of additional interest in the Bayu-Undan discovery in the Zone of Cooperation between Indonesia and Australia. Exploration drilling activities in 1996 in the subsalt play of the Gulf of Mexico resulted in discoveries at the Agate and Monazite prospects, while the Alexandrite exploration well was unsuccessful. The company is currently evaluating the feasibility of producing the Agate discovery through the Mahogany platform, which would significantly lower production costs. The company is also evaluating possible future exploration and appraisal drilling activity in the subsalt area, including the Monazite prospect. The 1997 E&P capital budget is $905 million, 65 percent of which is targeted for international projects that support the company's growth strategy. Exploration will focus on projects that the company believes have large reserve potential. These include the subsalt area and deep-water prospects in the Gulf of Mexico; the Borj Messouda area of Algeria; the Bozhong Block in Bohai Bay, China; the Porcupine Basin offshore Ireland; and offshore western Australia. Continued appraisal of the Tyonek Deep prospect, previously referred to as the Sunfish prospect, in Alaska's Cook Inlet is also planned. E&P's Global Ventures group is moving forward with a possible heavy oil project in Venezuela and a coal-seam gas project in China. The remaining capital is allocated to potential new development projects in Alaska, Denmark, Norway and the United Kingdom. About 23 percent of E&P's 1997 funds are allocated to the Ekofisk II redevelopment project in Norway. The new wellhead platform was completed in 1996 and construction continues on the new processing and transportation platform, which is expected to be operational in 1998. GPM Capital expenditures for GPM during the three-year period ended December 31, 1996, included acquisitions, technology and facility upgrades, projects to streamline operations, and new well connections. Following a large acquisition of gathering assets in late 1995, capital spending decreased in 1996, with expenditures directed toward asset maintenance, new well connections and other acquisition opportunities. 51 In December 1996, GPM Gas Corporation completed an acquisition from ANR Pipeline Company of gas gathering assets primarily located in northwest Oklahoma, increasing GPM's assets by 1,570 miles of gathering pipeline and 12 compressor stations. These systems gather approximately 165 million cubic feet of gas per day, increasing GPM's throughput by approximately 9 percent over 1996's average throughput. The new system will be integrated into GPM's existing facilities. The first of two installment payments for these assets was made in December 1996, with the final payment due in December 1997. The 1997 GPM capital budget increased 18 percent over 1996 actual expenditures. Most of the budgeted funds are scheduled to be used to increase production volumes through acquisitions and new well connections, as well as for investments in technology and operating equipment to improve operating efficiency and provide value-added producer services. The company continues to explore various options for maximizing the value of its gas gathering, processing and marketing assets. In January 1997, the company acquired approximately 630 miles of gathering pipeline and a majority interest in the North Cowden plant from Amoco Production Company. The acquired assets are located in the Permian Basin of West Texas and gather approximately 40 million cubic feet of gas per day. The company integrated the gathering facilities into its existing operations and shut down the plant. RM&T Capital expenditures for RM&T during the three-year period ended December 31, 1996, were primarily for refinery-upgrade projects-- projects to meet new environmental standards, to improve operating integrity of key process units, and to install advanced process control technology--as well as for safety projects. Beginning in 1996 and accelerating in 1997, a greater share of RM&T capital has been allocated to expansion of retail marketing assets and key transportation assets. The increase in RM&T's capital budget in 1996, coupled with the utilization of a master leasing program, accelerated plans to expand the number of company-operated retail outlets in the United States from 300 to 500 over the next several years. During the year, the company purchased 24 retail outlets, the majority of which are in Albuquerque, New Mexico, and the Salt Lake City, Utah, areas. In addition, seven new outlets were completed and five existing units were razed and rebuilt using the company's new, larger convenience store designs, with the name Kicks 66 displayed along with the Phillips shield. In 52 support of the retail marketing expansion efforts, the company is expanding its capacity in a products pipeline running from Amarillo, Texas, to Albuquerque, New Mexico, by 50 percent. As part of a continuing effort to increase profitability, RM&T's 1997 capital budget provides for a 17 percent increase over actual 1996 expenditures. Spending during 1997 is slated to continue installation of process control technology upgrades at the Borger and Sweeny, Texas, Complexes, as well as for the retail marketing expansion program. During 1997, the company plans to add 30 new outlets and raze and rebuild 18 outlets, utilizing capital funds and the master leasing program. Additionally, the company plans to sell approximately 40 service stations. At Sweeny, the company is evaluating a joint venture with Corpoven, a subsidiary of the state oil company of Venezuela, to install a coker for processing heavier crudes. In addition, the company plans to install a continuous catalytic reformer to convert a higher percentage of plant yield to higher-valued petrochemical feedstock products. This project is expected to commence in 1997, with completion scheduled for 2000. Phillips and its co-venturer plan to convert a portion of the Seaway pipeline system to refined products service, scheduled for completion in early 1998. As part of this conversion, Phillips will build a new pipeline to connect to its existing Midwest distribution system near Wichita, Kansas. The new system will permit Phillips to more efficiently move Gulf Coast products into the growing Midwest market. Chemicals For the three-year period ended December 31, 1996, capital spending for Chemicals focused on production expansion projects utilizing improved technology and debottlenecking techniques. These projects include a 400 million-pounds-per-year addition to high-density polyethylene production capacity at HCC, of which 100 million pounds was completed in 1996. The project, which is expected to be completed by mid-1998, will increase capacity to 2.2 billion pounds per year. Other projects include a 400 million-pounds-per-year increase in ethylene production at the company's Sweeny Complex, which is now expected to be producing in the second quarter of 1997; an increase in paraxylene production at Phillips' Puerto Rico Core facility, which is expected to increase capacity in the second quarter of 1997 to 880 million pounds from 675 million pounds per year; and construction of a 220 million-pounds-per-year linear polyethylene plant near Shanghai, China, of which the company will own 40 percent. 53 The 1997 Chemicals capital budget increased 71 percent over 1996 spending. Spending for 1997 is aimed at growing Chemicals' business with continued support of various new and ongoing production expansion projects. As part of the company's strategy to expand its non-cyclical specialty chemicals business, the budget includes the addition of two new chemical business lines-- methyl mercaptan and dicyclopentadiene (DCPD). In addition to the ongoing projects listed above, a Ryton debottlenecking project is under way at the company's facility in Borger, Texas, where capacity is expected to increase by 40 percent, to 21.6 million pounds per year, by late 1997. At HCC, the company plans to expand its K-Resin production by 100 million pounds per year, increasing capacity to 370 million pounds per year. Also, the company plans to expand its high-density polyethylene pipe production with projects in Mexico and Maryland. The company is entering the methyl mercaptan market with construction of a plant at its Borger Complex, scheduled to begin in mid-1997. Methyl mercaptan is a sulfur-based chemical used in the production of methionine, an important feed supplement for poultry, and agricultural chemicals. The facility will be capable of producing up to 100 million pounds a year, with first production expected late in 1998. The company plans to enter the DCPD market with the start-up of an idle hydrotreating unit at Sweeny. DCPD, a by-product of ethylene production, is used primarily in fiberglass-reinforced polyester products. The company expects to produce about 40 million pounds a year of DCPD at the facility by mid-1998. Contingencies Legal and Tax Matters The company has a number of issues outstanding with the IRS related to tax years 1983 through 1992 that can proceed toward final settlement as a result of resolving the Kenai LNG tax case. Although it is too early to determine the final financial effects of resolving these open years, a favorable outcome would have a positive effect on net income and cash flow, while an unfavorable one would not impact the company's net income or cash position. While total resolution may require a number of years, the majority of these open years are expected to be resolved in the near term. 54 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 now require investigatory or remedial work to adequately protect the environment or address new regulatory requirements. At year-end 1995, Phillips reported 48 sites where it had information indicating that it might have been identified as a Potentially Responsible Party (PRP). Since then, seven of these sites have been resolved through consent decrees, deposits into trust funds or otherwise. Six sites were also added during the year. Of the 47 sites remaining at December 31, 1996, the company believes it has a legal defense or its records indicate no involvement for 16 sites. At eight other sites, present information indicates that it is probable that the company's exposure is less than $100,000 per site. At eight sites, Phillips has had no communication or activity with government agencies or other PRPs in more than two years. Of the 15 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 potentially responsible by state or federal agencies 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 liability of those potentially responsible is generally joint and several for federal sites and frequently so for state sites, the company is 55 usually but one of many companies cited at a particular site. It has, to date, been successful in sharing cleanup costs with other financially sound companies. Many of the sites at which the company is potentially responsible are still under investigation by the Environmental Protection Agency (EPA) or the state agencies concerned. Prior to actual cleanup, those potentially responsible normally assess site conditions, apportion responsibility and determine the appropriate remediation. In some instances, Phillips may have no liability or attain a settlement of liability. Actual cleanup costs generally occur after the parties obtain EPA or equivalent state agency approval. At December 31, 1996, accruals of $9 million had been made for the company's unresolved PRP sites. In addition, the company had accrued $82 million for other planned remediation activities, including resolved state, PRP, and other federal sites, as well as sites where no claims have been asserted, and $6 million for other environmental contingent liabilities, for total environmental accruals of $97 million. No one site represents more than 10 percent of the total. Expensed environmental costs were $147 million in 1996 and are expected to be approximately $145 million in 1997 and 1998. The estimates for 1997 and 1998 do not include any amounts related to the federal Superfund tax, which expired December 31, 1995, and which has not been extended. Capitalized environmental costs were $55 million in 1996, and are expected to be approximately $80 million and $100 million in 1997 and 1998, respectively. After an assessment of environmental exposures for cleanup and other costs, the company makes accruals on an undiscounted basis for planned investigation and remediation activities for sites where it is probable that future costs will be incurred and these costs can be reasonably estimated. 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. 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 tax law changes and the future level of product prices, 56 costs and tax rates. Based on the company's historical taxable income, its expectations for the future, and available tax planning strategies, Management expects that the net deferred tax assets will be realized as offsets to reversing deferred tax liabilities and as reductions in future taxable operating income. The alternative minimum tax credit can be carried forward indefinitely to reduce the company's regular tax liability. The valuation allowance increased $53 million during 1996, primarily due to an increase in loss carryforwards for various companies. New Accounting Standards FASB Statement No. 123, "Accounting for Stock-Based Compensation," which establishes financial accounting and reporting standards for stock-based employee compensation plans, was effective for fiscal years beginning after December 15, 1995. The Statement provides the option to continue under the accounting provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," providing that pro forma footnote disclosures of the effects on net income and earnings per share, calculated as if the new method had been implemented, are included. The company has elected to continue under APB Opinion No. 25, but the pro forma disclosures have been omitted, as the results were not materially different from the amounts disclosed. In October 1996, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position (SOP) 96-1, "Environmental Remediation Liabilities," which provides authoritative guidance on the recognition, measurement, display, and disclosure of environmental remediation liabilities. The company has adopted the provisions of SOP 96-1, the impact of which required no significant change in the company's environmental accounting or disclosure. J-Block Update The J-Block production, processing and transportation facilities, located in Block 30/7a of the U.K. North Sea, were completed on schedule and below budget in mid-February 1996 and are available for production and delivery of gas. Production has been delayed, however, because the gas purchaser, Enron Europe Limited (EEL), has decided not to take gas until sometime in the future under its long-term take-or-pay agreements. The offshore U.K. gas reserves in Blocks 30/7a and 30/12a (J-Block) are dedicated to a single purchaser, EEL, under long-term take-or-pay gas sales agreements guaranteed by its parent, Enron Corp. (Enron). Under 57 the agreements, EEL is required to pay for gas at a predetermined rate even if it elects not to take actual deliveries. EEL has advised that its present non-binding estimate of future total daily nominations for delivery is zero through September 1999. Enron, EEL and Teesside Gas Transportation Limited (TGTL) have also asserted that the J-Block transportation agreements, J-Block gas sales agreements and parent company guarantees are terminated. The long-term economics of the project remain favorable, but delays in production are expected to reduce Phillips' net earnings and cash flows in the near term. Gas injection facilities are currently being installed, which will allow for initial production of liquids, while the associated natural gas production would be reinjected for later delivery. The U.K. government has approved these plans and the facilities are scheduled to begin operating in April 1997. The J-Block owners also own the rights to the reserves in Block 30/6b immediately adjacent to J-Block, which are in communication with J-Block reserves but not dedicated under the above agreements. The J-Block owners are continuing to investigate transportation, processing and sales of natural gas from the adjoining block. In order to maximize the value of its J-Block infrastructure, the company has also initiated and is continuing an active drilling program to explore and appraise the reserves in Blocks 30/2c and 30/13. On March 29, 1996, the J-Block owners filed legal proceedings in the English High Court in London seeking a declaration that EEL as buyer under the J-Block gas sales agreements cannot refuse to agree to a commissioning date for the J-Block facilities on the basis of a decline in natural gas prices in the United Kingdom, and cannot thereby delay commencement of its take-or-pay obligations under the sales agreements. On May 8, 1996, the English High Court ruled in favor of the J-Block owners. EEL appealed that judgment. On October 10, 1996, the English Court of Appeal reversed the May 8 decision, concluding that the date for commissioning the J-Block facilities could be delayed by EEL until the contract fall-back date of September 25, 1996. The House of Lords, the highest court in England, is considering a request by the J-Block owners for leave to hear an appeal of the Appeal Courts decision. If leave to appeal is granted, it would be expected to be heard sometime in 1997. The J-Block owners have amended their claims in the English High Court to enforce EEL's obligation to accept J-Block commissioning gas on and after September 25, 1996, as well as to seek damages resulting from EEL's breach. Trial of this amended claim by the J-Block owners began in the English High Court on October 28, 1996, together with the related claim filed in 1995 by the owners 58 of the Central Area Transmission System (CATS). The CATS' claim against EEL's wholly owned subsidiary, TGTL, is for breach of TGTL's obligation to pay the capacity reservation fee under the Capacity Reservation and Transportation Agreement (CRTA), under which J-Block gas is to be delivered to onshore processing facilities. EEL and TGTL assert as defenses in this litigation that the CRTA, the J-Block transportation agreements, and the J-Block gas sales agreements are terminated. Although EEL agreed in late 1996 to accept gas to run commissioning tests of the J-Block facilities, the trial continues in the English High Court, where judgment on the remaining issues is anticipated later in 1997. Further developments in this litigation are anticipated, and the course of events and range of possible outcomes cannot be predicted at this time. The company intends to vigorously assert its interests in each of the pending matters. The J-Block and Block 30/6b are operated by Phillips, which has a 36.5 percent interest. The company also owns 32.5 percent and 35 percent interests in Blocks 30/2c and 30/13, respectively. OUTLOOK Phillips' global growth strategy is reflected in its exploration and drilling activity plans for the Gulf of Mexico, Alaska, China, the United Kingdom, the North Sea, the Middle East, Greenland, South Africa, Peru, Ireland and Australia. Also, the company is marketing its expertise in its proprietary LNG process. Phillips and its co-venturers are evaluating plans to develop the Bayu-Undan field, including plans to construct an onshore LNG processing facility, using Phillips' proprietary technology to liquefy the natural gas. The recent success of the fifth appraisal well confirmed the southern extension of the Bayu-Undan reservoir and completes Phillips' appraisal drilling program. A decision on the field's commerciality is expected by late 1997 or early 1998. In early 1997, the company announced a discovery at the Jade field in Block 30/2c, located about 12 miles north of the J-Block area. The Jade accumulation is situated in a different license block from those in which the J-Block fields are located, thus it is not directly connected with the disputes and litigation involving the J-Block gas sales contracts. In order to reduce time to first production, development conceptual studies have been progressing in parallel with appraisal drilling. Studies 59 completed to date indicate that, if the field proves commercial, production could begin as early as the fourth quarter of 1998. Phillips is operator of the block and holds a 32.5 percent interest. The company is actively marketing its expertise in LNG technology and is pursuing equity opportunities in major LNG projects around the world. Additionally, the company and Bechtel Corporation established an alliance to jointly develop LNG projects worldwide. The projects will use Phillips' process, and Bechtel will serve as the engineering and procurement contractor. During 1996, Phillips secured rights to explore in several new areas. New ventures include a joint exploration agreement with Mobil Corporation for deep-water exploration in the Gulf of Mexico; an exploration and production-sharing contract with the Sultanate of Oman, marking a new phase of exploration for Phillips in the Middle East; and a technical cooperation agreement with South Africa's state-owned oil company for exclusive rights to evaluate two blocks along the eastern coast of Africa. In early 1997, Phillips signed a seven-year license agreement to explore 3 million acres in southeastern Peru, and acquired 38 percent of a license covering 2.3 million acres offshore western Greenland. Global expansion of the company's chemicals business continues with new production capacity under construction. Opportunities for new locations involving foreign joint-venture partners are also being actively pursued. Phillips has recently agreed to license its proprietary loop reactor technology, used in the manufacture of polyethylene, in North America. This is the first time in more than 20 years that the company has agreed to license its polyethylene technology in the United States, marking a major shift in the company's U.S. licensing strategy. Phillips is starting to replace many of its business and operating computer systems. The new systems, based on software from SAP America, Inc. and Oracle Corporation, will replace older legacy systems and allow employees at different locations to share financial and operating information more efficiently. The first major use of the new software commenced January 1, 1997, in certain areas of the company. Remaining business units and staffs are scheduled for implementation in phases, with project completion targeted for mid-1999. The new systems and software are Year-2000 compatible, thus handling a portion of the company's Year-2000 conversion requirements. The company is currently developing conversion strategies for its remaining systems. 60 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. Oil prices have recently been at their highest levels since the Gulf War, and natural gas prices, despite seasonal volatility, have been at their highest level since the mid-1980s. The futures market currently reflects an expectation of declining crude prices throughout 1997. Phillips concurs with this expectation. However, the market remains supported by strong global demand growth, historically low industry inventory levels, and the potential for increased turmoil in the Middle East. Increased gas drilling and rising deliverability may begin to soften natural gas prices as the heating season ends. Demand growth remains partially dependent on natural gas pricing versus competing fuels, sustained economic growth, and weather variances. The recent levels of oil and gas prices have contributed significantly to the company's ability to improve its financial performance, increase its cash balance, sustain its capital budget, and fund its new growth initiatives. CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Phillips is including the following cautionary statement to take advantage of the "safe harbor" provisions of the PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 for any forward-looking statement made by, or on behalf of, the company. The factors identified in this cautionary statement are important factors (but not necessarily all important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the company. Where any such forward-looking statement includes a statement of the assumptions or bases underlying such forward-looking statement, the company cautions that, while it believes such assumptions or bases to be reasonable and makes them in good faith, assumed facts or bases almost always vary from actual results, and the differences between assumed facts or bases and actual results can be material, depending on the circumstances. Where, in any forward-looking statement, the company, or its Management, expresses an expectation or belief as to future results, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will result, or be achieved or accomplished. 61 Taking into account the foregoing, the following are identified as important risk factors that could cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the company: o Plans to drill wells and develop offshore or onshore exploration and production properties are subject to the company's ability to obtain agreements from co-venturers or partners, and governments; engage drilling, construction and other contractors; obtain economical and timely financing; geology, land or sea, or ocean conditions; world prices for oil, natural gas and natural gas liquids; foreign and United States laws, including tax laws; and the favorable resolution in the case of J-Block of current litigation. o Plans for the construction, modernization or debottlenecking of domestic and foreign refineries and chemical plants, and the timing of production from such plants are subject to, in certain instances, approval from the company's and/or subsidiaries' Boards of Directors; and in general, to the issuance by foreign, federal, state, and municipal governments, or agencies thereof, of building, environmental and other permits; the availability of specialized contractors and work force; worldwide prices and demand for the products; availability of raw materials; and transportation in the form of pipelines, railcars or trucks; and, in certain instances, loan or project financing. o The ability to meet liquidity requirements, including the funding of the company's capital program from operations, is subject to changes in the commodity prices of the company's basic products of oil, natural gas and natural gas liquids, over which Phillips has no control, and to a lesser extent the commodity prices for its chemical and other products; its ability to operate its refineries and chemical plants consistently; and the effect of foreign and domestic legislation of federal, state and municipal governments that have jurisdiction in regard to taxes, the environment and human resources. o Estimates of proved reserves, raw natural gas supplies, cost estimates of the Ekofisk II project, and planned spending for maintenance and environmental remediation were developed by company personnel using the latest available information and data, and recognized techniques of estimating, including those prescribed by the Securities and Exchange Commission, generally accepted accounting principles and other applicable requirements; however, new or revised information or changes in scope or economics could cause results to vary, perhaps materially. 62 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PHILLIPS PETROLEUM COMPANY INDEX TO FINANCIAL STATEMENTS Page ---- Report of Management.................................... 64 Report of Independent Auditors.......................... 65 Consolidated Statement of Income for the years ended December 31, 1996, 1995 and 1994................ 66 Consolidated Balance Sheet at December 31, 1996 and 1995.............................................. 67 Consolidated Statement of Cash Flows for the years ended December 31, 1996, 1995 and 1994................ 68 Consolidated Statement of Changes in Common Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994......................................... 69 Accounting Policies..................................... 70 Notes to Financial Statements........................... 73 Supplementary Information Oil and Gas Operations............................. 101 Selected Quarterly Financial Data.................. 119 INDEX TO FINANCIAL STATEMENT SCHEDULES Schedule II--Valuation Accounts and Reserves............ 124 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. 63 - ---------------------------------------------------------------- Report of Management Management prepared, and is responsible for, the consolidated financial statements and the other information appearing in this annual report. The consolidated financial statements present fairly the company's financial position, results of operations and cash flows in conformity with generally accepted accounting principles. In preparing its consolidated financial statements, the company includes amounts that are based on estimates and judgments that Management believes are reasonable under the circumstances. The company maintains an internal control structure designed to provide reasonable assurance that the company's assets are protected from unauthorized use and that all transactions are executed in accordance with established authorizations and recorded properly. The internal control structure is supported by written policies and guidelines and is complemented by a staff of internal auditors. Management believes that the system of internal controls in place at December 31, 1996, provides reasonable assurance that the books and records reflect the transactions of the company and there has been compliance with its policies and procedures. The company's financial statements have been audited by Ernst & Young LLP, independent auditors selected by the Audit Committee of the Board of Directors and approved by the stockholders. Management has made available to Ernst & Young LLP all the company's financial records and related data, as well as the minutes of stockholders' and directors' meetings. The Audit Committee, composed solely of non-employee directors, meets periodically with the independent auditors, financial and accounting management, and the internal auditors to review and discuss the company's internal control structure, results of internal audits, the independent auditors' findings and opinion, financial information, and related matters. Both the independent auditors and the company's General Auditor have unrestricted access to the Audit Committee, without Management present, to discuss any matter that they wish to call to the Committee's attention. /s/ W. W. Allen /s/ T. C. Morris W. W. Allen T. C. Morris Chairman of the Board and Senior Vice President and Chief Executive Officer Chief Financial Officer February 21, 1997 64 - ----------------------------------------------------------------- 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, 1996 and 1995, and the related consolidated statements of income, changes in common stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, 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 April 1, 1995 the company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." /s/ Ernst & Young LLP ERNST & YOUNG LLP Tulsa, Oklahoma February 21, 1997 65 - ------------------------------------------------------------------ Consolidated Statement of Income Phillips Petroleum Company Years Ended December 31 Millions of Dollars --------------------------- 1996 1995 1994 --------------------------- Revenues Sales and other operating revenues $15,731 13,368 12,211 Equity in earnings of affiliated companies 4 127 84 Other revenues 72 26 72 - ------------------------------------------------------------------ Total Revenues 15,807 13,521 12,367 - ------------------------------------------------------------------ Costs and Expenses Purchased crude oil and products 9,896 8,182 7,292 Production and operating expenses 2,078 2,143 2,192 Exploration expenses 254 198 226 Selling, general and administrative expenses 509 500 478 Depreciation, depletion and amortization 941 871 794 Taxes other than income taxes 264 266 271 Interest expense 217 265 250 Preferred dividend requirements of subsidiary and capital trust 47 32 32 - ------------------------------------------------------------------ Total Costs and Expenses 14,206 12,457 11,535 - ------------------------------------------------------------------ Income before income taxes, subsidiary stock transaction and Kenai LNG tax settlement 1,601 1,064 832 Gain on subsidiary stock transaction - - 20 Kenai LNG tax settlement 571 - - - ------------------------------------------------------------------ Income before income taxes 2,172 1,064 852 Provision for income taxes 869 595 368 - ------------------------------------------------------------------ Net Income $ 1,303 469 484 ================================================================== Net Income Per Share of Common Stock $ 4.96 1.79 1.85 - ------------------------------------------------------------------ Average Common Shares Outstanding (in thousands) 262,919 261,989 261,529 - ------------------------------------------------------------------ See Accounting Policies and Notes to Financial Statements. 66 - ----------------------------------------------------------------- Consolidated Balance Sheet Phillips Petroleum Company At December 31 Millions of Dollars ------------------- 1996 1995 ------------------- Assets Cash and cash equivalents $ 615 67 Accounts and notes receivable (less allowances: 1996--$20; 1995--$15) 1,988 1,522 Inventories 472 505 Deferred income taxes 117 229 Prepaid expenses and other current assets 114 86 - ----------------------------------------------------------------- Total Current Assets 3,306 2,409 Investments and long-term receivables 912 841 Properties, plants and equipment (net) 9,120 8,493 Deferred income taxes 85 121 Deferred charges 125 114 - ----------------------------------------------------------------- Total $13,548 11,978 ================================================================= Liabilities Accounts payable $ 1,793 1,494 Notes payable and long-term debt due within one year 574 19 Accrued income and other taxes 483 922 Other accruals 287 380 - ----------------------------------------------------------------- Total Current Liabilities 3,137 2,815 Long-term debt 2,555 3,097 Accrued dismantlement, removal and environmental costs 783 657 Deferred income taxes 1,047 948 Employee benefit obligations 425 400 Other liabilities and deferred credits 700 522 - ----------------------------------------------------------------- Total Liabilities 8,647 8,439 - ----------------------------------------------------------------- Preferred Stock of Subsidiary and Other Minority Interests 350 351 - ----------------------------------------------------------------- Company-Obligated Mandatorily Redeemable Preferred Securities of Phillips Capital Trust I 300 - - ----------------------------------------------------------------- Common Stockholders' Equity Common stock--500,000,000 shares authorized at $1.25 par value Issued (306,380,511 shares) Par value 383 383 Capital in excess of par 1,999 1,966 Treasury stock (at cost: 1996--13,878,480 shares; 1995--15,047,246 shares) (757) (827) Compensation and Benefits Trust (CBT) (at cost: 1996 and 1995-- 29,200,000 shares) (989) (989) Foreign currency translation adjustments 54 39 Unearned employee compensation--Long-Term Stock Savings Plan (LTSSP) (378) (414) Retained earnings 3,939 3,030 - ----------------------------------------------------------------- Total Common Stockholders' Equity 4,251 3,188 - ----------------------------------------------------------------- Total $13,548 11,978 ================================================================= See Accounting Policies and Notes to Financial Statements. 67 - ------------------------------------------------------------------ Consolidated Statement of Cash Flows Phillips Petroleum Company Years Ended December 31 Millions of Dollars ------------------------- 1996 1995 1994 ------------------------- Cash Flows from Operating Activities Net income $ 1,303 469 484 Adjustments to reconcile net income to net cash provided by operating activities Non-working capital adjustments Depreciation, depletion and amortization 941 871 794 Dry hole costs and leasehold impairment 117 66 95 Deferred taxes 163 9 (51) Other 41 (77) (38) Working capital adjustments Increase (decrease) in aggregate balance of accounts receivable sold (200) 200 - Increase in other accounts and notes receivable (265) (245) (82) Decrease (increase) in inventories 31 25 (10) Decrease (increase) in prepaid expenses and other current assets (26) 12 22 Increase in accounts payable 295 130 15 Increase (decrease) in taxes and other accruals (315) 136 (26) - ------------------------------------------------------------------ Net Cash Provided by Operating Activities 2,085 1,596 1,203 - ------------------------------------------------------------------ Cash Flows from Investing Activities Capital expenditures and investments, including dry hole costs (1,544) (1,456) (1,154) Proceeds from asset dispositions 101 142 266 Long-term advances to affiliates and other investments (98) (39) (20) - ------------------------------------------------------------------ Net Cash Used for Investing Activities (1,541) (1,353) (908) - ------------------------------------------------------------------ Cash Flows from Financing Activities Issuance of debt 616 610 1,335 Repayment of debt (630) (619) (1,447) Issuance of common stock 25 9 12 Issuance of company-obligated mandatorily redeemable preferred securities 300 - - Dividends paid on common stock (329) (313) (293) Other 22 (56) 172 - ------------------------------------------------------------------ Net Cash Provided by (Used for) Financing Activities 4 (369) (221) - ------------------------------------------------------------------ Increase (Decrease) in Cash and Cash Equivalents 548 (126) 74 Cash and cash equivalents at beginning of year 67 193 119 - ------------------------------------------------------------------ Cash and Cash Equivalents at End of Year $ 615 67 193 ================================================================== See Accounting Policies and Notes to Financial Statements. 68 - ------------------------------------------------------------------ Consolidated Statement of Changes Phillips Petroleum Company in Common Stockholders' Equity Shares of Common Stock ------------------------------------- Held in Held in Issued Treasury CBT ------------------------------------- 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 - Net income Cash dividends paid on common stock Distributed under incentive compensation plans (494,828) Recognition of LTSSP unearned compensation Tax benefit of dividends on unallocated LTSSP shares Current period translation adjustment Establishment of CBT 29,200,000 29,200,000 Other - ------------------------------------------------------------------ December 31, 1995 306,380,511 15,047,246 29,200,000 Net income Cash dividends paid on common stock Distributed under incentive compensation plans (1,168,766) Recognition of LTSSP unearned compensation Tax benefit of dividends on unallocated LTSSP shares Current period translation adjustment Other - ------------------------------------------------------------------ December 31, 1996 306,380,511 13,878,480 29,200,000 ================================================================== - ------------------------------------------------------------------ Consolidated Statement of Changes Phillips Petroleum Company in Common Stockholders' Equity Millions of Dollars -------------------------------------- Common Stock -------------------------------------- Par Capital in Treasury Value Excess of Par Stock CBT -------------------------------------- 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) - Net income Cash dividends paid on common stock Distributed under incentive compensation plans 16 32 Recognition of LTSSP unearned compensation Tax benefit of dividends on unallocated LTSSP shares Current period translation adjustment Establishment of CBT 37 952 (989) Other 2 - ------------------------------------------------------------------ December 31, 1995 383 1,966 (827) (989) Net income Cash dividends paid on common stock Distributed under incentive compensation plans 26 70 Recognition of LTSSP unearned compensation Tax benefit of dividends on unallocated LTSSP shares Current period translation adjustment Other 7 - ------------------------------------------------------------------ December 31, 1996 $383 1,999 (757) (989) ================================================================== - ------------------------------------------------------------------ Consolidated Statement of Changes Phillips Petroleum Company in Common Stockholders' Equity Millions of Dollars ------------------------------------- Foreign Unearned Currency Employee Translation Compensation Retained Adjustments --LTSSP Earnings ------------------------------------- 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 Net income 469 Cash dividends paid on common stock (313) Distributed under incentive compensation plans (38) Recognition of LTSSP unearned compensation 37 Tax benefit of dividends on unallocated LTSSP shares 7 Current period translation adjustment 23 Establishment of CBT Other - ------------------------------------------------------------------ December 31, 1995 39 (414) 3,030 Net income 1,303 Cash dividends paid on common stock (329) Distributed under incentive compensation plans (72) Recognition of LTSSP unearned compensation 36 Tax benefit of dividends on unallocated LTSSP shares 7 Current period translation adjustment 15 Other - ------------------------------------------------------------------ December 31, 1996 54 (378) 3,939 ================================================================== See Accounting Policies and Notes to Financial Statements. 69 - ----------------------------------------------------------------- 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 1995 and 1994 financial statements have been reclassified to conform with the 1996 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); however, swaps and forward commodity contracts are not marked to market. Gains and losses are recognized during the same period in which the gains and losses from the underlying exposures being hedged are recognized. Occasionally, the company will use derivative 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, 70 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. Property Acquisition Costs--Oil and gas leasehold acquisition costs are capitalized. Leasehold impairment is recognized based on exploratory experience and Management judgment. 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, based on Management judgment, 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. 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. 71 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. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable. For all periods presented, the company's accounting policies comply, in all material respects, with the provisions of American Institute of Certified Public Accountants Statement of Position 96-1, "Environmental Remediation Liabilities." 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 common 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 LTSSP. Treasury stock and shares held by the CBT are excluded from the daily weighted- average number of common shares outstanding. 72 - ----------------------------------------------------------------- Notes to Financial Statements Phillips Petroleum Company Note 1--Accounting Changes Effective January 1, 1996, the company made certain changes in the estimated useful lives of its major domestic downstream facilities. This change increased 1996 net income by $19 million, $.07 per share. Also, effective January 1, 1996, the company changed its method of accounting for the depreciation of its Gas Gathering, Processing and Marketing segment's natural gas plants and systems from the unit-of-production method to the straight-line method, using an estimated life of 20 years for most of these assets. As a result of the change, net income for 1996 was $18 million higher, or $.07 per share. The estimated cumulative effect of the change was not material. These changes were made to better reflect how the assets are expected to be used over time, to provide a better matching of revenues and expenses, and to be consistent with prevalent industry practice. Effective April 1, 1995, the company adopted Financial Accounting Standards Board (FASB) Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which resulted in a before-tax addition of $95 million to depreciation, depletion and amortization expense in 1995. Under the new Statement, the company now evaluates impairment of exploration and production assets on a field-by- field basis rather than using one worldwide cost center for its proved properties. After-tax, the additional charge was $49 million, $.19 per share. Note 2--Inventories Inventories at December 31 were: Millions of Dollars ------------------- 1996 1995 ------------------- Crude oil and petroleum products $136 173 Chemical products 255 245 Materials, supplies and other 81 87 - ----------------------------------------------------------------- $472 505 ================================================================= Included in the amounts above were inventories valued on a LIFO basis totaling $283 million and $336 million at December 31, 1996 and 1995, respectively. The remainder of the company's 73 inventories are valued under various other methods, including first-in, first-out (FIFO), weighted average and standard cost. The inventories valued under LIFO would have been approximately $604 million and $443 million higher at December 31, 1996 and 1995, respectively, had they been valued using the FIFO method. Note 3--Investments and Long-Term Receivables Components of investments and long-term receivables at December 31 were: Millions of Dollars ------------------- 1996 1995 ------------------- Investments in and advances to affiliated companies $693 661 Long-term receivables 111 104 Other investments 108 76 - ----------------------------------------------------------------- $912 841 ================================================================= Equity Investments The company owns investments in chemicals, oil and gas transportation, coal mining, and other industries. In the ordinary course of business, Phillips has related party transactions with most of these equity companies including sales and purchases of feedstocks and finished products, as well as, operating and marketing services. Summarized financial information for all entities accounted for using the equity method follows: Millions of Dollars -------------------------- 1996 1995 1994 -------------------------- Revenues $3,043 2,776 2,603 Income before income taxes 583 680 579 Net income 380 470 360 Current assets 936 758 689 Other assets 3,372 3,236 2,994 Current liabilities 887 889 622 Other liabilities 1,745 1,212 1,525 - ----------------------------------------------------------------- 74 At December 31, 1996, retained earnings included $19 million related to the undistributed earnings of these affiliated companies, and distributions received from them were $107 million, $122 million and $103 million in 1996, 1995 and 1994, respectively. At December 31, 1996, the company's 50 percent interest in Sweeny Olefins Limited Partnership (SOLP), which owns and operates a 2 billion-pounds-per-year ethylene plant located adjacent to the company's Sweeny, Texas, refinery, was carried at a net investment of $187 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 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. The balance of the subordinated loan at December 31, 1996, was $152 million. During 1995, SOLP entered into a second subordinated loan agreement with the company, with essentially the same terms as the SLA, for $120 million to fund three new furnaces for the ethylene plant. The balance of this subordinated loan at December 31, 1996, was $95 million. It is not economically practicable to estimate the fair value of the company's obligations to SOLP or to the participating banks. 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 ----------------------------------------------------- 1996 1995 ------------------------- ------------------------ Gross Net Gross Net PP&E DD&A PP&E PP&E DD&A PP&E ------------------------- ------------------------ E&P $11,190 6,782 4,408 10,516 6,556 3,960 GPM 1,974 1,071 903 1,890 1,015 875 RM&T 3,619 1,718 1,901 3,463 1,573 1,890 Chemicals 2,773 1,164 1,609 2,646 1,140 1,506 Corporate and Other 547 248 299 573 311 262 - ------------------------------------------------------------------ $20,103 10,983 9,120 19,088 10,595 8,493 ================================================================== 75 Note 5--Impairments During 1996 and 1995, the company recognized the following before-tax impairments: Millions of Dollars ------------------- 1996 1995 ------------------- Additions to depreciation, depletion and amortization Point Arguello field $106 - Canadian oil and gas properties 25 - Other E&P properties - 81 Retail service stations 58 - Idle chemical assets - 4 Idle corporate assets 1 13 - ----------------------------------------------------------------- 190 98 Reductions in equity earnings Point Arguello field 78 - - ----------------------------------------------------------------- $268 98 ================================================================= After-tax, the above impairments by segment were: Millions of Dollars ------------------- 1996 1995 ------------------- E&P $144 41 RM&T 38 - Chemicals - 3 Corporate 1 7 - ----------------------------------------------------------------- $183 51 ================================================================= The facts and circumstances leading to the E&P impairments in 1996 were rapidly declining production rates and updated production forecasts for the Point Arguello field offshore California, and weaker natural gas price outlooks and disappointing drilling and production results on certain Canadian properties. The RM&T impairment in 1996 relates to the company's retail expansion and image improvement program, and includes stations that will be razed and rebuilt and others that the company plans to sell. The E&P impairments in 1995 were primarily the result of adopting FASB Statement No. 121, which calls for evaluation of impairment of E&P assets on a field-by-field basis, rather than using one worldwide cost center for proved properties. 76 The fair values of impaired E&P assets were determined by using the present values of expected future cash flows. The fair values of impaired RM&T assets were determined by using the present values of expected future cash flows, as well as information about sales and purchases of similar property in the same geographic area. The fair values of idle Chemical and Corporate assets considered to be impaired were determined based on information about sales and purchases of similar assets. Note 6--Accrued Dismantlement, Removal and Environmental Costs At December 31, 1996 and 1995, the company had accrued $686 million and $548 million, respectively, of dismantlement and removal costs, primarily related to worldwide offshore production facilities and to production facilities at Prudhoe Bay in Alaska. Estimated total future dismantlement and removal costs at December 31, 1996, were $940 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 $49 million and $58 million at December 31, 1996 and 1995, respectively. Phillips had also accrued $33 million and $34 million of environmental costs associated with discontinued or sold operations at December 31, 1996 and 1995, respectively. Also, $9 million and $7 million were included at December 31, 1996 and 1995, respectively, for sites where the company has been named a Potentially Responsible Party. At the same dates, $6 million and $10 million, respectively, had been accrued for other environmental litigation. At December 31, 1996 and 1995, total environmental accruals were $97 million and $109 million, respectively. 77 Note 7--Debt Long-term debt due after one year at December 31 was: Millions of Dollars --------------------- 1996 1995 --------------------- 9 1/2% Notes Due 1997 $ 300 300 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 2001 at 4% - 9% 232 220 Guarantees of LTSSP bank loans payable at 4.8825% - 6.2% 451 476 Medium-term notes due various years at 7.6% - 8% 100 100 Other obligations 27 1 - ----------------------------------------------------------------- Total debt 3,129 3,116 Notes payable and long-term debt due within one year (574) (19) - ----------------------------------------------------------------- Long-term debt $2,555 3,097 ================================================================= Maturities in 1997 through 2001 are: $574 million (included in current liabilities), $32 million, $85 million, $17 million and $647 million, respectively. The company's LTSSP has two term loan agreements: one requiring repayment in annual installments through the year 1998, and a second with repayment required in 25 annual installments beginning in 2005. The outstanding balance of the loans at December 31, 1996, were $54 million and $397 million, respectively. Under the LTSSP $397 million 25-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. Because of this option, all of the remaining $397 million due under this loan has been included in the year 2001, in the maturities above. The company does not anticipate a cessation of participation by 78 the lenders, and plans to commence scheduled repayments beginning in 2005. 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 of Directors (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.) The company has a $1.1 billion revolving bank credit facility, and a $250 million commercial paper program that is supported by a portion of the company's revolving credit line equal to 100 percent of the commercial paper outstanding. At December 31, 1996, nothing was outstanding under this facility, while $106 million of the facility supported the commercial paper program. At December 31, 1995, the revolving debt, including the commercial paper, was classified as non-current based on the company's ability and intent to refinance it on a long-term basis. During 1996, the company's wholly owned subsidiary, Phillips Petroleum Company Norway, reduced its revolving credit facility from $500 million to $300 million. At December 31, 1996, $118 million of this facility was outstanding. Depending on the credit facility, borrowings may bear interest at a margin above rates offered by certain designated banks in the London interbank market or at margins above certificate of deposit or prime rates offered by certain designated banks in the United States. The agreements call for commitment fees on available, but unused, amounts. The agreements also contain early termination rights if the company's current directors or their approved successors cease to be a majority of the Board. Note 8--Contingencies In the case of all known contingencies, the company accrues an undiscounted liability when the loss is probable and the amount is reasonably estimable. These liabilities are not reduced for potential insurance recoveries. If applicable, undiscounted receivables are accrued for probable 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. 79 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 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 costs related to tax and legal matters are subject to change as events evolve and as additional information becomes available during the administrative and litigation process. 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. Tax--The company has a number of issues outstanding with the IRS related to tax years 1983 through 1992 that can proceed toward final settlement as a result of resolving the Kenai LNG tax case. Although it is too early to determine the final financial effects of resolving these open years, a favorable outcome would have a positive effect on net income and cash flow, while an unfavorable one would not impact the company's net income or cash position. While total resolution may require a number of years, the majority of these open years are expected to be resolved in the near term. 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. 80 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 manage exposures to currency and commodity price fluctuations. For every derivative contract used, there is an offsetting physical or financial position, firm commitment or anticipated transaction. Neither Phillips nor its subsidiaries hold or issue derivative financial instruments with leveraged features. In 1996 and 1995, the net realized and unrealized gains and losses from derivative contracts were not material to the company's financial statements. Financial Derivative Contracts--The company uses forward exchange contracts to manage exposures to currency exchange rate fluctuations associated with certain assets, liabilities and firm commitments. In addition, these contracts are also used to manage exposures to currency exchange rate fluctuations stemming from a foreign subsidiary's anticipated purchases denominated in dollars and anticipated sales denominated in various European currencies. All forward exchange contracts are adjusted monthly to fair market value with recognition of the resulting gains and losses. The following table summarizes the company's major currency hedging activities. The notional amounts represent only the amounts hedged, not the net market exposure, which is significantly less. Any gains and losses from these positions will offset gains or losses on the underlying exposures. 81 Notional U.S. Dollar Positions ------------------------------ Millions of Dollars ------------------------------ Average Year-End Month-End ------------- ------------- 1996 1995 1996 1995 ------------- ------------- Source of Foreign Currency Risk Sales of pounds sterling forward to hedge sterling-denominated receivables from a U.K. subsidiary* $ - 523 407 416 Purchases of U.S. dollars forward by a U.K. subsidiary to hedge purchases of crude oil in U.S. dollars 41 27 36 24 Purchases of U.S. dollars forward by a Norwegian subsidiary to hedge dollar-denominated debt - - 37 60 Sales of various European currencies forward to hedge foreign-currency-denominated sales of chemical products 1 1 3 5 - ----------------------------------------------------------------- *At December 31, 1996, the company held contracts to sell pounds sterling equivalent to $182 million, and offsetting contracts to buy the same amount. Differences in exchange rates on the various contract dates resulted in an asset of $14 million and a liability of $19 million, both of which will be realized in 1997. Commodity Derivative Contracts--Phillips uses commodity-based swaps, options and futures to manage exposures to commodity price fluctuations. The following table summarizes the company's major commodity hedging activities. Again, the notional volumes represent only the amounts hedged, not the net market exposure, which is significantly less. 82 Notional Volume Positions ---------------------------- Average Year-End Month-End Class of -------------- ------------- Derivative 1996 1995 1996 1995 ---------- -------------- ------------- Source of Commodity Price Risk Natural gas (billions of British thermal units) Sales of domestic natural gas production Swaps 61,140 36,162 33,368 4,057 Futures - 350 - 86 Pricing difference between purchases and sales Swaps - 610 230 451 - ---------------------------------------------------------------------- Crude oil (thousands of barrels) Timing differences between purchases and sales Swaps - - 343 37 Futures 1,050 244 519 255 - ---------------------------------------------------------------------- Refined products (thousands of barrels) Feedstock-to-product margins on gasoline and distillates Swaps 4,789 2,859 6,401 575 Futures 641 638 625 228 - ---------------------------------------------------------------------- In the case of anticipated transactions, expected product sales or margins are hedged up to 12 months into the future. 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. Phillips' cash equivalents are placed in high-quality time deposits with major international banks and financial institutions, limiting the company's 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 83 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. 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. Swaps: Fair value is estimated based on quoted market prices of comparable contracts, and approximates the net gains and losses that would have been realized if the contracts had been closed out at year-end. Forward exchange contracts: Fair value is estimated by comparing the contract rate to the spot rate in effect on December 31, 1996, and approximates the net gains and losses that would have been realized if the contracts had been closed out at year-end. Commodity futures: Fair value is based on quoted market prices obtained from NYMEX and IPE. Certain company financial instruments at December 31 were: Millions of Dollars ------------------------------ Carrying Amount Fair Value --------------- ------------- 1996 1995 1996 1995 --------------- ------------- Financial assets Forward exchange contracts $ 14 5 14 5 Futures - * - * Swaps - - * * Financial liabilities Total debt, including current maturities 3,129 3,116 3,293 3,397 Forward exchange contracts 19 2 19 2 Futures 1 1 1 1 Swaps - - 12 13 - ----------------------------------------------------------------- *Indicates amounts were less than $1 million. 84 Note 10--Preferred Stock Preferred Stock of Subsidiary The company's subsidiary, Phillips Gas Company (PGC), has outstanding 13,800,000 shares of Series A 9.32% Cumulative Preferred Stock, carried at redemption value. 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. The company has a commitment to make equity infusions to keep the consolidated tangible net worth of PGC at or above specified levels. Phillips is 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. Company-Obligated Mandatorily Redeemable Preferred Securities of Phillips Capital Trust I During February 1996, the company formed a new statutory business trust, Phillips 66 Capital I (Trust I), of which the company owns all of the common stock. The Trust exists for the sole purpose of issuing trust securities and investing the proceeds thereof in an equivalent amount of subordinated debt securities of Phillips. On May 29, 1996, Trust I completed a $300 million underwritten public offering of 12,000,000 shares of 8.24% Trust Originated Preferred Securities (Preferred Securities). The sole asset of Trust I is $309 million of Phillips' 8.24% Junior Subordinated Deferrable Interest Debentures due 2036 (Subordinated Debt Securities), purchased by Trust I on May 29, 1996. The Subordinated Debt Securities are unsecured obligations of Phillips and subordinate and junior in right of payment to all present and future senior indebtedness of Phillips. The Subordinated Debt Securities and related income statement effects are eliminated in the company's consolidated financial statements. The Subordinated Debt Securities are due May 29, 2036, and are redeemable in whole, or in part, at the option of Phillips, on or after May 29, 2001, at a redemption price of $25 per share, plus accrued and unpaid interest. When the company redeems the Subordinated Debt Securities, Trust I is required to apply all redemption proceeds to the immediate redemption of the Preferred Securities. Phillips fully and unconditionally guarantees Trust I's obligations under the Preferred Securities. 85 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. 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, 1996, future minimum payments due under non-cancelable operating leases were: Millions of Dollars ---------- 1997 $ 86 1998 71 1999 56 2000 39 2001 31 Remaining years 257 - ----------------------------------------------------------------- $540 ================================================================= The amounts above do not include guaranteed residual values of $208 million, primarily related to two liquefied natural gas tankers under lease through the year 2000. Operating lease rental expense for years ended December 31 was: Millions of Dollars ------------------------ 1996 1995 1994 ------------------------ Total rentals $108 112 102 Less sublease rentals 2 3 6 - ----------------------------------------------------------------- $106 109 96 ================================================================= 86 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. Net pension cost was: Millions of Dollars --------------------------------------- U.S. Plans Foreign Plans ------------------ ------------------ 1996 1995 1994 1996 1995 1994 ------------------ ------------------ Service cost $ 36 26 30 14 14 14 Interest cost 57 48 43 20 18 15 Return on assets Actual (36) (86) 2 (32) (36) (2) Deferred gains (losses) (7) 57 (30) 6 14 (14) Amortization of Net asset (7) (7) (7) - - - Net losses (gains) 19 8 12 (2) (1) 1 Prior service cost 3 3 2 1 1 - - ----------------------------------------------------------------- Net pension cost $ 65 49 52 7 10 14 ================================================================= In determining net pension cost, Phillips has elected to amortize net gains and losses on a straight-line basis over 10 years. 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: 87 Millions of Dollars ------------------------------ U.S. Plans Foreign Plans -------------- ------------- 1996 1995 1996 1995 -------------- ------------- Plan assets at fair value $ 480 380 339 300 - ----------------------------------------------------------------- Actuarial present value of benefit obligations Vested benefits 478 439 231 193 Non-vested benefits 31 31 - - - ----------------------------------------------------------------- Accumulated benefit obligation 509 470 231 193 Effect of projected future salary increases 268 290 84 77 - ----------------------------------------------------------------- Projected benefit obligation 777 760 315 270 - ----------------------------------------------------------------- Excess asset (obligation) (297) (380) 24 30 Unrecognized net asset (27) (34) (1) (1) Unrecognized net (gains) losses 138 191 (14) (16) Unrecognized prior service cost 44 35 10 9 - ----------------------------------------------------------------- Prepaid (accrued) pension cost and deferred gain on reversion $(142) (188) 19 22 ================================================================= Assumptions--Weighted Average at December 31 Rate of compensation increase 4.25% 4.25 4.00 4.00 Discount rate 7.50 7.25 7.40 7.50 Long-term rate of return on assets 10.50 10.75 8.20 8.20 - ----------------------------------------------------------------- The plan assets reflected in the above table include a participating annuity contract, commingled funds, real estate, stocks, bonds and insurance contracts. A foreign plan also holds employee home mortgage loans. The accumulated benefit obligation reflected above includes $47 million and $50 million at December 31, 1996 and 1995, respectively, for supplemental retirement plans that are not qualified under the Employee Retirement Income Security Act of 1974 (ERISA). These non-qualified plans are funded by an irrevocable grantor trust, not out of the plan assets reflected in the above schedule. The plan assets shown above for 1995 do not reflect contributions made in 1996 applicable to the 1995 plan year. After adding plan asset contributions of $42 million for the 1995 plan year, which were paid in the following year, and eliminating the non-qualified plan obligations that were not payable from plan assets, the plan assets exceeded accumulated plan liabilities for both 1996 and 1995. 88 For U.S. plans that are qualified under ERISA, which includes the company's primary retirement plan for employees, the company's funding policy is to contribute at least the minimum required by ERISA. The contribution requirements are determined by an independent actuary using actuarial assumptions and asset valuation techniques allowed by ERISA and generally accepted in the actuarial profession as appropriate for funding purposes. These ERISA funding calculations differ in some important respects from the assumptions and techniques required by financial accounting rules used to prepare the information in the above table. However, the company's qualified U.S. retirement plans have assets that exceed the value of the liabilities accumulated to date, when valued under either set of requirements. For the foreign plans, the value of plan assets is also generally larger than the accumulated benefit obligation. Contributions to foreign plans are dependent upon local laws and tax regulations and, in most cases, are shared by co-venturers. 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. Net postretirement benefit cost was: Millions of Dollars ---------------------------------- Health Life ---------------- ---------------- 1996 1995 1994 1996 1995 1994 ---------------- ---------------- Service cost $ 2 2 2 1 1 1 Interest cost 6 6 8 4 4 4 Return on assets Actual - - - (2) (2) (2) Deferred losses - - - - - (1) Amortization of Net losses 1 1 - 2 1 - Prior service cost (4) (4) - (1) (1) - - ----------------------------------------------------------------- Net postretirement benefit cost $ 5 5 10 4 3 2 ================================================================= In determining net postretirement benefit cost, the company has elected to amortize net gains and losses on a straight-line basis over 10 years. 89 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 ------------- ------------- 1996 1995 1996 1995 ------------- ------------- Plan assets at fair value, held under a reserve deposit contract $ - - 31 34 - ----------------------------------------------------------------- Accumulated postretirement benefit obligation (APBO) Retirees 62 68 53 52 Fully eligible active participants 10 9 4 4 Other active participants 10 11 3 4 - ----------------------------------------------------------------- 82 88 60 60 - ----------------------------------------------------------------- APBO in excess of plan assets (82) (88) (29) (26) Unrecognized net losses 2 9 14 15 Unrecognized prior service cost (13) (17) (3) (4) - ----------------------------------------------------------------- Accrued postretirement benefit cost $(93) (96) (18) (15) ================================================================= Financial Assumptions Discount rate 7.25% 7.00 7.25 7.00 Long-term rate of return on assets (non-taxable) - - 7.00 7.00 Rate of compensation increase - - 4.25 4.25 - ----------------------------------------------------------------- At December 31, 1996, the health care cost trend rate is assumed to decrease gradually from 7 percent in 1997 to 5 percent in 2003 and 2004. No increases in medical costs are assumed for years beginning in 2005 because of a provision in the health plan which freezes the company's contribution at 2004 levels. The same health care cost trend rate was used at December 31, 1995. Increasing the assumed health care cost trend rate by one percentage point in each year would increase the APBO by $3 million and $4 million at December 31, 1996 and 1995, respectively, and the aggregate of the service and interest cost components by $1 million for both 1996 and 1995. For both defined benefit plans and other postretirement plans, certain financial assumptions are utilized in determining the company's projected benefit obligation. These assumptions are examined periodically by the company, and any required changes are incorporated in the subsequent determination of projected benefit obligations. 90 Termination Benefits The company recorded charges of $4 million, $69 million and $59 million for severance benefits in connection with work force reductions in 1996, 1995 and 1994, respectively. 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 1996, 1995 and 1994. 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 salary 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 common 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 stock held by the plan. The shares held by the LTSSP are released for allocation to participant accounts based on debt service payments on LTSSP borrowings. In addition, during the period from 1998 through 2005, when no debt principal payments are scheduled to occur, the company has committed to make direct contributions to the LTSSP to ensure a certain minimum level of stock allocation to participant accounts. 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 $30 million, $33 million and $23 million in 1996, 1995 and 1994, respectively. This included compensation expense of $30 million, $29 million and $22 million in 1996, 1995 and 1994, respectively. Company contributions to the LTSSP in 1996, 1995 and 1994 were $14 million, $21 million and $12 million, respectively. Dividends used to service debt were $39 million, $36 million and $37 million in 1996, 1995 and 1994, respectively. These dividends reduced the amount of expense recognized each period. Interest incurred on the LTSSP debt in 1996, 1995 and 1994 was $27 million, $31 million and $24 million, respectively. 91 The total LTSSP shares as of December 31, 1996, were: Unallocated shares 14,570,641 Allocated shares 16,427,907 - ----------------------------------------------------------------- Total LTSSP shares 30,998,548 ================================================================= Incentive Compensation Plans The company has a Performance Incentive Program and an Annual Incentive Compensation Plan to provide awards to most 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 $75 million, $52 million and $45 million were charged against earnings in 1996, 1995 and 1994, respectively. Under the Omnibus Securities Plan (the Plan) approved by shareholders, stock options and stock awards for certain 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 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 of 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 options. Options exercised in the form of SARs permit the holder to receive stock, or a combination of cash and stock, subject to a declining cap on the exercise price. The company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25), and related Interpretations in accounting for its employee stock options, and not the fair-value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation." Because the exercise price of Phillips' employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized under APB No. 25. The effect of applying the fair-value method of Statement No. 123 to the company's stock-based awards would result in net income and earnings per share that are not materially 92 different from amounts reported in the financial statements. A summary of Phillips' stock option activity follows: Weighted-Average Options Exercise Price ---------- ---------------- Outstanding at December 31, 1993 5,614,501 $23.01 Granted 1,528,200 30.51 Exercised (672,509) 20.52 Forfeited (145,156) 30.00 - ----------------------------------------------------------------- Outstanding at December 31, 1994 6,325,036 24.93 Granted 1,331,972 31.73 Exercised (529,094) 22.12 Forfeited (45,193) 30.41 - ----------------------------------------------------------------- Outstanding at December 31, 1995 7,082,721 26.38 Granted 1,292,707 35.25 Exercised (1,384,966) 22.58 Forfeited (27,059) 33.74 - ----------------------------------------------------------------- Outstanding at December 31, 1996 6,963,403 $28.75 ================================================================= Outstanding at December 31, 1996 Weighted-Average --------------------------------- Exercise prices: Options Remaining Lives Exercise Price --------- --------------- -------------- $12.63 to $31.44 5,475,485 5.68 years $27.01 $32.25 to $44.25 1,487,918 8.91 years 35.17 - ----------------------------------------------------------------- Weighted-Average Options Exercise Price --------- ---------------- Exercisable At December 31, 1996 Exercise prices: $12.63 to $31.44 3,548,226 $25.53 $32.25 to $44.25 78,608 34.62 - ----------------------------------------------------------------- At December 31, 1995 3,915,145 $23.75 - ----------------------------------------------------------------- At December 31, 1994 3,330,508 $22.42 - ----------------------------------------------------------------- Compensation and Benefits Trust In 1995, the company established the CBT, an irrevocable grantor trust, administered by an independent trustee and designed to acquire, hold and distribute shares of the company's common stock to fund certain future compensation and benefit obligations of the company. The CBT does not increase or alter the amount of benefits or compensation that will be paid under existing plans, but offers the company enhanced financial flexibility in providing the funding requirements of those plans. Phillips also has flexibility in determining the timing of distributions of shares from the CBT to fund compensation and benefits, subject to a minimum distribution schedule. The trustee votes shares held 93 by the CBT in accordance with voting directions from eligible employees, as specified in a trust agreement with the trustee. The company sold 29.2 million shares of previously unissued Phillips common stock, $1.25 par value, to the CBT in exchange for cash previously contributed to the CBT by Phillips in the amount of $37 million and a promissory note from the CBT to Phillips of $952 million. The CBT is consolidated by Phillips, therefore the cash contribution and promissory note are eliminated in consolidation. Shares held by the CBT are valued at cost and do not affect earnings per share or total common stockholders' equity until after they are transferred out of the CBT. All shares are required to be transferred out of the CBT by January 1, 2021. Note 14--Taxes Taxes charged to income were: Millions of Dollars ----------------------- 1996 1995 1994 ----------------------- Taxes Other Than Income Taxes Property $ 80 83 91 Production 65 54 56 Payroll 56 59 56 Environmental 40 58 57 Other 23 12 11 - ----------------------------------------------------------------- 264 266 271 - ----------------------------------------------------------------- Income Taxes Federal Current (6) 95 74 Deferred 189 18 (41) Foreign Current 624 520 340 Deferred 43 (43) (14) State and local Current (2) 7 6 Deferred 21 (2) 3 - ----------------------------------------------------------------- 869 595 368 - ----------------------------------------------------------------- Total taxes charged to income $1,133 861 639 ================================================================= 94 Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Major components of deferred tax liabilities and assets at December 31 were: Millions of Dollars ------------------- 1996 1995 ------------------- Deferred Tax Liabilities Depreciation, depletion and amortization $2,001 1,786 Other 41 36 - ----------------------------------------------------------------- Total deferred tax liabilities 2,042 1,822 - ----------------------------------------------------------------- Deferred Tax Assets Contingency accruals 47 154 Benefit plan accruals 212 200 Accrued dismantlement, removal and environmental costs 279 238 Other financial accruals and deferrals 130 116 Alternative minimum tax and other credit carryforwards 343 316 Loss carryforwards 359 327 Depreciation, depletion and amortization 13 6 Other 21 22 - ----------------------------------------------------------------- Total deferred tax assets 1,404 1,379 Less valuation allowance 208 155 - ----------------------------------------------------------------- Net deferred tax assets 1,196 1,224 - ----------------------------------------------------------------- Net deferred tax liabilities $ 846 598 ================================================================= Valuation allowances have been established for certain foreign and state net operating loss carryforwards that reduce deferred tax assets to an amount that will more likely than not be realized. Uncertainties that may affect the realization of these assets include tax law changes and the future level of product prices, costs and tax rates. Based on the company's historical taxable income, its expectations for the future, and available tax planning strategies, Management expects that the net deferred tax assets will be realized as offsets to reversing deferred tax liabilities and as reductions in future taxable operating income. The alternative minimum tax credit can be carried forward indefinitely to reduce the company's regular tax liability. The valuation allowance increased $53 million during 1996, primarily due to an increase in loss carryforwards for various companies. 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, 1996 and 1995, these temporary differences were $248 million and $349 million, respectively. 95 Determination of the amount of unrecognized deferred taxes on these temporary differences is not practicable due to foreign tax credits and exclusions. The amounts of U.S. and foreign income before income taxes, with a reconciliation of tax at the federal statutory rate with the provision for income taxes, were: Percent of Millions of Dollars Pretax Income -------------------- -------------------- 1996 1995 1994 1996 1995 1994 -------------------- -------------------- Income before income taxes United States $1,179 332 346 54.3% 31.2 40.6 Foreign 993 732 506 45.7 68.8 59.4 - --------------------------------------------------------------------- $2,172 1,064 852 100.0% 100.0 100.0 ===================================================================== Federal statutory income tax $ 760 372 298 35.0% 35.0 35.0 Foreign taxes in excess of federal statutory rate 337 267 169 15.5 25.0 19.8 Credit for producing fuel from a non-conventional source (27) (31) (44) (1.2) (2.9) (5.2) Capital-loss carryforward - - (50) - - (5.8) Kenai LNG tax settlement (194) - - (9.0) - - Other (7) (13) (5) (.3) (1.2) (.6) - --------------------------------------------------------------------- $ 869 595 368 40.0% 55.9 43.2 ===================================================================== Excise taxes accrued on the sale of petroleum products were $1,257 million, $1,150 million and $1,121 million for the years ended December 31, 1996, 1995 and 1994, respectively. These taxes are excluded from reported revenues and expenses. Kenai LNG Tax Settlement--On February 26, 1996, the U.S. Tax Court's previous decisions related to the company's sales of liquefied natural gas (LNG) from its Kenai, Alaska, facility to Japan, became final. The Tax Court's decisions supported the company's position that more than 50 percent of the income for years 1975 through 1978 was from a foreign source. The favorable resolution of this issue increased net income in 1996 by $565 million. 96 Note 15--Cash Flow Information Millions of Dollars ------------------------ 1996 1995 1994 ------------------------ Non-Cash Investing and Financing Activities Treasury stock awards issued (canceled) under incentive compensation plans $ (3) 2 (15) Issuance of promissory notes to purchase property, plant and equipment 26 - - Contribution of non-cash net assets to equity-method affiliates - 55 109 Common stock issued to establish CBT - 989 - - ----------------------------------------------------------------- Cash Payments Interest Debt $220 224 235 Taxes and other 41 19 48 - ----------------------------------------------------------------- $261 243 283 ================================================================= Income taxes $765 576 451 - ----------------------------------------------------------------- Note 16--Other Financial Information Millions of Dollars Except Per Share Amounts ------------------------ 1996 1995 1994 ------------------------ Interest Incurred Debt $ 222 228 237 Other 26 67 28 - ----------------------------------------------------------------- 248 295 265 Capitalized (31) (30) (15) - ----------------------------------------------------------------- Expensed $ 217 265 250 ================================================================= Maintenance and Repairs--expensed $ 416 413 441 - ----------------------------------------------------------------- Research and Development Expenditures--expensed $ 59 51 71 - ----------------------------------------------------------------- Foreign Currency Transaction Gains (Losses)--after-tax $ 41 (3) 3 - ----------------------------------------------------------------- Cash Dividends paid per common share $1.25 1.195 1.12 - ----------------------------------------------------------------- 97 Note 17--Segment and Geographic Information The company is 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, primarily in Oklahoma, Texas and New Mexico; 3) Refining, Marketing and Transportation (RM&T)-- refines, markets and transports crude oil and petroleum products, primarily in the United States; 4) Chemicals--fractionates natural gas liquids and manufactures and markets a broad range of petroleum-based chemical products on a worldwide basis. Corporate and Other includes general corporate overhead, net interest expense and various other operations. 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. 98 Analysis of Results by Business Segment Millions of Dollars -------------------------------- E&P GPM RM&T -------------------------------- 1996 Sales and Other Operating Revenues Outside customers $2,574 913 9,054 Sales within Phillips 1,288 804 522 - ---------------------------------------------------------------------- Segment sales $3,862 1,717 9,576 ====================================================================== Operating Profit $1,315 232 82 Equity in earnings of affiliates (56) - 18 Preferred dividend requirements of subsidiary and capital trust, and other minority interests (1) - - Corporate/non-operating items Interest expense - - - Kenai LNG tax settlement - - - Other - - - Income taxes (748) (88) (29) - ---------------------------------------------------------------------- Net income $ 510 144 71 ====================================================================== Assets Identifiable assets $5,376 1,112 2,745 Investments in and advances to affiliated companies 140 4 111 - ---------------------------------------------------------------------- Total assets $5,516 1,116 2,856 ====================================================================== Depreciation, Depletion and Amortization $ 576 73 172 - ---------------------------------------------------------------------- Capital Expenditures and Investments $ 981 85 209 - ---------------------------------------------------------------------- 1995 Sales and Other Operating Revenues Outside customers $2,224 481 7,674 Sales within Phillips 1,096 641 366 - ---------------------------------------------------------------------- Segment sales $3,320 1,122 8,040 ====================================================================== Operating Profit $ 901 13 38 Equity in earnings of affiliates 39 - 17 Preferred dividend requirements of subsidiary and other minority interests (1) - - Corporate/non-operating items Interest expense - - - Other - - - Income taxes (549) (3) (15) - ---------------------------------------------------------------------- Net income (loss) $ 390 10 40 ====================================================================== Assets Identifiable assets $4,828 1,048 2,543 Investments in and advances to affiliated companies 225 5 87 - ---------------------------------------------------------------------- Total assets $5,053 1,053 2,630 ====================================================================== Depreciation, Depletion and Amortization $ 520 73 133 - ---------------------------------------------------------------------- Capital Expenditures and Investments $ 856 274 150 - ---------------------------------------------------------------------- 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 Preferred dividend requirements of subsidiary and other minority interests (2) - - Corporate/non-operating items Interest expense - - - Other - - - Income taxes (400) (17) (66) - ---------------------------------------------------------------------- Net income (loss) $ 342 31 136 ====================================================================== Assets Identifiable assets $4,445 829 2,726 Investments in and advances to affiliated companies 252 6 24 - ---------------------------------------------------------------------- Total assets $4,697 835 2,750 ====================================================================== Depreciation, Depletion and Amortization $ 446 70 128 - ---------------------------------------------------------------------- Capital Expenditures and Investments $ 707 172 100 - ---------------------------------------------------------------------- Analysis of Results by Business Segment Millions of Dollars ----------------------------------- Corporate Chemicals and Other* Consolidated ----------------------------------- 1996 Sales and Other Operating Revenues Outside customers $3,185 5 15,731 Sales within Phillips 698 36 - - ---------------------------------------------------------------------- Segment sales $3,883 41 15,731 ====================================================================== Operating Profit $ 344 7 1,980 Equity in earnings of affiliates 42 - 4 Preferred dividend requirements of subsidiary and capital trust, and other minority interests - (47) (48) Corporate/non-operating items Interest expense - (217) (217) Kenai LNG tax settlement - 571 571 Other - (118) (118) Income taxes (120) 116 (869) - ---------------------------------------------------------------------- Net income $ 266 312 1,303 ====================================================================== Assets Identifiable assets $2,399 1,223 12,855 Investments in and advances to affiliated companies 438 - 693 - ---------------------------------------------------------------------- Total assets $2,837 1,223 13,548 ====================================================================== Depreciation, Depletion and Amortization $ 91 29 941 - ---------------------------------------------------------------------- Capital Expenditures and Investments $ 205 64 1,544 - ---------------------------------------------------------------------- 1995 Sales and Other Operating Revenues Outside customers $2,984 5 13,368 Sales within Phillips 541 48 - - ---------------------------------------------------------------------- Segment sales $3,525 53 13,368 ====================================================================== Operating Profit $ 482 16 1,450 Equity in earnings of affiliates 71 - 127 Preferred dividend requirements of subsidiary and other minority interests - (32) (33) Corporate/non-operating items Interest expense - (265) (265) Other - (215) (215) Income taxes (167) 139 (595) - ---------------------------------------------------------------------- Net income (loss) $ 386 (357) 469 ====================================================================== Assets Identifiable assets $2,222 676 11,317 Investments in and advances to affiliated companies 344 - 661 - ---------------------------------------------------------------------- Total assets $2,566 676 11,978 ====================================================================== Depreciation, Depletion and Amortization $ 108 37 871 - ---------------------------------------------------------------------- Capital Expenditures and Investments $ 148 28 1,456 - ---------------------------------------------------------------------- 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 Preferred dividend requirements of subsidiary and other minority interests - (32) (34) Corporate/non-operating items Interest expense - (250) (250) Other - (204) (204) Income taxes (94) 209 (368) - ---------------------------------------------------------------------- Net income (loss) $ 259 (284) 484 ====================================================================== Assets Identifiable assets $2,102 778 10,880 Investments in and advances to affiliated companies 291 - 573 - ---------------------------------------------------------------------- Total assets $2,393 778 11,453 ====================================================================== Depreciation, Depletion and Amortization $ 106 44 794 - ---------------------------------------------------------------------- Capital Expenditures and Investments $ 144 31 1,154 - ---------------------------------------------------------------------- *Includes certain intersegment eliminations. 99 Analysis of Results by Geographic Area Millions of Dollars ----------------------------------- United United States Norway Kingdom Africa ----------------------------------- 1996 Sales and Other Operating Revenues Outside customers $13,211 433 1,251 249 Sales within Phillips 162 762 - - - ---------------------------------------------------------------------- Segment sales $13,373 1,195 1,251 249 ====================================================================== Operating Profit $ 1,085 718 32 115 - ---------------------------------------------------------------------- Equity in Earnings of Affiliates $ (16) 10 3 - - ---------------------------------------------------------------------- Assets Identifiable assets $ 8,041 1,767 1,199 237 Investments in and advances to affiliated companies 478 83 29 - - ---------------------------------------------------------------------- Total assets $ 8,519 1,850 1,228 237 ====================================================================== 1995 Sales and Other Operating Revenues Outside customers $11,107 470 1,037 168 Sales within Phillips 203 651 3 28 - ---------------------------------------------------------------------- Segment sales $11,310 1,121 1,040 196 ====================================================================== Operating Profit $ 784 500 (8) 102 - ---------------------------------------------------------------------- Equity in Earnings of Affiliates $ 104 15 4 - - ---------------------------------------------------------------------- Assets Identifiable assets $ 7,604 1,552 950 227 Investments in and advances to affiliated companies 454 92 24 - - ---------------------------------------------------------------------- Total assets $ 8,058 1,644 974 227 ====================================================================== 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 $ 7,602 1,292 734 206 Investments in and advances to affiliated companies 362 102 24 - - ---------------------------------------------------------------------- Total assets $ 7,964 1,394 758 206 ====================================================================== Analysis of Results by Geographic Area Millions of Dollars ----------------------------------- Other Worldwide Areas Corporate Consolidated* ----------------------------------- 1996 Sales and Other Operating Revenues Outside customers $ 587 - 15,731 Sales within Phillips 62 - - - ---------------------------------------------------------------------- Segment sales $ 649 - 15,731 ====================================================================== Operating Profit $ 30 - 1,980 - ---------------------------------------------------------------------- Equity in Earnings of Affiliates $ 7 - 4 - ---------------------------------------------------------------------- Assets Identifiable assets $ 543 1,068 12,855 Investments in and advances to affiliated companies 103 - 693 - ---------------------------------------------------------------------- Total assets $ 646 1,068 13,548 ====================================================================== 1995 Sales and Other Operating Revenues Outside customers $ 586 - 13,368 Sales within Phillips 64 - - - ---------------------------------------------------------------------- Segment sales $ 650 - 13,368 ====================================================================== Operating Profit $ 72 - 1,450 - ---------------------------------------------------------------------- Equity in Earnings of Affiliates $ 4 - 127 - ---------------------------------------------------------------------- Assets Identifiable assets $ 460 524 11,317 Investments in and advances to affiliated companies 91 - 661 - ---------------------------------------------------------------------- Total assets $ 551 524 11,978 ====================================================================== 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 $ 451 595 10,880 Investments in and advances to affiliated companies 85 - 573 - ---------------------------------------------------------------------- Total assets $ 536 595 11,453 ====================================================================== *After elimination of intergeographic transactions. Export sales totaled $522 million, $507 million and $382 million for 1996, 1995 and 1994, respectively. 100 - ----------------------------------------------------------------- Oil and Gas Operations Exploration and Production In accordance with FASB Statement No. 69, "Disclosures about Oil and Gas Producing Activities," and regulations of the Securities and Exchange Commission, 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 102 Results of Operations 108 Statistics 110 Costs Incurred 114 Capitalized Costs 115 Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserve Quantities 116 101 o 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 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 Revisions of previous estimates - (7) (1) 1 8 (1) Improved recovery 77 11 64 - - 2 Purchases of reserves in place 3 1 - 2 - - Extensions and discoveries 29 20 - 6 3 - Production (82) (29) (37) (1) (9) (6) Sales of reserves in place (9) (9) - - - - - ------------------------------------------------------------------ End of 1995 895 261 442 50 94 48 Revisions of previous estimates 20 (4) 12 4 5 3 Improved recovery 49 13 36 - - - Purchases of reserves in place 2 2 - - - - Extensions and discoveries 10 6 - 1 2 1 Production (80) (25) (37) (2) (9) (7) Sales of reserves in place (1) (1) - - - - - ------------------------------------------------------------------ End of 1996 895 252 453 53 92 45 ================================================================== Developed End of 1993 680 245 314 4 83 34 End of 1994 703 226 350 4 89 34 End of 1995 699 200 333 33 91 42 End of 1996 743 183 399 28 90 43 - ------------------------------------------------------------------ 102 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. 103 Natural Gas Years Ended ---------------------------------------------- December 31 Billions of Cubic Feet ---------------------------------------------- United United Other Total States Norway Kingdom Africa Areas ---------------------------------------------- Developed and Undeveloped 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 Revisions of previous estimates 420 254 (32) 19 213 (34) Improved recovery 62 4 58 - - - Purchases of reserves in place 92 34 - 48 - 10 Extensions and discoveries 317 271 - 45 - 1 Production (543) (381) (121) (18) (1) (22) Sales of reserves in place (16) (16) - - - - - ------------------------------------------------------------------ End of 1995 6,708 4,218 1,134 836 244 276 Revisions of previous estimates 47 - 227 (90) - (90) Improved recovery 58 1 57 - - - Purchases of reserves in place 21 21 - - - - Extensions and discoveries 165 141 - 8 - 16 Production (562) (394) (114) (30) (2) (22) Sales of reserves in place (70) (70) - - - - - ------------------------------------------------------------------ End of 1996 6,367 3,917 1,304 724 242 180 ================================================================== Developed End of 1993 5,194 3,827 1,068 148 - 151 End of 1994 5,030 3,694 989 129 32 186 End of 1995 5,362 3,875 806 465 30 186 End of 1996 5,196 3,625 1,109 303 28 131 - ------------------------------------------------------------------ 104 o Natural gas production may differ from gas production (delivered for sale) on page 110, 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 Norway in 1996 are due in part to higher prices and a new gas contract that allows more produced gas, which previously would have been reinjected, to be sold. o Natural gas reserves are computed at 14.65 pounds per square inch absolute and 60 degrees Fahrenheit. 105 Natural Gas Liquids Years Ended --------------------------------------------- December 31 Millions of Barrels --------------------------------------------- United United Other Total States Norway Kingdom Africa Areas --------------------------------------------- Developed and Undeveloped 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 Revisions of previous estimates 8 8 1 - (1) - Improved recovery 4 1 3 - - - Extensions and discoveries 4 3 - 1 - - Production (15) (12) (3) - - - Sales of reserves in place (1) (1) - - - - - ------------------------------------------------------------------ End of 1995 196 130 38 7 20 1 Revisions of previous estimates 11 7 4 - - - Improved recovery 2 - 2 - - - Purchases of reserves in place 1 1 - - - - Extensions and discoveries 3 3 - - - - Production (15) (12) (2) - (1) - - ------------------------------------------------------------------ End of 1996 198 129 42 7 19 1 ================================================================== Developed End of 1993 162 132 29 - - 1 End of 1994 178 125 31 - 21 1 End of 1995 178 125 29 3 20 1 End of 1996 183 124 36 3 19 1 - ------------------------------------------------------------------ 106 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. 107 o Results of Operations Millions of Dollars --------------------------------------------------- United United Other Total States Norway Kingdom Africa Areas --------------------------------------------------- 1996 Sales $1,510 723 308 144 197 138 Transfers 1,347 590 757 - - - Other revenues 105 84 15 1 2 3 - ------------------------------------------------------------------------------ Total revenues 2,962 1,397 1,080 145 199 141 Production costs 744 392 222 46 49 35 Exploration expenses 254 111 22 36 23 62 Depreciation, depletion and amortization* 646 415 104 41 13 73 Other related expenses 111 112 (12) 2 - 9 - ------------------------------------------------------------------------------ 1,207 367 744 20 114 (38) Provision for income taxes 754 102 542 9 101 - - ------------------------------------------------------------------------------ Results of operations for producing activities 453 265 202 11 13 (38) Other earnings 57 64 - (2) - (5) - ------------------------------------------------------------------------------ E&P net income $ 510 329 202 9 13 (43) ============================================================================== 1995 Sales $1,190 547 306 70 120 147 Transfers 1,125 447 650 - 28 - Other revenues 128 99 22 1 2 4 - ------------------------------------------------------------------------------ Total revenues 2,443 1,093 978 71 150 151 Production costs 735 391 244 31 29 40 Exploration expenses 200 92 26 22 17 43 Depreciation, depletion and amortization** 499 269 147 24 12 47 Other related expenses 127 65 46 7 (11) 20 - ------------------------------------------------------------------------------ 882 276 515 (13) 103 1 Provision for income taxes 530 66 376 (3) 87 4 - ------------------------------------------------------------------------------ Results of operations for producing activities 352 210 139 (10) 16 (3) Other earnings 38 39 - - - (1) - ------------------------------------------------------------------------------ E&P net income $ 390 249 139 (10) 16 (4) ============================================================================== 1994 Sales $1,166 640 261 89 124 52 Transfers 944 450 478 - 16 - Other revenues 111 72 29 1 1 8 - ------------------------------------------------------------------------------ Total revenues 2,221 1,162 768 90 141 60 Production costs 807 441 269 33 38 26 Exploration expenses 228 106 32 25 28 37 Depreciation, depletion and amortization 431 266 103 35 10 17 Other related expenses 61 59 (1) (1) 3 1 - ------------------------------------------------------------------------------ 694 290 365 (2) 62 (21) Provision for income taxes 366 47 280 (2) 56 (15) - ------------------------------------------------------------------------------ Results of operations for producing activities 328 243 85 - 6 (6) Other earnings 14 14 - - - - - ------------------------------------------------------------------------------ E&P net income $ 342 257 85 - 6 (6) ============================================================================== *Includes before-tax property impairments in the United States of $106 million for the Point Arguello field and $78 million for associated equity facilities, and in Other Areas, $25 million for certain properties in Canada. **Includes before-tax property impairments in the United States and Norway of $51 million and $27 million, respectively, due to the adoption of FASB Statement No. 121. 108 o Results of operations for producing activities consist of all the activities within the E&P organization, except for an LNG operation, minerals operations, and crude oil and gas marketing activities, 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 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 and amortization differs from that shown in Analysis of Results by Business Segment on page 99, as depreciation of support equipment is 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. 109 o Statistics 1996 1995 1994 Net Production --------------------------- Thousands of Barrels Daily --------------------------- Crude Oil United States 69 79 90 Norway 99 100 82 United Kingdom 6 3 5 Africa 25 24 23 Other areas 20 16 6 - ----------------------------------------------------------------- 219 222 206 ================================================================= Natural Gas Liquids United States* 4 5 5 Norway 8 8 8 Other areas 3 2 1 - ----------------------------------------------------------------- 15 15 14 ================================================================= *Represents amounts extracted attributable to E&P operations. Additional quantities of NGL are extracted at GPM gas processing plants (see NGL reserves page 107 for further discussion). Natural Gas Millions of Cubic Feet Daily ---------------------------- United States (less gas equivalent of liquids shown above)* 1,102 1,078 1,035 Norway (dry basis) 291 299 272 United Kingdom (dry basis) 81 46 58 Other areas 53 58 49 - ----------------------------------------------------------------- 1,527 1,481 1,414 ================================================================= *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. Dollars Per Unit Average Sales Prices ---------------------------- Crude Oil--Per Barrel United States $18.96 14.98 13.37 Norway 20.92 17.08 15.77 United Kingdom 21.09 17.17 16.06 Africa 21.45 17.60 16.10 Other areas 19.46 16.92 12.92 Total foreign 20.89 17.16 15.75 Worldwide 20.28 16.43 14.74 - ----------------------------------------------------------------- Natural Gas Liquids--Per Barrel United States 15.81 11.01 11.60 Norway 9.59 9.73 8.59 - ----------------------------------------------------------------- Natural Gas (Lease)--Per Thousand Cubic Feet United States 2.10 1.37 1.69 Norway 2.61 2.66 2.34 United Kingdom 2.92 2.78 2.75 Other areas 1.27 1.12 1.53 Total foreign 2.52 2.50 2.31 Worldwide 2.25 1.77 1.92 - ----------------------------------------------------------------- 110 1996 1995 1994 ------------------------- Average Production Costs*-- Per Barrel-of-Oil-Equivalent United States $4.17 4.06 4.50 Norway 3.90 4.24 5.46 United Kingdom 6.28 7.39 5.98 Africa 4.95 3.19 4.55 Other areas 3.28 4.16 5.00 Total foreign 4.15 4.28 5.36 Worldwide 4.16 4.16 4.85 - ----------------------------------------------------------------- *Production costs consist of costs incurred to operate and maintain wells and related equipment and facilities used in the production of petroleum liquids and natural gas. These costs also include taxes other than income taxes, depreciation of support equipment and administrative expenses associated with the production activity. Excluded are depreciation, depletion and amortization of capitalized acquisition, exploration and development costs. o Per-unit costs in 1996, compared with 1995, were higher in the United States, primarily due to lower production volumes. The increase in per-unit costs in Africa was caused by higher costs, partly offset by higher production. Per-unit costs were lower in Norway, the United Kingdom and Other areas. The reduction in Norway was due to lower costs. The decline in the United Kingdom was due to higher production, partly offset by higher costs, while the improvement in Other areas resulted from higher production coupled with lower costs. 111 Acreage at December 31, 1996 Thousands of Acres ------------------ Gross Net ------------------ Developed United States 1,628 1,173 Norway 45 17 United Kingdom 199 70 Africa 81 16 Other areas 283 97 - ----------------------------------------------------------------- 2,236 1,373 ================================================================= Undeveloped United States 2,449 1,682 Norway 1,468 362 United Kingdom 978 359 Africa* 29,495 13,574 Canada 1,420 271 Other areas 12,208 9,189 - ----------------------------------------------------------------- 48,018 25,437 ================================================================= *Includes two Somalia concessions where operations have been suspended by declarations of force majeure totaling 21,865 gross and 8,135 net acres. 112 Net Wells Completed* Productive Dry ---------------- ---------------- 1996 1995 1994 1996 1995 1994 ---------------- ---------------- Exploratory United States 5 4 6 10 8 11 Norway - - - ** 1 ** United Kingdom ** - 2 2 ** 1 Africa - ** - 1 1 ** Other areas 1 4 1 7 3 2 - ------------------------------------------------------------------ 6 8 9 20 13 14 ================================================================== Development United States 90 87 88 7 6 7 Norway 2 2 - - - - United Kingdom 3 3 ** - - - Africa ** ** 1 - - - Other areas 5 14 3 1 1 1 - ------------------------------------------------------------------ 100 106 92 8 7 8 ================================================================== *Excludes farmout arrangements. **Phillips' total proportionate interest was less than one. Wells at Year-End 1996 Productive** ---------------------------- In Progress* Oil Gas ------------ ------------- ------------ Gross Net Gross Net Gross Net ------------ ------------- ------------ United States 58 29 13,197 2,914 5,460 2,906 Norway 2 1 140 50 33 9 United Kingdom 72 11 17 5 82 18 Africa 1 - 184 37 11 2 Other areas 21 6 886 364 251 87 - ------------------------------------------------------------------ 154 47 14,424 3,370 5,837 3,022 ================================================================== *Includes wells that have been temporarily suspended. **Includes 1,339 gross and 532 net multiple completion wells. 113 o Costs Incurred Millions of Dollars --------------------------------------------------- United United Other Total States Norway Kingdom Africa Areas --------------------------------------------------- 1996 Acquisition $ 139 57 - - - 82 Exploration 267 101 25 49 20 72 Development 695 184 345 125 13 28 - ------------------------------------------------------------------ $1,101 342 370 174 33 182 ================================================================== 1995 Acquisition $ 78 45 - 28 1 4 Exploration 218 85 33 27 21 52 Development 668 233 192 204 6 33 - ------------------------------------------------------------------ $ 964 363 225 259 28 89 ================================================================== 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 ================================================================== 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 $32 million, $27 million and $2 million in the United States for 1996, 1995 and 1994, respectively, and $28 million and $48 million in the United Kingdom for 1995 and 1994, 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. 114 o Capitalized Costs At December 31 Millions of Dollars ----------------------------------------------- United United Other Total States Norway Kingdom Africa Areas ----------------------------------------------- 1996 Proved properties $10,809 5,446 3,009 1,545 404 405 Unproved properties 397 202 7 58 3 127 - ------------------------------------------------------------------ 11,206 5,648 3,016 1,603 407 532 Accumulated depreciation, depletion and amortization 6,701 4,034 1,538 678 226 225 - ------------------------------------------------------------------ $ 4,505 1,614 1,478 925 181 307 ================================================================== 1995 Proved properties $10,164 5,403 2,717 1,283 387 374 Unproved properties 357 271 8 38 8 32 - ------------------------------------------------------------------ 10,521 5,674 2,725 1,321 395 406 Accumulated depreciation, depletion and amortization 6,468 4,036 1,482 577 211 162 - ------------------------------------------------------------------ $ 4,053 1,638 1,243 744 184 244 ================================================================== 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, and crude oil and gas marketing activities. 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. 115 o 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. 116 Discounted Future Net Cash Flows Millions of Dollars ---------------------------------------------------- United United Other Total States Norway Kingdom Africa Areas ---------------------------------------------------- 1996 Future cash inflows $42,271 19,847 14,755 3,728 2,580 1,361 Less: Future production costs 8,536 3,824 3,194 704 510 304 Future development costs 2,186 873 820 337 92 64 Future income tax provisions 15,266 4,896 7,957 611 1,576 226 - ------------------------------------------------------------------------------ Future net cash flows 16,283 10,254 2,784 2,076 402 767 10% annual discount 7,662 5,011 1,277 840 190 344 - ------------------------------------------------------------------------------ Discounted future net cash flows $ 8,621 5,243 1,507 1,236 212 423 ============================================================================== 1995 Future cash inflows $31,155 13,368 11,269 3,376 2,049 1,093 Less: Future production costs 8,508 3,988 3,061 689 355 415 Future development costs 2,437 811 1,133 349 78 66 Future income tax provisions 9,631 2,400 5,284 607 1,272 68 - ------------------------------------------------------------------------------ Future net cash flows 10,579 6,169 1,791 1,731 344 544 10% annual discount 4,912 2,792 843 858 166 253 - ------------------------------------------------------------------------------ Discounted future net cash flows $ 5,667 3,377 948 873 178 291 ============================================================================== 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 ============================================================================== 117 Sources of Change in Discounted Future Net Cash Flows Millions of Dollars --------------------------- 1996 1995 1994 --------------------------- Discounted future net cash flows at the beginning of the year $ 5,667 3,813 3,575 - ------------------------------------------------------------------ Changes during the year Revenues less production costs for the year (2,113) (1,569) (1,295) Net change in prices and production costs 5,866 2,917 786 Extensions, discoveries and improved recovery, less estimated future costs 1,061 1,215 345 Development costs for the year 695 668 515 Changes in estimated future development costs (311) (214) (49) Purchases of reserves in place, less estimated future costs 54 108 19 Sales of reserves in place, less estimated future costs (66) (77) (55) Revisions of previous quantity estimates (224) (113) 10 Accretion of discount 1,003 668 592 Net change in income taxes (3,013) (1,747) (630) Other 2 (2) - - ------------------------------------------------------------------ Total changes 2,954 1,854 238 - ------------------------------------------------------------------ Discounted future net cash flows at year-end $ 8,621 5,667 3,813 ================================================================== 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, along with extensions, discoveries and improved recovery, are calculated using production forecasts of the applicable reserve quantities for the year multiplied by the end of the year sales 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. 118 - ------------------------------------------------------------------- Selected Quarterly Financial Data Millions of Dollars --------------------------------------------- Sales Income Before and Other Income Taxes Net Net Income Operating and Kenai LNG Net Operating Per Share of Revenues Tax Settlement Income Income Common Stock --------------------------------------------- ------------ 1996 First $3,595 310 695 210 2.65 Second 3,937 443 221 221 .84 Third 3,852 435 187 208 .71 Fourth 4,347 413 200 252 .76 - ------------------------------------------------------------------- 1995 First $3,087 283 111 121 .43 Second 3,591 256 113 178 .42 Third 3,369 291 136 151 .52 Fourth 3,321 234 109 130 .42 - ------------------------------------------------------------------- In the above table, amounts for net income include certain special items. The impact of such items has been excluded in arriving at net operating income. These special items are shown in the following table. 119 Special Items by Quarter ---------------------------------------------- Millions of Dollars ---------------------------------------------- First Second Third Fourth ---------- ---------- ---------- ---------- 1996 1995 1996 1995 1996 1995 1996 1995 ---- ---- ---- ---- ---- ---- ---- ---- Property impairments $(45) - - (49) (25) - (113) (2) Kenai LNG tax settlement 565 - - - - - - - Net gains on asset sales - - 5 - 9 - - - Work force reduction charges (1) (5) - (8) 1 (5) (2) (13) Foreign currency gains (losses) - 1 - - 2 (2) 39 (2) Pending claims and settlements (28) - (1) - (13) (11) 24 (1) Other items (6) (6) (4) (8) 5 3 - (3) - -------------------------------------------------------------------- Total special items $485 (10) - (65) (21) (15) (52) (21) ==================================================================== 120 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 121 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information presented under the headings "Nominees for Election as Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the company's definitive proxy statement for the Annual Meeting of Stockholders on May 12, 1997, is incorporated herein by reference.* Information regarding the executive officers appears in Part I of this report on pages 24 and 25. 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 12, 1997, 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 Termination of Employment and Change-in-Control Arrangements Pension Plan Table Compensation of Directors and Nominees 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 12, 1997, 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 12, 1997, 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. 122 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 schedule listed in the Index to Financial Statements and Financial Statement Schedules, which appears on page 63, are filed as part of this annual report. 2. Exhibits -------- The exhibits listed in the Index to Exhibits, which appears on pages 125 through 128, are filed as a part of this annual report. (b) Reports on Form 8-K ------------------- During the three months ended December 31, 1996, the registrant did not file any reports on Form 8-K. 123 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) 1996 Deducted from asset accounts: Allowance for doubtful accounts and notes receivable $ 15 12 - 7 (c) 20 Deferred tax asset valuation allowance 155 56 (1) 2 208 - ------------------------------------------------------------------------------ 1995 Deducted from asset accounts: Allowance for doubtful accounts and notes receivable $ 20 2 - 7 (c) 15 Deferred tax asset valuation allowance 142 10 3 - 155 - ------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------ (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. 124 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 3(i) to Annual Report on Form 10-K for the year ended December 31, 1995). (ii) Bylaws of Phillips Petroleum Company, as amended effective December 9, 1996. 4(a) Indenture dated as of September 15, 1990, between Phillips Petroleum Company and First Trust National Association (formerly Continental Bank, National Association), relating to the 9 1/2% Notes due 1997 and the 9 3/8% Notes due 2011. (b) Indenture dated as of September 15, 1990, as supplemented by Supplemental Indenture No. 1 dated May 23, 1991, between Phillips Petroleum Company and First Trust National Association (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 4(c) to Annual Report on Form 10-K for the year ended December 31, 1995). (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). 125 PHILLIPS PETROLEUM COMPANY INDEX TO EXHIBITS (Continued) Exhibit Number Description - ------- ----------- The company incurred during 1996 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 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. Material Contracts 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, 1995). (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, 1995). (c) Trust Agreement dated December 12, 1995, between Phillips Petroleum Company and Vanguard Fiduciary Trust Company, as Trustee of the Phillips Petroleum Company Compensation and Benefits Arrangements Stock Trust (incorporated by reference to Exhibit 10(c) to Annual Report on Form 10-K for the year ended December 31, 1995). Management Contracts and Compensatory Plans or Arrangements (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). 126 PHILLIPS PETROLEUM COMPANY INDEX TO EXHIBITS (Continued) Exhibit Number Description - ------- ----------- 10(e) 1990 Stock Plan of Phillips Petroleum Company (incorporated by reference to Exhibit 10(e) to Annual Report on Form 10-K for the year ended December 31, 1995). (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 (incorporated by reference to Exhibit 10(g) to Annual Report on Form 10-K for the year ended December 31, 1994). (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, 1995). (i) Phillips Petroleum Company Supplemental Executive Retirement Plan. (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, 1995). (l) Omnibus Securities Plan of Phillips Petroleum Company. (m) Deferred Compensation Plan for Non-Employee Directors of Phillips Petroleum Company (incorporated by reference to Exhibit 10(m) to Annual Report on Form 10-K for the year ended December 31, 1995). (n) Key Employee Missed Credit Service Retirement Plan of Phillips Petroleum Company. 127 PHILLIPS PETROLEUM COMPANY INDEX TO EXHIBITS (Continued) Exhibit Number Description - ------- ----------- 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, 1996 (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, 1996 (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 for the fiscal year ended December 31, 1996 (to be filed by amendment pursuant to Rule 15d-21). 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 128 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 February 21, 1997 /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 February 21, 1997. 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 T. C. Morris and Chief Financial Officer (Principal financial officer) /s/ J. K. Wagner - --------------------------- Vice President and Controller J. K. Wagner (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 129 Signature Title --------- ----- /s/ David L. Boren - --------------------------- Director David L. Boren /s/ Robert E. Chappell, Jr. - --------------------------- Director Robert E. Chappell, Jr. /s/ Larry D. Horner - --------------------------- Director Larry D. Horner /s/ Randall L. Tobias - --------------------------- Director Randall L. Tobias /s/ Kathryn C. Turner - --------------------------- Director Kathryn C. Turner 130 EX-3 2 Exhibit 3(ii) BYLAWS PHILLIPS PETROLEUM COMPANY (INCORPORATED UNDER THE LAWS OF DELAWARE) DECEMBER 9, 1996 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 1975 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 any Executive Officer (as the term "Executive Officer" is defined from time to time under Rule 3b-7 of the Securities Exchange Act of 1934, as amended) or employee who has an annual salary of $250,000 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 in the performance of 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 Vice President with responsibility for the Company's government relations activities, 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 Vice President with responsibility for the Company's government relations activities (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 committees of such candidates, and other political committees supporting state or local candidates; provided, however, that the foregoing -30- 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-4 3 Exhibit 4(a) ====================================================== PHILLIPS PETROLEUM COMPANY, ISSUER AND CONTINENTAL BANK, NATIONAL ASSOCIATION, TRUSTEE ----------- INDENTURE Dated as of September 15, 1990 ----------- ====================================================== TIE-SHEET of provisions of Trust Indenture Act of 1939 with Indenture dated as of September 15, 1990 between Phillips Petroleum Company and Continental Bank, National Association, Trustee: Section of Act Section of Indenture -------------- -------------------- 310(a)(1) and (2)...................... 6.09 310(a)(3) and (4) ..................... Not applicable 310(b)................................. 6.08 and 6.10(a)(b) and (d) 310(c)................................. Not applicable 311(a) and (b)......................... 6.13 311(c)................................. Not applicable 312(a)................................. 4.01 and 4.02(a) 312(b) and (c)......................... 4.02(b) and (c) 313(a)................................. 4.04(a) 313(b)(1).............................. Not applicable 313(b)(2).............................. 4.04(b) 313(c)................................. 4.04(c) 313(d)................................. 4.04(d) 314(a)................................. 4.03 314(b)................................. Not applicable 314(c)(1) and (2)...................... 13.05 314(c)(3).............................. Not applicable 314(d)................................. Not applicable 314(e)................................. 13.05 314(f)................................. Not applicable 315(a) (c) and (d)..................... 6.01 315(b)................................. 5.08 315(e)................................. 5.09 316(a)(1).............................. 5.01 and 5.07 316(a)(2).............................. Omitted 316(a) last sentence................... 7.04 316(b)................................. 5.04 317(a)................................. 5.02 317(b)................................. 3.04(a) 318(a)................................. 13.07 - --------------- This tie-sheet is not part of the Indenture as executed. TABLE OF CONTENTS* ------------- PAGE ---- PARTIES.................................................... 1 RECITALS................................................... 1 Authorization of Indenture............................. 1 Compliance with Legal Requirements..................... 1 Purpose of and Consideration for Indenture............. 1 ARTICLE ONE. DEFINITIONS. SECTION 1.01. Definitions.................................. 1 Attributable Debt.......................... 2 Authenticating Agent....................... 2 Board of Directors......................... 2 Company.................................... 2 Consolidated Adjusted Net Assets........... 3 Event of Default........................... 3 Funded Debt................................ 3 Indenture.................................. 3 Interest................................... 3 Mortgage................................... 3 Officers' Certificate...................... 4 Opinion of Counsel......................... 4 Original Issue Date........................ 4 Original Issue Discount Security........... 4 Person..................................... 4 Principal Office of the Trustee............ 4 Responsible Officer........................ 5 Restricted Property........................ 5 Restricted Subsidiary...................... 5 Security or Securities; Outstanding........ 5 Securityholder............................. 6 Subsidiary................................. 7 Trustee.................................... 7 Trust Indenture Act of 1939................ 7 U.S. Government Obligations................ 7 Yield to Maturity.......................... 8 - ------------------ * This table of contents shall not, for any purpose, be deemed to be a part of the Indenture. ii PAGE ---- ARTICLE TWO. SECURITIES. SECTION 2.01. Forms Generally............................. 8 SECTION 2.02. Form of Trustee's Certificate of Authentication............................ 8 SECTION 2.03. Amount Unlimited: Issuable in Series........ 9 SECTION 2.04. Authentication and Dating................... 10 SECTION 2.05. Date and Denomination of Securities......... 12 SECTION 2.06. Execution of Securities..................... 13 SECTION 2.07. Exchange and Registration of Transfer of Securities................................ 13 SECTION 2.08. Mutilated, Destroyed, Lost or Stolen Securities................................ 14 SECTION 2.09. Temporary Securities........................ 16 SECTION 2.10. Cancellation of Securities Paid, etc........ 16 ARTICLE THREE. PARTICULAR COVENANTS OF THE COMPANY. SECTION 3.01. Payment of Principal, Premium and Interest.. 17 SECTION 3.02. Offices for Notices and Payments, etc....... 17 SECTION 3.03. Appointments to Fill Vacancies in Trustee's Office.................................... 18 SECTION 3.04. Provision as to Paying Agent................ 18 SECTION 3.05. Limitation on Liens......................... 19 SECTION 3.06. Limitation on Sales and Leasebacks.......... 20 SECTION 3.07. Certificate to Trustee...................... 22 ARTICLE FOUR. SECURITYHOLDERS' LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE. SECTION 4.01. Securityholders' Lists...................... 22 SECTION 4.02. Preservation and Disclosure of Lists........ 22 SECTION 4.03. Reports by Company.......................... 24 SECTION 4.04. Reports by Trustee.......................... 25 ARTICLE FIVE. REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS ON EVENT OF DEFAULT. SECTION 5.01. Events of Default........................... 27 SECTION 5.02. Payment of Securities on Default; Suit Therfor................................... 30 SECTION 5.03. Application of Moneys Collected by Trustee.. 32 SECTION 5.04. Proceedings by Securityholders.............. 33 SECTION 5.05. Proceedings by Trustee...................... 34 SECTION 5.06. Remedies of Cumulative and Continuing....... 34 iii PAGE ---- SECTION 5.07. Direction of Proceedings and Waiver of Defaults by Majority of Securityholders... 34 SECTION 5.08. Notice of Defaults.......................... 35 SECTION 5.09. Undertaking to Pay Costs.................... 36 ARTICLE SIX. CONCERNING THE TRUSTEE. SECTION 6.01. Duties and Responsibilities of Trustee...... 36 SECTION 6.02. Reliance on Documents, Opinions, etc........ 38 SECTION 6.03. No Responsibility for Recitals, etc......... 39 SECTION 6.04. Trustee, Authenticating Agent, Paying Agents, Transfer Agents or Registrar may Own Securities............................ 39 SECTION 6.05. Moneys to be Held in Trust.................. 39 SECTION 6.06. Compensation and Expenses of Trustee........ 40 SECTION 6.07. Officers' Certificate as Evidence........... 40 SECTION 6.08. Conflicting Interest of Trustee............. 41 SECTION 6.09. Eligibility of Trustee...................... 47 SECTION 6.10. Resignation or Removal of Trustee........... 47 SECTION 6.11. Acceptance by Successor Trustee............. 49 SECTION 6.12. Succession by Merger, etc................... 50 SECTION 6.13. Limitation on Rights of Trustee as a Creditor.................................. 51 SECTION 6.14. Authenticating Agents....................... 55 ARTICLE SEVEN. CONCERNING THE SECURITYHOLDERS. SECTION 7.01. Action by Securityholders................... 57 SECTION 7.02. Proof of Execution by Securityholders....... 57 SECTION 7.03. Who Are Deemed Absolute Owners.............. 57 SECTION 7.04. Securities Owned by Company Deemed Not Outstanding............................... 58 SECTION 7.05. Revocation of Consents; Future Holders Bound 58 ARTICLE EIGHT. SECURITYHOLDERS' MEETINGS. SECTION 8.01. Purposes of Meetings........................ 59 SECTION 8.02. Call of Meetings by Trustee................. 59 SECTION 8.03. Call of Meetings by Company or Security- holders................................... 60 SECTION 8.04. Qualifications for Voting................... 60 SECTION 8.05. Regulations................................. 60 SECTION 8.06. Voting...................................... 61 iv PAGE ---- ARTICLE NINE. SUPPLEMENTAL INDENTURES. SECTION 9.01. Supplemental Indentures without Consent of Securityholders........................... 62 SECTION 9.02. Supplemental Indentures with Consent of Securityholders........................... 63 SECTION 9.03. Compliance with Trust Indenture Act; Effect of Supplemental Indentures................ 65 SECTION 9.04. Notation on Securities...................... 65 SECTION 9.05. Evidence of Compliance of Supplemental Indenture to be Furnished Trustee......... 65 ARTICLE TEN. CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE. SECTION 10.01. Company May Consolidate, etc., on Certain Terms..................................... 66 SECTION 10.02. Successor Corporation to be Substituted for Company................................... 66 SECTION 10.03. Securities to be Secured in Certain Events.. 67 SECTION 10.04. Opinion of Counsel to be Given Trustee...... 67 ARTICLE ELEVEN. SATISFACTION AND DISCHARGE OF INDENTURE. SECTION 11.01. Discharge of Indenture...................... 68 SECTION 11.02. Deposited Moneys and U.S. Government Obligations to be Held in Trust by Trustee................................... 68 SECTION 11.03. Paying Agent to Repay Moneys Held........... 69 SECTION 11.04. Return of Unclaimed Moneys.................. 69 SECTION 11.05. Defeasance Upon Deposit of Moneys or U.S. Government Obligation..................... 69 ARTICLE TWELVE. IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS. SECTION 12.01. Indenture and Securities Solely Corporate Obligations............................... 71 ARTICLE THIRTEEN. MISCELLANEOUS PROVISIONS. SECTION 13.01. Successors.................................. 72 SECTION 13.02. Official Acts by Successor Corporation...... 72 v PAGE ---- SECTION 13.03. Addresses for Notices, etc.................. 72 SECTION 13.04. New York Contract........................... 72 SECTION 13.05. Evidence of Compliance with Conditions Precedent................................. 72 SECTION 13.06. Legal Holidays.............................. 73 SECTION 13.07. Trust Indenture Act to Control.............. 73 SECTION 13.08. Table of Contents, Headings, etc............ 73 SECTION 13.09. Execution in Counterparts................... 73 ARTICLE FOURTEEN. REDEMPTION OF SECURITIES--MANDATORY AND OPTIONAL SINKING FUND. SECTION 14.01. Applicability of Article.................... 74 SECTION 14.02. Notice of Redemption; Selection of Securities................................ 74 SECTION 14.03. Payment of Securities Called for Redemption. 75 SECTION 14.04. Mandatory and Optional Sinking Fund......... 75 TESTIMONIUM................................................ 79 SIGNATURES................................................. 79 ACKNOWLEDGMENTS............................................ 80 THIS INDENTURE, dated as of , 1990, between PHILLIPS PETROLEUM COMPANY, a Delaware corporation (hereinafter sometimes called the "Company"), and Continental Bank, National Association, as trustee (hereinafter sometimes called the "Trustee"), WITNESSETH: WHEREAS, for its lawful corporate purposes, the Company has duly authorized the issue from time to time of its unsecured debentures, notes or other evidence of indebtedness to be issued in one or more series (the "Securities") up to such principal amount or amounts as may from time to time be authorized in accordance with the terms of this Indenture and, to provide the terms and conditions upon which the Securities are to be authenticated, issued and delivered, the Company has duly authorized the execution of this Indenture; and WHEREAS, all acts and things necessary to make this Indenture a valid agreement according to its terms, have been done and performed; NOW, THEREFORE, THIS INDENTURE WITNESSETH: In consideration of the premises, and the purchase of the Securities by the holders thereof, the Company covenants and agrees with the Trustee for the equal and proportionate benefit of the respective holders from time to time of the Securities or of a series thereof, as follows: ARTICLE ONE. DEFINITIONS. SECTION 1.01. Definitions. The terms defined in this Section 1.01 (except as herein otherwise expressly provided or unless the context otherwise requires) for all purposes of this Indenture and of any indenture supplemental hereto shall have the respective meanings specified in this Section 1.01. All other terms used in this Indenture which are defined in the Trust Indenture Act of 1939, as amended, or which are by reference therein defined in the Securities Act of 1933, as amended, shall (except as herein otherwise expressly provided or unless the context otherwise requires) have the meanings assigned to such terms in said Trust Indenture Act and in said Securities Act as in force at the date of this Indenture as originally executed. All accounting terms used herein and not expressly defined shall have the meanings assigned to such terms in accordance with generally 2 accepted accounting principles and the term "generally accepted accounting principles" means such accounting principles as are generally accepted at the time of any computation. The words "herein", "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. Attributable Debt: The term "Attributable Debt" shall mean, as to any particular lease under which any Person is at the time liable, at any date as of which the amount thereof is to be determined, the total net amount of rent (discounted from the respective due dates thereof at the rate per annum equal to the interest rate borne by the Securities, or, in the case of Original Issue Discount Securities, equal to the Yield to Maturity, in each case compounded semi-annually) required to be Paid by such Person under such lease during the remaining term thereof. The net amount of rent required to be paid under any such lease for any such period shall be the total amount of the rent payable by the lessee with respect to such period, but may exclude amounts required to be paid on account of maintenance and repairs, insurance, taxes, assessments, water rates and similar charges. In the case of any lease which is terminable by the lessee upon the payment of a penalty, such net amount shall also include the amount of such penalty, but no rent shall be considered as required to be paid under such lease subsequent to the first date upon which it may be so terminated. Authenticating Agent: The term "Authenticating Agent" shall mean any agent or agents of the Trustee which at the time shall be appointed and acting pursuant to Section 6.14. Board of Directors: The term "Board of Directors" shall mean the Board of Directors or the Executive Committee or any other duly authorized committee thereof of the Company. Company: The term "Company" shall mean Phillips Petroleum Company, a Delaware corporation, and, subject to the Provisions of Article Ten, shall include its successors and assigns. 3 Consolidated Adjusted Net Assets: The term "Consolidated Adjusted Net Assets" shall mean the total amount of assets after deducting therefrom (a) all current liabilities (excluding any thereof which are by their terms extendible or renewable at the option of the obligor thereon to a time more than 12 months after the time as of which the amount thereof is being computed), and (b) total prepaid expenses and deferred charges. Event of Default: The term "Event of Default" shall mean any event specified in Section 5.01, continued for the period of time, if any, and after the giving of the notice, if any, therein designated. Funded Debt: The term "Funded Debt" shall mean all indebtedness for money borrowed having a maturity of more than 12 months from the date as of which the amount thereof is to be determined or having a maturity of less than 12 months but by its terms being renewable or extendible beyond 12 months from such date at the option of the borrower. Indenture: The term "Indenture" shall mean this instrument as originally executed or, if amended or supplemented as herein provided, as so amended or supplemented, or both, and shall include the form and terms of particular series of Securities established an contemplated hereunder. Interest: The term "Interest" shall mean, when used with respect to non- interest bearing Securities, interest payable after maturity. Mortgage: The term "Mortgage" shall mean and include any mortgage, pledge, lien, security interest, conditional sale or other title retention agreement or other similar encumbrance. 4 Officers' Certificate: The term "Officers' Certificate" shall mean a certificate signed by the Chairman of the Board, the President or any Vice President, and by the Treasurer, an Assistant Treasurer, the Comptroller, an Assistant Comptroller, the Secretary or an Assistant Secretary of the Company and delivered to the Trustee. Opinion of Counsel: The term "Opinion of Counsel" shall mean an opinion in writing signed by legal counsel, who may be an employee of or counsel to the Company, or may be other counsel satisfactory to the Trustee. Each such opinion shall inside the statements provided for in Section 13.05 if and to the extent required by the provisions of such Section. Original Issue Date: The term "Original Issue Date" of any Security (or any portion thereof) shall mean the earlier of (a) the date of such Security or (b) the date of any Security (or portion thereof) for which such Security was issued (directly or indirectly) on registration of transfer, exchange or substitution. Original Issue Discount Security: The term "Original Issue Discount Security" shall mean any Security which provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration of the maturity thereof pursuant to Section 5.01. Person: The term "Person" shall mean any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. Principal Office of the Trustee: The term "principal office of the Trustee", or other similar term, shall mean the principal office of the Trustee, at which at any particular time its corporate trust business shall be administered. 5 Responsible Officer: The term "Responsible Officer", when used with respect to the Trustee, shall mean the chairman and vice chairman of the board of directors, the chairman or vice-chairman of the executive committee of the board of directors, the president, any vice president, the cashier, any assistant cashier, the secretary, any assistant secretary, the treasurer, any assistant treasurer, any senior trust officer, any trust officer, the controller, any assistant controller or any other officer or assistant officer of the Trustee customarily performing functions similar to those performed by the persons who at the time shall be such officers, respectively, or to whom any corporate trust matter is referred because of his knowledge of and familiarity with the particular subject. Restricted Property: The term "Restricted Property" shall mean (a) any interest in property located in the United States (including any interest in property located off the coast of the United States operated pursuant to leases from any governmental body) which is producing crude oil, natural gas or natural gas liquids in paying quantities or (b) any refining or manufacturing plant located in the United States, except (1) related facilities employed in transportation or marketing or (2) any refining or manufacturing plant, or any portion thereof, which, in the opinion of the Board of Directors, is not a principal plant in relation to the activities of the Company and its Restricted Subsidiaries as a whole. Restricted Subsidiary: The term "Restricted Subsidiary" shall mean any Subsidiary which owns a Restricted Property if substantially all of the tangible property in which such Subsidiary has an interest is (a) located in the United States or (b) is located off the coast of the United States and is operated pursuant to leases from any governmental body. Security or Securities; Outstanding: The terms "Security" or "Securities" shall have the meaning stated in the first recital of this Indenture and more particularly means any security or securities, as the case may be, authenticated and delivered under this Indenture. 6 The term "outstanding" (except as otherwise provided in Section 6.08), when used with reference to Securities, shall, subject to the provisions of Section 7.04. mean, as of any particular time, all Securities authenticated and delivered by the Trustee or the Authenticating Agent under this Indenture, except (a) Securities theretofore cancelled by the Trustee or the Authenticating Agent or delivered to the Trustee for cancellation; (b) Securities, or portions thereof, for the payment or redemption of which moneys in the necessary amount shall have been deposited in trust with the Trustee or with any paying agent (other than the Company) or shall have been set aside and segregated in trust by the Company (if the Company shall act as its own paying agent), provided that, if such Securities, or portions thereof, are to be redeemed prior to maturity thereof, notice of such redemption shall have been given as in Article Fourteen provided or provision satisfactory to the Trustee shall have been made for giving such notice; and (c) Securities in lieu of or in substitution for which other Securities shall have been authenticated and delivered pursuant to the terms of Section 2.08 unless proof satisfactory to the Company and the trustee is presented that any such Securities are held by bona fide holders in due course. In determining whether the holders of the requisite principal amount of outstanding Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder, the principal amount of an Original Issue Discount Security that shall be deemed to be outstanding for such purposes shall be the amount of the principal thereof that would be due and payable as of the date of such determination upon a declaration of acceleration of the maturity thereof pursuant to Section 5.01. Securityholder: The terms "Securityholder", "holder of Securities", or other similar terms, shall mean any person in whose name at the time a particular Security is registered on the register kept by the Company or the Trustee for that purpose in accordance with the terms hereof. 7 Subsidiary: The term "Subsidiary" shall mean a corporation a majority of the outstanding voting stock of which is owned, directly or indirectly, by the Company or by one or more other Subsidiaries, or by the Company and one or more other Subsidiaries. For the purposes of this definition, "voting stock" means stock having voting power for the election of directors, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency. Trustee: The term "Trustee" shall mean the Person identified as "Trustee" in the first paragraph hereof, and, subject to the provisions of Article Six hereof, shall also include its successors and assigns as Trustee hereunder. Trust Indenture Act of 1939: The term "Trust Indenture Act of 1939" shall mean the Trust Indenture Act of 1939 as in force at the date of execution of this Indenture, except as provided in Section 9.03. U.S. Government Obligations: The term "U.S. Government Obligations" shall mean securities that are (i) direct obligations of the United States of America for the payment of which its full faith and credit is pledged or (ii) obligations of an entity controlled or supervised by and acting as an agency or instrumentality of the United States of America the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case under clauses (i) or (ii) are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank or trust company as custodian with respect to any such U.S. Government Obligation or a specific payment of interest on or principal of any such U.S. Government Obligation held by such custodian for the account of the holder of a depository receipt, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of interest on or principal of the U.S. Government Obligation evidenced by such depository receipt. 8 Yield to Maturity: The term "Yield to Maturity" shall mean the yield to maturity on a series of Securities, calculated at the time of issuance of such series of Securities, or if applicable, at the most recent redetermination of interest on such series and calculated in accordance with accepted financial practice. ARTICLE TWO. SECURITIES. SECTION 2.01. Forms Generally. The Securities of each series shall be in substantially the form as shall be established by or pursuant to a resolution of the Board of Directors or in one or more indentures supplemental hereto, in each case with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with any law or with any rules made pursuant thereto or with any rules of any securities exchange or all as may, consistently herewith, be determined by the officers executing such Securities, as evidenced by their execution of the Securities. The definitive Securities shall be printed, lithographed or engraved on steel engraved borders or may be produced in any other manner, all as determined by the officers executing such Securities, as evidenced by their execution of such Securities. SECTION 2.02. Form of Trustee's Certificate of Authentication. The Trustee's certificate of authentication on all Securities shall be in substantially the following form: This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture. CONTINENTAL BANK, NATIONAL ASSOCIATION as Trustee By......................... Authorized Officer 9 SECTION 2.03. Amount Unlimited; Issuable in Series. The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is unlimited. The Securities may be issued in one or more series. There shall be established in or pursuant to a resolution of the Board of Directors or established in one or more indentures supplemental hereto, prior to the issuance of Securities of any series, (1) the title of the Securities of the series (which shall distinguish the Securities of the series from all other Securities); (2) any limit upon the aggregate Principal amount of the Securities of the series which may be authenticated and delivered under this Indenture (except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities of the series pursuant to Section 2.07, 2.08, 2.09, 9.04 or 14.03); (3) the date or dates on which the principal of and premium, if any, on the Securities of the series is payable; (4) the rate or rates at which the Securities of the series shall bear interest, if any, or the method by which such interest may be determined, the date or dates from which such interest shall accrue, the interest payment dates on which such interest shall be payable and the record dates for the determination of holders to whom interest is payable; (5) the place or places where the principal of, and premium, if any, and any interest on Securities of the series shall be payable; (6) the price or prices at which, the period or periods within which and the terms and conditions upon which Securities of the series may be redeemed, in whole or in part, at the option of the Company, pursuant to any sinking fund or otherwise; (7) the obligation, if any, of the Company to redeem, purchase or repay Securities of the series pursuant to any sinking fund or analogous provisions or at the option of a Securityholder thereof and the price or prices at which and the period or periods within which and the 10 terms and conditions upon which Securities of the series shall be redeemed, purchased or repaid, in whole or in part, pursuant to such obligation; (8) if other than denominations of $1,000 and any integral multiple thereof, the denominations in which Securities of the series shall be issuable; (9) if other than the principal amount thereof, the portion of the principal amount of Securities of the series which shall be payable upon declaration of acceleration of the maturity thereof pursuant to Section 5.01 or provable in bankruptcy pursuant to Section 5.02; (10) any Events of Default with respect to the Securities of a particular series, if not set forth herein; (11) any trustee, authenticating or paying agents, warrant agents, transfer agents or registrars with respect to the Securities of such series; (12) whether the Securities of the series shall be issued in whole or in part in the form of one or more global Securities and, in such case, the depositary for such global Security or Securities, and whether beneficial owners of interests in any such global Securities may exchange such interests for other Securities of such series in the manner provided in Section 2.07, and the manner and the circumstances under which and the place or places where any such exchanges may occur if other than in the manner provided in Section 2.07, and any other terms of the series relating to the global nature of the Securities of such series and the exchange, registration or transfer thereof and the payment of any principal thereof, or interest or premium, if any, thereon; and (13) any other terms of the series (which terms shall not be inconsistent with the provisions of this Indenture). All Securities of any one series shall be substantially identical except as to denomination and except as may otherwise be provided in or pursuant to such resolution of the Board of Directors or in any such indenture supplemental hereto. SECTION 2.04. Authentication and Dating. At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities of any series executed by the Company to 11 the Trustee for authentication, and the Trustee shall thereupon authenticate and deliver said Securities to or upon the written order of the Company, signed by its Chairman of the Board of Directors, President or one of its Vice Presidents and by its Treasurer or any Assistant Treasurer, without any further action by the Company hereunder. In authenticating such Securities, and accepting the additional responsibilities under this Indenture in relation to such Securities, the Trustee shall be entitled to receive, and (subject to Section 6.01) shall be fully protected in relying upon: (1) a copy of any resolution or resolutions of the Board of Directors relating thereto and, if applicable, an appropriate record of any action taken pursuant to such resolution, in each case certified by the Secretary or an Assistant Secretary of the Company; (2) an executed supplemental indenture, if any; (3) an Officers' Certificate setting forth the form and terms of the Securities as required pursuant to Sections 2.01 and 2.03, respectively; and (4) an Opinion of Counsel prepared in accordance with Section 13.05 which shall also state (a) that the form of such Securities has been established by or pursuant to a resolution of the Board of Directors or by a supplemental indenture as permitted by Section 2.01 in conformity with the provisions of this Indenture; (b) that the terms of such Securities have been established by or pursuant to a resolution of the Board of Directors or by a supplemental indenture as permitted by Section 2.03 in conformity with the provisions of this Indenture; (c) that such Securities, when authenticated and delivered by the Trustee and issued by the Company in the manner and subject to any conditions specified in such Opinion of Counsel, will constitute valid and legally binding obligations of the Company; (d) that all laws and requirements in respect of the execution and delivery by the Company of the Securities have been complied with and that authentication and delivery of the Securities by the Trustee will not violate the terms of the Indenture; and 12 (e) such other matters as the Trustee may reasonably request. The Trustee shall have the right to decline to authenticate and deliver any Securities under this Section if the Trustee, being advised by counsel, determines that such action may not lawfully be taken or if the Trustee in good faith by its board of directors or trustees, executive committee, or a trust committee of directors or trustees and/or vice presidents shall determine that such action would expose the Trustee to personal liability to existing holders. SECTION 2.05. Date and Denomination of Securities. The Securities shall be issuable as registered Securities without coupons and in such denominations as shall be specified as contemplated by Section 2.03. In the absence of any such specification with respect to the Securities of any series, the Securities of such Series shall be issuable in the denominations of $1,000 and any multiple thereof. The Securities shall be numbered, lettered, or otherwise distinguished in such manner or in accordance with such plans as the officers of the Company executing the same may determine with the approval of the Trustee as evidenced by the execution and authentication thereof. Every Security shall be dated the date of its authentication, shall bear interest, if any from such date and shall be payable on such dates, in each case, as contemplated by Section 2.03. The person in whose name any Security of any series is registered at the close of business on any record date (as hereinafter defined) with respect to any interest payment date shall be entitled to receive the interest, if any, payable on such interest payment date notwithstanding the cancellation of such Security upon any transfer or exchange subsequent to the record date and prior to such interest payment date; provided, however, that if and to the extent the Company shall default in the payment of the interest due on such interest payment date, such defaulted interest shall be paid to the persons in whose names outstanding Securities are registered on a subsequent record date established by notice given by mail by or on behalf of the Company to the holders of Securities not less than 15 days preceding such subsequent record date, such subsequent record date to be not less than 5 days preceding the date of payment of such defaulted interest. The term "record date" as used in this Section with respect to any interest payment date shall mean if such interest payment date is the first day of a calendar month, the fifteenth day of the next preceding calendar month and shall mean, if such interest payment date is the fifteenth day of a 13 calendar month, the first day of such calendar month, whether or not such record date is a business day. SECTION 2.06. Execution of Securities. The Securities shall be signed in the name and on behalf of the Company by the facsimile signature of its Chairman of the Board of Directors, President or one of its Vice Presidents and by the facsimile signature of its Treasurer or one of its Assistant Treasurers, under its corporate seal which may be affixed thereto or printed, engraved or otherwise reproduced thereon, by facsimile or otherwise, and which need not be attested. Only such Securities as shall bear thereon a certificate of authentication substantially in the form hereinbefore recited, executed by the Trustee or the Authenticating Agent, shall be entitled to the benefits of this Indenture or be valid or obligatory for any purpose. Such certificate by the Trustee or the Authenticating Agent upon any Security executed by the Company shall be conclusive evidence that the Security so authenticated has been duly authenticated and delivered hereunder and that the holder is entitled to the benefits of this Indenture. In case any officer of the Company who shall have signed any of the Securities shall cease to be such officer before the Securities so signed shall have been authenticated and delivered by the Trustee or the Authenticating Agent, or disposed of by the Company, such Securities nevertheless may be authenticated and delivered or disposed of as though the person who signed such Securities had not ceased to be such officer of the Company; and any Security may be signed on behalf of the Company by such persons as, at the actual date of the execution of such Security, shall be the proper officers of the Company, although at the date of the execution of this Indenture any such person was not such an officer. SECTION 2.07. Exchange and Registration of Transfer of Securities. Subject to Section 2.03(12), Securities of any series may be exchanged for a like aggregate principal amount of Securities of the same series of other authorized denominations. Securities to be exchanged may be surrendered at the principal office of the Trustee or at any office or agency to be maintained by the Company for such purpose as provided in Section 3.02, and the Company or the Trustee shall execute and register and the Trustee or the Authenticating Agent shall authenticate and deliver in exchange therefor the Security or Securities which the Securityholder making the exchange shall be entitled to receive. Upon due presentment for registration of transfer of any Security of any series at the principal office of the 14 Trustee or at any office or agency of the Company maintained for such purpose as provided in Section 3.02, the Company or the Trustee shall execute and register and the Trustee or the Authenticating Agent shall authenticate and deliver in the name of the transferee or transferees a new Security or Securities of the same series for a like aggregate principal amount. Registration or registration of transfer of any Security by the Trustee or by any agent of the Company appointed pursuant to Section 3.02, and delivery of such Security, shall be deemed to complete the registration or registration of transfer of such Security. The Company or the Trustee shall keep, at the principal office of the Trustee, a register for each series of Securities issued hereunder in which, subject to such reasonable regulations as it may prescribe, the Company or the Trustee shall register all Securities and shall register the transfer of all Securities as in this Article Two provided. Such register shall be in written form or in any other form capable of being converted into written form within a reasonable time. All Securities presented for registration of transfer or for exchange or payment shall (if so required by the Company or the Trustee or the Authenticating Agent) be duly endorsed by, or be accompanied by a written instrument or instruments of transfer in form satisfactory to the Company and the Trustee or the Authenticating Agent duly executed by, the holder or his attorney duly authorized in writing. No service charge shall be made for any exchange or registration of transfer of Securities, but the Company or the Trustee may require payment of a sum sufficient to cover any tax, fee or other governmental charge that may be imposed in connection therewith. The Company or the Trustee shall not be required to exchange or register a transfer of (a) any Security for a period of 15 days next preceding the date of selection of Securities of such series for redemption, or (b) any Securities of any series selected, called or being called for redemption in whole or in part, except in the case of any Securities of any series to be redeemed in part, the portion thereof not so to be redeemed. SECTION 2.08. Mutilated, Destroyed, Lost or Stolen Securities. In case any temporary or definitive Security shall become mutilated or be destroyed, lost or stolen, the Company shall execute, and upon its request, the Trustee shall authenticate and deliver, a new Security of the same series bearing a number not contemporaneously outstanding, in exchange and 15 substitution for the mutilated Security, or in lieu of and in substitution for the Security so destroyed, lost or stolen. In every case the applicant for a substituted Security shall furnish to the Company and the Trustee such security or indemnity as may be required by them to save each of them harmless, and, in every case of destruction, loss or theft, the applicant shall also furnish to the Company and the Trustee evidence to their satisfaction of the destruction, loss or theft of such Security and of the ownership thereof. The Trustee may authenticate any such substituted Security and deliver the same upon the written request or authorization of any officer of the Company. Upon the issuance of any substituted Security, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses connected therewith. In case any Security which has matured or is about to mature or has been called for redemption in full shall become mutilated or be destroyed, lost or stolen, the Company may, instead of issuing a substitute Security, pay or authorize the payment of the same (without surrender thereof except in the case of a mutilated Security) if the applicant for such payment shall furnish to the Company and the Trustee such security or indemnity as may be required by them to save each of them harmless and, in case of destruction, loss or theft, evidence satisfactory to the Company and to the Trustee of the destruction, loss or theft of such Security and of the ownership thereof. Every substituted Security of any series issued pursuant to the provisions of this Section 2.08 by virtue of the fact that any such Security is destroyed, lost or stolen shall constitute an additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be found at any time, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities of the same series duly issued hereunder. All Securities shall be held and owned upon the express condition that, to the extent permitted by applicable law, the foregoing provisions are exclusive with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities and shall preclude any and all other rights or remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement or payment of negotiable instruments or other securities without their surrender. 16 SECTION 2.09. Temporary Securities. Pending the preparation of definitive Securities of any series the Company may execute and the Trustee shall authenticate and deliver temporary Securities (printed or lithographed). Temporary Securities shall be issuable in any authorized denomination, and substantially in the form of the definitive Securities but with such omissions, insertions and variations as may be appropriate for temporary Securities, all as may be determined by the Company. Every such temporary Security shall be executed by the Company and be authenticated by the Trustee upon the same conditions and in substantially the same manner, and with the same effect, as the definitive Securities. Without unreasonable delay the Company will execute and deliver to the Trustee or the Authenticating Agent definitive Securities and thereupon any or all temporary Securities of such series may be surrendered in exchange therefor, at the principal office of the Trustee or at any office or agency maintained by the Company for such Purpose as provided in Section 3.02, and the Trustee or the Authenticating Agent shall authenticate and deliver in exchange for such temporary Securities a like aggregate principal amount of such definitive Securities. Such exchange shall be made by the Company at its own expense and without any charge therefor except that in case of any such exchange involving a registration of transfer the Company may require payment of a sum sufficient to cover any tax, fee or other governmental charge that may be imposed in relation thereto. Until so exchanged, the temporary Securities of any series shall in all respects be entitled to the same benefits under this Indenture as definitive Securities of the same series authenticated and delivered hereunder. SECTION 2.10. Cancellations of Securities Paid, etc. All Securities surrendered for the purpose of payment, redemption, exchange or registration of transfer, shall, if surrendered to the Company or any paying agent, be surrendered to the Trustee and promptly cancelled by it, or, if surrendered to the Trustee or any Authenticating Agent, shall be promptly cancelled by it, and no Securities shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Indenture. All Securities cancelled by any Authenticating Agent shall be delivered to the Trustee. The Trustee shall destroy cancelled Securities and shall deliver a certificate of such destruction to the Company. If the Company shall acquire any of the Securities, however, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Securities unless and until the same am surrendered to the Trustee for cancellation. 17 ARTICLE THREE. PARTICULAR COVENANTS OF THE COMPANY. SECTION 3.01. Payment of Principal, Premium and Interest. The Company covenants and agrees for the benefit of each series of Securities that it will duly and punctually pay or cause to be paid the principal of and premium, if any, and interest on each of the Securities of that series at the place, at the respective times and in the manner provided in such Securities. Each installment of interest on the Securities of any series may be paid by mailing checks for such interest payable to the order of the holders of Securities entitled thereto as they appear on the registry books of the Company. SECTION 3.02. Offices for Notices and Payments, etc. So long as any of the Securities remains outstanding, the Company will maintain in the Borough of Manhattan, The City of New York and in Chicago, Illinois, an office or agency where the Securities of each series may be presented for payment, an office or agency where the Securities of that Series may be presented for registration of transfer and for exchange as in this Indenture provided and an office or agency where notices and demands to or upon the Company in respect of the Securities of that Series or of this Indenture may be served. The Company will give to the Trustee written notice of the location of any such office or agency and of any change of location thereof. Until otherwise designated from time to time by the Company in a notice to the Trustee, or specified as contemplated by Section 2.03, any such office or agency for all of the above purposes shall be the office or agency of the Trustee. In case the Company shall fail to maintain any such office or agency in the Borough of Manhattan, The City of New York and in Chicago, Illinois, or shall fail to give such notice of the location or of any change in the location thereof, presentations and demands may be made and notices may be served at the principal office of the Trustee. In addition to any such office or agency, the Company may from time to time designate one or more offices or agencies outside the Borough of Manhattan, The City of New York or Chicago, Illinois, where the Securities may be presented for registration of transfer and for exchange in the manner provided in this Indenture, and the Company may from time to time rescind such designation, as the Company may deem desirable or expedient; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain any such office or agency in the Borough of Manhattan, The City of New York and in Chicago, 18 Illinois, for the purposes above mentioned. The Company will give to the Trustee prompt written notice of any such designation or rescission thereof. SECTION 3.03. Appointments to Fill Vacancies in Trustee's Office. The Company, whenever necessary to avoid or fill a vacancy in the office of Trustee, will appoint, in the manner provided in Section 6.10, a Trustee, so that there shall at all times be a Trustee hereunder. Section 3.04. Provision as to Paying Agent. (a) If the Company shall appoint a paying agent other than the Trustee with respect to the Securities of any series, it will cause such paying agent to execute and deliver to the Trustee an instrument in which such agent shall agree with the Trustee, subject to the provision of this Section 3.04, (1) that it will hold all sums held by it as such agent for the payment of the principal of and premium, if any, or interest, if any, on the Securities of such series (whether such sums have been paid to it by the Company or by any other obligor on the Securities of such series) in trust for the benefit of the holders of the Securities of such series; and (2) that it will give the Trustee notice of any failure by the Company (or by any other obligor on the Securities of such series) to make any payment of the principal of and Premium, if any, or interest, if any, on the Securities of such series when the same shall be due and payable. (b) If the Company shall act as its own paying agent, it will, on or before each due date of the principal of and premium, if any, or interest, if any, on the Securities of any series, set aside, segregate and hold in trust for the benefit of the holders of the Securities of such series a sum sufficient to pay such principal, premium or interest so becoming due and will notify the Trustee of any failure to take such action and of any failure by the Company (or by any other obligor under the Securities of such series) to make any payment of the principal of and premium, if any, or interest, if any, on the Securities of such series when the same shall become due and payable. (c) Anything in this Section 3.04 to the contrary notwithstanding, the Company may, at any time, for the purpose of obtaining a satisfaction and discharge with respect to one or more or all series of Securities hereunder, 19 or for any other reason, pay or cause to be paid to the Trustee all sums held in trust for any such series by the Trustee or any paying agent hereunder, as required by this Section 3.04, such sums to be held by the Trustee upon the trusts herein contained. (d) Anything in this Section 3.04 to the contrary notwithstanding, the agreement to hold sums in trust as provided in this Section 3.04 is subject to Sections 11.03 and 11.04. SECTION 3.05. Limitation on Liens. The Company will not itself and will not permit any Restricted Subsidiary to, incur, issue, assume, or guarantee any notes, bonds, debentures or other similar evidences of indebtedness for money borrowed, secured by a Mortgage on any Restricted Property, or on any shares of stock or indebtedness of a Restricted Subsidiary, without effectively providing concurrently with the incurrence, issuance, assumption or guarantee of such secured indebtedness that the Securities of each series (together with, if the Company shall so determine, any other indebtedness of the Company or such Restricted Subsidiary then existing or thereafter created ranking on a parity with the Securities of each series) shall be secured equally and ratably with (or prior to) such secured indebtedness, so long as such secured indebtedness shall be so secured, unless, after giving effect thereto, the aggregate amount of all such secured indebtedness (excluding any indebtedness secured by Mortgages of the types referred to in clauses (a) through (e) below) plus all Attributable Debt of the Company and its Restricted Subsidiaries in respect of sale and leaseback transactions (as defined in Section 3.06) involving Restricted Property, but excluding any Attributable Debt in respect of any such sale and leaseback transactions, the proceeds of which have been applied to the retirement of Funded Debt pursuant to clause (c) of Section 3.06, would not exceed 10% of Consolidated Adjusted Net Assets as shown on the latest audited consolidated financial statements of the Company, provided, however, that this Section 3.05 shall not apply to: (a) Mortgages on property of, or on any shares of stock or indebtedness of, any corporation existing at the time such corporation becomes a Subsidiary; (b) Mortgages on property existing at the time of acquisition thereof (including acquisition through merger or consolidation) or to secure the payment of all or any part of the purchase price or construction cost thereof or to secure any indebtedness incurred prior to, at the time of, or within 6 months after, the acquisition or 20 completion of such property for the purpose of financing all or any part of the purchase price or construction cost thereof; (c) Mortgages to secure the cost of exploration, drilling or development of, or the cost of improvements to, such property as is, in the opinion of the Board of Directors, substantially unimproved, or to secure indebtedness incurred for the purpose of financing any such costs; (d) Mortgages in favor of the Company or any Restricted Subsidiary; and (e) any extension, renewal or replacement (or successive extensions, renewals or replacements), as a whole or in part, of any Mortgage referred to in the foregoing clauses (a) to (d), inclusive; provided, that such extension, renewal or replacement Mortgage shall be limited to all or a part of the same property that secured the Mortgage extended, renewed or replaced (plus improvements on such property). The following types of transactions, among others, shall not be deemed to create indebtedness secured by a Mortgage within the meaning of the foregoing paragraph: (1) the sale or transfer of crude oil, natural gas or natural gas liquids in place for a period of time until, or in an amount such that, the purchaser or transferee will realize therefrom a specified amount of money (however determined) or a specified amount of such oil, gas or gas liquids, or any other interest in property commonly referred to as a "production payment"; and (2) the Mortgage of any property of the Company or any Subsidiary in favor of the United States of America, or any State, or any entity, department, agency, instrumentality or political subdivision of either, to secure partial, progress, advance or other payments to the Company or any Subsidiary pursuant to the provisions of any contract or statute, or the Mortgage of any property to secure indebtedness of the pollution control or industrial revenue bond type. SECTION 3.06. Limitations on Sales and Leasebacks. The Company will not itself, and will not permit any Restricted Subsidiary to, enter into any arrangement with any bank, insurance company or other lender or investor (not including the Company or any Restricted Subsidiary), or to 21 which any such lender or investor is a party, providing for the leasing by the Company or such Restricted Subsidiary for a period, including renewals, in excess of 3 years of any Restricted Property which has been owned and operated by the Company or such Restricted Subsidiary for more than 6 months and which has been or is to be sold or transferred by the Company or such Restricted Subsidiary to such lender or investor or to any person to whom funds have been or are to be advanced by such lender or investor on the security of such Restricted Property (herein referred to as a "sale and leaseback transaction") unless either: (a) the Company or such Restricted Subsidiary could create indebtedness secured by a Mortgage Pursuant to Section 3.05 on the Restricted Property to be leased, in an amount equal to the Attributable Debt with respect to such sale and leaseback transaction, without equally and ratably securing the Securities of each series. (b) since the date hereof and within a period commencing 12 months prior to the consummation of the sale and leaseback transaction and ending 12 months after the consummation of such sale and leaseback transaction, the Company or any Restricted Subsidiary, as the case may be, has expended or will expend for any Restricted Property an amount equal to (i) the greater of (x) the net proceeds of such sale and leaseback transaction and (y) the fair market value of the Restricted Property so leased at the time of entering into such transaction, as determined by the Board of Directors (the greater of the sums specified in clauses (x) and (y) being referred to herein as the "Net Proceeds of such transaction"), and the Company elects to designate such amount as satisfying any obligation it would otherwise have under clause (c) hereof or (ii) a part of the Net Proceeds of such transaction and the Company elects to designate such amount as satisfying part of the obligation it would otherwise have under clause (c) hereof and applies an amount equal to the remainder of such Net Proceeds as provided in clause (c) hereof; or (c) the Company, within 12 months of the consummation of any such sale and leaseback transaction, applies an amount equal to the Net Proceeds of such transaction (less any amount elected under clause (b) of this Section 3.06) to the retirement of Funded Debt of the Company ranking on a parity with the Securities of each series. No retirement referred to in this clause (c) may be effected by payment at 22 maturity or pursuant to any mandatory sinking fund or prepayment provision. SECTION 3.07. Certificate to Trustee. The Company will deliver to the Trustee on or before April 30 in each year (beginning with April 30, 1991), so long as Securities of any series are outstanding hereunder, an Officers' Certificate stating that in the course of the performance by the signers of their duties as officers of the Company they would normally have knowledge of any default by the Company in the performance of any covenants contained in Sections 3.05, 3.06 and 10.03, stating whether or not they have knowledge of any such default and, if so, specifying each such default of which the signers have knowledge and the nature thereof. ARTICLE FOUR. SECURITYHOLDERS' LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE. SECTION 4.01. Securityholders' Lists. The Company covenants and agrees that it will furnish or cause to be furnished to the Trustee: (a) semi-annually, not more than 15 days after each record date for each series of Securities, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Securityholders of such series of Securities as of such record date (and on dates to be determined pursuant to Section 2.03 for non-interest bearing securities in each year); and (b) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company, of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished, except that no such lists need be furnished so long as the Trustee is in possession thereof by reason of its acting as Security registrar for such series. SECTION 4.02. Preservation and Disclosure of Lists. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, all information as to the names and addresses of the holders of each series of Securities (1) contained in the most recent list furnished to it as provided in Section 4.01 or (2) received by it in the capacity of Securities registrar 23 (if so acting) hereunder. The Trustee may destroy any list furnished to it as provided in Section 4.01 upon receipt of a new list so furnished. (b) In case 3 or more holders of Securities of any series (hereinafter referred to as "applicants") apply in writing to the Trustee and furnish to the Trustee reasonable proof that each such applicant has owned a Security of such series for a period of at least 6 months preceding the date of such application, and such application states that the applicants desire to communicate with other holders of Securities of such series or with holders of all Securities with respect to their rights under this Indenture or under such Securities and is accompanied by a copy of the form of proxy or other communication which such applicants propose to transmit, then the Trustee shall within 5 business days after the receipt of such application, at its election, either: (1) afford such applicants access to the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 4.02, or (2) inform such applicants as to the approximate number of holders of such series or all Securities, as the case may be, whose names and addresses appear in the information preserved at the time by the Trustee in accordance with the Provisions of subsection (a) of this Section 4.02, and as to the approximate cost of mailing to such Securityholders the form of proxy or other communication, if any, specified in such application. If the Trustee shall elect not to afford such applicants access to such information, the Trustee shall, upon the written request of such applicants, mail to each Securityholder of such series or all Securities, as the case may be, whose name and address appear in the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 4.02 a copy of the form of proxy or other communication which is specified in such request with reasonable promptness after a tender to the Trustee of the material to be mailed and of payment, or provision for the payment, of the reasonable expenses of mailing, unless within 5 days after such tender, the Trustee shall mail to such applicants and file with the Securities and Exchange Commission, together with a copy of the material to be mailed, a written statement to the effect that in the opinion of the Trustee, such mailing would be contrary to the best interests of the holders of Securities of such series or all Securities, as the case may be, or would be in Violation of applicable law. Such written statement shall specify the basis 24 of such opinion. If said Commission, after opportunity for a hearing upon the objections specified in the written statement so filed, shall enter an order refusing to sustain any of such objections or if, after the entry of an order sustaining 1 or more of such objections, said Commission shall find, after notice and opportunity for hearing, that all the objections so sustained have been met and shall enter an order so declaring, the Trustee shall mail copies of such material to all such Securityholders with reasonable promptness after the entry of such order and the renewal of such tender; otherwise the Trustee shall be relieved of an obligation or duty to such applicants respecting their application. (c) Each and every holder of Securities, by receiving and holding the same, agrees with Company and the Trustee that neither the Company nor the Trustee nor any paying agent shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the holders of Securities in accordance with the provisions of subsection (b) of this Section 4.02, regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under said subsection (b). SECTION 4.03. Reports by Company. (a) The Company covenants and agrees to file with the Trustee, within 15 days after the Company is required to file the same with the Securities and Exchange Commission, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as said Commission may from time to time by rules and regulations prescribe) which the Company may be required to file with said Commission pursuant to Section 13 or Section 15 (d) of the Securities Exchange Act of 1934, or, if the Company is not required to file information, documents or reports pursuant to either of such sections, then to file with the Trustee and said Commission, in accordance with rules and regulations prescribed from time to time by said Commission, such of the supplementary and periodic information, documents and reports which may be required pursuant to Section 13 of the Securities Exchange Act of 1934 in respect of a security listed and registered on a national securities exchange as may be prescribed from time to time in such rules and regulations. (b) The Company covenants and agrees to file with the Trustee and the Securities and Exchange Commission, in accordance with the rules and regulations prescribed from time to time by said Commission, such additional information, documents and reports with respect to compliance by 25 the Company with the conditions and covenants provided for in this Indenture as may be required from time to time by such rules and regulations. (c) The Company covenants and agrees to transmit by mail to all holders of Securities, as the names and addresses of such holders appear upon the Security register, within 30 days after the filing thereof with the Trustee, such summaries of any information, documents and reports required to be filed by the Company pursuant to subsections (a) and (b) of this Section 4.03 as may be required by rules and regulations prescribed from time to time by the Securities and Exchange Commission. SECTION 4.04. Reports by the Trustee. (a) On or before March 1, 1991, and on or before March 1 in every year thereafter, so long as any Securities are outstanding hereunder, the Trustee shall transmit to the Securityholder of each series of Securities for which such Trustee is appointed, as hereinafter in this Section 4.04 provided, a brief report dated as of a date convenient to the Trustee no more than 60 nor less than 45 days prior thereto with respect to: (1) its eligibility under Section 6.09, and its qualification under Section 6.08, or in lieu thereof, if to the best of its knowledge it has continued to be eligible and qualified under such Sections, a written statement to such effect; (2) the character and amount of any advances (and if the Trustee elects so to state, the circumstances surrounding the making thereof) made by the Trustee (as such) which remain unpaid on the date of such report, and for the reimbursement of which it claims or may claim a lien or charge, prior to that of the Securities, on any property or funds held or collected by it as Trustee, except that the Trustee shall not be required (but may elect) to state such advances if such advances so remaining unpaid aggregate not more than 1/2 of 1% of the principal amount of the Securities for any series outstanding on the date of such report; (3) the amount, interest rate, and maturity date of all other indebtedness owing by the Company (or by any other obligor on the Securities) to the Trustee in its individual capacity, on the date of such report, with a brief description of any property held as collateral security therefor, except an indebtedness based upon a creditor rela- 26 tionship arising in any manner described in paragraph (2), (3), (4) or (6) of subsection (b) of Section 6.13; (4) the property and funds, if any, physically in the possession of the Trustee, as such, on the date of such report; (5) any additional issue of Securities which the Trustee has not previously reported; and (6) any action taken by the Trustee in the performance of its duties under this Indenture which it has not previously reported and which in its opinion materially affects the Securities, except action in respect of a default, notice of which has been or is to be withheld by it in accordance with the provisions of Section 5.08. (b) The Trustee shall transmit to the Securityholders for each series as hereinafter provided, a brief report with respect to the character and amount of any advances (and if the Trustee elects so to state, the circumstances surrounding the making thereof) made by the Trustee (as such), since the date of the last report transmitted pursuant to the provisions of subsection (a) of this Section 4.04 (or, if no such report has yet been so transmitted, since the date of execution of this Indenture), for the reimbursement of which it claims or may claim a lien or charge prior to that of the Securities of such series on property or funds held or collected by it as Trustee, and which it has not previously reported pursuant to this subsection, except that the Trustee shall not be required (but may elect) to report such advances if such advances remaining unpaid at any time aggregate 10% or less of the principal amount of Securities for such series outstanding at such time, such report to be transmitted within 90 days after such time. (c) Reports pursuant to this Section 4.04 shall be transmitted by mail to all holders of Securities as the names and addresses of such holders appear upon the Security register. (d) A copy of each such report shall at the time of such transmission to Securityholders, be filed by the Trustee with each stock exchange upon which the Securities of any applicable series are listed and also with the Securities and Exchange Commission. The Company will notify the Trustee when and as the Securities of any series become listed on any stock exchange. 27 ARTICLE FIVE. REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS ON EVENT OF DEFAULT. SECTION 5.01. Events of Default. In case one or more of the following Events of Default with respect to Securities of any series or such other events as may be established with respect to the Securities of that series as contemplated by Section 2.03 hereof shall have occurred and be continuing: (a) default in the payment of any interest upon any Securities of that series when it becomes due and payable, and continuance of such default for a period of 30 days; or (b) default in the payment of all or any part of the principal of (or premium, if any, on) any Securities of that series as and when the same shall become due and payable either at maturity, upon redemption (including redemption for the sinking fund), by declaration or otherwise; or (c) default in the performance, or breach, of any covenant or warranty of the Company in this Indenture (other than a covenant or warranty a default in whose performance or whose breach is elsewhere in this Section specifically dealt with and other than those set forth exclusively in terms of any particular series of Securities established as contemplated in this Indenture), and continuance of such default or breach for a period of 90 days after there has been given, by registered or certified mail to the Company by the Trustee or to the Company and the Trustee by the holders of at least 10% in principal amount of the outstanding Securities a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder, or (d) a court having jurisdiction in the premises shall enter a decree or order for relief in respect of the Company in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of the Company or for any substantial part of its property, or ordering the winding-up or liquidation of its affairs and such decree or order shall remain unstayed and in effect for a period of 90 consecutive days; or 28 (e) the Company shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, shall consent to the entry of an order for relief in an involuntary case under any such law, or shall consent to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) of the Company or of any substantial part of its property, or shall make any general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due. If an Event of Default described in clause (a) or (b) or established pursuant to Section 2.03 occurs and is continuing, then, and in each and every such case, unless the principal of all of the Securities of such series shall have already become due and payable, either the Trustee or the holders of not less than 25% in aggregate principal amount of the Securities of all series affected thereby then outstanding hereunder, by notice in writing to the Company (and to the Trustee if given by Securityholders), may declare the entire principal (or, if the Securities of that series are Original Issue Discount Securities, such portion of the principal amount as may be specified in the terms of that series) of all Securities affected thereby and the interest accrued thereon, if any, to be due and payable immediately, and upon any such declaration the same shall become immediately due and payable. If an Event of Default described in clause (c), (d) or (e) occurs and is continuing, then and in each and every such case, unless the principal of all the Securities shall have already become due and payable, either the Trustee or the holders of not less than 25% in aggregate principal amount of all the Securities then outstanding hereunder (treated as one class), by notice in writing to the Company (and to the Trustee if given by Securityholders), may declare the entire principal (or, if any Securities are Original Issue Discount Securities, such portion of the principal as may be specified in the terms thereof) of all the Securities then outstanding and interest accrued thereon, if any, to be due and payable immediately, and upon any such declaration the same shall become immediately due and payable. The foregoing provisions, however, are subject to the condition that if, at any time after the principal (or, if the Securities are Original Issue Discount Securities, such portion of the Principal as may be specified in the terms thereof) of the Securities of any series (or of all the Securities, as the case may be) shall have been so declared due and payable, and before any 29 judgment or decree for the payment of the moneys due shall have been obtained or entered as hereinafter provided, the Company shall pay or shall deposit with the Trustee a sum sufficient to pay all matured installments of interest upon all the Securities of such series (or of all the Securities, as the case may be) and the principal of and premium, if any, on any and all Securities of such series (or of all the Securities, as the case may be) which shall have become due otherwise than by acceleration (with interest upon such principal and premium, if any, and, to the extent that payment of such interest is enforceable under applicable law, on overdue installments of interest, at the same rate as the rate of interest or Yield to Maturity (in the case of Original Issue Discount Securities) specified in the Securities of such series, (or at the respective rates of interest or Yields to Maturity of all the Securities, as the case may be) to the date of such payment or deposit) and such amount as shall be sufficient to cover reasonable compensation to the Trustee and each predecessor Trustee, their respective agents, attorneys and counsel, and all other expenses and liabilities incurred, and all advances made, by the Trustee and each Predecessor Trustee except as a result of negligence or bad faith, and if any and all Events of Default under the Indenture, other than the non-payment of the principal of or premium, if any, on Securities which shall have become due by acceleration, shall have been cured, waived or otherwise remedied an provided herein - then and in every such case the holders of a majority in aggregate principal amount of the Securities of such series (or of all the Securities, as the case may be) then outstanding, by written notice to the Company and to the Trustee, may waive all defaults with respect to that series (or with respect to all Securities, as the case may be, in such case, treated as a single class) and rescind and annul such declaration and its consequences, but no such waiver or rescission and annulment shall extend to or shall affect any subsequent default or shall impair any right consequent thereon. In case the Trustee shall have proceeded to enforce any right under this Indenture and such proceedings shall have been discontinued or abandoned because of such rescission or annulment or for any other reason or shall have been determined adversely to the Trustee, then and in every such case the Company, the Trustee and the holders of the Securities shall be restored respectively to their several positions and rights hereunder, and all rights, remedies and powers of the Company, the Trustee and the holders of the Securities shall continue as though no such proceeding had been taken. 30 SECTION 5.02. Payment of Securities on Default; Suit Therefor. The Company covenants that (a) in case default shall be made in the payment of any installment of interest upon any of the Securities of any series as and when the same shall become due and payable, and such default shall have continued for a period of 30 days, or (b) in case default shall be made in the payment of the principal of or premium, if any, on any of the Securities of any series as and when the same shall have become due and payable, whether at maturity of the Securities of that series or upon redemption or by declaration or otherwise - then, upon demand of the Trustee, the Company will pay to the Trustee, for the benefit of the holders of the Securities of that series, the whole amount that then shall have become due and payable on all such Securities of that series for principal and premium, if any or interest, or both, as the case may be, with interest upon the overdue principal and premium, if any, and (to the extent that payment of such interest is enforceable under applicable law) upon the overdue installments of interest at the rate or Yield to Maturity (in the case of Original Issue Discount Securities) borne by the Securities of that series; and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including a reasonable compensation to the Trustee, its agents, attorneys and counsel, and any expenses or liabilities incurred by the Trustee hereunder other than through its negligence or bad faith. In case the Company shall fail forthwith to pay such amounts upon such demand, the Trustee, in its own name and as trustee of an express trust, shall be entitled and empowered to institute any actions or proceedings at law or in equity for the collection of the sums so due and unpaid, and may prosecute any such action or proceeding to judgment or final decree, and may enforce any such judgment or final decree against the Company or any other obligor on such Securities and collect in the manner provided by law out of the property of the Company or any other obligor on such Securities wherever situated the moneys adjudged or decreed to be payable. In case there shall be pending proceedings for the bankruptcy or for the reorganization of the Company or any other obligor on the Securities of any series under Title 11, United States Code, or any other applicable law, or in case a receiver or trustee shall have been appointed for the property of the Company or such other obligor, or in the case of any other similar judicial proceedings relative to the Company or other obligor upon the Securities of any series, or to the creditors or property of the Company or such other obligor, the Trustee, irrespective of whether the principal of the 31 Securities of any series shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand pursuant to the provisions of this Section 5.02, shall be entitled and empowered, by intervention in such proceedings or otherwise, to file and prove a claim or claims for the whole amount of principal and interest (or, if the Securities of that series are Original Issue Discount Securities such portion of the principal amount as may be specified in the terms of that series) owing and unpaid in respect of the Securities of such series and, in case of any judicial proceedings, to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for reasonable compensation to the Trustee and each predecessor Trustee, and their respective agents, attorneys and counsel, and for reimbursement of mail expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee, except as a result of negligence or bad faith) and of the Securityholders allowed in such judicial proceedings relative to the Company or any other obligor on the Securities of any series, or to the creditors or property of the Company or such other obligor, unless prohibited by applicable law and regulations, to vote on behalf of the holders of title Securities or any series in any election of a trustee or a standby trustee in arrangement, reorganization, liquidation or other bankruptcy or insolvency proceedings or person performing similar functions in comparable proceedings, and to collect and receive any moneys or other property payable or deliverable on any such claims, and to distribute the same after the deduction of its charges and expenses; and any receiver, assignee or trustee in bankruptcy or reorganization is hereby authorized by each of the Securityholders to make such payments to the Trustee, and, in the event that the Trustee shall consent to the making of such payments directly to the Securityholders, to pay to the Trustee such amounts as shall be sufficient to cover reasonable compensation to the Trustee, each predecessor Trustee and their respective agents, attorneys and counsel, and all other expenses and liabilities incurred, and all advances made by the Trustee and each predecessor Trustee except as a result of negligence or bad faith. Nothing herein contained shall be construed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Securityholder any plan of reorganization, arrangement, adjustment or composition affecting the Securities of any series or the rights of any holder thereof or to authorize the Trustee to vote in respect of the claim of any Securityholder in any such proceeding. 32 All rights of action and of asserting claims under this Indenture, or under any of the Securities, may be enforced by the Trustee without the possession of any of the Securities, or the production thereof on any trial or other proceeding relative thereto, and any such suit or proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall be for the ratable benefit of the holders of the Securities. In any proceedings brought by the Trustee (and also any proceedings involving the interpretation of any provision of this Indenture to which the Trustee shall be a party) the Trustee shall be held to represent all the holders of the Securities, and it shall not be necessary to make any Holders of the Securities parties to any such proceedings. SECTION 5.03. Application of Moneys Collected by Trustee. Any moneys collected by the Trustee shall be applied in the order following, at the date or dates fixed by the Trustee for the distribution of such moneys, upon presentation of the several Securities in respect of which moneys have been collected, and stamping thereon the payment, if only partially paid, and upon surrender thereof if fully paid: FIRST: To the payment of costs and expenses of collection applicable to such series and reasonable compensation to the Trustee, its agents, attorneys and counsel, and of all other expenses and liabilities incurred, and all advances made, by the Trustee except as a result of its negligence or bad faith; SECOND: In case the principal of the outstanding Securities in respect of which moneys have been collected shall not have become due and be unpaid, to the payment of interest on the Securities of such series, in the order of the maturity of the installments of such interest, with interest (to the extent that such interest has been collected by the Trustee) upon the overdue installments of interest or Yield to Maturity (in the case of Original Issue Discount Securities) at the rate borne by the Securities of such series, such payments to be made ratably to the persons entitled thereto; THIRD: In case the principal of the outstanding Securities in respect of which moneys have been collected shall have become due, by declaration or otherwise, to the payment of the whole amount then owing and unpaid upon the Securities of such series for principal and premium, if any, and interest, with interest on the overdue principal 33 and premium, if any, and (to the extent that such interest has been collected by the Trustee) upon overdue installments of interest at the rate or Yield to Maturity (in the case of Original Issue Discount Securities) specified in the Securities of such series; and in case such moneys shall be insufficient to pay in the whole amount so due and unpaid upon the Securities of such series, then to the payment of such principal and premium, if any, and interest without preference or priority of principal and premium, if any, over interest, or of interest over principal and premium, if any, or of any installment of interest over any other installment of interest, or of any Security of such series over any other Security of such series, ratably to the aggregate of such principal and premium, if any, and accrued and unpaid interest. SECTION 5.04. Proceedings by Securityholders. No holder of any Security of any series shall have any right by virtue of or by availing of any provision of this Indenture to institute any suit, action or proceeding in equity or at law upon or under or with respect to this Indenture or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless such holder previously shall have given to the Trustee written notice of default and of the continuance thereof, as hereinbefore provided, and unless also the holders of not less than 25% in aggregate principal amount of the Securities of that series then outstanding or, in the case of any Event of Default described in clause (c), (d) or (e) of Section 5.01. 25% in aggregate principal amount of all Securities then outstanding, shall have made written request upon the Trustee to institute such action, suit or proceeding in its own name as Trustee hereunder and shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred therein or thereby, and the Trustee for 60 days after its receipt of such notice, request and offer of indemnity shall have failed to institute any such action, suit or proceeding, it being understood and intended, and being expressly covenanted by the taker and holder of every Security with every other taker and holder and the Trustee, that no one or more holders of Securities of any series shall have any right in any manner whatever by virtue of or by availing of any provision of this Indenture to affect, disturb or prejudice the rights of any other holder of Securities, or to obtain or seek to obtain priority over or preference to any other such holder, or to enforce any right under this Indenture, except in the manner herein provided and for the equal, ratable and common benefit of all holders of Securities of the applicable series. 34 Notwithstanding any other Provisions in this Indenture, however, the right of any holder of any Security to receive payment of the principal of, premium, if any, and interest, if any, on such Security, on or after the same shall have become due and payable, or to institute suit for the enforcement of any such payment, shall not be impaired or affected without the consent of such holder. SECTION 5.05. Proceedings by Trustee. In case of an Event of Default hereunder the Trustee may in its discretion proceed to protect and enforce the rights vested in it by this Indenture by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any of such rights, either by suit in equity or by action at law or by proceeding in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement contained in this Indenture or in aid of the exercise of any power granted in this Indenture, or to enforce any other legal or equitable right vested in the Trustee by this Indenture or by law. SECTION 5.06. Remedies Cumulative and Continuing. All powers and remedies given by this Article Five to the Trustee or to the Securityholders shall, to the extent permitted by law, be deemed cumulative and not exclusive of any thereof or of any other powers and remedies available to the Trustee or the holders of the Securities, by judicial proceedings or otherwise, to enforce the performance or observance of the covenants and agreements contained in this Indenture, and no delay or omission of the Trustee or of any holder of any of the Securities to exercise any right or power accruing upon any default occurring and continuing as aforesaid shall impair any such right or power, or shall be construed to be a waiver of any such default or an acquiescence therein; and, subject to the provisions of Section 5.04, every power and remedy given by this Article Five or by law to the Trustee or to the Securityholders may be exercised from time to time, and as often as shall be deemed expedient, by the Trustee or by the Securityholders. SECTION 5.07. Direction of Proceedings and Waiver of Defaults by Majority of Securityholders. The holders of a majority in aggregate principal amount of the Securities of any or all series affected (voting as one class) at the time outstanding shall have the right to direct the time, method, and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee; provided, however, that (subject to the provisions of Section 6.01) the Trustee shall have the right to decline to follow any such direction if the 35 Trustee shall determine that the action so directed would be unjustly prejudicial to the holders not taking part in such direction or if the Trustee being advised by counsel determines that the action or proceeding so directed may not lawfully be taken or if the Trustee in good faith by its board of directors or trustees, executive committee, or a trust committee of directors or trustees and/or Responsible Officers shall determine that the action or proceedings so directed would involve the Trustee in personal liability. Prior to any declaration accelerating the maturity of any series of the Securities, or of all the Securities, as the case may be, the holders of a majority in aggregate principal amount of the Securities of that series at the time outstanding may on behalf of the holders of all of the Securities of such series waive any past default or Event of Default including any default established pursuant to Section 2.03 (or, in the case of an event specified in clause (c), (d) or (e) of Section 5.01, the holders of a majority in aggregate principal amount of all the Securities then outstanding (voting as one class) may waive such default or Event of Default), and its consequences except a default (a) in the payment of principal of, premium, if any, or interest on any of the Securities or (b) in respect of covenants or provisions hereof which cannot be modified or amended without the consent of the holder of each Security affected. Upon any such waiver the Company, the Trustee and the holders of the Securities of that series (or of all Securities, as the case may be) shall be restored to their former positions and rights hereunder, respectively; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. Whenever any default or Event of Default hereunder shall have been waived as permitted by this Section 5.07, said default or Event of Default shall for all purposes of the Securities of that series (or of all Securities, as the case may be) and this Indenture be deemed to have been cured and to be not continuing. SECTION 5.08. Notice of Defaults. The Trustee shall, within 90 days after the occurrence of a default with respect to the Securities of any series, mail to all Securityholders of that series, as the names and addresses of such holders appear upon the Security register, notice of all defaults with respect to that series known to the Trustee, unless such defaults shall have been cured before the giving of such notice (the term "defaults" for the purpose of this Section 5.08 being hereby defined to be the events specified in clauses (a), (b), (c), (d) and (e) of Section 5.01, not including periods of grace, if any, provided for therein, and irrespective of the giving of written notice specified in clause (e) of Section 5.01); and provided that, 36 except in the case of default in the Payment of the principal of, premium, if any, or interest on any of the Securities of such series, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee, or a trust committee of directors and/or Responsible Officers of the Trustee in good faith determines that the withholding of such notice is in the interests of the Securityholders of such series; and provided further, that in the case of any default of the character specified in Section 5.01 (c) no such notice to Securityholders of such series shall be given until at least 60 days after the occurrence thereof but shall be given within 90 days after such occurrence. SECTION 5.09. Undertaking to Pay Costs. All parties to this Indenture agree, and each holder of any Security by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section 5.09 shall not apply to any suit instituted by the Trustee, to any suit instituted by any Securityholder, or group of Securityholders of any series holding in the aggregate more than 10% in principal amount of the Securities of that series (or, in the case of any suit relating to or arising under clause (c), (d) or (e) of Section 5.01, 10% in aggregate principal amount of all Securities) outstanding, or to any suit instituted by any Securityholder for the enforcement of the payment of the principal of or premium, if any, or interest on any Security against the Company on or after the same shall have become due and payable. ARTICLE SIX CONCERNING THE TRUSTEE. SECTION 6.01. Duties and Responsibilities of Trustee. With respect to the holders of any series of Securities issued hereunder, the Trustee, prior to the occurrence of an Event of Default with respect to securities of that series and after the curing or waiving of all Events of Default which may have occurred, with respect to securities of that series, undertakes to perform such duties and only such duties as are specifically set forth in this 37 Indenture. In case an Event of Default with respect to the Securities of a series has occurred (which has not been cured or waived) the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that (a) prior to the occurrence of an Event of Default with respect to Securities of a series and after the curing or waiving of all Events of Default with respect to that series which may have occurred (1) the duties and obligations of the Trustee with respect to Securities of a series shall be determined solely by the express provisions of this Indenture, and the Trustee shall not be liable except for the performance of such duties and obligations with respect to such series as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (2) in the absence of bad faith on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but, in the case of any such certificates or opinions which by any Provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture; (b) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer or Officers of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; and (c) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith, in accordance with the direction of the Securityholders pursuant to Section 5.07, relating to the time, method and place of conducting any proceeding for any 38 remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture. None of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if there is reasonable ground for believing that the repayment of such funds or liability is not reasonably assured to it. SECTION 6.02. Reliance on Documents, Opinions, etc. Except as otherwise provided in Section 6.01 (a) the Trustee may rely and shall be protected in acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, note, debenture or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request, direction, order or demand of the Company mentioned herein shall be sufficiently evidenced by an Officers' Certificate (unless other evidence in respect thereof be herein specifically prescribed); and any resolution of the Board of Directors may be evidenced to the Trustee by a copy thereof certified by the Secretary or an Assistant Secretary of the Company; (c) the Trustee may consult with counsel and any advice or Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken or omitted by it hereunder in good faith and in accordance with such advice or Opinion of Counsel; (d) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request, order or direction of any of the Securityholder, pursuant to the provisions of this Indenture, unless such Securityholders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby; (e) the Trustee shall not be liable for any action taken or omitted by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture; (f) prior to the occurrence of an Event of Default hereunder and after the curing or waiving of all Events of Default, the Trustee shall not be bound to make any investigation into the facts or matters stated 39 in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond, debenture, coupon or other paper or document, unless requested in writing to do so by the holders of not less than a majority in principal amount of the Securities of all series affected then outstanding; provided, however, that if the payment within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require reasonable indemnity against such expense or liability as a condition to so proceeding; and (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents (including any Authenticating Agent) or attorneys, and the Trustee shall not be responsible for any misconduct or negligence on the part of any such agent or attorney appointed by it with due care. SECTION 6.03. No Responsibility for Recitals, etc. The recitals contained herein and in the Securities (except in the certificate of authentication of the Trustee or the Authenticating Agent) shall be taken as the statements of the Company and the Trustee and the Authenticating Agent assume no responsibility for the correctness of the same. The Trustee and the Authenticating Agent make no representations as to the validity or sufficiency of this Indenture or of the Securities. The Trustee and the Authenticating Agent shall not be accountable for the use or application by the Company of any Securities or the proceeds of any Securities authenticated and delivered by the Trustee or the Authenticating Agent in conformity with the provisions of this Indenture. SECTION 6.04. Trustee, Authenticating Agent, Paying Agents, Transfer Agents or Registrar May Own Securities. The Trustee or any Authenticating Agent or any paying agent or any transfer agent or any Security registrar, in its individual or any other capacity, may become the owner or pledgee of Securities with the same rights it would have if it were not Trustee, Authenticating Agent, paying agent, transfer agent or Security registrar. SECTION 6.05. Moneys to be Held in Trust. Subject to the provisions of Section 11.04, all moneys received by the Trustee or any paying agent shall, until used or applied an herein provided, be held in trust for the purpose for which they were received, but need not be segregated from 40 other funds except to the extent required by law. The Trustee and any paying agent shall be under no liability for interest on any money received by it hereunder except as otherwise agreed with the Company. So long as no Event of Default shall have occurred and be continuing all interest allowed on any such moneys shall be paid from time to time upon the written order of the Company, signed by the Chairman of the Board of Directors, the President or a Vice President or the Treasurer or an Assistant Treasurer of the Company. SECTION 6.06. Compensation and Expenses of Trustee. The Company covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to, reasonable compensation (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust), and the Company will pay or reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any of the provisions of this Indenture (including the reasonable compensation and the expenses and disbursements of its counsel and of all persons not regularly in its employ and any amounts paid by the Trustee to any Authenticating Agent pursuant to Section 6.14) except any such expense, disbursement or advance as may arise from its negligence or bad faith. The Company also covenants to indemnify the Trustee for, and to hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on the part of the Trustee and arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself against any claim of liability in the premises. The obligations of the Company under this Section 6.06 to compensate the Trustee and to pay or reimburse the Trustee for expenses, disbursements and advances shall constitute additional indebtedness hereunder. Such additional indebtedness shall be secured by a lien prior to that of the Debentures upon all property and funds held or collected by the Trustee as such, except funds held in trust for the benefit of the holders of particular Securities. SECTION 6.07. Officers' Certificate as Evidence. Except as otherwise provided in Sections 6.01 and 6.02, whenever in the administration of the provisions of this Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or omitting any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of negligence or bad faith on the part of the Trustee, be deemed to be conclusively proved and established by an Officers' Certificate delivered to the Trustee, and such 41 Certificate, in the absence of negligence or bad faith on the part of the Trustee, shall be full warrant to the Trustee for any action taken or omitted by it under the provisions of this Indenture upon the faith thereof. SECTION 6.08. Conflicting Interest of Trustee. (a) If the Trustee has or shall acquire any conflicting interest, as defined in this Section 6.08, it shall, within 90 days after ascertaining that it has such conflicting interest, either eliminate such conflicting interest or resign in the manner and with the effect specified in Section 6.10. (b) In the event that the Trustee shall fail to comply with the provisions of subsection (a) of this Section 6.08, the Trustee shall, within 10 days after the expiration of such 90-day period, transmit notice of such failure to all holders of Securities, as the names and addresses of such holders appear upon the Securities register. (c) For the purposes of this Section 6.08 the Trustee shall be deemed to have a conflicting interest with respect to Securities of any series if (1) the Trustee is trustee under this Indenture with respect to the Securities of any other series or under another indenture under which any other securities, or certificates of interest or participation in any other securities, of the Company or other obligor on the Securities of such series (each of which is hereafter in this Section called a "Security party") are outstanding, unless such other indenture is a collateral trust indenture under which the only collateral consists of Securities issued under this Indenture; provided that there shall be excluded from the operation of this paragraph, this Indenture with respect to the Securities of any other series and any other indenture or indentures under which other securities, or certificates of interest or participation in other securities, of a Security party, are outstanding if (i) this Indenture is and, if applicable, this Indenture and such other indenture or indentures are wholly unsecured and such other indenture or indentures are hereafter qualified under the Trust Indenture Act of 1939, unless the Securities and Exchange Commission shall have found and declared by order pursuant to subsection (b) of Section 305 or subsection (c) of Section 307 of the Trust Indenture Act of 1939 that differences exist between the provisions of this Indenture with respect to Securities of such series and one or more other series or, if applicable, this Indenture and the provisions of such other indenture or indentures which are so likely to involve a material conflict of interest as to make it necessary in the public interest or for the protection of 42 investors to disqualify the Trustee from acting as such under this Indenture and such other indenture or indentures, or (ii) the Company shall have sustained the burden of proving, on application to the Securities and Exchange Commission and after opportunity for hearing thereon, that trusteeship under this Indenture with respect to Securities of such series and one or more other series or, if applicable, this Indenture and such other indenture or indentures is not so likely to involve a material conflict of interest as to make it necessary in the public interest or for the protection of investors to disqualify the Trustee from acting as such under this Indenture with respect to Securities of such series and one or more other series or, if applicable, this Indenture and one of such indentures; (2) the Trustee or any of its directors or executive officers is an obligor upon the Securities of any series issued under this Indenture or an underwriter for a Security party; (3) the Trustee directly or indirectly controls or is directly or indirectly controlled by or is under direct or indirect common control with a Security party or an underwriter for a Security party; (4) the Trustee or any of its directors or executive officers is a director, officer, partner, employee, appointee, or representative of a Security party, or of an underwriter (other than the Trustee itself) for a Security party who is currently engaged in the business of underwriting, except that (A) one individual may be a director and/or an executive officer of the Trustee and a director and/or an executive officer of a Security party, but may not be at the same time an executive officer of both the Trustee and a Security party; (B) if and so long as the number of directors of the Trustee in office is more than 9, one additional individual may be a director and/or an executive officer of the Trustee and a director of a Security party; and (C) the Trustee may be designated by a Security party or by an underwriter for a Debenture party to act in the capacity of transfer agent, registrar, custodian, paying agent, fiscal agent, escrow agent, or depositary, or in any other similar capacity, or, subject to the provisions of paragraph (1) of this subsection (c), to act as trustee whether under an indenture or otherwise; (5) 10% or more of the voting securities of the Trustee is beneficially owned either by a Security party or by any director, partner, or executive officer thereof, or 20% or more of such voting securities is 43 beneficially owned, collectively, by any 2 or more of such persons; or 10% or more of the voting securities of the Trustee is beneficially owned either by an underwriter for a Security party or by any director, partner, or executive officer thereof, or is beneficially owned, collectively, by any 2 or more such persons; (6) the Trustee is the beneficial owner of, or holds as collateral security for an obligation which is in default, (A) 5% or more of the voting securities, or 10% or more of any other class of security, of a Security party, not including the Securities issued under this Indenture and securities issued under any other indenture under which the Trustee is also trustee, or (B) 10% or more of any class of security of an underwriter for a Security party; (7) the Trustee is the beneficial owner of, or holds as collateral security for an obligation which is in default, 5% or more of the voting securities of any person who, to the knowledge of the Trustee, owns 10% or more of the voting securities of, or controls directly or indirectly or is under direct or indirect common control with, a Security party; (8) the Trustee is the beneficial owner of, or holds as collateral security for an obligation which is in default, 10% or more of any class of security of any person who, to the knowledge of the Trustee, owns 50% or more of the voting securities of a Security party; or (9) the Trustee owns on May 15 in any calendar year, in the capacity of executor, administrator, testamentary or inter vivos trustee, guardian, committee or conservator, or in any other similar capacity, an aggregate of 25% or more of the voting securities, or of any class of security, of any person, the beneficial ownership of a specified percentage of which would have constituted a conflicting interest under paragraph (6), (7), or (8) of this subsection (c). As to any such securities of which the Trustee acquired ownership through becoming executor, administrator or testamentary trustee of an estate which included them, the provisions of the preceding sentence shall not apply, for a period of 2 years from the date of such acquisition, to the extent that such securities included in such estate do not exceed 25% of such voting securities or 25% of any such class of security. Promptly after May 15, in each calendar year, the Trustee shall make a cheek of its holdings of such securities in any of the above-mentioned capacities as of such May 15. If the Company fails to make payment in full of 44 principal of or interest on any of the Securities when and as the same become due and payable, and such failure continues for 30 days thereafter, the Trustee shall make a prompt check of its holdings of such securities in any of the above-mentioned capacities as of the date of the expiration of such 30-day period and, after such date, notwithstanding the foregoing provisions of this paragraph (9), all such securities so held by the Trustee, with sole or joint control over such securities vested in it, shall, but only so long as such failure shall continue, be considered as though beneficially owned by the Trustee for the purposes of paragraphs (6), (7), and (8) of this subsection (c). The specifications of percentages in paragraphs (5) to (9), inclusive, of this subsection (c) shall not be construed as indicating that the ownership of such percentages of the securities of a person is or is not necessary or sufficient to constitute direct or indirect control for the purposes of paragraph (3) or (7) of this subsection (c). For the purposes of paragraphs (6), (7), (8), and (9) of this subsection (c) only, (A) the terms "security" and "securities" shall include only such securities as are generally known as corporate securities, but shall not include any note or other evidence of indebtedness issued to evidence an obligation to repay moneys lent to a person by one or more banks, trust companies or banking firms, or any certificate of interest or participation in any such note or evidence of indebtedness; (B) an obligation shall be deemed to be in default when a default in payment of principal shall have continued for 30 days or more and shall not have been cured; and (C) the Trustee shall not be deemed to be the owner or holder of (i) any security which it holds as collateral security (as trustee or otherwise) for an obligation which is not in default as defined in clause (B) above, or (ii) any security which it holds an collateral security under this Indenture, irrespective of any default hereunder, or (iii) any security which it holds as agent for collection, or an custodian, escrow agent, or depositary, or in any similar representative capacity. Except an provided in the next preceding paragraph hereof, the word "security" or "securities" an used in this Indenture shall mean any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, pre-organization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas or other mineral rights, or, 45 in general, any interest or instrument commonly known as a "security" or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase any of the foregoing. (d) For the Purposes of this Section 6.08: (1) The term "underwriter" when used with reference to a Security party shall mean every person who, within 3 years prior to the time as of which the determination is made, has purchased from such Security party with a view to, or has offered or sold for such Security party in connection with, the distribution of any security of such Security party outstanding at such time, or has participated or has had a direct or indirect participation in any such undertaking, or has participated or has had a participation in the direct or indirect underwriting of any such undertaking, but such term shall not include a person whose interest was limited to a commission from an underwriter or dealer not in excess of the usual and customary distributors' or sellers' commission. (2) The term "director" shall mean any director of a corporation or any individual performing similar functions with respect to any organization whether incorporated or unincorporated. (3) The term "person" shall mean an individual, a corporation, a partnership, an association, a joint-stock company, a trust, an unincorporated organization, or a government or political subdivision thereof. As used in this paragraph, the term "trust" shall include only a trust where the interest or interests of the beneficiary or beneficiaries are evidenced by a security. (4) The term "voting security" shall mean any security presently in direction or entitling the owner or holder thereof to vote in the direction or management of the affairs of a person, or any security issued under or pursuant to any trust, agreement or arrangement whereby a trustee or trustees or agent or agents for the owner or holder of such security are presently entitled to vote in the direction or management of the affairs of a person. (5) The term "executive officer" shall mean the president, every vice president, every trust officer, the cashier, the secretary, and the treasurer of a corporation, and any individual customarily performing similar functions with respect to any organization whether incorpo- 46 rated or unincorporated but shall not include the chairman of the board of directors. The percentages of voting securities and other securities specified in this Section 6.08 shall be calculated in accordance with the following provisions: (A) A specified percentage of the voting securities of the Trustee, the Company or any other person referred to in this Section 6.08 (each of whom is referred to as a "person" in this paragraph) means such amount of the outstanding voting securities of such person as entities the holder or holders to cast such specified percentage of the aggregate votes which the holders of all the outstanding voting securities of such person are entitled to cast in the direction or management of the affairs of such person. (B) A specified percentage of a class of securities of a person means such percentage of the aggregate amount of securities of the class outstanding. (C) The term "amount", when used in regard to securities, means the principal amount if relating to evidences of indebtedness, the number of shares if relating to capital shares, and the number of units if relating to any other kind of security. (D) The term "outstanding" means issued and not held by or for the account of the issuer. The following securities shall not be deemed outstanding within the meaning of this definition: (i) securities of an issuer held in a sinking fund relating to securities of the issuer of the same class; (ii) securities of an issuer held in a sinking fund relating to another class of securities of the issuer, if the obligation evidenced by such other class of securities is not in default as to principal or interest or otherwise; (iii) securities pledged by the issuer thereof as security for an obligation of the issuer not in default as to principal or interest or otherwise; (iv) securities held in escrow if placed in escrow by the issuer thereof; 47 provided, however, that any voting securities of an issuer shall be deemed outstanding if any person other than the issuer is entitled to exercise the voting rights thereof. (E) A security shall be deemed to be of the same class as another security if both securities confer upon the holder or holders thereof substantially the same rights and privileges: provided, however, that, in the case of secured evidences of indebtedness, all of which are issued under a single indenture, differences in the interest rates or maturity dates of various series thereof shall not be deemed sufficient to constitute such series different classes, and provided, further, that, in the case of unsecured evidences of indebtedness, differences in the interest rates or maturity dates thereof shall not be deemed sufficient to constitute them securities of different classes, whether or not they are issued under a single indenture. SECTION 6.09. Eligibility of Trustee. The Trustee hereunder shall at all times be a corporation organized and doing business under the laws of the United States or any State or Territory thereof or of the District of Columbia authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least $5,000,000, subject to supervision or examination by Federal, State, Territorial, or District of Columbia authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section 6.09 the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section 6.09, the Trustee shall resign immediately in the manner and with the effect specified in Section 6.10. SECTION 6.10. Resignation or Removal of Trustee. (a) The Trustee, or any trustee or trustees hereafter appointed, may at any time resign with respect to one or more or all series of Securities by giving written notice of such resignation to the Company and by mailing notice thereof to the holders of the applicable series of Securities at their addresses as they shall appear on the Security register. Upon receiving such notice of resignation, the Company shall promptly appoint a successor trustee or trustees with respect to the applicable series by written instrument, in duplicate, executed by order of its Board of Directors, one copy of which instrument shall 48 be delivered to the resigning Trustee and one copy to the successor trustee. If no successor trustee shall have been so appointed with respect to any series of Securities and have accepted appointment within 60 days after the mailing of such notice of resignation to the affected Securityholders, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor trustee, or any Securityholder who has been a bona fide holder of a Security or Securities of the applicable series for at least 6 months may, subject to the provisions of Section 5.09, on behalf of himself and all others similarly situated, petition any such court for the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, appoint a successor trustee. (b) In case at any time any of the following shall occur - (1) the Trustee shall fail to comply with the provisions of subsection (a) of Section 6.08 after written request therefor by the Company or by any Securityholder who has been a bona fide holder of a Security or Securities for at least 6 months, or (2) the Trustee shall cease to be eligible in accordance with the provisions of Section 6.09 and shall fail to resign after written request therefor by the Company or by any such Securityholder, or (3) the Trustee shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or a receiver of the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, the Company may remove the Trustee and appoint a successor trustee by written instrument, in duplicate, executed by order of the Board of Directors, 1 copy of which instrument shall be delivered to the Trustee so removed and 1 copy to the successor trustee, or, subject to the provisions of Section 5.09, any Securityholder who has been a bona fide holder of a Security or Securities of the applicable series for at least 6 months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint a successor trustee. 49 (c) The holders of a majority in aggregate principal amount of the Securities of one or more series (each series voting as a class) or all series at the time outstanding may at any time remove the Trustee with respect to the applicable series of Securities or all series, as the case may be, and nominate a successor trustee with respect to the applicable series of Securities or all series, as the case may be, which shall be deemed appointed as successor trustee with respect to the applicable series unless within 10 days after such nomination the Company objects thereto, in which case the Trustee so removed or any Securityholder of the applicable series, upon the terms and conditions and otherwise as in subsection (a) of this Section 6.10 provided, may petition any court of competent jurisdiction for an appointment of a successor trustee with respect to such series. (d) Any resignation or removal of the Trustee and appointment of a successor trustee pursuant to any of the provisions of this Section 6.10 shall become effective upon acceptance of appointment by the successor trustee as provided in Section 6.11. SECTION 6.11. Acceptance by Successor Trustee. Any successor trustee appointed as provided in Section 6.10 shall execute, acknowledge and deliver to the Company and to its predecessor trustee an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the predecessor trustee with respect to all or any applicable series shall become effective and such successor trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, duties and obligations with respect to such series of its predecessor hereunder, with like effect as if originally named as trustee herein; but, nevertheless, on the written request of the Company or of the successor trustee, the trustee ceasing to act shall, upon payment of any amounts then due it pursuant to the provisions of Section 6.06, execute and deliver an instrument transferring to such successor trustee all the rights and powers of the trustee so ceasing to act. Upon request of any such successor trustee, the Company shall execute any and all instruments in writing for more fully and certainly vesting in and confirming to such successor trustee all such rights and powers. Any trustee ceasing to act shall nevertheless, retain a lien upon all property or funds held or collected by such trustee to secure any amounts then due it pursuant to the provisions of Section 6.06. If a successor trustee is appointed with respect to the Securities of one or more (but not all) series, the Company, the predecessor trustee and each successor trustee with respect to the Securities of any applicable series 50 shall execute and deliver an indenture supplemental hereto which shall contain such provisions as shall be deemed necessary or desirable to confirm that all the rights, powers, trusts and duties of the predecessor trustee with respect to the Securities of any series as to which the predecessor trustee is not retiring shall continue to be vested in the predecessor trustee, and shall add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trustee hereunder by more than one trustee, it being understood that nothing herein or in such supplemental indenture shall constitute such trustees co-trustees of the same trust and that each such trustee shall be trustee of a trust or trusts hereunder separate and apart from any trust or trusts hereunder administered by any other such trustee. No successor trustee shall accept appointment as provided in this Section 6.11 unless at the time of such acceptance such successor trustee shall be qualified under the provisions of Section 6.08 and eligible under the provisions of Section 6.09. Upon acceptance of appointment by a successor trustee as provided in this Section 6.11, the Company shall mail notice of the succession of such trustee hereunder to the holders of Securities of any applicable series at their addresses as they shall appear on the Security register. If the Company fails to mail such notice within 10 days after the acceptance of appointment by the successor trustee, the successor trustee shall cause such notice to be mailed at the expense of the Company. SECTION 6.12. Succession by Merger, etc. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case at the time such successor to the Trustee shall succeed to the trusts created by this Indenture any of the Securities of any series shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor trustee, and deliver such Securities so authenticated, and in case at that time any of the Securities of any series shall not have been authenticated, any successor to the Trustee may authenticate such Securities either in the 51 name of any predecessor hereunder or in the name of the successor trustee, and in all such cases such certificates shall have the full force which it is anywhere in the Securities of such series or in this Indenture provided that the certificate of the Trustee shall have; provided, however, that the right to adopt the certificate of authentication of any predecessor Trustee or authenticate Securities of any series in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation. SECTION 6.13. Limitation on Rights of Trustee as a Creditor. (a) Subject to the provisions of subsection (b) of this Section 6.13, if the Trustee shall be or shall become a creditor, directly or indirectly, secured or unsecured, of the Company or of any other obligor on the Securities (each of which is hereafter in this Section 6.13 called a "Security party") within 4 months prior to a default, as defined in subsection (c) of this Section 6.13, or subsequent to such a default, then, unless and until such default shall be cured, the Trustee shall set apart and hold in a special account for the benefit of the Trustee individually, the holders of the Securities, and the holders of other indenture securities (as defined in paragraph (2) of subsection (c) of this Section 6.13) (1) an amount equal to any and all reductions in the amount due and owing upon any claim as such creditor in respect of principal or interest, effected after the beginning of such 4-month period and valid as against such Security party and its other creditors, except any such reduction resulting from the receipt or disposition of any property described in paragraph (2) of this subsection, or from the exercise of any right of set-off which the Trustee could have exercised if a petition in bankruptcy had been filed by or against such Security party upon the date of such default; and (2) all property received by the Trustee in respect of any claim as such creditor, either as security therefor, or in satisfaction or composition thereof, or otherwise, after the beginning of such 4-month period, or an amount equal to the proceeds of any such property, if disposed of, subject, however, to the rights, if any, of such Security party and its other creditors in such property or such proceeds. Nothing herein contained, however, shall affect the right of the Trustee: (A) to retain for its own account (i) payments made on account of any such claim by any person (other than such Security party) who 52 is liable thereon, and (ii) the proceeds of the bona fide sale of any such claim by the Trustee to a third person, and (iii) distributions made in cash, securities, or other property in respect of claims filed against such Security party in bankruptcy or receivership or in proceedings for reorganization pursuant to Title 11, United States Code or applicable state law; (B) to realize, for its own account, upon any property held by it as security for any such claim, if such property was so held prior to the beginning of such 4-month period; (C) to realize, for its own account, but only to the extent of the claim hereinafter mentioned, upon any property held by it as security for any such claim, if such claim was created after the beginning of such 4-month period and such property was received as security therefor simultaneously with the creation thereof, and if the Trustee shall sustain the burden of proving that at the time such property was so received the Trustee had no reasonable cause to believe that a default, as defined in subsection (c) of this Section 6.13, would occur within 4 months; or (D) to receive payment on any claim referred to in paragraph (B) or (C), against the release of any property held as security for such claim as provided in such paragraph (B) or (C), as the case may be, to the extent of the fair value of such property. For the purposes of paragraphs (B), (C), and (D), property substituted after the beginning of such 4-month period for property held as security at the time of such substitution shall, to the extent of the fair value of the property released have the same status as the property released, and, to the extent that any claim referred to in any of such paragraphs is created in renewal of or in substitution for or for the purpose of repaying or refunding any pre-existing claim of the Trustee as such creditor, such claim shall have the same status as such pre-existing claim. If the Trustee shall be required to account, the funds and property held in such special account and the proceeds thereof shall be apportioned between the Trustee, the Securityholders and the holders of other indenture securities in such manner that the Trustee, the Securityholders and the Holders of other indenture securities realize, as a result of payments from such special account and payments of dividends on claims filed against such Security party in bankruptcy or receivership or in proceedings for reorgani- 53 zation pursuant to Title 11, United States Code, or applicable state law, the same percentage of their respective claims, figured before crediting to the claim of the Trustee anything on account of the receipt by it from such Security party of the funds and property in such special account and before crediting to the respective claims of the Trustee, the Securityholders, and the holders of other indenture securities dividends on claims flied against such Security party in bankruptcy or receivership or in proceedings for reorganization pursuant to Title 11, United States Code, or applicable state law, but after crediting thereon receipts on account of the indebtedness represented by their respective claims from all sources other than from such dividends and from the funds and property so held in such special account. As used in this paragraph, with respect to any claim, the term "dividends" shall include any distribution with respect to such claim, in bankruptcy or receivership or in proceedings for reorganization pursuant to Title 11, United States Code, or applicable state law, whether such distribution is made in cash, securities, or other property, but shall not include any such distribution with respect to the secured portion, if any, of such claim. The court in which such bankruptcy, receivership, or proceeding for reorganization is pending shall have jurisdiction (i) to apportion among the Trustee, the Securityholders, and the holders of other indenture securities, in accordance with the provisions of this Paragraph, the funds and property held in such special account and the proceeds thereof, or (ii) in lieu of such apportionment, in whole or in part, to give to the provisions of this paragraph due consideration in determining the fairness of the distributions to be made to the Trustee, the Securityholders and the holders of other indenture securities with respect to their respective claims, in which event it shall not be necessary to liquidate or to appraise the value of any securities or other property held in such special account or as security for any such claim, or to make a specific allocation of such distributions as between the secured and unsecured portions of such claims, or otherwise to apply the provisions of this paragraph as a mathematical formula. Any Trustee who has resigned or been removed after the beginning of such 4-month period shall be subject to the provisions of this subsection (a) as though such resignation or removal had not occurred. If any Trustee has resigned or been removed prior to the beginning of such 4-month period, it shall be subject to the provisions of this subsection (a) if and only if the following conditions exist: 54 (i) the receipt of property or reduction of claim which would have given rise to the obligation to account, if such Trustee had continued as trustee, occurred after the beginning of such 4-month period, and (ii) such receipt of property or reduction of claim occurred within 4 months after such resignation or removal. (b) There shall be excluded from the operation of subsection (a) of this Section 6.13 a creditor relationship arising from (1) the ownership or acquisition of securities issued under any indenture, or any security or securities having a maturity of 1 year or more at the time of acquisition by the Trustee; (2) advances authorized by a receivership or bankruptcy court of competent jurisdiction, or by this Indenture, for the purpose of preserving any property which shall at any time be subject to the lien of this Indenture or of discharging tax liens or other prior liens or encumbrances thereon, if notice of such advance and of the circumstances surrounding the making thereof is given to the Securityholders at the time and in the manner provided in Section 4.04 with respect to reports pursuant to subsections (a) and (b) thereof, respectively; (3) disbursements made in the ordinary course of business in the capacity of trustee under an indenture, transfer agent, registrar, custodian, paying agent, fiscal agent or depositary, or other similar capacity; (4) an indebtedness created as a result of services rendered or premises rented; or an indebtedness created as a result of goods or securities sold in a cash transaction as defined in subsection (c) of this Section 6.13; (5) the ownership of stock or of other securities of a corporation organized under the provisions of Section 25(a) of the Federal Reserve Act, as amended, which is directly or indirectly a creditor of a Security party; or (6) the acquisition, ownership, acceptance or negotiation of any drafts, bills of exchange, acceptances or obligations which fall within the classification of self-liquidating paper as defined in subsection (c) of this Section 6.13. 55 (c) As used in this Section 6.13: (1) The term "default" shall mean any failure to make payment in full of the principal of or interest upon any of the Securities or upon the other indenture securities when and as such principal or interest becomes due and payable; (2) The term "other indenture securities" shall mean securities upon which a Security party is an obligor (as defined in the Trust Indenture Act of 1939) outstanding under any other indenture (A) under which the Trustee is also trustee, (B) which contains provisions substantially similar to the provisions of subsection (a) of this Section 6.13, and (C) under which a default exists at the time of the apportionment of the funds and property held in said special account; (3) The term "cash transaction" shall mean any transaction in which full payment for goods or securities sold is made within seven days after delivery of the goods or securities in currency or in checks or other orders drawn upon banks or bankers and payable upon demand; (4) The term "self-liquidating paper" shall mean any draft, bill of exchange, acceptance or obligation which is made, drawn, negotiated or incurred by a Security party for the purpose of financing the purchase, processing, manufacture, shipment, storage or sale of goods, wares or merchandise and which is secured by documents evidencing title to, possession of, or a lien upon, the goods, wares or merchandise or the receivables or proceeds arising from the sale of the goods, wares or merchandise previously constituting the security; provided that the security is received by the Trustee simultaneously with the creation of the creditor relationship with such Security party arising from the making, drawing, negotiating or incurring of the draft, bill of exchange, acceptance or obligation. SECTION 6.14. Authenticating Agents. There may, be 1 or more Authenticating Agents appointed by the Trustee upon the request of the Company with power to act on its behalf and subject to its direction in the authentication and delivery of Securities of any series issued upon exchange or transfer thereof as fully to all intents and purposes an though any such Authenticating Agent had been expressly authorized to authenticate and deliver Securities of such series; provided, that the Trustee shall have no liability to the Company for any acts or omissions of the Authenticating Agent with respect to the authentication and delivery of Securities of any 56 series. Any such Authenticating Agent shall at all times be a corporation organized and doing business under the laws of the United States or of any State or Territory thereof or of the District of Columbia authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of at least $5,000,000 and being subject to supervision or examination by Federal, State, Territorial or District of Columbia authority. If such corporation publishes reports of condition at least annually pursuant to law or the requirements of such authority, then for the purposes of this Section 6.14 the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect herein specified in this Section. Any corporation into which any Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, consolidation or conversion to which any Authenticating Agent shall be a party, or any corporation succeeding to the corporate trust business of any Authenticating Agent, shall be the successor of such Authenticating Agent hereunder, if such successor corporation is otherwise eligible under this Section 6.14, without the execution or filing of any paper or any further act on the part of the parties hereto or such Authenticating Agent. Any Authenticating Agent may at any time resign with respect to one or more or all series of Securities by giving written notice of resignation to the Trustee and to the Company. The Trustee may at any time terminate the agency of any Authenticating Agent with respect to one or more or all series of Securities by giving written notice of termination to such Authenticating Agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time any Authenticating Agent shall cease to be eligible under this Section 6.14, the Trustee may, and upon the request of the Company shall, promptly appoint a successor Authenticating Agent with respect to the applicable series eligible under this Section 6.14, shall give written notice of such appointment to the Company and shall mail notice of such appointment to an holders of the applicable series of Securities as the names and addresses of such holders appear on the Security register. Any successor Authenticating Agent with respect to all or any series upon acceptance of its appointment hereunder shall become vested with all rights, powers, duties and responsi- 57 bilities with respect to such series of its predecessor hereunder, with like effect as if originally named as Authenticating Agent herein. The Trustee agrees to pay to any Authenticating Agent from time to time reasonable compensation for its services, and the Trustee shall be entitled to be reimbursed for such payments, subject to Section 6.06. Any Authenticating Agent shall have no responsibility or liability for any action taken by it as such in accordance with the directions of the Trustee. ARTICLE SEVEN. CONCERNING THE SECURITYHOLDERS. SECTION 7.01. Action by Securityholders. Whenever in this Indenture it is provided that the holders of a specified percentage in aggregate principal amount of the Securities of any or all series may take any action (including the making of any demand or request, the giving of any notice, consent or waiver or the taking of any other action) the fact that at the time of taking any such action the holders of such specified percentage have joined therein may be evidenced (a) by any instrument or any number of instruments of similar tenor executed by such Securityholders in person or by agent or proxy appointed in writing, or (b) by the record of such holders of Securities voting in favor thereof at any meeting of such Securityholders duly called and held in accordance with the provisions of Article Eight, or (c) by a combination of such instrument or instruments and any such record of such a meeting of such Securityholders. SECTION 7.02. Proof of Execution by Securityholders. Subject to the provisions of Section 6.01, 6.02 and 8.05, proof of the execution of any instrument by a Securityholder or his agent or proxy shall be sufficient if made in accordance with such reasonable rules and regulations as may be prescribed by the Trustee or in such manner as shall be satisfactory to the Trustee. The ownership of Securities shall be proved by the Security register or by a certificate of the Security registrar. The record of any Securityholders' meeting shall be proved in the manner provided in Section 8.06. SECTION 7.03. Who Are Deemed Absolute Owners. Prior to due presentment for registration of transfer of any Security, the Company, the Trustee, any Authenticating Agent, any paying agent, any transfer agent and any Security registrar may deem the person in whose name such 58 Security shall be registered upon the Security register to be, and may treat him as, the absolute owner of such Security (whether or not such Security shall be overdue) for the purpose of receiving payment of or on account of the principal of, premium, if any, and interest on such Security and for all other purposes; and neither the Company nor the Trustee nor any Authenticating Agent nor any paying agent nor any transfer agent nor any Security registrar shall be affected by any notice to the contrary. All such payments so made to any holder for the time being or upon his order shall be valid, and, to the extent of the sum or sums so paid, effectual to satisfy and discharge the liability for moneys payable upon any such Security. Section 7.04. Securities Owned by Company Deemed Not Outstanding. In determining whether the holders of the requisite aggregate principal amount of Securities have concurred in any direction. consent or waiver under this Indenture, Securities which are owned by the Company or any other obligor on the Securities or by any person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any other obligor on the Securities shall be disregarded and deemed not to be outstanding for the purpose of any such determination; provided that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, consent or waiver, only Securities which the Trustee knows are so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as outstanding for the purposes of this Section 7.04 if the pledgee shall establish to the satisfaction of the Trustee the pledgee's right to vote such Securities and that the pledgee is not the Company or any such other obligor or person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any such other obligor. In the case of a dispute as to such right, any decision by the Trustee taken upon the advice of counsel shall be full protection to the Trustee. SECTION 7.05. Revocation of Consents; Future Holders Bound. At any time prior to (but not after) the evidencing to the Trustee, as provided in Section 7.01, of the taking of any action by the holders of the percentage in aggregate principal amount of the Security specified in this Indenture in connection with such action, any holder of a Security (or any Security, issued in whole or in part in exchange or substitution therefor) the serial number of which is shown by the evidence to be included in the Securities the Holders of which have consented to such action may by filing written notice with the Trustee at its principal office and upon proof of holding as 59 provided in Section 7.02, revoke such action so far as concerns such Security (or so far as concerns the principal amount represented by any exchanged or substituted Security). Except as aforesaid any such action taken by the holder of any Security shall be conclusive and binding upon such holder and upon all future holders and owners of such Security, and of any Security issued in exchange or substitution therefor, irrespective of whether or not any notation in regard thereto is made upon such Security or any Security issued in exchange or substitution therefor. ARTICLE EIGHT. SECURITYHOLDERS' MEETINGS. SECTION 8.01. Purposes of Meetings. A meeting of Securityholders of any or all series may be called at any time and from time to time pursuant to the provisions of this Article Eight for any of the following purposes: (a) to give any notice to the Company or to the Trustee, or to give any directions to the Trustee, or to consent to the waiving of any default hereunder and its consequences, or to take any other action authorized to be taken by Securityholders pursuant to any of the provisions of Article Five; (b) to remove the Trustee and nominate a successor trustee pursuant to the provisions of Article Six; (c) to consent to the execution of an indenture or indentures supplemental hereto pursuant to the Provisions of Section 9.02; or (d) to take any other action authorized to be taken by or on behalf of the holders of any specified aggregate principal amount of such Securities under any other provision of this Indenture or under applicable law. SECTION 8.02. Call of Meetings by Trustee. The Trustee may at any time call a meeting of Securityholders of any or all series to take any action specified in Section 8.01, to be held at such time and at such place in the Borough of Manhattan, The City of New York, as the Trustee shall determine. Notice of every meeting of the Securityholders of any or all series, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting, shall be mailed to holders of Securities of each series affected at their addresses as they shall 60 appear on the Securities of each series affected register. Such notice shall be mailed not less than 20 nor more than 180 days prior to the date fixed for the meeting. SECTION 8.03. Call of Meetings by Company or Securityholders. In case at any time the Company pursuant to a resolution of the Board of Directors, or the holders of at least 10% in aggregate principal amount of the Securities of any or all series, as the case may be, then outstanding, shall have requested the Trustee to call a meeting of Securityholders of any or all series, as the case may be, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have mailed the notice of such meeting within 20 days after receipt of such request, then the Company or such Securityholders may determine the time and the place in said Borough of Manhattan for such meeting and may call such meeting to take any action authorized in Section 8.01, by mailing notice thereof as provided in Section 8.02. SECTION 8.04. Qualifications for Voting. To be entitled to vote at any meeting of Securityholders a person shall (a) be a holder of one or more Securities with respect to which the meeting is being held or (b) a person appointed by an instrument in writing as proxy by a holder of one or more such Securities. The only persons who shall be entitled to be present or to speak at any meeting of Securityholders shall be the persons entitled to vote at such meeting and their counsel and any representatives of the Trustee and its counsel and any representatives of the Company and its counsel. SECTION 8.05. Regulations. Notwithstanding any other provisions of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of Securityholders, in regard to proof of the holding of Securities and of the appointment of proxies, and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall think fit. The Trustee shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Company or by Securityholders as provided in Section 8.03, in which case the Company or the Securityholders calling the meeting, as the case may be, shall in like manner appoint a temporary chairman. A permanent chairman 61 and a permanent secretary of the meeting shall be elected by majority vote of the meeting. Subject to the provisions of Section 7.04, at any meeting each holder of Securities with respect to which such meeting is being held or proxy therefor shall be entitled to 1 vote for each $1,000 principal amount (in the case of Original Issue Discount Securities, such principal amount to be determined as provided in the definition "outstanding") of Securities held or represented by him; provided, however, that no vote shall be cast or counted at any meeting in respect of any Security challenged as not outstanding and ruled by the chairman of the meeting to be not outstanding. The chairman of the meeting shall have no right to vote other than by virtue of Securities held by him or instruments in writing as aforesaid duly designating him as the person to vote on behalf of other Securityholders. Any meeting of Securityholders duly called pursuant to the provisions of Section 8.02 or 8.03 may be adjourned from time to time by a majority of those present, whether or not constituting a quorum, and the meeting may be held as so adjourned without further notice. SECTION 8.06. Voting. The vote upon any resolution submitted to any meeting of holders of Securities with respect to which such meeting is being held shall be by written ballots on which shall be subscribed the signatures of such holders or of their representatives by proxy and the serial number or numbers of the Securities held or represented by them. The permanent chairman of the meeting shall appoint 2 inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in triplicate of all votes cast at the meeting. A record in duplicate of the proceedings of each meeting of Securityholders shall be prepared by the secretary of the meeting and there shall be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by 1 or more persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that said notice was mailed as provided in Section 8.02. The record shall show the serial numbers of the Securities voting in favor of or against any resolution. The record shall be signed and verified by the affidavits of the permanent chairman and secretary of the meeting and 1 of the duplicates shall be delivered to the Company and the other to the Trustee to be preserved by the Trustee, the latter to have attached thereto the ballots voted at the meeting. 62 Any record so signed and verified shall be conclusive evidence of the matters therein stated. ARTICLE NINE. SUPPLEMENTAL INDENTURES. SECTION 9.01. Supplemental Indentures without Consent of Securityholders. The Company when authorized by a resolution of the Board of Directors, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto for 1 or more of the following purposes: (a) to evidence the succession of another corporation to the Company, or successive successions, and the assumption by the successor corporation of the covenants, agreements and obligations of the Company pursuant to Article Ten hereof, (b) to add to the covenants of the Company such further covenants, restrictions or conditions for the protection of the holders of all or any series of Securities (and if such covenants are to be for the benefit of less than all series of Securities stating that such covenants are expressly being included for the benefit of such series) as the Board of Directors and the Trustee shall consider to be for the protection of the holders of such Securities, and to make the occurrence, or the occurrence and continuance, of a default in any of such additional covenants, restrictions or conditions a default or an Event of Default permitting the enforcement of all or any of the several remedies provided in this Indenture as herein set forth, provided however, that in respect of any such additional covenant, restriction or condition such supplemental indenture may provide for a particular period of grace after default (which period may be shorter or longer than that allowed in the case of other defaults) or may provide for an immediate enforcement upon such default or may limit the remedies available to the Trustee upon such default; (c) to provide for the issuance under this Indenture of Securities in coupon form (including Securities registrable as to principal only) and to provide for exchangeability of such Securities with the Securities issued hereunder in fully registered form and to make all appropriate changes for such purpose; 63 (d) to secure the Securities pursuant to the requirements of Section 10.03 or otherwise; or (e) to cure any ambiguity or to correct or supplement any provision contained herein or in any supplemental indenture which may be defective or inconsistent with any other provision contained herein or in any supplemental indenture, or to make such other provisions in regard to matters or questions arising under this Indenture; provided that any such action shall not adversely affect the interests of the holders of the Securities; (f) to establish the form or terms of Securities of any series as permitted by Section 2.01 and 2.03, including, without limitation, any terms relating to the issuance, exchange, registration or transfer of Securities issued in whole or in part in the form of one or more global Securities and the payment of any principal thereof, or interest or premium, if any, thereon; and (g) to evidence and provide for the acceptance of appointment hereunder by a successor trustee with respect to the Securities of one or more series and to add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one trustee, pursuant to the requirements of Section 6.11. The Trustee is hereby authorized to join with the Company in the execution of any such supplemental indenture, to make any further appropriate agreements and stipulations which may be therein contained and to accept the conveyance, transfer and assignment of any property thereunder, but the Trustee shall not be obligated to, but may in its discretion, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. Any supplemental indenture authorized by the provisions of this Section 9.01 may be executed by the Company and the Trustee without the consent of the holders of any of the Securities at the time outstanding, notwithstanding any of the provisions of Section 9.02. SECTION 9.02. Supplemental Indentures with Consent of Securityholders. With the consent (evidenced as provided in Section 7.01) of the holders of not less than 66 2/3% in aggregate principal amount of the Securities at the time outstanding of all series affected by such supplemen- 64 tal indenture (voting as a class), the Company, when authorized by a resolution of the Board of Directors, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or of modifying in any manner the rights of the holders of the Securities of each series so affected; provided, however, that no such supplemental indenture shall (i) extend the fixed maturity of any Security, or reduce the rate or extend the time of payment of interest thereon, or reduce the principal amount thereof or any premium thereon, or reduce any amount payable on redemption thereof or make the principal thereof or any interest or premium thereon payable in any coin or currency other than that provided in the Securities, or reduce the amount of the principal of an Original Issue Discount Security that would be due and payable upon an acceleration of the maturity thereof pursuant to Section 5.01 or the amount thereof provable in bankruptcy pursuant to Section 5.02, or impair or affect the right of any Securityholder to institute suit for payment thereof or the right of repayment, if any, at the option of the holder, without the consent of the holder of each Security so affected, or (ii) reduce the aforesaid percentage of Securities the holders of which are required to consent to any such supplemental indenture, without the consent of the holders of each Security then affected. A supplemental indenture which changes or eliminates any covenant or other provision of this Indenture which has expressly been included solely for the benefit of one or more particular series of Securities, or which modifies the rights of Securityholders of such series with respect to such covenant or provision, shall be deemed not to affect the rights under this Indenture or the Securityholders of any other series. Upon the request of the Company accompanied by a copy of a resolution of the Board of Directors certified by its Secretary or Assistant Secretary authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence of the consent of Securityholders as aforesaid, the Trustee shall join with the Company in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture. 65 It shall not be necessary for the consent of the Securityholders under this Section 9.02 to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof. SECTION 9.03. Compliance with Trust Indenture Act; Effect of Supplemental Indentures. Any supplemental indenture executed pursuant to the provisions of this Article Nine shall comply with the Trust Indenture Act of 1939, as then in effect. Upon the execution of any supplemental indenture pursuant to the provisions of this Article Nine, this Indenture shall be and be deemed to be modified and amended in accordance therewith and the respective rights, limitations of rights, obligations, duties and immunities under this Indenture of the Trustee, the Company and the holders of Securities of each series affected thereby shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes. SECTION 9.04. Notation on Securities. Securities of any series authenticated and delivered after the execution of any supplemental indenture affecting such series pursuant to the provisions of this Article Nine may bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company or the Trustee shall so determine, new Securities of any series so modified as to conform, in the opinion of the Trustee and the Board of Directors, to any modification of this Indenture contained in any such supplemental indenture may be prepared and executed by the Company, authenticated by the Trustee or the Authenticating Agent and delivered in exchange for the Securities of any series then outstanding. SECTION 9.05. Evidence of Compliance of Supplemental Indenture to be Furnished Trustee. The Trustee, subject to the provisions of Sections 6.01 and 6.02, may receive an Officers' Certificate and an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant hereto complies with the requirements of this Article Nine. 66 ARTICLE TEN. CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE. SECTION 10.01. Company May Consolidate, etc., on Certain Terms. The Company shall not consolidate with or merge into any other corporation or convey or transfer its properties and assets substantially as an entirety to any Person, unless: (1) the corporation formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance or transfer the properties and assets of the Company substantially as an entirety shall be a corporation organized and existing under the laws of the United States of America or any State or the District of Columbia, and shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, the due and punctual payment of the principal of and premium, if any, and interest on all the Securities and the performance and observance of every covenant or condition of this Indenture on the part of the Company to be performed or observed; (2) immediately after giving effect to such transaction, no Event of Default, and no event which, after notice or lapse of time, or both, would become an Event of Default, shall have happened and be continuing; and (3) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel each stating that such consolidation, merger, conveyance or transfer and such supplemental indenture comply with this Article and that all conditions precedent herein provided for relating to such transaction have been complied with. SECTION 10.02. Successor Corporation to be Substituted for Company. In case of any such consolidation, merger, conveyance or transfer and upon the assumption by the successor corporation, by supplemental indenture, executed and delivered to the Trustee and satisfactory in form to the Trustee, of the due and punctual payment of the principal of and premium, if any, and interest on all of the Securities and the due and punctual performance and observance of all of the covenants and conditions of this Indenture to be performed or observed by the Company, such successor corporation shall succeed to and be substituted for the Company, with the same effect as if it had been named herein an the party of the first part, and the Company thereupon shall be relieved of any further liability or obligation hereunder or upon the Securities. Such successor corporation there- 67 upon may cause to be signed, and may issue either in its own name or in the name of Phillips Petroleum Company, any or all of the Securities issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee or the Authenticating Agent; and, upon the order of such successor corporation instead of the Company and subject to all the terms, conditions and limitations in this Indenture prescribed, the Trustee or the Authenticating Agent shall authenticate and deliver any Securities which previously shall have been signed and delivered by the officers of the Company to the Trustee or the Authenticating Agent for authentication, and any Securities which such successor corporation thereafter shall cause to be signed and delivered to the Trustee or the Authenticating Agent for that purpose. All the Securities so issued shall in all respects have the same legal rank and benefit under this Indenture as the Securities theretofore or thereafter issued in accordance with the terms of this Indenture as though all of such Indentures had been issued at the date of the execution hereof. SECTION 10.03. Securities to be Secured in Certain Events. If, upon any such consolidation or merger of the Company, or upon any such conveyance or transfer of the property and assets of the Company substantially as an entirety or upon any consolidation or merger of any Restricted Subsidiary with or into any other Subsidiary, or upon any conveyance or transfer of the property and assets of any Restricted Subsidiary substantially as an entirety to any other Subsidiary, any Restricted Property of the Company or any Restricted Subsidiary or any shares of stock or indebtedness of any Restricted Subsidiary owned immediately prior thereto would thereupon become subject to any Mortgage (other than Mortgages which would be permitted under Section 3.05 without the Company's having to secure the Securities equally and ratably), the Company, prior to any such consolidation, merger, conveyance or transfer, will by indenture supplemental hereto secure the Securities (together with, if the Company shall so determine, any other indebtedness of the Company or such Restricted Subsidiary then existing or thereafter created ranking on a parity with the Securities) by a direct lien on such Restricted Property, shares of stock or indebtedness, prior to all liens other than any theretofore existing thereon. SECTION 10.04. Opinion of Consul to be Given Trustee. The Trustee, subject to the provisions of Sections 6.01 and 6.02, may receive an Opinion of Counsel as conclusive evidence that any consolidation, merger, conveyance or transfer, and any assumption, permitted or required by the terms of this Article Ten complies with the provisions of this Article Ten. 68 ARTICLE ELEVEN. SATISFACTION AND DISCHARGE OF INDENTURE. SECTION 11.01. Discharge of Indenture. When (a) the Company shall deliver to the Trustee for cancellation all Securities theretofore authenticated (other than any Securities which shall have been destroyed, lost or stolen and which shall have been replaced or paid as provided in Section 2.08) and not theretofore cancelled, or (b) all the Securities not theretofore cancelled or delivered to the Trustee for cancellation shall have become due and payable, or are by their terms to become due and payable within 1 year or are to be called for redemption within 1 year under arrangements satisfactory to the Trustee for the giving of notice of redemption, and the Company shall deposit with the Trustee, in trust, funds sufficient to pay at maturity or upon redemption all of the Securities (other than any Securities which shall have been destroyed, lost or stolen and which shall have been replaced or paid as provided in Section 2.08) not theretofore cancelled or delivered to the Trustee for cancellation, including principal and premium, if any, and interest due or to become due to such date of maturity or redemption date, as the case may be, but excluding, however, the amount of any moneys for the payment of principal of, and premium, if any, or interest on the Securities (1) theretofore repaid to the Company in accordance with the provisions of Section 11.04, or (2) paid to any State or to the District of Columbia pursuant to its unclaimed property or similar laws, and if in either case the Company shall also pay or cause to be paid all other sums payable hereunder by the Company, then this Indenture shall cease to be of further effect, and the Trustee, on demand of the Company accompanied by any Officers' Certificate and an Opinion of Counsel and at the cost and expense of the Company, shall execute proper instruments acknowledging satisfaction of and discharging this Indenture, the Company, however, hereby agreeing to reimburse the Trustee for any costs or expenses thereafter reasonably and property incurred by the Trustee in connection with this Indenture or the Securities. SECTION 11.02. Deposited Moneys and U.S. Government Obligations to be Held in Trust by Trustee. Subject to the provisions of Section 11.04, all moneys and U.S. Government Obligations deposited with the Trustee pursuant to Sections 11.01 or 11.05 shall be held in trust and applied by it to the payment, either directed or through any paying agent (including the Company if acting as its own paying agent), to the holders of the particular Securities for the payment of which such moneys or U.S. Government 69 Obligations have been deposited with the Trustee, of all sums due and to become due thereon for principal, premium, if any, and interest. SECTION 11.03. Paying Agent to Repay Moneys Held. Upon the satisfaction and discharge of this Indenture all moneys then held by any paying agent of the Securities (other than the Trustee) shall, upon demand of the Company, be repaid to it or paid to the Trustee, and thereupon such paying agent shall be released from all further liability with respect to such moneys. SECTION 11.04. Return of Unclaimed Moneys. Any moneys deposited with or paid to the Trustee or any paying agent for payment of the principal of, and premium, if any, or interest on Securities and not applied but remaining unclaimed by the holders of Securities for 3 years after the date upon which the principal of, and premium, if any, or interest on such Securities, as the case may be, shall have become due and payable, shall be repaid to the Company by the Trustee or such paying agent on written demand; and the holder of any of the Securities shall thereafter look only to the Company for any payment which such holder may be entitled to collect and all liability of the Trustee or such paying agent with respect to such moneys shall thereupon cease. SECTION. 11.05. Defeasance Upon Deposit of Moneys or U.S. Government Obligations. At the Company's option, either (a) the Company shall be deemed to have been Discharged (as defined below) from its respective obligations with respect to any series of Securities on the 91st day after the applicable conditions set forth below have been satisfied or (b) the Company shall cease to be under any obligation to comply with any term, provision or condition set forth in Sections 3.05, 3.06, 10.01 and 10.03 with respect to any series of Securities at any time after the applicable conditions set forth below have been satisfied: (1) The Company shall have deposited or caused to be deposited irrevocably with the Trustee or the Defeasance Agent (as defined below) as trust funds in trust, specifically pledged as security for, and dedicated solely to, the benefit of the holders of the Securities of such series (i) money in an amount, or (ii) U.S. Government Obligations which through the payment of interest and principal in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment, money in an amount, or (iii) a combination of (i) and (ii), sufficient, in the opinion (with respect to (ii) and (iii)) of a nationally recognized firm of independent public 70 accountants expressed in a written certification thereof delivered to the Trustee and the Defeasance Agent, if any, to pay and discharge each installment of principal (including any mandatory sinking fund payments) of, and interest and premium, if any, on, the outstanding Securities of such series on the dates such installments of principal, interest or premium are due; (2) if the Securities of such series are then listed on any national securities exchange, the Company shall have delivered to the Trustee and the Defeasance Agent, if any, an Opinion of Counsel to the effect that the exercise of the option under this Section 11.05 would not cause such Securities to be delisted from such exchange; (3) no Event of Default or event which with notice or lapse of time would become an Event of Default with respect to the Securities of such series shall have occurred and be continuing on the date of such deposit; and (4) the Company shall have delivered to the Trustee and the Defeasance Agent, if any, an Opinion of Counsel to the effect that holders of the Securities of such series will not recognize income, gain or loss for United States Federal income tax purposes as a result of the exercise of the option under this Section 11.05 and will be subject to United States Federal income tax on the same amount and in the same manner and at the same times an would have been the case if such option had not been exercised, and, in the case of the Securities of such series being Discharged, such opinion shall be accompanied by a private letter ruling to that effect received from the United States Internal Revenue Service or a revenue ruling pertaining to a comparable form of transaction to that effect published by the United States Internal Revenue Service. "Discharged" means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by, and obligations under, the Securities of such series and to have satisfied all the obligations under this Indenture relating to the Securities of such series (and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging the same), except (A) the rights of holders of Securities of such series to receive, from the trust fund described in clause (1) above, payment of the principal of and the interest and premium, if any, on such Securities when such payments are due; (B) the Company's obligations with respect to such Securities under Sections 2.07, 2.08, 5.02 and 11.04; 71 and (C) the rights, powers, trusts, duties and immunities of the Trustee hereunder. "Defeasance Agent" means another financial institution which is eligible to act as Trustee hereunder and which assumes all of the obligations of the Trustee necessary to enable the Trustee to act hereunder. In the event such a Defeasance Agent is appointed pursuant to this section, the following conditions shall apply: 1. The Trustee shall have approval rights over the document appointing such Defeasance Agent and the document setting forth such Defeasance Agent's rights and responsibilities; 2. The Defeasance Agent shall provide verification to the Trustee acknowledging receipt of sufficient money and/or U.S. Government Obligations to meet the applicable conditions set forth in this Section 11.05; 3. The Trustee shall determine whether the Company shall be deemed to have been Discharged from its respective obligations with respect to any series of Securities or whether the Company shall cease to be under any obligation to comply with any term, provision or condition set forth in Sections 3.05, 3.06, 10.01 and 10.03 with respect to any series of Securities. ARTICLE TWELVE. IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS. SECTION 12.01. Indenture and Securities Solely Corporate Obligations. No recourse for the payment of the principal of or premium, if any, or interest on any Security, or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company in this Indenture or in any supplemental indenture, or in any Security, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, officer or director, as such, past, present or future, of the Company or of any successor corporation of the Company, either directly or through the Company or any successor corporation of the Company, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that all such liability is hereby expressly waived and released as a condition of, 72 and as a consideration for, the execution of this Indenture and the issue of the Securities. ARTICLE THIRTEEN. MISCELLANEOUS PROVISIONS. SECTION 13.01. Successors. All the covenants, stipulations, promises and agreements in this Indenture contained by the Company shall bind its successors and assigns whether so expressed or not. SECTION 13.02. Official Acts by Successor Corporation. Any act or proceeding by any provision of this Indenture authorized or required to be done or performed by any board, committee or officer of the Company shall and may be done and performed with like force and effect by the like board, committee or officer of any corporation that shall at the time be the lawful sole successor of the Company. SECTION 13.03. Addresses for Notices, etc. Any notice or demand which by any provision of this Indenture is required or permitted to be given or served by the Trustee or by the holders of Securities on the Company may be given or served by being deposited postage prepaid by registered or certified mail in a post office letter box addressed (until another address is filed by the Company with the Trustee for the purpose) to the Company, 630 Fifth Avenue, Suite 1970, New York, N.Y., 10111, Attention: Manager, Investor Relations, Phillips Petroleum Company. Any notice, direction, request or demand by any Securityholder to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, if given or made in writing at the office of the Trustee, addressed to the Trustee, 231 South LaSalle Street, 7th Floor, Chicago, Illinois 60697, Attention: Corporate Trust Division. SECTION 13.04. New York Contract. This Indenture and each Security shall be deemed to be a contract made under the laws of the State of New York, and for all purposes shall be governed by and construed in accordance with the laws of said State. SECTION 13.05. Evidence of Compliance with Conditions Precedent. Upon any application or demand by the Company to the Trustee to take any action under any of the provisions of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate stating that in the opinion of the signers all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of 73 Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with. Each certificate or opinion provided for in this Indenture and delivered to the Trustee with respect to compliance with a condition or covenant provided for in this Indenture shall include (1) a statement that the person making such certificate or opinion has read such covenant or condition, (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. SECTION 13.06. Legal Holidays. In any case where the date of payment of interest on or principal of the Securities will be in The City of New York, New York or Chicago, Illinois a legal holiday or a day on which banking institutions are authorized by law to close, the payment of such interest on or principal of the Securities need not be made on such date but may be made on the next succeeding day not in either City a legal holiday or a day on which banking institutions are authorized by law to close, with the same force and effect as if made on the date of payment and no interest shall accrue for the period from and after such date. SECTION 13.07. Trust Indenture Act to Control. If and to the extent that any provision of this Indenture limits, qualifies or conflicts with another provision included in this Indenture which is required to be included in this Indenture by any of Sections 310 to 317, inclusive, of the Trust Indenture Act of 1939, such required provision shall control. SECTION 13.08. Table of Contents, Headings, etc. The table of contents and the titles and headings of the articles and sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof. SECTION 13.09. Execution in Counterparts. This Indenture may be executed in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute but one and the same instrument. 74 ARTICLE FOURTEEN. REDEMPTION OF SECURITIES - MANDATORY AND OPTIONAL SINKING FUND. SECTION 14.01 Applicability of Article. The provisions of this Article shall be applicable to the Securities of any series which are redeemable before their maturity or to any sinking fund for the retirement of Securities of a series except as otherwise specified as contemplated by Section 2.03 for Securities of such series. SECTION 14.02. Notice of Redemption; Selection of Securities. In case the Company shall desire to exercise the right to redeem all, or, as the case may be, any part of the Securities of any series in accordance with their terms, it shall fix a date for redemption and shall mail a notice of such redemption at least 30 and not more than 60 days prior to the date fixed for redemption to the holders of Securities of such series so to be redeemed as a whole or in part at their last addresses as the same appear on this Security register. Such mailing shall be by first class mail. The notice if mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the holder receives such notice. In any case, failure to give such notice by mail or any defect in the notice to the holder of any Security of a series designated for redemption as a whole or in part shall not affect the validity of the proceedings for the redemption of any other Security of such series. Each such notice of redemption shall specify the date fixed for redemption, the redemption price at which Securities of such series are to be redeemed,. the place or places of payment, that payment will be made upon presentation and surrender of such Securities, that interest accrued to the date fixed for redemption will be paid an specified in said notice, and that on and after said date interest thereon or on the portions thereof to be redeemed will cease to accrue. If less than all the Securities of such series are to be redeemed the notice of redemption shall specify, the numbers of the Securities of that series to be redeemed. In case any Security of a series is to be redeemed in part only, the notice of redemption shall state the portion of the principal amount thereof to be redeemed and shall state that on and after the date fixed for redemption, upon surrender of such Security, a new Security or Securities of that series in principal amount equal to the unredeemed portion thereof will be issued. 75 Prior to the redemption date specified in the notice of redemption given as provided in this Section, the Company will deposit with the Trustee or with 1 or more paying agents an amount of money sufficient to redeem on the redemption date all the Securities so called for redemption at the appropriate redemption price, together with accrued interest to the date fixed for redemption. If less than all the Securities of a series are to be redeemed, the Company will give the Trustee notice not less than 60 days prior to the redemption date as to the aggregate principal amount of Securities of that series to be redeemed and the Trustee shall select, in such manner as in its sole discretion it shall deem appropriate and fair, the Securities of that series or portions thereof (in integral multiples of $1,000, except as otherwise set forth in the applicable form of Security) to be redeemed. SECTION 14.03. Payment of Securities Called for Redemption. If notice of redemption has been given as provided in Section 14.02 or Section 14.04, the Securities or portions of Securities of the series with respect to which such notice has been given shall become due and payable on the date and at the place or places stated in such notice at the applicable redemption price, together with interest accrued to the date fixed for redemption, and on and after said date (unless the Company shall default in the payment of such Securities at the redemption price, together with interest accrued to said date) interest on the Securities or portions of Securities of any series so called for redemption shall cease to accrue. On presentation and surrender of such Securities at a place of payment specified in said notice, the said Securities or the specified portions thereof shall be paid and redeemed by the Company at the applicable redemption price, together with interest accrued thereon to the date fixed for redemption. Upon presentation of any Security of any series redeemed in part only, the Company shall execute and the Trustee shall authenticate and deliver to the holder thereof, at the expense of the Company, a new Security or Securities of such series of authorized denominations, in principal amount equal to the unredeemed portion of the Security so presented. SECTION 14.04. Mandatory and Optional Sinking Fund. The minimum amount of any sinking fund payment provided for by the terms of Securities of any series is herein referred to as a "mandatory sinking fund payment", and any payment in excess of such minimum amount provided for by the terms of Securities of any series is herein referred to as an 76 "optional sinking fund payment". The last date on which any such payment may be made is herein referred to as a "sinking fund payment date". In lieu of making all or any part of any mandatory sinking fund payment with respect to any Securities of a series in cash, the Company may at its option (a) deliver to the Trustee Securities of that series theretofore purchased by the Company and (b) may apply as a credit Securities of that series which have been redeemed either at the election of the Company pursuant to the terms of such Securities or through the application of optional sinking fund payments pursuant to the next succeeding paragraph, in each case in satisfaction of all or any part of any mandatory sinking fund payment, provided that such Securities have not been previously so credited. Each such Security so delivered or applied as a credit shall be credited at the sinking fund redemption price for such Securities and the amount of any mandatory sinking fund shall be reduced accordingly. If the Company intends so to deliver or credit such Securities with respect to any mandatory sinking fund payment it shall deliver to the Trustee at least 60 days prior to the next succeeding sinking fund payment date for such series (a) a certificate signed by the Treasurer or an Assistant Treasurer of the Company specifying the portion of such sinking fund payment, if any, to be satisfied by payment of cash and the portion of such sinking fund payment, if any, which is to be satisfied by delivering and crediting such Securities and (b) any Securities to be so delivered. All Securities so delivered to the Trustee shall be cancelled by the Trustee and no Securities shall be authenticated in lieu thereof if the Company fails to deliver such certificate and Securities at or before the time provided above, the Company shall not be permitted to satisfy any portion of such mandatory sinking fund payment by delivery or credit of Securities. At its option the Company may pay into the sinking fund for the retirement of Securities of any particular series, on or before each sinking fund payment date for such series, any additional sum in cash as specified by the terms of such series of Securities. If the Company intends to exercise its right to make any such optional sinking fund payment, it shall deliver to the Trustee at least 60 days prior to the next succeeding sinking fund payment date for such Series a certificate signed by the Treasurer or an Assistant Treasurer of the Company stating that the Company intends to exercise such optional right and specifying the amount which the Company intends to pay on such sinking fund payment date. If the Company fails to deliver such certificate at or before the time provided above, the Company shall not be permitted to make any optional sinking fund payment with 77 respect to such sinking fund payment date. To the extent that such right is not exercised in any year it shall not be cumulative or carried forward to any subsequent year. If the sinking fund payment or payments (mandatory or optional) made in cash plus any unused balance of any preceding sinking fund payments made in cash shall exceed $50,000 (or a lesser sum if the Company shall so request) with respect to the Securities of any particular series, it shall be applied by the Trustee or 1 or more paying agents on the next succeeding sinking fund payment date to the redemption of Securities of such series at the sinking fund redemption price together with accrued interest to the date fixed for redemption. The Trustee shall select, in the manner provided in Section 14.02, for redemption on such sinking fund payment date a sufficient principal amount of Securities of such series to absorb said cash, as nearly as may be, and the Trustee shall, at the expense and in the name of the Company, thereupon cause notice of redemption of Securities of such series to be given in substantially the manner and with the effect provided in Sections 14.02 and 14.03 for the redemption of Securities of that series in part at the option of the Company, except that the notice of redemption shall also state that the Securities of such series are being redeemed for the sinking fund. Any sinking fund moneys not so applied or allocated by the Trustee or any paying agent to the redemption of Securities of that series shall be added to the next cash sinking fund payment received by the Trustee or such paying agent and, together with such payment, shall be applied in accordance with the provisions of this Section 14.04. Any and all sinking fund moneys held by the Trustee or any paying agent on the maturity date of the Securities of any particular series, and not held for the payment or redemption of particular Securities of such series, shall be applied by the Trustee or such paying agent, together with other moneys, if necessary, to be deposited sufficient for the purpose, to the payment of the principal of the Securities of that series at maturity. On or before each sinking fund payment date, the Company shall pay to the Trustee or to 1 or more paying agents in cash a sum equal to all interest accrued to the date fixed for redemption on Securities to be redeemed on the next following sinking fund payment date pursuant to this Section. Neither the Trustee nor any paying agent shall redeem any Securities of a series with sinking fund moneys, and the Trustee shall not mail any notice of redemption of Securities for such series by operation of the sinking fund, during the continuance of a default in payment of interest on 78 such Securities or of any Event of Default (other than an Event of Default occurring as a consequence of this paragraph), except that if the notice of redemption of any Securities shall theretofore have been mailed in accordance with the provisions hereof, the Trustee or any paying agent shall redeem such Securities if cash sufficient for that purpose shall be deposited with the Trustee or such paying agent for that purpose in accordance with the terms of this Article Fourteen. Except as aforesaid, any moneys in the sinking fund for such series at the time when any such default or Event of Default shall occur and any moneys thereafter paid into the sinking fund shall, during the continuance of such default or Event of Default, be held as security for the payment of all such Securities; provided, however, that in case such Event of Default or default, shall have been cured or waived as provided herein, such moneys shall thereafter be applied on the next succeeding sinking fund payment date on which such moneys may be applied pursuant to the provisions of this Section 14.04. CONTINENTAL BANK, NATIONAL ASSOCIATION hereby accepts the trusts in this Indenture declared and provided, upon the terms and conditions hereinabove set forth. 79 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed by their respective officers thereunto duly authorized and their respective corporate seals to be hereunto duly affixed and attested, all as of the day and year first above written. PHILLIPS PETROLEUM COMPANY Issuer By /s/ J.J. Mulva ---------------------- [CORPORATE SEAL] Attest: /s/ Terry B. Nance - --------------------- Assistant Secretary CONTINENTAL BANK, NATIONAL ASSOCIATION Trustee By /s/ A.H. Lenters ----------------------- [CORPORATE SEAL] Attest: /s/ Debra DeLovey - --------------------- Trust Officer 80 STATE OF OKLAHOMA | ss.: COUNTY OF WASHINGTON| On the 14th day of November, 1990, before me personally came J.J. Mulva, to me known, who, being by me duly sworn, did depose and say that he resides at BARTLESVILLE, OKLAHOMA; that he is a Vice President, Treasurer and Chief Financial Officer of PHILLIPS PETROLEUM COMPANY, one of the corporations described in and which executed the above instrument; that he knows the corporate seal of said corporation; that the seal affixed to the said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation; and that he signed his name thereto by like authority. /s/ Ann J. Anderson ------------------------- Notary Public My Commission expires: January 6, 1994 [ NOTARIAL SEAL ] STATE OF ILLINOIS| ss.: COUNTY OF COOK | On the 15th day of November 1990, before me personally came A.H. Lenters, to me known, who, being by me duly sworn, did depose and say that he resides at Chicago, Illinois; that he is an Vice President of Continental Bank, National Association, one of the corporations described in and which executed the above instrument; that he knows the corporate seal of said corporation; that the seal affixed to the said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation, and that he signed his name thereto by like authority. /s/ V. Washington ------------------------ Notary Public [ NOTARIAL SEAL ] ----------------------------------- | "OFFICIAL SEAL" | | V. WASHINGTON | | NOTARY PUBLIC, STATE OF ILLINOIS | | MY COMMISSION EXPIRES 9-20-92 | ------------------------------------ EX-4 4 Exhibit 4(d) AMENDMENT TO RIGHTS AGREEMENT ----------------------------- AMENDMENT, dated as of May 16, 1990, to the Rights Agreement, dated as of July 10, 1989 (the "Rights Agreement"), between Phillips Petroleum Company, a Delaware corporation (the "Company"), and Manufacturers Hanover Trust Company, as Rights Agent (the "Rights Agent"). The Company and the Rights Agent have heretofore executed and entered into the Rights Agreement. Pursuant to Section 27 of the Rights Agreement, the Company and the Rights Agent may from time to time supplement or amend the Rights Agreement in accordance with the provisions of Section 27 thereof. All acts and things necessary to make this Amendment a valid agreement, enforceable according to its terms, have been done and performed, and the execution and delivery of this Amendment by the Company and the Rights Agent have been in all respects duly authorized by the Company and the Rights Agent. In consideration of the foregoing and the mutual agreements set forth herein, the parties hereto agree as follows: 1. Section 1(a) of the Rights Agreement is hereby modified and amended by adding the following sentence to the end thereof: Notwithstanding the foregoing, if the Board of Directors of the Company determines in good faith that a Person who would otherwise be an Acquiring Person, as defined pursuant to the foregoing provisions of this paragraph (a), has become such inadvertently, and such Person divests as promptly as practicable a sufficient number of Common Shares so that such Person would no longer be an Acquiring Person, as defined pursuant to the foregoing provisions of this paragraph (a), then such Person shall not be deemed to be an "Acquiring Person" for any purposes of this Agreement. 2. Section 1 of the Rights Agreement is hereby further modified and amended by deleting paragraphs (i) and (o) thereof in their entirety and relettering paragraphs (j) through (n) thereof accordingly. 3. Section 11(a) of the Rights Agreement is hereby modified and amended by deleting subparagraph (iii) thereof in its entirety, renumbering subparagraph (iv) thereof as subparagraph (iii), and amending and modifying subparagraph (ii) thereof to read in its entirety as follows: (ii) Subject to Section 24 of this Agreement, in the event any Person becomes an Acquiring Person, each holder of a Right shall thereafter have a right to receive, upon exercise thereof at a price equal to the then current Purchase Price multiplied by the number of one-hundredths of a Preferred Share for which a Right is then exercisable, in accordance with the terms of this Agreement and in lieu of Preferred Shares, such number -2- of Common Shares of the Company as shall equal the result obtained by (x) multiplying the then current Purchase Price by the number of one-hundredths of a Preferred Share for which a Right is then exercisable and dividing that product by (y) 50% of the then current per share market price of the Company's Common Shares (determined pursuant to Section 11(d) hereof) on the date of the occurrence of such event. In the event that any Person shall become an Acquiring Person and the Rights shall then be outstanding, the Company shall not take any action which would eliminate or diminish the benefits intended to be afforded by the Rights. From and after the occurrence of such event, any Rights that are or were acquired or beneficially owned by any Acquiring Person (or any Associate or Affiliate of such Acquiring Person) shall be void and any holder of such Rights shall thereafter have no right to exercise such Rights under any provision of this Agreement. No Right Certificate shall be issued pursuant to Section 3 that represents Rights beneficially owned by an Acquiring Person whose Rights would be void pursuant to the preceding sentence or any Associate or Affiliate thereof; no Right Certificate shall be issued at any time upon the transfer of any Rights to an Acquiring Person whose Rights would be void pursuant to the preceding sentence or any Associate or Affiliate thereof -3- or to any nominee of such Acquiring Person, Associate or Affiliate; and any Right Certificate delivered to the Rights Agent for transfer to an Acquiring Person whose Rights would be void pursuant to the preceding sentence shall be cancelled. 4. Section 11 (a) of the Rights Agreement is hereby further modified and amended by adding to the end of newly renumbered subparagraph (iii) thereof the following sentence: In the event the Company shall, after good faith effort, be unable to take all such action as may be necessary to authorize such additional Common Shares, the Company shall substitute, for each Common Share that would otherwise be issuable upon exercise of a Right, a number of Preferred Shares or fraction thereof such that the current per share market price of one Preferred Share multiplied by such number or fraction is equal to the current per share market price of one Common Share as of the date of issuance of such Preferred Shares or fraction thereof. 5. Section 23 of the Rights Agreement is hereby modified and amended to read in its entirety as follows: Section 23. Redemption. (a) The Board of Directors of the Company may, at its option, at any time prior to such time as any Person becomes an Acquiring -4- Person, redeem all but not less than all the then outstanding Rights at a redemption price of $.01 per Right, appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof (such redemption price being hereinafter referred to as the "Redemption Price"). The redemption of the Rights by the Board of Directors may be made effective at such time, on such basis, and with such conditions as the Board of Directors in its sole discretion may establish. (b) Immediately upon the action of the Board of Directors of the Company ordering the redemption of the Rights pursuant to subsection (a) of this Section 23, and without any further action and without any notice, the right to exercise the Rights will terminate and the only right thereafter of the holders of Rights shall be to receive the Redemption Price. The Company shall promptly give public notice of any such redemption; provided, however, that the failure to give or any defect in any such notice shall not affect the validity of such redemption. Within 10 days after such action of the Board of Directors ordering the redemption of the Rights, the Company shall mail a notice of redemption to all the holders of the then outstanding Rights at their last addresses as they appear upon the registry books of the Rights Agent or, prior to the Distribution Date, on -5- the registry books of the transfer agent for the Common Shares. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of redemption will state the method by which the payment of the Redemption Price will be made. Neither the Company nor any of its Affiliates or Associates may redeem, acquire or purchase for value any Rights at any time in any manner other than that specifically set forth in this Section 23 or in Section 24 hereof, and other than in connection with the purchase of Common Shares prior to the Distribution Date. 6. Section 24 of the Rights Agreement is hereby modified and amended by deleting paragraph (c) thereof in its entirety, relettering paragraphs (d) and (e) thereof as paragraphs (c) and (d), respectively, and amending and modifying the newly relettered paragraph (c) thereof to read in its entirety as follows: In the event that there shall not be sufficient common Shares issued but not outstanding or authorized but unissued to permit any exchange of Rights as contemplated in accordance with this Section 24, the Company shall take all such action as may be necessary to authorize additional Common Shares for issuance upon exchange of the Rights. In the event the Company shall, after good faith effort, be unable to take all such action as may be necessary to authorize such additional -6- Common Shares, the Company shall substitute, for each Common Share that would otherwise be issuable upon exchange of a Right, a number of Preferred Shares or fraction thereof such that the current per share market price of one Preferred Share multiplied by such number or fraction is equal to the current per share market price of one Common Share as of the date of issuance of such Preferred Shares or fraction thereof. 7. This Amendment to the Rights Agreement shall be governed by and construed in accordance with the laws of the State of Delaware and for all purposes shall be governed by and construed in accordance with the laws of such State applicable to contracts to be made and performed entirely within such State. 8. This Amendment to the Rights Agreement may be executed in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute one and the same instrument. Terms not defined herein shall, unless the context otherwise requires, have the meanings assigned to such terms in the Rights Agreement. 9. In all respects not inconsistent with the terms and provisions of this Amendment to the Rights Agreement, the Rights Agreement is hereby ratified, adopted, approved and confirmed. In executing and delivering this Amendment, the Rights Agent shall be entitled to all the privileges and immunities afforded to the -7- Rights Agent under the terms and conditions of the Rights Agreement. 10. If any term, provision, covenant or restriction of this Amendment to the Rights Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Amendment to the Rights Agreement, and of the Rights Agreement, shall remain in full force and effect and shall in no way be affected, impaired or invalidated. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and attested, all as of the date and year first above written. Attest: PHILLIPS PETROLEUM COMPANY By: /s/ D.L. Cone By: /s/ J.J. Mulva ------------------------- ------------------------ Vice President Attest: MANUFACTURERS HANOVER TRUST COMPANY By: /s/ Leslie A. DeLuca By: /s/ Lawrence E. Dennedy ------------------------- ------------------------ Assistant Vice President Lawrence E. Dennedy Vice President -8- EX-10 5 Exhibit 10(i) BOARD OF DIRECTORS AMENDED JANUARY 8, 1996 PHILLIPS PETROLEUM COMPANY SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN SECTION I - PURPOSE ------------------- The purpose of the Phillips Petroleum Company Supplemental Executive Retirement Plan ("Plan") is to supplement the retirement benefits of Retiring eligible employees who were hired in mid- career. Phillips Petroleum Company ("Company") recognizes that from time to time, it retains the services of employee(s) after the employee has performed services at another company (or companies) for varying periods of time, in order to obtain the special skills and expertise developed by the key employee during these other periods of employment. These employees generally forego all or a portion of their potential retirement benefits upon leaving their previous employer(s). This Plan, therefore, supplements retirement benefits to at least partially compensate for the loss of retire- ment benefits accrued at the previous employer(s). The amount of supplemental benefit payable under this Plan will not cause a Retiring eligible employee's retirement benefit to equal or exceed a full career Retiring eligible employee's benefit. SECTION II - DEFINITION OF TERMS -------------------------------- a) Retirement Income Plan is the Retirement Income Plan of Phillips Petroleum Company. b) Retirement (or Retire, or is termination of employment with Retiring) the Company on or after the employee's earliest early retire- ment date as defined in the Retire- ment Income Plan. It includes ter- mination of employment at an age below 55 only when Section V ap- plies. c) Credited Service, as determined in accordance with Final Average Earnings, the provisions of the Retirement Normal Retirement Date, Income Plan. and Early Retirement Date d) Total Final Average is the average of the high 3 earn- -1- Earnings ings, excluding Incentive Compensa- tion Plan Awards, paid in consecu- tive years of the last 10 years prior to termination of employment plus the average of the high 3 Incentive Compensation Plan Awards for any of such last 10 years under the Incentive Compensation Plan, whether paid or deferred and the Key Employee Missed Credited Ser- vice Retirement Plan. e) Total Credited Service is an employee's Credited Service plus any additional months of ser- vice as calculated under the Prin- cipal Corporate Officers Supplemen- tal Retirement Plan and Missed Credited Service as defined in sub- section (j) of Section II of Arti- cle I in the Retirement Income Plan. SECTION III - ELIGIBLE EMPLOYEES -------------------------------- All employees of the Company who are participants in the Retirement Income Plan and who, a) as of November 1, 1988 participated in the Incentive Compensation Plan as members of Teams I, II, III (including those individuals promoted to such levels through November 1, 1988, ie: Grade 33 or above and ICP eligible), or b) were active employee participants or were eligible to participate in the Key Employee Death Protection Plan on the date of its termination (December 31, 1986), c) are hired subsequent to November 1, 1988 and at the time of hire are recommended for participation in the Plan by the Vice President, Planning and Corporate Relations and Services with approval by the Chief Executive Officer, or d) prior to retirement are recommended for participation in the Plan by the Vice President, Planning and -2- Corporate Relations and Services with approval by the Chief Executive Officer, will be eligible for benefits under this Plan. SECTION IV - ELIGIBILITY FOR BENEFITS ------------------------------------- An eligible employee as described in Section III who commences retirement benefits under the Retirement Income Plan, will be eligible to receive the benefit amount described in Section VI only if the results of (a) below exceed the results of (b) below where: (a) is the lesser of the following percentages; (i) 2.4% times the greater of the eligible employee's Credited Service or the Employee's Total Credited Service at the time of Retirement; or (ii) the Maximum SERP Benefit Percentage shown in the schedule below based upon the eligible employee's attained age at Retirement and, (b) is the percentage derived by multiplying 1.6% times the eligible employee's Total Credited Service at the time of Retirement. Attained Age at Maximum SERP Retirement Benefit Percentage ---------- ------------------ 65 60.0% 64 58.4% 63 56.8% 62 55.2% 61 53.6% 60 52.0% 59 50.4% 58 48.8% 57 47.2% 56 45.6% 55 44.0% 54 or younger -0- -3- SECTION V - SPECIAL ELIGIBILITY ------------------------------- An eligible employee as described in Section III who is less than age 55 and who is laid off under the Layoff Plan of Phillips Petroleum Company and/or the Supplemental Layoff Plan of Phillips Petroleum Company and/or the Enhanced Supplemental Layoff Pay Plan of Phillips Petroleum Company or any similar plans which may be adopted by the Company from time to time, will be eligible to receive the benefit described in Section VI if the results of (a) below exceed the results of (b) below where: (a) is the lesser of the following percentages; (i) 2.4% times the greater of an eligible employee's Credited Service, or the employee's Total Credited Service at the time of layoff; or (ii) the Maximum SERP Benefit Percentage shown in the schedule below based upon the eligible employee's attained age at the time of layoff. and, (b) is the percentage derived by multiplying 1.6% times the eligible employee's Total Credited Service at the time of layoff. Attained Age at the time Maximum SERP of Layoff Benefit Percentage ------------ ------------------ 54 42.4% 53 40.8% 52 39.2% 51 37.6% 50 36.0% 49 34.4% 48 32.8% 47 31.2% 46 29.6% 45 28.0% 44 26.4% 43 24.8% 42 23.2% -4- Attained Age at the time Maximum SERP of Layoff Benefit Percentage ------------ ------------------ 41 21.6% 40 20.0% 39 18.4% 38 16.8% 37 15.2% 36 13.6% 35 12.0% 34 10.4% 33 8.8% 32 7.2% 31 5.6% 30 4.0% 29 2.4% 28 0.8% SECTION VI - BENEFIT AMOUNT --------------------------- An eligible employee who qualifies for benefits under this Plan in accordance with Sections IV and V will be eligible to receive retirement benefits from the Plan as follows: A. With respect to eligible employees who commence retirement benefits on or after their Normal Retirement Date - multiply the lesser of (a)(i) or (a) (ii) as computed in Sections IV or V, as applicable, times the greater of the employee's Final Average Earnings or the employee's Total Final Average Earnings and with the results reduced by the portion of the eligible employee's Primary Social Security benefit as determined in the same manner as such reduction is determined under the Final Average Earnings formula of the Retirement Income Plan. B. With respect to eligible employees who commence retirement benefits at an Early Retirement Date - benefits will be -5- calculated in the same manner as the benefits for Normal Retirement Date, as described in A. of this Section, but reduced for early retirement in the same manner as is applicable under the Retirement Income Plan. In either A. or B. above the Retirement Income Plan calculations shall be made as if no benefit limitations were imposed by the Internal Revenue Code and no benefit reductions resulted from participation in any qualified or non-qualified Company-sponsored benefit plan, and the resulting benefit amount will be reduced by applicable retirement benefit payments for which the retiree is eligible from any of the following plans, or any other similar plan or plans, of the Company or any of its subsidiary or affiliated companies; Retirement Income Plan, Retirement Restoration Plan of Phillips Petroleum Company, Key Employee Deferred Compensation Plan of Phillips Petroleum Company, the Retirement Makeup Plan of Phillips Petroleum Company, Principal Corporate Officers Supplemen- tal Retirement Plan of Phillips Petroleum Company, the Phillips Petroleum Company Key Employee Death Protection Plan and the Key Employee Missed Credited Service Retirement Plan. SECTION VII - PAYMENT OF RETIREMENT BENEFITS -------------------------------------------- Subject to the requirement that the manner of payment of retirement benefits determined in accordance with this Plan, the Retirement Restoration Plan of Phillips Petroleum Company, the Key Employee Deferred Compensation Plan of Phillips Petroleum Company, the Principal Corporate Officers Supplemental Retirement Plan of -6- Phillips Petroleum Company, and the Retirement Makeup Plan of Phillips Petroleum Company, shall be the same, and subject further to the condition that a Retiring eligible employee who receives retirement payments under this Plan other than in one lump-sum payment, shall agree to be available during the payment period to provide, from time to time, advice and consultation to the Company after reasonable notice, or forfeit his/her remaining unpaid benefits, therefore: (i) The Retiring eligible employee may elect on the forms prescribed by the Company to have such retirement payments paid on a straight-life annuity basis, or to have such life annuity payments converted in the manner provided by the Retirement Income Plan to any one of the other forms of payment which the Retiring eligible employee would be entitled to select (except the lump-sum settlement option) if such payments were to be paid to the Retiring eligible employee under the Retirement Income Plan. (ii) Notwithstanding (i) above, an eligible employee who is commencing retirement benefits at age 60 or older may, not later than 30 days prior to commencing retirement bene- fits, express preferences as to: (a) whether the payment amounts should be converted in the manner provided by the Retirement Income Plan from a life annuity basis to one lump-sum payment, -7- (b) whether such lump-sum payment shall be paid to the employee on or as soon as practicable after the employee's commencement of retirement benefits, (c) whether such lump-sum payment shall be credited as an award under the Company's Key Employee Deferred Compensation Plan. The Chief Executive Officer, with respect to Retiring eligible employees who are not members of the Board of Directors and the Compensation Committee of the Board of Directors, with respect to Retiring eligible employees who are members of the Board of Directors, shall consider such indication of preference and shall respectively decide whether to accept or reject the preferences expressed. In the event the Chief Executive Officer or the Compensation Committee, as applicable, accepts such Retiring eligible employee's preference, such retirement benefit shall be paid in one lump sum as soon as practicable after the later of such acceptance or the Retiring eligible employee's retirement benefit commencement date; or if applicable, credited as of the eligible employee's retirement benefit commencement date as an award under the Key Employee Deferred Compensation Plan. SECTION VIII - METHOD OF PROVIDING BENEFITS ------------------------------------------- This Plan shall be unfunded. All benefits shall be provided solely from the general assets of the Company and any rights accruing to an eligible employee under the Plan shall be those of a general creditor; provided, however, that the Company may establish a -8- grantor trust to satisfy part or all of its Plan payment obliga- tions so long as the plan remains unfunded for purposes of Title I of ERISA. SECTION IX - MISCELLANEOUS PROVISIONS ------------------------------------- (a) No right or interest of an eligible employee under this Plan shall be assignable or transferable, in whole or in part, directly or indirectly, by operation of law or otherwise (excluding devolution upon death or mental incompetency). (b) This Plan shall be administered by the Chief Executive Officer except to the extent otherwise specifically stated herein, and the Chief Executive Officer's decisions in all matters relating to the interpretation and application thereof shall be final. (c) The Chief Executive Officer, may amend or terminate this Plan at any time if, in his or her sole judgment such amendment or termination is deemed desirable. However, such amendments may not increase the benefits payable hereunder to any Officer of the Company who is also currently a Director of the Company. (d) No amount accrued or payable hereunder shall be deemed to be a portion of an eligible employee's compensation or earnings for the purpose of any other employee benefit plan adopted or maintained by the Company, nor shall this Plan be deemed to amend or modify the provisions of the Retirement Income Plan. (e) Participation or nonparticipation in this Plan shall not affect any eligible employee's employment status, or confer any special rights other than those expressly stated in the Plan. -9- (f) 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 substan- tially all of the Company's assets and business or with or into which the Company may be consolidated or merged. (g) The payment of benefits to eligible employees commencing retirement benefits under this Plan is contingent upon their not engaging in activities during the payment period which, in the evaluation of the Chief Executive Officer, are detrimental to the Company. Such determination that an eligible employee has engaged in activities detrimental to the Company will result in the forfeiture of his/her unpaid benefits. (h) The Plan shall be construed, regulated, and administered in accordance 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. SECTION X - EFFECTIVE DATE -------------------------- This Plan became effective January 1, 1987. -10- EX-10 6 Exhibit 10(j) BOARD OF DIRECTORS APPROVED - JANUARY 13, 1997 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 1 which may be awarded to the Participant pursuant to the Incentive Compensation Plan, the Long Term Incentive Compensation Plan, the 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, (viii) credited as a result of an Employee's deferral of the settlement of a Long Term Performance Unit Award, or (ix) any other amount determined by the Committee to be an Award under the Plan. Sections 2 and 3 of this Plan shall not apply with respect to Awards included under (ii), (v), and (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. 2 (d) "Committee" shall mean the Compensation Committee of the Board of Directors. (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 Contribution 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 3 classified as a U.S. Domestic Employee; provided, however, that the Plan Administrator may approve 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 Securities Plan of Phillips Petroleum Company. 4 (o) "Participant" shall mean a person for whom a Deferred Compensation Account is maintained. (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. 5 (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. (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. (y) "Long Term Performance Unit Award" shall mean a Performance Award as authorized by Section 4.4 of the Omnibus Securities Plan, or similar or successive plan, where the applicable administrative procedure for such award provides that the recipient is eligible to indicate a preference to defer all or any part of such award. 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 6 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. (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. 7 (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. (f) Long Term Performance Unit Award. As soon as practicable following the grant of a Long Term Performance Unit Award, employees 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. 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 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 8 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 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 appli- 9 cable, 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 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. 10 (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 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 11 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. (f) Long Term Performance Unit Award. If a Potential Participant prefers to defer under this Plan the value of all or any part of the Long Term Performance Unit Award to which a notice received under Section 2(f) 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 90 days from the grant date of the Long Term Performance Unit Award. Such indication must be in writing signed by the Potential Participant, and, must state the portion of the value of the Long Term Performance Unit Award the Potential Participant desires to be deferred. If an indication is not received by 90 days from the grant date of the award, the Potential Participant will be deemed to have elected not to defer any portion of the award. Such indication of preference becomes irrevocable 90 days from the grant date of the award. The Committee or CEO, as applicable, shall consider such indication of preference as submitted and shall decide whether to accept or reject the preference expressed. The 12 Potential Participant shall be notified in writing of the decision. A deferral of the value of the Long Term Performance Unit Award 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. 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 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), 3(e), and 3(f) 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 13 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 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 14 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 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 accounting, 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. 15 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. (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 16 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: (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. 17 (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 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. 18 (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, 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, 19 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 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 determined 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). 20 (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 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. 21 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 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. 22 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 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. 23 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. 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 24 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 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 accordance 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. 25 EX-10 7 Exhibit 10(l) Shareholder Approved 5/10/93 Amended by the Board of Directors 1/13/97 OMNIBUS SECURITIES PLAN OF PHILLIPS PETROLEUM COMPANY (Amended and Restated) Section 1. Purpose and Establishment. The purpose of the Omnibus Securities Plan of Phillips Petroleum Company (the "Plan") is to benefit the Company's stockholders by encouraging high levels of performance by individuals whose performance is a key element in achieving the Company's continued financial and operational success, and to enable the Company to recruit, reward, retain and motivate employees to work as a team to achieve the Company's mission of being the top performer in each of our businesses by rewarding the creation of shareholder value. The Omnibus Securities Plan of Phillips Petroleum Company shall become effective January 1, 1993 upon its adoption by the Company's stockholders at the 1993 Annual Meeting. Section 2. Definitions. For purposes of the Plan, the following terms, as used herein, shall have the meaning specified: (a) "Award" or "Awards" means an award granted pursuant to Section 4 hereof. (b) "Award Agreement" means an agreement described in Section 5 hereof entered into between the Company and a Participant, setting forth the terms, conditions and any limitations applicable to the Award granted to the Participant. (c) "Beneficiary" means a person or persons designated by a Participant to receive, in the event of death, any unpaid portion of an Award held by the Participant. Any Participant may, subject to such limitations as may be prescribed by the Committee, designate one or more persons primarily or contin- gently as beneficiaries in writing upon forms supplied by and delivered to the Company, and may revoke such designations in writing. If a Participant fails effectively to designate a beneficiary, then the Award will be paid in the following order of priority: (i) Surviving spouse; (ii) Surviving children in equal shares; (iii) To the estate of the Participant. (d) "Board" means the Board of Directors of the Company as it may be comprised from time to time. (e) "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute. (f) "Committee" means the Compensation Committee of the Board or any successor committee with substantially the same responsi- bilities. (g) "Company" means Phillips Petroleum Company, a Delaware corporation or any successor corporation. (h) "Disability" shall mean the inability, in the opinion of the Company's group life insurance carrier, 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. -2- (i) "Employee" means any individual who is a salaried employee of the Company or any Participating Subsidiary. (j) "Exchange Act" means the Securities Exchange Act of 1934, as amended and in effect from time to time, or any successor statute. (k) "Fair Market Value" in reference to the common Stock of the Company means (i) the average of the reported highest and lowest sale prices per share of such Stock as reported on the composite tape of New York Stock Exchange transactions (or such other reporting system as shall be selected by the Committee) on the relevant date; or (ii) in the absence of reported sales on that date, the average of the reported highest and lowest sales prices per share on the last previous day for which there was a reported sale. The Committee shall determine the Fair Market Value of any security that is not publicly traded, using such criteria as it shall determine, in its sole discretion, to be appropriate for such valuation. (l) "Insider" means any person who is subject to Section 16 of the Exchange Act. (m) "Participant" means an Employee who has been designated by the Committee to be eligible for an Award pursuant to this Plan. (n) "Participating Subsidiary" means 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, and one or more Employees of which are Participants, or are eligible for Awards pursuant to this Plan. -3- (o) "Restricted Stock" means shares of Stock which have certain restrictions attached to the ownership thereof, which may be issued under Section 4.3. (p) "Retirement" means termination of employment with the Company or a Participating Subsidiary which qualifies the Employee for Retirement as that term is defined in the Retirement Income Plan of Phillips Petroleum Company or of the applicable retirement plan of a Participating Subsidiary. (q) "Rule 16b-3" means Rule 16b-3 promulgated by the Securities and Exchange Commission as now in force or as such regulation or successor regulation shall be hereafter amended. (r) "Section 16" means Section 16 of the Exchange Act or any successor regulation and the rules promulgated thereunder as they may be amended from time to time. (s) "Stock" means shares of Common Stock of the Company, par value $1.25. (t) "Stock Appreciation Right" means a right, the value of which is determined relative to the appreciation in value of shares of Stock, which may be issued under Section 4.2. (u) "Stock Option" means a right to purchase shares of Stock granted pursuant to Section 4.1 and includes Incentive Stock Options and Non-Qualified Stock Options as defined in Section 4.1. -4- Section 3. Eligibility. Awards may be granted only to Employees who are designated as Participants from time to time by the Committee. The Committee shall determine which Employees shall be Participants, the types of Awards to be made to Participants and the terms, conditions and limitations applicable to the Awards. Section 4. Awards Awards may include, but are not limited to, those described in this Section 4. The Committee may grant Awards singly, in tandem or in combination with other Awards, as the Committee may in its sole discretion determine. Subject to the other provisions of this Plan, Awards may also be granted in combination or in tandem with, in replacement of, or as alternatives to, grants or rights under this Plan and any other employee plan of the Company. 4.1 Stock Options A Stock Option is a right to purchase a specified number of shares of Stock at a specified price during such specified time as the Committee shall determine. (a) Options granted may be either of a type that complies with the requirements of incentive stock options as defined in Section 422 of the Code ("Incentive Stock Options") or of a type that does not comply with such requirements ("Non-Qualified Options"), provided however, that the aggregate number of shares which may be subject to Incentive Stock Options under this Plan shall not exceed twenty million (20,000,000) shares of Stock. (b) The exercise price per share of any Stock Option shall be no less than the Fair Market Value per share of the Stock subject to the option on the date the Stock Option is granted. -5- (c) A Stock Option may be exercised, in whole or in part, by giving written notice of exercise to the Company specifying the number of shares of Stock to be purchased. (d) The exercise price of the Stock subject to the Stock Option may be paid in cash or, at the discretion of the Committee, may also be paid by the tender of Stock already owned by the Participant, or through a combination of cash and Stock, or through such other means the Committee determines are consistent with the Plan's purpose and applicable law. No fractional shares of Stock will be issued or accepted. 4.2 Stock Appreciation Rights A Stock Appreciation Right is a right to receive, upon surrender of the right, but without payment, an amount payable in cash and/or shares of Stock under the terms and conditions as the Committee shall determine. (a) A Stock Appreciation Right may be granted in tandem with part or all of, in addition to, or completely independent of a Stock Option or any other Award under this Plan. A Stock Appreciation Right issued in tandem with a Stock Option may be granted at the time of grant of the related Stock Option or at any time thereafter during the term of the Stock Option. (b) The amount payable in cash and/or shares of Stock with respect to each right shall be equal in value to a percent of the amount by which the Fair Market Value per share of Stock on the exercise date exceeds the exercise price of the Stock Appreciation Right. The applicable percent shall be established by the Committee. The amount payable in shares of Stock, if any, is determined with reference to the Fair Market Value on the date of exercise. (c) Stock Appreciation Rights issued in tandem with Stock Options shall be exercisable only to the extent that the Stock Options to which they relate are exercisable. Upon exercise of the Stock Appreciation Right, the Participant shall surrender to the Company the underlying -6- Stock Option. Stock Appreciation Rights issued in tandem with Stock Options shall automatically terminate upon the exercise of such Stock Options. 4.3 Restricted Stock Restricted Stock is Stock that is issued to a Participant and is subject to such terms, conditions and restrictions as the Committee deems appropriate, which may include, but are not limited to, restrictions upon the sale, assignment, transfer or other disposition of the Restricted Stock and the requirement of forfeiture of the Restricted Stock upon termination of employment under certain specified conditions. The Committee may provide for the lapse of any such term or condition or waive any term or condition based on such factors or criteria as the Committee may determine. The Participant shall have, with respect to awards of Restricted Stock, all of the rights of a shareholder of the Company, including the right to vote the Restricted Stock and the right to receive any cash or stock dividends on such Stock. No more than thirty percent (30%) of the total number of shares of Stock available for Awards under the Plan shall be issued during the duration of the Plan as Restricted Stock. 4.4 Performance Awards Performance Awards may be granted under this Plan from time to time based on the terms and conditions as the Committee deems appropriate provided that such Awards shall not be inconsistent with the terms and purposes of this Plan. Performance Awards are Awards which are contingent upon the performance of all or a portion of the Company and/or its Subsidiaries or which are contingent upon the individual performance of a Participant. Performance Awards may be in the form of performance units, performance shares and such other forms of performance Awards which the Committee shall determine. The Committee shall determine the performance measurements and criteria for such performance Awards. -7- 4.5 Other Awards The Committee may from time to time grant Stock, other Stock based and non-Stock based Awards under the Plan including without limitations those Awards pursuant to which Shares of Stock are or may in the future be acquired, Awards denominated in Stock units, securities convertible into Stock, phantom securities and dividend equivalents. The Committee shall determine the terms and conditions of such other Stock, Stock based and non-Stock based Awards provided that such Awards shall not be inconsistent with the terms and purposes of this Plan. Section 5. Award Agreements. Each Award under this Plan shall be evidenced by an Award Agreement setting forth the number of shares of Stock or other security, Stock Appreciation Rights, or units subject to the Award and such other terms and conditions applicable to the Award as determined by the Committee. (a) Award Agreements shall include the following terms: (i) Non-assignability: ----------------- A provision that the Awards under the Plan other than Awards representing Non-Qualified Stock Options shall not be assigned, pledged or otherwise transferred except by will or by the laws of descent and distribution and that during the lifetime of a Participant, an Award other than an Award representing Non-Qualified Stock Options shall be exercised only by such Participant or by the Participant's guardian or legal representative. (ii) Termination of Employment: ------------------------- A provision describing the treatment of an Award in the event of the Retirement, Disability, death or other termination of a Participant's employment with the Company, including but not limited to terms relating to the vesting, time for exercise, forfeiture or cancellation of an Award in such circumstances. -8- (iii) Rights as Stockholder: --------------------- A provision that a Participant shall have no rights as a stockholder with respect to any securities covered by an Award until the date the Participant becomes the holder of record. Except as provided in Section 8 hereof, no adjustment shall be made for dividends or other rights, unless the Award Agreement specifically requires such adjustment, in which case, grants of dividend equivalents or similar rights shall not be considered to be a grant of any other stockholder right. (iv) Withholding: ----------- A provision requiring the withholding of applicable taxes required by law from all amounts paid in satisfaction of an Award. In the case of an Award paid in cash, the withholding obligation shall be satisfied by withholding the applicable amount and paying the net amount in cash to the Participant. In the case of Awards paid in shares of Stock or other securities of the Company, a Participant may satisfy the withholding obligation by paying the amount of any taxes in cash or, with the approval of the Committee, shares of Stock or other securities may be deducted from the payment to satisfy the obligation in full or in part as long as such withholding of shares does not violate any applicable laws, rules or regulations of federal, state or local authorities. The number of shares to be deducted shall be determined by reference to the Fair Market Value of such shares of Stock on the applicable date. (v) Holding Period: -------------- In the case of an Award to an Insider: (A) of an equity security, a provision stating (or the effect of which is to require) that such security must be held for a least six months (or such longer period as the Committee in its discretion speci- fies) from the date of acquisition; or (B) of a derivative security with a fixed exercise price within the meaning of Section 16, a provision stating (or the effect of which is to require) that at least six months (or such longer period as the Committee in its discretion specifies) must elapse from the date of acquisition of the derivative security -9- to the date of disposition of the derivative security (other than upon exercise or conversion) or its underlying equity security; or (C) of a derivative security without a fixed exercise price within the meaning of Section 16, a provision stating (or the effect of which is to require) that at least six months (or such longer period as the Committee in its discretion specifies) must elapse from the date upon which such price is fixed to the date of disposition of the derivative security (other than by exercise or conversion) or its underlying equity security. (b) Award Agreements may include the following terms: (i) Replacement, Substitution, and Reloading: ---------------------------------------- Any provisions (A) permitting the surrender of outstanding Awards or securities held by the Participant in order to exercise or realize rights under other Awards, or in exchange for the grant of new Awards under similar or different terms (including the grant of reload options), or, (B) requiring holders of Awards to surrender outstanding Awards as a condition precedent to the grant of new Awards under the Plan. (ii) Transferability of Non-Qualified Stock Options: ---------------------------------------------- Such provisions as the Committee may, in its discretion, authorize in any particular case, with respect to all or any portion of any Non-Qualified Stock Options to be granted to Participant, the transfer by such Participant of any such Non- Qualified Stock Options to (a) the spouse, children or grandchildren (including in each case stepchildren or step grandchildren) of the Participant (all such persons collectively "Immediate Family Members":), (b) -10- a trust or trusts for the exclusive benefit of persons all of whom are Immediate Family Members, or (c) a partnership in which all partners are Immediate Family Members, provided that following any such permitted transfer, subsequent transfers of transferred Non-Qualified Stock Options, except by will or the laws of descent and distribution, are prohibited. Following any transfer contemplated hereby, the transferred Non-Qualified Stock Options shall continue to be subject to all of the terms hereof and Administrative Procedure and the Award Agreement pursuant to which it was originally granted and the transferee shall be obliged to comply in all respects with all of the terms and conditions hereof, the Administrative Procedure and the Awards Agreement in the same manner as if the transferee were a Participant hereunder. (ii) Other Terms: ----------- Such other terms as are necessary and appropriate to effect an Award to the Participant including but not limited to the term of the Award, vesting provisions, deferrals, any requirements for continued employment with the Company, any other restrictions or conditions (including performance requirements) on the Award and the method by which restrictions or conditions lapse, effect on the Award of a Change of Control as defined in Section 9, the price, amount or value of Awards. Section 6. Shares of Stock Subject to the Plan (a) Subject to the adjustment provisions of Section 8 hereof, the number of Shares for which Awards may be granted in each calendar year during any part of which the Plan is in effect (including, for the purpose of this limitation, shares of Stock which have been or may be the subject of Awards under the Prior Plans as defined in Section 17 hereof during such year) shall not exceed eight-tenths of one percent (.8%) of the total issued and outstanding shares of Stock on December 31 of the immediately preceding year. In the event that not all of the shares available in one year are used for Awards in that year, the number of shares not used -11- for Awards that year shall be carried forward and shall be available for Awards in succeeding calendar years in addition to the eight- tenths of one percent (.8%) of shares that would otherwise be available in such years. (b) Any unexercised or undistributed portion of any terminated, expired, exchanged, or forfeited Award or Awards settled in cash in lieu of shares of Stock shall be available for further Awards in addition to those available under Section 6(a) hereof. (c) For the purposes of computing the total number of shares of Stock granted under the Plan, the following rules shall apply to Awards payable in Stock or other securities, where appropriate: (i) except as provided in (v) of this Section, each Stock Option shall be deemed to be the equivalent of the maximum number of shares that may be issued upon exercise of the particular Stock Option; (ii) except as provided in (v) of this Section, each other Stock-based Award payable in some other security shall be deemed to be equal to the number of shares to which it relates; (iii) except as provided in (v) of this Section, where the number of shares available under the Award is variable on the date it is granted, the number of shares shall be deemed to be the maximum number of shares that could be received under that particular Award; (iv) where one or more types of Awards (both of which are payable in shares of Stock or another security) are granted in tandem with each other, such that the exercise of one type of Award with respect to a number of shares cancels an equal number of shares of the other, each joint Award shall be deemed to be the equivalent of the number of shares under the other; and -12- (v) each share awarded or deemed to be awarded under the preceding subsections shall be treated as shares of Stock, even if the Award is for a security other than Stock. Additional rules for determining the number of shares of Stock granted under the Plan may be made by the Committee, as it deems necessary or appropriate. (d) The Stock which may be issued pursuant to an Award under the Plan may be treasury or authorized but unissued Stock or Stock may be acquired, subsequently or in anticipation of the transaction, in the open market to satisfy the requirements of the Plan. Section 7. Administration. (a) The Plan and all Awards granted pursuant thereto shall be administered by the Committee so as to permit the Plan to comply with Rule 16b-3. A majority of the members of the Committee shall constitute a quorum. The vote of a majority of a quorum shall constitute action by the Committee. (b) The Committee shall periodically determine the Participants in the Plan and the nature, amount, pricing, timing, and other terms of Awards to be made to such individuals. (c) The Committee shall have the power to interpret and administer the Plan. All questions of interpretation with respect to the Plan, the number of shares of Stock or other security, Stock Appreciation Rights, or units granted, and the terms of any Award Agreements shall be determined by the Committee and its determination shall be final and conclusive upon all parties in interest. In the event of any conflict between an Award Agreement and the Plan, the terms of the Plan shall govern. (d) It is the intent of the Company that the Plan and Awards hereunder satisfy and be interpreted in a manner, that, in the case of Participants who are or may be Insiders, satisfies the applica- -13- ble requirements of Rule 16b-3, so that such persons will be entitled to the benefits of Rule 16b-3 or other exemptive rules under Section 16 and will not be subjected to avoidable liability thereunder. If any provision of the Plan or of any Award would otherwise frustrate or conflict with the intent expressed in this Section 7(d), that provision to the extent possible shall be interpreted and deemed amended so as to avoid such conflict. To the extent of any remaining irreconcilable conflict with such intent, the provision shall be deemed void as applicable to Insiders. (e) The Committee may delegate to the officers or employees of the Company the authority to execute and deliver such instruments and documents, to do all such acts and things, and to take all such other steps deemed necessary, advisable or convenient for the effective administration of the Plan in accordance with its terms and purpose, except that the Committee may not delegate any discretionary authority with respect to substantive decisions or functions regarding the Plan or Awards thereunder as these relate to Insiders including but not limited to decisions regarding the timing, eligibility, pricing, amount or other material term of such Awards. Section 8. Adjustments Upon Changes in Capitalization. Subject to any required action by the Company's shareholders, in the event of a reorganization, recapitalization, Stock split, Stock dividend, exchange of Stock, combination of Stock, merger, consolidation or any other change in corporate structure of the Company affecting the Stock, or in the event of a sale by the Company of all or a significant part of its assets, or any distribution to its shareholders other than a normal cash dividend, the Committee may make appropriate adjustment in the number, kind, price and value of Stock authorized by this Plan and any adjustments to outstanding Awards as it determines appropriate so as to prevent dilution or enlargement of rights. -14- Section 9. Change of Control (a) In the event of a Change of Control of the Company, in addition to any action required or authorized by the terms of an Award Agreement, the Committee may, in its discretion, recommend that the Board of Directors take any of the following actions as a result of, or in anticipation of, any such event to assure fair and equitable treatment of the Plan Participants: (i) accelerate time periods for purposes of vesting in, or realizing gain from, any outstanding Award made pursuant to the Plan; (ii) offer to purchase any outstanding Award made pursuant to this Plan from the holder for its equivalent cash value, as determined by the Committee, as of the date of the Change of Control; or (iii) make adjustments or modifications to outstanding Awards as the Committee deems appropriate to maintain and protect the rights and interests of Plan Participants following such Change of Control. Any such action approved by the Board of Directors shall be conclusive and binding on the Company and all Plan Participants. (b) For the purposes of this Section, a "Change of Control" shall mean the earliest date on which either of the following events shall occur: (i) An individual, entity or group shall acquire, otherwise than directly from the Company, beneficial ownership of 20% or more of the outstanding common stock or voting power of the Company, provided that no such individual, entity or group shall be deemed to beneficially own any securities held by: -15- (A) the Company or any of its subsidiaries; or (B) any employee benefit plan of the Company or any of its subsidiaries, or (ii) The persons who were directors of Phillips Petroleum Company on February 12, 1990, together with those who subsequently became directors of Phillips Petroleum Company and whose election, or nomination for election by the Company's shareholders, was approved by the vote of at least a majority of the directors who were directors on February 12, 1990, or directors whose nomination or election was approved as provided above (the "Continuing Directors"), shall cease to constitute a majority of the Board or of its successor by merger, consolidation or sale of assets. However, a majority of the Continuing Directors may approve any event described in (a) of this Section and determine, for purposes of this Plan that a Change of Control has not occurred. Section 10. Rights of Employees. (a) Status as an eligible Employee shall not be construed as a commitment that any Award will be made under the Plan to such eligible Employee or to eligible Employees generally. (b) Nothing contained in the Plan (or in any other documents related to this Plan or to any Award) shall confer upon any Employee or Participant any right to continue in the employ or other service of the Company or constitute any contract or limit in any way the right of the Company to change such person's compensation or other benefits or to terminate the employment of such person with or without cause. -16- Section 11. Awards in Foreign Countries. The Committee shall have the authority to adopt such modifications, procedures and subplans as may be necessary or desirable to comply with provisions of the laws of foreign countries in which the Company or its Participating Subsidiaries may operate to assure the viability of the benefits of Awards made to Participants employed in such countries and to meet the purpose of this Plan. Section 12. Compliance with Applicable Legal Requirements No certificate for Stock distributable pursuant to this Plan shall be issued and delivered unless the issuance of such certificate complies with all applicable legal requirements including, without limitation, compliance with the provisions of applicable state securities laws, the Securities Act of 1933, as amended from time to time or any successor statute, the Exchange Act and the requirements of the exchanges on which the Company's Stock may, at the time, be listed. Section 13. Amendment and Termination. The Board of Directors may at any time amend, suspend or terminate the Plan. The Committee may at any time alter or amend any or all Award Agreements under the Plan to the extent permitted by law. However, no such action may, without further approval of the stockholders of the Company, be effective if such approval is required in order that transactions in Company securities under the Plan be exempt from the operation of Section 16(b) of the Securities Exchange Act of 1934 and may not amend the plan so as to (i) increase the number of shares of Stock which may be issued under the Plan, except as provided for in Section 8; (ii) materially modify the requirements as to eligibility for participation, -17- (iii) materially increase the benefits accruing to Participants under the Plan; or (iv) extend the duration beyond the date approved by the stockholders. Section 14. Unfunded Plan. The Plan shall be unfunded. Neither the Company nor the Board of Directors shall be required to segregate any assets that may at any time be represented by Awards made pursuant to the Plan. Neither the Company, the Committee, nor the Board of Directors shall be deemed to be a trustee of any amounts to be paid under the Plan. Section 15. Limits of Liability. (a) Any liability of the Company to any Participant with respect to an Award shall be based solely upon contractual obligations created by the Plan and the Award Agreement. (b) Neither the Company nor any member of the Board of Directors or of the Committee, nor any other person participating in any determination of any question under the Plan, or in the interpretation, administration or application of the Plan, shall have any liability to any party for any action taken or not taken, in good faith under the Plan. Section 16. Duration of the Plan. This Plan shall become effective on January 1, 1993 upon the adoption by the Company's stockholders at the 1993 Annual Meeting and the Committee shall have authority to grant Awards hereunder until December 31, 2002 subject to the ability of the Board of Directors to terminate the Plan as provided in Section 13. -18- Section 17. Termination of Other Plans. Effective upon the adoption of the Plan by stockholders, no further grants of options, stock appreciation rights, stock or restricted stock shall be made under the Company's 1986 Stock Plan and 1990 Stock Plan ("Prior Plans"). Thereafter, all grants and awards made under the Prior Plans prior to that date shall continue in accordance with the terms of the Prior Plans. -19- EX-10 8 Exhibit 10(n) BOARD OF DIRECTORS APPROVED JANUARY 8, 1996 KEY EMPLOYEE MISSED CREDITED SERVICE RETIREMENT PLAN OF PHILLIPS PETROLEUM COMPANY PURPOSE The purpose of the Key Employee Missed Credited Service Retirement Plan of Phillips Petroleum Company (the "Plan") is to attract and retain key employees by restoring retirement benefits which are missing for certain periods of Company service. This Plan is intended to be and shall be administered as an unfunded excess benefit plan for a select group of Highly Compensated Employees. SECTION I. Definitions. ----------- As used in this Plan: (a) "Board" shall mean the board of directors of the Company. (b) "Chief Executive Officer (CEO)" shall mean the Chief Executive Officer of the Company. (c) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (d) "Committee" shall mean the Compensation Committee of the Board. (e) "Company" shall mean a company or other corporation which is a member of the control group of corporations (defined in 1 Code Section 414(b)) of which Phillips Petroleum Company is a member. (f) "Employee" shall mean a person who is an active participant in the Retirement Plan and who qualifies as a Highly Compensated Employee who as of May 1, 1995 is classified on the Company's records as a job schedule 51 grades 32 and above, all schedule 66 job grades, or a job schedule 70L grades 07 or 08. (g) "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, or any successor statute. (h) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended and in effect from time to time, or any successor statute. (i) "Foreign Plan Offset" shall mean the amounts of the vested monthly retirement income from the I.E.L. Pension Plan or foreign retirement plans maintained or sponsored by the Company which is or would be payable in the form of a single life annuity upon reaching normal retirement age under such plans. If necessary, such retirement income shall be converted into a dollar amount using the exchange rate for the effective date of the Employee's transfer onto the U.S. payroll (or the next business day rate if there is no rate for that day) as published in the Wall Street Journal, and shall be converted into a monthly single life annuity using the actuarial standards set out in Section 5 of Article V of the Retirement Plan for a deemed commencement date as of the 2 first day of the month of transfer into the Retirement Plan. The Foreign Plan Offset shall be limited to no more than the amount by which the Missed Credited Service Retirement Benefit of the Employee would have been increased by the Missed Credited Service Months attributable to the months of participation in the I.E.L. Pension Plan or other foreign plans. (j) "Highly Compensated Employee" shall mean an Employee who is Highly Compensated within the meaning of ERISA Sections 3(36) and 4(b)(5) subject to Section IV. (k) "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. (l) "KEDCP" shall mean the Key Employee Deferred Compensation Plan of Phillips Petroleum Company or any similar or successor plans. (m) "Missed Credited Service Months" shall mean the number of months during any employment period with the Company not included as Credited Service in the Retirement Plan as calculated in Section II. (n) "Missed Credited Service Retirement Benefit" shall mean the supplemental retirement benefit that would be calculated under the Retirement Plan using as Credited Service the Missed Credited Service Months in addition to the Credited Service and using Total Final Average Earnings, without 3 regard for Internal Revenue Service limitations relating to Code Sections 401(a)(17) or 415, and reduced by: (1) any offset applied to the retirement benefit which would be payable at normal retirement age due to a Foreign Plan Offset or due to withdrawals or benefit commencement from the Retirement Plan or the Key Employee Supplemental Retirement Plan, made in the manner specified in the Retirement Plan, and (2) retirement benefits payable from the Retirement Plan and from the Key Employee Supplemental Retirement Plan. (o) "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. (p) "Plan" shall mean the Key Employee Missed Credited Service Retirement Plan of Phillips Petroleum Company, the terms of which are stated in and by this document. (q) "Plan Administrator" shall mean the person designated by the Chief Executive Officer to carry out ministerial duties related to the Plan. (r) "Retirement Plan" shall mean the Retirement Income Plan of Phillips Petroleum Company, which plan is qualified under Code Section 401(a). The following terms used in the Plan shall be determined in accordance with the provisions of the Retirement Income Plan: 4 (1) Approved Leave of Absence (2) Credited Service (3) Non-contributory Benefits Schedule and (4) Normal Retirement Date (s) "Total Final Average Earnings" shall mean the average of the high 3 earnings, excluding Incentive Compensation Plan awards, paid in consecutive years of the last 11 years including the year prior in which termination of employment occurs plus the average of the high 3 Incentive Compensation awards for any of such last 11 years under the Incentive Compensation Plan, whether paid or deferred. SECTION II. Eligibility for Benefits. ------------------------- Each Employee shall be eligible for a Missed Credited Service Retirement Benefit as a result of Missed Credited Service Months for service with the Company (provided that the full number of months as calculated below exceeds one) during any period of employment on the direct payroll of the Company which is not included as Credited Service under the other rules of the Retirement Plan, except for months attributable to the following: (a) Service while classified as an employee eligible for participation in the Retirement Savings Plan of Phillips Petroleum Company or its predecessor plans, (b) Service with a company prior to its acquisition by the Company, 5 (c) Service while classified on Company's records as a Temporary or Intermittent employee prior to January 1, 1990, (d) Service as a non-managerial retail marketing outlet employee, (e) Service in a category which is specifically excluded from the Retirement Plan by the definition of Employee or by Article II of the Retirement Plan at the time the person becomes an Employee, with the exception of international expatriates and foreign nationals, (f) Periods while on an Approved Leave of Absence, (g) Service as an employee who has commenced retirement benefits on or after his earliest Early Retirement Date and thereafter resumes employment duties with the Company, (h) Service associated with absence due to a strike, (i) Periods associated with absence due to discharge, or (j) An earlier employment period with the Company followed by an absence from employment exceeding (i) 120 months from the end of employment date if that date occurred on or before January 1, 1985, or (ii) 60 months from the end of employment date if that date occurred after January 1, 1985. In calculating the Missed Credited Service Months under this paragraph, the beginning and ending dates of an employment period shall be deemed to be as follows: 6 Actual Beginning or Ending Dates Deemed Date ---------------------------------------------- December 17 through January 16 January 1 January 17 through February 16 February 1 February 17 through March 16 March 1 March 17 through April 16 April 1 April 17 through May 16 May 1 May 17 through June 16 June 1 June 17 through July 16 July 1 July 17 through August 16 August 1 August 17 through September 16 September 1 September 17 through October 16 October 1 October 17 through November 16 November 1 November 17 through December 16 December 1 For the purposes of this Plan, the number of full months during any period of employment will be determined by subtracting the beginning deemed date and actual year from the ending deemed date and actual year. The Missed Credited Service Months restored pursuant to the provisions of this Plan should be deemed to have been completed under the Non- contributory Benefits Schedule of the Retirement Plan but shall not entitle any Employee to current service benefits, as described in Article IV of the Retirement Plan, with respect to such period. 7 SECTION III. Plan Benefits. -------------- Supplemental payments will be made in the amount of the Missed Credited Service Retirement Benefit to the Employee or the Employee's surviving spouse (in the case of the death of an Employee prior to retirement or the death of a former Employee prior to commencing retirement benefits). SECTION IV. Form and Payment of Benefits. ----------------------------- Subject to the requirement that the manner of payment of supplemental retirement benefits which an Employee is eligible to receive under this Plan, the Key Employee Supplemental Retirement Plan of Phillips Petroleum Company, the Principal Corporate Officers Supplemental Retirement Plan of Phillips Petroleum Company, the Phillips Petroleum Company Supplemental Executive Retirement Plan, the Phillips Petroleum Company Key Employee Death Protection Plan and any similar plan or plans of the Company or a Participating Subsidiary, shall be the same and, subject further to the condition that an Employee who receives payments under this Plan in the manner described in Section IV (b) hereof, shall agree to be available to provide from time to time advice and consultation to the Company after reasonable notice and for reasonable compensation therefor: (a) An Employee may elect in the manner prescribed by the Company to have the payments provided for hereunder made 8 on a straight life annuity basis, or to have such life annuity payments converted in the manner provided by the Retirement Plan to any one of the other forms of payments which the Employee would be entitled to select (except the lump-sum settlement option) if such payments were to be paid to the Employee under the Retirement Plan. (b) Notwithstanding (a) above, an Employee who is commencing retirement benefits at age 60 or older may, not earlier than 90 days nor later than 30 days prior to commencing retirement benefits, express a preference, in the manner prescribed by the Plan Administrator, to have the pay- ment of the amounts provided for hereunder converted in the manner provided by the Retirement Plan from a life annuity basis to one lump-sum payment of which all or part of the lump sum payment is either paid to the Em- ployee or considered an award pursuant to the provisions of KEDCP. The Chief Executive Officer, with respect to Employees who are not subject to Section 16 of the Exchange Act, and the Committee, with respect to Employees who are subject to Section 16 of the Exchange Act, shall consider such indication of preference and shall respec- tively decide in the Chief Executive Officer's or the Committee's sole discretion whether to accept or reject the preference expressed. In the event the Chief Executive Officer or the Committee, as applicable, accepts such Employee's preference, part or all of the Plan 9 benefits shall be paid in a lump sum as soon as practicable after the later of such acceptance or the Employee's retirement benefit commencement date or credited as of the Employee's retirement benefit commencement date to the Employee's KEDCP account as applicable. SECTION V. Method of Providing Benefits. ----------------------------- All amounts payable under this Plan shall be paid solely from the general assets of the Company and any rights accruing to an eligible Employee or Retiree under the Plan shall be those of a general creditor; 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 an unfunded excess benefit plan for purposes of Title I of ERISA. SECTION VI. Nonassignability. ----------------- The right of an Employee, 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 Employee, beneficiary, or other such person. 10 SECTION VII. Administration. --------------- The Plan shall be administered by the Chief Executive Officer. 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, 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 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 VIII. 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 11 Company's or the Participating Subsidiary's right to terminate the Employee's employment or to change the Employee's compensation or position. SECTION IX. Miscellaneous Provisions. ------------------------- (a) The Board reserves the right to amend or terminate this Plan at any time, if, in the sole judgment of the Board, such amendment or termination is deemed desirable; provided that no member of the Board who is also an Employee or Retiree shall participate in any action which has the actual or potential effect of increasing his or her benefits hereunder, and further provided, the Company shall remain liable for any benefits accrued under this Plan prior to the date of amendment or termination. (b) 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. (c) No amount accrued or payable hereunder shall be deemed to be a portion of an Employee's compensation or earnings for the purpose of any other employee benefit plan adopted or main- 12 tained by the Company, nor shall this Plan be deemed to amend or modify the provisions of the Retirement Plan. (d) The Plan shall be construed, regulated, and administered in accordance 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. 13 EX-12 9 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 -------------------------------------- 1996 1995 1994 1993 1992 -------------------------------------- (Unaudited) Earnings Available for Fixed Charges Income before income taxes, extraordinary items and cumulative effect of changes in accounting principles $2,172 1,064 852 538 511 Distributions in excess of (less than) equity in earnings of less-than- fifty-percent-owned companies 76 (1) 2 9 (3) Fixed charges, excluding capitalized interest and the portion of the preferred dividend requirements of a subsidiary not previously deducted from income* 328 364 340 363 442 - ----------------------------------------------------------------------------- $2,576 1,427 1,194 910 950 ============================================================================= Fixed Charges Interest and expense on indebtedness, excluding capitalized interest $ 237 285 266 290 392 Capitalized interest 33 31 15 11 16 Preferred dividend requirements of a subsidiary 68 73 56 71 3 One-third of rental expense, net of subleasing income, for operating leases 35 36 32 30 38 - ----------------------------------------------------------------------------- $ 373 425 369 402 449 ============================================================================= Ratio of Earnings to Fixed Charges 6.9 3.4 3.2 2.3 2.1 - ----------------------------------------------------------------------------- *Includes amortization of capitalized interest totaling approximately $10 million each in 1996, 1995, 1994 and 1992, and $11 million in 1993. 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 in 1994, and again in 1995. Consolidated interest expense includes interest attributable to the LTSSP borrowings of $3 million in 1995, and $1 million each in 1994, 1993 and 1992. Interest attributable to the LTSSP borrowings in 1996 was minimal. EX-21 10 Exhibit 21 LIST OF SUBSIDIARIES OF PHILLIPS PETROLEUM COMPANY Listed below are subsidiaries of the registrant at December 31, 1996. 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 Anadarko Gathering Company Delaware GPM Gas Corporation Delaware Phillips Alaska Natural Gas Corporation Delaware Phillips China Inc. Liberia Phillips Coal Company Nevada Phillips Gas Company Delaware Phillips Investment Company Nevada Phillips Oil Company (Nigeria) Limited Nigeria Phillips Petroleum Canada Ltd. Canada Phillips Petroleum Chemicals Belgium 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 Denmark Cayman Islands Phillips Petroleum International Investment Company Delaware Phillips Petroleum Resources, Ltd. Delaware Phillips Petroleum Timor Sea Inc. Delaware Phillips Petroleum UK Investment Corporation Delaware Phillips Pipe Line Company Delaware Phillips Puerto Rico Core Inc. Delaware Phillips-San Juan Partners, L.P. Delaware Sooner Insurance Company Vermont The Largo Company Delaware WesTTex 66 Pipeline Company Delaware EX-23 11 Exhibit 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference of our report dated February 21, 1997, with respect to the consolidated financial statements and schedule of Phillips Petroleum Company included in the Annual Report (Form 10-K) for the year ended December 31, 1996, in the following registration statements and related prospectuses. Phillips Petroleum Company Form S-3 File No. 33-51559 Phillips Petroleum Company Form S-3 File No. 33-54987 Phillips Petroleum Company Form S-3 File No. 333-01209 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 Form S-8 File No. 33-28669 /s/ Ernst & Young LLP ERNST & YOUNG LLP Tulsa, Oklahoma February 21, 1997 EX-27 12
5 This schedule contains summary financial information extracted from the consolidated balance sheet of Phillips Petroleum Company as of December 31, 1996, and the related consolidated statement of income for the year ended December 31, 1996, and is qualified in its entirety by reference to such financial statements. 1,000,000 YEAR DEC-31-1996 DEC-31-1996 615 0 2,008 20 472 3,306 20,103 10,983 13,548 3,137 2,555 300 0 636 3,615 13,548 15,731 15,807 13,169 13,433 47 0 217 2,172 869 1,303 0 0 0 1,303 4.96 4.96 Purchased crude oil and products + Production and operating expenses + Exploration expenses + Depreciation, depletion and amortization. CGS + Taxes other than income taxes. Preferred dividend requirements of subsidiary and capital trust.
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