-----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, CoNtrgQLCt1KhGVanVtMzT294FVELxmt7vcMANPt57DpW5aEeWcY0x1gtQKuwAXR xc+EO0bUKzRB3kSIEXyUHw== 0000078214-98-000002.txt : 19980304 0000078214-98-000002.hdr.sgml : 19980304 ACCESSION NUMBER: 0000078214-98-000002 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980302 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: SEC FILE NUMBER: 001-00720 FILM NUMBER: 98553948 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 UNITED STATES 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 For the fiscal year ended December 31, 1997 -------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------ ------------ Commission file number 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 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 262,403,941 shares of Common Stock, $1.25 Par Value, outstanding at January 31, 1998. The aggregate market value of voting stock held by non-affiliates of the registrant was $11,545,773,404 as of January 31, 1998. 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 412,179 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 11, 1998 (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.............. 3 E&P (Exploration and Production).............. 3 GPM (Gas Gathering, Processing and Marketing). 12 RM&T (Refining, Marketing and Transportation). 14 Chemicals..................................... 18 Other......................................... 21 Competition..................................... 23 General......................................... 24 3. Legal Proceedings................................. 25 4. Submission of Matters to a Vote of Security Holders................................ 25 -------------------- Executive Officers of the Registrant.............. 26 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters..................... 28 6. Selected Financial Data........................... 29 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................... 30 8. Financial Statements and Supplementary Data....... 68 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 126 PART III 10. Directors and Executive Officers of the Registrant...................................... 127 11. Executive Compensation............................ 127 12. Security Ownership of Certain Beneficial Owners and Management........................... 127 13. Certain Relationships and Related Transactions.... 127 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................... 128 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," "may," "plan" or "plans," "scheduled," "would," "could," "should," "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 65. 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) -- which explores for and produces crude oil, natural gas and natural gas liquids on a worldwide basis; (2) Gas Gathering, Processing and Marketing (GPM) -- which 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) -- which refines, markets and transports crude oil and petroleum products, primarily in the United States; (4) Chemicals -- which 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, 1997, Phillips employed 17,100 people, slightly less than the previous year. 1 Phillips continued to focus on growth opportunities and operating excellence in 1997. Current developments include the following: o Phillips and Mobil Corporation established an alliance in 1996 for deep-water exploration in the Gulf of Mexico. Seismic data was acquired in 1997, and drilling is scheduled to begin in 1998. Phillips currently holds a one-third ownership interest in 121 deep-water blocks. o Work continued on the Ekofisk II redevelopment in 1997. The new wellhead platform was completed in October 1996 and production from the first well began in early 1997. Work continues on the new processing/transportation platform. Ekofisk II is scheduled for start-up in the fall of 1998. o Phillips and its co-venturers are studying a plan to develop both blocks of the Bayu-Undan gas/condensate discovery in the Timor Sea Zone of Cooperation, initially as a gas- reinjection project. Initial production is expected in 2002. A decision is pending on the location and type of facility to liquefy the natural gas at a later stage in the project's development. o During 1997, Phillips and its co-venturers successfully bid on risk service contracts for three production fields in Venezuela with gross estimated reserves, after application of enhanced recovery efforts, of 650 million to 900 million barrels of oil. o Phillips purchased oil and gas assets in the Zama/Virgo area of northwest Alberta, Canada. The company's average working interest in the Zama/Virgo area ranges between 90 and 100 percent for the oil and gas properties, with combined estimated net reserves of oil and natural gas of 100 million barrels-of-oil-equivalent (BOE). o During third quarter 1997, Phillips and the Venezuelan state oil company signed a Principles of Agreement to build a 58,000 barrels-per-day coker and related facilities at Phillips' Sweeny, Texas, Complex for the processing of heavier, lower-cost crude oil. o The company and Qatar General Petroleum Corporation signed an agreement for the development of a new joint-venture petrochemical complex. The complex would feature a 1.1 billion-pounds-per-year ethylene plant. It would also feature manufacturing facilities capable of producing one billion pounds per year of polyethylene and a hexene-1 plant with a capacity of 100 million pounds per year. Phillips would have a 49 percent interest in this project. 2 SEGMENT AND GEOGRAPHIC INFORMATION Segment information about sales and other operating revenues, earnings, total assets and additional information, located in Note 19 -- Segment and Geographic Information in the Notes to Financial Statements on pages 103 through 105, is incorporated herein by reference. Products which contributed more than 10 percent of consolidated sales and other operating revenues follow: 1997 1996 1995 ------------------------ Crude Oil 23% 26 26 Petroleum Products 41 42 41 Natural Gas 15 14 12 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 106 through 124 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 BOE. o Developed and undeveloped acreage. o Net wells completed, wells in progress and productive wells. In 1997, Phillips' worldwide crude oil production averaged 232,000 barrels per day, a 6 percent increase from 219,000 barrels per day in 1996. In 1997, 67,000 barrels per day of crude oil production was from the United States, down from 69,000 barrels per day in 1996. Lower U.S. production was due to general production declines, primarily from the Point Arguello, 3 South Marsh Island Blocks 146/147, and Prudhoe Bay fields. This decline was partially offset by new production from the Mahogany subsalt field in the Gulf of Mexico. Foreign crude oil production was up 10 percent in 1997, reflecting higher production in the U.K. sector of the North Sea with the start-up of J-Block, and higher volumes from Norway. E&P's worldwide production of natural gas liquids averaged 14,000 barrels per day in 1997, compared with 15,000 barrels per day in 1996. U.S. production accounted for 4,000 barrels per day in 1997, the same as in 1996. The company's worldwide production of natural gas averaged 1,472 million cubic feet per day in 1997, down 4 percent from 1996. U.S. natural gas production decreased 7 percent in 1997, to 1,024 million cubic feet per day, primarily attributable to normal field declines, lower production from Blocks 70/71 in the Garden Banks area of the Gulf of Mexico, and asset dispositions. Higher production from the U.K. sector of the North Sea contributed to a 5 percent increase in foreign natural gas production in 1997. Phillips' worldwide annual average crude oil sales price decreased 8 percent in 1997, to $18.57 per barrel. Both U.S. and foreign average prices were lower. E&P's annual average worldwide natural gas sales price increased 9 percent, led by 11 percent higher sales prices in the United States. The company's finding and development costs in 1997 were $4.42 per BOE, compared with $7.55 in 1996. Over the last five years, Phillips' finding and development costs averaged $4.17 per BOE. At December 31, 1997, Phillips held a combined 33.9 million net developed and undeveloped acres, a 26 percent increase from 26.8 million net acres at year-end 1996. The increase in net acreage is primarily attributable to new acreage in South Africa, Peru, Greenland and Venezuela. At year-end, the company held acreage in 21 nations, and produced hydrocarbons in six. E&P -- U.S. OPERATIONS Phillips' alliance with Mobil Corporation to jointly explore deep-water blocks in the Gulf of Mexico moved forward in 1997. Three-dimensional seismic surveys were acquired in 1997 and a drilling program is scheduled to begin in 1998, with two to four exploratory wells planned annually over the next three to five years. The alliance covers 121 deep-water blocks, with Phillips holding one-third of the ownership interests and Mobil two- thirds. 4 The company has drilled the majority of its subsalt portfolio on the continental shelf in the Gulf of Mexico. Production has been less than anticipated from the Mahogany field (Ship Shoal Blocks 349/359), where work continues to boost output. A fifth production well has been completed, and recompletions are planned in other producing zones. In 1997, Mahogany's net production was 2,808 barrels of oil and 4.3 million cubic feet of natural gas per day. Phillips plans to develop the Agate field (Ship Shoal South Block 361) by connecting it to the Mahogany platform, located about six miles away. First production from Agate is expected in 1998. Phillips owns a 37.5 percent interest in the Mahogany field, and a 50 percent interest in the Agate field. In the North Cook Inlet of Alaska, Phillips has completed appraisal drilling of the Tyonek Deep prospect, in which the company owns a 100 percent working interest. Although the first appraisal well did not encounter commercial quantities of hydrocarbons, a second appraisal well, started in late 1997, was successful, testing at a combined rate of 3,100 barrels of oil per day. Two development wells are planned for 1998. Drilling has taken place from the existing Tyonek platform, which has continued to supply gas to the company's Kenai LNG facility. Phillips owns a 10 to 25 percent interest in three satellite fields of the Prudhoe Bay Unit: Schrader Bluff, S-Pad Kuparuk and Northwest Eileen. A two-well appraisal-drilling program began in the fall of 1997 at Schrader Bluff, and a three-well program began in early 1998 at Northwest Eileen. Liquefied natural gas (LNG) sales volumes from the company's Kenai, Alaska, plant decreased 8 percent in 1997, compared with 1996, due to slightly lower customer demand. Through refrigeration and compression techniques, and utilization of Phillips' 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. Net production from the company's three jointly owned coal mines was 1.8 million tons in 1997, compared with 2.9 million tons in 1996. The mines are located in Louisiana, Texas and Wyoming. Phillips has a 50 percent-equity interest in each. The reduction in coal production was due to reduced demand for production from the Dry Fork mine in Wyoming. However, as a result of contractual minimum royalty payments to Phillips and the allocation of most fixed costs to the operator at the present low production level, the lower deliveries at Dry Fork did not adversely impact Phillips' financial results. 5 Construction is scheduled to begin in 1998 on a lignite mine in Mississippi with an expected capacity of 3.2 million-tons-per- year. Commercial production is expected to begin in 2000. Phillips will own 75 percent of the mine, which will provide fuel for a 440-megawatt power plant to be built and owned by a third party in northeast Mississippi. E&P -- NORWEGIAN OPERATIONS Work continued on the Ekofisk II redevelopment in 1997. The new wellhead platform was completed during 1996, with production starting in early 1997. The new processing/transportation platform was installed in September 1997. Full operation of Ekofisk II is scheduled to begin in the fall of 1998. The Ekofisk, Eldfisk, Embla and Tor fields will be connected to the Ekofisk II facilities, as well as some third-party fields. It is currently anticipated that the remaining fields in the Ekofisk area -- Cod, Albuskjell, Edda, and West Ekofisk -- will be shut-in by the end of 1998 because tie-in of these fields to the new Ekofisk II facilities was determined to be uneconomical based on remaining reserves, existing platform operating costs and tie-in costs. However, a re-assessment of some of these fields is ongoing and alternate development scenarios are being studied. The abandonment plans for these fields have not yet been finalized by the company, and are not scheduled to be submitted to the Norwegian authorities until 1999. At December 31, 1997, the company had accrued $44 million for dismantlement and removal costs on these fields based on total anticipated costs to Phillips of $48 million. The combined liquids production for these fields in 1997 was 1,900 barrels per day, about 2 percent of the company's Norway production. Phillips received government approval to proceed with a water injection program at the Eldfisk field, the second largest field in the Ekofisk area. The project includes a new unmanned platform, new pipelines and modification of existing facilities. The platform, which will include water injection, gas lift and gas injection equipment, is scheduled to begin operation in early 2000, and will be controlled from a nearby manned platform. The completed facility will include eight injection wells -- seven for water and one for gas. Total water injection capacity will be 670,000 barrels per day, enough to serve Eldfisk and provide a new source for the ongoing Ekofisk waterflood project 15 miles away. This project is expected to increase Phillips' net Eldfisk oil production from about 13,000 barrels per day to a peak of 26,000 barrels per day in 2004. At December 31, 1997, Phillips owned a 37 percent working interest. 6 In 1996, 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. The first exploratory well was a dry hole, and work is ongoing to evaluate other prospects on the license. Phillips was also awarded a 20 percent non-operating interest in a block near the Norne field, where an exploratory well is planned for the first quarter of 1998. 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 of the field, with first production expected in late 1998 at an anticipated net rate to Phillips of 6,000 barrels per day. 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. Siri East may be developed as a satellite to Siri. Phillips is the operator and holds a 35 percent interest in the second license, located in the westernmost part of the Danish shelf immediately south of the Ekofisk area, where three-dimensional seismic data is being evaluated. Phillips was awarded 38.25 percent interest in a license offshore western Greenland covering 2.3 million acres, effective January 1, 1997. Seismic data was acquired in the summer of 1997, and the first exploration well is planned for 1999. E&P -- U.K. OPERATIONS Commercial liquids production from J-Block began in April 1997, following the commissioning of gas injection facilities on the Judy platform. Commercial gas production also began in 1997, after legal issues with the gas buyer were settled. In December 1997, net production averaged 23,000 barrels per day of liquids and 108 million cubic feet per day of natural gas. Phillips is the operator of J-Block, with a 36.5 percent interest. The J-Block platform is designed to process 100,000 barrels of oil per day and 450 million cubic feet of natural gas per day. This additional capacity provides the infrastructure needed to cost-effectively develop other discoveries in the area. The Jade field, discovered in 1996, was successfully appraised in 1997. Development options are being evaluated, with an expected start-up in 2000 with a tie-in to the J-Block infrastructure. Development options are being reviewed with the co-venturers and the U.K. authorities. Phillips is the operator with a 32.5 percent interest. 7 Also tying into the J-Block infrastructure will be the Janice field, for which development approval was obtained in 1997. Initial production is planned for 1998 at a net rate of 13,000 barrels of oil per day, and 5 million cubic feet per day of natural gas. Gas production from Janice will be transported to the J-Block facility, while the oil production will be transported to Teesside, England, through an existing pipeline. Phillips has a 24.4 percent interest in Janice. Phillips has an interest in two fields being developed in the U.K. North Sea--Armada and Britannia. Armada began production in late 1997, averaging a net rate of 2,700 barrels of liquids and 44 million cubic feet of natural gas per day in December 1997. Britannia is scheduled to begin production in mid-1998, averaging net production of 2,800 barrels of liquids and 38 million cubic feet of natural gas per day in 1999. The company has an 11.45 percent interest in Armada and a 6.78 percent interest in Britannia. A discovery well was drilled in 1997 on a prospect that straddles two blocks in the U.K. North Sea. Named Kate, the well tested at a combined rate from two intervals of 11,500 barrels of oil per day, and 22 million cubic feet of natural gas per day. Phillips and its co-venturers operate the 22/28a block (in which Phillips holds a 62.74 percent interest), while Shell U.K. Exploration and Production Company (Shell) and its co-venturers operate block 22/23b. The discovery well was funded 50/50 by the Phillips and Shell groups. An appraisal well is planned for 1998. A subsequent well, drilled by Shell in block 22/28a and funded 50/50 by the Phillips and Shell groups, also encountered a potentially commercial hydrocarbon pay zone. Phillips holds a 43.8 percent interest in the Renee field (block 15/27) and a 27 percent interest in the Rubie field (block 15/28b) in the U.K. North Sea. A successful appraisal well was drilled on Renee in 1997, and tested at a combined rate from two intervals of 10,250 barrels of oil and 7 million cubic feet of gas per day. Phillips and its co-venturers will develop the fields with subsea facilities tied into a third-party floating production facility located about 13 miles away. The company plans five wells for the area. Production could begin as early as the fourth quarter of 1998, at a combined initial net production rate of 9,000 barrels per day to Phillips. In deep-water frontier areas of the Atlantic Ocean offshore the United Kingdom and the Republic of Ireland, Phillips was awarded 46 blocks in two licensing rounds. During the summer of 1997, Phillips and its co-venturers conducted extensive seismic surveys over much of the newly acquired acreage. Further seismic acquisition and the first exploratory well are planned for 1998. 8 E&P -- OTHER OPERATIONS China: In the South China Sea, Phillips' combined net production of crude oil from its Xijiang facilities averaged 15,000 barrels per day in 1997, the same as in 1996. The company drilled a five- mile extended-reach well from the Xijiang facilities to an adjacent field, with production commencing in 1997. Phillips' exploratory program on the Bozhong Block, off China's northern coast in Bohai Bay, recorded two successful exploratory wells. The Peng Lai 14-3-1 was the company's first successful well and the Bozhong 36-2-1 was the second. An appraisal well was started in early 1998. Phillips is the operator and holds a 60 percent interest in the block. China National Offshore Oil Corporation has the right to acquire up to 51 percent interest in any prospect development. Nigeria: In Nigeria, the company's non-operating interests in 23 fields yielded net average crude oil production of 23,000 barrels per day, 8 percent lower than 1996. Information contained in Management's Discussion and Analysis on page 64 related to the company's oil mining leases in Nigeria is incorporated herein by reference. Australia: Phillips and its co-venturers are studying a plan to develop both blocks of the Bayu-Undan gas/condensate discovery in the Timor Sea Zone of Cooperation as a single field, with BHP Petroleum Pty. Ltd. as unit operator. The field, located between Indonesia and Australia, is planned to be developed initially as a gas-reinjection project, with liquids production processed on a floating processing, storage and offloading facility built from a modified tanker. Initial production is expected in 2002. In 1997, a successful exploration well was drilled offshore northwestern Australia at the Athena prospect, in which Phillips holds a 50 percent interest. The Athena well tested an extension of a field discovered by an adjacent operator. Phillips and the operator of the adjacent field are discussing development options for these reserves with owners of nearby production facilities. In the same area, an unsuccessful exploratory well was drilled on the Andromeda prospect, where the company also holds a 50 percent interest. 9 Phillips was awarded a 40 percent interest in two offshore licenses in the Carnarvon Basin, off the northwest shelf of Australia. The new licenses are on either side of the license containing Athena and Andromeda. Phillips plans to drill up to 10 wells in these three licenses over the next three years. Venezuela: 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. The agreement was approved by the Venezuelan Congress in the summer of 1997, and engineering studies are under way, with a decision regarding construction expected by year-end 1998. Production could begin in 1999 at a net rate to Phillips of 2,000 barrels of oil per day, with peak net production reaching 40,000 barrels of oil per day by 2006. Phillips has a 20 percent interest in the project. In mid-1997, Phillips obtained interests in three reactivation blocks offshore western Venezuela: La Vela (50 percent), Ambrosio (100 percent) and LL-652 (20 percent). Phillips will operate the Ambrosio and La Vela blocks, and plans to drill new wells and extend or re-complete certain existing wells. In addition, improved recovery technology will be utilized to fully exploit the fields. The company is conducting three-dimensional seismic surveys on these blocks in 1998, with exploratory/ appraisal drilling scheduled to begin late in the year. Phillips and its co-venturers have approved a plan to expand production and initiate a waterflood project on the LL-652 block. Approval of the development and improved recovery plans for the three blocks is expected from Venezuela's national oil company in the first quarter of 1998. Other: Phillips continued its exploration program on a block in the Borj Messouda area of eastern Algeria. The first two exploratory wells, drilled over the past two years, were unsuccessful. A third well is scheduled to be drilled in the spring of 1998. In two separate transactions, Phillips acquired an average working interest ranging from 90 to 100 percent in the oil and gas properties in the Zama/Virgo area in northwest Alberta, Canada, with estimated total reserves of 100 million barrels-of- oil-equivalent. 10 In other exploration activity: o Phillips signed an exploration and production-sharing contract with the Sultanate of Oman, which will allow Phillips to explore 4.6 million acres in southern Oman. Acquisition of seismic data began in late 1997. The company has committed to drill five wells over the nine-year exploratory phase of the agreement, with the first well planned for 1999. o In early 1997, Phillips signed a seven-year license agreement with Peru's state-owned oil company, which will enable Phillips to explore 2.5 million acres in southeastern Peru. An exploration well is planned for late 1998. o Phillips is acquiring seismic data in block 17/18 of the Indian Ocean, offshore South Africa. Exploratory drilling is planned for early 1999. Phillips is the operator of the 14.5 million acre sublease, with a 40 percent interest. E&P -- RESERVES In 1997, on a BOE basis, Phillips replaced 164 percent of the reserves it produced during the year, compared with 71 percent in 1996. The 1997 total includes replacement of 263 percent of foreign production and 61 percent of U.S. production. Excluding acquisitions and related property dispositions, Phillips replaced 125 percent of its total worldwide production. U.S. reserves decreased 3 percent, while foreign reserves increased 14 percent. Total worldwide proved reserves on a BOE basis were 2.3 billion barrels at year-end. Crude oil reserves and natural gas liquids reserves rose 9 percent, and natural gas reserves increased 2 percent. Natural gas comprises 48 percent 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 1993 through 1997, Phillips' five-year-average BOE production replacement equaled 126 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 re-evaluation 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, 1997. No difference exists between the 11 company's estimated total proved reserves for year-end 1996 and year-end 1995, which are shown in this filing, and estimates of these reserves shown in a filing with another federal agency in 1997. 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 134 billion cubic feet of liquefied natural gas. Production from one field in Alaska, with estimated proved reserves greater than the company's obligation and estimated production levels 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 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 14 natural gas liquids extraction plants, and operates or has an interest in three more. The plants are located in Texas (11), Oklahoma (3), and New Mexico (3). In addition, GPM operates gas gathering systems with approximately 28,000 miles of gathering pipelines, with some 19,800 active meter connections to producing wells. In January 1997, GPM purchased, from Amoco Production Company, gathering assets in the Permian Basin of West Texas that gathered approximately 40 million cubic feet of natural gas per day and produced approximately 8,000 barrels per day of natural gas liquids. 12 This purchase followed the late 1996 acquisition of gathering assets, primarily located in northwest Oklahoma, from ANR Pipeline Company. Together, these acquisitions contributed to a 5 percent increase in natural gas liquids production in 1997, compared with 1996. Technology continued to play a key role in GPM's objectives of providing superior customer service, and operating its plants and systems efficiently and consistently. A major improvement effort -- adding distributive control system technology to all GPM-owned and operated processing plants -- has begun and is scheduled to be completed by the year 2000. With this technology, plant operations can be monitored from a central control room and plant operators have more accurate and timely information. This improves operating consistency, increases the extraction of natural gas liquids and lowers energy consumption. An expansion of GPM's Spraberry plant, located in West Texas, was completed in 1997. Distributive control system technology, additional processing equipment and turbine-driven compression were added, increasing plant capacity 63 percent -- to 65 million cubic feet of natural gas per day. Further technological improvements in 1997 included the continuation of remote monitoring and control equipment installation at GPM's key field compression sites, scheduled to be completed by the year 2000. These improvements allow for the monitoring of remote compressors from a central location, providing a more efficient use of resources and reducing compression downtime. GPM also completed its installation of electronic flow measurement and radio telemetry equipment. Wellhead production data, which was once collected manually, may now be transmitted electronically, providing more timely and accurate data, giving producers more flexibility in monitoring their well production. GPM's raw gas throughput averaged 1,983 million cubic feet per day in 1997, compared with 1,913 million cubic feet per day in 1996, reflecting the impact of the acquisitions and expansions discussed above. Raw gas purchased from Phillips E&P represented approximately 8 percent of GPM's total 1997 throughput, compared with 9 percent in 1996. 13 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 -------------------------- 1997 1996 1995 -------------------------- From Phillips E&P leasehold gas 15 17 19 From gas purchased outside Phillips 140 131 125 - ----------------------------------------------------------------- 155 148 144 ================================================================= Residue gas sales were 1,046 million cubic feet per day in 1997, compared with 1,076 million cubic feet per day in 1996. GPM sells residue gas under contracts with prices that change with the gas markets. Approximately 58 percent of the residue gas sales volumes were sold under contracts with a term of one year or longer in 1997, compared with 64 percent in 1996. The remaining residue gas sales volumes were either sold on a daily or monthly basis. At year-end 1997, gross raw natural gas supplies available for processing through GPM-operated plants were estimated at 7.1 trillion cubic feet, the same as at year-end 1996. At year- end 1997 and 1996, respectively, these supplies included about 643 million and 651 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 91 percent of rated capacity in 1997, compared with 95 percent in 1996. The lower utilization rate was the result of maintenance turnarounds in 1997, an external power outage that affected the Sweeny refinery, and a weather-related operating interruption at the Borger refinery. The average purchase cost of a barrel of crude oil delivered to the U.S. refineries in 1997 was $19.67 per barrel, 10 percent lower than in 1996. Forty-four percent of the crude oil processed by Phillips' U.S. refineries in 1997 was supplied from the United States, with the majority of the remainder provided by purchases from the Middle East, primarily Saudi Arabia, and, to a lesser extent, South 14 America, the North Sea, and West Africa. In 1996, 42 percent of the crude oil processed came from the United States. Net E&P production satisfied 65 percent of Phillips' 1997 crude oil requirements, which consisted of U.S. refinery crude oil runs (314,000 barrels per day) and crude oil supplied to the refinery in Teesside, England (41,000 barrels per day). The ratio of net crude oil production to requirements for 1998 is estimated at 67 percent based on production forecasts of 258,000 barrels per day and estimated crude oil requirements of 387,000 barrels per day. As in 1997, purchases in the United States; from the Middle East, primarily Saudi Arabia; and, to a lesser degree, from South America, the North Sea, and West Africa are expected to be the major sources supplying the difference. Output from refining operations -- automotive gasoline, distillates, aviation fuels, chemical feedstocks and other products -- averaged 366,000 barrels per day, compared with 384,000 barrels per day in 1996. The decrease is attributable to the lower capacity utilization rate in 1997. In late 1997, the company created a new supply chain organization aimed at improving the profitability of its RM&T operations. The effort involves improved coordination of materials handling from feedstock acquisition through product supply and distribution to final refined product sales. Upon full implementation of the management program in late 1998, expected benefits are improved sales and production forecasting, improved inventory management, and lower costs for crude oil and refined products acquisition and transportation. Phillips continued an extensive process control modernization of its U.S. refineries in 1997. With the start-up of central control buildings at Sweeny and Woods Cross, and continued connections of refinery units to the Borger control building, the project neared the half-way point, with completion expected in 2001. The modernization project is intended to improve safety, operating efficiency and product yields, while reducing operating costs. Phillips and an affiliate of the Venezuelan state oil company signed a Principles of Agreement in 1997 to build a 58,000 barrels-per-day coker and related facilities at the Sweeny Complex. Under the terms of the agreement, the producing unit of the Venezuelan state oil company would supply up to 165,000 barrels per day of heavy Venezuelan crude oil to be processed at the refinery. Phillips and the Venezuelan state oil company would each have a 50 percent interest in the project. A coker uses a thermal process to remove heavy materials from crude oil and turn them into petroleum coke, a substitute for coal in power generation. The remaining liquids are then sent to other 15 units in the refinery to be upgraded into more valuable products, such as gasoline and distillates. If the project goes forward, construction could begin in late 1998, with completion in 2000. Catalytic reforming is a key refinery process for producing large quantities of high-octane gasoline, aromatics and hydrogen. Over the years, the industry's catalytic reforming technology has advanced, making the process more efficient at increasing the yields of higher-margin aromatics. To capitalize on this technology, Phillips is studying the replacement of two existing catalytic reformers at its Sweeny facility with a new catalytic reformer that can continue operations while the catalyst is regenerated. This would increase aromatics yields with only a small reduction in gasoline production. The project also would provide more hydrogen, which would be needed for the proposed coker. In the first quarter of 1998 at the Sweeny Complex, Phillips and a subsidiary of Central and South West Corporation (CSW) completed the construction of a 325-megawatt cogeneration plant that produces 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. At the Borger facility, Phillips and a subsidiary of Southwestern Public Service Company continued construction of a 200-megawatt cogeneration facility. Scheduled for completion in late 1998, the facility will produce electricity for the utility and steam for use at the Borger Complex. 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 1997, the second full year of implementation, the process helped Phillips' three U.S. refineries reduce their recordable injuries by 36 percent, compared with 1995. In 1997, environmental measures were added to the process. MARKETING In the United States, the company's wholesale and retail operations market refined products in 26 states under the Phillips 66 trademark. Gasoline and other products are distributed in the United States through approximately 7,500 retail outlets, bulk distributing plants, airport dealers and marinas. Of these, Phillips owns and operates 274 retail outlets, and operates another 59 on leased property. RM&T s total gasoline sales volumes in the United States decreased slightly during the year. Total distillates sales volumes in RM&T decreased 6 percent in 1997. Both decreases were 16 the result of lower spot sales. In total, RM&T petroleum products sales in the United States, from both Phillips' refinery output and purchased products, averaged 494,000 barrels per day during 1997, compared with 506,000 barrels per day in 1996. Phillips continued to build brand value in 1997 by expanding its advertising and increasing its spending on marketer incentive and support programs. These programs assist marketers in upgrading their service stations and stores, and adding new services, such as express-pay machines that allow customers to pay for their gasoline purchases at the pump with a credit card. The company continued its retail-marketing expansion in 1997, with the opening of 24 new retail outlets. In addition, 10 existing units were razed and rebuilt. Since the program began in 1996, the company has acquired 24 retail outlets, opened 31 new ones, and razed and rebuilt 16 others. The new outlets 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. The majority of the additional retail units are in markets where Phillips perceives it has a business or supply advantage. The Borger refinery and a network of pipelines and terminals aid Phillips in supplying the Southwest and Rocky Mountain regions. In addition, the Woods Cross refinery is positioned to supply the Salt Lake City area. 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 early 1997, Phillips and its co-venturer in the Seaway Pipeline Company (Seaway) entered a pipeline project to transport gasoline and distillates from the Texas Gulf Coast to the Midwest. The system is expected to have an initial average capacity of 85,000 barrels per day. Scheduled for completion in the second quarter of 1998, the project involves converting and 17 expanding one of Seaway's existing crude oil pipelines to transport refined products from Pasadena, Texas, to Cushing, Oklahoma. The project also includes building a new 148-mile pipeline from Cushing to connect to Phillips' existing pipeline system at Wichita, Kansas. This connection provides access to pipeline systems servicing the upper Midwest. Phillips has signed a letter of intent to purchase a 25 percent interest in Ultramar Diamond Shamrock Corporation's (UDS) El Paso refined products terminal and pipeline system, a 408-mile pipeline that extends from McKee, Texas, to El Paso, Texas, to assist Phillips in supplying its retail expansion into the Southwest. UDS plans to expand the capacity of the El Paso system from 40,000 barrels per day to 60,000 barrels per day in 1998. Once completed, Phillips expects to increase its interest in the terminal and pipeline system to 33 1/3 percent, with UDS continuing as operator. Phillips is no longer pursuing its previous plan to build a pipeline from the Borger refinery to El Paso. 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. The company owns and operates processing facilities at the Sweeny and Borger Complexes and has an 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. Phillips also owns an equity interest in an ethylene/ propylene plant at the Sweeny Complex. 3) Plastics products -- Products manufactured in this operation include polyethylene, polypropylene, K-Resin, plastic pipe and Ryton. The company's major production facility is the Houston Chemical Complex (HCC), near Houston, Texas. The company also 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 six regionally located U.S. plants, as well as through a joint venture in Mexico. 18 NGL NGL is used as a feedstock to manufacture higher-value chemicals, such as ethylene and propylene. The NGL business operated at 85 percent of rated fresh-feed capacity for the year, compared with 82 percent in 1996. Total NGL fresh-feed processing capacity is 250,000 barrels per day. INTERMEDIATE PETROCHEMICALS Phillips' ethylene and propylene are produced at the Sweeny Complex, through both 100 percent-owned units and the 50 percent-owned Sweeny Olefins Limited Partnership (SOLP). 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 company completed the restart of a 100 percent-owned ethylene unit in 1997 that had been idle since 1992. This project added an additional 400 million pounds per year of ethylene capacity. Phillips' share of the Sweeny Complex's annual ethylene and propylene capacities, including SOLP, is 3.5 billion and 950 million pounds, respectively. 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 used as a feedstock for nylon. In 1997, the company completed a paraxylene expansion at Puerto Rico Core, increasing design capacity to 880 million pounds per year. As part of the company's growth strategy for its specialty chemicals business, Phillips is constructing a 100 million- pounds-per-year methyl mercaptan plant at its Borger Complex. Construction began 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. Phillips plans to build a hexene-1 facility at HCC with an annual capacity of 200 million pounds. Construction is scheduled to begin in 1998, with completion in 1999. Hexene-1 is produced from ethylene and is a key feedstock in the manufacturing of high-density and linear low-density polyethylene. Using Phillips' new proprietary catalyst technology, hexene-1 can be 19 produced with greater selectivity and purity than other processes currently provide. PLASTICS At HCC, debottlenecking work continued in 1997 on the company's polyethylene production. By project completion, scheduled for 1999, HCC's high-density polyethylene capacity will be 2.2 billion pounds per year, compared with 2.0 billion pounds at year-end 1997. In 1997, HCC produced 1.8 billion pounds of polyethylene, about the same as 1996, its highest ever annual output of polyethylene. Polyethylene is used to manufacture a wide variety of plastic products. The expansion of Phillips' 50 percent-owned Singapore polyethylene facility, which supplies polyethylene to markets in Asia and the Pacific Rim, was completed in 1997. The expansion brings the facility's total annual linear polyethylene capacity to 860 million pounds. 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 40 percent-equity interest in the plant, which will use Phillips' proprietary polyethylene technology. The plant will be located at the 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 China. Phillips and Qatar General Petroleum Corporation signed an agreement for a joint venture to develop a new petrochemical complex in Qatar. The complex would have expected annual capacities of 1.1 billion pounds of ethylene, 1 billion pounds of polyethylene and 100 million pounds of hexene-1. The polyethylene facilities would use Phillips' proprietary technology to produce high-density and linear low-density polyethylene. If the project goes forward, construction would begin in 1999, with commercial production in early 2002. Phillips would own a 49 percent interest. 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 20 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 790 million pounds. Phillips will eventually hold a 50 percent interest in PSPC. K-Resin, a clear copolymer used in food and medical packaging, is produced at HCC, with a current annual capacity of 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 in 1999. Phillips' Driscopipe division manufactures polyethylene pipe, utilizing six U.S. manufacturing facilities. Polyethylene pipe is used in a variety of ways, including municipal water and telecommunications applications. A new leased manufacturing facility in Hagerstown, Maryland, began production in 1997. Also, the Driscopipe division formed 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 1997 included: o Upstream (E&P and GPM) - Geophysical and computer specialists continued to develop algorithms that produce clearer three-dimensional images of hydrocarbon reserves. - To support the vast computational requirements of three-dimensional seismology and other techniques, the company installed a Cray T3E computer. This replaced an earlier Cray, cutting costs and increasing memory capacity and processing speed. - Three-dimensional seismic techniques, computer modeling of reservoirs, simulation of alternative production techniques and the analysis of water's effect on production aided the company in its E&P work at Bayu-Undan, Venezuela and the North Sea. 21 o Downstream (RM&T and Chemicals) - At Phillips' Woods Cross, Utah, refinery, start-up of a new proprietary technology called Reduced Volatility Alkylation Process (ReVAP) is under way. 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. - Researchers assisted the refineries in achieving savings in their crude oil and catalyst purchases by continuing to develop 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 demonstrated at the Sweeny Complex. This technology reduces the production of contaminants, allowing furnaces used in ethylene production to operate more consistently. - Researchers and operations employees successfully tested metallocene catalysts in a commercial reactor at HCC in 1996. During 1997, the company further developed its metallocene catalyst technology, and started construction of a metallocene compounding facility that will ensure catalyst supplies through the year 2000. Metallocenes are "precision" catalysts that provide more control over the structure and properties of polyethylene. The ability to produce a broader range of polyethylene resins offers the company opportunities to expand into higher-value markets. - The company developed a catalyst that converts nearly all acetylene -- an unwanted by-product produced during ethylene manufacturing -- into additional ethylene. This increases yields and reduces operating expenses. Corporate Technology is also involved in a company-wide, long- range effort to replace most of the company's older in-house- developed and purchased computer systems, such as plant maintenance, materials management and financial systems. The new systems will primarily use programs from SAP America, Inc. and, for certain 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, and is scheduled to be fully implemented by July 1, 1999. Corporate Technology is also involved in a company-wide Year 2000 project. The "Year 2000" information contained in Management's Discussion and Analysis on pages 59 and 60 is incorporated herein by reference. 22 Phillips received its 15,000th U.S. patent in January 1998. At the end of 1997, Phillips held a total of 4,345 active patents in 55 countries worldwide, including 1,658 active U.S. patents. During 1997, the company received 77 patents in the United States, and 420 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 33 countries at year-end 1997, resulting in licensing revenues of $112 million. Polypropylene-related licenses contributed about 70 percent of the total, with polyethylene-related licenses contributing 12 percent. 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. 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, including state-owned companies. 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 natural gas liquids feedstocks, which are upgraded into chemicals and plastics. The 23 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 Phillips experienced a significant drop in the number of recordable injuries during 1997. The recordable injury rate for 1997 was 1.18 per 200,000 man-hours, which is 22 percent lower than the 1996 rate of 1.52. The rate of 1.18 compares very favorably with the most recent American Petroleum Institute industry recordable injury rate of 2.47, and sets a new record for the company. Company-sponsored research and development activities charged against earnings were $56 million, $59 million and $51 million in 1997, 1996 and 1995, respectively. The environmental information contained in Management's Discussion and Analysis on pages 61 and 62 under the caption, "Environmental" is incorporated herein by reference. It includes information on expensed and capitalized environmental costs for 1997 and those expected for 1998 and 1999. 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. 24 Item 3. LEGAL PROCEEDINGS The following is a description of a legal proceeding involving governmental authorities under federal, state and local laws regulating the discharge of materials into the environment. While it is not possible to predict the outcome of such proceeding, if it were decided adversely to the company, there would be no material effect on its consolidated financial position. Nevertheless, such proceeding is reported pursuant to the Securities and Exchange Commission's regulations. In December 1997, the Department of Justice, on behalf of the Environmental Protection Agency (EPA), filed a complaint in the Federal District Court in Utah, Salt Lake City, alleging that Phillips violated the Utah State Implementation Plan of the National Ambient Air Quality Standards for PM-10 (small particulate matter) at its Woods Cross, Utah, refinery. The state of Utah, which has primary authority, concluded no action should be taken against Phillips. The EPA however, has claimed that it has jurisdiction. The EPA's over-filing complaint alleges that Phillips failed to continuously operate an emission monitor to test sulfur dioxide emissions from its sulfur recovery unit tail gas incinerator, that Phillips exceeded its emission limit on numerous occasions, and that the violations allegedly ran from October 1994 to the present. The complaint seeks unspecified civil penalties and injunctive relief. A demand has been made for a civil penalty of $3 million. The company continues to vigorously defend itself against the allegations. Discussions with the EPA and the Department of Justice in regard to settlement of the matter are occurring. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 25 EXECUTIVE OFFICERS OF THE REGISTRANT Officer Name Position Held Age* Since ---- ------------- --- ------- W. W. Allen Chairman of the Board of 61 1988 Directors and Chief Executive Officer Knut Am Senior Vice President 54 1996 Exploration and Production C. L. Bowerman Executive Vice President 58 1984 Director R. G. Ceconi Senior Vice President 55 1991 Corporate Engineering Raj K. Gupta Vice President 55 1997 Strategic Planning K. L. Hedrick Executive Vice President 45 1994 J. L. Howe Senior Vice President 53 1992 Chemicals and Plastics J. C. Mihm Senior Vice President 55 1988 Corporate Technology T. C. Morris Senior Vice President and 57 1993 Chief Financial Officer J. J. Mulva President and Chief Operating 51 1985 Officer Director M. J. Panatier** President and Chief Executive 49 1994 Officer of Phillips Gas Company B. Z. Parker Senior Vice President 50 1997 Refining, Marketing and Transportation Barbara J. Price Vice President Health, 53 1992 Environment and Safety J. Bryan Whitworth Senior Vice President 59 1981 and General Counsel - ------------------------ *On February 1, 1998. **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. 26 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 11, 1998. All of the executive officers named above have been employed by the company for more than five years. 27 PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Quarterly Common Stock Prices and Cash Dividends Per Share Stock Price ------------------- High Low Dividends ------------------- --------- 1997 First $46 7/8 40 1/8 .32 Second 45 37 3/8 .34 Third 52 1/4 42 15/16 .34 Fourth 52 1/8 44 7/8 .34 - ----------------------------------------------------------------- 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 - ----------------------------------------------------------------- Closing Stock Price at December 31, 1997 $48 5/8 Number of Stockholders of Record at January 31, 1998 59,272 - ----------------------------------------------------------------- Phillips' common stock is traded primarily on the New York, Pacific and Toronto stock exchanges. 28 Item 6. SELECTED FINANCIAL DATA Millions of Dollars Except Per Share Amounts -------------------------------------------- 1997 1996 1995 1994 1993 -------------------------------------------- Sales and other operating revenues $15,210 15,731 13,368 12,211 12,309 Income before extraordinary items 959 1,303 469 484 245 Net income 959 1,303 469 484 243 Per common share -- basic Income before extraordinary items 3.64 4.96 1.79 1.85 .94 Net income 3.64 4.96 1.79 1.85 .93 Per common share -- diluted Income before extraordinary items 3.61 4.91 1.78 1.84 .93 Net income 3.61 4.91 1.78 1.84 .92 Total assets 13,860 13,548 11,978 11,453 11,035 Long-term debt 2,775 2,555 3,097 3,106 3,208 Company-obligated mandatorily redeemable preferred securities of Phillips Capital Trusts I and II 650 300 - - - Cash dividends declared per common share 1.34 1.25 1.195 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. 29 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS February 23, 1998 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, 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," "may," "plan" or "plans," "scheduled," "would," "could," "should," "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 65. 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 1997 1996* 1995* ----------------------- Exploration and Production (E&P) $ 609 493 373 Gas Gathering, Processing and Marketing (GPM) 101 144 10 Refining, Marketing and Transportation (RM&T) 137 54 20 Chemicals 297 245 367 Corporate and Other (185) 367 (301) - ----------------------------------------------------------------- Net income $ 959 1,303 469 ================================================================= *Restated to reflect the transfer of the company's wholesale propane business from RM&T to Chemicals. In addition, certain costs previously held at Corporate are now aligned with the operating segments. 30 Earnings for the three years included the following special items on an after-tax basis: Millions of Dollars ---------------------- 1997 1996 1995 ---------------------- Kenai liquefied natural gas (LNG) tax settlement $ 83 565 - Property impairments (46) (183) (51) Net gains on asset sales 16 14 - Work force reduction charges (3) (2) (31) Foreign currency gains (losses) (17) 41 (3) Pending claims and settlements 15 (18) (12) Other items - (5) (14) - ----------------------------------------------------------------- Total special items $ 48 412 (111) ================================================================= Net operating income, which excludes the above items, was $911 million in 1997, $891 million in 1996 and $580 million in 1995. 1997 vs. 1996 E&P's net operating income was strong again in 1997, only slightly below 1996. Growth projects and higher natural gas prices mitigated the impact of 8 percent lower crude oil sales prices. GPM's results decreased 35 percent, primarily as a result of lower natural gas liquids prices. Net operating income from Downstream operations increased 27 percent in 1997, leading to a 2 percent increase in the company's net operating income in 1997, compared with 1996. RM&T's earnings increased $50 million -- 56 percent -- mainly as a result of improved refinery gasoline margins. Chemicals' net operating income increased 17 percent, reflecting higher ethylene margins and sales volumes, partially offset by lower aromatics margins and sales volumes. 1996 vs. 1995 The company's E&P, GPM and RM&T segments all contributed to significantly higher net operating income in 1996, compared with 1995. 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. 31 RM&T's operating earnings in 1996 more than doubled those of 1995, 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. Phillips at a Glance 1997 1996 1995 ----------------------- U.S. crude oil production (MBD) 67 69 79 Worldwide crude oil production (MBD) 232 219 222 U.S. natural gas production (MMCFD) 1,024 1,102 1,078 Worldwide natural gas production (MMCFD) 1,472 1,527 1,481 Worldwide natural gas liquids production (MBD) 169 163 159 Liquefied natural gas sales (MMCFD) 119 130 125 Refinery utilization rate (%) 91 95 97 U.S. automotive gasoline sales (MBD) 335 340 331 U.S. distillates sales (MBD) 130 138 135 Worldwide petroleum products sales (MBD) 685 702 696 Natural gas liquids processed (MBD) 213 205 199 Ethylene production (MMlbs)* 3,171 2,587 2,465 Polyethylene production (MMlbs)* 2,039 2,048 1,797 Polypropylene production (MMlbs)* 439 327 418 Paraxylene production (MMlbs) 552 622 578 - ----------------------------------------------------------------- *Includes Phillips' share of equity affiliates' production. Income Statement Analysis 1997 vs. 1996 Sales and other operating revenues decreased 3 percent in 1997, reflecting lower revenues from the sale of crude oil and petroleum products, partially offset by higher natural gas revenues and higher revenues from the company's chemicals and plastics operations. The amount of crude oil sold in Phillips' buy/sell marketing activities, utilized to supply crude oil to the company's domestic refineries, decreased in 1997, lowering crude oil revenues. This was also the primary reason for the reduction in purchase costs in 1997. The decrease in petroleum products revenues in 1997 was due to both lower sales prices and volumes. 32 Equity in earnings of affiliated companies was $126 million in 1997, compared with $4 million in 1996. The 1996 period was reduced by an investment impairment of $78 million related to Point Arguello equity companies. In addition, equity earnings from the company's interest in the Sweeny Olefins Limited Partnership (SOLP) was much improved in 1997, reflecting higher ethylene margins and sales volumes. This was partially offset by lower earnings in 1997 from two equity companies in the plastics business line. Other revenues increased 22 percent in 1997, primarily as a result of higher interest income and revenues associated with an environmental recovery project. After adjustment for special items, controllable costs -- primarily production and operating expenses and selling, general and administrative expenses -- increased 8 percent in 1997. Expenses were higher due to increased production costs associated with new volumes from expansions in the Chemicals segment; new production from E&P's J-Block and Armada in the U.K. North Sea; worldwide growth initiatives; and higher maintenance, well-workover and fuel-gas costs. Exploration expenses decreased 5 percent in 1997, reflecting lower foreign dry hole expenses. After adjusting for special items, depreciation, depletion and amortization (DD&A) increased 7 percent in 1997, primarily related to J-Block, which came online in mid-1997. Special items primarily included E&P impairments in the Gulf of Mexico and the U.K. North Sea in 1997, and in 1996, Canada and Point Arguello, offshore California. 1996 also included an impairment of certain retail service stations. Taxes other than income taxes decreased slightly in 1997, as lower foreign taxes were mostly offset by higher production taxes. Interest expense decreased 9 percent in 1997, reflecting lower average debt levels in 1997 and higher capitalized interest related to the Ekofisk II project. Preferred dividend requirements increased 74 percent in 1997, as a result of the issuance of mandatorily redeemable preferred securities in May 1996 and January 1997. The redemption of Phillips Gas Company's preferred stock in December 1997 will lower preferred dividend requirements in 1998 by approximately $32 million. 1996 vs. 1995 Sales and other operating revenues increased 18 percent in 1996, compared with 1995, as a result of higher sales prices for crude oil, natural gas and petroleum products. Equity earnings of affiliated companies declined significantly in 1996, compared with 1995. Over 60 percent of the decrease was a result of an 33 investment impairment related to Point Arguello equity companies. The remainder of the decrease was primarily attributable to lower earnings from the company's interest in SOLP. Other revenues increased $46 million in 1996, primarily as a result of higher net gains on asset sales and higher interest income. Total costs and expenses were 14 percent higher in 1996, compared with 1995, primarily as a result of higher purchase costs, reflecting higher prices for crude oil, natural gas and petroleum products. 34 Segment Results E&P 1997 1996* 1995* ---------------------------- Millions of Dollars ---------------------------- Operating Income Net income $609 493 373 Less special items (25) (159) (61) - ----------------------------------------------------------------- Net operating income $634 652 434 ================================================================= Dollars Per Unit ---------------------------- Average Sales Prices Crude oil (per barrel) United States $17.41 18.96 14.98 Foreign 19.02 20.89 17.16 Worldwide 18.57 20.28 16.43 Natural gas -- lease (per thousand cubic feet) United States 2.33 2.10 1.37 Foreign 2.63 2.52 2.50 Worldwide 2.45 2.25 1.77 - ----------------------------------------------------------------- Average Production Costs per Barrel-of-Oil-Equivalent United States $ 4.85 4.30 4.19 Foreign 3.99 4.22 4.36 Worldwide 4.42 4.26 4.26 - ----------------------------------------------------------------- Finding and Development Costs per Barrel-of-Oil-Equivalent United States $ 7.21 6.24 2.79 Foreign 3.85 8.34 4.23 Worldwide 4.42 7.55 3.54 - ----------------------------------------------------------------- *Restated to reflect that certain costs previously held at Corporate are now aligned with the operating segments. Millions of Dollars ---------------------------- Worldwide Exploration Expenses Geological and geophysical $140 127 126 Leasehold impairment 22 28 30 Dry holes 69 89 36 Lease rentals 11 10 6 - ----------------------------------------------------------------- $242 254 198 ================================================================= 35 1997 1996 1995 ---------------------------- Thousands of Barrels Daily ---------------------------- Operating Statistics Crude oil produced United States 67 69 79 Norway 104 99 100 United Kingdom 18 6 3 Africa 23 25 24 China 15 15 11 Canada 5 5 5 - ----------------------------------------------------------------- 232 219 222 ================================================================= Natural gas liquids produced United States 4 4 5 Norway 7 8 8 Other areas 3 3 2 - ----------------------------------------------------------------- 14 15 15 ================================================================= Millions of Cubic Feet Daily ---------------------------- Natural gas produced United States (less gas equivalent of liquids shown above) 1,024 1,102 1,078 Norway* 275 291 299 United Kingdom* 122 81 46 Canada 51 53 58 - ----------------------------------------------------------------- 1,472 1,527 1,481 ================================================================= *Dry basis. Liquefied natural gas sales 119 130 125 - ----------------------------------------------------------------- 1997 vs. 1996 E&P, the company's largest operating segment, recorded another excellent earnings performance in 1997, with net operating income of $634 million, only slightly lower than last year's strong results. Several important growth projects benefited 1997 results, including the start-ups of J-Block and Armada in the U.K. North Sea, and a full year's production from the Mahogany subsalt field in the Gulf of Mexico. Also positively affecting E&P's net operating income in 1997 were higher worldwide natural gas sales prices and higher crude oil production from the Norwegian North Sea. Factors that lowered 1997 net operating income, compared with 1996, were lower crude oil sales prices; lower U.S. crude oil and gas production; higher U.S. production costs; and lower tax benefits from capital investments in Norway associated with Ekofisk II. 36 Phillips' average worldwide crude oil sales price was $18.57 per barrel in 1997, 8 percent lower than 1996. Crude oil prices generally trended downward during the first six months of 1997, before stabilizing in the third quarter due to unanticipated industry supply disruptions and tight inventory levels. Although the fourth quarter's average price was little changed from the third quarter, prices declined throughout the fourth quarter, with Phillips' December prices at their lowest level since 1995. Crude oil prices in the fourth quarter were under pressure from warmer-than-normal weather that lowered seasonal demand, and rising industry-wide production levels. 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. U.S. E&P - -------- Millions of Dollars -------------------------- 1997 1996* 1995* -------------------------- Operating Income Net income $360 320 239 Less special items (17) (136) (44) - ----------------------------------------------------------------- Net operating income $377 456 283 ================================================================= *Restated to reflect that certain costs previously held at Corporate are now aligned with the operating segments. 1997 vs. 1996 Net operating income decreased 17 percent in the company's U.S. E&P operations in 1997. Higher lease gas sales prices -- 11 percent higher than a year ago -- were more than offset by lower crude oil and lease gas production, lower crude oil sales prices, and higher production costs. In addition, benefits received from the allocation of foreign tax credits were lower as well. U.S. crude oil production declined 3 percent in 1997, reflecting natural field declines at Point Arguello, offshore California; Prudhoe Bay, Alaska; and South Marsh Island Blocks 146/147, Gulf of Mexico. These declines were partially offset by new production from the Mahogany subsalt field in the Gulf of Mexico. U.S. natural gas production decreased 7 percent in 1997, primarily attributable to normal field declines, lower production from Garden Banks Blocks 70/71 in the Gulf of Mexico, and asset dispositions. A major Garden Banks well was shut-in during part of the year for workover activity. 37 Special items in 1997, on an after-tax basis, primarily included charges of $31 million for property impairments, a net gain on asset sales of $7 million and a reversal of a contingent liability of $7 million. Special items in 1996 on an after-tax basis included 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, the most significant of which related to an unfavorable court judgment regarding producing properties in Alabama, which the company has appealed to the Alabama Supreme Court. 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. crude oil production declined in 1996 as a result of continuing production declines from the Point Arguello field, general field declines in the Gulf of Mexico and Prudhoe Bay, 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 Garden Banks Blocks 70/71, which came online in mid-year 1995; and property acquisitions in south Louisiana, partially offset by lower production from South Marsh Island Blocks 146/147. 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. 38 Foreign E&P - ----------- Millions of Dollars -------------------------- 1997 1996* 1995* -------------------------- Operating Income Net income $249 173 134 Less special items (8) (23) (17) - ----------------------------------------------------------------- Net operating income $257 196 151 ================================================================= *Restated to reflect that certain costs previously held at Corporate are now aligned with the operating segments. 1997 vs. 1996 Net operating income from the company's foreign E&P operations increased 31 percent in 1997, reflecting higher crude oil and natural gas production and higher natural gas sales prices, partially offset by lower crude oil prices. The J-Block and Armada fields in the U.K. North Sea came online in 1997, benefiting both financial results and production statistics for the year. Foreign crude oil production increased 10 percent in 1997, while foreign natural gas production increased 5 percent. The crude oil production increases are attributable to new production from J-Block, and, to a lesser extent, higher production from the Norwegian North Sea. New J-Block and Armada production contributed to the increased natural gas production in 1997. Special items in 1997 on an after-tax basis included property impairments of the Ann and Allison fields in the U.K. North Sea totaling $11 million, as well as foreign currency transaction losses of $6 million, and a net gain on asset sales of $9 million. Special items in 1996 consisted primarily of a $25 million after-tax impairment of certain Canadian proved properties. 1996 vs. 1995 Net operating income from the company's foreign E&P operations increased 29 percent in 1996, compared with 1995. The improvement 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. 39 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. Foreign natural gas production increased 5 percent in 1996, as lower demand for Norway production was more than offset by higher production and increased demand in the U.K. sector of the North Sea. 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. GPM 1997 1996 1995 ---------------------------- Millions of Dollars ---------------------------- Operating Income Net income $101 144 10 Less special items 9 3 (11) - ----------------------------------------------------------------- Net operating income $ 92 141 21 ================================================================= Dollars Per Unit ---------------------------- Average Sales Prices U.S. residue gas (per thousand cubic feet) $ 2.42 2.20 1.49 U.S. natural gas liquids (per barrel -- unfractionated) 12.60 14.49 10.07 - ----------------------------------------------------------------- Millions of Cubic Feet Daily ---------------------------- Operating Statistics Natural gas purchases Outside Phillips 1,371 1,360 1,247 Phillips 158 178 194 - ----------------------------------------------------------------- 1,529 1,538 1,441 ================================================================= Raw gas throughput 1,983 1,913 1,620 - ----------------------------------------------------------------- Residue gas sales Outside Phillips 990 1,002 833 Phillips 56 74 184 - ----------------------------------------------------------------- 1,046 1,076 1,017 ================================================================= Thousands of Barrels Daily ---------------------------- Natural gas liquids net production From Phillips E&P leasehold gas 15 17 19 From gas purchased outside Phillips 140 131 125 - ----------------------------------------------------------------- 155 148 144 ================================================================= 40 1997 vs. 1996 The company's gas gathering, processing and marketing segment reported solid net operating income of $92 million in 1997. However, this was 35 percent lower than the outstanding earnings performance in 1996. Natural gas liquids (NGL) prices, a key performance driver in this industry, while strong at $12.60 per barrel, were still 13 percent lower than 1996's $14.49 per barrel, resulting in lower margins and operating income for GPM. In addition, operating expenses were higher in 1997, reflecting acquisitions made in late 1996 and early 1997, the reactivation in late 1997 of an idled processing plant, and higher repair and maintenance costs associated with projects to improve plant and system operating consistency. GPM's unfractionated NGL sales prices generally stayed in the $11 to $13 per barrel range in 1997, similar to 1996's profile, with the exception of the fourth quarter of 1996. In that quarter, NGL prices increased significantly, reaching almost $21 per barrel in December 1996. NGL sales volumes increased 5 percent in 1997, primarily as a result of acquisitions and improved operating consistency. Residue gas sales prices continued to benefit from the effect of increased industry demand and lower natural gas storage levels experienced in 1996, resulting in average residue gas prices increasing 10 percent in 1997. However, prices declined sharply in December 1997 from the previous month, dropping 26 percent to $2.33 per thousand cubic feet, reflecting the warmer-than-normal winter weather. Residue gas sales volumes decreased slightly in 1997, reflecting field production declines in the Austin Chalk area of south central Texas. Special items in 1997 represented the settlement of a processing- rights dispute with a producer-gatherer. 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. 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 NGL and residue gas sales prices and higher raw gas throughput volumes. Earnings also benefited from significantly lower operating expenses. 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 41 acquisitions completed at the end of 1995. The 6 percent increase in residue gas sales volumes in 1996 was primarily the result of the 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 re-engineering efforts completed in 1995. Special items in 1995 consisted of work force reduction charges. RM&T 1997 1996* 1995* -------------------------- Millions of Dollars -------------------------- Operating Income Net income $137 54 20 Less special items (2) (35) (11) - ----------------------------------------------------------------- Net operating income $139 89 31 ================================================================= Dollars Per Unit -------------------------- Average Sales Prices (per gallon) Automotive gasoline -- wholesale $.66 .67 .58 Automotive gasoline -- retail .82 .83 .74 Distillates .60 .64 .52 - ----------------------------------------------------------------- Thousands of Barrels Daily -------------------------- Operating Statistics U.S. refinery crude oil Rated capacity 345 345 345 Crude runs 314 329 333 Capacity utilization (percent) 91% 95 97 Refinery production 366 384 392 - ----------------------------------------------------------------- Petroleum products outside sales United States Automotive gasoline -- wholesale 285 291 286 Automotive gasoline -- retail 37 37 35 Aviation fuels 28 25 29 Distillates 130 138 135 Other products 14 15 18 - ----------------------------------------------------------------- 494 506 503 Foreign 42 46 45 - ----------------------------------------------------------------- 536 552 548 ================================================================= *Restated to reflect the transfer of the company's wholesale propane business from RM&T to Chemicals. In addition, certain costs previously held at Corporate are now aligned with the operating segments. 42 1997 vs. 1996 RM&T's net operating income increased for the second consecutive year, reaching $139 million in 1997 -- a 56 percent increase over 1996. Improved margins from the company's U.S. refineries primarily contributed to the increased RM&T earnings in 1997. Crude oil acquisition costs were 10 percent lower in 1997, which resulted in improved gasoline margins. Net operating income also improved on higher margins for certain other refinery products, partially offset by higher refinery costs, reflecting higher utilities and maintenance expenses. The company's refineries ran at 91 percent of capacity in 1997, 4 percent lower than the year before. The decrease was the result of maintenance turnarounds, an external power outage that affected the Sweeny refinery during the second quarter of 1997, and a weather-related operating interruption at the Borger refinery. Results for RM&T's marketing business were slightly lower than a year ago, mainly the result of lower gasoline margins. Earnings benefited from higher revenues from convenience-store sales and services. The company continued to build its brand value through increased spending on marketer incentive and support programs and advertising. Special items in 1997 included certain costs associated with a power outage at the Sweeny refinery. Special items in 1996 consisted primarily of a $38 million after-tax impairment of certain retail service stations. 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 -- 23 percent -- than 1995. 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. Special items in 1995 included an inventory write-down and work force reduction charges. 43 Chemicals 1997 1996* 1995* --------------------------- Millions of Dollars --------------------------- Operating Income Net income $297 245 367 Less special items 3 (7) (4) - ----------------------------------------------------------------- Net operating income $294 252 371 ================================================================= Millions of Pounds Except as Indicated --------------------------- Operating Statistics Production** Ethylene 3,171 2,587 2,465 Polyethylene 2,039 2,048 1,797 Propylene 486 418 434 Polypropylene 439 327 418 Paraxylene 552 622 578 Cyclohexane (millions of gallons) 164 169 133 - ----------------------------------------------------------------- Thousands of Barrels Daily --------------------------- U.S. petroleum products outside sales Automotive gasoline 13 12 10 Liquefied petroleum gas 103 101 98 Other products 33 37 40 - ----------------------------------------------------------------- 149 150 148 ================================================================= Natural gas liquids Rated processing capacity 250 250 227 Liquids processed 213 205 199 - ----------------------------------------------------------------- *Restated to reflect the transfer of the company's wholesale propane business from RM&T to Chemicals. In addition, certain costs previously held at Corporate are now aligned with the operating segments. **Includes Phillips' share of equity affiliates' production. 1997 vs. 1996 Chemicals' net operating income increased 17 percent in 1997, primarily on the strength of higher ethylene margins and volumes, partially offset by lower margins and sales volumes at the Puerto Rico Core facility, and higher costs associated with worldwide growth initiatives. In total, earnings in the plastics business were about the same as in 1996. Ethylene production volumes increased 23 percent in 1997, boosted by the completion of a project to restart a 100 percent-owned 400 million-pound ethylene unit that had been idle since 1992. In addition, an incremental debottlenecking project was completed in late 1996 at the 50 percent-owned Sweeny Olefins Limited Partnership. 44 Paraxylene and cyclohexane are produced at the company's Puerto Rico Core facilities. Paraxylene margins were much lower than a year ago, due to weakening demand and surplus industry capacity. In addition, production volumes declined 11 percent in 1997, primarily as a result of the plant being down most of the first quarter of the year due to a paraxylene expansion project, which increased the facility's total annual capacity to 880 million pounds. Polyethylene margins were higher than a year ago and production of polyethylene remained strong during 1997. Combined, this resulted in improved earnings performance from this business line. Phillips has an equity interest in a partnership that owns the polypropylene production facilities at the Houston Chemical Complex (HCC). The company's polypropylene production from these facilities increased 34 percent in 1997, reflecting expanded capacity attributable to a new, gas-phase polypropylene unit completed in late 1996. However, the return from the company's equity share was lower in 1997, due to lower polypropylene margins. Special items in 1997 primarily consisted of a gain on the settlement of a license-related contingency. Special items in 1996 represented a tax item related to the company's Puerto Rico Core operations. 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 1996 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. 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 45 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 in 1996 than 1995, due to softening industry conditions. The company's HCC facility turned in an excellent operating performance in 1996, with its highest annual polyethylene output ever. Special items in 1995 included property impairments on an after- tax basis of $3 million. Corporate and Other Millions of Dollars ----------------------- 1997 1996* 1995* ----------------------- Operating Results Corporate and Other $(185) 367 (301) Less special items 63 610 (24) - ----------------------------------------------------------------- Adjusted Corporate and Other $(248) (243) (277) ================================================================= Adjusted Corporate and Other includes: Corporate general and administrative expenses $ (72) (76) (75) Net interest (113) (147) (173) Preferred dividend requirements (71) (43) (32) Other 8 23 3 - ----------------------------------------------------------------- Adjusted Corporate and Other $(248) (243) (277) ================================================================= *Restated to reflect that certain costs previously held at Corporate are now aligned with the operating segments. 1997 vs. 1996 Corporate general and administrative expenses decreased 5 percent in 1997, reflecting increased allocations of corporate costs to the operating segments, primarily related to information technology. Net interest represents interest income and expense, net of capitalized interest. Net interest was lower in 1997, due to higher capitalized interest and lower debt levels. In addition, interest income was higher in 1997 as a result of increased cash balances during most of the year. Preferred dividend requirements includes dividends on Phillips Gas Company preferred stock (which was redeemed in December 1997), and on the preferred securities of the Phillips 66 Capital I (Trust I) and Phillips 66 Capital II (Trust II) trusts. 46 The Trust I securities were issued in May 1996 and the Trust II securities were issued in January 1997, which resulted in the higher preferred dividend requirements in 1997. Other consists primarily of the company's captive insurance subsidiary, along with income tax and other items that are not directly associated with the operating segments. Other was adversely impacted in 1997 by lower results from the captive insurance subsidiary, as well as higher income taxes not directly associated with the operating segments. Special items in 1997 included an $83 million favorable resolution of U.S. income tax issues covering the years 1983 through 1986, related primarily to income from the company's Kenai liquefied natural gas facility. Also included were contingency accruals, and foreign currency transaction losses of $11 million, due to the revaluing of an intercompany, sterling-denominated receivable. 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. 1996 vs. 1995 Corporate general and administrative expenses were about 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 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. The Trust I securities issued in May 1996 resulted in higher preferred dividend requirements in 1996, compared with 1995. In 1996, Other benefited from lower tax accruals not directly associated with operating segments. Special items in 1995 included property impairments on an after- tax basis of $7 million, contingency accruals and work force reduction charges. 47 CAPITAL RESOURCES AND LIQUIDITY Financial Indicators Millions of Dollars Except as Indicated ---------------------- 1997 1996 1995 ---------------------- Current ratio 1.1 1.1 .9 Total debt $3,009 3,129 3,116 Preferred stock of subsidiary $ - 345 345 Company-obligated mandatorily redeemable preferred securities $ 650 300 - Common stockholders' equity $4,814 4,251 3,188 Percent of total debt to capital* 36% 39 47 Percent of floating-rate debt to total debt 30% 22 22 - ----------------------------------------------------------------- *Capital includes total debt, preferred stock of subsidiary, company-obligated mandatorily redeemable preferred securities and common stockholders' equity. Cash from operations increased $160 million during 1997. Included in both 1997 and 1996 were cash refunds from the Internal Revenue Service (IRS) of $107 million and $400 million, respectively, as a result of the favorable resolution of the Kenai LNG tax case. Excluding the cash impact of these refunds, cash from operations increased $453 million. Contributing to this increase were a $20 million increase in net operating income and a $161 million settlement related to J-Block gas production in the U.K. sector of the North Sea (see Note 8 -- J-Block Settlement). In addition, cash from operations in 1996 included a $200 million reduction in the balance of accounts receivable sold, while the receivable monetization program was inactive in 1997. During 1997, the Phillips 66 Capital II trust completed a $350 million underwritten public offering of 8% Capital Securities. The sole asset of the trust is $361 million of the company's 8% Junior Subordinated Deferrable Interest Debentures due 2037. Phillips owns all of the common stock of the trust, and fully and unconditionally guarantees the trust's obligation under the securities. Also during the year, the company's subsidiary, Phillips Gas Company, redeemed its 13,800,000 shares of Series A 9.32% Cumulative Preferred Stock at par for $345 million, plus accrued dividends of $3 million. This redemption will reduce Phillips' fixed charges by approximately $32 million annually. During 1997, cash balances decreased $452 million. This decrease in cash, together with $2.2 billion in cash from operating activities and the issuance of the $350 million of company- obligated mandatorily redeemable preferred securities, was used 48 to fund the company's $2 billion capital spending program, to retire the 9 1/2% Notes due 1997, to redeem the PGC preferred stock and to pay common stock dividends. Capital expenditures in 1997 were about $500 million higher than in 1996, primarily due to E&P acquisitions in Canada and Venezuela. Phillips' equity base continued to strengthen in 1997, with the percentage of total debt to capital at its lowest level in 14 years and the company's current ratio at 1.1 for the second consecutive year. The company's short-term liquidity position at December 31, 1997, was stronger than indicated because the current cost of the company's inventories was approximately $457 million greater than their last-in, first-out (LIFO) carrying value. During 1997, Phillips' Board of Directors approved the company's third dividend increase in three years, raising the quarterly per share dividend to $.34, a 6 percent increase, effective with the June 2, 1997, payment. In 1997, the company announced a stock repurchase program that authorized the expenditure of up to $150 million to repurchase shares of the company's common stock through December 31, 1999. As a separate and additional program, in February 1998, Phillips' Board of Directors authorized the repurchase of up to $500 million of the company's common stock by year-end 1998. Through February 20, 1998, approximately $115 million worth of shares had been repurchased. In conjunction with the first repurchase program, in late 1997, the company issued put options on a notional 400,000 shares of the company's common stock at an exercise price of $45 per share. If the options have intrinsic value on their maturity date, the company can elect physical settlement, net share settlement, or net cash settlement. Put options on 200,000 notional shares having a maturity date of January 29, 1998, were settled for a small cash payment. The options on the remaining 200,000 shares mature April 29, 1998. The company expanded its master leasing arrangement, under which it leases and supervises the construction of retail outlets, from $50 million to $100 million in 1997. The company also entered into a $75 million master leasing arrangement to upgrade its fleet of corporate planes during the year. The company has agreements with a bank-sponsored entity for the revolving sale of credit card and trade receivables. During 1997, these agreements were extended until September 1998, the expiration date of the supporting liquidity facilities for the bank-sponsored entity related to these agreements. The maximum 49 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, 1997. However, on January 9, 1998, credit card and trade receivables totaling $200 million were sold under the facilities. At December 31, 1997, no portion of the company's $500 million shelf registration of debt securities, which became effective in 1994, had been issued. 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. Financial Instrument Market Risk Phillips Petroleum Company and certain of its subsidiaries hold derivative contracts and financial instruments that have cash flow or earnings exposure to changes in commodity prices, foreign exchange rates, or interest rates. Financial and commodity-based derivative contracts are used to limit the risks inherent in some foreign currency fluctuations and some crude oil, natural gas and related products price changes faced by the company. In the past, the company has, on occasion, hedged interest rates, and may do so in the future should certain circumstances or transactions warrant. Phillips' Board of Directors has 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, 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. Commodity Price Risk The following table indicates the potential loss in earnings that could result from a hypothetical 10 percent change in the year- end market prices of the respective commodity-based swaps and futures contracts. Because the latest expected maturity date of all the swaps and futures contracts is less than one year from the reporting date, the potential losses in earnings have not been discounted to present values. All of the derivative losses and gains shown below effectively offset the gains and losses on the underlying commodity exposures that are being hedged. The 50 fair values of the swaps are estimated based on quoted market prices of comparable contracts, and approximate the net gains and losses that would have been realized if the contracts had been closed out at year end. The fair value of the futures are based on quoted market prices obtained from the New York Mercantile Exchange or the International Petroleum Exchange of London Limited. Millions of Dollars ----------------------------- Sensitivity of Fair Value to Assumed Notional Fair Value at 10 Percent Amount December 31, 1997 Change -------- ----------------- ----------- Natural gas swaps (billions of British thermal units) 16,082 $2 (3) Crude oil futures -- timing differences between purchases and refining (thousands of barrels) 2,627 2 (5) Feedstock-to-product margin swaps (thousands of barrels) 5,119 - (1) Feedstock-to-product margin futures (thousands of barrels) 2,613 - (1) - ----------------------------------------------------------------- Interest Rate Risk The following table provides information about the company's financial instruments that are sensitive to changes in interest rates. The table presents principal cash flows and related weighted-average interest rates by expected maturity dates. Weighted-average variable rates are based on implied forward rates in the yield curve at the reporting date. The carrying amount of the company's floating-rate debt approximates its fair value. The fair value of the fixed-rate financial instruments is estimated based on quoted market prices. 51 Millions of Dollars Except as Indicated ---------------------------------------------------------- Mandatorily Redeemable Preferred Debt Securities -------------------------------------- ------------------ Expected Fixed Average Floating Average Fixed Average Maturity Rate Interest Rate Interest Rate Interest Date Maturity Rate Maturity Rate Maturity Rate - --------- -------- -------- -------- -------- -------- -------- 1998 $ 1 6.69% $233 5.71% $ - -% 1999 85 7.96 - - - - 2000 1 6.03 - - - - 2001 250 8.99 158 6.91 - - 2002 1 6.03 110 6.35 - - Remaining years 1,772 8.44 398 6.86 650 8.11 - --------------------------------------------------------------------- Total $2,110 - $899 - $650 - ===================================================================== Fair value $2,302 - $899 - $675 - ===================================================================== Foreign Currency Risk At December 31, 1997, a Norwegian subsidiary, whose functional currency is the kroner, had outstanding $158 million of floating rate, revolving debt, denominated in U.S. dollars. The potential foreign currency remeasurement loss in earnings from a hypothetical 10 percent change in the year-end exchange rate is $16 million. The section on interest rate risk contains information about the fair value of this debt instrument. At December 31, 1997, U.S. subsidiaries had outstanding $439 million of long-term intercompany receivables from a U.K. subsidiary denominated in pounds sterling and $164 million outstanding from Canadian subsidiaries denominated in U.S. dollars. While these intercompany balances are eliminated in consolidation, exchange rate changes do affect consolidated earnings. The potential foreign currency remeasurement loss in non-cash earnings from a hypothetical 10 percent change in the year-end exchange rate from these intercompany balances is $60 million. 52 Capital Spending Capital Expenditures and Investments Millions of Dollars --------------------------------- Estimated 1998 1997 1996 1995 --------------------------------- E&P $1,001 1,346 981 856 GPM 90 116 85 274 RM&T* 343 235 209 150 Chemicals* 281 275 205 148 Corporate and Other 74 71 64 28 - ----------------------------------------------------------------- $1,789 2,043 1,544 1,456 ================================================================= United States $1,050 1,059 841 923 Foreign 739 984 703 533 - ----------------------------------------------------------------- $1,789 2,043 1,544 1,456 ================================================================= *Effective January 1, 1998, Phillips' NGL operations were moved from the Chemicals segment to the RM&T segment. RM&T's estimated 1998 budget includes $23 million for NGL. Comparable amounts included in Chemicals for the years ended December 31, 1997, 1996, and 1995, respectively, were $14 million, $18 million and $15 million. The company's improved operating results, the settlement of the J-Block gas production dispute, and additional refunds as a result of the 1996 Kenai LNG tax case resolution have all enhanced Phillips' financial flexibility during 1997. As a result, the company increased its 1997 capital budget twice during the year, from $1.67 billion to $2.09 billion, a cumulative increase of 25 percent. Actual expenditures for 1997 were the highest since 1982. Phillips' 1998 capital budget promotes the company's growth strategy by supporting its worldwide exploration program and development projects, expanding chemicals and plastics volumes, upgrading refineries, and expanding pipeline systems. The level of payout projects -- projects defined as those that generate income and increase shareholder value -- is targeted at 74 percent in 1998. The remainder of the capital spending will be directed toward maintenance or environmental-compliance projects. This level of payout projects supports Management's objective of increasing volumes of Phillips' major products -- a key to earnings growth. E&P Capital spending for E&P during the three-year period ended December 31, 1997, supported several major development projects including J-Block, Armada and Britannia in the U.K. North Sea; the Ekofisk II redevelopment and Eldfisk waterflood projects in Norway; the Mahogany development in the Gulf of Mexico; and the 53 Xijiang fields, offshore China. Exploratory drilling was focused on 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; the Timor Sea Zone of Cooperation; and several subsalt prospects in the Gulf of Mexico. Acquisitions of additional interests in the Bayu-Undan discovery in the Zone of Cooperation between Indonesia and Australia, and the Britannia development in the U.K. North Sea comprised significant portions of capital spending in 1996 and 1995, respectively. When the budget was increased during 1997, the additional E&P funds were used primarily to purchase interests in the Zama/Virgo area in northwest Alberta, Canada, and to acquire the rights to operate and explore existing fields in northwest Venezuela. These activities will also comprise a major portion of E&P's capital spending in 1998. In 1997, E&P's capital spending focused on several key exploratory and development projects. In the U.K. North Sea, the Jade field was successfully appraised, and with production expected in 2000, will be tied in to the J-Block infrastructure. Also in the J-Block area, approval was obtained to develop the Janice field, where appraisal drilling was successfully completed in early 1996. Initial production at Janice is expected in 1998. Straddling the border of two license blocks in the U.K. North Sea, the Kate discovery was drilled by Phillips in cooperation with Shell U.K. Exploration and Production Company (Shell), operator of the other block. An appraisal well is planned for 1998. In cooperation with Phillips, Shell drilled a subsequent well in Phillips' block that also encountered a potentially commercial hydrocarbon pay zone. In February 1998, the U.K.'s Department of Trade and Industry approved development of discoveries in the Renee and Rubie fields in the U.K. North Sea. Offshore Australia, natural gas and gas/condensate were discovered at the Athena 1 well. In China, successful discoveries were announced at a Xijiang satellite field and in the Bozhong Block of China's Bohai Bay. E&P's capital budget for 1998 is $1 billion, 70 percent of which is targeted for international projects that support the company's growth strategy. Seismic and drilling programs are planned for the three operating contracts Phillips won in Venezuela's third reactivation round in 1997. The company plans to apply enhanced recovery technology to fully exploit the fields. In addition, spending will be focused on the development of the Zama/Virgo area in Canada; development projects in the U.K. North Sea, including the Jade, Janice and Renee/Rubie fields; the Siri field in Denmark; and the development of extra-heavy oil reserves from the Hamaca region of the Orinoco Oil Belt of Venezuela. Further exploration in the United Kingdom is planned for 1998, as the company was awarded 46 offshore license blocks in the Atlantic Margin area, west of the United Kingdom and Ireland. Other 54 exploration planned for 1998 includes projects in China, Australia, Africa, Greenland, Peru, Algeria, Venezuela, Nigeria and Norway. In addition to the development of the Zama/Virgo area in Canada, key North America exploration and development projects continue in the Gulf of Mexico and Alaska in 1998. The company plans to use the technology developed for subsalt applications in its exploration of the Gulf deep-water blocks. Phillips has acquired a 33.33 percent interest in 121 offshore deep-water blocks, as part of its alliance with Mobil Corporation. The companies plan to drill their first joint deep-water well in 1998. The co- venturers plan to accelerate their deep-water exploration after taking delivery of a contracted drillship in late 1998. In addition, recompletions of two wells in the Mahogany field offshore Louisiana are planned. In the North Cook Inlet of Alaska, Phillips has completed appraisal drilling of the Tyonek Deep prospect, in which the company owns a 100 percent working interest. The first appraisal well did not encounter commercial quantities of hydrocarbons. A second appraisal well, started in late 1997, was successful, testing at a combined rate of 3,100 barrels of oil per day. Two development wells are planned for 1998. Drilling has taken place from the existing Tyonek platform, which has continued to supply gas to the company's Kenai LNG facility. The largest development project in E&P's 1998 capital budget is the continued construction of the Ekofisk II project in the Norwegian North Sea, which was 93 percent complete at December 31, 1997, on time and under budget. It replaces the majority of the facilities in the existing Ekofisk complex. Some of the existing facilities that are to continue in operation after the start-up of Ekofisk II in 1998 will be impacted by the continuing subsidence in the Ekofisk area, and studies are in progress to determine what future actions are necessary with regard to these facilities. Future costs related to subsidence of the existing facilities are not expected to materially impact the financial position of the company. The Norwegian Ministry of Petroleum and Energy has approved a waterflood project for the Eldfisk field, also in the Greater Ekofisk Area of the Norwegian North Sea. The project is expected to commence in 1998 and will involve the construction of a new unmanned platform, modifications to existing platforms, laying of new pipelines, and an extensive drilling program. The platform, scheduled to start up in early 2000, would be controlled from an existing manned Eldfisk platform. 55 GPM At GPM, capital spending during the three-year period ended December 31, 1997, included acquisitions, technology and facility upgrades, projects to streamline operations, and new well connections. Following a large acquisition of gathering assets in 1995, capital spending decreased in 1996 but then increased substantially in 1997, primarily due to the purchase of gathering assets from Amoco Production Company in January 1997. Remaining 1997 capital spending was directed toward expansion of GPM's Spraberry plant in West Texas, asset maintenance, new well connections and technology enhancements. In 1998, GPM's capital budget is $90 million. 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. RM&T Capital spending for RM&T during the three-year period ended December 31, 1997, was primarily for refinery-upgrade projects -- projects to meet new environmental standards, to improve operating integrity of key processing units, and to install advanced process control technology -- as well as for safety projects. Central control buildings at the Sweeny, Texas, and Woods Cross, Utah, facilities were started up during 1997. When the modernization of these facilities is completed, all manufacturing processes at the facilities will be managed from the new central control centers. During 1997, the company also continued the retail-marketing expansion that it began in 1996, as well as continued to expand its key transportation assets. The company continues to expand the number of company-operated retail outlets in the United States from 300 in 1995, to 450 within the next five to 10 years. This expansion is being funded through master leasing programs and capital expenditures. During 1997, 24 new retail outlets were opened and 10 existing units were razed and rebuilt. Since the expansion program began, the company has acquired 24 retail outlets, opened 31 new ones, and razed and rebuilt 16 others. During 1998, the company plans to raze and rebuild 15 outlets and add 30 new ones -- either by acquisition of top-quality outlets in key geographical areas or through construction. Both new outlets and those that are razed and rebuilt utilize the new Kicks 66 convenience store design. 56 The company plans to sell approximately 100 retail units in non- strategic areas over the next few years. The company is going forward with two major pipeline projects to serve growth areas in the Midwest and the Southwest United States. During the year, Phillips and its co-venturer in the Seaway Pipeline Company (Seaway) announced plans to convert a portion of an existing crude oil pipeline to refined products service. In conjunction with this conversion, Phillips is constructing a new 148-mile pipeline to connect the converted line to the company's existing Midwest distribution system to transport gasoline and distillates from the Gulf Coast to the growing Midwest market. Construction is scheduled to be completed in the second quarter of 1998. The company also recently signed a letter of intent to purchase interests in Ultramar Diamond Shamrock Corporation's El Paso terminal and pipeline system, which will allow Phillips to transport petroleum products to El Paso, Texas, and Tucson and Phoenix, Arizona. As part of a continuing effort to increase profitability, RM&T's 1998 capital budget provides for a 38 percent increase over actual 1997 expenditures, adjusted for the amount spent on NGL operations during 1997. This increase results largely from unique opportunities to expand pipeline capacity as outlined above and plans to construct a new continuous catalytic reformer at the Sweeny Complex to convert a higher percentage of plant yield to higher-margin petrochemicals. This project is now expected to commence in late 1998, with completion scheduled for mid-2000. Spending is also planned during 1998 for the installation of additional process control technology upgrades at the Borger and Sweeny, Texas, Complexes, as well as for the previously mentioned retail marketing upgrade program. During 1997, Phillips and an affiliate of the Venezuelan state oil company signed a Principles of Agreement to build a 58,000 barrels-per-day coker for processing heavier crudes, and related facilities at Phillips' Sweeny Complex. Under terms of the agreement, the producing unit of the Venezuelan state oil company would supply up to 165,000 barrels per day of heavy Venezuelan crude oil to be processed at the refinery. Subject to negotiation of definitive documents and to the approval of the respective Boards of Directors, construction could begin in late 1998, with completion in 2000. Total project cost is estimated to be $600 million. Phillips would hold a 50 percent interest in the project. Phillips continues to explore various options for maximizing the value of its RM&T assets. 57 Chemicals For the three-year period ended December 31, 1997, capital spending for Chemicals focused on production expansion projects utilizing improved technology and debottlenecking techniques. Projects completed during 1997 included the restart of a 400 million-pounds-per-year ethylene unit at Sweeny that had been idle for several years; a paraxylene expansion at the company's Puerto Rico Core facility, which increased capacity to 880 million pounds per year; a polyethylene expansion that brought plant capacity to 860 million pounds a year at a joint- venture Singapore facility where the company has a 50 percent interest; and a 40 percent expansion of the Ryton plant at the company's Borger facility, increasing capacity to 21.6 million pounds per year. Ongoing projects include a 400 million-pounds- per-year debottlenecking of high-density polyethylene production capacity at HCC, of which 200 million pounds was completed by December 31, 1997. This debottlenecking, which is expected to be completed by late-1999, will increase capacity to 2.2 billion pounds per year. Other projects include a 100 million-pounds- per-year methyl mercaptan plant at the company's Borger facility, with first production expected late in 1998; and a 40 million- pounds-per-year dicyclopentadiene hydrotreating unit at Sweeny, which is expected to be completed in third quarter 1998. In China, the company is participating in a joint venture that recently signed loan agreements to partially fund the design and construction of a 220 million-pounds-per-year polyethylene plant near Shanghai, which is expected to start up in third quarter 1998. Phillips has a 40 percent interest in the joint venture, and is guaranteeing the U.S. dollar portion of the loan agreements, totaling approximately $34 million. Chemicals' 1998 proposed capital spending is an increase of 8 percent over the actual amount spent in 1997, excluding the amount spent on NGL operations. Spending is planned for various new and ongoing production expansion projects -- the largest of which is slated to fund a 100 million-pounds-per-year expansion of the company's K-Resin copolymer plant at HCC, increasing capacity to 370 million pounds per year by 1999. Also at HCC, the company is moving forward with plans to build a 200 million- pounds-per-year hexene-1 plant, based on Phillips' new, proprietary catalyst technology. Construction is scheduled to begin in 1998, with completion in 1999. At the Phillips Research Center in Bartlesville, Oklahoma, the company is constructing a plant to produce metallocene compounds, the key ingredients in the company's proprietary metallocene catalysts. Scheduled to come onstream late in first quarter 1998, the plant will produce metallocene compounds in sufficient quantities to meet the needs of Phillips and licensees through the year 2000. 58 In 1997, Phillips entered into two separate agreements for projects in Qatar. The company and Qatar General Petroleum Corporation (QGPC) signed an agreement for a new joint venture to develop a petrochemical complex. The complex would use Phillips' proprietary polyethylene and hexene-1 manufacturing and catalyst technology and would feature a 1.1 billion-pounds-per-year ethylene plant. It would also feature manufacturing facilities capable of producing one billion pounds per year of polyethylene (high-density and linear low-density), and a hexene-1 plant with a capacity of 100 million pounds per year. If the project goes forward, construction of the complex would begin in 1999, with commercial production in early 2002. The project is subject to negotiation of definitive agreements and to the approval of the Boards of Directors of QGPC and Phillips. Phillips would have a 49 percent interest in this project. The company also signed a memorandum of understanding with QGPC and Sasol Limited of South Africa providing for a feasibility study of a proposed joint venture for a gas-to-liquids project. The feasibility study, which is currently being conducted to fully assess the economics and viability of the new venture, is scheduled to be completed in first quarter 1998. If a plant is built, it would produce a total of approximately 20,000 barrels per day of distillates and naphtha and be scheduled for start-up in 2002. Phillips would hold a 15 percent equity interest in this joint venture. Year 2000 Readiness Until recently, computer programs were written to store only two digits of date-related information in order to more efficiently handle and store data, and are thus unable to distinguish between the year 1900 and the year 2000. This is frequently referred to as the "Year 2000 Problem." In April 1996, Phillips initiated a company-wide Year 2000 Project to address this issue. Utilizing internal and external resources, the company is in the process of defining, assessing and converting, or replacing, various programs, hardware and instrumentation systems to make them Year 2000 compatible. The company's Year 2000 Project is composed of two components: Business Applications In 1995, Phillips began a worldwide business systems replacement project. Based on a recent inventory of business computer programs within Phillips, these new systems, which are Year 2000 compliant, will replace approximately 70 percent of the company's business computer programs. An additional 12 percent of business programs will be made compliant through the Year 2000 Project, and 7 percent will be retired. The remaining non-compliant programs are to be brought into compliance by the vendors who 59 supply the programs. The company is in the process of identifying and prioritizing critical third parties and customers, and will follow up with them concerning their plans and progress in addressing the Year 2000 Problem. The company's business applications Year 2000 Project is scheduled to be completed by mid-1999 when the final phases of the worldwide business systems replacement project are completed. Process Control and Instrumentation (PC&I) The company is currently evaluating the Year 2000 readiness of PC&I with a comprehensive inventory of monitoring and control devices for plants, refineries, pipelines, platforms, safety systems and other similar operating installations. Plans detailing the tasks and resources required to ensure PC&I Year 2000 readiness by the end of 1998 are expected to be in place by the end of the second quarter. Costs associated with PC&I upgrades are included in existing operating budgets. The total cost associated with required modifications to become Year 2000 compliant is not expected to be material to the company's financial position. An unexpected failure to have corrected a Year 2000 Problem could result in an interruption in certain normal business activities or operations. However, the company believes that, with the implementation of new business systems and completion of its Year 2000 Project, significant interruptions will not be encountered. Contingencies Legal and Tax Matters The company has a number of issues outstanding with the IRS related to tax years 1987 through 1992 that are expected to be resolved in the near term as a result of resolving the Kenai LNG tax case. Although it is too early to determine the final financial effects, 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. 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 the likelihood is remote that future costs related to known contingent liability exposures will exceed current accruals by an amount that would 60 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 1996, Phillips reported 47 sites where it had information indicating that it might have been identified as a Potentially Responsible Party (PRP). Since then, six sites were resolved through consent decrees, deposits into trust funds, or otherwise. Two sites were added during the year. Of the 43 sites remaining at December 31, 1997, the company believes it has a legal defense or its records indicate no involvement for 13 sites. At seven other sites, present information indicates that it is probable that the company's exposure is less than $100,000 per site. At seven sites, Phillips has had no communication or activity with government agencies or other PRPs in more than two years. Of the 16 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 usually but one of many companies cited at a particular site. It has, to date, been successful in sharing clean-up 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 clean-up, those potentially 61 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 clean-up costs generally occur after the parties obtain EPA or equivalent state agency approval. At December 31, 1997, accruals of $7 million had been made for the company's unresolved PRP sites. In addition, the company has accrued $72 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 $4 million for other environmental contingent liabilities, for total environmental accruals of $83 million. No one site represents more than 10 percent of the total. Included in the company's planned remediation activities is a voluntary environmental investigation of the former Okmulgee, Oklahoma, refinery that Phillips sold in 1966, which has been closed since 1982. The company plans to perform a clean-up effort to turn the area into an industrial park. Expensed environmental costs were $162 million in 1997 and are expected to be approximately $150 million in 1998 and 1999. The estimates for 1998 and 1999 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 $69 million in 1997, and are expected to be approximately $100 million and $110 million in 1998 and 1999, respectively. After an assessment of environmental exposures for clean-up 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, although claims for recovery of remediation costs have been filed with certain of the company's insurers. At this time, the company is progressing with negotiations with several of its insurers. These negotiations may result in Phillips' receipt of significant settlement amounts in exchange for general releases of liability or commutations of some of the company's liability and pollution policies. However, the ultimate amount, if any, the terms of the settlement, and the timing of recoveries remains uncertain. Based on currently available information, the company believes that the likelihood 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. 62 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, 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 $24 million during 1997, primarily due to an increase in loss carryforwards for various companies. New Accounting Standards In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive Income," and Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information." Both Statements are effective for fiscal years beginning after December 15, 1997, and are disclosure-oriented statements. Therefore, neither Statement will affect the company's reported consolidated net income or cash flows. The company has not yet determined the disclosure formats it will adopt in response to these Statements, but it is anticipated that the composition and number of its operating segments will be unchanged under Statement No. 131. OUTLOOK Phillips continues its global growth strategy. In E&P, the company plans exploration activity in Norway, the United Kingdom, China, Australia, Algeria, South Africa, Peru, and the Gulf of Mexico. Further, the company joined a study of a proposed Alaska North Slope gas project. This study will examine the viability of producing natural gas from Alaska's North Slope, transporting it across the state, converting it to liquid natural gas, and marketing it in the Far East. Phillips owns interests in the two fields containing most of the North Slope gas reserves -- a small interest in the Prudhoe Bay Unit and a 12 percent interest in the undeveloped Point Thomson field. Phillips and its co-venturers continue evaluating plans to develop both blocks of the Bayu-Undan gas/condensate discovery in 63 the Timor Sea Zone of Cooperation, as a single field, with BHP Petroleum Pty. Ltd. as unit operator. The field initially is planned to be developed as a gas-reinjection project. Initial production is expected in 2002. A decision is pending on the location and type of facility to liquefy the natural gas at a later stage in the project's development. The company has oil mining leases for production of oil and gas in Nigeria. These interests are operated on behalf of the company under a joint operating agreement (JOA) with Nigerian Agip Oil Company for the life of the leases covered and until all joint property has been disposed of and final settlement made. The initial term of the leases was through June 13, 1997, and, under the lease terms, the company is entitled to renewal of the lease upon application, assuming it has performed its obligations under the leases. The company believes it has performed its obligations and the operator of the company's interests has made timely application for renewal on behalf of the company. While renewal of the leases has not yet been confirmed by Nigerian authorities, the operator has been advised by the Nigerian authorities that the renewal application is being processed and that it should continue operations. Production has continued unabated after June 13, 1997. Management expects that production will continue and that renewals will be confirmed in due course. The company's Nigerian interests represent approximately 7 percent of its currently reported total worldwide oil and gas reserves, and the sale of the production from these reserves contributed approximately $27 million to the company's after-tax net income in 1997. The company's net investment in Nigeria at December 31, 1997, was $180 million. Global expansion of the company's chemicals business continues with opportunities for new locations involving foreign joint- venture partners. In an effort to meet growing worldwide demand for plastics and petrochemicals, Phillips signed three letters of intent with major petrochemical manufacturers in the People's Republic of China. The letters of intent are to conduct joint feasibility studies to build an ethylene complex and a K-Resin copolymer plant, and to expand a polyethylene plant currently under construction. In 1996, Phillips and Shanghai Petrochemical Company Limited formed a joint venture to build a 220 million- pounds-per-year plant, which is scheduled to come onstream in 1998. In late 1997, the company created a new supply chain organization to improve the profitability of its refining, marketing and transportation activities. The effort involves improved coordination of materials handling from feedstock acquisition through product supply and distribution to final refined product sales. Upon full implementation of the management system in late 1998, expected benefits are improved sales and production 64 forecasting, inventory control, and lower costs for crude oil and refined products acquisition and transportation. Phillips experienced a significant drop in the number of recordable injuries during 1997. The recordable injury rate for 1997 was 1.18 per 200,000 man-hours, which is 22 percent lower than the 1996 rate of 1.52. The rate of 1.18 compares very favorably with the most recent American Petroleum Institute industry recordable injury rate of 2.47, and sets a new record for the company. 1997 was the third year for the company's Process for Safety Excellence program where business units identify the safety management elements most critical to their operations, evaluate their present level, set goals for each element and develop initiatives for reaching those goals. During 1997, the process was expanded to include environmental elements and is now called Process for Safety and Environmental Excellence. The impact of the recent economic downturn in Asia on the businesses in which Phillips operates remains uncertain. Sales revenues generated in Asian countries currently comprise a relatively small percent of the company's total revenues, giving the company minimal earnings exposure. The company continues to monitor both short-term and long-term effects of the crisis on supply and demand. 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 over which it has no control. Crude oil prices in early 1998 have been considerably lower than year-ago levels due in part to warmer-than-normal weather that has dampened seasonal demand, the recent economic downturn in Asia and rising production. Phillips is pursuing a number of significant growth projects and expects to increase 1998 hydrocarbon production by 7 percent, which should help offset lower oil and natural gas prices. 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. 65 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. 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; as well as subject to geological, land, or sea conditions; world prices for oil, natural gas and natural gas liquids; and foreign and United States laws, including tax laws. 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 approval from the company's and/or subsidiaries' Boards of Directors; loan or project financing; the issuance by foreign, federal, state, and municipal governments, or agencies thereof, of building, environmental and other permits; and the availability of specialized contractors and work force. Production and delivery of the company's products are subject to worldwide prices; supply and demand for the products; availability of raw materials; and the availability of transportation in the form of pipelines, railcars, trucks or ships. 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 66 have jurisdiction in regard to taxes, the environment and human resources. o Estimates of proved reserves, raw natural gas supplies, project cost estimates 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. o The Year 2000 Project and the date on which the company believes it will be completed are based on Management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third-party modification plans and other factors. However, there can be no assurance that there will not be a delay in, or increased costs associated with, the implementation of the Year 2000 Project. Specific factors that might cause differences between the estimates and actual results include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, timely responses by third-parties and suppliers, and similar uncertainties. The company's inability to implement Year 2000 changes could have an adverse effect on future results of operations. o The date on which the company believes it will implement the new SAP America, Inc. and Oracle Corporation business computer systems is based on Management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, plans and other factors. However, there can be no guarantee that these estimates will be achieved. Specific factors that might cause differences between the estimates and actual results include, but are not limited to, the availability and cost of personnel trained in these areas, the ability to implement interfaces between the new systems and the systems that are not being replaced, and similar uncertainties. 67 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PHILLIPS PETROLEUM COMPANY INDEX TO FINANCIAL STATEMENTS Page ---- Report of Management.................................... 69 Report of Independent Auditors.......................... 70 Consolidated Statement of Income for the years ended December 31, 1997, 1996 and 1995................ 71 Consolidated Balance Sheet at December 31, 1997 and 1996.............................................. 72 Consolidated Statement of Cash Flows for the years ended December 31, 1997, 1996 and 1995................ 73 Consolidated Statement of Changes in Common Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995......................................... 74 Notes to Financial Statements........................... 75 Supplementary Information Oil and Gas Operations............................. 106 Selected Quarterly Financial Data.................. 125 INDEX TO FINANCIAL STATEMENT SCHEDULES Schedule II -- Valuation Accounts and Reserves.......... 129 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. 68 - ---------------------------------------------------------------- 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, 1997, 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 23, 1998 69 - ----------------------------------------------------------------- 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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, 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. /s/ Ernst & Young LLP ERNST & YOUNG LLP Tulsa, Oklahoma February 23, 1998 70 - ------------------------------------------------------------------ Consolidated Statement of Income Phillips Petroleum Company Years Ended December 31 Millions of Dollars --------------------------- 1997 1996 1995 --------------------------- Revenues Sales and other operating revenues $15,210 15,731 13,368 Equity in earnings of affiliated companies 126 4 127 Other revenues 88 72 26 - ------------------------------------------------------------------ Total Revenues 15,424 15,807 13,521 - ------------------------------------------------------------------ Costs and Expenses Purchased crude oil and products 9,127 9,896 8,182 Production and operating expenses 2,199 2,079 2,143 Exploration expenses 242 254 198 Selling, general and administrative expenses 631 508 500 Depreciation, depletion and amortization 863 941 871 Taxes other than income taxes 263 264 266 Interest expense 198 217 265 Preferred dividend requirements of subsidiary and capital trusts 82 47 32 - ------------------------------------------------------------------ Total Costs and Expenses 13,605 14,206 12,457 - ------------------------------------------------------------------ Income before income taxes and Kenai LNG tax settlement 1,819 1,601 1,064 Kenai LNG tax settlement 81 571 - - ------------------------------------------------------------------ Income before income taxes 1,900 2,172 1,064 Provision for income taxes 941 869 595 - ------------------------------------------------------------------ Net Income $ 959 1,303 469 ================================================================== Net Income Per Share of Common Stock Basic $ 3.64 4.96 1.79 Diluted 3.61 4.91 1.78 - ------------------------------------------------------------------ Average Common Shares Outstanding (in thousands) Basic 263,392 262,919 261,989 Diluted 265,419 265,256 263,569 - ------------------------------------------------------------------ See Notes to Financial Statements. 71 - ----------------------------------------------------------------- Consolidated Balance Sheet Phillips Petroleum Company At December 31 Millions of Dollars ------------------- 1997 1996 ------------------- Assets Cash and cash equivalents $ 163 615 Accounts and notes receivable (less allowances: 1997 -- $19; 1996 -- $20) 1,717 1,988 Inventories 500 472 Deferred income taxes 168 117 Prepaid expenses and other current assets 100 114 - ----------------------------------------------------------------- Total Current Assets 2,648 3,306 Investments and long-term receivables 964 912 Properties, plants and equipment (net) 10,022 9,120 Deferred income taxes 82 85 Deferred charges 144 125 - ----------------------------------------------------------------- Total $13,860 13,548 ================================================================= Liabilities Accounts payable $ 1,546 1,793 Notes payable and long-term debt due within one year 234 574 Accrued income and other taxes 365 483 Other accruals 300 287 - ----------------------------------------------------------------- Total Current Liabilities 2,445 3,137 Long-term debt 2,775 2,555 Accrued dismantlement, removal and environmental costs 713 783 Deferred income taxes 1,257 1,047 Employee benefit obligations 436 425 Other liabilities and deferred credits 769 700 - ----------------------------------------------------------------- Total Liabilities 8,395 8,647 - ----------------------------------------------------------------- Preferred Stock of Subsidiary and Other Minority Interests 1 350 - ----------------------------------------------------------------- Company-Obligated Mandatorily Redeemable Preferred Securities of Phillips Capital Trusts I and II 650 300 - ----------------------------------------------------------------- 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 2,031 1,999 Treasury stock (at cost: 1997 -- 14,000,882 shares; 1996 -- 13,878,480 shares) (752) (757) Compensation and Benefits Trust (CBT) (at cost: 1997 and 1996 -- 29,200,000 shares) (989) (989) Foreign currency translation adjustments (8) 54 Unearned employee compensation -- Long-Term Stock Savings Plan (LTSSP) (342) (378) Retained earnings 4,491 3,939 - ----------------------------------------------------------------- Total Common Stockholders' Equity 4,814 4,251 - ----------------------------------------------------------------- Total $13,860 13,548 ================================================================= See Notes to Financial Statements. 72 - ------------------------------------------------------------------ Consolidated Statement of Cash Flows Phillips Petroleum Company Years Ended December 31 Millions of Dollars ------------------------- 1997 1996 1995 ------------------------- Cash Flows From Operating Activities Net income $ 959 1,303 469 Adjustments to reconcile net income to net cash provided by operating activities Non-working capital adjustments Depreciation, depletion and amortization 863 941 871 Dry hole costs and leasehold impairment 91 117 66 Deferred taxes 283 163 9 J-Block settlement 161 - - Other 12 41 (77) Working capital adjustments Increase (decrease) in aggregate balance of accounts receivable sold - (200) 200 Decrease (increase) in other accounts and notes receivable 245 (265) (245) Decrease (increase) in inventories (33) 31 25 Decrease (increase) in prepaid expenses and other current assets 15 (26) 12 Increase (decrease) in accounts payable (224) 295 130 Increase (decrease) in taxes and other accruals (127) (315) 136 - ------------------------------------------------------------------ Net Cash Provided by Operating Activities 2,245 2,085 1,596 - ------------------------------------------------------------------ Cash Flows From Investing Activities Capital expenditures and investments, including dry hole costs (2,043) (1,544) (1,456) Proceeds from asset dispositions 21 101 142 Long-term advances to affiliates and other investments (34) (98) (39) - ------------------------------------------------------------------ Net Cash Used for Investing Activities (2,056) (1,541) (1,353) - ------------------------------------------------------------------ Cash Flows From Financing Activities Issuance of debt 468 212 97 Repayment of debt (569) (226) (106) Purchase of common stock (50) - - Issuance of common stock 20 25 9 Issuance of company-obligated mandatorily redeemable preferred securities 350 300 - Redemption of preferred stock of subsidiary (345) - - Dividends paid on common stock (353) (329) (313) Other (162) 22 (56) - ------------------------------------------------------------------ Net Cash Provided by (Used for) Financing Activities (641) 4 (369) - ------------------------------------------------------------------ Increase (Decrease) in Cash and Cash Equivalents (452) 548 (126) Cash and cash equivalents at beginning of year 615 67 193 - ------------------------------------------------------------------ Cash and Cash Equivalents at End of Year $ 163 615 67 ================================================================== See Notes to Financial Statements. 73 - ------------------------------------------------------------------ Consolidated Statement of Changes Phillips Petroleum Company in Common Stockholders' Equity Shares of Common Stock ------------------------------------- Held in Held in Issued Treasury CBT ------------------------------------- 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 Net income Cash dividends paid on common stock Distributed under incentive compensation plans (971,198) Recognition of LTSSP unearned compensation Tax benefit of dividends on unallocated LTSSP shares Current period translation adjustment Stock purchases 1,093,600 - ------------------------------------------------------------------ December 31, 1997 306,380,511 14,000,882 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, 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) Net income Cash dividends paid on common stock Distributed under incentive compensation plans 32 55 Recognition of LTSSP unearned compensation Tax benefit of dividends on unallocated LTSSP shares Current period translation adjustment Stock purchases (50) - ------------------------------------------------------------------ December 31, 1997 $383 2,031 (752) (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, 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 Net income 959 Cash dividends paid on common stock (353) Distributed under incentive compensation plans (61) Recognition of LTSSP unearned compensation 36 Tax benefit of dividends on unallocated LTSSP shares 7 Current period translation adjustment (62) Stock purchases - ------------------------------------------------------------------ December 31, 1997 (8) (342) 4,491 ================================================================== See Notes to Financial Statements. 74 - ----------------------------------------------------------------- Notes to Financial Statements Phillips Petroleum Company Note 1 -- Accounting Policies 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 1996 and 1995 financial statements have been reclassified to conform with the 1997 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 LIFO basis. Materials and supplies are valued at, or below, average cost. o Derivative Instruments -- Forward foreign currency contracts designated and effective as hedges of firm commitments, commodity futures and commodity option contracts designated and effective as hedges are recorded at market value, either through monthly adjustments for unrealized gains and losses (forwards and options) or through daily settlements in cash (futures), and the resulting gains and losses are deferred. Forward foreign currency contracts designated and effective as hedges of existing assets and liabilities are recorded at market value through monthly adjustments, with immediate recognition of the resulting gains and losses. Commodity swaps and forward commodity contracts designated as hedges are not recorded until the resulting cash flows are known. The gains and losses from all of these derivative instruments are recognized during the same period in which the gains and 75 losses from the underlying exposures being hedged are recognized, except for gains and losses from hedges of asset acquisitions that are reported as adjustments to the carrying value of the assets. In accordance with company risk-management policies, any derivative instrument held by the company must relate to an underlying, offsetting position, probable anticipated transaction or firm commitment. Additionally, the hedging instrument used must be expected to be highly effective in achieving market value changes that offset the opposing market value changes of the underlying transaction. If an existing derivative position is terminated prior to expected maturity or re-pricing, any deferred or resultant gain or loss will continue to be deferred unless the underlying position has ceased to exist. Deferred gains and losses, deferred premiums paid for forward exchange contracts, and deferred premiums paid for commodity option contracts are reported on the balance sheet with other current assets or other current liabilities. Gains and losses from derivatives designated as hedges of sales are reported on the statement of income with sales and other operating revenues, whereas gains and losses from derivatives designated as hedges of commodity purchases are reported with purchased crude oil and products or with production and operating expenses, subject to the effects of any related inventory costing reflected on the balance sheet. Gains and losses from hedging feedstock- to-product margins are reported with purchased crude oil and products. Recognized gains and losses are reported on the statement of cash flows in a manner consistent with the underlying position being hedged. 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's 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's judgment, exploratory wells are determined to be commercially unsuccessful or dry holes, applicable costs are expensed. 76 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 oil and gas production facilities, including necessary site restoration, are accrued using either the unit-of-production or the straight-line method. 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 clean-ups 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." 77 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 Net Income Per Share of Common Stock -- Basic 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. Diluted income per share of common stock includes the above, plus "in the money" stock options issued pursuant to company compensation plans. Treasury stock and shares held by the CBT are excluded from the daily weighted-average number of common shares outstanding in both calculations. Note 2 -- Accounting Changes The company adopted FASB Statement No. 128, "Earnings per Share," effective for the year ending December 31, 1997. All prior- period earnings per share data have been restated. This Statement requires dual presentation of basic and diluted earnings per share on the face of the income statement. "In the money" stock options issued pursuant to company compensation plans are the only dilutive securities in all periods presented. 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. Also 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. These changes were made 78 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 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 Statement, the company 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 3 -- Inventories Inventories at December 31 were: Millions of Dollars ------------------- 1997 1996 ------------------- Crude oil and petroleum products $156 136 Chemical products 254 255 Materials, supplies and other 90 81 - ----------------------------------------------------------------- $500 472 ================================================================= Included in the amounts above were inventories valued on a LIFO basis totaling $299 million and $283 million at December 31, 1997 and 1996, respectively. The remainder of the company's 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 $457 million and $604 million higher at December 31, 1997 and 1996, respectively, had they been valued using the FIFO method. Note 4 -- Investments and Long-Term Receivables Components of investments and long-term receivables at December 31 were: Millions of Dollars ------------------- 1997 1996 ------------------- Investments in and advances to affiliated companies $722 693 Long-term receivables 97 111 Other investments 145 108 - ----------------------------------------------------------------- $964 912 ================================================================= 79 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 -------------------------- 1997 1996 1995 -------------------------- Revenues $3,203 3,043 2,776 Income before income taxes 658 583 680 Net income 470 380 470 Current assets 856 936 758 Other assets 3,076 3,372 3,236 Current liabilities 777 887 889 Other liabilities 1,300 1,493 1,031 - ----------------------------------------------------------------- At December 31, 1997, retained earnings included $128 million related to the undistributed earnings of these affiliated companies, and distributions received from them were $96 million, $107 million and $122 million in 1997, 1996 and 1995, respectively. At December 31, 1997, the company's 50 percent interest in 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 $240 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, 1997, was $120 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, 1997, was $105 million. It is not economically practicable to estimate the fair value of the company's obligations to SOLP or to the participating banks. 80 Note 5 -- 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 ----------------------------------------------------- 1997 1996 ------------------------- ------------------------ Gross Net Gross Net PP&E DD&A PP&E PP&E DD&A PP&E ------------------------- ------------------------ E&P $11,924 6,982 4,942 11,190 6,782 4,408 GPM 2,080 1,136 944 1,974 1,071 903 RM&T 3,772 1,772 2,000 3,599 1,705 1,894 Chemicals 3,033 1,243 1,790 2,793 1,177 1,616 Corporate and Other 617 271 346 547 248 299 - ------------------------------------------------------------------ $21,426 11,404 10,022 20,103 10,983 9,120 ================================================================== Note 6 -- Impairments During 1997, 1996, and 1995, the company recognized the following before-tax impairments: Millions of Dollars -------------------- 1997 1996 1995 -------------------- Additions to depreciation, depletion and amortization Point Arguello field $ - 106 - Garden Banks Blocks 70/71 field 39 - - United Kingdom oil and gas properties 15 - - Canadian oil and gas properties - 25 - Other E&P properties 9 - 81 Retail service stations 1 58 - Chemical assets 4 - 4 Idle Corporate assets - 1 13 - ----------------------------------------------------------------- 68 190 98 Reductions in equity earnings Point Arguello field - 78 - - ----------------------------------------------------------------- $68 268 98 ================================================================= 81 After-tax, the above impairments by segment were: Millions of Dollars -------------------- 1997 1996 1995 -------------------- E&P $42 144 41 RM&T 1 38 - Chemicals 3 - 3 Corporate - 1 7 - ----------------------------------------------------------------- $46 183 51 ================================================================= The facts and circumstances leading to the E&P impairments in 1997 were unsuccessful development drilling and downward reserve revisions for the Garden Banks Blocks 70/71 field in the Gulf of Mexico, increased drilling costs for a well at the West Cameron Block 146 field in the Gulf of Mexico, and downward reserve revisions for fields located in the U.K. North Sea. The facts and circumstances leading to the E&P impairments in 1996 were rapidly declining production rates and 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. 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 Chemicals and Corporate assets considered to be impaired were determined based on information about sales and purchases of similar assets. 82 Note 7 -- Accrued Dismantlement, Removal and Environmental Costs At December 31, 1997 and 1996, the company had accrued $670 million and $686 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, 1997, were $986 million. These costs are accrued primarily on the unit-of-production method. Phillips had accrued environmental costs, primarily related to clean-up of ponds and pits at domestic refineries and underground storage tanks at U.S. service stations, and other various costs, of $40 million and $49 million at December 31, 1997 and 1996, respectively. Phillips had also accrued $32 million and $33 million of environmental costs associated with discontinued or sold operations at December 31, 1997 and 1996, respectively. Also, $7 million and $9 million were included at December 31, 1997 and 1996, respectively, for sites where the company has been named a PRP. At the same dates, $4 million and $6 million, respectively, had been accrued for other environmental litigation. At December 31, 1997 and 1996, total environmental accruals were $83 million and $97 million, respectively. Of the total $753 million of accrued dismantlement, removal and environmental costs at December 31, 1997, $40 million was classified as short-term on the balance sheet, under the caption "Other accruals." At year-end 1996, the total $783 million was classified as long-term. Note 8 -- J-Block Settlement On June 2, 1997, Phillips Petroleum Company United Kingdom Limited and its co-venturers, Agip (U.K.) Limited and BG Exploration and Production Limited reached a settlement with Enron Europe Limited (Enron) concerning J-Block gas production in the U.K. sector of the North Sea. Under the terms of the settlement agreement, Enron made an immediate cash payment of $440 million to the J-Block owners; the existing take-or-pay depletion contract was amended to become a firm long-term supply contract; and the fixed contract price for J-Block gas was reduced to reflect current market conditions for long-term gas sales contracts. The total contract gas quantity, however, remains essentially the same. Phillips' share of the $440 million cash payment was $161 million. The settlement concluded all J-Block litigation with Enron. The income associated with the cash payment will be recognized over the remaining term of the supply contract. 83 Note 9 -- Debt Long-term debt at December 31 was: Millions of Dollars --------------------- 1997 1996 --------------------- 9 1/2% Notes Due 1997 $ - 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 2002 at 3.7% - 9% 474 232 Guarantees of LTSSP bank loans payable at 4.98% - 6.1875% 425 451 Medium-term notes due various years at 7.6% - 8% 84 100 Other obligations 7 27 - ----------------------------------------------------------------- Total debt 3,009 3,129 Notes payable and long-term debt due within one year (234) (574) - ----------------------------------------------------------------- Long-term debt $2,775 2,555 ================================================================= Maturities in 1998 through 2002 are: $234 million (included in current liabilities), $85 million, $1 million, $408 million and $111 million, respectively. The company's LTSSP has two term-loan agreements: one requiring repayment in annual installments through the year 1998, and a second requiring annual installments beginning in 2005, and continuing through 2015. The outstanding balances of the loans at December 31, 1997, were $28 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 December 5, 2004, by giving not less than 180 days' prior notice to the LTSSP and the company. The company does not anticipate a cessation of participation by the lenders, and plans to commence scheduled repayments beginning in 2005. 84 Each bank participating in the LTSSP loan has the optional right, if the current company 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 15 for additional discussion of the LTSSP.) During 1997, Phillips increased its revolving bank credit facility from $1.1 billion to $1.5 billion. The company's commercial paper program is supported by this credit facility in an amount equal to 100 percent of the commercial paper outstanding. The commercial paper program was raised from $250 million to $1.5 billion this year. At December 31, 1997, nothing was outstanding under the revolving bank credit facility, while $311 million in commercial paper was outstanding. During 1997, the company's wholly owned subsidiary, Phillips Petroleum Company Norway, refinanced its $300 million revolving credit facility, maturing in 2001, to secure more favorable interest rates. The committed amount and term remained unchanged. At December 31, 1997, $158 million was outstanding under this facility. 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 10 -- 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 or other third- party recoveries. Based on currently available information, the company believes that it is remote that future costs related to known contingent liability exposures will exceed current accruals by an amount that would have a material adverse impact on the company's financial statements. As facts concerning contingencies become known to the company, the company reassesses its position both with respect to accrued liabilities and other potential exposures. Estimates that are 85 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 clean-up under these laws at federal Superfund and comparable state sites. In the future, the company may be involved in additional environmental assessments, clean-ups and proceedings. Tax -- The company has a number of issues outstanding with the IRS related to tax years 1987 through 1992 that are expected to be resolved in the near term as a result of resolving the Kenai LNG tax case. Although it is too early to determine the final financial effects, 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. 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. 86 Note 11 -- 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 1997 and 1996, 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. All forward exchange contracts are adjusted monthly to fair market value with recognition of the resulting gains and losses. At December 31, 1996, a U.K. subsidiary had purchased forward 41 million U.S. dollars to hedge purchases of crude oil in U.S. dollars. This notional amount represents only the amounts hedged, not the net market exposure of items hedged, which is significantly less. Any gain or loss from this position offsets gains or losses on the underlying exposures. There were no outstanding contracts at December 31, 1997. Commodity Derivative Contracts -- Phillips uses commodity-based swaps 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 of the items hedged, which is significantly less. 87 Notional Volume Positions ------------------------- December 31 Class of ------------------------- Derivative 1997 1996 ---------- ------------------------- Source of Commodity Price Risk Natural gas (billions of British thermal units) Sales of domestic natural gas production Swaps 16,082 61,140 - ------------------------------------------------------------------- Crude oil (thousands of barrels) Timing differences between purchases and refining Futures 2,627 1,050 - ------------------------------------------------------------------- Refined products (thousands of barrels) Feedstock-to-product margins on gasoline Swaps 5,119 4,789 and distillates Futures 2,613 641 - ------------------------------------------------------------------- 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 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). 88 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 and mandatorily redeemable preferred securities: The carrying amount of the company's floating-rate debt approximates fair value. The fair value of the fixed-rate debt and mandatorily redeemable preferred securities 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 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 --------------- ------------- 1997 1996 1997 1996 --------------- ------------- Financial assets Forward exchange contracts $ - 14 - 14 Futures 3 - 3 - Swaps - - 2 * Financial liabilities Total debt, including current maturities 3,009 3,129 3,201 3,293 Mandatorily redeemable preferred securities 650 300 675 303 Forward exchange contracts - 19 - 19 Futures - 1 - 1 Swaps - - 1 12 - ----------------------------------------------------------------- *Indicates amount was less than $1 million. 89 Note 12 -- Preferred Stock Company-Obligated Mandatorily Redeemable Preferred Securities of Phillips Capital Trusts During 1996 and 1997, the company formed two new statutory business trusts, Phillips 66 Capital I (Trust I) and Phillips 66 Capital II (Trust II), in which the company owns all of the common stock. The Trusts exist 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 I), purchased by Trust I on May 29, 1996. The Subordinated Debt Securities I are unsecured obligations of Phillips, subordinate and junior in right of payment to all present and future senior indebtedness of Phillips. The Subordinated Debt Securities I 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. On January 17, 1997, Trust II completed a $350 million underwritten public offering of 350,000 shares of 8% Capital Securities (Capital Securities). The sole asset of Trust II is $361 million of the company's 8% Junior Subordinated Deferrable Interest Debentures due 2037 (Subordinated Debt Securities II) purchased by Trust II on January 17, 1997. The Subordinated Debt Securities II are unsecured obligations of Phillips, subordinate and junior in right of payment to all present and future senior indebtedness of Phillips, but equal in right of payment with Subordinated Debt Securities I. The Subordinated Debt Securities II are due January 15, 2037, and are redeemable in whole, or in part, at the option of Phillips, on or after January 15, 2007, at a redemption price of $1,000 per share, plus accrued and unpaid interest. The subordinated debt securities and related income statement effects are eliminated in the company's consolidated financial statements. When the company redeems the subordinated debt securities, Trusts I and II are required to apply all redemption proceeds to the immediate redemption of the Trusts' Securities. Phillips fully and unconditionally guarantees the Trusts' obligations under the Preferred and Capital Securities. 90 Preferred Stock of Subsidiary In December 1997, the company's subsidiary, Phillips Gas Company, redeemed its 13,800,000 shares of Series A 9.32% Cumulative Preferred Stock at par. Note 13 -- 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 14 -- 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, 1997, future minimum payments due under non-cancelable operating leases were: Millions of Dollars ---------- 1998 $ 88 1999 75 2000 51 2001 38 2002 35 Remaining years 245 - ----------------------------------------------------------------- $532 ================================================================= The amounts above do not include guaranteed residual values of $263 million, related to two liquefied natural gas tankers under lease through the year 2000, retail service stations and corporate aircraft. 91 Operating lease rental expense for years ended December 31 was: Millions of Dollars ------------------------ 1997 1996 1995 ------------------------ Total rentals $119 108 112 Less sublease rentals 2 2 3 - ----------------------------------------------------------------- $117 106 109 ================================================================= Note 15 -- 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 ------------------- ------------------ 1997 1996 1995 1997 1996 1995 ------------------- ------------------ Service cost $ 35 36 26 15 14 14 Interest cost 60 57 48 21 20 18 Return on assets Actual (117) (36) (86) (52) (32) (36) Deferred gains (losses) 68 (7) 57 26 6 14 Amortization of Net asset (7) (7) (7) - - - Net losses (gains) 14 19 8 (1) (2) (1) Prior service cost 3 3 3 1 1 1 - ----------------------------------------------------------------- Net pension cost $ 56 65 49 10 7 10 ================================================================= 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: 92 Millions of Dollars ------------------------------ U.S. Plans Foreign Plans -------------- ------------- 1997 1996 1997 1996 -------------- ------------- Plan assets at fair value $ 626 480 373 339 - ----------------------------------------------------------------- Actuarial present value of benefit obligations Vested benefits 581 478 256 231 Non-vested benefits 37 31 - - - ----------------------------------------------------------------- Accumulated benefit obligation 618 509 256 231 Effect of projected future salary increases 291 268 87 84 - ----------------------------------------------------------------- Projected benefit obligation 909 777 343 315 - ----------------------------------------------------------------- Excess asset (obligation) (283) (297) 30 24 Unrecognized net asset (20) (27) (1) (1) Unrecognized net (gains) losses 125 138 (13) (14) Unrecognized prior service cost 45 44 9 10 - ----------------------------------------------------------------- Prepaid (accrued) pension cost and deferred gain on reversion $(133) (142) 25 19 ================================================================= Assumptions -- Weighted Average at December 31 Rate of compensation increase 4.25% 4.25 3.70 4.00 Discount rate 7.00 7.50 7.00 7.40 Long-term rate of return on assets 10.25 10.50 7.80 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. For 1997, domestic plan assets exceeded the accumulated benefit obligation reflected above, which includes liabilities of $57 million for supplemental retirement plans that are not qualified under the Employee Retirement Income Security Act of 1974 (ERISA). For 1996, domestic plan assets exceeded the accumulated benefit obligation after eliminating liabilities of $47 million related to non-qualified plans. These non-qualified plans are funded by irrevocable grantor trusts, not out of the plan assets reflected in the above schedule. 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. 93 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 ---------------- ---------------- 1997 1996 1995 1997 1996 1995 ---------------- ---------------- Service cost $ 2 2 2 1 1 1 Interest cost 5 6 6 4 4 4 Return on assets Actual - - - (2) (2) (2) Deferred losses - - - - - - Amortization of Net losses - 1 1 1 2 1 Prior service cost (4) (4) (4) - (1) (1) - ----------------------------------------------------------------- Net postretirement benefit cost $ 3 5 5 4 4 3 ================================================================= In determining net postretirement benefit cost, the company has elected to amortize net gains and losses on a straight-line basis over 10 years. 94 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 ------------- ------------- 1997 1996 1997 1996 ------------- ------------- Plan assets at fair value, held under a reserve deposit contract $ - - 29 31 - ----------------------------------------------------------------- Accumulated postretirement benefit obligation (APBO) Retirees 53 62 53 53 Fully eligible active participants 11 10 5 4 Other active participants 10 10 3 3 - ----------------------------------------------------------------- 74 82 61 60 - ----------------------------------------------------------------- APBO in excess of plan assets (74) (82) (32) (29) Unrecognized net losses 7 2 12 14 Unrecognized prior service cost (23) (13) (3) (3) - ----------------------------------------------------------------- Accrued postretirement benefit cost $(90) (93) (23) (18) ================================================================= Financial Assumptions Discount rate 6.75% 7.25 6.75 7.25 Long-term rate of return on assets (non-taxable) - - 6.60 7.00 Rate of compensation increase - - 4.25 4.25 - ----------------------------------------------------------------- At December 31, 1997, the health care cost trend rate is assumed to decrease gradually from 7 percent in 1998 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 that freezes the company's contribution at 2004 levels. The same health care cost trend rate was used at December 31, 1996. Increasing the assumed health care cost trend rate by one percentage point in each year would increase the APBO by $4 million and $3 million at December 31, 1997 and 1996, respectively, and the aggregate of the service and interest cost components by $1 million for both 1997 and 1996. 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. 95 Termination Benefits The company recorded charges of $5 million, $4 million and $69 million for severance benefits in connection with work force reductions in 1997, 1996 and 1995, 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 1997, 1996 and 1995. 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 $27 million, $30 million and $33 million in 1997, 1996 and 1995, respectively. This included compensation expense of $27 million, $30 million and $29 million in 1997, 1996 and 1995, respectively. Company contributions to the LTSSP in 1997, 1996 and 1995 were $20 million, $14 million and $21 million, respectively. Dividends used to service debt were $32 million, $39 million and $36 million in 1997, 1996 and 1995, respectively. These dividends reduced the amount of expense recognized each period. Interest incurred on the LTSSP debt in 1997, 1996 and 1995 was $26 million, $27 million and $31 million, respectively. 96 The total LTSSP shares as of December 31, 1997, were: Unallocated shares 12,732,919 Allocated shares 17,446,774 - ----------------------------------------------------------------- Total LTSSP shares 30,179,693 ================================================================= 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 $64 million, $75 million and $52 million were charged against earnings in 1997, 1996 and 1995, 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 different from amounts reported in the financial 97 statements. A summary of Phillips' stock option activity follows: Weighted-Average Options Exercise Price ---------- ---------------- 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 35.26 Exercised (1,384,966) 22.58 Forfeited (27,059) 33.74 - ---------------------------------------------- ---------------- Outstanding at December 31, 1996 6,963,403 $28.76 Granted 1,181,103 44.93 Exercised (1,177,307) 25.01 Forfeited (50,948) 40.25 - ---------------------------------------------- ---------------- Outstanding at December 31, 1997 6,916,251 $32.07 ============================================== ---------------- Outstanding at December 31, 1997 Weighted-Average ---------------------------------- Exercise Prices Options Remaining Lives Exercise Price - ---------------- --------- --------------- -------------- $12.63 to $31.44 4,331,966 4.97 years $27.63 $32.25 to $50.72 2,584,285 8.45 years 39.52 - ----------------------------------------------------------------- Exercisable at December 31 Weighted-Average Exercise Prices Options Exercise Price ---------------- --------- ---------------- 1997 $12.63 to $31.44 3,436,254 $26.74 $32.25 to $50.72 412,916 35.34 - ----------------------------------------------------------------- 1996 - 3,626,834 $25.72 - ----------------------------------------------------------------- 1995 - 3,915,145 $23.75 - ----------------------------------------------------------------- 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 by the CBT in accordance with voting directions from eligible employees, as specified in a trust agreement with the trustee. 98 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 16 -- Taxes Taxes charged to income were: Millions of Dollars ------------------------ 1997 1996 1995 ------------------------ Taxes Other Than Income Taxes Property $ 82 80 83 Production 69 65 54 Payroll 55 56 59 Environmental 37 40 58 Other 20 23 12 - ----------------------------------------------------------------- 263 264 266 - ----------------------------------------------------------------- Income Taxes Federal Current 145 (6) 95 Deferred 142 189 18 Foreign Current 547 624 520 Deferred 72 43 (43) State and local Current 16 (2) 7 Deferred 19 21 (2) - ----------------------------------------------------------------- 941 869 595 - ----------------------------------------------------------------- Total taxes charged to income $1,204 1,133 861 ================================================================= 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: 99 Millions of Dollars ------------------- 1997 1996 ------------------- Deferred Tax Liabilities Depreciation, depletion and amortization $2,129 2,001 Other 39 41 - ----------------------------------------------------------------- Total deferred tax liabilities 2,168 2,042 - ----------------------------------------------------------------- Deferred Tax Assets Contingency accruals 53 47 Benefit plan accruals 214 212 Accrued dismantlement, removal and environmental costs 264 279 Other financial accruals and deferrals 116 130 Alternative minimum tax and other credit carryforwards 344 343 Loss carryforwards 383 359 Depreciation, depletion and amortization - 13 Other 19 21 - ----------------------------------------------------------------- Total deferred tax assets 1,393 1,404 Less valuation allowance 232 208 - ----------------------------------------------------------------- Net deferred tax assets 1,161 1,196 - ----------------------------------------------------------------- Net deferred tax liabilities $1,007 846 ================================================================= 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 $24 million during 1997, 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, 1997 and 1996, these temporary differences were $239 million and $248 million, respectively. Determination of the amount of unrecognized deferred taxes on these temporary differences is not practicable due to foreign tax credits and exclusions. 100 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 -------------------- -------------------- 1997 1996 1995 1997 1996 1995 -------------------- -------------------- Income before income taxes United States $ 909 1,179 332 47.8% 54.3 31.2 Foreign 991 993 732 52.2 45.7 68.8 - --------------------------------------------------------------------- $1,900 2,172 1,064 100.0% 100.0 100.0 ===================================================================== Federal statutory income tax $ 665 760 372 35.0% 35.0 35.0 Foreign taxes in excess of federal statutory rate 320 337 267 16.8 15.5 25.0 Credit for producing fuel from a non-conventional source (29) (27) (31) (1.5) (1.2) (2.9) Kenai LNG tax settlement (31) (194) - (1.6) (9.0) - Other 16 (7) (13) .8 (.3) (1.2) - --------------------------------------------------------------------- $ 941 869 595 49.5% 40.0 55.9 ===================================================================== Excise taxes accrued on the sale of petroleum products were $1,331 million, $1,257 million and $1,150 million for the years ended December 31, 1997, 1996 and 1995, 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 relating to the company's sales of 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. Final resolution of all outstanding issues with the IRS was achieved for years 1983 through 1986. Refunds, including interest, of $107 million, primarily relating to the company's sales of LNG from its Kenai, Alaska, facility, increased net income in 1997 by $83 million. The company also has a number of issues outstanding with the IRS related to tax years 1987 through 1992, further discussed in Note 10 -- Contingencies. 101 Note 17 -- Cash Flow Information Millions of Dollars ------------------------ 1997 1996 1995 ------------------------ Non-Cash Investing and Financing Activities Issuance of promissory notes to purchase property, plant and equipment $ - 26 - Contribution of non-cash net assets to equity-method affiliates - - 55 Fair market value of property, plant and equipment exchanged as part of a broader monetary transaction 49 - - Common stock issued to establish CBT - - 989 - ----------------------------------------------------------------- Cash Payments Interest Debt $212 220 224 Taxes and other 22 31 19 - ----------------------------------------------------------------- $234 251 243 ================================================================= Income taxes $770 765 576 - ----------------------------------------------------------------- Note 18 -- Other Financial Information Millions of Dollars Except Per Share Amounts ------------------------ 1997 1996 1995 ------------------------ Interest Incurred Debt $ 212 222 228 Other 32 26 67 - ----------------------------------------------------------------- 244 248 295 Capitalized (46) (31) (30) - ----------------------------------------------------------------- Expensed $ 198 217 265 ================================================================= Maintenance and Repairs -- expensed $ 493 416 413 - ----------------------------------------------------------------- Research and Development Expenditures -- expensed $ 56 59 51 - ----------------------------------------------------------------- Foreign Currency Transaction Gains (Losses) -- after-tax $ (17) 41 (3) - ----------------------------------------------------------------- Cash Dividends paid per common share $1.34 1.25 1.195 - ----------------------------------------------------------------- 102 Note 19 -- 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. 103 Analysis of Results by Business Segment Millions of Dollars ----------------------------------- E&P GPM RM&T ----------------------------------- 1997 Sales and Other Operating Revenues Outside customers $3,379** 952 7,347** Sales within Phillips 567 759 350 - ---------------------------------------------------------------------- Segment sales $3,946 1,711 7,697 ====================================================================== Operating Profit $1,316 161 190 Equity in earnings of affiliates 39 1 15 Preferred dividend requirements of subsidiary and capital trusts, and other minority interests 1 - - Corporate/non-operating items Interest expense - - - Kenai LNG tax settlement - - - Other - - - Income taxes (747) (61) (68) - ---------------------------------------------------------------------- Net income (loss) $ 609 101 137 ====================================================================== Assets Identifiable assets $5,894 1,102 2,636 Investments in and advances to affiliated companies 140 4 110 - ---------------------------------------------------------------------- Total assets $6,034 1,106 2,746 ====================================================================== Depreciation, Depletion and Amortization $ 548 77 119 - ---------------------------------------------------------------------- Capital Expenditures and Investments $1,346 116 235 - ---------------------------------------------------------------------- 1996 Sales and Other Operating Revenues Outside customers $2,574 913 8,857 Sales within Phillips 1,288 804 522 - ---------------------------------------------------------------------- Segment sales $3,862 1,717 9,379 ====================================================================== Operating Profit $1,289 232 56 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 (739) (88) (20) - ---------------------------------------------------------------------- Net income $ 493 144 54 ====================================================================== Assets Identifiable assets $5,376 1,112 2,738 Investments in and advances to affiliated companies 140 4 111 - ---------------------------------------------------------------------- Total assets $5,516 1,116 2,849 ====================================================================== 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 $ 876 13 7 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 (541) (3) (4) - ---------------------------------------------------------------------- Net income (loss) $ 373 10 20 ====================================================================== 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 - ---------------------------------------------------------------------- Analysis of Results by Business Segment Millions of Dollars ----------------------------------- Corporate Chemicals and Other* Consolidated ----------------------------------- 1997 Sales and Other Operating Revenues Outside customers $3,528 4 15,210 Sales within Phillips 538 28 - - ---------------------------------------------------------------------- Segment sales $4,066 32 15,210 ====================================================================== Operating Profit $ 371 16 2,054 Equity in earnings of affiliates 71 - 126 Preferred dividend requirements of subsidiary and capital trusts, and other minority interests - 82 83 Corporate/non-operating items Interest expense - (198) (198) Kenai LNG tax settlement - 81 81 Other - (246) (246) Income taxes (145) 80 (941) - ---------------------------------------------------------------------- Net income (loss) $ 297 (185) 959 ====================================================================== Assets Identifiable assets $2,638 868 13,138 Investments in and advances to affiliated companies 468 - 722 - ---------------------------------------------------------------------- Total assets $3,106 868 13,860 ====================================================================== Depreciation, Depletion and Amortization $ 95 24 863 - ---------------------------------------------------------------------- Capital Expenditures and Investments $ 275 71 2,043 - ---------------------------------------------------------------------- 1996 Sales and Other Operating Revenues Outside customers $3,382 5 15,731 Sales within Phillips 698 36 - - ---------------------------------------------------------------------- Segment sales $4,080 41 15,731 ====================================================================== Operating Profit $ 312 7 1,896 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 - (34) (34) Income taxes (109) 87 (869) - ---------------------------------------------------------------------- Net income $ 245 367 1,303 ====================================================================== Assets Identifiable assets $2,406 1,223 12,855 Investments in and advances to affiliated companies 438 - 693 - ---------------------------------------------------------------------- Total assets $2,844 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 $ 452 16 1,364 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 - (129) (129) Income taxes (156) 109 (595) - ---------------------------------------------------------------------- Net income (loss) $ 367 (301) 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 - ---------------------------------------------------------------------- *Includes certain intersegment eliminations. **Certain foreign crude oil marketing activities were transferred from RM&T to E&P in 1997. This had the effect of increasing E&P outside sales by $652 million in 1997. The effect on E&P's net income was not material. 104 Analysis of Results by Geographic Area Millions of Dollars ----------------------------------- United United States Norway Kingdom Africa ----------------------------------- 1997 Sales and Other Operating Revenues Outside customers $12,633 448 1,268 209 Sales within Phillips 177 743 2 1 - ---------------------------------------------------------------------- Segment sales $12,810 1,191 1,270 210 ====================================================================== Operating Profit $ 1,183 673 64 111 - ---------------------------------------------------------------------- Equity in Earnings of Affiliates $ 111 13 3 - - ---------------------------------------------------------------------- Assets Identifiable assets $ 8,169 1,714 1,247 231 Investments in and advances to affiliated companies 517 84 29 - - ---------------------------------------------------------------------- Total assets $ 8,686 1,798 1,276 231 ====================================================================== 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 $ 1,013 725 30 114 - ---------------------------------------------------------------------- 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 (Loss) $ 708 497 (8) 99 - ---------------------------------------------------------------------- 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 ====================================================================== Analysis of Results by Geographic Area Millions of Dollars ----------------------------------- Other Worldwide Areas Corporate Consolidated* ----------------------------------- 1997 Sales and Other Operating Revenues Outside customers $ 652 - 15,210 Sales within Phillips 57 - - - ---------------------------------------------------------------------- Segment sales $ 709 - 15,210 ====================================================================== Operating Profit $ 23 - 2,054 - ---------------------------------------------------------------------- Equity in Earnings of Affiliates $ (1) - 126 - ---------------------------------------------------------------------- Assets Identifiable assets $ 971 806 13,138 Investments in and advances to affiliated companies 92 - 722 - ---------------------------------------------------------------------- Total assets $ 1,063 806 13,860 ====================================================================== 1996 Sales and Other Operating Revenues Outside customers $ 587 - 15,731 Sales within Phillips 62 - - - ---------------------------------------------------------------------- Segment sales $ 649 - 15,731 ====================================================================== Operating Profit $ 14 - 1,896 - ---------------------------------------------------------------------- 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 (Loss) $ 68 - 1,364 - ---------------------------------------------------------------------- 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 ====================================================================== *After elimination of intergeographic transactions. Export sales totaled $494 million, $522 million and $507 million for 1997, 1996 and 1995, respectively. 105 - ----------------------------------------------------------------- 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 U.S. 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 Page - ----------------------------------------------------------------- Proved Reserves Worldwide 107 Results of Operations 113 Statistics 116 Costs Incurred 120 Capitalized Costs 121 Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserve Quantities 122 106 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 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 Revisions of previous estimates 54 (1) 42 3 7 3 Improved recovery 79 6 73 - - - Purchases of reserves in place 8 - - - - 8 Extensions and discoveries 66 10 - 30 2 24 Production (85) (23) (39) (7) (9) (7) Sales of reserves in place (23) - - - - (23) - ------------------------------------------------------------------ End of 1997 994 244 529 79 92 50 ================================================================== Developed 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 End of 1997 744 189 409 30 89 27 - ------------------------------------------------------------------ 107 o Proved reserves are those quantities of crude oil, natural gas and natural gas liquids (NGL) that, upon analysis of geological and engineering data, appear with reasonable certainty to be recoverable in the future from known oil and gas reservoirs under existing economic and operating conditions. As additional information becomes available or conditions change, estimates must be revised. o Developed reserves are those portions of proved reserves that are recoverable through existing well bores, and production equipment and facilities. o Purchases of reserves in place in Other Areas for 1997 result from the acquisition of proved properties in the Zama/Virgo area in Canada. o Extensions and discoveries in Other Areas for 1997 include 11 million barrels in Venezuela in which the company has an economic interest through risk service contracts. At year- end 1997, the company's total worldwide crude oil reserves include 11 million barrels related to such contracts. o Sales of reserves in place in Other Areas for 1997 include 22 million barrels related to an exchange of a proved property in Canada. 108 Natural Gas Years Ended ---------------------------------------------- December 31 Billions of Cubic Feet ---------------------------------------------- United United Other Total States Norway Kingdom Africa Areas ---------------------------------------------- Developed and Undeveloped 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 Revisions of previous estimates (194) (57) (103) (37) - 3 Improved recovery 73 1 72 - - - Purchases of reserves in place 532 7 - - - 525 Extensions and discoveries 316 280 - 22 - 14 Production (541) (357) (111) (48) (1) (24) Sales of reserves in place (32) (1) - - - (31) - ------------------------------------------------------------------ End of 1997 6,521 3,790 1,162 661 241 667 ================================================================== Developed 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 End of 1997 4,812 3,371 884 346 27 184 - ------------------------------------------------------------------ 109 o Natural gas production may differ from gas production (delivered for sale) on page 116, primarily because the quantities above omit the gas equivalent of the liquids, where applicable, but include gas consumed at the lease. o Purchases of reserves in place in Other Areas for 1997 result from the acquisition of proved properties in the Zama/Virgo area in Canada. o Sales of reserves in place in Other Areas for 1997 are for a Canadian property. o Natural gas reserves are computed at 14.65 pounds per square inch absolute and 60 degrees Fahrenheit. 110 Natural Gas Liquids Years Ended --------------------------------------------- December 31 Millions of Barrels --------------------------------------------- United United Other Total States Norway Kingdom Africa Areas --------------------------------------------- Developed and Undeveloped 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 Revisions of previous estimates 1 - 1 - - - Improved recovery 2 - 2 - - - Purchases of reserves in place 5 - - - - 5 Extensions and discoveries 5 5 - - - - Production (15) (11) (3) (1) - - Sales of reserves in place (1) (1) - - - - - ------------------------------------------------------------------ End of 1997 195 122 42 6 19 6 ================================================================== Developed 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 End of 1997 172 116 31 4 19 2 - ------------------------------------------------------------------ 111 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. o Purchases of reserves in place in Other Areas for 1997 result from the acquisition of proved properties in the Zama/Virgo area in Canada. 112 o Results of Operations Millions of Dollars --------------------------------------------------- United United Other Total States Norway Kingdom Africa Areas --------------------------------------------------- 1997 Sales $1,562 687 279 261 162 173 Transfers 1,339 596 743 - - - Other revenues 130 58 44 12 1 15 - ----------------------------------------------------------------------------- Total revenues 3,031 1,341 1,066 273 163 188 Production costs 792 428 217 68 39 40 Exploration expenses 245 103 29 30 14 69 Depreciation, depletion and amortization* 518 251 107 113 11 36 Other related expenses 131 92 20 (2) (13) 34 - ----------------------------------------------------------------------------- 1,345 467 693 64 112 9 Provision for income taxes 747 132 499 20 96 - - ----------------------------------------------------------------------------- Results of operations for producing activities 598 335 194 44 16 9 Other earnings 11 25 - - - (14) - ----------------------------------------------------------------------------- E&P net income $ 609 360 194 44 16 (5) ============================================================================= 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 762 404 225 48 50 35 Exploration expenses 259 113 22 36 24 64 Depreciation, depletion and amortization*** 646 415 104 41 13 73 Other related expenses 114 112 (12) 2 - 12 - ----------------------------------------------------------------------------- 1,181 353 741 18 112 (43) Provision for income taxes 745 97 541 8 100 (1) - ----------------------------------------------------------------------------- Results of operations for producing activities 436 256 200 10 12 (42) Other earnings 57 64 - (2) - (5) - ----------------------------------------------------------------------------- E&P net income $ 493 320 200 8 12 (47) ============================================================================= 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 753 403 247 32 31 40 Exploration expenses 205 94 26 22 18 45 Depreciation, depletion and amortization**** 499 270 147 24 11 47 Other related expenses 129 65 46 8 (11) 21 - ----------------------------------------------------------------------------- 857 261 512 (15) 101 (2) Provision for income taxes 521 61 375 (4) 87 2 - ----------------------------------------------------------------------------- Results of operations for producing activities 336 200 137 (11) 14 (4) Other earnings 37 39 - - - (2) - ----------------------------------------------------------------------------- E&P net income $ 373 239 137 (11) 14 (6) ============================================================================= *Includes before-tax property impairments in the United States and the United Kingdom of $48 million and $15 million, respectively. **Restated to reflect that certain costs previously held at Corporate are now aligned with the operating segments. ***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. 113 o Results of operations for producing activities consist of all the activities within the E&P organization, except for a liquefied natural gas 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 (DD&A) in Results of Operations differs from that shown for total Exploration and Production in Analysis of Results by Business Segment on page 104, mainly due to depreciation of support equipment being reclassified to production or exploration expenses, as applicable, in Results of Operations. In addition, other earnings includes certain E&P activities, including their related DD&A charges. o Other related expenses are primarily third-party transportation expense, foreign currency gains and losses and other miscellaneous expenses. 114 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. 115 o Statistics Net Production 1997 1996 1995 --------------------------- Thousands of Barrels Daily --------------------------- Crude Oil United States 67 69 79 Norway 104 99 100 United Kingdom 18 6 3 Africa 23 25 24 Other areas 20 20 16 - ----------------------------------------------------------------- 232 219 222 ================================================================= Natural Gas Liquids United States* 4 4 5 Norway 7 8 8 Other areas 3 3 2 - ----------------------------------------------------------------- 14 15 15 ================================================================= *Represents amounts extracted attributable to E&P operations. Additional quantities of NGL are extracted at GPM gas processing plants (see NGL reserves page 112 for further discussion). Millions of Cubic Feet Daily Natural Gas ---------------------------- United States (less gas equivalent of liquids shown above)* 1,024 1,102 1,078 Norway (dry basis) 275 291 299 United Kingdom (dry basis) 122 81 46 Other areas 51 53 58 - ----------------------------------------------------------------- 1,472 1,527 1,481 ================================================================= *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 $17.41 18.96 14.98 Norway 19.09 20.92 17.08 United Kingdom 18.77 21.09 17.17 Africa 19.25 21.45 17.60 Other areas 18.50 19.46 16.92 Total foreign 19.02 20.89 17.16 Worldwide 18.57 20.28 16.43 - ----------------------------------------------------------------- Natural Gas Liquids -- Per Barrel United States $15.14 15.81 11.01 Norway 10.16 9.59 9.73 - ----------------------------------------------------------------- Natural Gas (Lease) -- Per Thousand Cubic Feet United States $ 2.33 2.10 1.37 Norway 2.57 2.61 2.66 United Kingdom 3.22 2.92 2.78 Other areas 1.64 1.27 1.12 Total foreign 2.63 2.52 2.50 Worldwide 2.45 2.25 1.77 - ----------------------------------------------------------------- 116 1997 1996 1995 ------------------------- Average Production Costs* -- Per Barrel-of-Oil-Equivalent United States $4.85 4.30 4.19 Norway 3.79 3.95 4.30 United Kingdom 4.74 6.56 7.62 Africa 4.45 5.06 3.40 Other areas 3.71 3.28 4.19 Total foreign 3.99 4.22 4.36 Worldwide 4.42 4.26 4.26 - ----------------------------------------------------------------- *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. 117 Acreage at December 31, 1997 Thousands of Acres ------------------ Gross Net ------------------ Developed United States 1,563 1,150 Norway 45 17 United Kingdom 197 69 Africa 81 16 Other areas 607 268 - ----------------------------------------------------------------- 2,493 1,520 ================================================================= Undeveloped United States 2,950 1,771 Norway 2,061 505 United Kingdom 1,868 612 Africa* 43,995 17,635 Canada 1,276 324 Other areas 21,500 11,505 - ----------------------------------------------------------------- 73,650 32,352 ================================================================= *Includes two Somalia concessions where operations have been suspended by declarations of force majeure totaling 21,865 gross and 8,135 net acres. 118 Net Wells Completed* Productive Dry ---------------- ---------------- 1997 1996 1995 1997 1996 1995 ---------------- ---------------- Exploratory United States 6 5 4 6 10 8 Norway - - - 1 ** 1 United Kingdom ** ** - ** 2 ** Africa - - ** - 1 1 Other areas - 1 4 1 7 3 - ------------------------------------------------------------------ 6 6 8 8 20 13 ================================================================== Development United States 121 90 87 7 7 6 Norway 4 2 2 - - - United Kingdom ** 3 3 - - - Africa ** ** ** - - - Other areas 5 5 14 ** 1 1 - ------------------------------------------------------------------ 130 100 106 7 8 7 ================================================================== *Excludes farmout arrangements. **Phillips' total proportionate interest was less than one. Wells at Year-End 1997 Productive** ---------------------------- In Progress* Oil Gas ------------ ------------- ------------ Gross Net Gross Net Gross Net ------------ ------------- ------------ United States 48 24 12,978 2,876 5,577 2,919 Norway 5 2 151 54 33 9 United Kingdom 32 4 17 5 85 19 Africa 3 1 185 37 11 2 Other areas 11 5 792 250 397 206 - ------------------------------------------------------------------ 99 36 14,123 3,222 6,103 3,155 ================================================================== *Includes wells that have been temporarily suspended. **Includes 1,373 gross and 551 net multiple completion wells. 119 o Costs Incurred Millions of Dollars --------------------------------------------------- United United Other Total States Norway Kingdom Africa Areas --------------------------------------------------- 1997 Acquisition $ 428 29 - - - 399 Exploration 307 128 29 54 18 78 Development 774 265 292 140 11 66 - ------------------------------------------------------------------ $1,509 422 321 194 29 543 ================================================================== 1996 Acquisition $ 139 57 - - - 82 Exploration 272 103 25 49 21 74 Development 695 184 345 125 13 28 - ------------------------------------------------------------------ $1,106 344 370 174 34 184 ================================================================== 1995 Acquisition $ 78 45 - 28 1 4 Exploration 223 87 33 27 22 54 Development 668 233 192 204 6 33 - ------------------------------------------------------------------ $ 969 365 225 259 29 91 ================================================================== 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 $6 million, $32 million and $27 million in the United States for 1997, 1996 and 1995, respectively, and $28 million in the United Kingdom for 1995. In addition, the 1997 amount in Other Areas includes $317 million for proved properties acquired in Canada, of which $49 million represents the fair value of a property in Canada exchanged for interests in other Canadian properties. 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. 120 o Capitalized Costs At December 31 Millions of Dollars ----------------------------------------------- United United Other Total States Norway Kingdom Africa Areas ----------------------------------------------- 1997 Proved properties $11,346 5,613 2,909 1,661 419 744 Unproved properties 469 230 - 67 4 168 - ------------------------------------------------------------------ 11,815 5,843 2,909 1,728 423 912 Accumulated depreciation, depletion and amortization (6,898) (4,230) (1,440) (768) (240) (220) - ------------------------------------------------------------------ $ 4,917 1,613 1,469 960 183 692 ================================================================== 1996 Proved properties $10,730 5,375 2,997 1,545 404 409 Unproved properties 397 202 - 58 3 134 - ------------------------------------------------------------------ 11,127 5,577 2,997 1,603 407 543 Accumulated depreciation, depletion and amortization 6,701 4,034 1,538 678 226 225 - ------------------------------------------------------------------ $ 4,426 1,543 1,459 925 181 318 ================================================================== 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. 121 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. 122 Discounted Future Net Cash Flows Millions of Dollars ---------------------------------------------------- United United Other Total States Norway Kingdom Africa Areas ---------------------------------------------------- 1997 Future cash inflows $29,967 11,346 11,866 3,245 1,731 1,779 Less: Future production costs 9,659 4,309 3,439 660 450 801 Future development costs 2,409 908 703 392 80 326 Future income tax provisions 8,796 1,732 5,565 518 925 56 - ------------------------------------------------------------------------------ Future net cash flows 9,103 4,397 2,159 1,675 276 596 10 percent annual discount 3,789 2,070 844 525 130 220 - ------------------------------------------------------------------------------ Discounted future net cash flows $ 5,314 2,327 1,315 1,150 146 376 ============================================================================== 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 15,268 4,896 7,957 611 1,577 227 - ------------------------------------------------------------------------------ Future net cash flows 16,281 10,254 2,784 2,076 401 766 10 percent annual discount 7,392 4,924 1,137 822 190 319 - ------------------------------------------------------------------------------ Discounted future net cash flows $ 8,889 5,330 1,647 1,254 211 447 ============================================================================== 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 percent annual discount 4,619 2,693 695 821 164 246 - ------------------------------------------------------------------------------ Discounted future net cash flows $ 5,960 3,476 1,096 910 180 298 ============================================================================== 123 Sources of Change in Discounted Future Net Cash Flows Millions of Dollars --------------------------- 1997 1996 1995 --------------------------- Discounted future net cash flows at the beginning of the year $ 8,889 5,960 3,813 - ------------------------------------------------------------------ Changes during the year Revenues less production costs for the year (2,109) (2,113) (1,569) Net change in prices and production costs (7,764) 5,866 2,917 Extensions, discoveries and improved recovery, less estimated future costs 1,001 1,061 1,215 Development costs for the year 774 695 668 Changes in estimated future development costs (526) (311) (214) Purchases of reserves in place, less estimated future costs 151 54 108 Sales of reserves in place, less estimated future costs (101) (66) (77) Revisions of previous quantity estimates 74 (224) (113) Accretion of discount 1,541 1,003 668 Net change in income taxes 3,384 (3,038) (1,454) Other - 2 (2) - ------------------------------------------------------------------ Total changes (3,575) 2,929 2,147 - ------------------------------------------------------------------ Discounted future net cash flows at year-end $ 5,314 8,889 5,960 ================================================================== 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 prices, 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. 124 - --------------------------------------------------------------------- Selected Quarterly Financial Data Millions of Dollars ---------------------------------------- Income Before Net Net Income Income Income Sales Taxes Per Share Per Share and Other and Kenai Net of Common of Common Operating LNG Tax Net Operating Stock -- Stock -- Revenues Settlement Income Income Basic Diluted ---------------------------------------- --------- --------- 1997 First $3,944 493 227 247 .86 .86 Second 3,709 466 307 214 1.17 1.15 Third 3,844 461 216 247 .82 .81 Fourth 3,713 399 209 203 .79 .79 - --------------------------------------------------------------------- 1996 First $3,595 310 695 210 2.65 2.63 Second 3,937 443 221 221 .84 .83 Third 3,852 435 187 208 .71 .70 Fourth 4,347 413 200 252 .76 .75 - --------------------------------------------------------------------- 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. Special Items by Quarter ---------------------------------------------- Millions of Dollars ---------------------------------------------- First Second Third Fourth ---------- ---------- ---------- ---------- 1997 1996 1997 1996 1997 1996 1997 1996 ---------- ---------- ---------- ---------- Kenai LNG tax settlement $ - 565 80 - 3 - - - Property impairments - (45) (11) - (25) (25) (10) (113) Net gains on asset sales - - 7 5 - 9 9 - Foreign currency gains (losses) (20) - 6 - (12) 2 9 39 Pending claims and settlements - (28) 16 (1) 2 (13) (3) 24 Other items - (7) (5) (4) 1 6 1 (2) - -------------------------------------------------------------------- Total special items $(20) 485 93 - (31) (21) 6 (52) ==================================================================== 125 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 126 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 11, 1998, is incorporated herein by reference.* Information regarding the executive officers appears in Part I of this report on pages 26 and 27. 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 11, 1998, 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 11, 1998, 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 11, 1998, 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. 127 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 68, are filed as part of this annual report. 2. Exhibits -------- The exhibits listed in the Index to Exhibits, which appears on pages 130 through 133, are filed as a part of this annual report. (b) Reports on Form 8-K ------------------- During the three months ended December 31, 1997, the registrant did not file any reports on Form 8-K. 128 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) 1997 Deducted from asset accounts: Allowance for doubtful accounts and notes receivable $ 20 7 - 8 (c) 19 Deferred tax asset valuation allowance 208 27 (3) - 232 - ----------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------- (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. 129 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 July 14, 1997 (incorporated by reference to Exhibit 3(ii) to Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997). 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 (incorporated by reference to Exhibit 4(a) to Annual Report on Form 10-K for the year ended December 31, 1996). (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. (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) (incorporated by reference to Exhibit 4(d) to Annual Report on Form 10-K for the year ended December 31, 1996). 130 PHILLIPS PETROLEUM COMPANY INDEX TO EXHIBITS (Continued) Exhibit Number Description - ------- ----------- The company incurred during 1997 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. (e) 1990 Stock Plan of Phillips Petroleum Company. 131 PHILLIPS PETROLEUM COMPANY INDEX TO EXHIBITS (Continued) Exhibit Number Description - ------- ----------- 10(f) Annual Incentive Compensation Plan of Phillips Petroleum Company. (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 (incorporated by reference to Exhibit 10(i) to Annual Report on Form 10-K for the year ended December 31, 1996). (j) Key Employee Deferred Compensation Plan of Phillips Petroleum Company. (k) Non-Employee Director Retirement Plan of Phillips Petroleum Company. (l) Omnibus Securities Plan of Phillips Petroleum Company. (m) Deferred Compensation Plan for Non-Employee Directors of Phillips Petroleum Company. (n) Key Employee Missed Credited Service Retirement Plan of Phillips Petroleum Company (incorporated by reference to Exhibit 10(n) to Annual Report on Form 10-K for the year ended December 31, 1996). (o) Phillips Petroleum Company Stock Plan for Non-Employee Directors. 12 Computation of Ratio of Earnings to Fixed Charges. 21 List of Subsidiaries of Phillips Petroleum Company. 23 Consent of Independent Auditors. 132 PHILLIPS PETROLEUM COMPANY INDEX TO EXHIBITS (Continued) Exhibit Number Description - ------- ----------- 27(a) Financial Data Schedule. (b) Restated Financial Data Schedules (restated to reflect the adoption of Financial Accounting Standards Board (FASB) Statement No. 128, "Earnings per Share," for the 1997 interim periods). (c) Restated Financial Data Schedules (restated to reflect the adoption of FASB Statement No. 128, for the years 1995 and 1996, and the interim periods of 1996). 99(a) Form 11-K, Annual Report, of the Thrift Plan of Phillips Petroleum Company for the fiscal year ended December 31, 1997 (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, 1997 (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, 1997 (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 133 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 /s/ W. W. Allen February 23, 1998 ---------------------------------- 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 23, 1998. 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/ Rand C. Berney - --------------------------- Vice President and Controller Rand C. Berney (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 134 Signature Title --------- ----- /s/ David L. Boren - --------------------------- Director David L. Boren /s/ James B. Edwards - --------------------------- Director James B. Edwards /s/ Larry D. Horner - --------------------------- Director Larry D. Horner /s/ Randall L. Tobias - --------------------------- Director Randall L. Tobias /s/ Victoria J. Tschinkel - --------------------------- Director Victoria J. Tschinkel 135 EX-4 2 Exhibit 4(d) - ----------------------------------------------------------------- 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 the 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 Therefor ................................. 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 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 Securityholders .......................... 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 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 as 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 include 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. Cancellation 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 are 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 is 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 other, 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. Limitation 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 any 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 (buy 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 as 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 all 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 the 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 full 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 (c) 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 Securityholders, 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 herein 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 as 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 of 25% of any such class of security. Promptly after May 15, in each calendar year, the Trustee shall make a check 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 as collateral security under this Indenture, irrespective of any default hereunder, or (iii) any security which it holds as agent for collection, or as custodian, escrow agent, or depositary, or in any similar representative capacity. Except as provided in the next preceding paragraph hereof, the word "security" or "securities" as 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 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 entitles 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 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, 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 as 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, have 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 all 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 resignation 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 as 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 Counsel 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 properly 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 directly 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 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 as 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 the 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 as 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 DeLaney - ------------------------------ 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 - ------------------------------- Exhibit 4(d)--continued PHILLIPS PETROLEUM COMPANY SUPPLEMENTAL INDENTURE NO. 1 Dated as of May 23, 1991 Supplemental Indenture No. 1 dated as of May 23, 1991, between PHILLIPS PETROLEUM COMPANY, a corporation organized and existing under the laws of the State of Delaware (hereinafter referred to as the "Company"), and CONTINENTAL BANK, NATIONAL ASSOCIATION, a national banking association duly organized and existing under the laws of the United States of America (hereinafter referred to as the "Trustee"). W I T N E S S E T H: The Company and the Trustee have executed and delivered an Indenture dated as of September 15, 1990 (the "Indenture"). The Company desires to amend the Indenture to provide for the issuance of Securities of a series on a continuous basis and with differing terms and to expressly provide that the Securities of such series may be denominated in currencies other than the currency of the United States of America or may provide that the amount of payments of principal of and any premium or interest thereon may be determined with reference to an index. Section 9.01 of the Indenture provides for the Company, when authorized by the Board of Directors, and the Trustee to enter into an indenture supplemental to the Indenture to amend such Indenture by creating such provisions as shall not adversely affect the interests of any Holder. NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Securities by the holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all holders of Securities or of such series thereof, as follows: ARTICLE ONE RELATION TO INDENTURE; DEFINITIONS SECTION 1.01. This Supplemental Indenture No. 1 constitutes an integral part of the Indenture. SECTION 1.02. For all purposes of this Supplemental Indenture No. 1: (1) Capitalized terms used herein without definition shall have the meanings specified in the Indenture; (2) All references herein to Articles and Sections, unless otherwise specified, refer to the corresponding Articles and Sections of this Supplemental Indenture No. 1; and (3) The terms "hereof", "herein", "hereby", "hereto", "hereunder" and "herewith" refer to this Supplemental Indenture. ARTICLE TWO PROVISIONS APPLICABLE EXCLUSIVELY TO THE SERIES OF MEDIUM-TERM NOTES SECTION 2.01. There shall be a series of Securities designated the "Medium-Term Notes" (the "Notes"). The Notes shall be limited to an aggregate principal amount of up to U.S. $300,000,000 (or the equivalent thereof, determined as of the respective dates of issuance of Notes, in any other currency or currencies) and shall be issued at any time or from time to time. SECTION 2.02. Each Note shall have the particular terms (which need not be substantially identical to the terms of any other Notes) established in accordance with or as contemplated by this Section 2.02. Each fixed rate Note ("Fixed Rate Note") shall be in substantially the form attached as Exhibit A hereto, and each floating rate Note ("Floating Rate Note") shall be in substantially the form attached as Exhibit B hereto. Any two of the Chairman of the Board, the President, and the Vice President and Treasurer (each a "Designated Officer") may at any time and from time to time, on behalf of the Company, authorize the issuance of Notes and in connection therewith establish, or, if all of the Notes of such series may not be -2- originally issued at one time, to the extent deemed appropriate, prescribe the manner of determining within any limitations established by such Designated Officer (subject in either case to the limitations set forth in this Supplemental Indenture and the Indenture), the following; (1) the date or dates on which the principal and premium, if any, of the Notes is payable; (2) the rate or rates (or method by which determined) at which the Notes shall bear interest, if any, the date or dates from which such interest shall accrue, the interest payment dates on which such interest shall be payable and, in the case of registered Notes, the record dates for the determination of holders to whom such interest is payable; (3) if an Original Issue Discount Security, the Yield to Maturity; (4) the price or prices at which, the period or periods within which and the terms and conditions upon which Notes may be redeemed, in whole or in part, at the option of the Company, pursuant to any sinking fund or otherwise; (5) the obligation, if any, of the Company to redeem, purchase or repay Notes pursuant to any sinking fund or analogous provisions or at the option of a holder thereof and the price or prices at which and the period or periods within which and the terms and conditions upon which Notes shall be redeemed, purchased or repaid, in whole or in part, pursuant to such obligation; (6) if other than denominations of $100,000 and integral multiples of $1,000 in excess thereof (or, in the case of any Note denominated in other than U.S. dollars, the amount of the Specified Currency (as defined below) for such Note which is equivalent, at the noon buying rate in The City of New York for cable transfers for such Specified Currency on the first Business Day in The City of New York and the country issuing such Specified Currency (or, in the case of European Currency Units, in Brussels, Belgium) next preceding the date on which the Company accepts the offer to purchase such Note, to U.S. $100,000 (rounded down to an integral multiple of 1,000 units of such Specified Currency) and any greater amount that is an integral multiple of 1,000 units of such Specified Currency), the denominations in which Notes shall be issuable; -3- (7) if the amount of payments of principal of and any premium or interest on the Notes may be determined with reference to an index, the manner in which such amounts shall be determined; (8) if other than the principal amount thereof, the portion of the principal amount of Notes which shall be payable upon declaration of acceleration of the maturity thereof pursuant to Section 5.01 of the Indenture or provable in bankruptcy pursuant to Section 5.02 of the Indenture; (9) any Events of Default with respect to the Notes, if not set forth in the Indenture; (10) whether the Notes shall be issued in registered or bearer form, with or without coupons; (11) whether the Notes shall be issued in whole or in part in the form of one or more Global Notes and, in such case, the Depositary for such Global Note or Notes, which Depositary must be a clearing agency registered under the Debt Securities Exchange Act of 1934; (12) if other than United States dollars, the currency or currencies, including composite currencies, in which payment of the principal of and any premium and interest on the Notes shall be payable (the "Specified Currency"); and (13) any other terms of the Notes (which terms shall not be inconsistent with the provisions of this Supplemental Indenture or the Indenture). In connection with the Notes, the officers of the Company specified in the Indenture may execute and deliver one or more Officers' Certificates setting forth, or, if all of the Notes may not be originally issued at one time, to the extent deemed appropriate describing the manner of determining, the foregoing terms of the Notes, established or prescribed, as the case may be, in accordance with the foregoing. SECTION 2.03. The places of payment for the principal of the Notes shall be the Borough of Manhattan, the City of New York or Chicago, Illinois. Interest, if any, on the Notes will be paid by check, draft or wire, as specified in the terms thereof. The Trustee shall be the paying agent (the "Paying Agent") for the Notes. SECTION 2.04. Unless otherwise provided in the terms of a particular Note, definitive Notes of any authorized denomination shall be exchangeable for a like aggregate principal amount of Notes denominated in the same Specified Currency and bearing interest (if any) at the same rate or having the same Yield to -4- Maturity and maturity and of different authorized denominations upon surrender of such Notes with a request for such exchange at the designated office of the Trustee in the Borough of Manhattan, the City of New York or Chicago, Illinois, SECTION 2.05. Unless otherwise specified in a particular Note, payments of principal of (and premium, if any) and interest on each Note will be made in U.S. dollars, provided, -------- however, that payments of principal(and premium, if any) and - ------- interest on Notes denominated in a Specified Currency other than U.S. dollars will be made in such Specified Currency (i) at the option of the holders thereof under the procedures described in the two following paragraphs and (ii) at the option of the Company in the case of imposition of exchange controls or other circumstances beyond the control of the Company. If specified in a particular Note, the amount of principal payable on such Note will be determined by reference to an index or formula described therein. Unless otherwise specified in the terms of a Note, and except as provided in the next paragraph, payments of interest and principal (and premium, if any) with respect to any Note denominated in a Specified Currency other than U.S. dollars will be made in U.S. dollars unless the registered holder of such Note on the relevant Regular Record Date or at maturity, redemption or repayment as the case may be, has transmitted a written request to elect to receive such payment in a Specified Currency other than U.S. dollars to the Trustee at its Corporate Trust Office or agency in the Borough of Manhattan, the City of New York or Chicago, Illinois on or prior to such Regular Record Date or the date 15 days prior to maturity, redemption or repayment as the case may be. Such request may be in writing (mailed or hand delivered) or by cable or telex or, if promptly confirmed in writing, by other form of facsimile transmission. Any such request made with respect to any Note by a registered holder will remain in effect with respect to any further payments of interest and principal (and premium, if any) with respect to such Note payable to such holder, unless such request is revoked on or prior to the relevant Regular Record Date or the date 15 days prior to maturity, redemption or repayment as the case may be. Unless otherwise provided in the applicable Officers' Certificate, Continental Bank, National Association will be the Exchange Rate Agent (the "Exchange Rate Agent") with respect to the Notes. -5- Unless otherwise indicated in the terms of a particular Note, the "Regular Record Date" with respect to any Floating Rate Note shall be the date 15 calendar days prior to each Interest Payment Date, whether or not such date shall be a Business Day, and the "Regular Record Date" with respect to any Fixed Rate Note shall be the January 1 and July 1 next preceding the January 15 and July 15 Interest Payment Dates. Unless otherwise indicated in the terms of a particular Note and except as provided below, interest will be payable, in the case of Floating Rate Notes which reset daily, weekly or monthly, on the third Wednesday of each month or on the third Wednesday of March, June, September and December of each year (as respectively indicated in such Notes); in the case of Floating Rate Notes which reset quarterly, on the third Wednesday of March, June, September and December of each year; in the case of Floating Rate Notes which reset semi-annually, on the third Wednesday of the two months of each year specified in such Notes; and in the case of Floating Rate Notes which reset annually, on the third Wednesday of the month specified in such Notes (each an "Interest Payment Date"), and in each case, at maturity. Payments of interest on any Fixed Rate Note or Floating Rate Note with respect to any Interest Payment Date will include interest accrued to but excluding such Interest Payment Date; provided, however, that if the Interest Reset Dates (as defined - -------- ------- in a particular Note) with respect to any Floating Rate Note are daily or weekly, interest payable on such Note on any Interest Payment Date, other than interest payable on the date on which principal on such Note is payable, will include interest accrued to but excluding the day following the next preceding Regular Record Date. With respect to a Floating Rate Note, accrued interest from the date of issue or from the last date to which interest has been paid shall be calculated by multiplying the face amount of such Floating Rate Note by an accrued interest factor. Such accrued interest factor shall be computed by adding the interest factor calculated for each day from the date of issue, or from the last date to which interest has been paid, to but excluding the date for which accrued interest is being calculated. The interest factor for a Floating Rate Note (expressed as a decimal) for each such day shall be computed either (i) by dividing the interest rate (expressed as a decimal) applicable to such date by 360 or (ii) by the actual number of days in the year, as specified in such Note. Interest on Fixed Rate Notes will be computed on the basis of a 360-day year of twelve 30-day months. -6- SECTION 2.06. For the purposes of the Notes and this Section 2.06, the term "Agent Member" means a member of, or participant in, a Depositary; the term "Depositary" means, with respect to Notes issuable or issued in whole or in part in the form of one or more Global Notes, the Person designated as Depositary by the Company pursuant to Section 2.02 hereof (or a successor Depositary), and if at any time there is more than one such Person, "Depositary" as used with respect to the Notes shall mean the respective Depositary with respect to particular Notes; and the term "Global Note" means a global certificate evidencing all or part of the series of Notes, issued to the Depositary for the series or such portion of the series, and registered in the name of such Depositary or its nominee. Notwithstanding Section 2.07 of the Indenture, except as otherwise specified as contemplated by Section 2.02 hereof, any Global Note shall be exchangeable only as provided in this paragraph. A Global Note shall be exchangeable pursuant to this Section if (x) the Depositary notifies the Company that it is unwilling or unable to continue as Depositary for such Global Note or if at any time the Depositary ceases to be a clearing agency registered under the Debt Securities Exchange Act of 1934, as amended (the "Exchange Act"), and a successor Depositary is not appointed by the Company, (y) the Company in its sole discretion determines that all Global Notes then outstanding hereunder and under the Indenture shall be exchangeable for definitive Notes in registered form or (z) an Event of Default with respect to the Notes represented by such Global Note has occurred and is continuing. Any Global Note that is exchangeable pursuant to the preceding sentence shall be exchangeable for definitive Notes in registered form, bearing interest (if any) at the same rate or pursuant to the same formula, having the same date of issuance, redemption provisions, if any, Specified Currency, maturity and other terms and of differing denominations aggregating a like amount. Such definitive Notes shall be registered in the names of the owners of the beneficial interests in such Global Note as such names are from time to time provided by the relevant participants in the Depositary holding such Global Note (as such participants are identified from time to time by such Depositary). Any Global Note that is exchangeable pursuant to the preceding paragraph shall be exchangeable for Notes issuable in denominations of $100,000 and integral multiples of $1,000 in excess thereof and registered in such names as the Depositary that is the holder of such Global Note shall direct. No Global Note may be transferred except as a whole by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any such nominee to a successor of the Depositary or a nominee of such successor. Except as provided above, owners solely of beneficial interests in -7- a Global Note shall not be entitled to receive physical delivery of Notes in definitive form and will not be considered the holders thereof for any purpose under the Indenture or this Supplemental Indenture. In the event that a Global Note is surrendered for redemption in part pursuant to Section 14.02 of the Indenture, the Company shall execute, and the Trustee shall authenticate and deliver to the Depositary for such Global Note, without service charge, a new Global Note in a denomination equal to and in exchange for the unredeemed portion of the principal of the Global Note so surrendered. The Trustee shall fix a record date for the purpose of determining the Persons entitled to waive any past default hereunder or the Persons entitled to consent to any indenture supplemental to the Indenture. If a record date is fixed, the holders on such record date, or their duly designated proxies, and only such Persons, shall be entitled to waive any default hereunder, or to retract any such waiver previously given, or to consent to such supplemental indenture or to revoke any such consent previously given, as the case may be, whether or not such holders remain holders after such record date. No such waiver or consent shall be valid or effective for more than 90 days after such record date. The Agent Members shall have no rights under the Indenture or this Supplemental Indenture with respect to any Global Note held on their behalf by a Depositary, and such Depositary may be treated by the Company, the Trustee, and any agent of the Company or the Trustee as the owner of such Global Note for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee, or any Agent of the Company or the Trustee, from giving effect to any written certification, proxy or other authorization furnished by a Depositary or impair, as between a Depositary and its Agent Members, the operation of customary practices governing the exercise of the rights of a holder of any Note, including without limitation the granting of proxies or other authorization of participants to give or take any request, demand, authorization, direction, notice, consent, waiver or other action which a holder is entitled to give or take under the Indenture. SECTION 2.07. Unless otherwise specified in an Officers' Certificate delivered pursuant to Section 2.02 with respect to such Notes, whenever for purposes of this Indenture any action may be taken by the holders of a specified percentage in aggregate principal amount of Securities of all series or all series affected by a particular action at the time outstanding and, at such time, there are Notes outstanding which are denominated in a coin or currency other than U.S. Dollars (including ECUs), then the principal amount of such Notes which -8- shall be deemed to be outstanding for the purpose of taking such action shall be that amount of U.S. Dollars that could be obtained for such amount at the Market Exchange Rate. For purposes of this section, Market Exchange rate shall mean the noon U.S. Dollar buying rate in New York City for cable transfers of that currency as published by the Federal Reserve Bank of New York; provided, however, in the case of ECUs, Market Exchange Rate shall mean the rate of exchange determined by the Commission of the European Communities (or any successor thereto) as published in the Official Journal of the European Communities (such publication or any successor publication, the "Journal"). If such market Exchange Rate is not available for any reason with respect to such currency, the Trustee shall use, in its sole discretion and without liability on its part, such quotation of the Federal Reserve Bank of New York, or, in the case of ECUs, the rate of exchange as published in the Journal, as of the most recent available date, or quotations or, in the case of ECUs, rates of exchange from one or more major banks in the City of New York or in the country of issue of the currency in question, which for purposes of the ECU shall be Brussels, Belgium, or such other quotations or, in the case of ECU, rates of exchange as the Trustee shall deem appropriate. All decisions and determinations of the Trustee regarding the Market Exchange Rate or any alternative determination provided for in the preceding paragraph shall be in its sole discretion and shall, in the absence of manifest error, be conclusive to the extent permitted by law for all purposes and irrevocably binding upon the Company and all holders. SECTION 2.08. References in the Indenture to the "Yield to Maturity" of Securities shall be deemed, solely with respect to the Notes, to refer to the respective yields to maturity, calculated at the respective times of issuance of the particular Notes or, if applicable, at the respective most recent redeterminations of interest on such respective Notes and calculated in accordance with accepted financial practice. References in Article V of the Indenture to the "rate" or "rate of interest" of Securities shall be deemed, solely with respect to the notes, to refer to the respective rates or rates of interest of the particular Notes. SECTION 2.09. Notwithstanding the provisions of Sections 2.04 and 13.05 of the Indenture, if all Notes are not to be originally issued at one time, it shall not be necessary to deliver the Officers' Certificate and the Opinion of Counsel otherwise required pursuant to Section 13.05 or the written order of the Company otherwise required pursuant to Section 2.04 at or prior to the time of authentication of each Note if such documents are delivered at or prior to the time of authentication upon original issuance of the first Note to be issued. -9- SECTION 2.10. If any Securities described in subsections (a) or (b) of Section 11.01 or Section 11.05 of the Indenture are Notes which are denominated and, at the election of the holders of such Notes or otherwise, are payable, in a currency or currencies other than United States dollars, then in order to satisfy the deposit conditions in Section 11.01 or Section 11.05 with respect to any such Notes, the Company shall deposit or cause to be deposited as specified in Section 11.01 or Section 11.05 the required amount in the currency or currencies in which such Notes are denominated or in direct obligations of the sovereign nation or sovereign nations issuing such currency or currencies and denominated in such currency or currencies. -10- IN WITNESS WHEREOF, PHILLIPS PETROLEUM COMPANY has caused this Supplemental Indenture No. 1 to be signed, acknowledged and delivered by its Chairman of the Board, President, Vice President and Treasurer or its Assistant Treasurer and its corporate seal to be affixed hereunto and the same to be attested by its Secretary or Assistant Secretary; and CONTINENTAL BANK, National Association has caused this Supplemental Indenture No. 1 to be signed, acknowledged and delivered by one of its Vice Presidents, and its seal to be affixed hereunto and the same to be attested by one of its Trust Officers, all as of the day and year first written above. PHILLIPS PETROLEUM COMPANY (Corporate Seal) BY: /s/ J. M. McKee ---------------------------- Title: Assistant Treasurer Attest: /s/ G. C. Meese ----------------------- Secretary CONTINENTAL BANK, NATIONAL ASSOCIATION, as Trustee (Corporate Seal) By: /s/ A. H. Lenters ---------------------- Title: Vice President Attest: /s/ Debra DeLaney ----------------------- Trust Officer -11- STATE OF OKLAHOMA ) ) SS: COUNTY OF WASHINGTON ) On the 17th Day of May 1991, before me personally came -------------------- J. M. McKee, to me known, who, being by me duly sworn, did depose - ----------- and say that he resides at Bartlesville, Oklahoma, U.S.A.; that ------------------------------ he is an Assistant Treasurer 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/ Jean J. Morrison --------------------------------- Notary Public (NOTARIAL SEAL) My Commission expires August 8, 1994. -------------- STATE OF ILLINOIS ) ) SS: COUNTY OF COOK ) On the 20th day of May, 1991, 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, U.S.A.; that ------------------------- he is a Vice President of Continental, Bank, N.A., 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/ Carol Cohen -------------------------------- Notary Public (NOTARIAL SEAL) My Commission Expires . -------------- -------------------------------- "OFFICIAL SEAL" CAROL COHEN NOTARY PUBLIC, STATE OF ILLINOIS MY COMMISSION EXPIRES 10-29-94 --------------------------------- -12- EXHIBIT A CUSIP NO. PRINCIPAL AMOUNT: REGISTERED NO. PHILLIPS PETROLEUM COMPANY MEDIUM-TERM FIXED RATE NOTE Due From Nine Months to 30 Years From Date of Issue Unless this certificate is presented by an authorized representative of The Depository Trust Company (55 Water Street, New York, New York) to the issuer or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of Cede & Co. or such other name as requested by an authorized representative of The Depository Trust Company and any payment is made to Cede & Co., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL since the registered owner hereof, Cede & Co., has an interest herein.* If applicable, the following will be completed solely for purposes of the U.S. Federal Income Tax "Original Issue Discount" rules, as that term is defined in Section 1273 of the Internal Revenue Code of 1986, as amended. This information is provided solely for the purposes of applying the U.S. Federal Income Tax Original Issue Discount ("OID") rules to the certificate and is based on an interpretation of proposed Treasury regulations. The Issue Date of this certificate is __________________. *Applies to Global Notes only This certificate has been issued with ___________________________ of OID per $1,000 of initial principal amount. The annual yield to maturity is _____% based on semi-annual compounding. The amount of OID attributable to the initial accrual period is _____________ per $1,000 of initial principal amount, contributed under the ______________________________ method as defined in proposed Treasury regulations. ORIGINAL ISSUE DATE: INTEREST RATE PER ANNUM: % MATURITY DATE: INTEREST PAYMENT DATES: SPECIFIED CURRENCY: (if other than U.S. dollars) ISSUE PRICE: % REDEEMABLE ON OR AFTER: (AT OPTION OF THE AUTHORIZED DENOMINATIONS: COMPANY) (Only applicable if Specified Currency is INITIAL DATE ON WHICH THE other than U.S. dollars) NOTE IS REPAYABLE AT THE OPTION OF THE HOLDER: EXCHANGE RATE AGENT: (Only applicable if Specified Currency INITIAL REPAYMENT PERCENTAGE: INITIAL REDEMPTION is other than PERCENTAGE: U.S. dollars) ANNUAL REPAYMENT PERCENTAGE REDUCTION: ANNUAL REDEMPTION DEPOSITARY: PERCENTAGE REDUCTION: (Only applicable if Note is a Global Note) SINKING FUND: OID DEFAULT AMOUNT: DEFAULT RATE: (Only applicable if Note (Only applicable if Note issued at original issue issued at original issue discount) discount) -2- PHILLIPS PETROLEUM COMPANY, a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company"), for value received, hereby promises to pay to _____________________________________________, or registered assigns, the principal sum of______________________ __________________ at the office or agency of the Company in the Borough of Manhattan, The City of New York, or Chicago, Illinois, on the maturity date shown above, or if such date is not a Business Day (as defined below), the next succeeding Business Day (the "Maturity Date"), and to pay interest on said principal sum at the rate per annum (computed on the basis of a 360-day year of twelve 30-day months) shown above, semi-annually on each Interest Payment Date set forth above from and after the date of this Note and on the Maturity Date or date of redemption or repayment, if any, until payment of said principal sum has been made or duly provided. The Company will make such payments in respect of non- U.S. dollar denominated Notes in U.S. dollars; provided, however, -------- ------- that payments of principal (and premium, if any) and interest on Notes denominated in other than U.S. dollars will be made in a Specified Currency other than U.S. dollars (i) at the election of the holder as provided herein and (ii) at the election of the Company in the case of imposition of exchange controls or other circumstances beyond the control of the Company. Unless this Note is a Note which has been issued upon transfer of, in exchange for, or in replacement of a predecessor Note, interest on this Note shall accrue from the Original Issue Date indicated above. If this Note has been issued upon transfer of, in exchange for, or in -3- replacement of a predecessor Note, interest on this Note shall accrue from the last Interest Payment Date to which interest was paid on such predecessor Note or, if no interest was paid on such predecessor Note, from the Original Issue Date indicated above. The first payment of interest on a Note originally issued and dated between a Record Date (as defined below) and an Interest Payment Date will be due and payable on the Interest Payment Date following the next succeeding Record Date to the registered owner on such next succeeding Record Date. Subject to certain exceptions provided in the Indenture referred to on the reverse hereof, the interest so payable on any Interest Payment Date will be paid to the person in whose name this Note is registered at the close of business on the fifteenth calendar day next preceding such Interest Payment Date (each such date a "Record Date"), and interest payable at maturity or upon redemption or repayment (other than a Maturity Date, redemption date or repayment date which is an Interest Payment Date) will be paid to the person to whom said principal sum is payable. Payment of interest on this Note due on any Interest Payment Date (other than interest on this Note due to the holder hereof on the Maturity Date or a redemption or repayment date, if any) to be made in U.S. dollars, will be paid by check mailed to the person entitled thereto at his last address as it appears on the registry books of the Company. Notwithstanding the preceding sentence, a holder of U.S. $10,000,000 or more in aggregate principal amount of Notes having the same Interest Payment Date will be entitled to receive payments of interest, other than -4- interest due at maturity or any date of redemption or repayment, by wire transfer of immediately available funds if appropriate wire transfer instructions have been received by the Trustee as set forth herein. Payment of the principal of, premium, if any, and interest, if any, on this Note due to the holder hereof at maturity or upon earlier redemption or repayment to be made in U.S. dollars will be paid, in immediately available funds, upon presentation of this Note at the office or agency of the Company maintained for that purpose in the Borough of Manhattan, The City of New York, or Chicago, Illinois. Payments of interest to be made in a currency or currency unit other than U.S. dollars (other than interest on this Note due to the holder hereof on the Maturity Date or date of redemption or repayment, if any) will be paid by wire transfer of immediately available funds to a designated account maintained in _______________________________ or other jurisdiction (Country of Specified Currency) acceptable to the Company and the Trustee as shall have been designated at least 5 Business Days prior to the Interest Payment Date by the registered holder of this Note on the relevant Record Date. Payment in a currency or currency unit, other than U.S. dollars, of the principal of and premium and interest, if any, on this Note due to the holder hereof at maturity or upon any earlier redemption or repayment will be made by wire transfer of immediately available funds to a designated account maintained in _______________________________, or other jurisdiction acceptable (Country of Specified Currency) to the Company and the Trustee as shall have been -5- designated at least 5 Business Days prior to the Maturity Date by the registered Holder of this Note at maturity, provided that this Note is presented for surrender to the paying agent under the Indenture (the "Paying Agent") in time for the Paying Agent to make such payment in such funds in accordance with its normal procedures. Any such designation for wire transfer purposes shall be made by filing the appropriate information with the Trustee at its Corporate Trust Office or agency in the Borough of Manhattan, The City of New York, or Chicago, Illinois and, unless revoked by written notice to the Paying Agent, received by the Paying Agent on or prior to the Record Date immediately preceding the applicable Interest Payment Date or the fifteenth calendar day preceding the Maturity Date or applicable date of redemption or repayment, as the case may be, shall remain in effect with respect to further payments with respect to this Note payable to such holder. The holder of any Note denominated in a Specified Currency other than U.S. dollars may elect to receive payments in a Specified Currency other than U.S. dollars by transmitting a written request for such payment to the principal office of the Paying Agent on or prior to the Record Date immediately preceding any Interest Payment Date or at least fifteen calendar days prior to the Maturity Date or date of redemption or repayment, if applicable. Such request may be in writing (mailed or hand delivered) or by cable or telex or, if promptly confirmed in writing, by other form of facsimile transmission. The holder of -6- any such Note may elect to receive payment in a Specified Currency other than U.S. dollars for all principal, premium and interest payments, if any, and need not file a separate election for each payment. Any such election will remain in effect until revoked by written notice to the Paying Agent, but written notice of any such revocation must be received by the Paying Agent on or prior to the Record Date immediately preceding the applicable Interest Payment Date or the fifteenth calendar day preceding the Maturity Date or applicable date of redemption or repayment. If a payment with respect to this Note cannot be made by wire transfer because the required designation has not been received by the Trustee on or before the requisite date or for any other reason, a notice will be mailed to the holder at its registered address requesting a designation pursuant to which such wire transfer can be made and, upon the Trustee's receipt of such a designation, such payment will be made within 5 Business Days of such receipt. The Company will pay any administrative costs imposed by banks in connection with making payments by wire transfer, but any tax, assessment or governmental charge imposed upon payments will be borne by the holder or holders of this Note in respect of which payments are made. If the principal of (and premium, if any) or interest on this Note is payable in other than U.S. dollars and such Specified Currency is not available due to the imposition of exchange controls or other circumstances beyond the control of the Company, the Company will be entitled to satisfy its obligations to the holder of this Note by making payment in U.S. dollars on the basis -7- of the most recently available exchange rate as specified by the Exchange Rate Agent as provided herein. Any payment on this Note due on any day which is not a Business Day in The City of New York or which is not a Business Day in the City of Chicago, Illinois (or if this Note is denominated in other than U.S. dollars, which is not a Business Day in the country issuing the Specified Currency (or, if this Note is denominated in European Currency Units ("ECUs"), Brussels, Belgium)) need not be made on such day, but may be made on the next succeeding Business Day with the same force and effect as if made on the due date and no interest shall accrue on such payment for the period from and after such date. If this Note is a Global Note as specified on the face ------------------------------------------------------ hereof, the following legend is applicable: "THIS GLOBAL NOTE - ------------------------------------------ MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OF ANOTHER NOMINEE OF THE DEPOSITARY." "Business Day" shall mean, as used herein with respect to any particular location, each Monday, Tuesday, Wednesday, Thursday or Friday which is (a) not a day on which banking institutions in such location are authorized or obligated by law or executive order to close and (b) in the event that this Note is denominated in a Specified Currency other than U.S. dollars, not a day on which banking institutions in ____________________ (Principal Financial ________________________________________ (or, if this Note is Center of Country of Specified Currency) denominated -8- in ECUs, in Brussels, Belgium) are authorized or obligated by law or executive order to close. Additional provisions of this Note are contained on the reverse hereof and such provisions shall for all purposes have the same effect as though fully set forth at this place. This Note shall not be valid or become obligatory for any purpose until the Certificate of Authentication hereon shall have been signed by an authorized officer of the Trustee or its duly authorized agent under the Indenture referred to on the reverse hereof. IN WITNESS WHEREOF, PHILLIPS PETROLEUM COMPANY has caused this instrument to be signed by the facsimile signatures of its duly authorized officers, and has caused a facsimile of its corporate seal to be affixed hereto or imprinted hereon. Dated: TRUSTEE's CERTIFICATE OF AUTHENTICATION PHILLIPS PETROLEUM COMPANY This Note is one of a designated series of Securities described in the Indenture referred to on the reverse hereof By: Title: Chairman of the Board of Directors By: CONTINENTAL BANK, National Association, Title: Vice President and as Trustee, Treasurer By: __________________________________ Authorized Officer Attest: Secretary OR CONTINENTAL BANK, National Association, [SEAL] as Authenticating Agent for the Trustee By: ___________________________________ Authorized Officer -9- PHILLIPS PETROLEUM COMPANY MEDIUM-TERM FIXED RATE NOTE Due From Nine Months to 30 Years From Date of Issue This Note is one of a duly authorized issue of debentures, notes or other evidences of indebtedness of the Company (hereinafter called the "Securities"), all issued or to be issued under and pursuant to an indenture dated as of September 15, 1990, as supplemented by Supplemental Indenture No. 1 dated as of May 10, 1991 (hereinafter called the "Indenture"), duly executed and delivered by the Company to Continental Bank, National Association, as Trustee (hereinafter called the "Trustee"), to which Indenture reference is hereby made for a description of the rights, duties and immunities thereunder of the Trustee and the rights thereunder of the holders of the Securities. As provided in the Indenture, the Securities may be issued in one or more series, which different series may be issued in various aggregate principal amounts, may mature at different times, may bear interest, if any, at different rates, may be subject to different redemption provisions, if any, may be subject to different sinking, purchase or analogous funds, if any, may be subject do different covenants and events of default, and may otherwise vary as in the Indenture provided or permitted. This Note is one of a series of the Securities, which series is limited in aggregate principal amount to $__________ designated as the Medium-Term Notes Due From 9 Months to 30 Years From Date of Issue (the "Notes") of the Company. The Notes may mature at different -10- times, bear interest, if any, at different rates, be redeemable at the option of the Company at different times or not at all, be repayable at the option of the holder at different times or not at all, be issued at an original issue discount and be denominated in different currencies. If this Note is denominated in a currency or currency unit other than U.S. dollars, any U.S. dollar amount to be received by a holder of this Note will be based on the highest bid quotation (rounded up to the nearest cent) in The City of New York received by the Exchange Rate Agent as of 11:00 A.M., New York City time, on the second Business Day preceding the applicable payment date from three recognized foreign exchange dealers (one of which may be the Exchange Rate Agent) for the purchase by the quoting dealer of the Specified Currency for U.S. dollars for settlement on such payment date, in an amount equal to the aggregate amount of the Specified Currency payable to all holders of Notes receiving U.S. dollar payments on such payment date and at which the applicable dealer commits to execute a contract. If three such bid quotations are not available, payments will be made in the Specified Currency. All currency exchange costs associated with any payments in a Specified Currency other than U.S. dollars will be borne by the holder of the Note by deductions from such payments. If the principal, premium (if any) or interest on this Note is payable in a currency or currency unit other than U.S. dollars and, due to the imposition of exchange controls or other circumstances beyond the control of the Company, the Specified -11- Currency is not available at the time of any scheduled payment of principal or interest to be made in the Specified Currency, then the Company shall be entitled to satisfy its obligations hereunder by making such payment in U.S. dollars. Any such payment shall be made on the basis of the noon buying rate in The City of New York for cable transfers of the Specified Currency as certified for customs purposes by the Federal Reserve Bank of New York (the "Market Exchange Rate") on the second day prior to such payment, or if such Market Exchange Rate is not then available, on the basis of the most recently available Market Exchange Rate. Any payment under such circumstances in U.S. dollars where required payment is in a Specified Currency will not constitute a default under the Indenture. In case an Event of Default, as defined in the Indenture, with respect to the Notes shall have occurred and be continuing, the principal hereof may be declared, and upon such declaration shall become, due and payable in the manner, with the effect and subject to the conditions provided in the Indenture. The Indenture contains provisions permitting the Company and the Trustee, with the consent of the holders of not less than 66 2/3% in aggregate principal amount of the outstanding Securities of all series issued under the Indenture which are affected thereby (voting as one class), at the time outstanding, evidenced as in the Indenture provided, to execute supplemental indentures adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or any indenture supplemental thereto or modifying in any manner the -12- rights of the holders of the Notes; provided, however, that no -------- ------- such supplemental indenture shall (i) extend the fixed maturity of any Security, or reduce the principal amount thereof or any premium thereon, or reduce the rate or extend the time of payment of interest thereon, or reduce any amount payable upon the redemption thereof without the consent of the holder of each such Security so affected, (ii) reduce the aforesaid percentage of Securities, the consent of the holders of which is required for any such supplemental indenture, without the consent of the holders of all Securities affected then outstanding or (iii) modify, without the written consent of the Trustee, the rights, duties or immunities of the Trustee. The Indenture also contains provisions permitting the holders of a majority in aggregate principal amount of the Securities of any series (or of all Securities, as the case may be) then outstanding, prior to any declaration accelerating the maturity of such Securities, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences, except in each case a failure to pay principal or premium, if any, or interest on such Securities or except in the event of a default in respect of covenants or provisions in the Indenture or herein which cannot be modified or amended without the consent of the holder of each Security affected. Any such consent or waiver by the holder of this Note (unless revoked as provided in the Indenture) shall be conclusive and binding upon such holder and upon all future holders and owners of this Note and any Notes which may be issued upon the registration of -13- transfer hereof or in exchange or substitution therefor, irrespective of whether or not any notation thereof is made upon this Note or other such Notes. If so provided on the face of this Note, this Note may be redeemed by the Company on and after the date so indicated on the face hereof. On and after the date, if any, from which this Note may be redeemed, this Note may be redeemed in whole or in part, at the option of the Company at a redemption price equal to the product of the principal amount of this Note to be redeemed multiplied by the Redemption Percentage. The Redemption Percentage shall initially equal the Initial Redemption Percentage specified on the face of this Note, and shall decline at each anniversary of the initial date that this Note is redeemable by the amount of the Annual Redemption Percentage Reduction specified on the face of this Note, until the Redemption Percentage is equal to 100%. If so provided on the face of this Note, this Note is subject to redemption in part, through the operation of the sinking fund provided for in the Indenture, on and after the date so indicated on the face hereof and at the price equal to the sinking fund redemption price noted on the face hereof, together with accrued interest to the date fixed for redemption. At its option, the Company may pay into the sinking fund for the retirement of the Notes, in cash except as provided in the Indenture, on the dates specified on the face hereof, an amount sufficient to redeem an additional principal amount of the Notes up to an amount specified on the face hereof at the sinking fund -14- redemption price. To the extent that the right to such optional sinking fund payment is not exercised in any year, it shall not be cumulative or carried forward to any subsequent year. If so provided on the face of this Note, this Note will be repayable in whole or in part in increments of $1,000 or, in the case of non-U.S. dollar denominated Notes, of an amount equal to the integral multiples referred to on the face hereof under "Authorized Denominations" (or, if no such reference is made, an amount equal to the minimum Authorized Denomination) provided that the remaining principal amount of any Note surrendered for partial repayment shall be at least $100,000 or, in the case of non-U.S. dollar denominated Notes, the minimum Authorized Denomination referred to on the face hereof, on any Business Day on or after the "Initial Date on which the Note is Repayable at the Option of the Holder" (as stated on the face hereof), at the option of the holder, at the repayment amount specified on the face hereof, plus accrued interest, if any, to the repayment date. In order for the exercise of the option to be effective and the Notes to be repaid, the Company must receive at the applicable address of the Paying Agent set forth below or at such other place or places of which the Company shall from time to time notify the holder of the within note, on or before the fifteenth, but not earlier than the twenty-fifth calendar day, or, if such day is not a Business Day, the next succeeding Business Day, prior to the repayment date, either (i) this Note, with the form below entitled "Option to Elect Repayment" duly completed, or (ii) a telegram, telex, facsimile transmission, or letter from a member of a -15- national securities exchange or the National Association of Securities Dealers, Inc. or a commercial bank or a trust company in the United States of America setting forth (a) the name, address, and telephone number of the holder of this Note, (b) the principal amount of this Note and the amount of this Note to be repaid, (c) a statement that the option to elect repayment is being exercised thereby, and (d) a guarantee stating that the Company will receive this Note, with the form below entitled "Option to Elect Repayment" duly completed, not later than five Business Days after the date of such telegram, telex, facsimile transmission, or letter (and this Note and form duly completed are received by the Company by such fifth Business Day). Any such election shall be irrevocable. The address to which such deliveries are to be made are as follows: (i) to Continental Bank, National Association, Attention: Corporate Trust Division, 231 LaSalle Street, Chicago, Illinois 60697, if delivery is made by regular or registered mail, (ii) to Continental Bank, National Association, Corporate Trust Operations, 19th Floor, 231 South LaSalle Street, Chicago, Illinois 60697, if delivery is made by hand, armored car or courier service or (iii) to Continental Bank, National Association, Attention: Corporate Trust Division, 231 South LaSalle Street, Chicago, Illinois 60697, if delivery is by telegram or facsimile transmission (or, at such other places as the Company shall notify the holders of the Notes). All questions as to the validity, eligibility (including time of receipt) and acceptance of any Note for repayment will be determined by the Company, whose determination will be final, binding and non- -16- appealable. No transfer or exchange of any Note (or, in the event that any Note is to be repaid in part, the portion of the Note to be repaid) will be permitted after exercise of a repayment option. If this Note is issued with an original issue discount, (i) if an Event of Default with respect to the Notes shall have occurred and be continuing, the amount of principal of this Note which may be declared due and payable in the manner, with the effect and subject to the conditions provided in the Indenture, shall be determined in the manner set forth under "OID Default Amount" on the face hereof, and (ii) in the case of a default of payment in principal upon acceleration, redemption, repayment at the option of the holder or at the stated maturity hereof, in lieu of any interest otherwise payable, the overdue principal of this Note shall bear interest at a rate of interest per annum equal to the Default Rate stated on the face hereof (to the extent that the payment of such interest shall be legally enforceable), which shall accrue from the date of such acceleration, redemption, repayment at the option of the holder or stated maturity, as the case may be, to the date payment has been made or duly provided for or such default has been waived in accordance with the terms of the Indenture. The Notes are issuable in global or definitive form without coupons in denominations of $100,000 and integral multiples of $1,000 in excess thereof or, if the Specified Currency is other than U.S. dollars, in the denominations indicated on the face hereof. Upon due presentment for -17- registration of transfer of this Note at the office or agency of the Company in the Borough of Manhattan, The City of New York, or Chicago, Illinois, a new Note or Notes in authorized denominations in the Specified Currency for an equal aggregate principal amount and like interest rate and maturity will be issued to the transferee in exchange therefor, subject to the limitations provided in the Indenture and to the limitations described below if applicable, without charge except for any tax or other governmental charge imposed in connection therewith. If this Note is a Global Note (as specified on the face hereof), this Note is exchangeable only if (x) the Depositary notifies the Company that it is unwilling or unable to continue as Depositary for this Global Note or if at any time the Depositary ceases to be a clearing agency registered under the Securities Exchange Act of 1934, as amended, and a successor Depositary is not appointed by the Company, (y) the Company in its sole discretion determines that this Note shall be exchangeable for definitive Notes in registered form or (z) an Event of Default with respect to the Notes represented hereby has occurred and is continuing. If this Note is exchangeable pursuant to the preceding sentence, it shall be exchangeable for definitive Notes in registered form, bearing interest (if any) at the same rate or pursuant to the same formula, having the same date of issuance, redemption provisions, if any, Specified Currency, Maturity Date and other terms and of differing denominations aggregating a like amount. -18- No reference herein to the Indenture and no provision of this Note or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and interest on this Note at the places, at the respective times, at the rate and in the currency herein prescribed. The Company, the Trustee and any paying agent may deem and treat the registered holder hereof as the absolute owner of this Note at such holder's address as it appears on the registry books of the Company as kept by the Trustee or duly authorized agent of the Company (whether or not this Note shall be overdue), for the purpose of receiving payment of or on account hereof and for all other purposes, and neither the Company nor the Trustee nor any paying agent shall be affected by any notice to the contrary. All payments made to or upon the order of such registered holder shall, to the extent of the sum or sums paid, effectually satisfy and discharge liability for moneys payable on this Note. No recourse under or upon any obligation, covenant or agreement contained in the Indenture or in any indenture supplemental thereto of any Note, or because of any indebtedness evidenced thereby, shall be had against any incorporator, or against any past, present or future stockholder, officer or director, as such, of the Company or of any successor corporation, either directly or through the Company or any successor corporation, under any rule of law, statute or constitutional provision or by the enforcement of any assessment or by any legal -19- or equitable proceeding or otherwise, all such personal liability of every such incorporator, stockholder, officer and director, as such, being expressly waived and released by the acceptance hereof and as a condition of and as part of the consideration for the issuance of this Note. Terms used herein which are defined in the Indenture shall have the respective meanings assigned thereto in the Indenture. This Note shall be governed by and construed in accordance with the laws of the State of New York. ------------------------- OPTION TO ELECT REPAYMENT TO BE COMPLETED ONLY IF THIS NOTE IS REPAYABLE AT THE OPTION OF THE HOLDER AND THE HOLDER ELECTS TO EXERCISE SUCH RIGHTS The undersigned hereby irrevocably requests and instructs the Company to repay the within Note (or portion thereof specified below) pursuant to its terms at a price equal to the principal amount thereof, together with interest to the repayment date, to the undersigned, at __________________________ _________________________________________________________________ (Please print or typewrite name and address of the undersigned) For this Note to be repaid, the Company must receive at the applicable address of the Paying Agent set forth above or at such other place or places of which the Company shall from time to time notify the holder of the within Note, on or before the -20- fifteenth, but not earlier than the twenty-fifth, calendar day, or, if such day is not a Business Day, the next succeeding Business Day, prior to the repayment date, (i) this Note, with this "Option to Elect Repayment" form duly completed, or (ii) a telegram, telex, facsimile transmission, or letter from a member of a national securities exchange or the National Association of Securities Dealers, Inc. or a commercial bank or a trust company in the United States of America setting forth (a) the name, address, and telephone number of the holder of the Note, (b) the principal amount of the Note and the amount of the Note to be repaid, (c) a statement that the option to elect repayment is being exercised thereby, and (d) a guarantee stating that the Note to be repaid with the form entitled "Option to Elect Repayment" on the reverse of the Note duly completed will be received by the Company not later than five Business Days after the date of such telegram, telex, facsimile transmission, or letter (and such Note and form duly completed are received by the Company by such fifth Business Day). If less than the entire principal amount of the within Note is to be repaid, specify the portion thereof (which shall be an integral multiple of $1,000 or, if the Note is denominated in a currency other than U.S. dollars, of an amount equal to the integral multiples referred to on the face hereof under "Authorized Denominations" (or, if no such reference is made, an amount equal to the minimum Authorized Denomination)) which the holder elects to have repaid: _____________________________; and specify the denomination or denominations (which shall be $100,000 -21- or an integral multiple of $1,000 in excess thereof or, if the Note is denominated in a currency other than U.S. dollars, an Authorized Denomination) of the Note or Notes to be issued to the holder for the portion of the within Note not being repaid (in the absence of any specification, one such Note will be issued for the portion not being repaid): _________________ Date: _______________ ___________________________________ Notice: The signature to this Option to Elect Repayment must correspond with the name as written upon the face of the Note in every particular without alteration or enlargement or any other change whatsoever. ------------------ -22- ABBREVIATIONS The following abbreviations, when used in the inscription on the face of this instrument, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM--as tenants in common UNIF GIFT MIN ACT--........ Custodian...... TEN ENT--as tenants by the (Cust) (Minor) entireties JT TEN --as joint tenants with Under Uniform Gifts to Minors Act right of survivorship and not as tenants in common ........................................... Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and transfer(s) unto Please Insert Social Security or Other Identifying Number of Assignee ____________________________________ /________________________________/________________________________________ PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE ____________________________________________________________________________ ____________________________________________________________________________ the within Note of PHILLIPS PETROLEUM COMPANY and does hereby irrevocably constitute and appoint ______________________________________________ attorney to transfer the said Note on the books of the Company, with full power of substitution in the premises. Dated:_______________ __________________________________________ __________________________________________ NOTICE: The signature to this assignment must correspond with the name as written upon the face of the within instrument in every particular, without alteration or enlargement or any change whatever. -23- EXHIBIT B CUSIP NO. PRINCIPAL AMOUNT: REGISTERED NO. PHILLIPS PETROLEUM COMPANY MEDIUM-TERM FLOATING RATE NOTE Due From Nine Months to 30 Years From Date of Issue Unless this certificate is presented by an authorized representative of The Depository Trust Company (55 Water Street, New York, New York) to the issuer or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of Cede & Co. or such other name as requested by an authorized representative of The Depository Trust Company and any payment is made to Cede & Co., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL since the registered owner hereof, Cede & Co., has an interest herein.* If applicable, the following will be completed solely for purposes of the U.S. Federal Income Tax "Original Issue Discount" rules, as that term is defined in Section 1273 of the Internal Revenue Code of 1986, as amended. This information is provided solely for the purposes of applying the U.S. Federal Income Tax Original Issue Discount ("OID") rules to the certificate and is based on an interpretation of proposed Treasury regulations. The Issue Date of this certificate is ________________. This certificate has been issued with _______________________________ *Applies to Global Notes only of OID per $1,000 of initial principal amount. The annual yield to maturity is _____% based on semi-annual compounding. The amount of OID attributable to the initial accrual period is ______________ per $1,000 of initial principal amount, contributed under the ___________________________ method as defined in proposed Treasury regulations. ORIGINAL ISSUE DATE: INITIAL INTEREST RATE: MATURITY DATE: INTEREST RATE BASIS: MAXIMUM INTEREST RATE: INDEX MATURITY: INTEREST PAYMENT PERIOD: MINIMUM INTEREST RATE: SPREAD: + - INTEREST PAYMENT DATES: INTEREST RESET DATE: SPREAD MULTIPLIER: INTEREST CALCULATION DATES: INTEREST RATE RESET PERIOD: CALCULATION AGENT: INTEREST DETERMINATION AUTHORIZED DENOMINATIONS: SPECIFIED CURRENCY DATES: (Only applicable if (if other than Specified Currency is U.S. Dollars) other than U.S. dollars) INITIAL DATE ON WHICH THE REDEEMABLE ON OR AFTER: EXCHANGE RATE AGENT: NOTE IS REPAYABLE AT THE (AT OPTION OF COMPANY) (Only applicable if OPTION OT THE HOLDER: Specified Currency is other than U.S. dollars) INITIAL REPAYMENT INITIAL REDEMPTION DEPOSITARY: PERCENTAGE: PERCENTAGE: (Only applicable if this Note is a ANNUAL REPAYMENT ANNUAL REDEMPTION Global Note) PERCENTAGE REDUCTION: PERCENTAGE REDUCTION: SINKING FUND: OID DEFAULT AMOUNT: DEFAULT RATE: (Only applicable if Note (Only applicable if Note is is issued at original issued at original issue issue discount) discount) -2- PHILLIPS PETROLEUM COMPANY, a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company"), for value received, hereby promises to pay to __________________________, or registered assigns, the principal sum of __________________________________ at the office or agency of the Company in the Borough of Manhattan, The City of New York, or Chicago, Illinois, on the maturity date shown above (except to the extent redeemed or repaid prior to such date), or if such date is not a Business Day, the next succeeding Business Day (the "Maturity Date"), and to pay interest thereon at a rate per annum equal to the Initial Interest Rate specified above until the first Interest Reset Date specified above and thereafter at a rate per annum determined in accordance with the provisions specified on the reverse hereof until the principal hereof is paid or duly made available for payment. The Company will pay interest in arrears monthly, quarterly, semi-annually or annually as specified above under "Interest Payment Period", on each Interest Payment Date specified above, commencing with the first Interest Payment Date following the Original Issue Date specified above, and on the Maturity Date or date of redemption or repayment, if any, on said principal sum at said offices or agencies; provided, however, -------- ------- that if any Interest Payment Date specified above (or any date of redemption or repayment) would otherwise fall on a day that is not a Business Day (as defined herein), such Interest Payment Date (or redemption or repayment date) will be the following day that is a Business Day, except that in the event that the Interest Rate Basis for -3- this Note is LIBOR, if such day falls in the next calendar month, such Interest Payment Date (or redemption or repayment date) will be the next preceding day that is a Business Day; provided, -------- further, that if the Original Issue Date occurs between a Record - ------- Date (as defined herein) and the next succeeding Interest Payment Date, interest payments will commence on the second Interest Payment Date succeeding the Original Issue Date to which the registered holder of this Note on the Record Date with respect to such second Interest Payment Date. The Company will make payments of principal (and premiums, if any) and interest in respect of non-U.S. dollar denominated Notes in U. S. dollars; provided, however, that payments of principal (and premium, if - -------- ------- any) and interest on Notes denominated in other than U.S. dollars will be made in a Specified Currency other than U.S. dollars (i) at the election of the holder as provided herein and (ii) at the election of the Company in the case of imposition of exchange controls or other circumstances beyond the control of the Company. Interest on this Note will accrue from the most recent date to which interest has been paid or duly provided for, or, if no interest has been paid or duly provided for, from the Original Issue Date, until the principal hereof has been paid or duly made available for payment. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, subject to certain exceptions described herein, be paid to the person in whose name this Note (or one or more predecessor Notes) is registered at the close of business on the date fifteen calendar days prior to such Interest Payment Date (whether or not -4- a Business Day) (each such date a "Record Date"); provided, --------- however, that interest payable on the Maturity Date (or any - -------- redemption or repayment date) will be payable to the person to whom the principal hereof shall be payable. "Business Day" shall mean, as used herein with respect to any particular location, each Monday, Tuesday, Wednesday, Thursday or Friday which is (a) not a day on which banking institutions in such location are authorized or obligated by law or executive order to close, (b) in the event that the Interest Rate Basis for this Note is LIBOR, a London Business Day and (c) in the event that this Note is denominated in a Specified Currency other than U.S. dollars, not a day on which banking institutions in ____________________________________________________________ (or, (Principal Financial Center of Country of Specified Currency) if this Note is denominated in European Currency Units ("ECUs"), in Brussels, Belgium) are authorized or obligated by law or executive order to close. "London Business Day" shall mean any day on which dealings in deposits in U.S. dollars are transacted in the London interbank market. Payment of interest on this Note due on any Interest Payment Date (other than interest on this Note due to the holder hereof on the Maturity Date or a redemption or repayment date, if any) to be made in U.S. dollars, will be made by check mailed to the person entitled thereto at the holder's last address as it appears on the registry books of the Company. Notwithstanding the preceding sentence, a holder of U.S. $10,000,000 or more in aggregate principal amount of Notes having the same Interest -5- Payment Date will be entitled to receive payments of interest, other than interest due at maturity or any date of redemption or repayment, by wire transfer of immediately available funds if appropriate wire transfer instructions have been received by the Trustee as set forth herein. Payment of the principal of, premium, if any, and interest, if any, on this Note due to the holder hereof at maturity or upon earlier redemption or repayment to be made in U.S. dollars, will be made, in immediately available funds, upon presentation of this Note at the office or agency of the Company maintained for that purpose in the Borough of Manhattan, The City of New York, or Chicago, Illinois. Payments of interest to be made in a currency or currency unit other than U.S. dollars (other than interest on this Note due to the holder hereof on the Maturity Date or date of redemption or repayment, if any) will be paid by wire transfer of immediately available funds to a designated account maintained in _______________________________, or other jurisdiction (Country of Specified Currency) acceptable to the Company and the Trustee as shall have been designated at least 5 Business Days prior to the Interest Payment Date by the registered holder of this Note on the relevant Record Date. Payment in a currency, or currency unit, other than U.S. dollars, of the principal and premium and interest, if any, on this Note due to the holder hereof at maturity or upon any earlier redemption or repayment will be made by wire transfer of immediately available funds to a designated account maintained in _______________________________, or other jurisdiction acceptable (Country of Specified Currency) -6- to the Company and the Trustee as shall have been designated at least 5 Business Days prior to the Maturity Date by the registered holder of this Note at maturity, provided that this Note is presented for surrender to the paying agent under the Indenture (the "Paying Agent") in time for the Paying Agent to make such payment in such funds in accordance with its normal procedures. Any such designation for wire transfer purposes shall be made by filing the appropriate information with the Trustee at its Corporate Trust Office or agency in the Borough of Manhattan, The City of New York, or Chicago, Illinois and, unless revoked by written notice to the Paying Agent received by the Paying Agent on or prior to the Record Date immediately preceding the applicable Interest Payment Date or the fifteenth calendar day preceding the Maturity Date or applicable date of redemption or repayment, as the case may be, shall remain in effect with respect to any further payments with respect to this Note payable to such holder. The holder of any Note denominated in a Specified Currency other than U.S. dollars may elect to receive payments in a Specified Currency other than U.S. dollars by transmitting a written request for such payment to the principal offices of the Paying Agent on or prior to the Record Date immediately preceding any Interest Payment Date or at least fifteen calendar days prior to the Maturity Date or date of redemption or repayment, if applicable. Such request may be in writing (mailed or hand delivered) or by cable or telex or, if promptly confirmed in writing, by other form of facsimile transmission. The holder of -7- any such Note may elect to receive payment in a Specified Currency other than U.S. dollars for all principal, premium and interest payments and need not file a separate election for each payment. Any such election will remain in effect until revoked by written notice to the Paying Agent, but written notice of any such revocation must be received by the Paying Agent on or prior to the Record Date immediately preceding the applicable Interest Payment Date or the fifteenth calendar day preceding the Maturity Date or applicable date of redemption or repayment. If a payment with respect to this Note cannot be made by wire transfer because the required designation has not been received by the Trustee on or before the requisite date or for any other reason, a notice will be mailed to the holder at its registered address requesting a designation pursuant to which such wire transfer can be made and, upon the Trustee's receipt of such a designation, such payment will be made within 5 Business Days of such receipt. The Company will pay any administrative costs imposed by banks in connection with making payments by wire transfer, but any tax, assessment or governmental charge imposed upon payments will be borne by the holder or holders of this Note in respect of which payments are made. If the principal of (and premium, if any) or interest on this Note is payable in other than U.S. dollars and such Specified Currency is not available due to the imposition of exchange controls or other circumstances beyond the control of the Company, the Company will be entitled to satisfy its obligations to the holder of this Note by making payment in U.S. dollars on the basis -8- of the most recently available exchange rate as specified by the Exchange Rate Agent as provided herein. If this Note is a Global Note as specified on the face ------------------------------------------------------ hereof, the following legend is applicable: "THIS GLOBAL NOTE - ------------------------------------------ MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY." Additional provisions of this Note are contained on the reverse hereof and such provisions shall for all purposes have the same effect as though fully set forth at this place. This Note shall not be valid or become obligatory for any purpose until the Certificate of Authentication hereon shall have been signed by an authorized officer of the Trustee or its duly authorized agent under the Indenture referred to on the reverse hereof. -9- IN WITNESS WHEREOF, PHILLIPS PETROLEUM COMPANY has caused this instrument to be signed by the facsimile signatures of its duly authorized officers, and has caused a facsimile of its corporate seal to be affixed hereto or imprinted hereon. Dated: TRUSTEE'S CERTIFICATE OF AUTHENTICATION PHILLIPS PETROLEUM COMPANY This Note is one of a designated series of Securities described in the Indenture referred to on the reverse hereof By: Title: Chairman of the Board of Directors By: CONTINENTAL BANK, National Association, Title: Vice President and Treasurer as Trustee, By:______________________________ Authorized Officer Attest: Secretary OR CONTINENTAL BANK, National Association, [SEAL] as Authenticating Agent for the Trustee By: _____________________________ Authorized Officer -10- PHILLIPS PETROLEUM COMPANY MEDIUM-TERM FLOATING RATE NOTE Due From 9 Months to 30 Years From Date of Issue This Note is one of a duly authorized issue of debentures, notes or other evidences of indebtedness of the Company (hereinafter called the "Securities"), all issued or to be issued under and pursuant to an indenture dated as of September 15, 1990 as supplemented by Supplemental Indenture No. 1 dated as of May 23, 1991 (hereinafter called the "Indenture"), duly executed and delivered by the Company to Continental Bank, National Association, as Trustee (hereinafter called the "Trustee"), to which Indenture reference is hereby made for a description of the rights, duties and immunities thereunder of the Trustee and the rights thereunder of the holders of the Securities. As provided in the Indenture, the Securities may be issued in one or more series, which different series may be issued in various aggregate principal amounts, may mature at different times, may bear interest, if any, at different rates, may be subject to different redemption provisions, if any, may be subject to different sinking, purchase or analogous funds, if any, may be subject to different covenants and events of default, and may otherwise vary as in the Indenture provided or permitted. This Note is one of a series of the Securities, which series is limited in aggregate principal amount to $________, designated as the Medium-Term Notes Due From 9 Months to 30 Years From Date of Issue (the "Notes") of the Company. The Notes may mature at different -11- times, bear interest, if any, at different rates, be redeemable at the option of the Company at different times or not at all, be repayable at the option of the holder at different times or not at all and be denominated in different currencies. Subject to applicable provisions of law and except as specified herein, this Note will bear interest at the rate determined in accordance with the applicable provisions below by reference to the Interest Rate Basis specified on the face hereof. The interest rate in effect from the date of issue to the first Interest Reset Date shall be the Initial Interest Rate specified on the face hereof. Commencing with the first Interest Reset Date specified on the face hereof following the Original Issue Date specified on the face hereof, the rate at which interest on this Note is payable shall be adjusted daily, weekly, monthly, quarterly, semi-annually or annually as specified on the face hereof under "Interest Rate Reset period"; provided, -------- however, that the interest rate in effect hereon for the 10 - ------- calendar days immediately prior to the maturity hereof (or, with respect to any principal amount to be redeemed or repaid, any redemption or repayment date) will be that in effect on the tenth day next preceding the Maturity Date or such date of redemption or repayment, as the case may be. Each such adjusted rate shall be applicable from and including the Interest Reset Date to which it relates to but not including the next succeeding Interest Reset Date or until maturity, as the case may be. If any Interest Reset Date would otherwise be a day that is not a Business Day, such Interest Reset Date shall be postponed to the next succeeding day -12- that is a Business Day, except that if the Interest Rate Basis specified on the face hereof is LIBOR and such Business Day is in the next succeeding calendar month, such Interest Reset Date shall be the next preceding Business Day. Unless otherwise specified on the face hereof, the Interest Determination Date pertaining to an Interest Reset Date for Notes bearing interest calculated by reference to the CD Rate, Commercial Paper Rate, Federal Funds Rate, LIBOR and Prime Rate will be the second Business Day next preceding such Interest Reset Date. The Interest Determination Date pertaining to an Interest Reset Date for Notes bearing interest calculated by reference to the Treasury Rate shall be the day of the week in which such Interest Reset Date falls on which Treasury bills normally would be auctioned; provided, however, that if as a -------- ------- result of a legal holiday an auction is held on the Friday of the week preceding such Interest Reset Date, the related Interest Determination Date shall be such preceding Friday; and provided, -------- further, that if an auction shall fall on any Interest Reset - ------- Date, then the Interest Reset Date shall instead be the first Business Day following the date of such auction. Unless otherwise specified on the face hereof, the "Calculation Date" pertaining to any Interest Determination Date will be the earlier of the tenth calendar day after such Interest Determination Date or the next succeeding Record Date after such Interest Determination Date or, if either such day is not a Business Day, the next succeeding Business Day. -13- Determination of Interest Rate Per Annum for Prime -------------------------------------------------- Rate Notes. If the Interest Rate Basis specified on the face - ---------- hereof is Prime Rate, the interest rate per annum determined with respect to any Interest Determination Date specified on the face hereof shall equal the rate, adjusted by the addition or subtraction of the Spread, if any, specified on the face hereof, or by multiplication by the Spread Multiplier, if any, specified on the face hereof, set forth for the relevant Prime Rate Interest Determination Date in "Statistical Release H.15(519), Selected Interest Rates", published by the Board of Governors of the Federal Reserve System under the heading "Bank Prime Loan", or any successor publication ("Release H.15(519)"). In the event that such rate is not published prior to 9:00 A.M., New York City time, on the relevant Calculation Date, then the Prime Rate with respect to such Interest Reset Date will be the arithmetic mean (adjusted or multiplied as described above) of the rates of interest publicly announced by each bank that appears on the display designated as page "NYMF" on the Reuter Monitor Money Rates Service (or such other page as may replace the NYMF page on that service for the purpose of displaying prime rates or base lending rates of major United States banks) ("Reuters Screen NYMF Page") as such bank's prime rate or base lending rate as in effect for such Prime Rate Interest Determination Date as quoted on the Reuters Screen NYMF Page on such Prime Rate Interest Determination Date. If fewer than four such rates appear on the Reuters Screen NYMF Page on such Prime Rate Interest Determination Date, the Prime Rate with respect to such Interest Reset Date will be the -14- arithmetic mean (adjusted or multiplied and calculated as described above) of the prime rates or base lending rates (quoted on the basis of the actual number of days in the year divided by a 360-day year) as of the close of business on such Prime Rate Interest Determination Date by three major money center banks in The City of New York selected by the Calculation Agent; provided, -------- however, that if fewer than three banks selected as aforesaid by - ------- the Calculation Agent are quoted as mentioned in this sentence, the Prime Rate with respect to such Interest Reset Date will be the Prime Rate in effect on such Prime Rate Interest Determination Date. Determination of Interest Rate Per Annum for LIBOR -------------------------------------------------- Notes. If the Interest Rate Basis specified on the face hereof - ----- is LIBOR, the interest rate per annum determined with respect to any Interest Determination Date specified on the face hereof shall equal the arithmetic mean (as calculated by the Calculation Agent specified on the face hereof) of offered rates for deposits of not less than U.S. $1,000,000 having the Index Maturity specified on the face hereof, commencing on the second Business Day immediately following such LIBOR Interest Determination Date, which appear on the Reuters Screen LIBO Page (as defined herein) as of 11:00 A.M., London time, on such Interest Determination Date, adjusted by the addition or subtraction of the Spread, if any, specified on the face hereof, or by multiplication by the Spread Multiplier, if any, specified on the face hereof; provided, however, that if fewer than two such offered rates so - -------- ------- appear on the Reuters Screen LIBO Page, the Calculation Agent shall request the principal -15- London office of each of four major banks in the London interbank market selected by the Calculation Agent to provide a quotation of the rate at which such bank offered to prime banks in the London interbank market at approximately 11:00 A.M., London time, on such Interest Determination Date, deposits in U.S. dollars having the Index Maturity specified on the face hereof and in a principal amount not less than U.S. $1,000,000 and equal to an amount that is representative for a single transaction in such market at such time, and the interest rate per annum hereon shall equal the arithmetic mean (adjusted or multiplied as described above) of (a) such quotations, if at least two quotations are provided, or (b), if fewer than two such quotations are provided, the rates quoted at approximately 11:00 A.M., New York City time on such Interest Determination Date by three major banks in The City of New York selected by the Calculation Agent for loans in U.S. dollars to leading European banks having the Index Maturity specified on the face hereof and in a principal amount that is not less than U.S. $1,000,000 and is representative for a single transaction in such market at such time, in either case, adjusted or multiplied and calculated as described above; provided, -------- however, that if not all of the three banks selected by the - ------- Calculation Agent pursuant to clause (b) above are quoting as described above, the interest rate per annum hereon with respect to such Interest Determination Date shall be the LIBOR in effect hereon on such Interest Determination Date. "Reuters Screen LIBO Page" shall mean the display designated as page "LIBO" on the Reuters Monitor Money Rates Service (or such other page as may replace the LIBO page on that -16- service for the purpose of displaying London interbank offered rates of major banks). Determination of Interest Rate Per Annum for Treasury ----------------------------------------------------- Rate Notes. If the Interest Rate Basis specified on the face - ---------- hereof is Treasury Rate, the interest rate per annum determined with respect to any Interest Determination Date specified on the face hereof shall equal the rate for the auction held on such date of direct obligations of the United States ("Treasury Bills") having the Index Maturity specified on the face hereof as published in Release H.15(519), under the heading "U.S. Government Securities/Treasury Bills/Auction Average (Investment)" or, if not so published by 9:00 A.M., New York City time, on the Interest Calculation Date (as specified on the face hereof) pertaining to such Interest Determination Date, the auction average rate on such Interest Determination Date (expressed as a bond equivalent, on the basis of a year of 365 or 366 days, as applicable, and applied on a daily basis) as otherwise reported by the United States Department of the Treasury, in either case, adjusted by the addition or subtraction of the Spread, if any, specified on the face hereof, or by multiplication by the Spread Multiplier, if any, specified on the face hereof. In the event that the results of the auctions of Treasury Bills having the Index Maturity specified on the face hereof are not published or reported as provided above by 3:00 P.M., New York City time, on such Interest Calculation Date or if no such auction is held on such Interest Determination Date, then the interest rate per annum with respect to such Interest Calculation Date shall be calculated by the -17- Calculation Agent and shall be the yield to maturity (expressed as a bond equivalent, on the basis of a year of 365 or 366 days, as applicable, and applied on a daily basis) calculated using the arithmetic mean (adjusted or multiplied as described above) of the secondary market bid rates, as of approximately 3:30 P.M., New York City time, on such Interest Determination Date, of three leading primary United States government securities dealers in The City of New York selected by the Calculation Agent for the issue of Treasury bills with a remaining maturity closest to the Index Maturity specified on the face hereof, adjusted or multiplied as described above; provided, however, that if the -------- ------- dealers selected as aforesaid by the Calculation Agent are not quoting as described in this sentence, the interest rate per annum hereon with respect to such Interest Determination Date shall be the Treasury Rate in effect hereon on such Interest Determination Date. Determination of Interest Rate Per Annum for -------------------------------------------- Commercial Paper Rate Notes. If the Interest Rate Basis - --------------------------- specified on the face hereof is Commercial Paper Rate, the Interest Rate per annum determined with respect to any Interest Determination Date Specified on the face hereof shall equal (a) the Money Market Yield (as defined herein) of the rate on such Interest Determination Date for commercial paper having the Index Maturity specified on the face hereof, (i) as such rate is published in Release H.15(519), under the heading "Commercial Paper", or (ii) if such rate is not published prior to 9:00 A.M., New York City time, on the Interest Calculation Date (as specified on the face hereof) pertaining to such Interest Determination Date, as -18- published by the Federal Reserve Bank of New York in its daily statistical release, "Composite 3:30 P.M. Quotations for U.S. Government Securities", or any successor publication of the Federal Reserve Bank of New York ("Composite Quotations"), under the heading "Commercial Paper", or (b) if by 3:00 P.M., New York City time, on such Interest Calculation Date, such rate is not published in either of such publications, the Money Market Yield of the arithmetic mean of the offered rates, as of 11:00 A.M., New York City time, on such Interest Determination Date, of three leading dealers of commercial paper in The City of New York selected by the Calculation Agent for commercial paper having the Index Maturity specified on the face hereof placed for industrial issuers whose bond rating is "AA", or the equivalent, from a nationally recognized rating agency, in each of the above cases adjusted by the addition or subtraction of the Spread, if any, specified on the face hereof, or by multiplication by the Spread Multiplier, if any, specified on the face hereof; provided, -------- however, that if fewer than three such dealers are quoting as - ------- described above, the interest rate per annum hereon with respect to such Interest Determination Date shall be the Commercial Paper Rate in effect hereon on such Interest Determination Date. "Money Market Yield" shall be a yield (expressed as a percentage) calculated in accordance with the following formula: Money Market Yield = 100 x 360 x D --------------------------- 360 - (D x M) -19- where "D" refers to the per annum rate for commercial paper, quoted on a bank discount basis and expressed as a decimal; and "M" refers to the actual number of days in the interest period for which interest is being calculated. Determination of Interest Rate Per Annum for CD Rate ---------------------------------------------------- Notes. If the Interest Rate Basis specified on the face hereof - ----- is CD Rate, the Interest Rate per annum determined with respect to any Interest Determination Date specified on the face hereof shall equal the rate, adjusted by the addition or subtraction of the Spread, if any, specified on the face hereof, or by multiplication by the Spread Multiplier, if any, specified on the face hereof, for the relevant CD Interest Determination Date for negotiable certificates of deposit having the specified Index Maturity as published in Release H.15(519) under the heading "CDs (Secondary Market)". In the event that such rate is not published prior to 9:00 A.M., New York City time, on the relevant Calculation Date, then the CD Rate with respect to such Interest Reset Date shall be the rate (adjusted or multiplied as described above) on such CD Rate Interest Determination Date for negotiable certificates of deposit having the specified Index Maturity as published in Composite Quotations under the heading "Certificates of Deposit". If by 3:00 P.M., New York City time, on such Calculation Date such rate is not published in either Release H.15(519) or Composite Quotations, the CD Rate with respect to such Interest Reset Date shall be calculated by the Calculation Agent and shall be the arithmetic mean (adjusted or multiplied as described above) of the secondary market offered rates, as of 10:00 A.M., New York City -20- time, on such CD Rate Interest Determination Date, of three leading nonbank dealers of negotiable U.S. dollar certificates of deposit in The City of New York selected by the Calculation Agent for negotiable certificates of deposit of major United States money market banks of the highest credit standing with a remaining maturity closest to the specified Index Maturity in a denomination of U.S. $5,000,000; provided, however, that, if -------- ------- fewer than three dealers selected as aforesaid by the Calculation Agent are quoting as mentioned in this sentence, the CD Rate with respect to such Interest Reset Date will be the CD Rate in effect on such CD Rate Interest Determination Date. Determination of Interest Rate Per Annum for Federal ---------------------------------------------------- Funds Rate Notes. If the Interest Rate Basis specified on the - ---------------- face hereof is Federal Funds Rate, the Interest Rate per annum determined with respect to any Interest Determination Date specified on the face hereof shall equal the rate, adjusted by the addition or subtraction of the Spread, if any, specified on the face hereof, or by multiplication by the Spread Multiplier, if any, specified on the face hereof, on the relevant Federal Funds Interest Determination Date for Federal Funds as published in Release H.15(519) under the heading "Federal Funds (Effective)". In the event that such rate is not published prior to 9:00 A.M., New York City time, on the relevant Calculation Date, then the Federal Funds Rate with respect to such Interest Reset Date will be the rate (adjusted or multiplied as described above) on such Federal Funds Interest Determination Date as published in Composite Quotations under the heading "Federal Funds/Effective -21- Rate". If by 3:00 P.M., New York City time, on such Calculation Date such rate is not published in either Release H.15(519) or Composite Quotations, the Federal Funds Rate with respect to such Interest Reset Date shall be calculated by the Calculation Agent and shall be the arithmetic mean (adjusted or multiplied as described above) of the rates, as of 11:00 A.M., New York City time, on such Federal Funds Interest Determination Date, for the last transaction in overnight Federal Funds arranged by three leading brokers of Federal Funds transactions in The City of New York selected by the Calculation Agent; provided, however, that -------- ------- if fewer than three brokers selected as aforesaid by the Calculation Agent are quoting as mentioned in this sentence, the Federal Funds Rate with respect to such Interest Reset Date will be the Federal Funds Rate in effect on such Federal Funds Interest Determination Date. Notwithstanding the foregoing, the interest rate per annum hereon shall not be greater than the Maximum Interest Rate, if any, or less than the Minimum Interest Rate, if any, specified on the face hereof. The Calculation Agent shall calculate the interest rate hereon in accordance with the foregoing on or before each Interest Calculation Date. The interest rate on this Note will in no event be higher than the maximum rate permitted by New York law as the same may be modified by United States law of general application. At the request of the holder hereof, the Calculation Agent will provide to the holder hereof the interest rate hereon then in effect and, if determined, the interest rate which will -22- become effective as a result of a determination made on the most recent Interest Determination Date with respect to this Note. Interest payments hereon will include interest accrued to but excluding the applicable Interest Payment Date or the Maturity Date (or any earlier redemption or repayment date), as the case may be; provided, however, that if the rate at which -------- ------- interest on this Note is payable shall be adjusted daily or weekly as specified on the face hereof under "Interest Rate Reset Period" and as determined in accordance with the provisions hereof, interest payable on any Interest Payment Date, other than interest payable on any date on which principal hereof is payable, will include interest accrued to and including the Record Date next preceding such Interest Payment Date. Accrued Interest hereon from the Original Issue Date or from the last date to which interest hereon has been paid, as the case may be, shall be an amount calculated by multiplying the principal amount hereof by an accrued interest factor. Such accrued interest factor shall be computed by adding the interest factors calculated for each day from the Original Issue Date or from the last date to which interest shall have been paid or duly provided for, as the case may be, up to but not including the date for which accrued interest is being calculated. The interest factor for each such day shall be computed by dividing the interest rate per annum applicable to such day by 360 if the Interest Rate Basis specified on the face hereof is Prime Rate, LIBOR, Commercial Paper Rate, CD Rate or Federal Funds Rate or by the actual number of days in the year if the Interest Rate Basis specified on the face hereof is -23- Treasury Rate. All percentages used in or resulting from any calculation of the rate of interest on this Note will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point (.0000001), with five one-millionths of a percentage point round upward, and all dollar amounts used in or resulting from such calculation on this Note will be rounded to the nearest cent (with one-half cent rounded upward). If this Note is denominated in a currency or currency unit other than U.S. dollars, any U.S. dollar amount to be received by a holder of this Note will be based on the highest bid quotation (rounded to the nearest cent) in The City of New York received by the Exchange Rate Agent as of 11:00 A.M., New York City time, on the second Business Day preceding the applicable payment date from three recognized foreign exchange dealers (one of which may be the Exchange Rate Agent) for the purchase by the quoting dealer of the Specified Currency for U.S. dollars for settlement on such payment date, in an amount equal to the aggregate amount of the Specified Currency payable to all holders of Notes receiving U.S. dollar payments on such payment date and at which the applicable dealer commits to execute a contract. If three such bid quotations are not available, payments will be made in the Specified Currency. All currency exchange costs associated with any payments in U.S. dollars will be borne by the holder of the Note by deductions from such payments. If the principal, premium (if any) or interest on this Note is payable in a currency or currency unit other than U.S. dollars and, due to the imposition of exchange controls or other -24- circumstances beyond the control of the Company, the Specified Currency is not available at the time of any scheduled payment of principal, premium or interest to be made in the Specified Currency, then the Company shall be entitled to satisfy its obligations hereunder by making such payment in U.S. dollars. Any such payment shall be made on the basis of the noon buying rate in The City of New York for cable transfers of the Specified Currency as certified for customs purposes by the Federal Reserve Bank of New York (the "Market Exchange Rate") on the second day prior to such payment, or if such Market Exchange Rate is not then available, on the basis of the most recently available Market Exchange Rate. Any payment under such circumstances in U.S. dollars where required payment is in a Specified Currency will not constitute a default under the Indenture. In case an Event of Default, as defined in the Indenture, with respect to the Notes shall have occurred and be continuing, the principal hereof may be declared, and upon such declaration shall become, due and payable in the manner, with the effect and subject to the conditions provided in the Indenture. The Indenture contains provisions permitting the Company and the Trustee, with the consent of the holders of not less than 66 2/3% in aggregate principal amount of the outstanding Securities of all series issued under the Indenture which are affected thereby (voting as one class), at the time outstanding, evidenced as in the Indenture provided, to execute supplemental indentures adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of any -25- indenture supplemental thereto or modifying in any manner the rights of the holders of the Notes; provided, however, that no -------- ------- such supplemental indenture shall (i) extend the fixed maturity of any Security, or reduce the principal amount thereof or any premium thereon, or reduce the rate or extend the time of payment of interest thereon, or reduce any amount payable upon the redemption thereof without the consent of the holder of each such Security so affected, (ii) reduce the aforesaid percentage of Securities, the consent of the holders of which is required for any such supplemental indenture, without the consent of the holders of all Securities affected then outstanding or (iii) modify, without the written consent of the Trustee, the rights, duties or immunities of the Trustee. The Indenture also contains provisions permitting the holders of a majority in aggregate principal amount of the Securities of any series (or of all Securities, as the case may be) then outstanding, prior to any declaration accelerating the maturity of such Securities, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences, except in each case for failure to pay principal or premium, if any, or interest on such Securities or except in the event of a default in respect of covenants or provisions in the Indenture or herein which cannot be modified or amended without the consent of the holder of each Security affected. Any such consent by the holder of this Note (unless revoked as provided in the Indenture) shall be conclusive and binding upon such holder and upon all future holders and owners of this Note and any Notes -26- which may be issued upon the registration of transfer hereof or in exchange or substitution therefor, irrespective of whether or not any notation thereof is made upon this Note or other such Notes. If so provided on the face of this Note, this Note may be redeemed by the Company on and after the date so indicated on the face hereof. On and after the date, if any, from which this note may be redeemed, this Note may be redeemed in whole or in part at the option of the Company at a redemption price equal to the product of the principal amount of this Note to be redeemed multiplied by the Redemption Percentage. The Redemption Percentage shall initially equal the Initial Redemption Percentage specified on the face of this Note, and shall decline at each anniversary of the initial date that this Note is redeemable by the amount of the Annual Redemption Percentage Reduction specified on the face of this Note, until the Redemption Percentage is equal to 100%. If so provided on the face of this Note, this Note is subject to redemption in part, through the operation of the sinking fund provided for in the Indenture, on and after the date so indicated on the face hereof and at the price equal to the sinking fund redemption price noted on the face hereof, together with accrued interest to the date fixed for redemption. At its option, the Company may pay into the sinking fund for the retirement of the Notes, in cash except as provided in the Indenture, on the dates specified on the face hereof, an amount sufficient to redeem an additional principal amount of the Notes up to an amount specified on the face hereof at the sinking fund -27- redemption price. To the extent that the right to such optional sinking fund payment is not exercised in any year, it shall not be cumulative or carried forward to any subsequent year. If so provided on the face of this Note, this Note will be repayable in whole or in part in increments of $1,000 or, in the case of non-U.S. dollar denominated Notes, of an amount equal to the integral multiples referred to on the face hereof under "Authorized Denominations" (or, if no such reference is made, an amount equal to the minimum Authorized Denomination) provided that the remaining principal amount of any Note surrendered for partial repayment shall be at least $100,000 or, in the case of non-U.S. dollar denominated Notes, the minimum Authorized Denomination referred to on the face hereof, on any Business Day on or after the "Initial Date on Which the Note is Repayable at the Option of the Holder" (as stated on the face hereof), at the option of the holder, at the repayment amount specified on the face hereof, plus accrued interest, if any, to the repayment date. In order for the exercise of the option to be effective and the Notes to be repaid, the Company must receive at the applicable address of the Paying Agent set forth below or at such other place or places of which the Company shall from time to time notify the holder of the within Note, on or before the fifteenth, but not earlier than the twenty-fifth day, or, if such day is not a Business Day, the next succeeding Business Day, prior to the repayment date, either (i) this Note, with the form below entitled "Option to Elect Repayment" duly completed, or (ii) a telegram, telex, facsimile transmission, or letter from a member of a -28- national securities exchange or the National Association of Securities Dealers, Inc., or a commercial bank or a trust company in the United States of America setting forth (a) the name, address, and telephone number of the holder of this Note, (b) the principal amount of this Note and the amount of this Note to be repaid, (c) a statement that the option to elect repayment is being exercised thereby, and (d) a guarantee stating that the Company will receive this Note, with the form below entitled "Option to Elect Repayment" duly completed, not later than five Business Days after the date of such telegram, telex, facsimile transmission, or letter (and this Note and form duly completed are received by the Company by such fifth Business Day). Any such election shall be irrevocable. The addresses to which such deliveries are to be made are as follows: (i) to Continental Bank, National Association, Attention: Corporate Trust Division, 231 South LaSalle Street, Chicago, Illinois 60697, if delivery is made by regular or registered mail, (ii) to Continental Bank, National Association, Corporate Trust Operations, 19th Floor, 231 South LaSalle Street, Chicago, Illinois 60697, if delivery is made by hand, armored car or courier service or (iii) to Continental Bank, National Association, Attention: Corporate Trust Division, 231 South LaSalle Street, Chicago, Illinois 60697, if delivery is by telegram or facsimile transmission (or at such other places as the Company shall notify the holders of the Notes). All questions as to the validity, eligibility (including time of receipt) and acceptance of any Note for repayment will be determined by the Company, whose determination will be final, binding and non- -29- appealable. No transfer or exchange of any Note (or, in the event that any Note is to be repaid in part, the portion of the Note to be repaid) will be permitted after exercise of a repayment option. If this Note is issued with an original issue discount, (i) if an Event of Default with respect to the Notes shall have occurred and be continuing, the amount of principal of this Note which may be declared due and payable in the manner, with the effect and subject to the conditions provided in the Indenture, shall be determined in the manner set forth under "OID Default Amount" on the face hereof, and (ii) in the case of a default of payment in principal upon acceleration, redemption, repayment at the option of the holder or at the stated maturity hereof, in lieu of any interest otherwise payable, the overdue principal of this Note shall bear interest at a rate of interest per annum equal to the Default Rate stated on the face hereof (to the extent that the payment of such interest shall be legally enforceable), which shall accrue from the date of such acceleration, redemption, repayment at the option of the holder or stated maturity, as the case may be, to the date payment has been made or duly provided for or such default has been waived in accordance with the terms of the Indenture. The Notes are issuable in global or definitive form without coupons in denominations of $100,000 and integral multiples of $1,000 in excess thereof or, if the Specified Currency is other than U.S. dollars, in the denominations indicated on the face hereof. Upon due presentment for -30- registration of transfer of this Note at the office or agency of the Company in the Borough of Manhattan, The City of New York, or Chicago, Illinois, a new Note or Notes in authorized denominations in the Specified Currency for an equal aggregate principal amount and like interest rate and maturity will be issued to the transferee in exchange therefor, subject to the limitations provided in the Indenture and to the limitations described below if applicable, without charge except for any tax or other governmental charge imposed in connection therewith. If this Note is a Global Note (as specified on the face hereof), this Note is exchangeable only if (x) the Depositary notifies the Company that it is unwilling or unable to continue as Depositary for this Global Note or if at any time the Depositary ceases to be a clearing agency registered under the Securities Exchange Act of 1934, as amended, and a successor Depositary is not appointed by the Company, (y) the Company in its sole discretion determines that this Note shall be exchangeable for definitive Notes in registered form or (z) an Event of Default with respect to the Notes represented hereby has occurred and is continuing. If this Note is exchangeable pursuant to the preceding sentence, it shall be exchangeable for definitive Notes in registered form, bearing interest (if any) at the same rate or pursuant to the same formula, having the same date of issuance, redemption provisions, if any, Specified Currency, Maturity Date and other terms and of differing denominations aggregating a like amount. -31- No reference herein to the Indenture and no provision of this Note or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and interest on this Note at the places, at the respective times, at the rate and in the currency herein prescribed. The Company, the Trustee, and any paying agent may deem and treat the registered holder hereof as the absolute owner of this Note at such holder's address as it appears on the registry books of the Company as kept by the Trustee or duly authorized agent of the Company (whether or not this Note shall be overdue), for the purpose of receiving payment of or on account hereof and for all other purposes, and neither the Company nor the Trustee nor any paying agent shall be affected by any notice to the contrary. All payments made to or upon the order of such registered holder shall, to the extent of the sum or sums paid, effectually satisfy and discharge liability for moneys payable on this Note. No recourse under or upon any obligation, covenant or agreement contained in the Indenture or in any indenture supplemental thereto or in any Note, or because of any indebtedness evidenced thereby, shall be had against any incorporator, or against any past, present or future stockholder, officer or director, as such, of the Company or of any successor corporation, either directly or through the Company or of any successor corporation, under any rule of law, statute or constitutional provision or by the enforcement of any assessment -32- or by any legal or equitable proceeding or otherwise, all such personal liability of every such incorporator, stockholder, officer and director, as such, being expressly waived and released by the acceptance hereof and as a condition of and as part of the consideration for the issuance of this Note. Terms used herein which are defined in the Indenture shall have the respective meanings assigned thereto in the Indenture. This Note shall be governed by and construed in accordance with the laws of the State of New York. _________________________ OPTION TO ELECT REPAYMENT TO BE COMPLETED ONLY IF THIS NOTE IS REPAYABLE AT THE OPTION OF THE HOLDER AND THE HOLDER ELECTS TO EXERCISE SUCH RIGHTS The undersigned hereby irrevocably requests and instructs the Company to repay the within Note (or portion thereof specified below) pursuant to its terms at a price equal to the principal amount thereof, together with interest to the repayment date, to the undersigned, at ________________________ _______________________________________________________________ (Please print or typewrite name and address of the undersigned) For this Note to be repaid the Company must receive at the applicable address of the Paying Agent set forth above or at such other place or places of which the Company shall from time to time notify the holder of the within Note, on or before the fifteenth, but not earlier than the twenty-fifth, calendar day, -33- or, if such day is not a Business Day, the next succeeding Business Day, prior to the repayment date, (i) this Note, with this "Option to Elect Repayment" form duly completed, or (ii) a telegram, telex, facsimile transmission, or letter from a member of a national securities exchange or the National Association of Securities Dealers, Inc. or a commercial bank or a trust company in the United States of America setting forth (a) the name, address, and telephone number of the holder of the Note, (b) the principal amount of the Note and the amount of the Note to be repaid, (c) a statement that the option to elect repayment is being exercised thereby, and (d) a guarantee stating that the Note to be repaid with the form entitled "Option to Elect Repayment" on the reverse of the Note duly completed will be received by the Company not later than five Business Days after the date of such telegram, telex, facsimile transmission, or letter (and such Note and form duly completed are received by the Company by such fifth Business Day). If less than the entire principal amount of the within Note is to be repaid, specify the portion thereof (which shall be an integral multiple of $1,000 or, if the Note is denominated in a currency other than U.S. dollars, of an amount equal to the integral multiples referred to on the face hereof under "Authorized Denominations" (or, if no such reference is made, an amount equal to the minimum Authorized Denomination)) which the holder elects to have repaid: ______________________________; and specify the denomination or denominations (which shall be $100,000 or an integral multiple of $1,000 in excess thereof or, if the -34- Note is denominated in a currency other than U.S. dollars, an Authorized Denomination) of the Note or Notes to be issued to the holder for the portion of the within Note not being repaid (in the absence of any specification, one such Note will be issued for the portion not being repaid): _____________________ Date:___________ _____________________________________________ Notice: The signature to this Option to Elect Repayment must correspond with the name as written upon the face of the Note in every particular without alteration or enlargement or any other change whatsoever. ________________________ -35- ABBREVIATIONS The following abbreviations, when used in the inscription on the face of this instrument, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM--as tenants in common UNIF GIFT MIN ACT--........ Custodian...... TEN ENT--as tenants by the (Cust) (Minor) entireties JT TEN --as joint tenants with Under Uniform Gifts to Minors Act right of survivorship and not as tenants in common ........................................... Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and transfer(s) unto Please Insert Social Security or Other Identifying Number of Assignee ____________________________________ /__________________________________/_______________________________________ PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE ___________________________________________________________________________ ___________________________________________________________________________ the within Note of PHILLIPS PETROLEUM COMPANY and does hereby irrevocably constitute and appoint ______________________________________________ attorney to transfer the said Note on the books of the Company, with full power of substitution in the premises. Dated:_______________ _________________________________________ _________________________________________ NOTICE: The signature to this assignment must correspond with the name as written upon the face of the within instrument in every particular, without alteration or enlargement or any change whatever. -36- EX-10 3 Exhibit 10(d) Amended by the Board of Directors 1/12/98 1986 STOCK PLAN OF PHILLIPS PETROLEUM COMPANY -------------------------- 1. PURPOSE ------- The purpose of the 1986 Stock Plan of Phillips Petroleum Company is to provide incentive earnings opportunities to those key employees whose decisions and actions most directly affect the profitability and growth of the Company and its subsidiaries. Since the incentive earnings opportunities under this Plan are based on the market value of the Company's Common Stock it will have the additional effect of increasing these employees' identity of interest with that of the Company's stockholders. There are two programs permitted by this Plan; a Stock Option Plan and the Strategic Incentive Plan. 2. DEFINITIONS ----------- a) "Board" shall mean the Board of Directors of the Company. b) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. c) "Company" shall mean Phillips Petroleum Company. d) "Committee" shall mean the Compensation Committee of the Board of Directors as appointed from time to time, and consisting of not less than three Board members. Each member of the Committee shall be a "disinterested person" as that term is now or hereafter defined in Rule 16(b)(3) of the Securities and Exchange Commission. e) "Earned Award" shall mean the award which an SIP Participant is entitled to receive under the Strategic Incentive Plan. f) "Employee" shall mean any person employed by the Company or a Subsidiary on a full-time salaried basis, including officers and employee directors thereof. 1 g) "Fair Market Value" shall mean the average of the highest price and the lowest price at which Stock shall have been sold on the date of the grant of the Option as reflected on the consolidated tape of New York Stock Exchange issues. In the event that any Option shall be granted on a date on which there were no such sales of Stock, the fair market value of Stock on such date shall be the average of the highest price and lowest price at which Stock shall have been sold on the last trading day preceding the date of grant of such Option as reflected on the consolidated tape of New York Stock Exchange issues. h) "Incentive Stock Option" or "ISO" shall mean an Option grant which meets or complies with the terms and conditions set forth in Section 422A of the Code and Treasury regulations promulgated thereunder. i) "Indicators of Performance" shall mean the criteria which the Committee will use at the conclusion of the Performance Period to evaluate the Company's overall performance as described in Section 9(b) of this Plan. j) "Strategic Incentive Plan Participant" or "SIP Participant" shall mean any eligible Employee who has been so designated by the Committee. k) "Option" or "Stock Option" shall mean a right granted under the Plan to an Optionee to purchase a stated number of shares of Stock at a stated exercise price. l) "Optionee" shall mean an employee who has received a Stock Option granted under the Plan. m) "Performance Period" shall mean a period established by the Committee beginning on the first day of a calendar year, of not less than three consecutive calendar years, at the conclusion of which settlement will be made with a SIP Participant with respect to his Earned Award. n) "Plan" shall mean the 1986 Stock Plan of Phillips Petroleum Company. 2 o) "Restricted Stock" shall mean Stock which is not transferable except in accordance with the terms established for such transfer at the time of its issue in accordance with the plan under which it was issued. p) "Stock" shall mean the common stock, including both Restricted and unrestricted Stock, of the Company. q) "Stock Appreciation Right" or "SAR" shall mean the right of an Optionee to exercise his Option in accordance with Section 8 of this Plan. r) "Subsidiary" shall mean any corporation, a majority of the voting stock of which is beneficially owned, directly or indirectly, by the Company. s) "Target Award" shall mean the award, expressed in shares of Stock, which will be considered an Earned Award, absent any adjustment thereto for individual performance, if the Committee determines pursuant to Section 9(b) of this Plan that the Company's overall performance was "competitive". t) "Total Disability" and "Totally Disabled" shall mean that condition in which, by reason of bodily injury or disease, an employee is and will at all times thereafter be wholly prevented from engaging in any occupation or employment for compensation, profit or gain. All determinations of Total Disability shall be made by the insurance company carrying the group life insurance plan of the Company on the date on which the employee, whether or not eligible for benefits under such insurance plan, becomes Totally Disabled. 3. ADMINISTRATION -------------- The Committee is authorized, subject to the provisions of the Plan, from time to time to establish such rules and regulations and to appoint such agents as it deems appropriate for the proper administration of the Plan, and to make such determinations under, and such interpretations of, and to take such steps in connection with the Plan or the Options 3 or Stock Appreciation Rights or the Strategic Incentive Plan as it deems necessary or advisable. Each determination, interpretation, or other action made or taken pursuant to the provisions of the Plan by the Committee shall be final and shall be binding and conclusive for all purposes and upon all persons. 4. ELIGIBILITY ----------- Only those Employees who, in the sole judgment of the Committee, may have a significant effect on the profitability and growth of the Company, shall be eligible to receive Options and Stock Appreciation Rights under this Plan. Of such Employees, those who are in positions evaluated at grade 35 or higher under the Company's salary administration system are eligible for participation in the Strategic Incentive Plan; provided, however, the Committee may also permit Employees eligible for Participation in the Plan evaluated at less than grade 35 to participate in the Strategic Incentive Plan if in the opinion of the Committee such Employees have a significant effect on the Company's long term growth and profitability. 5. MAXIMUM SHARES AVAILABLE ------------------------ The Stock to be distributed under the Plan may be either authorized and unissued shares or issued shares whether held in the treasury of the Company or otherwise. The total amount of Stock which, under the provisions of this Plan, may be subject to delivery on the exercise of Options, issued in satisfaction of exercised options or SAR's, or issued under the Strategic Incentive Plan shall not exceed 3.5% of the number of issued and outstanding shares of Stock, determined as of the effective date of this Plan. The maximum number of shares is subject to adjustment in accordance with the provisions of Section 10 hereof. 6. STOCK OPTIONS ------------- 4 a) Award of Options: (i) The Committee, at any time and ----------------- from time to time prior to December 31, 1990, may grant Options under the Plan to eligible Employees, for such numbers of shares and having such terms as the Committee shall designate, subject, however, to the provisions of the Plan. The Committee will also determine the type of Option granted (e.g., ISO, nonstatutory, other statutory Options as from time to time may be permitted by the Code) or a combination of various types of Options. Options designated as ISOs shall comply with all the provisions of Section 422A of the Code and applicable Treasury Department regulations. The aggregate Fair Market Value (determined at the time the Option is granted) of Stock with respect to which ISOs are exercisable for the first time by any individual during a calendar year under all plans of the Company, and any subsidiary shall not exceed $100,000. The date on which an Option shall be granted shall be the date of the Committee's authorization of such grant. Any individual at any one time and from time to time may hold more than one Option granted under the Plan or under any other Stock plan of the Company. (ii) Each Option shall be evidenced by a Stock Option Agreement in such form and containing such provisions not inconsistent with the provisions of the Plan as the Committee from time to time shall approve. b) Exercise Price. The price at which shares of Stock may --------------- be purchased under an Option shall not be less than 100 percent of the Fair Market Value of the Stock on the date the Option is granted. c) Term of Options. The period during which an option may ---------------- be exercised shall be determined by the Committee; provided, that such period will not be longer than ten years from the date on which the Option is granted for those Options designated as ISOs or 11 years for other types of Options. The date or dates on which installment portion(s) of an Option may be exercised during the term of an Option shall be 5 determined by the Committee and may vary from Option to Option. If the Committee makes no such specific arrangement with respect to an Option, each such Option granted pursuant to the Plan shall become exercisable in four installments. The first such installment shall become exercisable on the first anniversary of the date of the grant for 25 percent of the number of shares of Stock subject to the Option. Thereafter, on each anniversary of the date of the grant an installment shall become exercisable for an additional 25 percent of the number of shares of Stock subject to the Option until the Option shall have become fully exercisable. To the extent that an installment is not exercised when it becomes exercisable, it shall not expire but shall continue to be exercisable at any time thereafter until the Option shall be cancelled, expire or be surrendered. In no event, however, will any option or portion of an option be exercisable within six months of its grant date. The Committee may accelerate the exercise schedule on outstanding Options, if in its sole judgment conditions are such to warrant such acceleration. d) Termination of Employment. (i) If, prior to a date one -------------------------- year from the date an Option shall have been granted, the Optionee's employment with the Company or Subsidiary shall be terminated for any reason, such Option shall be cancelled and all rights thereunder shall cease; provided that an option granted in any year to an Optionee who terminates his employment on January 1 of the following year due to retirement pursuant to the terms of a retirement plan of the Company or a Subsidiary shall not be cancelled for that reason, and provided, further, the Committee may, in its sole discretion determine that all or any portion of any other Option shall not be cancelled due to termination of employment prior to a date one year from the date the Option shall have been granted. (ii) If, on or after one year from the date an Option shall have been granted, an Optionee's employment with the Company or Subsidiary is 6 terminated for any reason except retirement pursuant to the terms of a retirement plan of the Company or a Subsidiary, Total Disability, or death, any Option granted to him under the Plan shall be cancelled on such termination; provided, that the Committee may, in its sole discretion, determine that all or a portion of any such Option shall not be cancelled. (iii) If, on or after a date one year from the date the Option is granted, an Optionee shall terminate employment by reason of retirement pursuant to a retirement plan of the Company or Subsidiary, or by reason of Total Disability, the Optionee shall retain all rights provided by the Option at the time of such termination of employment. If on or after a date one year from the date the Option is granted, or such shorter period as may be permitted pursuant to (d) (ii) above, an Optionee shall die while in the employ of the Company or Subsidiary or after termination of employment by reason of retirement pursuant to a retirement plan of the Company or Subsidiary, the executor or administrator of the estate of the Optionee or the person or persons to whom the Option shall have been validly transferred by the executor or the administrator pursuant to will or the laws of descent and distribution shall have the right to exercise the Option to the same extent the Optionee could have, had he not died. No transfer of an Option by the Optionee by will or by the laws of descent and distribution shall be effective to bind the Company unless the Company shall have been furnished with written notice thereof and a copy of the will and such other evidence as the Company may deem necessary to establish the validity of the transfer and the acceptance by the transferee or transferees of the terms and conditions of such Option. (iv) Transfer of employment between the Company and a Subsidiary or between Subsidiaries shall not constitute termination of employment for the purpose of any Option granted under the Plan. Whether any leave of absence shall constitute termination of employment for the purposes of any Option granted 7 under the Plan shall be determined in each case by the Committee in its sole discretion. e) Payment for Shares. (i) The exercise price for all ------------------- shares of Stock purchased upon the exercise of an Option, or a portion thereof, shall be paid in full at the time of such exercise. Such payment may be made in cash, by tendering shares of Stock having a value on the date of exercise equal to the exercise price, or tendering shares of Restricted Stock having a value on the date of exercise equal to the exercise price. Such value shall be the Fair Market Value except that the applicable date for determination of the highest and lowest price on the New York Stock Exchange shall be the date on which the Option is exercised, or if not a trading date, then the last trading day on such Exchange preceding the date on which the Option is exercised. If Restricted Stock is used in such exercise, the resulting new shares shall have the same restrictions as the tendered shares. The number of shares so restricted shall not be less than the number of shares of Restricted Stock tendered. The Committee may, in its sole discretion and judgment, limit the extent to which shares of Stock or shares of Restricted Stock may be used in exercising Options. (ii) The Stock delivered to the Optionee upon exercise of an Option, whether or not Restricted Stock is used for payment of the purchase price of the Option may, at the discretion of the Committee, have restrictions placed on it, provided that the Stock Option agreement with the Optionee covering the Option permits such use of Restricted Stock. 7. DETRIMENTAL ACTIVITIES ---------------------- If the Committee determines that, subsequent to the grant of any Option, the Optionee has engaged or is engaging in any activity which, in the sole judgment of the Committee, is or may be detrimental to the Company or a Subsidiary, the Committee may refuse to 8 honor the exercise of such Optionee's Options already requested, and cancel the Option or Options granted to that Optionee. 8. STOCK APPRECIATION RIGHTS ------------------------- a) Grant. The Committee may, at its discretion, affix Stock ------ Appreciation Rights to any Option, either at the time of its initial granting to the Optionee or at a later date. The addition of such SARs must be accomplished prior to the completion of the period during which the Option may be exercised and such exercise period may not be extended beyond that which was initially established. The Committee may establish any SAR terms and conditions that it desires at the time such SAR is established, provided that, notwithstanding any provision of this Plan to the contrary, the terms and conditions of a SAR related to an ISO shall be the same as the terms applicable to the underlying ISO. b) Exercise of Stock Appreciation Right. (i) A Stock ------------------------------------- Appreciation Right shall be exercisable at such time as may be determined by the Committee, which shall be not less than six months after its grant, and provided further that a Stock Appreciation Right shall be exercisable only to the extent that the related Option could be exercised. Option shares with respect to which the related Stock Appreciation Right shall have been exercised may not again be subjected to Options under this Plan. Upon the exercise of a Stock Appreciation Right, that portion of the Option underlying the Stock Appreciation Right will be considered as having been exercised. (ii) The Committee may impose any other conditions upon the exercise of a Stock Appreciation Right, which conditions may include a condition that the Stock Appreciation Right may only be exercised in accordance with rules and regulations adopted by the Committee from time to time. Such rules and regulations may govern the right to exercise Stock Appreciation Rights granted prior to the adoption or 9 amendment of such rules and regulations as well as Stock Appreciation Rights granted thereafter. The exercise of a Stock Appreciation Right for cash shall be made only during the periods specified in Rule 16b-3(e)(3)(iii) of the Securities and Exchange Commission. (iii) Upon the exercise of a Stock Appreciation Right, the Company shall give to an Optionee an amount (less any applicable withholding taxes) equivalent to the excess of the value of the shares of Stock for which the right is exercised on the date of such exercise over the exercise price of such shares under the related Option. The value on the date of exercise shall be the Fair Market Value as determined in Section 6(e) of this Plan. Such amount shall be either in cash or in shares of Stock or both as the Committee shall determine. Such determination may be made at the time of the granting of the Stock Appreciation Right and may be changed at any time thereafter. The shares may consist either in whole or in part of authorized and unissued shares of Stock or issued shares of Stock whether held in the treasury of the Company or otherwise. No fractional shares of Stock shall be issued and the Committee shall determine whether cash shall be given in lieu of such fractional share or whether such fractional share shall be eliminated. c) Expiration or Termination of Stock Appreciation Rights. ------------------------------------------------------- (i) Subject to (c)(ii), each Stock Appreciation Right and all rights and obligations thereunder shall expire on a date to be determined by the Committee. (ii) A Stock Appreciation Right shall terminate and may no longer be exercised upon the termination of the related Option. d) Amend, Suspension or Termination of Stock Appreciation ------------------------------------------------------ Rights. The Committee may at any time amend, suspend or ------- terminate any Stock Appreciation Right theretofore granted under the Plan. 9. STRATEGIC INCENTIVE PLAN ------------------------ 10 a) Administrative Procedure. Normally, the Committee shall ------------------------- adopt administrative procedures applicable to a Performance Period prior to, or within 30 days after, the date designated by the Committee for the Commencement of such Performance Period. The Committee may, however, adopt such administrative procedures more than 30 days after such commencement if in its opinion such delayed action is appropriate. Such procedures shall establish Indicators of Performance and the Target Awards applicable to the Performance Period. Indicators of Performance may vary from Performance Period to Performance Period. b) Indicators of Performance. Indicators of Performance may -------------------------- include, but shall not be limited to, increased shareholder value, earnings per share, return on shareholder's equity, return on assets and/or other similar criteria. Such indicators may be based on the Company's performance compared to the performance of one or more selected companies in the petroleum industry during the same Performance Period or may relate solely to the Company's performance during the Performance Period or a combination of such indicators. At the completion of the Performance Period, the Committee will review the Company's actual performance with respect to the Indicators of Performance and, in its sole judgment, rank the Company's overall performance. Such ranking may range from "noncompetitive" through "competitive" to "outstanding". In arriving at such ranking the Committee may take into consideration, and make appropriate adjustments for, events occurring during the Performance Period which the Committee, in its sole judgment, concludes have affected the performance of the Company or any selected company with respect to any of the Indicators of Performance. No earned Awards will be granted if the Company's overall performance is ranked "noncompetitive". Subject to individual performance adjustments therein, if any, pursuant to paragraph 9(c) of this Plan, if the Company's 11 overall performance is ranked "competitive", Target Awards will result; higher or lower ranking will result in greater or lesser awards provided that in no event, including individual performance adjustments, shall the Earned Award of a SIP Participant exceed 150% of his Target Award. c) Award Adjustments. The Committee in its sole discretion ------------------ may make adjustments in awards determined under paragraph (b) of this Section based on the SIP Participant's individual performance during the Performance Period. The administrative procedures for each Performance Period shall establish the method to be used by the Committee in determining which, if any, SIP Participants may receive such performance adjustments and, subject to the maximum set out in paragraph (b) of this Section, the size of such adjustments. d) Partial Performance Period Participation. The ----------------------------------------- administrative procedures adopted for each Performance Period shall also include procedures to be used in determining the extent to which an Employee shall participate in a partial Performance Period due to either assignment to a position which makes eligible to be a SIP Participant after the beginning of such Performance Period or termination of employment prior to the completion of such a Performance Period in which he was a SIP Participant. e) Award Settlement. With respect to each Performance ----------------- Period, settlement of all Earned Awards shall be made in Stock as soon as practicable following the date on which the Committee determines the size of Earned Awards; provided that the Committee may decide to settle such awards over a period or periods of time as the Committee shall deem appropriate. 10. ADJUSTMENT UPON CHANGES IN CAPITALIZATION ----------------------------------------- In the event of a reorganization, recapitalization, Stock split, Stock dividend, exchange of 12 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 adjustment to outstanding Awards as it determines appropriate so as to prevent dilution or enlargements of rights. 11. MISCELLANEOUS ------------- a) Except as otherwise required by law, no action taken under the Plan shall be taken into account in determining any benefits under any pension, retirement, thrift, profit sharing, group insurance, or other benefit plan maintained by the Company or any Subsidiary, unless such other plan specifically provides for such inclusion. b) No Option or Stock Appreciation Right or right under the Strategic Incentive Plan shall be transferable other than by will or the laws of descent and distribution. During the lifetime of an Optionee, any Option or Stock Appreciation Right shall be exercisable only by him or by his duly appointed guardian or legal representative. c) The Company shall have the right to withhold from any settlement hereunder any federal, state, or local taxes required by law to be withheld. Such withholding may be satisfied by the withholding of shares of Stock by the Company if the Optionee so requests in a manner prescribed by the Committee, if the Committee so approves, and such withholding of shares does not violate any applicable laws, rules or regulations of federal, state or local authorities. d) All administrative expenses associated with the administration of the Plan shall be borne by the Company. e) Masculine pronouns and other words of masculine gender used herein shall refer to both men and women. 13 f) The titles and headings of the sections in this Plan are for convenience of reference only and in the event of any conflicts, the text of the Plan, rather than such titles or headings, shall control. 12. AMENDMENT AND TERMINATION ------------------------- The Board may at any time terminate or amend this Plan in such respect as it shall deem advisable, provided, the Board may not, without further approval of the stockholders of the Company 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 10; (ii) materially modify the requirements as to eligibility for participation; (iii) materially increase the benefits accruing to Participants under the Plan; (iv) extend the duration of the Plan beyond the date approved by the stockholders; or (v) increase the maximum dollar amount of ISOs which an individual Optionee may exercise during any calendar year beyond that permitted in the Code and applicable regulations of the Treasury Department. Notwithstanding the foregoing, no such termination or amendment may adversely affect the rights of any Participant under any Award that is outstanding at the time of such termination or amendment without the Participant's consent. 13. DURATION OF THE PLAN -------------------- The Plan shall become effective on approval by the stockholders at the annual meeting of the stockholders in April of 1986, retroactive to January 1, 1986, and shall terminate on December 31, 1990. 14. CHANGE OF CONTROL ----------------- a) In the event of a Change of Control: i) Any Stock Options and Stock Appreciation Rights outstanding as of the date of the Change of Control that are not then fully exercisable and vested, shall become fully exercisable and vested to the full extent of the original grant; 14 ii) All restrictions and other limitations applicable to any Restricted Stock shall lapse, and such Restricted Stock shall become free of all restrictions and become fully vested and transferable to the full extent of the original grant; iii) All Performance Awards and other Awards outstanding as of the date of the Change of Control shall be considered to be earned and payable in full, and any deferral or other restriction shall lapse and except as provided in subsection (c) of this Section 14, such Performance Units shall be settled in cash as promptly as is practicable; and iv) Section 7 of the Plan, and all noncompetition covenants and other similar restrictive covenants applicable to any outstanding Awards, shall lapse and become null and void and of no further effect. b) A "Change of Control" shall mean: i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 as amended (a "Person")) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934) of 20% or more of either (a) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (b) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (i), the following acquisitions shall not constitute a Change of Control: (A) any acquisition directly from the Company, (B) any acquisition by the Company, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (D) any acquisition pursuant to a 15 transaction which complies with clauses (A), (B) and (C) of subsection (iii) of this Section 14(b); or ii) Individuals who, as of January 12, 1998, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to January 12, 1998, whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or iii) Approval by the shareholders of the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets of another entity (a "Corporate Transaction"), in each case, unless, following such Corporate Transaction, (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Corporate Transaction beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Corporate Transaction (including, without limitation, a corporation which as a result of such transaction 16 owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Corporate Transaction of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Corporate Transaction) beneficially own, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Corporate Transaction or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Corporate Transaction and (C) at least a majority of the members of the board of directors of the corporation resulting from such Corporate Transaction were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Corporate Transaction; or iv) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. c) Notwithstanding the foregoing, if any right to receive cash granted pursuant to this Section 14 would make a Change of Control transaction ineligible for pooling-of- interest accounting under APB No. 16 that but for the nature of such right would be eligible for such accounting treatment, the Committee shall have the ability to substitute for the cash payable pursuant to such right Stock or other securities with a fair market value equal to the cash that would otherwise be payable hereunder. 17 027a 18 EX-10 4 Exhibit 10(e) Amended by the Board of Directors 1/12/98 1990 STOCK PLAN OF PHILLIPS PETROLEUM COMPANY -------------------------- (As Approved April 25, 1989) 1. PURPOSE ------- The purpose of the 1990 Stock Plan of Phillips Petroleum Company is to provide incentive earnings opportunities to those key employees whose decisions and actions most directly affect the profitability and growth of the Company and its subsidiaries. Since the incentive earnings opportunities under this Plan are based on the market value of the Company's Common Stock, it will have the additional effect of increasing these employees' identity of interest with that of the Company's stockholders. There are two programs permitted by this Plan; a Stock Option Plan and the Strategic Incentive Plan. 2. DEFINITIONS ----------- a) "Board" shall mean the Board of Directors of the Company. b) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. c) "Company" shall mean Phillips Petroleum Company. d) "Committee" shall mean the Compensation Committee of the Board of Directors as appointed from time to time, and consisting of not less than three Board members. Each member of the Committee shall be a "disinterested person" as that term is now or hereafter defined in Rule 16(b)(3) of the Securities and Exchange Commission. e) "Earned Award" shall mean the award which an SIP Participant is entitled to receive under the Strategic Incentive Plan. f) "Employee" shall mean any person employed by the Company or a Subsidiary on a full-time salaried basis, including officers and employee directors thereof. g) "Fair Market Value" shall mean the average of the highest price and the lowest price at which Stock shall have been sold on the date of the grant of the Option as reflected on the consolidated tape of New York Stock Exchange issues. In the event that any Options shall be granted on a date on which there were no such sales of Stock, the fair market value of Stock on such date shall be the average of the highest price and the lowest price at which Stock shall have been sold on the last trading day preceding the date of grant of such Option as reflected on the consolidated tape of New York Stock Exchange issues. 2 h) "Incentive Stock Option" or "ISO" shall mean an Option which meets or complies with the terms and conditions set forth in Section 422A of the Code and Treasury regulations promulgated thereunder. i) "Indicators of Performance" shall mean the criteria which the Committee will use at the conclusion of the Performance Period to evaluate the Company's overall performance as described in Section 9(b) of this Plan. j) "Strategic Incentive Plan Participant" or "SIP Participant" shall mean any eligible Employee who has been so designated by the Committee. k) "Option" or "Stock Option" shall mean a right granted under the Plan to an Optionee to purchase a stated number of shares of Stock at a stated exercise price. l) "Optionee" shall mean an employee who has received a Stock Option granted under the Plan. m) "Performance Period" shall mean a period established by the Committee beginning on the first day of a calendar year, of not less than three consecutive calendar years, at the conclusion of which settlement will be made with a SIP Participant with respect to his Earned Award. 3 n) "Plan" shall mean the 1990 Stock Plan of Phillips Petroleum Company. o) "Restricted Stock" shall mean Stock which is not transferable except in accordance with the terms established for such transfer at the time of its issue in accordance with the plan under which it was issued. p) "Stock" shall mean the common stock, including both Restricted and unrestricted Stock, of the Company. q) "Stock Appreciation Right" or "SAR" shall mean the right of an Optionee to exercise an Option granted in accordance with Section 8 of this Plan. r) "Subsidiary" shall mean any corporation, a majority of the voting stock of which is beneficially owned, directly or indirectly, by the Company. s) "Target Award" shall mean the award, expressed in shares of Stock, which will be considered an Earned Award, absent any adjustment thereto for individual performance, if the Committee determines pursuant to Section 9(b) of this Plan that the Company's overall performance was "competitive." t) "Total Disability" and "Totally Disabled" shall mean the condition in which, by reason of bodily injury or disease, an employee is and will at all 4 times thereafter be wholly prevented from engaging in any occupation or employment for compensation, profit or gain. All determinations of Total Disability shall be made by the insurance company carrying the group life insurance plan of the Company on the date on which the employee, whether or not eligible for benefits under such insurance plan, becomes Totally Disabled. 3. ADMINISTRATION -------------- The Committee is authorized, subject to the provisions of the Plan, from time to time to establish such rules and regulations and to appoint such agents as it deems appropriate for the proper administration of the Plan, and to make such determinations under, and such interpretations of, and to take such steps in connection with the Plan or the Options or Stock Appreciation Rights or the Strategic Incentive Plan as it deems necessary or advisable. Each determination, interpretation, or other action made or taken pursuant to the provision of the Plan by the Committee shall be final and shall be binding and conclusive for all purposes and upon all persons. Notwithstanding any provision of the Plan or any Administrative Procedure adopted thereunder which may be capable of being construed to the contrary, no discretion concerning the administration of the Plan insofar as it relates to persons subject to Section 16 of the Securities Exchange Act of 1934 shall be afforded to a person who is not a disinterested person in respect of the Plan. 5 4. ELIGIBILITY ----------- Only those Employees who, in the sole judgment of the Committee, may have a significant effect on the profitability and growth of the Company, shall be eligible to receive Options and Stock Appreciation Rights under this Plan. Of such Employees, those who are in positions evaluated at grade 35 or higher under the Company's salary administration system are eligible for participation in the Strategic Incentive Plan; provided, however, the Committee may also permit Employees eligible for Participation in the Plan evaluated at less than grade 35 to participate in the Strategic Incentive Plan if in the opinion of the Committee such Employees have a significant effect on the Company's long term growth and profitability. 5. MAXIMUM SHARES AVAILABLE ------------------------ The Stock to be distributed under the Plan may be either authorized and unissued shares or issued shares whether held in the treasury of the Company or otherwise. The total amount of Stock which, under the provisions of this Plan, may be subject to delivery on the exercise of Options, issued in satisfaction of exercised Options or SAR's, or issued under the Strategic Incentive Plan shall not exceed 8.6 million shares of the Company's Stock, which represents approximately 3.5% of the number of issued and outstanding shares of Stock as of December 31, 1988. The maximum number of shares is subject to adjustment in accordance with the provisions of Section 10 hereof. In determining the number of shares subject to delivery under this Plan, those represented by cancelled Options, forfeited Options, 6 expired Options and non-earned awards under the Strategic Incentive Plan shall be returned upon the occurrence of such event to the pool of shares available for distribution under the Plan and may be the subject of further Options or SAR's, or may be issued under the Strategic Incentive Plan. 6. STOCK OPTIONS ------------- a) Award of Options. (i) The Committee, at any time and ----------------- from time to time prior to December 31, 1994, may grant Options under the Plan to eligible Employees, for such numbers of shares and having such terms as the Committee shall designate, subject, however, to the provisions of the Plan. The Committee will also determine the type of Option granted (e.g., ISO, nonstatutory, other statutory Options as from time to time may be permitted by the Code) or a combination of various types of Options. Options designated as ISO's shall comply with all the provisions of Section 422A(b) of the Code and applicable Treasury Department regulations. The aggregate Fair Market Value (determined at the time the Option is granted) of Stock with respect to which ISO's are exercisable for the first time by any individual during a calendar year under all plans of the Company, and any subsidiary shall not exceed $100,000. All shares over the $100,000 first exercisable value shall be granted as a non-qualified Option. The date on which an Option shall be granted shall be the date of the Committee's authorization of such grant. Any individual at any one time and from time to time may hold more than one Option granted under the Plan or under 7 any other Stock plan of the Company. (ii) Each Option shall be evidenced by a Stock Option Agreement in such form and containing such provisions not inconsistent with the provisions of the Plan as the Committee from time to time shall approve. b) Exercise Price. The price at which shares of Stock may --------------- be purchased under an Option shall not be less than 100 percent of the Fair Market Value of the Stock on the date the Option is granted. c) Term of Options. The period during which an Option may ---------------- be exercised shall be determined by the Committee; provided, that such period will not be longer than ten years from the date on which the Option is granted for those Options designated as ISO's or 11 years for other types of Options. The date or dates on which installment portion(s) of an Option may be exercised during the term of an Option shall be determined by the Committee and may vary from Option to Option. If the Committee makes no such specific arrangement with respect to an Option, each such Option granted pursuant to the Plan shall become exercisable in four installments. The first such installment shall become exercisable on the first anniversary of the date of the grant for 25 percent of the number of shares of Stock subject to the Option. Thereafter, on each anniversary of the date of the grant an installment shall become exercisable for an additional 25 percent of the number of shares of Stock subject to the Option until the Option 8 shall have become fully exercisable. To the extent that an installment is not exercised when it becomes exercisable, it shall not expire but shall continue to be exercisable at any time thereafter until the Option shall be cancelled, expire or be surrendered. The Committee may accelerate the exercise schedule on outstanding Options, if in its sole judgment conditions are such to warrant such acceleration. d) Termination of Employment. (i) If, prior to a date -------------------------- one year from the date an Option shall have been granted, the Optionee's employment with the Company or Subsidiary shall be terminated for any reason, such Option shall be cancelled and all rights thereunder shall cease; provided that an Option granted in any year to an Optionee who terminates employment on January 1 of the following year due to retirement pursuant to the terms of a retirement plan of the Company or a Subsidiary shall not be cancelled for that reason, and provided, further, the Committee may, in its sole discretion determine that all or any portion of any other Option shall not be cancelled due to termination of employment prior to a date one year from the date the Option shall have been granted. (ii) If, on or after one year from the date an Option shall have been granted, an Optionee's employment with the Company or Subsidiary is terminated for any reason except retirement pursuant to the terms of a retirement plan of the Company or a Subsidiary, Total Disability, or death, 9 any Option so granted under the Plan shall be cancelled on such termination; provided, that the Committee may, in its sole discretion, determine that all or a portion of any such Option shall not be cancelled. (iii) If, on or after a date one year from the date the Option is granted, an Optionee shall terminate employment by reason of retirement pursuant to a retirement plan of the Company or Subsidiary, or by reason of Total Disability, the Optionee shall retain all rights provided by the Option at the time of such termination of employment. If on or after a date one year from the date the Option is granted, or such shorter period as may be permitted pursuant to (d)(ii) above, an Optionee shall die while in the employ of the Company or Subsidiary or after termination of employment by reason of retirement pursuant to a retirement plan of the Company or Subsidiary, the executor or administrator of the estate of the Optionee or the person or persons to whom the Option shall have been validly transferred by the executor or the administrator pursuant to will or the laws of descent and distribution shall have the right to exercise the Option to the same extent the Optionee could have, had the Optionee not died. No transfer of an Option by the Optionee by will or by the laws of descent and distribution shall be effective to bind the Company unless the Company shall have been furnished with written notice thereof and a copy of the will and such other evidence as the Company may deem necessary to establish 10 the validity of the transfer and the acceptance by the transferee or transferees of the terms and conditions of such Option. (iv) Transfer of employment between the Company and a Subsidiary or between Subsidiaries shall not constitute termination of employment for the purpose of any Option granted under the Plan. Whether any leave of absence shall constitute termination of employment for the purposes of any Option granted under the Plan shall be determined in each case by the Committee in its sole discretion. e) Payment for Shares. (i) The exercise price for all ------------------- shares of Stock purchased upon the exercise of an Option, or a portion thereof, shall be paid in full at the time of such exercise. Such payment may be made in cash, by tendering shares of Stock having a value on the date of exercise equal to the exercise price, or tendering shares of Restricted Stock having a value on the date of exercise equal to the exercise price. Such value shall be the Fair Market Value except that the applicable date for determination of the highest and lowest price on the New York Stock Exchange shall be the date on which the Option is exercised, or if not a trading date, then the last trading day on such Exchange preceding the date on which the Option is exercised. If Restricted Stock is used in such exercise, the resulting new shares shall have the same restrictions as the tendered shares. The number of shares so restricted shall not be less than the number of shares of 11 Restricted Stock tendered. The Committee may, in its sole discretion and judgment, limit the extent to which shares of Stock or shares of Restricted Stock may be used in exercising Options. (ii) The Stock delivered to the Optionee upon exercise of an Option, whether or not Restricted Stock is used for payment of the purchase price of the Option may, at the discretion of the Committee, have restrictions placed on it, provided that the Stock Option Agreement with the Optionee covering the Option permits such use of Restricted Stock. f) Should a withholding tax obligation arise upon the exercise of an Option, the withholding tax may be satisfied by withholding shares of Stock or by payment of cash. 7. DETRIMENTAL ACTIVITIES ---------------------- If the Committee determines that, subsequent to the grant of any Option, the Optionee has engaged or is engaging in any activity which, in the sole judgment of the Committee, is or may be detrimental to the Company or a Subsidiary, the Committee may refuse to honor the exercise of such Optionee's Options already requested, and cancel the Option or Options granted to that Optionee. 12 8. STOCK APPRECIATION RIGHTS ------------------------- a) Grant. The Committee may, at its discretion, affix ------ Stock Appreciation Rights to any Option, either at the time of its initial granting to the Optionee or at a later date. The addition of such SAR's must be accomplished prior to the completion of the period during which the Option may be exercised and such exercise period may not be extended beyond that which was initially established. The Committee may establish any SAR terms and conditions that it desires at the time such SAR is established, provided that, to the extent permitted by applicable law, notwithstanding any provision of this Plan to the contrary, the terms and conditions of a SAR related to an ISO shall be the same as the terms applicable to the underlying ISO. b) Exercise of Stock Appreciation Right. (i) A Stock ------------------------------------- Appreciation Right shall be exercisable at such time as may be determined by the Committee, which shall be not less than six months after its grant, and provided further that a Stock Appreciation Right shall be exercisable only to the extent that the related Option could be exercised. Option shares with respect to which the related Stock Appreciation Right shall have been exercised may not again be subjected to Options under this Plan. Upon the exercise of a Stock Appreciation Right, that portion of the Option underlying the Stock Appreciation Right will be considered as having been exercised. 13 (ii) The Committee may impose any other conditions upon the exercise of a Stock Appreciation Right, which conditions may include a condition that the Stock Appreciation Right may only be exercised in accordance with rules and regulations adopted by the Committee from time to time. Such rules and regulations may govern the right to exercise Stock Appreciation Rights granted prior to the adoption or amendment of such rules and regulations as well as Stock Appreciation Rights granted thereafter. The exercise of a Stock Appreciation Right for cash shall be made only during the periods specified in Rule 16b-3 of the Securities and Exchange Commission. (iii) Upon the exercise of a Stock Appreciation Right, the Company shall give to an Optionee an amount (less any applicable withholding taxes, which at the Company's discretion may be settled by withholding shares of Stock or by payment of cash) equivalent to the excess of the value of the shares of Stock for which the right is exercised on the date of such exercise over the exercise price of such shares under the related Option. The value on the date of exercise shall be the Fair Market Value as determined in Section 6(e) of this Plan. Such amount shall be either in cash or in shares of Stock or both as the Committee shall determine. Such determination may be made at the time of the granting of the Stock Appreciation Right and may be changed at any time thereafter. The shares may consist either 14 in whole or in part of authorized and unissued shares of Stock or issued shares of Stock whether held in the treasury of the Company or otherwise. No fractional shares of Stock shall be issued and the Committee shall determine whether cash shall be given in lieu of such fractional share or whether such fractional share shall be eliminated. c) Expiration or Termination of Stock Appreciation Rights. ------------------------------------------------------- (i) Subject to (c)(ii), each Stock Appreciation Right and all rights and obligations thereunder shall expire on a date to be determined by the Committee. (ii) A Stock Appreciation Right shall terminate and may no longer be exercised upon the termination of the related Option. d) Amendment, Suspension or Termination of Stock --------------------------------------------- Appreciation Rights. The Committee may, at any time, -------------------- amend, suspend, or terminate any Stock Appreciation Right theretofore granted under the Plan. 9. STRATEGIC INCENTIVE PLAN ------------------------ a) Administrative Procedure. Normally, the Committee ------------------------- shall adopt administrative procedures applicable to a Performance Period prior to, or within 30 days after, the date designated by the Committee for the Commencement of such Performance Period. The Committee may, however, adopt such administrative procedures more than 30 days after 15 such commencement if in its option such delayed action is appropriate. Such procedures shall establish Indicators of Performance and the Target Awards applicable to the Performance Period. Indicators of Performance may vary from Performance Period to Performance Period. b) Indicators of Performance. Indicators of Performance -------------------------- may include, but shall not be limited to, increased shareholder value, earnings per share, return on shareholder's equity, return on assets and/or other similar criteria. Such indicators may be based on the Company's performance compared to the performance of one or more selected companies in the petroleum industry during the same Performance Period or may relate solely to the Company's performance during the Performance Period or a combination of such indicators. At the completion of the Performance Period, the Committee will review the Company's actual performance with respect to the Indicators of Performance, and, in its sole judgment, rank the Company's overall performance. Such ranking may range from "noncompetitive" through "competitive" to "outstanding." In arriving at such ranking, the Committee may take into consideration, and make appropriate adjustments for, events occurring during the Performance Period, which the Committee, in its sole judgment, concludes have affected the performance of the Company or any selected company with respect to any of the Indicators of Performance. No Earned Awards will be granted if the Company's overall performance is ranked "non-competitive." Subject 16 to individual performance adjustments therein, if any, pursuant to paragraph 9(c) of this Plan, if the Company's overall performance is ranked "competitive," Target Awards will result; higher or lower ranking will result in greater or lesser awards provided that in no event, including individual performance adjustments, shall the Earned Award of a SIP Participant exceed 150% of the SIP Participant's Target Award. c) Award Adjustments. The Committee in its sole ------------------ discretion may make adjustments in awards determined under paragraph (b) of this Section based on the SIP Participant's individual performance during the Performance Period. The administrative procedures for each Performance Period shall establish the method to be used by the Committee in determining which, if any, SIP Participants may receive such performance adjustments and, subject to the maximum set out in paragraph (b) of this Section, the size of such adjustments. d) Partial Performance Period Participation. The ----------------------------------------- administrative procedures adopted for each Performance Period shall also include procedures to be used in determining the extent to which an Employee shall participate in a partial Performance Period due to either assignment to a position which makes the Employee eligible to be a SIP Participant after the beginning of such Performance Period or termination of employment prior to the 17 completion of such a Performance Period in which the Employee was a SIP Participant. e) Award Settlement. With respect to each Performance ----------------- Period, settlement of all Earned Awards shall be made in Stock as soon as practicable following the date on which the Committee determines the size of Earned Awards; provided that the Committee may decide to settle such awards over a period or periods of time as the Committee shall deem appropriate. 10. ADJUSTMENT UPON CHANGES IN CAPITALIZATION ----------------------------------------- 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 adjustment to outstanding Awards as it determines appropriate so as to prevent dilution or enlargement of rights. 11. MISCELLANEOUS ------------- a) Except as otherwise required by law, no action taken under the Plan shall be taken into account in determining any benefits under any pension, retirement, thrift, profit sharing, group insurance, or other benefit plan 18 maintained by the Company or any Subsidiary, unless such other plan specifically provides for such inclusion. b) No Option or Stock Appreciation Right or right under the Strategic Incentive Plan shall be transferable other than by will or the laws of descent and distribution. During the lifetime of an Optionee, any Option or Stock Appreciation Right shall be exercisable only by the Optionee or the Optionee's duly appointed guardian or legal representative. c) The Company shall have the right to withhold from any settlement hereunder any Federal, state, or local taxes required by law to be withheld. Such withholding may be satisfied by the withholding of shares of Stock by the Company if the Optionee so requests in a manner prescribed by the Committee, if the Committee so approves, and such withholding of shares does not violate any applicable laws, rules or regulations of Federal, state or local authorities. d) All administrative expenses associated with the administration of the Plan shall be borne by the Company. e) Masculine pronouns and other words of masculine gender used herein shall refer to both men and women. 19 f) The titles and headings of the sections in this Plan are for convenience of reference only and in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control. 12. AMENDMENT AND TERMINATION ------------------------- The Board may, at any time, terminate or amend this Plan in such respect as it shall deem advisable, provided, the Board may not, without further approval of the stockholders of the Company 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, 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 10; (ii) materially modify the requirements as to eligibility for participation; (iii) materially increase the benefits accruing to Participants under the Plan; (iv) extend the duration of the Plan beyond the date approved by the stockholders; or (v) increase the maximum dollar amount of ISO's which an individual Optionee may first exercise during any calendar year beyond that permitted in the Code and applicable regulations of the Treasury Department. Notwithstanding the foregoing, no such termination or amendment may adversely affect the rights of any Participant under any Award that is outstanding at the time of such termination or amendment without the Participant's consent. 20 13. DURATION OF THE PLAN -------------------- The Plan shall become effective on January 1, 1990, provided that it has been approved by the stockholders at the annual meeting of the stockholders in April of 1989, and shall terminate on December 31, 1994. 14. CHANGE OF CONTROL ----------------- a) In the event of a Change of Control: i) Any Stock Options and Stock Appreciation Rights outstanding as of the date of the Change of Control that are not then fully exercisable and vested, shall become fully exercisable and vested to the full extent of the original grant; ii) All restrictions and other limitations applicable to any Restricted Stock shall lapse, and such Restricted Stock shall become free of all restrictions and become fully vested and transferable to the full extent of the original grant; iii) All Performance Awards and other Awards outstanding as of the date of the Change of Control shall be considered to be earned and payable in full, and any deferral or other restriction shall lapse and except as provided in subsection (c) of this Section 14, such 21 Performance Units shall be settled in cash as promptly as is practicable; and iv) All noncompetition covenants and other similar restrictive covenants applicable to any outstanding Awards shall lapse and become null and void and of no further effect. b) A "Change of Control" shall mean: i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 as amended (a "Person")) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934) of 20% or more of either (a) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (b) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for the purposes of this subsection (i), the following acquisitions shall not constitute a Change of Control: (A) any acquisition directly from the Company, (B) any acquisition by the Company, (C) any acquisition by any employee benefit plan (or 22 related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (D) any acquisition pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (iii) of this Section 14(b); or ii) Individuals who, as of January 12, 1998, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to January 12, 1998, whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or iii) Approval by the shareholders of the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets of another entity (a "Corporate Transaction"), in each case, 23 unless, following such Corporate Transaction, (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Corporate Transaction beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Corporate Transaction (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Corporate Transaction of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Corporate Transaction) beneficially own, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Corporate Transaction or the combined voting power of the then outstanding voting securities of such corporation except to 24 the extent that such ownership existed prior to the Corporate Transaction and (C) at least a majority of the members of the board of directors of the corporation resulting from such Corporate Transaction were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Corporate Transaction; or iv) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. c) Notwithstanding the foregoing, if any right to receive cash granted pursuant to this Section 14 would make a Change of Control transaction ineligible for pooling-of- interests accounting under APB No. 16 that but for the nature of such right would be eligible for such accounting treatment, the Committee shall have the ability to substitute for the cash payable pursuant to such right Stock or other securities with a fair market value equal to the cash that would otherwise be payable hereunder. cc1990 - a Stock Plan98 25 EX-10 5 Exhibit 10(f) Amended by the Board of Directors 1/12/98 ANNUAL INCENTIVE COMPENSATION PLAN OF PHILLIPS PETROLEUM COMPANY Section 1. Purpose and Establishment The purpose of the Annual Incentive Compensation Plan of Phillips Petroleum Company (the "Plan") is to benefit the shareholders of Phillips Petroleum Company 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 all employees to work as a team to achieve the Company's mission of being the top performer in each of our businesses through the recognition and reward of such performance on an annual basis when measured against predetermined annual performance objectives. The Annual Incentive Compensation Plan of Phillips Petroleum Company is established effective January 1, 1993. 1 Section 2. Definitions As used in this Plan: (a) "Award" means the grant of cash or any other form of Share based or non-Share based Award granted pursuant to this Plan. (b) "Award Agreement" means a written agreement between the Company and a Participant that sets forth the terms, conditions and any limitations applicable to an 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 contingently 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: Surviving spouse 2 Surviving children in equal shares To the estate of the Participant. (d) "Board" means the Board of Directors of Phillips Petroleum Company. (e) "Code" means the Internal Revenue Code of 1986, as amended and in effect 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 responsibilities. (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. (i) "Employee" means any individual who is a salaried 3 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 Per Share" 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 the 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. (l) "Participant" means any Employee who has been designated by the Committee to be eligible for an Award under this Plan. (m) "Participating Subsidiary" means a subsidiary of the 4 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 the Plan. (n) "Performance Measures" means the criteria which the Committee will use to evaluate the Company's performance. (o) "Plan Year" means calendar year. (p) "Restricted Stock" means shares of Stock which have certain restrictions attached to the ownership thereof. (q) "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. (r) "Rule 16b-3" has the meaning described in Section 12(c). (s) "Section 16" means Section 16 of the Exchange Act or any successor regulation and the rules promulgated thereunder 5 as they may be amended from time to time. (t) "Stock" mean shares of common stock of the Company, par value $1.25. (u) "Stock Unit" means the right to receive a payment equivalent in value to one share of Stock on the date of payment. 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. Performance Measures As soon as practicable after the beginning of the year the Committee shall determine the Performance Measures for the Plan Year and shall advise Participants of the Performance Measures. The Performance Measures may include corporate, group, business unit and Staff objectives. The objectives may include a combination of financial and/or operational criteria and may be measured 6 solely against internal targets or in comparison to the performance of an industry peer group or both. The Committee shall establish a threshold Performance Measure applicable to overall financial performance of the Company which must be achieved before Awards for the Plan Year will be granted. Section 5. Determination of Awards Following the completion of the Plan Year, the Committee will review the Company's performance with respect to the Performance Measures, and in its sole judgment, determine the amount and manner of Awards to be granted to eligible Employees. No Awards will be granted if the threshold Performance Measure established under Section 4 is not achieved. Section 6. Payment of Awards (a) Each Award may be made at the discretion of the Committee either in cash, in Stock, in Restricted Stock, in Stock Units, or in another form as determined by the Committee and may be made partly in one form and partly in one or more other forms. In the case of an Award in Stock, Restricted Stock, or Stock Units, the number shall be determined by using the Fair Market Value Per share of Stock on the date of the Award, provided, however, that 7 no Employee whose acquisition of Stock, Restricted Stock, Stock Units or other form of Award would be subject to the provisions of Section 16 of the Exchange Act shall be eligible to receive an Award otherwise than in cash, and the Committee shall grant Awards to such persons only in cash, unless prior to the grant of any such Award all action necessary to qualify such award for the exemption under Rule 16b-3 shall have been taken. (b) The payment of any Award shall be subject to such obligations or conditions as the Committee may specify in making or recommending the Award, but Awards need not be evidenced by Award Agreements. (c) Part or all of a cash Award may be deferred by a Participant under the terms of the Key Employee Deferred Compensation Plan of Phillips Petroleum Company or any successor plan thereto. (d) Any Award payable in Stock or Restricted Stock may, in the discretion of the Committee, be paid part or all in cash, on each date on which payment in Stock or Restricted Stock would otherwise have been made, in an amount equal to the Fair Market Value per share of Stock on each such date, multiplied by the number of shares of 8 Stock or Restricted Stock which would otherwise have been paid on such date. (e) Awards may be granted in Restricted Stock that is issued to a Participant and is subject to such terms, conditions and restrictions as the Committee deems appropriate, which may include 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 rights to receive any cash or stock dividend on such Stock. (f) Awards may be granted in Stock Units that are subject to such terms and conditions as the Committee deems appropriate. The number of Stock Units awarded with respect to any Award shall be the number determined by using the Fair Market Value per share of Stock on the date of the Award. Any Award made in Stock Units may, in 9 the discretion or the recommendation of the Committee, be paid in shares of Stock on each date on which payment in cash would otherwise be made. (g) In lieu of the foregoing forms of payment of Awards, the Committee may specify or recommend any other form of payment which it determines to be of substantially equivalent economic value to the cash value of the Award including, without limitation, forms involving payments to a trust or trusts for the benefit of one or more Participants. (h) Each payment of an Award that is to be made in cash shall be from the general funds of the Company or the Participating Subsidiary making the payment. (i) In the event the Participant resigns during the Plan Year or before Awards are paid for the Plan Year, no Awards shall be made to that Participant, provided, that the Committee may, in its sole discretion, determine that an Award shall be made with respect to the period of time during which the Participant was an Employee. (j) In the event the Participant transfers to a non- participating subsidiary or otherwise becomes ineligible prior 10 to the end of the Plan Year, the Participant may remain a Participant for the purpose of all Awards which shall have been made prior to the Participant's transfer or prior to the Participant becoming ineligible or are to be made, but in such later case, only with respect to the period of time during which the Participant was an eligible Participant. (k) In the event the Participant terminates employment by reason of Disability, the Participant may remain a Participant for the purpose of all Awards which shall have been made prior to the Participant's Disability or are to be made, but in such later case, only with respect to the period of time prior to the Disability. (l) In the event the Participant terminates employment by Retirement, the Participant may remain a Participant for the purpose of all Awards which shall have been made prior to Retirement or are to be made, but in such later case, only with respect to the period of time during which the Participant was an Employee. (m) In the event of the death of a Participant to whom an Award is to be or shall have been made, the Award or any portion thereof remaining unpaid may be paid to such 11 Participant's Beneficiary either in the manner in which payment would have been made had the Participant not died or in such other manner as may be determined by the Committee. 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) To the extent permitted by Section 12, the Committee is authorized to (i) determine which Employees shall be Participants in the Plan and which form of Awards shall be granted to Participants, (ii) establish, amend and rescind rules, regulations and guidelines relating to this Plan as it deems appropriate, 12 (iii) interpret and administer this Plan, Awards and Award Agreements, (iv) establish, modify and terminate terms and conditions of Award Agreements, (v) grant waivers and accelerations of Plan, Award and Award Agreement restrictions and (vi) take any other action necessary for the proper administration and operation of the Plan, all of which shall be executed in accordance with the objectives of this Program. (c) The Committee may delegate to the officers or employees of the Company the authority to carry out any of its responsibilities under and described in this Plan, under such conditions or limitations as the Committee may establish, other than its authority with regard to Participants who are subject to Section 16. (d) Determinations of the Committee and its designees shall be final, binding and conclusive on the Company, its Participating Subsidiaries, shareholders, Employees and Participants. No member of the Committee or any of its 13 designees shall be personally liable for any action or determination made in good faith with respect to this Program, any Award, or any Award Agreement. 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. Section 9. Change of Control (a) In the event of a Change of Control, all restrictions and other limitations applicable to any Restricted Stock shall lapse, and such Restricted Stock shall become free of all restrictions and become fully vested and transferable to the full extent of the original grant. 14 (b) A "Change of Control" shall mean: (i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act (a "Person")) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (a) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (b) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (i), the following acquisitions shall not constitute a Change of Control: (A) any acquisition directly from the Company, (B) any acquisition by the Company, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (D) any acquisition pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (iii) of this Section 9(b); or (ii) Individuals who, as of January 12, 1998, constitute the Board (the "Incumbent Board") cease for any reason to 15 constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to January 12, 1998, whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (iii) Approval by the shareholders of the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets of another entity (a "Corporate Transaction"), in each case, unless, following such Corporate Transaction, (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Corporate Transaction beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting 16 power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Corporate Transaction (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Corporate Transaction of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Corporate Transaction) beneficially own, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Corporate Transaction or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Corporate Transaction and (C) at least a majority of the members of the board of directors of the corporation resulting from such Corporate Transaction were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Corporate Transaction; or 17 (iv) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. 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. Section 11. 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 18 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 12. Amendments and Termination (a) The Committee or the Board, as appropriate, may, insofar as permitted by law, from time to time, suspend or terminate this Plan or revise or amend it in any respect whatsoever; provided, however, unless the Committee or the Board, as appropriate, specifically otherwise provides, any revision or amendment that would cause this Plan to fail to comply with any requirement of applicable law, regulation or rule if such amendment were not approved by the shareholders of the Company shall not be effective unless and until the approval of the shareholders of the Company is obtained. (b) Subject to the terms and conditions and within the limitations of this Plan, the Committee may amend, cancel, modify or extend outstanding Awards granted under this Plan, but no such action taken after a Change of Control, at the request of a third party seeking to effect a Change of Control, or otherwise in connection 19 with or in anticipation of a Change of Control, may adversely affect the rights of any Participant with respect to any outstanding award without such Participant's consent. (c) This Plan is intended to comply with 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 ("Rule 16b-3") with respect to Participants who are subject to Section 16 of the Exchange Act. Should the requirements of Rule 16b-3 change, the Board or the Committee, as appropriate, may amend the program to comply with the requirements of the amended Rule 16b-3 or its successor provision or provisions. Section 13. 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. 20 Section 14. Limits of Liability (a) Any liability of the Company to any Participant with respect to an Award shall be based solely upon contracted 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 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. 2DP/026 01/08/98 21 EX-10 6 Exhibit 10(j) Board of Directors Amended January 12, 1998 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 in the event restrictions lapse on Restricted Stock previously awarded or which may be awarded to the Participant pursuant to the Incentive Compensation Plan, the Long Term Incentive Compensation Plan, the 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 1 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 (ix) above and a participant receiving such an Award shall be deemed, with respect thereto, to have elected a Section 5(b)(i) payment option - 10 annual installments commencing about one year after retirement, but subject to revision under the terms of this Plan. (b) "Board of Directors" shall mean the board of directors of the Company. (c) "Chief Executive Officer (CEO)" shall mean the Chief Executive Officer of the Company. (d) "Committee" shall mean the Compensation Committee of the Board of Directors. (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 2 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 or Rehired Participant who satisfies the conditions of Section 5(i) who is a salaried employee of the Company or of a Participating Subsidiary who is eligible to receive an Award from an Incentive Compensation Plan or has Restricted Stock and is not subject to taxation in countries other than the United States of America either at the time of any preference election pursuant to Section 3 of the Plan or on the date that an Award would be deferred and credited to a Deferred Compensation Account pursuant to Section 4, generally classified as a U.S. Domestic Employee; provided, however, that the Plan Administrator may approve 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. Employee shall also include former employees who Retire or are Laid Off and are eligible to receive a lump sum distribution from non- qualified retirement plans. (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. 3 (m) "Layoff" or "Laid Off" shall mean layoff under the Phillips Layoff Plan or any similar plan which the Company may adopt from time to time under the terms of which the Participant executes and does not revoke a general release of liability, acceptable to the Company, under such layoff plan. (n) "Long-Term Incentive Compensation Plan" shall mean the Long-Term Incentive Compensation Plan of the Company which was terminated December 31, 1985. (o) "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. (p) "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. (q) "Newhire Employee" shall mean any Employee who is hired or rehired during a calendar year. (r) "Participant" shall mean a person for whom a Deferred Compensation Account is maintained. (s) "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. 4 (t) "Plan Administrator" shall mean the person designated by the Chief Executive Officer to carry out ministerial duties related to the Plan. (u) "Potential Participant" shall mean a person who has received a notice specified in Section 2. (v) "Rehired Participant" shall mean a Participant who subsequent to Retirement or Layoff is rehired by the Company and whose employment status is classified as regular full-time or its equivalent. (w) "Restricted Stock" shall mean shares of Stock which have certain restrictions attached to the ownership thereof. (x) "Retirement" or "Retire", or "Retiring" shall mean termination of employment with the Company on or after the earliest early retirement date as defined in the Retirement Income Plan. (y) "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. (z) "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. (aa) "Salary" shall mean the monthly equivalent rate of pay for an Employee before adjustments for any before-tax voluntary reductions. 5 (bb) "Stock" means shares of common stock of the Company, par value $1.25. (cc) "Strategic Incentive Plan" shall mean the Strategic Incentive Plan portion of the 1986 Stock Plan of the Company, of the 1990 Stock Plan of the Company, and of any successor plans of similar nature. SECTION 2. Notification of Potential Participants. (a) Incentive Compensation Plan. Each year, during --------------------------- September, Employees who are eligible to receive an Award in the immediately following calendar year under the Company's or a Participating Subsidiary's Incentive Compensation Plan will be notified and given the opportunity, in a manner prescribed by the Plan Administrator, to indicate a preference concerning deferral of all or part of such Award. (b) Restricted Stock Awards. Each year Employees who are or ----------------------- will become 55 years of age prior to the end of the calendar year or who are over 55 years old and have not previously been notified will be notified and given the opportunity, in a manner prescribed by the Plan Administrator, to indicate a preference concerning the deferral of the receipt of the value of all or part of the Stock which would otherwise be delivered to the Employees in the event restrictions lapse 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 6 Plan, may indicate, in a manner prescribed by the Plan Administrator, a preference concerning deferral of all of part of such payment. (e) Salary Reduction. Annually, Employees and Newhire ---------------- 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, or for Newhire Employees the remainder of the calendar year in which they are hired, 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, in a manner prescribed by the Plan Administrator, (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 state the portion of the Award the Potential Participant desires to be deferred. If an indication is not received by October 1, the Potential Participant will be deemed to have elected to receive any ICP award awarded by the Committee. 7 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, except that, in the event of any of the following: i) the Employee is demoted to a job classification/grade that is no longer eligible to receive an Award from an Incentive Compensation Plan, ii) the Employee's employment status is classified to a status other than regular full-time or its equivalent, iii) the Employee is receiving Unavoidable Absence Benefits (UAB) pay such that the pay received is less than his/her pay had been prior to being on UAB, the Employee can request, subject to approval by the Plan Benefits Administrator, that his/her indication of preference to defer, whether approved or not, be revoked for that Incentive Compensation Plan 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 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, in a manner prescribed by the Plan Administrator, (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 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 are lapsed. 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 8 applicable, shall consider such indication of preference as submitted and shall decide whether to accept or reject the preference expressed. The Potential Participant shall be notified in writing of the decision. A deferral of the value of the Restricted Stock will be paid under the terms of Section 5(b)(i) hereof - 10 annual installments commencing about one year after retirement, but subject to revision under the terms of this Plan. (c) Lump Sum Distribution from Non-Qualified Retirement --------------------------------------------------- Plans. If a Potential Participant prefers to defer under ----- this Plan all or part of the lump sum distribution to which Section 2(c) pertains, the Potential Participant must indicate such preference, in a manner prescribed by the Plan Administrator, (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 state the portion of the lump sum distribution the Potential Participant desires to be deferred. The Committee or CEO, as applicable, shall consider such indication of preference as submitted and shall decide whether to accept or reject the preference expressed as soon as practicable. Such indication of preference, if accepted, becomes irrevocable on the date of such acceptance. (d) Lump Sum from Defined Contribution Makeup Plan. If a ---------------------------------------------- Potential Participant prefers to defer under this Plan all or part of the lump sum cash payment to which Section 2(d) pertains, the Potential Participant must indicate such preference, in a manner prescribed by the Plan Administrator, (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 9 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 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 must make an election, in the manner prescribed by the Plan Administrator, which must be received on or before November 30 prior to the beginning of the calendar year of the elected deferral or for Newhire Employees prior to their first day of employment or reemployment. 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 or for Newhire Employees on their first day of employment or reemployment, except that in the event of any of the following: i) the Employee is demoted to a job classification/grade that is no longer eligible to receive an Award from an Incentive Compensation Plan, ii) the Employee's employment status is classified to a status other than regular full-time or its equivalent, 10 iii) the Employee is receiving Unavoidable Absence Benefits (UAB) pay such that the pay received is less than his/her pay had been prior to being on UAB, the Employee can request, subject to approval by the Plan Benefits Administrator, that his/her election to voluntarily reduce his/her salary be revoked for the remainder 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, in a manner prescribed by the Plan Administrator, (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 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 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 11 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 restrictions lapse. For this purpose, the market value of the underlying Restricted Stock shall be based on the higher of (i) the average of the high and low selling prices of the Company Stock on the date the restrictions lapse or the last trading day before the day the restrictions lapse if such date is not a trading day or (ii) the average of the high three monthly Fair Market Values of the Company Stock during the twelve calendar months preceding the month in which the restrictions lapse. The monthly Fair Market Value of the Company Stock is the average of the daily Fair Market Value of the Stock for each trading day of the month. The daily Fair Market Value of the Stock shall be deemed equal to the average of the high and low selling prices of the Stock on the New York Stock Exchange, as reported in the Wall Street Journal. 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 but not later than 30 days after the date the Award would otherwise be payable. (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 12 security" in which the Participant's Deferred Compensation Account shall be deemed to have been invested until designation instructions are received from the Participant. Eligible securities are those securities designated by the Treasurer of the Company. The Treasurer of the Company may include as eligible securities, stocks listed on a national securities exchange, and bonds, notes, debentures, corporate or governmental, either listed on a national securities exchange or for which price quotations are published in The Wall Street Journal and shares issued by investment companies commonly known as "mutual funds". The Participant's Deferred Compensation Account will be adjusted to reflect the deemed gains, losses and earnings as though the amount deferred was actually invested and reinvested in the eligible securities for the Participant's Deferred Compensation Account. Notwithstanding anything to the contrary in this section 4(b), in the event the Company actually purchases or sells such securities in the quantities and at the times the securities are deemed to be purchased or sold for a Participant's Deferred Compensation Account, the Account shall be adjusted accordingly to reflect the price actually paid or received by the Company for such securities after adjustment for all transaction expenses incurred (including without limitation brokerage fees and stock transfer taxes). In the case of any deemed purchase not actually made by the Company, the Deferred Compensation Account shall be charged with a dollar amount equal to the quantity and kind of securities deemed to have been purchased multiplied by the fair market value of such security on the date of reference and shall be credited with the quantity and kind of securities so deemed to have been purchased. In the case of any deemed sale not actually made by the Company, the account shall be charged with the quantity and kind of securities deemed to have been sold, and shall be credited with a dollar amount equal to the quantity and kind of securities deemed to have been sold multiplied by the fair market value of such security on the date of reference. As used herein "fair market value" means in the case of a listed security the closing price on 13 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. 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. 14 SECTION 5. Payments from Deferred Compensation Accounts. (a) Election of Method of Payment for an Incentive ---------------------------------------------- Compensation Plan Award. At the time a Potential ----------------------- Participant submits an indication of preference to defer all or any part of an Award under an Incentive Compensation Plan as provided in Section 3(a) above, the Potential Participant shall also elect in a manner prescribed by the Plan Administrator, which of the payment options, provided for in Paragraph (b) of this Section, shall apply to the deferred portion of said Award adjusted for any deemed gains, losses and earnings accrued thereon credited to the Participant's Deferred Compensation Account under this Plan. Subject to Paragraphs (e), (g) and (h) of this Section, if the Committee or CEO, as appropriate, accepts the Potential Participant's indication of preference, the election of the method of payment of the amount deferred shall become irrevocable. (b) Payment Options. A Potential Participant may elect to --------------- have the deferred portion of an Incentive Compensation Plan Award adjusted for any deemed gains, losses and earnings accrued thereon paid: (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 15 payout option was elected, and is prior to the date the Potential Participant will attain the Participant's Normal Retirement Date under the terms of the Retirement Income Plan. (c) Election of Method of Payment of the Value of Restricted -------------------------------------------------------- Stock. As provided in Section 3(b) above, a deferral of ----- the value of all or part of the Restricted Stock will be considered payment option (b)(i) of this Section subject to Paragraphs (e) and (g) of this Section. (d) Election of Method of Payment of a Lump Sum Distribution -------------------------------------------------------- from Non-Qualified Retirement Plans. At the time a ----------------------------------- Potential Participant submits an indication of preference to defer all or part of the lump sum distribution as provided in Section 3(c) above, the Potential Participant shall also elect in a manner prescribed by the Plan Administrator which payment option shall apply to the deferred lump sum adjusted for any gains, losses and earnings to be accrued thereon credited to the Participant's Deferred Compensation Account under this Plan. The payment options are annual installments of not less than 5 nor more than 10, semi-annual installments of not less than 10 nor more than 20, or quarterly installments of not less than 20 nor more than 40. The first installment to commence as soon as practicable after any date specified by the Potential Participant, so long as such date is the first day of a calendar quarter and is at least one year from the date the payout option was elected. Subject to Paragraph (g) of this Section, if the Committee or CEO, as appropriate, accepts the Potential Participant's indication of preference, the election of the method of payment of the amount deferred shall become irrevocable. (e) Payment Option Revisions. If a Section 5(b)(i) payment ------------------------ option applies to any part of the balance of a Participant's Deferred Compensation Account, the Participant may revise such payment option as follows: 16 (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 (e)(i) or (e)(ii) of this Section, the Participant, subject to the exception in (e)(iv) of this Section, may select payments in annual installments of not less than 5 nor more than 10, in semi-annual installments of not less than 10 nor more than 20, or in quarterly installments of not less than 20 nor more than 40 with the first installment to commence, as soon as practicable following any date specified by the Participant so long as such date is the first day of a calendar quarter, is on or after the Participant's first day of Retirement or the first 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. 17 (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). (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 surviving spouse, surviving children (natural or adopted) in equal shares, or the Estate 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 Compen- 18 sation 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. (i) Rehire of Participant --------------------- In the event a Participant is a Rehired Participant, he/she will be eligible to receive notifications as specified in Section 2 and will be eligible to submit an Indication of Preference or Election to Defer as specified in Section 3, if the Participant agrees to the suspension of payments from his/her Deferred Compensation Account during the period of reemployment by the Company. Upon termination of reemployment, such payments shall resume on the same schedule as was in effect at the time the Participant previously Retired or was Laid Off. 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 Partici- pant, 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. 19 SECTION 7. Nonassignability The right of a Participant, or beneficiary, or other person who becomes entitled to receive payments under this Plan, shall not be assignable or subject to garnishment, attachment or any other legal process by the creditors of, or other claimants against, the Participant, beneficiary, or other such person. SECTION 8. Administration. The Chief Executive Officer may adopt such rules, regulations and forms as deemed desirable for administration of the Plan and shall have the discretionary authority to allocate responsibilities under the Plan to such other persons as may be designated, whether or not employee members of the Board of Directors, including the appointment of a person to be the Plan Administrator. The decision of the Chief Executive Officer with respect to any questions arising as to the interpretation of the Plan shall be final, conclusive and binding; provided, however that all such decisions, interpretations and actions which affect or have the potential 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. 20 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 obligations so long as the Plan remains unfunded for federal tax purposes and for purposes of Title I of ERISA. 21 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. O:\hr\5_pb\wordproc\2dp\kedcpRED 1/7/98 22 EX-10 7 Exhibit 10(k) Board of Directors Amended February 9, 1998 NON-EMPLOYEE DIRECTOR RETIREMENT PLAN OF PHILLIPS PETROLEUM COMPANY ARTICLE I - PURPOSE ------------------- The Non-Employee Director Retirement Plan is intended to provide Non-Employee Directors with income commencing upon their retirement from service on the Phillips Petroleum Company Board of Directors. ARTICLE II - DEFINITIONS ------------------------ The following terms, when used in this Plan, have the following meaning unless the context clearly indicates otherwise: 1. "Annual Board Service Retainer" shall mean the sum of the cash compensation paid for Board service exclusive of compensation for committee membership and of fees for attendance at Board or Committee meetings, if any, plus the value of the Company common stock granted, if any, to a Non-Employee Director during the twelve calendar months immediately preceding the date on which the Non-Employee Director retires, such value to be determined as the product of the number of shares of such common stock granted multiplied by the higher of the Fair Market Value for the last year or the average of the high three Fair Market Values calculated in accordance - 1 - with Article II, Section 6, for the last ten years preceding the Non-Employee Director's retirement. 2. "Board" shall mean the Board of Directors of the Company. 3. "Chief Executive Officer" shall mean the Chief Executive Officer of the Company. 4. "Company" shall mean Phillips Petroleum Company. 5. "Disability" shall mean that condition in which, by reason of bodily injury or disease, a Non-Employee Director is prevented from serving in such capacity. All determinations of Disability shall be made by a physician selected by the Company. 6. "Fair Market Value" shall be calculated as the average of the high three monthly fair market values of the Company common stock during the twelve calendar months preceding the month in which the Non-Employee Director retires. The monthly fair market value of the Company common stock is the average of the daily fair market value of the stock for each trading day of the month. The daily fair market value of the stock shall be deemed equal to the average of the high and low selling prices of the stock on the New York Stock Exchange, as reported in the Wall Street Journal. - 2 - 7. "Non-Employee Director" shall mean a member of the Board of Directors who is not a present employee nor former employee of the Company or any of its subsidiaries. 8. "Normal Retirement Date" shall mean the date of the Annual Stockholders Meeting of the Company in the year in which the director is no longer eligible for election as a director as defined in the Bylaws of the Company, currently the year in which the director attains age 71. 9. "Plan" shall mean the Non-Employee Director Retirement Plan of Phillips Petroleum Company, the terms and provisions of which are herein set forth, together with such amendments thereto as may hereafter from time to time be adopted. 10. "Retires" or "Retirement" shall mean the termination of Board service due to a) the Non-Employee Director's not being nominated for election to the Board; or b) the Non-Employee Director's not being reelected to Board service after being so nominated; or c) the Non- Employee Director's resignation from Board service as a result of the Director's Disability or any reason, acceptable to a majority of the remaining members of the Board of Directors. 11. "Years of Service" shall mean the number of full and - 3 - partial consecutive calendar years during which the Non-Employee Director was a member of the Board; provided, however that only a Non-Employee Director whose Normal Retirement Date occurs in 1998, shall accrue Years of Service after December 31, 1997, and further that no Non-Employee Director shall accrue Years of Service after the date of the 1998 Annual Stockholders Meeting of the Company. ARTICLE III - ELIGIBILITY ------------------------- Only Non-Employee Directors are eligible to participate in the Plan. ARTICLE IV - PAYMENT OF RETIREMENT BENEFITS ------------------------------------------- Upon Retirement from Board service each Non-Employee Director shall receive payments under this Plan. Notwithstanding anything to the contrary in this Plan, no payments shall be made under this Plan for any Non-Employee Director who has given written consent to the Company to receive an Award of Restricted Stock, as of March 2, 1998, under the Phillips Petroleum Company Stock Plan for Non-Employee Directors representing and in lieu of his or her accrued benefits under this Plan. a) These payments shall be made on a monthly basis beginning on or about the first of the month after Retirement. The amount of these monthly payments shall be equal to the Annual Board Service Retainer divided by - 4 - 12; provided, however, that the amount of payments to any retired Non-Employee Director who has commenced receiving payments from this Plan prior to April 10, 1995, shall not be increased or paid in a different manner, but shall be paid in the same amount and manner as in effect at the time payments commenced. These payments shall continue for a number of months equal to Years of Service times 12. b) Notwithstanding (a) above, a Retiring Non-Employee Director may, not earlier than 150 days nor later than 30 days prior to the date retirement benefit payments would begin, express a preference, in the manner prescribed by the Chief Executive Officer, to have the monthly payment provided hereunder converted to one lump sum payment which is calculated as the present value of the monthly payment amount using the December 1 of the year prior to Retirement rate of the 30-year Treasury Bond as quoted in the Federal Reserve Statistical Release Bulletin No. H.15, or the comparable successor publication, and the number of Years of Service. All or part of such lump sum payment may be either paid to the Non-Employee Director or considered for deferral under the Deferred Compensation Plan for Non-Employee Directors of Phillips Petroleum Company. The Chief Executive Officer shall consider such indication of preference for a lump sum and shall respectively decide - 5 - in the Chief Executive Officer's sole discretion whether to accept or reject the preference expressed. In the event the Chief Executive Officer accepts such Non-Employee Director's preference for a lump sum, part or all of the retirement benefit shall be paid in a lump sum as soon as practicable after the later of such acceptance or on or about the first of the month after Retirement. ARTICLE V - DEATH OF NON-EMPLOYEE DIRECTOR ------------------------------------------ In the event a Non-Employee Director dies prior to Retirement, no benefits shall be payable from this Plan. After commencement of Retirement payments, if paid as a monthly payment determined in accordance with Article IV (a), such monthly payments will continue until the total number of payments has been made, or the death of the retired Non-Employee Director, whichever occurs first. If death occurs first, then the remaining payments shall be made to the surviving spouse, if any. If there is no surviving spouse, or if the surviving spouse should die, then there will be no further payment obligation under this Plan. ARTICLE VI - ADMINISTRATION --------------------------- The Chief Executive Officer is authorized, subject to the provisions of the Plan, to establish rules and regulations, to make determinations under and such interpretations of, and to take steps in connection with the Plan as the Chief Executive Officer - 6 - deems necessary or advisable, and to appoint agents as the Chief Executive Officer deems appropriate for the proper administration of the Plan. Each determination, interpretation, or other action made or taken pursuant to the provisions of the Plan by the Chief Executive Officer shall be reported to the Board of Directors and once so reported shall be final and shall be binding and conclusive for all purposes and upon all persons. ARTICLE VII - TERMINATION OR AMENDMENT OF THE PLAN -------------------------------------------------- The Board may at any time terminate the Plan and may from time to time alter or amend the Plan, or any part thereof, (including any amendment deemed necessary to ensure that the Company may comply with any regulatory requirement); provided, however, that no director may act to terminate or amend the Plan if such action would either increase benefits payable under the Plan to that director or remove or reduce the risk that such director's benefits under the Plan might be forfeited. Such termination or amendment will not negatively impact any rights or benefits accrued to date of such termination or amendment under this Plan. After the 1998 Annual Stockholders Meeting of the Company and upon the final payment of all amounts owed to Retired Non- Employee Directors and their surviving spouses, this Plan shall automatically terminate without further action of this Board. - 7 - ARTICLE VIII - NON-ASSIGNABILITY -------------------------------- Retirement payments may not be pledged, anticipated, assigned (either at law or in equity), alienated or subject to attachment, garnishment, levy, execution or other legal or equitable process. ARTICLE IX - MISCELLANEOUS -------------------------- (a) All amounts payable under this Plan are unfunded and unsecured benefits and shall be paid solely from the general assets of the Company and any rights accruing to the Non- Employee Director or the surviving spouse under the Plan shall be those of a unsecured general creditor; provided, however, that the Company may establish a grantor trust to pay part or all of its Plan payment obligations so long as the Plan remains unfunded for federal tax purposes. (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) This Plan shall be construed, regulated, and administered in accordance with the laws of the State of Delaware except to the extent that said laws have been preempted by the laws of the United States. - 8 - ARTICLE X - EFFECTIVE DATE OF THE PLAN --------------------------------------- The Plan is amended and restated effective as of January 1, 1998. 2DP/015 2/10/98 2:29PM - 9 - EX-10 8 Exhibit 10(l) Amended by the Board of Directors 1/12/98 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 contingently 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 responsibilities. (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 legal 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 -8- vesting, time for exercise, forfeiture or cancellation of an Award in such circumstances. (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 specifies) 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 -9- specifies) must elapse from the date of acquisition of the derivative security 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 of such Non-Qualified Stock Options to (a) the spouse, children or grandchildren (including in each case stepchildren or step grandchildren) -10- of the Participant (all such persons collectively "Immediate Family Members":), (b) 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 Award Agreement in the same manner as if the transferee were a Participant hereunder. (iii) 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 -12- of the other, each joint Award shall be deemed to be the equivalent of the number of shares under the other; and (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. -13- (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 applicable 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: (i) Any Stock Options and Stock Appreciation Rights outstanding as of the date of the Change of Control that are not then fully exercisable and vested, shall become fully exercisable and vested to the full extent of the original grant; (ii) All restrictions and other limitations applicable to any Restricted Stock shall lapse, and such Restricted Stock shall become free of all restrictions and become fully vested and transferable to the full extent of the original grant; (iii) All Performance Awards and other Awards outstanding as of the date of the Change of Control shall be considered to be earned and payable in full, and any deferral or other restriction shall lapse and except as provided in subsection (c) of this Section 9, such Performance Units shall be settled in cash as promptly as is practicable; and (iv) All noncompetition covenants and other similar restrictive covenants applicable to any outstanding Awards shall lapse and become null and void and of no further effect. (b) A "Change of Control" shall mean: (i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14 (d)(2) of the Exchange Act (a "Person")) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (a) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (b) the combined power of the then -15- outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (i), the following acquisitions shall not constitute a Change of Control: (A) any acquisition directly from the Company, (B) any acquisition by the Company, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (D) any acquisition pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (iii) of this Section 9(b); or (ii) Individuals who, as of January 12, 1998, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to January 12, 1998, whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (iii) Approval by the shareholders of the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets of another entity (a "Corporate Transaction"), in each case, unless, following such Corporate Transaction, (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities -16- immediately prior to such Corporate Transaction beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Corporate Transaction (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Corporate Transaction of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Corporate Transaction) beneficially own, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Corporate Transaction or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Corporate Transaction and (C) at least a majority of the members of the board of directors of the corporation resulting from such Corporate Transaction were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Corporate Transaction; or (iv) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. (c) Notwithstanding the foregoing, if any right to receive cash granted pursuant to this Section 9 would make a Change of Control transaction ineligible for pooling-of-interests accounting under APB No. 16 that but for the nature of such right would be eligible for such accounting treatment, the Committee shall have the ability to substitute for the cash payable pursuant to -17- such right Stock or other securities with a fair market value equal to the cash that would otherwise be payable hereunder. 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. 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. -18- 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, but no such alteration or amendment may adversely affect the rights of the Participant in question without such Participant's consent. 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, (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. -19- 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. 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. Omnibus.sec/wc98 01/02/98 -20- EX-10 9 Exhibit 10(m) Board of Directors Amended February 9, 1998 DEFERRED COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS OF PHILLIPS PETROLEUM COMPANY Section 1. Purpose of the Plan ------------------- The purpose of the Deferred Compensation Plan for Non-Employee Directors ("Plan") is to provide a program whereby a member of the Board of Directors of Phillips Petroleum Company ("Company") who is not an officer, present employee, nor former employee of the Company or any of its subsidiaries ("Non-Employee Director") may: 1) defer the payment of all or a specific amount of the cash compensation payable to the Non-Employee Director for services rendered as a Non-Employee Director ("Cash Compensation") 2) elect to receive part or all of the shares of unrestricted Phillips Petroleum Company common stock $1.25 par value ("Common Stock") awarded to the Non-Employee Director for services rendered as a Non-Employee Director as shares of Restricted Stock under the terms of the Phillips Petroleum Company Stock Plan for Non-Employee Directors ("Stock Compensation"), 3) elect to delay the lapsing of restrictions on restricted stock due to the attainment of certain ages under the terms of the Phillips Petroleum Company Stock Plan for Non-Employee -1- Directors ("Restricted Stock Lapsing") 4) defer the value of shares of unrestricted Common Stock which would otherwise be delivered to the Non-Employee Director as a result of restrictions being lapsed on shares of Restricted Stock under the terms of the Phillips Petroleum Company Stock Plan for Non-Employee Directors ("Value of Restricted Stock"), and 5) defer the payment of all or a portion of the lump sum payment from the Non-Employee Director Retirement Plan ("Retirement Payment"). Section 2. Indication of Preference to Defer --------------------------------- (a) Cash Compensation. For each calendar year, a Non-Employee ----------------- Director may indicate a preference to have payment of part or all of the Non-Employee Director's Cash Compensation deferred. On or before December 1 of each year, the indication of preference to defer Cash Compensation to be earned in the next calendar year may be made by giving written notice thereof to the Corporate Secretary, except that such indication of preference may be made by the end of the month in which a Non-Employee Director is first elected to the Board of Directors or within 30 days of the date the amount of the Cash Compensation is changed. The Chief Executive Officer (CEO) shall consider such indication of preference and shall decide whether to accept or reject the preference expressed as soon as practicable. Such indication -2- of preference, if accepted, becomes irrevocable on the date of such acceptance. (b) Stock Compensation. For each calendar year, a Non-Employee ------------------ Director may indicate a preference to receive Restricted Stock instead of unrestricted Common Stock. On or before December 1 of each year, such indication of preference to receive Restricted Stock instead of unrestricted Common Stock that would be awarded in January of the year after the next calendar year may be made by giving written notice thereof to the Corporate Secretary, except that such indication of preference may be made within 30 days of the amendment of this Plan providing for this election, within 30 days of the date the number of shares awarded as Stock Compensation is changed, or by the end of the month in which a Non-Employee Director is first elected to the Board of Directors. The CEO shall consider such indication of preference and shall decide whether to accept or reject the preference expressed as soon as practicable. Such indication of preference, if accepted, to receive Restricted Stock becomes irrevocable on the date of such acceptance. (c) Restricted Stock Lapsing. Each year Non-Employee Directors ------------------------ who are or will become 65 years of age prior to the end of that calendar year or who are over 65 years old and have not previously been given the opportunity may indicate a preference to delay the lapsing of restrictions on -3- Restricted Stock that would otherwise be lapsed based on their age under the terms of the Phillips Petroleum Company Stock Plan for Non-Employee Directors until the day the Director retires from the Board of Directors. The Non- Employee Director must make the indication of preference by giving written notice thereof to the Corporate Secretary on or before December 1 of that year except that such indication of preference may be made within 30 days of the amendment of this plan providing for such indication of preference or by the end of the month in which a Non- Employee Director if first elected to the Board of Directors if such Director would receive shares of Common Stock as a result of restrictions being lapsed on shares of Restricted Stock based on their age under the terms of the Phillips Petroleum Company Stock Plan for Non-Employee Directors. The CEO shall consider such indication of preference and shall decide whether to accept or reject the preference expressed as soon as practicable. Such indication of preference, if accepted, to delay the lapsing of restrictions on Restricted Stock becomes irrevocable on the date of such acceptance. (d) Value of Restricted Stock. Each year Non-Employee Directors -------------------------- who are or will become 65 years of age prior to the end of that calendar year or who are over 65 years old and have not previously been given the opportunity may indicate a preference concerning the deferral of the receipt of the value of all or part of the Common Stock which would -4- otherwise be delivered to the Non-Employee Director as a result of restrictions being lapsed on shares of Restricted Stock. The Non-Employee Director must indicate such preference to the CEO of the Company and it must be received by the Corporate Secretary on or before December 1 of that year except that such indication of preference may be made within 30 days of the amendment of this Plan providing for such indication of preference or by the end of the month in which a Non-Employee Director is first elected to the Board of Directors if such Director would receive shares of Common Stock as a result of restrictions being lapsed on shares of Restricted Stock under the terms of the Phillips Petroleum Company Stock Plan for Non-Employee Directors prior to the next period for indicating such preference. The CEO shall consider such indication of preference 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. (e) Retirement Payment. If a Non-Employee Director prefers to ------------------ defer under this Plan all or part of the lump sum payment from the Non-Employee Director Retirement Plan, the Non- Employee Director must indicate such preference to the Chief Executive Officer (CEO) of the Company. The Non-Employee Director's preference must be received by the Corporate Secretary in the period beginning 150 days prior to and ending no less than 30 days prior to the date the retirement -5- payment is to be made. Such indication must be in writing signed by the Non-Employee Director and must state the portion of the lump sum payment the Non-Employee Director desires to be deferred. The CEO 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. Section 3. Deferred Compensation Accounts ------------------------------ (a) Credit for Deferral. The Company will establish and ------------------- maintain an account for each Non-Employee Director who defers Cash Compensation, the Value of Restricted Stock and/or a Retirement Payment in which will be credited the amounts deferred. Amounts deferred shall be credited as soon as practicable but not later than 30 days after the date the payment would otherwise have been made. The value of the underlying Restricted Stock shall be the higher of (a) the average of the high and low selling prices of the Common Stock on the date the restrictions lapse or the last trading day before the day the restrictions lapse if such date is not a trading day, or (b) the average of the high three monthly Fair Market Values of the Common Stock during the twelve calendar months preceding the month in which the restrictions lapse. The monthly Fair Market Value of the Common Stock is the average of the daily Fair Market Value -6- of the Common Stock for each trading day of the month. The daily Fair Market Value of the Common Stock shall be deemed equal to the average of the reported highest and lowest sales prices per share of such Common Stock as reported on the composite tape of the New York Stock Exchange transactions, as reported in the Wall Street Journal. (b) Designation of Investments. The amount in each Non-Employee -------------------------- Director's Deferred Compensation Account shall be deemed to have been invested and reinvested from time to time, in such "eligible securities" as the Non-Employee Director shall designate. Prior to or in the absence of a Non-Employee Director's designation, the Company shall designate an "eligible security" in which the Non-Employee Director's Deferred Compensation Account shall be deemed to have been invested until designation instructions are received from the Non-Employee Director. 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 Non-Employee Director's Deferred Compensation Account will be adjusted to reflect the deemed gains, losses and earnings as though the amount deferred was -7- actually invested and reinvested in the eligible securities for the Non-Employee Director's Deferred Compensation Account. Notwithstanding anything to the contrary in this section 3(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 Non- Employee Director's Deferred Compensation Account, the Account shall be adjusted accordingly to reflect the price actually paid or received by the Company for such securities after adjustment for all transaction expenses incurred (including without limitation brokerage fees and stock transfer taxes). In the case of any deemed purchase not actually made by the Company, the Deferred Compensation Account shall be charged with a dollar amount equal to the quantity and kind of securities deemed to have been purchased multiplied by the fair market value of such security on the date of reference and shall be credited with the quantity and kind of securities so deemed to have been purchased. In the case of any deemed sale not actually made by the Company, the account shall be charged with the quantity and kind of securities deemed to have been sold, and shall be credited with a dollar amount equal to the quantity and kind of securities deemed to have been sold multiplied by the fair -8- 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 may also designate a Fund Manager to provide services which may include recordkeeping, Non-Employee Director accounting, Non-Employee Director communication, payment of installments to the Non-Employee Director, tax reporting and any other services specified by the Company in agreement with the Fund Manager. (c) Payments. A Non-Employee Director's Deferred Compensation -------- Account shall be debited with respect to payments made from the account pursuant to this Plan as of the date such payments are made from the account. The payment shall be made as soon as practicable, but no later than 30 days, after the installment payment date. If any person to whom a payment is due hereunder is under legal disability as determined in the sole discretion of the -9- Chief Executive Officer, the Company 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 and any fiduciary of the Plan. (d) Statements. At least one time per year the Company or the ---------- Company's designee will furnish each Non-Employee Director a written statement setting forth the current balance in the Non-Employee Director's Deferred Compensation Account, the amounts credited or debited to such account since the last statement and the payment schedule of deferred amounts and deemed gains, losses and earnings accrued thereon as provided by the deferred payment option selected by the Non- Employee Director. Section 4. Deferred Payment Options ------------------------ (a) Payment Options for Cash Compensation and the Value of ------------------------------------------------------ Restricted Stock. A Non-Employee Director, at the time ---------------- notice of an indication of preference to defer Cash Compensation or the Value of Restricted Stock is given, shall also specify in writing whether the Cash Compensation or the Value of Restricted Stock deferred by such indication and any deemed gains, losses and earnings accrued thereon is to be paid in one lump sum or in annual installments of not -10- less than 5 nor more than 10. If a lump sum payment is selected, the Non-Employee Director will specify the date the lump sum payment is to be made so long as the date is the first day of a calendar quarter and is at least one year from the date of the election or is specified as the first day of the calendar quarter following retirement from the Board of Directors. If annual installments of not less than 5 nor more than 10 are selected, the first installment will begin as soon as practicable after the first day of the calendar quarter which is on or after the Non-Employee Director's retirement. After a payment option is selected the first time a Non-Employee Director defers Cash Compensation or the value of Restricted Stock, all subsequent deferrals of Cash Compensation and/or the value of Restricted Stock will have the same payment option b) Payment Options for Retirement Payment. -------------------------------------- (i) The payment option for a deferred Retirement Payment for a Non-Employee Director who has previously deferred Cash Compensation or the Value of Restricted Stock will be the same as the payment option for the deferred Compensation. (ii) The payment option for a deferred Retirement Payment for a Non-Employee Director who has not previously deferred Cash Compensation or the Value of Restricted Stock will be 10 annual installments with -11- the first installment to begin as soon as practicable after the first day of the calendar quarter which is on or after the Non-Employee Director's Retirement, except that a different payment schedule may be selected by the Non-Employee Director at the time the Non-Employee Director submits a preference to defer all or part of the lump sum Retirement payment. The payment options in this situation 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 Non- Employee Director, 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 selected. Subject to Section 5, if the CEO, accepts the Non- Employee Director's indication of preference, the method of payment of the deferred Retirement Payment shall become irrevocable. (c) Payment Option Revision. If a Non-Employee Director ----------------------- specified annual installments of not less than 5 nor more than 10 pursuant to Section 4(a) herein, the Non-Employee Director may at any time during a period beginning 365 days prior to and ending 90 days prior to the date the Non- -12- Employee Director terminates Board service due to (a) not being nominated for election to the Board; or (b) not being reelected to Board service after being so nominated; or (c) resignation from Board service as a result of the Director's disability or any reason acceptable to a majority of the remaining members of the Board of Directors ("Retires" or "Retirement"), in the manner prescribed by the Company, revise such payment option and select one of the following payment options in place of such payment option: (i) annual installments of not less than 5 nor more than 10, (ii) semi-annual installments of not less than 10 nor more than 20, or (iii) 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 Non-Employee Director so long as such date is the first day of a calendar quarter, is on or after the Non-Employee Director's first day of Retirement and is at least one year from the date the payment option was revised. (d) Installment Amount. The amount of each installment ------------------ shall be determined by dividing the balance in the Non- Employee Director's Deferred Compensation Account as of the date the -13- installment is to be paid, by the number of installments remaining to be paid (inclusive of the current installment). Section 5. Death of Non-Employee Director ------------------------------ Upon the death of a Non-Employee Director, the Non-Employee Director's beneficiary or beneficiaries designated in accordance with Section 6 of this Plan, or, in the absence of an effective beneficiary designation, the surviving spouse, the surviving children (natural or adopted) in equal shares, or the Estate of the deceased Non-Employee Director, in that order of priority, shall receive the beneficiary's or beneficiaries' portion of the payments in accordance with the deferred payment schedule selected by the Non-Employee Director, whether the Non-Employee Director's 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. Section 6. Designation of Beneficiary -------------------------- Each Non-Employee Director who defers under this Plan shall designate a beneficiary or beneficiaries to receive the entire -14- balance of the Non-Employee Director's Deferred Compensation Account by giving signed written notice of such designation to the Corporate Secretary. The Non-Employee Director may from time to time change or cancel any previous beneficiary designation in the same manner. The last written beneficiary designation received by the Corporate Secretary shall be controlling over any prior designation and over any testamentary or other disposition. After receipt by the Corporate Secretary of such written designation, it shall take effect as of the date on which it was signed by the Non-Employee Director, whether the Non-Employee Director is living at the time of such receipt, but without prejudice to the Company on account of any payment made under this Plan before receipt of such designation. Section 7. Nonassignability ---------------- The right of a Non-Employee Director or beneficiary or other person who becomes entitled to receive payments under this Plan shall not be pledged, assigned or subject to garnishment, attachment or any other legal process by the creditors of or other claimants against the Non-Employee Director, beneficiary, or other such person. Section 8. Administration, Interpretation and Amendment -------------------------------------------- The Plan shall be administered by the Chief Executive Officer of the Company. The decision of the Chief Executive Officer with -15- respect to any questions arising as to the interpretation of this Plan, including the severability of any and all of the provisions thereof, shall be final, conclusive and binding. 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 Non-Employee Director's account on the effective date of the amendment. A Non-Employee Director shall not participate in a decision to amend or terminate this Plan. In the event of termination of the Plan, the Chief Executive Officer in the Chief Executive Officer's sole discretion, may elect to pay in one lump sum as soon as practicable after termination of the Plan, the balance then in the Non-Employee Director's account. Section 9. Nonsegregation -------------- Amounts deferred pursuant to this Plan and the crediting of amounts to a Non-Employee Director'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 Non-Employee Director 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 -16- Account. Section 10. Funding ------- All amounts payable under the Plan are unfunded and unsecured benefits and shall be paid solely from the general assets of the Company and any rights accruing to the Non-Employee Director or the beneficiary under this Plan shall be those of an unsecured general creditor; provided, however, that the Company may establish a grantor trust to pay part or all of its Plan payment obligations so long as the Plan remains unfunded for federal tax purposes. Section 11. Miscellaneous ------------- (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 Delaware except to the extent that said laws have been preempted by the laws of the United States. -17- Section 12. Effective Date of the Plan -------------------------- This Plan is amended and restated effective as of January 1, 1998. 2DP/016REV 02/10/98 2:33 PM -18- EX-10 10 Exhibit 10(o) Board of Directors Approved February 9, 1998 PHILLIPS PETROLEUM COMPANY STOCK PLAN FOR NON-EMPLOYEE DIRECTORS ARTICLE I - PURPOSES OF THE PLAN -------------------------------- The purposes of this Plan are to enable non-employee members of the Board of Directors to acquire additional stock ownership and further alignment with shareholders of the Company, and to attract and retain highly qualified individuals as directors of this Company without significantly changing the total amount of non-employee director compensation. ARTICLE II - DEFINITIONS ------------------------ 1. "Award" shall mean a grant of Restricted Stock or Unrestricted Stock pursuant to this Plan. 2. "Beneficiary" means a person or persons designated by a Non- Employee Director to receive, in the event of death, any shares of Common Stock held by the Non-Employee Director under this Plan. Any Non-Employee Director may designate one or more persons primarily or contingently as beneficiaries in writing upon forms supplied by and delivered to the Company, and may revoke such designations in writing. If a Non-Employee Director fails effectively to designate a beneficiary, then such shares will be paid in the following order of priority: (i) Surviving Spouse, (ii) Surviving children (natural or adopted) in equal shares, (iii)To the Estate of the Non-Employee Director. 3. "Board" means the Board of Directors of the Company. 4. "Change of Control" shall mean: (i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 as amended (a "Person")) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934) of 20% or more of either (a) the then outstanding shares of Common Stock of the Company (the "Outstanding Company Common Stock") or (b) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (i), the following acquisitions shall not constitute a Change of Control: (A) any acquisition directly from the Company, (B) any acquisition by the Company, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (D) any acquisition pursuant to a transaction which complies with clauses (A), (B) and (C) of Subparagraph (iii) of this Paragraph 4; or (ii) Individuals who, as of January 12, 1998, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to January 12, 1998, whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (iii) Approval by the shareholders of the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets of another entity (a "Corporate Transaction"), in each case, unless, following such Corporate Transaction, (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Corporate Transaction beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Corporate Transaction (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Corporate Transaction of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Corporate Transaction) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Corporate Transaction or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Corporate Transaction and (C) at least a majority of the members of the board of directors of the corporation resulting from such Corporate Transaction were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Corporate Transaction; or (iv) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. 5. "Chief Executive Officer" shall mean the Chief Executive Officer of the Company. 6. "Company" shall mean Phillips Petroleum Company. -2- 7. "Common Stock" shall mean the common stock of the Company having a par value of $1.25 per share. 8. "Disability" shall mean that condition in which, by reason of bodily injury or disease, a Non-Employee Director is prevented from serving in such capacity. All determinations of Disability shall be made by a physician selected by the Chief Executive Officer. 9. "Fair Market Value" in reference to a share of Common Stock of the Company shall be deemed equal to the average of the reported highest and lowest sales prices per share of such Common Stock on the applicable date, or the last trading day before the applicable day if such date is not a trading day, as reported on the composite tape of the New York Stock Exchange transactions for the applicable date, as reported in the Wall Street Journal. 10. "Non-Employee Director" shall mean a member of the Board who is not an employee or former employee of the Company or any of its subsidiaries. 11. "Normal Retirement Date" shall mean the date of the Annual Stockholders Meeting of the Company in the year in which the director is no longer eligible for election as a director as determined by the Bylaws of the Company, currently the year in which the director attains age 71. 12. "Plan" shall mean the Phillips Petroleum Company Restricted Stock Plan for Non-Employee Directors, including any amendments thereto as may hereafter from time to time be adopted. 13. "Restricted Stock" shall mean Common Stock awarded under this Plan, which is subject to certain forfeiture and transferability restrictions as may be provided in the Plan. 14. "Retires" or "Retirement" shall mean the termination of Board service due to (a) the Non-Employee Director's not being nominated for election to the Board; (b) the Non-Employee Director's not being reelected to Board service after being so nominated; or (c) the Non-Employee Director's resignation from Board service as a result of the director's Disability. 15. "Unrestricted Stock" shall mean Common Stock either Awarded under this Plan to a Non-Employee Director as part of his or her annual retainer or issued to such Director upon the lapsing of restrictions on Restricted Stock, and which is nonforfeitable and free of transferability restrictions under the Plan. ARTICLE III - ELIGIBILITY ------------------------- Each Non-Employee Director who is participating in the Non- Employee Director Retirement Plan of Phillips Petroleum Company ( the "NED -3- Retirement Plan") on December 31, 1997, and (i) whose Normal Retirement Date is after 1998, and (ii) who consents in writing on or before February 27, 1998, to receive an Award of Restricted Stock in this Plan in lieu of a benefit from the NED Retirement Plan, is eligible to participate and shall be a participant in this Plan. All Non-Employee Directors who are first elected to serve on the Board after 1997 are eligible and will participate in this Plan. After the date of the 1998 Annual Stockholders Meeting of the Company, all Non-Employee Directors of the Company are eligible and will participate in this Plan. ARTICLE IV - AWARDS OF COMMON STOCK ----------------------------------- 1. There shall be an Award of shares of Restricted Stock to each eligible Non-Employee Director representing the converted present value of the accrued benefit of each Non-Employee Director who has consented in writing on or before February 27, 1998, to the conversion of his or her benefits under the NED Retirement Plan to such an Award under this Plan, such Award to be made effective in its entirety on the first business day of March 1998, for prior service and in lieu of a benefit payable from the NED Retirement Plan. Such Award shall be equal to the converted present value of the Non-Employee Director's benefits under the NED Retirement Plan (the "Conversion Amount"). The Conversion Amount shall be determined by calculating to a single lump sum the present value of the monthly payment provided under the NED Retirement Plan using the December 1, 1997 rate of the 30-year Treasury Bond as quoted in the Federal Reserve Statistical Release Bulletin No. H.15 and the number of Years of Service (as defined in the NED Retirement Plan) through December 31, 1997, and assuming that such monthly payments are deemed to begin on January 1, 1998. The number of shares Awarded pursuant to this Paragraph 1 shall be determined by dividing the Conversion Amount by (i) the Fair Market Value of the Common Stock as of January 12, 1998, and rounding up to the next higher whole number. 2. On the first business day of March, 1998, there shall be an Award of 400 shares of Restricted Stock to each eligible Non- Employee Director for past service during the director's then- current term of office; or in respect of a Non-Employee Director who served in such term of office only subsequent to the first business day of March 1998 for the term ending on the date of the 1998 Annual Stockholders Meeting of the Company, then such Award shall be effective in its entirety on the fifteenth day of the month following the month of such director's election, for past services during the first term in which the Non-Employee Director serves. After December 31, 1998, there shall be an Award of 400 shares of Restricted Stock to each eligible Non-Employee Director each year, such Award to be made effective in its entirety on the first business day in January of each year for past service during the director's then-current term of office; or in respect of a Non-Employee Director who served in such term of office only subsequent to the first of January of that term of office and prior to the Annual Stockholders Meeting of the Company for that year, then such Award shall be effective in its entirety on the fifteenth -4- day of the month following the month of such director's election, for past services during the first term in which the Non-Employee Director serves. 3. Subject to Paragraph 4 hereof, after December 31, 1998, there shall be an Award of 1,000 shares of Unrestricted Stock to each Non-Employee Director each year, such Award to be made effective in its entirety on the first business day in January of each year for past service during the director's then-current term of office; or in respect of a Non-Employee Director who served in such term of office only subsequent to the first of January of that term of office and prior to the Annual Stockholders Meeting of the Company for that year, then such Award shall be effective in its entirety on the fifteenth day of the month following the month of such director's election, for past services during the first term in which the Non-Employee Director serves. 4. After December 31, 1998, for each Non-Employee Director who properly elects to receive Restricted Stock in lieu of part or all of the director's Award of Unrestricted Stock , there shall be an additional Award of shares of Restricted Stock to each such Non-Employee Director each year that such election is made, such Award to be made effective in its entirety at the time the Unrestricted Stock would have been issued for past service, representing the number of shares of Unrestricted Stock which the Non-Employee Director has elected to receive as Restricted Stock. Such election shall be made in the manner and at the times provided in the Deferred Compensation Plan for Non-Employee Directors of Phillips Petroleum Company ("DCPNED"). The Restricted Stock Awarded pursuant to this Paragraph in lieu of such Unrestricted Stock shall thereafter be subject to the terms of this Plan and be subject to forfeiture and all restrictions as Restricted Stock under the terms of this Plan. 5. Each Non-Employee Director who receives an Award of Restricted Stock on the first business day of March 1998 pursuant to Paragraphs 1 or 2 of this Article shall also receive an Award of a dividend equivalent to be determined as though such shares Awarded to the director on the first business day of March 1998 were continuously held by the Plan for the director from the first business day of January 1998 until the first business day of March 1998. All dividends earned on any Restricted Stock held under this Plan (including dividend equivalent amounts Awarded pursuant to the preceding sentence) shall be reinvested in additional shares of Restricted Stock on the date such dividends are payable and such additional shares of Restricted Stock shall be subject to the terms and conditions generally applicable to Restricted Stock under the Plan. The number of shares of Restricted Stock acquired through this reinvestment of dividends shall be acquired at the Fair Market Value of Common Stock on the date such dividends are payable and shall be purchased through the Company's dividend reinvestment program if practicable; provided, however if not purchased through the dividend reinvestment program, the shares purchased with dividends shall be rounded up to the next higher whole number. -5- 6. The Restricted Stock held for the benefit of each Non- Employee Director shall be held in escrow for the Non-Employee Director by the Treasurer of the Company. The Non-Employee Director will have all rights of ownership to such Restricted Stock including, but not limited to, voting rights and the right to receive dividends (provided such dividends must be reinvested in Restricted Stock), and other distributions, except that the Non-Employee Director shall not have the right to sell, transfer, assign, pledge or otherwise dispose of such shares until the escrow is terminated. The escrow shall end as to shares of such stock on the earliest date restrictions on Restricted Stock lapse pursuant to Article V. 7. Upon termination of the Restricted Stock escrow, the Company shall deliver to the Non-Employee Director his or her shares of such Common Stock free of any restrictions. Unless the Non- Employee Director has requested to defer receipt in the manner and at the times provided in the DCPNED, the director will receive such unrestricted shares of Common Stock as soon as practicable after the termination of the escrow as to those shares. A Non-Employee Director who has properly and timely elected to have receipt of part or all of the shares of Restricted Stock for which restrictions lapse deferred shall receive instead a credit to his or her account in the DCPNED in an amount and at the time determined pursuant to the terms of the DCPNED. ARTICLE V - TERMS AND CONDITIONS OF RESTRICTED STOCK ---------------------------------------------------- 1. All Restricted Stock Awarded or held under the Plan shall be subject to the following terms and conditions: A. Shares of Restricted Stock shall be, subject to Subparagraph B, forfeitable, nontransferable and nonassignable and may not be pledged, anticipated, assigned (either at law or in equity), alienated, or subject to attachment, garnishment, levy, execution, or other legal or equitable process until the restrictions lapse pursuant to Subparagraphs B or C hereof. B. Each share of Restricted Stock shall become nonforfeitable, transferable and all restrictions shall lapse upon the earliest to occur of (i) the Non-Employee Director's Retirement, including Retirement due to Disability, (ii) the Non-Employee Director's death, (iii) a Change of Control, or (iv) the Non-Employee Director's termination of Board service for any reason other than those described in clauses (i), (ii), and (iii), but only if a majority of the remaining directors of the Board consent to the vesting of such shares and the lapsing of such restrictions. C. Shares of Restricted Stock shall become nonforfeitable, transferable and all restrictions shall lapse on the first business day of October of each year in the following amounts unless the Non-Employee Director has elected, under the terms of the DCPNED, to delay the lapsing of such restrictions until the day of the Director's retirement: (i) 20% of all shares of Restricted Stock held under the -6- Plan for the Non-Employee Director in the year in which he or she will attain age 66; (ii) 25% of all shares of Restricted Stock held under the Plan for the Non-Employee Director in the year in which he or she will attain age 67; (iii)33 1/3 % of all shares of Restricted Stock held under the Plan for the Non-Employee Director in the year in which he or she will attain age 68; (iv) 50% of all shares of Restricted Stock held under the Plan for the Non-Employee Director in the year in which he or she will attain age 69; and (v) 100% of all shares of Restricted Stock held under the Plan for the Non-Employee Director in the year in which he or she will attain age 70. ARTICLE VI - ADJUSTMENTS ------------------------ Subject to any required action by the Company's shareholders, if the class of shares of Restricted Stock then subject to the Plan is changed into or exchanged for a different number or kind of shares or securities, as the result of any one or more reorganizations, recapitalizations, stock splits, reverse stock splits, stock dividends or similar events, 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, an adjustment shall be made in the number and/or type of shares or securities for which Restricted Stock has been or may thereafter be Awarded under this Plan so as to prevent dilution or enlargement of rights. ARTICLE VII - ADMINISTRATION OF THE PLAN ---------------------------------------- The Plan shall be administered by the Chief Executive Officer who is authorized to adopt rules and regulations, to make determinations under and such determinations of, and to take steps in connection with the Plan as the Chief Executive Officer deems necessary or advisable, and to appoint agents as the Chief Executive Officer deems appropriate for the proper administration of the Plan. Each determination, interpretation, or other action made or taken pursuant to the provisions of the Plan by the Chief Executive Officer shall be reported to the Board and once so reported shall be final and shall be binding and conclusive for all purposes and upon all persons. ARTICLE VIII - MISCELLANEOUS ---------------------------- 1. The Chief Executive Officer may rely upon information reported to him or her by officers or employees of the Company with delegated responsibilities and shall not be liable for any act of commission or omission of others or, except in circumstances involving his or her own bad faith, for any act taken or omitted by himself or herself. -7- 2. The Plan and each Award hereunder shall be subject to all applicable laws and the rules and regulations of governmental authorities promulgated thereunder. 3. Shares of Common Stock received with respect to Restricted Stock received pursuant to a stock split, dividend reinvestment, stock dividend or other change in the capitalization of the Company will be held subject to the same restrictions on transferability that are applicable to such shares Awarded hereunder as Restricted Stock. 4. All amounts payable under this Plan are unfunded and unsecured benefits and shall be paid solely from the general assets of the Company and any rights accruing to the Non-Employee Director or his or her Beneficiaries under the Plan shall be those of a general creditor; provided, however, that the Company may establish a grantor trust to pay part or all of its Plan payment obligations so long as the Plan remains unfunded for federal tax purposes. 5. 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. 6. This Plan shall be construed, regulated, and administered in accordance with the laws of the State of Delaware except to the extent that said laws have been preempted by the laws of the United States. ARTICLE X - AMENDMENT OR TERMINATION ------------------------------------ The Board of Directors of the Company may amend or terminate the Plan. No amendment or termination of the Plan shall deprive any Non-Employee Director or former Non-Employee Director or any Beneficiary of any rights or benefits accrued to the date of such amendment or termination. ARTICLE XI - EFFECTIVE DATE --------------------------- The Plan is effective as of January 1, 1998. o:\2dp\nedstk 2/10/98 2:26 PM -8- EX-12 11 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 -------------------------------------- 1997 1996 1995 1994 1993 -------------------------------------- (Unaudited) Earnings Available for Fixed Charges Income before income taxes, extraordinary items and cumulative effect of changes in accounting principles $1,900 2,172 1,064 852 538 Distributions in excess of (less than) equity in earnings of less-than- fifty-percent-owned companies (22) 76 (1) 2 9 Fixed charges, excluding capitalized interest and the portion of the preferred dividend requirements of a subsidiary not previously deducted from income* 352 328 364 340 363 - ---------------------------------------------------------------------------- $2,230 2,576 1,427 1,194 910 ============================================================================ Fixed Charges Interest and expense on indebtedness, excluding capitalized interest $ 217 237 285 266 290 Capitalized interest 46 33 31 15 11 Preferred dividend requirements of a subsidiary 113 68 73 56 71 One-third of rental expense, net of subleasing income, for operating leases 39 35 36 32 30 - ---------------------------------------------------------------------------- $ 415 373 425 369 402 ============================================================================ Ratio of Earnings to Fixed Charges 5.4 6.9 3.4 3.2 2.3 - ---------------------------------------------------------------------------- *Includes amortization of capitalized interest totaling approximately $14 million in 1997, $10 million each in 1996, 1995 and 1994, 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, 1995, and again in 1997. Consolidated interest expense includes interest attributable to the LTSSP borrowings of $3 million in 1995, and $1 million each in 1994 and 1993. Interest attributable to the LTSSP borrowings was minimal in 1997 and 1996. EX-21 12 Exhibit 21 LIST OF SUBSIDIARIES OF PHILLIPS PETROLEUM COMPANY Listed below are subsidiaries of the registrant at December 31, 1997. 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 --------------- --------------------- 66 Pipe Line Company Delaware 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 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 Timor Sea Pty Ltd New South Wales Phillips Petroleum UK Investment Corporation Delaware Phillips Petroleum Venezuela L.L.C. Delaware Phillips Pipe Line Company Delaware Phillips Pt. Arguello Production Company Delaware Phillips Puerto Rico Core Inc. Delaware Phillips Texas Pipeline Company, Ltd. Texas Phillips-New Mexico Partners, L.P. Delaware Phillips-San Juan Partners, L.P. Delaware Sooner Insurance Company Vermont The Largo Company Delaware WesTTex 66 Pipeline Company Delaware EX-23 13 Exhibit 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference of our report dated February 23, 1998, 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, 1997, 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 Omnibus Securities Plan of Phillips Petroleum Company Form S-8 File No. 333-31355 /s/ Ernst & Young LLP ERNST & YOUNG LLP Tulsa, Oklahoma February 23, 1998 EX-27 14
5 This schedule contains summary financial information extracted from the consolidated balance sheet of Phillips Petroleum Company as of December 31, 1997, and the related consolidated statement of income for the year ended December 31, 1997, and is qualified in its entirety by reference to such financial statements. 1,000,000 YEAR DEC-31-1997 DEC-31-1997 163 0 1,736 19 500 2,648 21,426 11,404 13,860 2,445 2,775 650 0 673 4,141 13,860 15,210 15,424 12,431 12,694 82 0 198 1,900 941 959 0 0 0 959 3.64 3.61 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 trusts.
EX-27 15
5 This schedule contains summary financial information extracted from the applicable 1997 interim financial statements of Phillips Petroleum Company, and is qualified in its entirety by reference to such financial statements. 1,000,000 3-MOS 6-MOS 9-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 MAR-31-1997 JUN-30-1997 SEP-30-1997 861 774 899 0 0 0 1,752 1,782 1,800 19 20 20 452 521 565 3,290 3,390 3,486 20,278 20,316 20,839 11,046 11,037 11,291 13,657 13,823 14,216 2,732 2,591 2,823 2,555 2,507 2,507 650 650 650 0 0 0 663 649 689 3,727 3,937 4,032 13,657 13,823 14,216 3,944 7,653 11,497 3,994 7,757 11,652 3,192 6,222 9,349 3,266 6,358 9,550 20 41 62 0 0 0 54 103 153 493 1,035 1,501 266 501 751 227 534 750 0 0 0 0 0 0 0 0 0 227 534 750 .86 2.03 2.85 .86 2.01 2.82 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 trusts. Restated to reflect the adoption of Financial Accounting Standards Board Statement No. 128, "Earnings per Share."
EX-27 16
5 This schedule contains summary financial information extracted from the applicable 1996 and 1995 annual and interim financial statements of Phillips Petroleum Company, and is qualified in its entirety by reference to such financial statements. 1,000,000 3-MOS 6-MOS 9-MOS YEAR YEAR DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1995 MAR-31-1996 JUN-30-1996 SEP-30-1996 DEC-31-1996 DEC-31-1995 164 223 346 615 67 0 0 0 0 0 1,640 1,837 1,721 2,008 1,537 17 20 20 20 15 472 523 504 472 505 2,452 2,755 2,764 3,306 2,409 19,273 19,570 19,847 20,103 19,088 10,734 10,844 10,998 10,983 10,595 12,236 12,766 12,929 13,548 11,978 2,472 2,352 2,499 3,137 2,815 2,910 2,954 2,855 2,555 3,097 0 300 300 300 0 0 0 0 0 0 585 613 626 636 533 3,238 3,369 3,476 3,615 2,655 12,236 12,766 12,929 13,548 11,978 3,595 7,532 11,384 15,731 13,368 3,602 7,577 11,474 15,807 13,521 3,033 6,295 9,490 13,170 11,394 3,099 6,427 9,691 13,434 11,660 8 18 32 47 32 0 0 0 0 0 59 118 171 217 265 881 1,324 1,759 2,172 1,064 186 408 656 869 595 695 916 1,103 1,303 469 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 695 916 1,103 1,303 469 2.65 3.49 4.20 4.96 1.79 2.63 3.46 4.16 4.91 1.78 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. Restated to reflect the adoption of Financial Accounting Standards Board Statement No. 128, "Earnings per Share."
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