-----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, FOPQZWaIJxLnYUQCOt34cfwl34lcJeBaoWcTkGHEtYcJqXKt6PdAe2EMLcpbnhq4 srad4f3sZQbVdF1KlmbjGw== 0000078214-98-000029.txt : 19981116 0000078214-98-000029.hdr.sgml : 19981116 ACCESSION NUMBER: 0000078214-98-000029 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 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-Q SEC ACT: SEC FILE NUMBER: 001-00720 FILM NUMBER: 98747890 BUSINESS ADDRESS: STREET 1: PHILLIPS BUILDING STREET 2: 800 PLAZA OFFICE BUILDING CITY: BARTLESVILLE STATE: OK ZIP: 74004 BUSINESS PHONE: 9186616600 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM 10-Q (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 -------------------------------------------- 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) 918-661-6600 (Registrant's telephone number, including area code) --------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The registrant had 254,625,488 shares of common stock, $1.25 par value, outstanding at October 31, 1998 PART I. FINANCIAL INFORMATION - --------------------------------------------------------------------- Consolidated Statement of Income Phillips Petroleum Company Millions of Dollars --------------------------------- Three Months Nine Months Ended Ended September 30 September 30 --------------------------------- 1998 1997 1998 1997 --------------------------------- Revenues Sales and other operating revenues $2,890 3,844 8,947 11,497 Equity in earnings of affiliated companies 12 33 62 98 Other revenues 11 18 158 57 - --------------------------------------------------------------------- Total Revenues 2,913 3,895 9,167 11,652 - --------------------------------------------------------------------- Costs and Expenses Purchased crude oil and products 1,700 2,272 5,015 6,955 Production and operating expenses 533 561 1,605 1,613 Exploration expenses 45 44 144 159 Selling, general and administrative expenses 135 171 418 467 Depreciation, depletion and amortization 270 250 753 622 Taxes other than income taxes 52 65 177 201 Interest expense 56 50 136 153 Preferred dividend requirements of subsidiary and capital trusts 14 21 40 62 - --------------------------------------------------------------------- Total Costs and Expenses 2,805 3,434 8,288 10,232 - --------------------------------------------------------------------- Income before income taxes and Kenai LNG tax settlement 108 461 879 1,420 Kenai LNG tax settlement - 5 - 81 - --------------------------------------------------------------------- Income before income taxes 108 466 879 1,501 Provision for income taxes 62 250 432 751 - --------------------------------------------------------------------- Net Income $ 46 216 447 750 ===================================================================== Net Income Per Share of Common Stock Basic $ .18 .82 1.72 2.85 Diluted .18 .81 1.71 2.82 - --------------------------------------------------------------------- Dividends Paid $ .34 .34 1.02 1.00 - --------------------------------------------------------------------- Average Common Shares Outstanding (in thousands) Basic 256,779 263,503 259,786 263,459 Diluted 258,659 265,784 261,858 265,419 - --------------------------------------------------------------------- See Notes to Financial Statements. 1 - ------------------------------------------------------------------ Consolidated Balance Sheet Phillips Petroleum Company Millions of Dollars ------------------------- September 30 December 31 1998 1997* ------------------------- Assets Cash and cash equivalents $ 127 163 Accounts and notes receivable (less allowances: 1998--$14; 1997--$19) 1,374 1,717 Inventories 599 500 Deferred income taxes 136 168 Prepaid expenses and other current assets 129 100 - ------------------------------------------------------------------ Total Current Assets 2,365 2,648 Investments and long-term receivables 1,003 964 Properties, plants and equipment (net) 10,855 10,022 Deferred income taxes 90 82 Deferred charges 149 144 - ------------------------------------------------------------------ Total $14,462 13,860 ================================================================== Liabilities Accounts payable $ 1,553 1,546 Notes payable and long-term debt due within one year 124 234 Accrued income and other taxes 401 365 Other accruals 348 300 - ------------------------------------------------------------------ Total Current Liabilities 2,426 2,445 Long-term debt 3,495 2,775 Accrued dismantlement, removal and environmental costs 762 713 Deferred income taxes 1,403 1,257 Employee benefit obligations 404 436 Other liabilities and deferred credits 683 770 - ------------------------------------------------------------------ Total Liabilities 9,173 8,396 - ------------------------------------------------------------------ Company-Obligated Mandatorily Redeemable Preferred Securities of Phillips Capital Trusts I and II 650 650 - ------------------------------------------------------------------ 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 2,051 2,031 Treasury stock (at cost: 1998--22,434,279 shares; 1997--14,000,882 shares) (1,139) (752) Compensation and Benefits Trust (CBT) (at cost: 1998--29,125,863 shares; 1997--29,200,000 shares (987) (989) Accumulated other comprehensive income Foreign currency translation adjustments (10) (8) Unrealized gain on available-for-sale securities 8 - Unearned employee compensation--Long- Term Stock Savings Plan (LTSSP) (313) (342) Retained earnings 4,646 4,491 - ------------------------------------------------------------------ Total Common Stockholders' Equity 4,639 4,814 - ------------------------------------------------------------------ Total $14,462 13,860 ================================================================== See Notes to Financial Statements. *Reclassified to conform to current presentation. 2 - ----------------------------------------------------------------- Consolidated Statement of Phillips Petroleum Company Cash Flows Millions of Dollars ------------------- Nine Months Ended September 30 ------------------- 1998 1997 ------------------- Cash Flows from Operating Activities Net income $ 447 750 Adjustments to reconcile net income to net cash provided by operating activities Non-working capital adjustments Depreciation, depletion and amortization 753 622 Dry hole costs and leasehold impairment 29 57 Deferred taxes 139 196 J-Block settlement - 161 Other (58) 56 Working capital adjustments Increase in aggregate balance of accounts receivable sold 200 - Decrease in other accounts and notes receivable 161 193 Increase in inventories (97) (97) Increase in prepaid expenses and other current assets (20) (9) Decrease in accounts payable (10) (199) Increase in taxes and other accruals 132 128 - ----------------------------------------------------------------- Net Cash Provided by Operating Activities 1,676 1,858 - ----------------------------------------------------------------- Cash Flows from Investing Activities Capital expenditures and investments, including dry hole costs (1,574) (1,277) Proceeds from asset dispositions 36 19 Long-term advances to affiliates and other investments (11) (21) - ----------------------------------------------------------------- Net Cash Used for Investing Activities (1,549) (1,279) - ----------------------------------------------------------------- Cash Flows from Financing Activities Issuance of debt 712 - Repayment of debt (124) (270) Purchase of company common stock (417) (21) Issuance of company common stock 11 18 Issuance of company-obligated mandatorily redeemable preferred securities - 350 Dividends paid on common stock (266) (263) Other (79) (109) - ----------------------------------------------------------------- Net Cash Used for Financing Activities (163) (295) - ----------------------------------------------------------------- Increase (Decrease) in Cash and Cash Equivalents (36) 284 Balance at beginning of period 163 615 - ----------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 127 899 ================================================================= See Notes to Financial Statements. 3 - ----------------------------------------------------------------- Notes to Financial Statements Phillips Petroleum Company Note 1--Interim Financial Information The financial information for the interim periods presented in the financial statements included in this report is unaudited and includes all known accruals and adjustments which Phillips Petroleum Company (hereinafter referred to as "Phillips" or "the company") considers necessary for a fair presentation of the consolidated financial position of the company and its results of operations and cash flows for such periods. All such adjustments are of a normal and recurring nature. Note 2--Accounting Changes Comprehensive Income Effective January 1, 1998, the company adopted Financial Accounting Standards Board (FASB) Statement No. 130, "Reporting Comprehensive Income." Statement No. 130 establishes new rules for the reporting and display of comprehensive income and its components. Comprehensive income is net income, plus certain other items that are recorded directly to stockholders' equity. Phillips' comprehensive income for the three- and nine-month periods ended September 30 was as follows: Millions of Dollars --------------------------------- Three Months Nine Months Ended Ended September 30 September 30 --------------------------------- 1998 1997 1998 1997 --------------------------------- Net income $46 216 447 750 After-tax changes in: Foreign currency translation adjustments 13 (7) (2) (46) Net unrealized gain on available-for-sale securities 8 - 8 - - ----------------------------------------------------------------- Comprehensive income $67 209 453 704 ================================================================= 4 Segments The company adopted FASB Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information," effective January 1, 1998. The adoption of this Statement did not result in a change in the composition of the company's operating segments, or in the previously reported net income for each segment. Full interim disclosures are not required by Statement No. 131 until the first quarter of 1999. Note 3--Inventories Inventories consisted of the following: Millions of Dollars ------------------------- September 30 December 31 1998 1997 ------------------------- Crude oil and petroleum products $221 156 Chemical products 279 254 Materials, supplies and other 99 90 - ----------------------------------------------------------------- $599 500 ================================================================= Note 4--Properties, Plants and Equipment Properties, plants and equipment (net) included the following: Millions of Dollars ------------------------- September 30 December 31 1998 1997 ------------------------- Properties, plants and equipment (at cost) $22,857 21,426 Less accumulated depreciation, depletion and amortization 12,002 11,404 - ----------------------------------------------------------------- $10,855 10,022 ================================================================= Note 5--Impairments Impairments totaling $26 million after-tax were taken in third quarter 1998 to reduce the net book values of the Maureen, Ann and Alison fields, offshore the United Kingdom. The Maureen impairment resulted from a $32 million before-tax upward revision in the platform dismantlement cost estimate. The Ann and Alison impairments were the result of a downward revision to reserves and increased cost estimates on well work-overs. The 5 fair market values of the Ann and Alison properties were determined using the present value of expected future cash flows, resulting in before-tax charges totaling $5 million to depreciation, depletion and amortization expense. Note 6--Debt On July 6, 1998, the company issued $300 million of 6.65% Debentures due July 15, 2018, in the public market. This was in addition to the $300 million of 7.125% Debentures due March 15, 2028, issued in first quarter 1998. At September 30, 1998, no amounts were outstanding under the company's revolving bank credit facility. However, $216 million in commercial paper, which is 100 percent supported by this credit facility, was outstanding. Also, $250 million of the Phillips Petroleum Company Norway $300 million revolving credit facility was outstanding at September 30, 1998. Note 7--Kenai LNG Tax Settlement Final resolution of all outstanding issues with the Internal Revenue Service (IRS) was achieved for years 1983 through 1986. Refunds, including interest, of $107 million, primarily relating to the company's sales of liquefied natural gas from its Kenai, Alaska, facility, increased net income for the nine-month period ended September 30, 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 9--Contingencies. Note 8--Income Taxes The company's effective tax rates for the third quarter and the first nine months of 1998 were 57 and 49 percent, respectively, compared with 54 and 50 percent for each of the same periods a year ago. The third quarter increase in the effective tax rate was due mainly to a higher proportion of income in higher tax rate jurisdictions. Note 9--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 6 company believes that it is remote that future costs related to known contingent liability exposures will exceed current accruals by an amount that would have a material adverse impact on the company's financial statements. As facts concerning contingencies become known to the company, the company reassesses its position both with respect to accrued liabilities and other potential exposures. Estimates that are particularly sensitive to future change include contingent 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 clean-up 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 this year as a result of the favorable outcome in 1996 of the Kenai LNG tax case related to the company's sales of LNG from Kenai, Alaska. A favorable resolution of these issues would have a positive effect on net income and cash flow of up to $125 million while an unfavorable one would not impact the company's net income or cash position. All outstanding issues with the IRS for years prior to 1987 have been resolved. 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. 7 Note 10--Cash Flow Information Cash payments and non-cash investing and financing activities for the nine-month periods ended September 30 were as follows: Millions of Dollars ------------------- 1998 1997 ------------------- Cash payments Interest Debt $163 155 Taxes and other 6 16 - ----------------------------------------------------------------- $169 171 ================================================================= Income taxes $287 449 - ----------------------------------------------------------------- Non-Cash Financing and Investing Activities Stock awards issued (canceled) under incentive compensation plans $ 7 (1) Change in market value of investments 12 13 Accrued repurchase of company common stock - 5 Deferred payment obligation to purchase property, plant and equipment 8 - Investment in a joint venture in exchange for non-cash assets 5 - Investment in equity affiliate through direct guarantee of debt 13 - - ----------------------------------------------------------------- Note 11--Environmental Cost Recovery During the first nine months of 1998, as part of a comprehensive environmental cost recovery project, the company entered into settlement agreements with certain of its historical liability and pollution insurers in exchange for releases or commutations of their present and future liabilities to the company under its historical liability and pollution policies. As a result of these settlement agreements, the company recorded a before-tax benefit to earnings of $109 million, $71 million after-tax. At September 30, 1998, $109 million had been collected. 8 - ----------------------------------------------------------------- Management's Discussion and Phillips Petroleum Company Analysis of Financial Condition and Results of Operations Management's Discussion and Analysis contains forward-looking statements including, without limitation, statements relating to the company's plans, strategies, objectives, expectations, intentions, and adequate resources, that are made pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. The words "forecasts," "intends," "to be," "possible," "potential," "targeted," "believe," "expect," "may," "plan," or "plans," "scheduled," "would," "should," "could," "perceives," "anticipate," "estimate," "designed," 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 38. RESULTS OF OPERATIONS Unless otherwise noted, discussion of results for the three- and nine-month periods ending September 30, 1998, are based on a comparison with the corresponding periods in 1997. Consolidated Results A summary of the company's net income by business segment follows: Millions of Dollars -------------------------------------- Three Months Ended Nine Months Ended September 30 September 30 ------------------ ----------------- 1998 1997* 1998 1997* ------------------ ----------------- Exploration and Production (E&P) $ 22 122 188 448 Gas Gathering, Processing and Marketing (GPM) 13 25 44 75 Refining, Marketing and Transportation (RM&T) 53 64 159 144 Chemicals 24 78 142 212 Corporate and Other (66) (73) (86) (129) - ----------------------------------------------------------------- Net Income $ 46 216 447 750 ================================================================= *Restated to reflect the transfer of the company's natural gas liquids fractionation and marketing business from Chemicals to RM&T. 9 Net income included the following special items on an after-tax basis: Millions of Dollars -------------------------------------- Three Months Ended Nine Months Ended September 30 September 30 ------------------ ----------------- 1998 1997 1998 1997 ------------------ ----------------- Property impairments $(26) (25) (46) (36) Kenai LNG tax settlement - 3 - 83 Net gain on asset sales - - 3 7 Foreign currency gains (losses) 3 (12) (2) (26) Pending claims and settlements (2) 2 98 18 Other items 5 1 5 (4) - ----------------------------------------------------------------- Total special items $(20) (31) 58 42 ================================================================= Excluding the special items listed above, the company's net operating income by business segment was: Millions of Dollars -------------------------------------- Three Months Ended Nine Months Ended September 30 September 30 ------------------ ----------------- 1998 1997 1998 1997 ------------------ ----------------- E&P $ 52 146 226 474 GPM 11 25 42 66 RM&T 53 64 156 145 Chemicals 21 70 145 205 Corporate and Other (71) (58) (180) (182) - ----------------------------------------------------------------- Net operating income $ 66 247 389 708 ================================================================= The company's net operating income continued to be adversely affected by two significant factors in the third quarter of 1998: sharp declines in both the company's average worldwide crude oil sales price and ethylene margins. Also negatively impacting third quarter results were lower crude oil production, lower natural gas prices and lower refinery gasoline margins. In the nine-month period, the company's net operating income decreased 45 percent, reflecting lower product prices and margins across most major product lines. 10 Three Months Ended Nine Months Ended September 30 September 30 ------------------ ----------------- 1998 1997 1998 1997 Phillips at a Glance ------------------ ----------------- U.S. crude oil production (MBD) 59 65 62 67 Worldwide crude oil production (MBD) 195 244 229 230 U.S. natural gas production (MMCFD) 985 1,014 981 1,040 Worldwide natural gas production (MMCFD) 1,370 1,474 1,476 1,465 Worldwide natural gas liquids production (MBD) 169 173 174 168 Liquefied natural gas sales (MMCFD) 145 114 130 115 Refinery utilization rate (%) 94 101 94 93 U.S. automotive gasoline sales (MBD)* 344 344 323 343 U.S. distillates sales (MBD) 150 138 136 130 Worldwide petroleum products sales (MBD)* 709 700 682 692 Natural gas liquids processed (MBD) 176 213 211 206 Ethylene production (MMlbs)** 656 838 2,314 2,288 Polyethylene production (MMlbs)** 569 503 1,710 1,486 Polypropylene production (MMlbs)** 112 100 344 326 Paraxylene production (MMlbs) 178 195 560 353 - ----------------------------------------------------------------- *Includes certain sales by the Chemicals segment. **Includes Phillips' share of equity affiliates' production. Income Statement Analysis Sales and other operating revenues declined 25 and 22 percent in the third quarter and first nine months of 1998, respectively, reflecting lower sales prices for crude oil, natural gas, petroleum and chemicals products. These same factors also accounted for 25 and 28 percent declines in purchase costs in the respective 1998 periods. 11 Equity in earnings of affiliated companies decreased 64 and 37 percent in the third quarter and nine-month period of 1998, respectively, primarily because of lower ethylene margins experienced by the company's 50 percent-owned Sweeny Olefins Limited Partnership, as well as lower polyethylene margins at the company's 50 percent-owned polyethylene facility in Singapore. Other revenues declined 39 percent in the third quarter of 1998, mainly due to a decrease in interest income resulting from the company's lower average cash balance in the third quarter of 1998, compared with the third quarter a year ago. For the nine-month period of 1998, other revenues increased $101 million, primarily as a result of recoveries from certain of the company's historical liability and pollution insurers related to claims made as a part of a comprehensive environmental cost recovery project, partially offset by lower interest income. After adjustment for special items, controllable costs--primarily production and operating expenses, and selling, general and administrative expenses--declined 4 percent in the third quarter and were approximately the same as a year ago for the nine-month period of 1998. This reflects the company's emphasis on cost control in the current environment of depressed product prices. Foreign currency translation gains in 1998, compared with losses a year ago, and a favorable contingency-related item in 1998 are the most significant special items affecting these income statement line items. Exploration costs were slightly higher in the third quarter of 1998, and 9 percent lower in the first nine months of 1998. Both periods reflect higher geological and geophysical expenses, while in the nine-month period these were more than offset by lower dry hole charges. Depreciation, depletion and amortization (DD&A) increased 8 and 21 percent in the third quarter and first nine months of 1998. The increase in the third quarter of 1998 is primarily the result of the E&P acquisition in the Zama area of Canada that was completed in late 1997. In addition, higher DD&A rates in Norway, as a result of the newly completed Ekofisk II facilities and in the United States, due to downward reserve revisions, also served to increase DD&A expense. The year-to-date 1998 period also reflects full production from J-Block in the U.K. North Sea, which came on-line in mid-1997. In addition, property impairments of $37 million and $67 million were included in the third quarter and nine-month period of 1998, respectively, compared with $39 million and $54 million in the corresponding periods of 1997. 12 Taxes other than income taxes decreased 20 and 12 percent in the third quarter and first nine months of 1998, respectively, as declining U.S. E&P sales prices and production resulted in lower production taxes. Interest expense increased 12 percent in the third quarter of 1998, primarily due to higher debt balances. In the first nine months of 1998, interest expense decreased 11 percent, reflecting the benefit of reversals of the interest portion of previously accrued contingencies in the second quarter of 1998, partially offset by higher debt balances. Preferred dividend requirements were 33 and 35 percent lower in the third quarter and nine-month period of 1998, as a result of the redemption of Phillips Gas Company's preferred stock in December 1997. Segment Results E&P Three Months Ended Nine Months Ended September 30 September 30 ------------------ ----------------- 1998 1997 1998 1997 ------------------ ----------------- Millions of Dollars -------------------------------------- Operating Income Reported net income $ 22 122 188 448 Less special items (30) (24) (38) (26) - ----------------------------------------------------------------- Net operating income $ 52 146 226 474 ================================================================= Dollars Per Unit -------------------------------------- Average Sales Prices Crude oil (per barrel) United States $10.70 16.19 11.20 17.64 Foreign 12.22 18.51 13.14 19.13 Worldwide 11.81 17.92 12.64 18.72 Natural gas--lease (per thousand cubic feet) United States 1.75 2.15 1.90 2.22 Foreign 2.39 2.46 2.48 2.61 Worldwide 1.99 2.28 2.15 2.37 - ----------------------------------------------------------------- Millions of Dollars -------------------------------------- Worldwide Exploration Expenses Geological and geophysical $38 32 107 95 Leasehold impairment 4 6 16 17 Dry holes - 3 13 40 Lease rentals 3 3 8 7 - ----------------------------------------------------------------- $45 44 144 159 ================================================================= 13 Three Months Ended Nine Months Ended September 30 September 30 ------------------ ----------------- 1998 1997 1998 1997 ------------------ ----------------- Thousands of Barrels Daily -------------------------------------- Operating Statistics Crude Oil Produced United States 59 65 62 67 Norway 76 108 103 105 United Kingdom 20 26 23 14 Nigeria 19 25 20 24 China 13 16 14 16 Canada 7 4 7 4 Venezuela 1 - - - - ----------------------------------------------------------------- 195 244 229 230 ================================================================= Natural Gas Liquids Produced United States 3 4 3 4 Norway 3 8 6 7 Other areas 5 3 5 3 - ----------------------------------------------------------------- 11 15 14 14 ================================================================= Millions of Cubic Feet Daily -------------------------------------- Natural Gas Produced United States (less gas equivalent of liquids shown above) 985 1,014 981 1,040 Norway* 132 288 216 285 United Kingdom* 158 120 185 92 Canada 95 52 94 48 - ----------------------------------------------------------------- 1,370 1,474 1,476 1,465 ================================================================= *Dry basis. Liquefied Natural Gas Sales 145 114 130 115 - ----------------------------------------------------------------- E&P's net operating income decreased 64 and 52 percent in the third quarter and first nine months of 1998, respectively, primarily as a result of continued weak crude oil prices relative to a year ago. Phillips' worldwide average crude oil sales price reached a 1998 low of $11.35 per barrel for the month of July, before recovering marginally to $12.70 per barrel in September. The third quarter 1998 average price of $11.81 per barrel was $6.11 per barrel lower than the corresponding quarter in 1997. Industry production continued to outpace demand in the third quarter of 1998; however, the downward price trend eased late in the quarter on supply disruptions and production curtailments. 14 Lower lease gas sales prices also negatively impacted both 1998 periods, as did lower crude oil production rates in the third quarter. U.S. E&P - -------- Millions of Dollars -------------------------------------- Three Months Ended Nine Months Ended September 30 September 30 ------------------ ----------------- 1998 1997 1998 1997 ------------------ ----------------- Operating Income Reported net income $ 38 52 147 269 Less special items 2 (25) 1 (11) - ----------------------------------------------------------------- Net operating income $ 36 77 146 280 ================================================================= Net operating income decreased 53 and 48 percent in the company's U.S. E&P operations for the third quarter and first nine months of 1998, respectively. Lower sales prices for crude oil, natural gas and liquefied natural gas were primarily responsible, along with lower crude oil and natural gas production volumes. These items were partially offset by lower lifting costs in both periods, reflecting lower well workover activity; as well as lower exploration expenses and production taxes. U.S. crude oil production in the third quarter of 1998 was 9 percent lower than the third quarter of 1997, reflecting lower production at Prudhoe Bay, Alaska; Point Arguello, offshore California; and in the Gulf of Mexico, including the Mahogany subsalt field and South Marsh Island Blocks 146/147. In addition, production in the Gulf of Mexico was shut-in nine days during the third quarter of 1998 due to tropical storm activity. U.S. natural gas production declined 3 percent in the third quarter of 1998, primarily due to lower production of coal-seam gas in the San Juan basin of New Mexico, as well as lower production from various fields in the Gulf of Mexico. Special items in the third quarter of 1998 primarily included a gain from the sale of the company's right to an interest in a power plant being constructed in Mississippi. The nine-month period of 1998 also included a reversal of a previously accrued contingency, which was mostly offset by impairments taken on two producing properties in the Gulf of Mexico. Special items in the third quarter of 1997 consisted mainly of an after-tax charge of $25 million for an impairment of Garden Banks Blocks 70/71 in the Gulf of Mexico. In addition, the first nine months of 1997 included a net after-tax gain on asset sales of $7 million and a reversal of a contingent liability of $7 million after-tax. 15 Foreign E&P - ----------- Millions of Dollars -------------------------------------- Three Months Ended Nine Months Ended September 30 September 30 ------------------ ----------------- 1998 1997 1998 1997 ------------------ ----------------- Operating Income Reported net income (loss) $(16) 70 41 179 Less special items (32) 1 (39) (15) - ----------------------------------------------------------------- Net operating income $ 16 69 80 194 ================================================================= Net operating income from the company's foreign E&P operations decreased 77 and 59 percent in the third quarter and nine-month period of 1998, respectively. Both periods were negatively impacted by lower crude oil prices and higher exploration expenses, while the third quarter was also hurt by lower crude oil production volumes. In the nine-month period of 1998, earnings benefited from higher production volumes of crude oil and natural gas. Foreign crude oil production volumes declined 24 percent in the third quarter of 1998, reflecting downtime incurred during the tie-in of the new Ekofisk II facilities that impacted both Norway and U.K. production, as well as problems encountered following the start-up of the Ekofisk II facilities. These items also primarily accounted for the 16 percent decline in natural gas production in the third quarter of 1998. Special items in the third quarter and nine-month period of 1998 included impairments of the Maureen, Ann, and Alison fields in the U.K. North Sea totaling $26 million after-tax, as well as foreign currency transaction losses. Most of the impairment related to the Maureen field and was triggered by a revised estimate of platform decommissioning costs, resulting from the July 23, 1998, decision by the Oslo and Paris convention related to the disposal of offshore installations that are no longer used. Special items in the first nine months of 1997 primarily included a property impairment of two U.K. North Sea fields totaling $11 million, after-tax, as well as foreign currency losses. 16 GPM Three Months Ended Nine Months Ended September 30 September 30 ------------------ ----------------- 1998 1997 1998 1997 ------------------ ----------------- Millions of Dollars -------------------------------------- Operating Income Reported net income $13 25 44 75 Less special items 2 - 2 9 - ----------------------------------------------------------------- Net operating income $11 25 42 66 ================================================================= Dollars Per Unit -------------------------------------- Average Sales Prices U.S. residue gas (per thousand cubic feet) $ 1.90 2.18 2.02 2.28 U.S. natural gas liquids (per barrel-- unfractionated) 8.36 12.39 9.30 12.71 - ----------------------------------------------------------------- Millions of Cubic Feet Daily -------------------------------------- Operating Statistics Natural Gas Purchases Outside Phillips 1,281 1,389 1,318 1,371 Phillips 152 159 154 159 - ----------------------------------------------------------------- 1,433 1,548 1,472 1,530 ================================================================= Raw Gas Throughput 1,829 1,973 1,879 1,995 - ----------------------------------------------------------------- Residue Gas Sales Outside Phillips 930 997 951 995 Phillips 47 57 54 55 - ----------------------------------------------------------------- 977 1,054 1,005 1,050 ================================================================= Thousands of Barrels Daily -------------------------------------- Natural Gas Liquids Net Production From Phillips E&P leasehold gas 15 15 15 15 From gas purchased outside Phillips 143 143 145 139 - ----------------------------------------------------------------- 158 158 160 154 ================================================================= GPM's net operating income decreased 56 and 36 percent in the third quarter and first nine months of 1998, respectively. The decline in both periods was the result of sharply lower natural gas liquids sales prices--$4.03 per barrel lower in the third quarter, and $3.41 lower in the nine-month period. Industry natural gas liquids prices have generally followed the decline in crude oil prices through the first nine months of the year. 17 Raw gas throughput volumes declined 7 percent in the third quarter of 1998, due to field production declines in the Austin Chalk area of south central Texas and the sale of a small gathering system. Natural gas liquids production volumes in the third quarter were the same as the corresponding quarter last year. Residue gas sales prices were 13 percent lower in the third quarter, reflecting lower demand, particularly in the month of September, than was experienced in 1997. For the nine-month period, residue gas sales prices were 11 percent lower, primarily due to the reduced demand in the first quarter of 1998 resulting from warmer-than-normal winter weather. Special items in the third quarter and first nine months of 1998 represented the partial reversal of previously accrued severance charges. Special items in the nine-month period of 1997 consisted of a settlement of a dispute with a producer. 18 RM&T Three Months Ended Nine Months Ended September 30 September 30 ------------------ ----------------- 1998 1997* 1998 1997* ------------------ ----------------- Millions of Dollars -------------------------------------- Operating Income Reported net income $ 53 64 159 144 Less special items - - 3 (1) - ----------------------------------------------------------------- Net operating income $ 53 64 156 145 ================================================================= Dollars Per Gallon -------------------------------------- Average Sales Prices Automotive gasoline Wholesale $.49 .68 .51 .68 Retail .66 .83 .67 .83 Distillates .41 .56 .44 .60 - ----------------------------------------------------------------- Thousands of Barrels Daily -------------------------------------- Operating Statistics U.S. Refinery Crude Oil Rated capacity 355 345 355 345 Crude runs 335 347 334 320 Capacity utilization (percent) 94% 101 94 93 Natural gas liquids fractionation Capacity 252 250 252 250 Processed 176 213 211 206 Capacity utilization (percent) 70% 85 84 82 - ----------------------------------------------------------------- Petroleum Products Outside Sales United States Automotive gasoline Wholesale 295 292 275 293 Retail 37 38 37 37 Aviation fuels 33 30 32 28 Distillates 150 138 136 130 Natural gas liquids (fractionated) 129 129 128 134 Other products 26 15 28 13 - ----------------------------------------------------------------- 670 642 636 635 Foreign 27 44 35 44 - ----------------------------------------------------------------- 697 686 671 679 ================================================================= *Restated to reflect the transfer of the company's natural gas liquids fractionation and marketing business from Chemicals to RM&T. 19 Net operating income from the company's RM&T operations declined 17 percent in the third quarter of 1998, primarily the result of lower earnings from the company's refining operations, partially offset by improved performance in wholesale marketing. The decrease in refining results was attributable to lower gasoline margins, partially offset by higher gasoline sales volumes. In wholesale marketing, gasoline margins were higher in the third quarter of 1998 than a year ago. Earnings in the quarter were also negatively impacted by tropical storms that led to a temporary shutdown of the Sweeny, Texas, refinery. In the nine-month period of 1998, RM&T's net operating income increased 8 percent, reflecting improved refinery results due to higher sales volumes of gasoline, distillates and other products. This was partially offset by lower gasoline margins. For the first nine months of 1998, RM&T's crude oil throughput volumes were 4 percent higher, due in part to a scheduled maintenance turnaround at the Sweeny refinery in the first quarter of 1997. The increased throughput was achieved even though the Sweeny refinery was temporarily shutdown in the third quarter of 1998 by flooding caused by tropical storms. Special items in the nine-month period of 1998 consisted of gains from the sale of certain non-strategic retail service stations. Special items in the first nine months of 1997 included certain costs associated with an external power outage at the Sweeny refinery. 20 Chemicals Three Months Ended Nine Months Ended September 30 September 30 ------------------ ----------------- 1998 1997* 1998 1997* -------------------------------------- Millions of Dollars -------------------------------------- Operating Income Reported net income $ 24 78 142 212 Less special items 3 8 (3) 7 - ----------------------------------------------------------------- Net operating income $ 21 70 145 205 ================================================================= *Restated to reflect the transfer of the company's natural gas liquids fractionation and marketing business from Chemicals to RM&T. Millions of Pounds Except as Indicated -------------------------------------- Operating Statistics Production** Ethylene 656 838 2,314 2,288 Polyethylene 569 503 1,710 1,486 Propylene 115 131 387 359 Polypropylene 112 100 344 326 Paraxylene 178 195 560 353 Cyclohexane (millions of gallons) 40 41 138 115 - ----------------------------------------------------------------- **Includes Phillips' share of equity affiliates' production. Chemicals' net operating income declined 70 percent in the third quarter of 1998, and 29 percent in the nine-month period. Both periods were adversely affected by a sharp drop in ethylene margins, as well as lower polyethylene margins. Excess industry capacity and weak global demand have continued to depress margins in the commodity chemicals and plastics industry. Ethylene production volumes were 22 percent lower in the third quarter of 1998, with the decrease attributable to a maintenance turnaround and the temporary shutdown during the quarter of the company's Sweeny refinery and petrochemicals facility, due to flooding caused by tropical storms. The Houston Chemical Complex continued to run well in the third quarter, which contributed to the increase in polyethylene production volumes. Also contributing to the higher volumes was increased production from the company's 50 percent interest in a polyethylene plant in Singapore, as well as new production from the company's 40 percent interest in Shanghai Golden Phillips, a joint-venture polyethylene facility in China that started up in the second quarter. Special items in the third quarter of 1998 consisted of foreign currency gains and a favorable excise tax settlement. The 1998 nine-month period also included an impairment taken on a plastics recycling facility that will be closed. 21 Special items in the third quarter and first nine months of 1997 primarily consisted of a gain on the settlement of a license-related contingency. Corporate and Other Millions of Dollars -------------------------------------- Three Months Ended Nine Months Ended September 30 September 30 ------------------ ----------------- 1998 1997 1998 1997 ------------------ ----------------- Operating Results Reported Corporate and Other $(66) (73) (86) (129) Less special items 5 (15) 94 53 - ----------------------------------------------------------------- Adjusted Corporate and Other $(71) (58) (180) (182) ================================================================= Adjusted Corporate and Other includes: Corporate general and administrative expenses $(22) (15) (59) (48) Net interest (39) (29) (101) (87) Preferred dividend requirements (10) (18) (31) (53) Other - 4 11 6 - ----------------------------------------------------------------- Adjusted Corporate and Other $(71) (58) (180) (182) ================================================================= Corporate general and administrative expenses increased 47 and 23 percent in the third quarter and first nine months of 1998, respectively. The increases were primarily attributable to higher salaries, benefits and Year-2000-Project costs. Net interest represents interest income and expense, net of capitalized interest. In both the third quarter and year-to-date period of 1998, net interest was higher, primarily because of lower interest income resulting from the company carrying a smaller cash balance in 1998. In addition, higher average debt levels increased interest expense in the third quarter of 1998. Preferred dividend requirements includes dividends on the Phillips Gas Company preferred stock and on the preferred securities of the Phillips 66 Capital I (Trust I) and Phillips 66 Capital II (Trust II) trusts. Preferred dividend requirements were lower in the third quarter and nine-month period of 1998 due to the redemption of the preferred stock of Phillips Gas Company in late 1997. 22 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 on a stand-alone basis. In the third quarter, results were lower due mainly to tax-related items. In the nine-month period, results benefited from the receipt of dividends from certain industry insurance companies in which Phillips has an ownership interest, partially offset by higher tax-related items. Special items in the third quarter of 1998 consisted primarily of foreign currency gains, partially offset by insurance claims for property damage caused by tropical storms. The nine-month period of 1998 also included insurance recoveries related to a comprehensive environmental cost recovery project, as well as favorable contingency-related settlements or accrual reversals. Special items in the third quarter of 1997 consisted primarily of after-tax non-cash foreign currency transaction losses of $13 million. In addition, the nine-month period of 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. In addition, the period included non-cash foreign currency transaction losses. CAPITAL RESOURCES AND LIQUIDITY Financial Indicators Millions of Dollars --------------------------------------- At At At September 30 December 31 September 30 1998 1997 1997 --------------------------------------- Current ratio 1.0 1.1 1.2 Total debt $3,619 3,009 2,859 Preferred stock of subsidiary $ - - 345 Company-obligated mandatorily redeemable preferred securities $ 650 650 650 Common stockholders' equity $4,639 4,814 4,721 Percent of total debt to capital* 41% 36 33 Percent of floating-rate debt to total debt 25% 30 15 - ----------------------------------------------------------------- *Capital includes total debt, preferred stock of subsidiary, company-obligated mandatorily redeemable preferred securities and common stockholders' equity. 23 Cash from operations decreased $182 million for the nine-month period ending September 30, 1998, compared with the same period in 1997. However, excluding the $161 million favorable cash impact of the J-Block settlement in 1997, cash from operations only decreased slightly. Net operating income decreased $319 million, or 45 percent, in the first nine months of 1998, compared with the first nine months of 1997. However, this decrease was primarily offset by the receipt of $109 million resulting from settlements pursuant to the comprehensive environmental cost recovery project, and the sale of $200 million of receivables under the company's receivables monetization program. In May 1998, Phillips filed a universal shelf registration statement with the U.S. Securities and Exchange Commission for $700 million of various types of debt and equity securities, and securities convertible into either. This registration statement became effective June 5, 1998. Securities to be issued under the universal shelf registration statement can be combined by prospectus with $300 million of securities remaining under earlier shelf registrations. As a result, the company could issue and sell a total of $1 billion of the various types of securities available under the universal shelf registration statement. On July 6, 1998, the company issued $300 million of 6.65% Debentures due July 15, 2018, in the public market, leaving $700 million of securities available. The company is continuing its previously announced stock repurchase program to buy back up to $500 million of its common stock by year-end 1998. Through November 6, 1998, approximately $408 million worth of shares had been repurchased. The company also has a $150 million stock repurchase program expiring December 31, 1999. Under the two programs, the company has repurchased approximately $488 million worth of shares since the programs began. During the first nine months of 1998, cash decreased $36 million. Cash was provided by operating activities, the previously mentioned $300 million of debentures issued in the third quarter 1998, $300 million of debentures issued in first quarter 1998, and the issuance of $92 million of revolving debt. These funds were used to retire $94 million of revolving debt, pay $28 million to retire the first of two LTSSP bank loans, fund the company's capital expenditures program, and purchase $417 million of the company's common stock under the stock repurchase programs. The company has agreements with a bank-sponsored entity for the revolving sale of credit card and trade receivables. During September 1998, these agreements were extended until September 1999, the expiration date of the supporting liquidity facilities related to these agreements. The maximum aggregate amount of 24 receivables that can be sold and outstanding under these agreements is limited to $200 million, all of which was outstanding at September 30, 1998. At September 30, 1998, no amounts were outstanding under the company's revolving bank credit facility of $1.5 billion, but $216 million in commercial paper and $250 million of the Phillips Petroleum Company Norway $300 million revolving credit facility were outstanding. To meet its liquidity requirements, including funding its capital program, the company looks primarily to existing cash balances, cash generated from operations and financing. Capital Expenditures and Investments Millions of Dollars ----------------------------------------------------- Three Months Ended Nine Months Ended September 30 September 30 ------------------ ----------------- Estimated 1998 1998 1997 1998 1997 -------------- ------------------ ----------------- E&P $1,426 573 345 1,114 811 GPM 90 22 27 51 86 RM&T 241 49 53 154 158 Chemicals 261 66 63 188 172 Corporate and Other 101 22 17 67 50 - ------------------------------------------------------------------ $2,119 732 505 1,574 1,277 ================================================================== United States $1,013 226 270 685 736 Foreign 1,106 506 235 889 541 - ------------------------------------------------------------------ $2,119 732 505 1,574 1,277 ================================================================== Phillips' Board of Directors recently approved an 18 percent increase in the company's capital budget, from $1.79 billion to $2.12 billion. This increase was primarily attributable to approval of the acquisition of a 7 percent interest in an exploration project in the Kazakhstan sector of the Caspian Sea. The company signed an agreement with the Republic of Kazakhstan on September 14, 1998, to acquire this interest. In addition, Phillips agreed to study the development, gathering and processing of natural gas, and the extraction, transportation and marketing of natural gas liquids on behalf of the government. The exploration area consists of 10 blocks totaling nearly 2,000 square miles about 50 miles west-northwest of the giant Tengiz oil field onshore Kazakhstan. The offshore acreage comprises a number of prospects. The joint venturers, including Phillips, are committed to drill six exploration wells and 25 conduct additional seismic work over six years, with an option to extend the exploration phase another two years. Drilling is expected to begin on the first well in the spring of 1999. The blocks are covered by a production-sharing agreement with the Kazakhstan government. The initial production phase of the contract is for 20 years, with options to extend the agreement another 20 years. The Ekofisk II project to replace the majority of the facilities in the former Ekofisk complex was completed on schedule and about 20 percent under budget. Ekofisk II consists of two new platforms--one for drilling and production, and one for processing and transportation. It has taken longer than originally expected to reach stable operations at design capacity due to problems after start-up. However, crude oil production is expected to be at about 90 percent of the platform's design capacity in the fourth quarter. Field tests are under way on a poorly performing low-pressure separator, used to separate oil and gas from water, and a resolution is expected by late-1998 or early-1999. Production is expected to be shut-in for about a week while the separator is being repaired. In addition, a fire in a gas compressor caused production to be shut-in on October 12, 1998. Production restarted October 14, but gas production has been limited to about 60 percent of the platform's design capacity until the damaged compressor can be repaired. Actions are also being taken that are expected to debottleneck processing and increase crude oil production. As a result of Ekofisk II, Phillips phased out or modified 10 existing platforms, installing 31 miles of new pipeline. The company plans to submit a cessation plan for the redundant Ekofisk facilities to the Norwegian government in July 1999. Current plans are to sell as many platforms as possible for reuse. Phillips is evaluating the existing offshore hotel platform to determine how it will be impacted by continuing subsidence and expected usage over the license period. Studies are in progress to determine what future actions are necessary with regard to this facility, either to be moved, jacked up, or replaced with new construction. The cost of the project is still being analyzed, but is not expected to materially impact the financial position of the company. Also in the Greater Ekofisk Area of the Norwegian North Sea, offshore construction activity related to the waterflood project for the Eldfisk field has commenced. Development drilling is expected to begin in mid-1999 and the new platform, controlled from an existing manned Eldfisk platform, is scheduled to start up in early 2000. 26 In western Venezuela, Phillips acquired interests in three projects under the third bid round. The company now holds a 90 percent interest in Ambrosio, a 31.5 percent interest in La Vela, and an 18 percent interest in LL-652. The company is operator on the Ambrosio block, where operations were taken over this year in June, and on La Vela, where drilling was recently begun on the first of two exploration wells. At LL-652, the participants are proceeding with a plan for workovers, drilling new wells and upgrading the infrastructure for a major waterflood project. In the North Cook Inlet of Alaska, the drilling of an additional well was recently completed on the Tyonek project. The results of this well, along with plans to test a previously drilled well, will help determine the reservoir size and commercial potential of the project. Engineering and commercial studies continue with the objective of reducing the cost of project development. Pending satisfactory results from these wells and the cost studies, plans for development will continue. The book investment was approximately $105 million at October 31, 1998. Depending on the reservoir size and project development costs, it is possible that some impairment of this asset will be required. Other E&P spending has been focused on several key development projects during 1998. In the United Kingdom, development is under way at the Janice, Renee and Rubie fields, with expected production in the fourth quarter of 1998. Net peak production at Janice is expected to be 13,000 barrels of oil per day, and 9,000 barrels per day at the combined Renee and Rubie fields. In Denmark, the Siri development is expected to begin production in first quarter 1999. Recently approved, development of the Chinook discovery, offshore Louisiana, is scheduled to commence in fourth quarter 1998, with initial production expected in 2000. Phillips holds a one-third interest in Chinook. GPM's capital expenditures and investments for the first nine months of 1998 were substantially lower than those of the same period in 1997, primarily because the 1997 period included a major gathering asset acquisition. RM&T continued its retail marketing expansion during the first nine months of 1998, with the purchase of 12 retail outlets in the Dallas, Texas, area, and the opening of nine new outlets. In addition, four outlets were razed and rebuilt. Since the expansion program began, the company has acquired 36 retail outlets, opened 40 new ones, and razed and rebuilt 20 others. Both new outlets and those that are razed and rebuilt utilize the new Kicks 66 convenience store design. Also during the first nine months of 1998, the company sold 44 retail units in non- strategic areas. 27 The company's pipeline capacity has been expanded during 1998. Early in the year, Phillips purchased interests in an El Paso, Texas, terminal and pipeline system. Construction of a 148-mile pipeline to connect the Seaway Pipeline system to the company's existing Midwest distribution system near Wichita, Kansas, was also completed. Engineering and survey work has begun on a new 55-mile natural gas liquids pipeline from Wichita, Kansas, to Conway, Kansas, targeted for completion in second quarter 1999, to allow Phillips to better serve its customers by providing better access to propane and butane bulk storage in the Midwest. In second quarter 1998, the company's Board of Directors approved the construction of a 36,000 barrels-per-day continuous catalyst regeneration reformer at the Sweeny, Texas, refinery and petrochemical complex. The new catalytic reformer is designed to convert a higher percentage of plant yield to higher-margin petrochemicals. This project is now scheduled to commence in early 1999, with completion scheduled for mid-2000. On October 30, 1998, Phillips and the Venezuelan state oil company, Petroleos de Venezuela S.A. (PdVSA), signed agreements to form a limited partnership to build a 58,000 barrels-per-day coker and related facilities at Phillips' Sweeny Complex. A coker allows the processing of heavier, lower-cost crude oil, thus lowering crude oil acquisition costs. Under terms of the agreements, PdVSA will supply the refinery with up to 165,000 barrels per day of heavy Venezuelan crude oil once the coker is completed, which is scheduled to be in the fourth quarter of 2000. Phillips and PdVSA each hold a 50 percent interest in the limited partnership. The total capital cost of the project is estimated at $450 million, which will be financed by the limited partnership. Expenditures are expected to begin in late 1998. During the third quarter in Chemicals, construction was completed on a 100 million-pounds-per-year methyl mercaptan plant at the company's Borger facility and production commenced. In addition, commercial production of metallocene compounds began at a new facility at the Phillips Research Center in Bartlesville, Oklahoma. Metallocene compounds are used to manufacture catalysts for the production of medium- and low-density linear polyethylenes. The plant's current annual capacity is expected to meet Phillips' and its licensees' projected yearly demand through at least the year 2000. 28 New Accounting Standards In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is required to be adopted in years beginning after June 15, 1999. The Statement permits early adoption as of the beginning of any fiscal quarter after its issuance. The company expects to adopt the new Statement effective January 1, 2000. The Statement will require the company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability, or firm commitment through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The company does not anticipate that the adoption of this Statement will have a significant effect on its results of operations or financial position. Year 2000 Update General - ------- Phillips' company-wide Year 2000 Project (Project) is proceeding on schedule as planned. The Project is addressing the issue of computer programs and embedded computer chips being unable to distinguish between the year 1900 and the year 2000. In 1995, in order to improve access to business information through common, integrated computing systems across the company, Phillips began a worldwide business systems replacement project with systems that use programs primarily from SAP America, Inc. (SAP) and, for certain E&P operations, Oracle Corporation (Oracle). The new systems, which are expected to make approximately 70 percent of the company's business computer systems Year 2000 compliant, are scheduled for completion by mid-1999. Implementation of the SAP programs is on schedule and was approximately 61 percent complete at September 30, 1998. Implementation of the Oracle programs is slightly behind schedule and was approximately 67 percent complete at that date. The company developed a contingency plan to make the programs that are scheduled to be replaced by the Oracle programs Year 2000 compliant. However, the company has determined that it is not necessary to implement the contingency plan at this time and estimates that the Oracle project will be completed by June 30, 1999. Remaining business software programs are expected to be made Year 2000 compliant through the Year 2000 Project, including those supplied by vendors, or they will be 29 retired. None of the company's other information technology (IT) projects have been delayed due to the implementation of the Year 2000 Project. Project - ------- Phillips' Project is divided into four major sections-- Infrastructure, Applications Software (Infrastructure and Applications Software are sometimes collectively referred to as "IT Systems"), third-party suppliers and customers (External Agents), and process control and instrumentation (PC&I). The company has engaged third parties, including Ernst & Young LLP, to assist in the completion of various phases of the Project. The general phases common to all sections are: (1) inventorying Year 2000 items; (2) assigning priorities to identified items; (3) assessing the Year 2000 compliance of items determined to be material to the company; (4) repairing or replacing material items that are determined not to be Year 2000 compliant; (5) testing material items; and (6) designing and implementing contingency and business continuation plans for each organization and company location. The inventory and priority assessment phases of each section of the Project have been completed. Material items are those believed by the company to have a risk involving the safety of individuals, or that may cause damage to property or the environment, or affect revenues. The testing phases of the Project are being performed by the company. The Infrastructure section consists of hardware and systems software other than Applications Software. This section is on schedule, and the company estimates that approximately 69 percent of the planned activities related to the section had been completed at September 30, 1998. The testing phase is ongoing as hardware or system software is remediated, upgraded or replaced. Contingency planning for the section commenced in third quarter 1998 and is scheduled for completion by mid-1999. All Infrastructure activities (related to definition, testing, and implementation of Year-2000-ready products) are scheduled to be completed by June 30, 1999. The Applications Software section includes both the conversion of applications software that is not Year 2000 compliant and, where available from the supplier, the replacement of such software. The company estimates that the software conversion phase was 77 percent complete at September 30, 1998, and the remaining conversions are on schedule to be completed by mid-1999. The testing phase of this section, scheduled for completion by mid- 1999, is ongoing. The vendor software replacements and upgrades were approximately 63 percent complete at September 30, 1998, and 30 remaining replacements and upgrades will be completed on schedule by mid-1999. The testing phase is conducted as the software is replaced and is also scheduled to be completed by mid-1999. Contingency planning for this section began in third quarter 1998 and is scheduled for completion by mid-1999. The External Agents section includes the process of identifying and prioritizing critical suppliers and customers at the direct interface level, and communicating with them about their plans and progress in addressing the Year 2000 problem. Detailed evaluations of the most critical third parties have been initiated. These evaluations will be followed by the development of contingency plans as necessary, which are scheduled to commence in the fourth quarter of 1998, with completion by mid- 1999. The company estimates that this section was on schedule and 27 percent completed at September 30, 1998. The process of evaluating these external agents began in third quarter 1998 and is scheduled for completion by mid-1999, with follow-up reviews scheduled through the remainder of 1999. Plans detailing the critical tasks and resources required for the PC&I section of the Project have been developed. This section includes the hardware, software and associated embedded computer chips that are used in the operation of all facilities operated by the company. This section is on schedule and the company believes that the repair and testing of PC&I equipment is approximately 66 percent complete. The company estimates that 75 percent of the date-sensitive PC&I equipment will be Year 2000 ready by year-end 1998. The company has scheduled and expects that most repair and testing will be completed by mid-1999, with the remaining repair and testing to be completed in third quarter 1999 because of planned turnaround schedules. Contingency planning for this section began in third quarter 1998 and is scheduled to be completed by year-end 1999. Costs - ----- The total cost associated with required modifications to become Year 2000 compliant is not expected to be material to the company's financial position. The estimated total cost of the Year 2000 Project is approximately $63 million. This estimate includes Phillips' estimated share of Year 2000 repair and replacement costs that may be incurred by partnerships and joint ventures in which the company participates but is not the operator, but does not include any estimates of liability for non-compliance. The total amount expended on the Project through September 30, 1998, was $26 million, of which approximately $18 million related to the cost to repair or replace software and related hardware problems, approximately $7 million related to the cost of replacing non-compliant PC&I equipment, and 31 approximately $1 million related to the cost of identifying and communicating with External Agents. The estimated future cost of completing the Year 2000 Project is estimated to be approximately $37 million--$11 million to repair or replace software and related hardware, $18 million to repair or replace non-compliant PC&I equipment, $3 million to identify and communicate with External Agents, and $5 million for operations in which Phillips is not the operator. Funds for the Project are provided from a separate budget of $29 million for all items other than PC&I and External Agent costs, which are included in existing operating budgets. The costs of implementing the SAP and Oracle business replacement systems are not included in these cost estimates. Risks - ----- The failure to correct a material Year 2000 problem could result in an interruption in, or a failure of, certain normal business activities or operations. Such failures could materially and adversely affect the company's results of operations, liquidity and financial condition. Due to the general uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 readiness of third-party suppliers and customers, the company is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact on the company's results of operations, liquidity or financial condition. The Year 2000 Project is expected to significantly reduce the company's level of uncertainty about the Year 2000 problem and, in particular, about the Year 2000 compliance and readiness of its material External Agents. The company believes that, with the implementation of new business systems and completion of the Project as scheduled, the possibility of significant interruptions of normal operations should be reduced. The above contains forward-looking statements including, without limitation, statements relating to the company's plans, strategies, objectives, expectations, intentions, and adequate resources that are made pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Readers are cautioned that forward-looking statements contained in the Year 2000 Update 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 38. 32 Contingencies Legal and Tax Matters Phillips accrues for contingencies when a loss is probable and the amounts can be reasonably estimated. Based on currently available information, the company believes that it is remote that future costs related to known contingent liability exposures will exceed current accruals by an amount that would have a material adverse impact on the company's financial statements. Environmental Most aspects of the businesses in which the company engages are subject to various federal, state, local and foreign environmental laws and regulations. Similar to other companies in the petroleum and chemical industries, the company incurs costs for preventive and corrective actions at facilities and waste disposal sites. Phillips may be obligated to take remedial action as the result of the enactment of laws, such as the federal Superfund law, the issuance of new regulations, or as a result of leaks and spills. In addition, an obligation may arise when a facility is closed or sold. Most of the expenditures to fulfill these obligations relate to facilities and sites where past operations followed practices and procedures that were considered appropriate under regulations, if any, existing at the time, but may now require investigatory or remedial work to adequately protect the environment or address new regulatory requirements. At year-end 1997, Phillips reported 43 sites where it had information indicating that it might have been identified as a Potentially Responsible Party (PRP). Two sites were added in the nine month period ending September 30, 1998. Of these 45 sites remaining at September 30, 1998, the company believes it has a legal defense or its records indicate no involvement for 13 sites. At eight sites, present information indicates that it is probable that the company's exposure is less than $100,000 per site. At seven other sites, Phillips has had no communication or activity with government agencies or other PRPs in more than two years. Of the 17 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 33 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 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 September 30, 1998, accruals of $6 million had been made for the company's unresolved PRP sites. In addition, the company has accrued $62 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 $3 million for other environmental contingent liabilities, for total environmental accruals of $71 million. No one site represents more than 10 percent of the total. 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. During the first nine months of 1998, as part of a comprehensive environmental cost recovery project, the company entered into settlement agreements with certain of its historical liability and pollution insurers in exchange for releases or commutations of their present and future liabilities to the company under its historical liability and pollution policies. As a result of these settlement agreements, the company recorded a before-tax benefit to earnings of $109 million, all of which had been collected at September 30, 1998. At this time, the company is in negotiations with several other historical insurers. The ultimate amount, if any; the terms of the settlements; and the timing of recoveries from these other insurers remain uncertain. 34 OUTLOOK On October 8, 1998, Phillips and Ultramar Diamond Shamrock Corporation (UDS) announced that they had signed a letter of intent to form a joint venture company to be named Diamond 66, combining all of the operating assets of UDS and the North American refining, marketing, and transportation operations of Phillips (including Phillips' interest in the previously mentioned limited partnership formed to build a 58,000 barrels- per-day coker at the Sweeny Complex). Under the terms of the letter of intent, UDS will own 55 percent and Phillips will own 45 percent of Diamond 66. Phillips will receive or retain a one- time cash or cash equivalent amount of $500 million from the joint venture company upon the closing of the transaction and a $300 million cash distribution one year from the closing of the transaction. Diamond 66 will be a consolidated subsidiary of UDS, who will account for the transaction as a stock purchase of Phillips' refining, marketing and transportation business. Phillips' minority interest in the joint venture will be reflected as an equity investment. The parties are working to close the transaction in the first quarter of 1999. Closing is subject to final approvals by the respective boards of directors, the negotiation and execution of definitive agreements, regulatory approvals, and the approval of UDS shareholders. Phillips is participating in several appraisal wells on the north slope of Alaska at the Schrader Bluff and Northwest Eileen fields, which are satellite fields to the main Prudhoe Bay and Kuparuk fields. The results to date at Northwest Eileen have been successful, and the co-venturers plan to pursue an aggressive program for additional appraisal and development well drilling during 1999 and 2000. Testing of appraisal wells is under way at Schrader Bluff. In Nigeria, the company's oil mining leases for production of oil and gas have been renewed for 30 years from June 14, 1997. These interests are operated on behalf of the company under a joint operating agreement with Nigerian Agip Oil Company (Agip). Recently, domestic unrest there has caused production interruptions. On October 5, 1998, two pipelines transporting oil and condensates to the Brass terminal were turned off, affecting 120,000 gross barrels of oil per day. Production was restored October 17, 1998. Estimated net production lost to Phillips was about 230,000 barrels. In the United Kingdom, a development well drilled from the Maureen platform to extend production from the field was a dry hole. It is now expected that Maureen will cease production in 1999 or 2000. Phillips continues its effort to find another user for the Maureen platform and its review of other disposal 35 options. An additional financial provision for decommissioning was recorded in third quarter 1998, which should cover the cost of any option currently being considered. Production of liquefied natural gas at the Bayu-Undan gas field in the Timor Sea has been delayed at least two years from 2003 to 2005. The delay is due to the weak Asian market and disagreements with Phillips' major co-venturer concerning the potential location of the proposed liquefied natural gas plant. Due to the delay, Phillips is exploring opportunities for selling the gas in the domestic Australian market. If the company is unsuccessful at finding a market, the gas is expected to be reinjected. Initial production of the field's liquid reserves is expected in late 2002. Phillips anticipates that the joint-venture project to develop extra-heavy oil reserves from the Hamaca region of the Orinoco Oil Belt in eastern Venezuela, in which it has a 20 percent interest, will be approved in 1999. Initial production is expected in 2000 with peak production in 2003 or 2004. Phillips continues to jointly acquire, process and interpret 3-D seismic data with Mobil Corporation to build a portfolio of drilling prospects on its jointly held deep-water leases in the Gulf of Mexico. The delivery of a previously contracted deep- water drillship has been cancelled due to construction delays. However, drilling is planned to begin on the first prospect in early 1999 using a semi-submersible drilling rig. In January 1999, several European countries will begin operating with a single currency, the Euro, starting the process of completely replacing their national currencies during the next three and one-half years. This European Monetary Union will affect many of the business and financial functions for companies operating in these countries. The previously mentioned worldwide business systems replacement project is expected to position the company for the introduction of the Euro and no significant adverse economic impact is anticipated. Phillips operates in three countries where cutbacks in production have been announced. Norway previously volunteered to implement measures to cut back crude oil production on the Norwegian continental shelf by 3 percent for the remainder of 1998. This reduction plan is no longer anticipated to impact the Phillips- operated Ekofisk area fields since the yearly production volumes were reduced in the third quarter due to the previously mentioned production problems after start-up of Ekofisk II. The Nigerian government dictated quota reductions of 6 percent, effective April 1, 1998, and an additional 9 percent, effective July 1, 1998. These affect leases operated on behalf of the company under the joint operating agreement with Nigerian Agip Oil Company, 36 but anticipated 1998 annual production from these leases falls within the limits allowed under the revised production arrangements. Venezuela, an OPEC member, has agreed to cut back oil production, but third-bid-round-property operators have not been asked to curtail production. Based on the above, the company does not expect the economic impact of these announced production curtailments in any of the three countries to have a material adverse impact on the company's results of operations or financial position in 1998. Low crude oil prices and low chemical margins are expected to negatively impact earnings in fourth quarter 1998. However, production levels at Ekofisk have increased over third quarter levels and production is also expected to increase in the United Kingdom as a result of the start-up of production from the Janice field during fourth quarter, and a full quarter's production from the Britannia field, which began producing during the third quarter. These production increases could be somewhat offset if the previously mentioned domestic unrest in Nigeria causes production interruptions there. Natural gas prices are anticipated to increase in the fourth quarter as winter approaches. The current climate of low crude oil prices could have the impact of shortening the economic limits on field lives, which potentially could reduce proved property reserve estimates sufficiently to trigger impairment losses. Phillips constantly monitors its assets for signs of potential impairment and recognizes impairment losses whenever the carrying amount of a field is not expected to be recovered by future, undiscounted cash flows. Given the current low level of crude oil prices, and indications of only modest recovery, a comprehensive impairment analysis of E&P properties is being conducted that is expected to be completed in the fourth quarter. The company has a number of issues outstanding with the IRS related to tax years 1987 through 1992 that are expected to be resolved this year as a result of the favorable outcome in 1996 of the Kenai liquefied natural gas tax case related to the company's sales of liquefied natural gas from Kenai, Alaska. A favorable resolution of these issues would have a positive effect on net income and cash flow of up to $125 million while an unfavorable one would not impact the company's net income or cash position. All outstanding issues with the IRS for years prior to 1987 have been resolved. 37 CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Phillips is including the following cautionary statement to take advantage of the "safe harbor" provisions of the PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 for any forward-looking statement made by, or on behalf of, the company. The factors identified in this cautionary statement are important factors (but not necessarily all important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the company. Where any such forward-looking statement includes a statement of the assumptions or bases underlying such forward-looking statement, the company cautions that, while it believes such assumptions or bases to be reasonable and makes them in good faith, assumed facts or bases almost always vary from actual results, and the differences between assumed facts or bases and actual results can be material, depending on the circumstances. Where, in any forward-looking statement, the company, or its Management, expresses an expectation or belief as to future results, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will result, or be achieved or accomplished. 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: (1) the company's ability to obtain agreements from co-venturers or partners, and governments; engage drilling, construction and other contractors; and obtain economical and timely financing; (2) geology, land or sea, or ocean conditions; (3) world prices for oil, natural gas and natural gas liquids; and (4) 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 and demand for the 38 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 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 U.S. Securities and Exchange Commission, generally accepted accounting principles and other applicable requirements. o The dates on which the company believes the Year 2000 Project will be completed and the SAP and Oracle business computer systems will be implemented 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 guarantee that these estimates will be achieved, or that there will not be a delay in, or increased costs associated with, the implementation of the Year 2000 Project. A delay in the implementation of SAP could also impact the company's readiness for the introduction of the Euro. 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 locate and correct all relevant computer code, timely responses to and corrections by third-parties and suppliers, the ability to implement interfaces between the new systems and the systems not being replaced, and similar uncertainties. Due to the general uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 readiness of third-parties and the interconnection of global businesses, the company cannot ensure its ability to timely and cost-effectively resolve problems associated with the Year 2000 issue that may affect its operations and business or expose it to third-party liability. 39 PART II. OTHER INFORMATION Item 5. OTHER INFORMATION On October 8, 1998, Phillips and Ultramar Diamond Shamrock Corporation (UDS) announced that they had signed a letter of intent to contribute all of UDS's operating assets and the North American refining, marketing, and transportation operations of Phillips into a joint venture company to be named Diamond 66. Information describing this joint venture is located on page 35 in Management's Discussion and Analysis and is incorporated herein by reference. At the July 1998 meeting of the company's Board of Directors, the date of the company's 1999 annual meeting of stockholders was changed from May 10, 1999, to May 3, 1999. This change will not impact the date, November 30, 1998, by which stockholder proposals must be submitted. Under Article II, Section 10 of the company's bylaws, Nominations and Stockholder Business (an advance notice bylaw), a stockholder must deliver to the company notice of nominations or other business to be considered at the 1999 annual meeting of stockholders not less than 60 nor more than 90 days prior to the anniversary of last year's meeting or not later than March 12, 1999, or earlier than February 10, 1999. In September 1998, the Board of Directors, upon the recommendation of the Committee on Directors' Affairs, amended the second paragraph of Article II, Section 6, of the company's bylaws to increase the amounts that could be paid and received by a director or an affiliated entity before such director would not be considered independent under the definition of "Independent Director" in the bylaws. This change was made to update the amounts not changed since the Section was adopted in 1976. Item 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibits - -------- 3(ii) Bylaws of Phillips Petroleum Company, as amended effective September 14, 1998. 12 Computation of Ratio of Earnings to Fixed Charges. 27 Financial Data Schedule. Reports on Form 8-K - ------------------- During the three months ended September 30, 1998, the company did not file any reports on Form 8-K. 40 SIGNATURE Pursuant to the requirements 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/ Rand C. Berney ----------------------------- Rand C. Berney Vice President and Controller (Chief Accounting and Duly Authorized Officer) November 10, 1998 41 EX-3 2 Exhibit 3(ii) BYLAWS PHILLIPS PETROLEUM COMPANY (INCORPORATED UNDER THE LAWS OF DELAWARE) SEPTEMBER 14, 1998 TABLE OF CONTENTS ARTICLE I LOCATION OF OFFICES SECTION 1. LOCATION: ..................................... 1 ARTICLE II STOCKHOLDERS MEETINGS SECTION 1. ANNUAL MEETING: NOTICE: ....................... 1 SECTION 2. SPECIAL MEETINGS: NOTICE: ..................... 1 SECTION 3. QUORUM: ....................................... 2 SECTION 4. VOTING RIGHTS: PROXIES: RECORD DATE: LIST OF STOCKHOLDERS: ........... 2 SECTION 5. CHAIRMAN AND SECRETARY OF MEETINGS: ........... 3 SECTION 6. ELECTION OF DIRECTORS: ........................ 3 SECTION 7. INSPECTORS: ................................... 4 SECTION 8. INDEPENDENT PUBLIC ACCOUNTANTS: ............... 5 SECTION 9. STOCKHOLDER ACTION: ........................... 5 SECTION 10. NOMINATIONS AND STOCKHOLDER BUSINESS: ......... 5 - i - ARTICLE III DIRECTORS SECTION 1. POWERS: ....................................... 8 SECTION 2. FIRST MEETING OF NEWLY ELECTED BOARD OF DIRECTORS: ........................... 8 SECTION 3. REGULAR MEETINGS: ............................. 8 SECTION 4. SPECIAL MEETINGS: NOTICE: ..................... 9 SECTION 5. QUORUM AND VOTING: ............................ 9 SECTION 6. VACANCIES: ................................... 10 SECTION 7. COMMITTEES, APPOINTMENT AND LIMITATION OF POWERS: ........................ 10 SECTION 8. AUDITING OF ACCOUNTS: ........................ 11 SECTION 9. CHANGE IN NUMBER OF DIRECTORS: ............... 11 SECTION 10. OTHER INTERESTS OF DIRECTORS: ................ 11 SECTION 11. SUBMISSION OF ACTS TO STOCKHOLDERS: .......... 11 SECTION 12. COMPENSATION TO DIRECTORS: ................... 12 SECTION 13. ELIGIBILITY OF DIRECTORS: .................... 12 SECTION 14. INDEMNIFICATION: ............................. 12 - ii - ARTICLE IV EXECUTIVE COMMITTEE SECTION 1. MEMBERS: ..................................... 15 SECTION 2. POWERS: ...................................... 15 SECTION 3. MEETINGS: .................................... 15 SECTION 4. QUORUM: ...................................... 15 SECTION 5. OFFICERS: SUBCOMMITTEES: ..................... 16 SECTION 6. VACANCIES: ................................... 16 ARTICLE V COMMITTEE ON DIRECTORS' AFFAIRS SECTION 1. MEMBERS: ..................................... 16 SECTION 2. POWERS: ...................................... 16 SECTION 3. MEETINGS: .................................... 17 SECTION 4. QUORUM AND VOTING: ........................... 17 SECTION 5. FAILURE TO ACT: .............................. 17 SECTION 6. RIGHTS OF STOCKHOLDERS: ...................... 17 - iii - ARTICLE VI AUDIT COMMITTEE SECTION 1. MEMBERS: ..................................... 18 SECTION 2. POWERS: ...................................... 18 SECTION 3. DEFINITION: .................................. 19 SECTION 4. MEETINGS: .................................... 20 SECTION 5. STAFF: ....................................... 20 ARTICLE VII COMPENSATION COMMITTEE SECTION 1. MEMBERS: ..................................... 20 SECTION 2. POWERS: ...................................... 20 SECTION 3. MEETINGS: .................................... 21 SECTION 4. STAFF: ....................................... 21 ARTICLE VIII PUBLIC POLICY COMMITTEE SECTION 1. MEMBERS: ..................................... 21 SECTION 2. POWERS: ...................................... 22 SECTION 3. MEETINGS: .................................... 23 SECTION 4. STAFF: ....................................... 23 - iv - ARTICLE IX OFFICERS SECTION 1. DESIGNATION: ................................. 23 SECTION 2. ELECTION: TERM OF OFFICE: .................... 24 SECTION 3. REMOVAL FROM OFFICE: FAILURE TO PERFORM DUTIES: ................... 24 SECTION 4. CHAIRMAN OF THE BOARD OF DIRECTORS: VICE CHAIRMAN: PRESIDENT: .................... 24 SECTION 5. CHIEF EXECUTIVE OFFICER: ..................... 25 SECTION 6. EXECUTIVE VICE PRESIDENTS: VICE PRESIDENTS: ............................. 25 SECTION 7. SECRETARY: ................................... 25 SECTION 8. TREASURER: ................................... 26 SECTION 9. CONTROLLER: .................................. 26 SECTION 10. GENERAL: ..................................... 27 ARTICLE X CAPITAL STOCK SECTION 1. CERTIFICATES: FACSIMILE SIGNATURES: LOST STOCK: .................................. 27 SECTION 2. TRANSFERS: PRESERVATION OF CANCELED CERTIFICATES: FRACTIONAL SHARES: TRANSFER AGENTS: ............................. 28 SECTION 3. DATE FOR DETERMINATION OF STOCKHOLDERS: ............................. 28 SECTION 4. ADDITIONAL REGULATIONS: ...................... 29 - v - ARTICLE XI POLITICAL ACTIVITIES SECTION 1. COMPLIANCE WITH LAWS CONCERNING POLITICAL CONTRIBUTIONS: ..................... 29 SECTION 2. POLITICAL CONTRIBUTIONS: ..................... 29 SECTION 3. POLITICAL COMMITTEE AUTHORIZED BY FEDERAL LAW: ................... 30 SECTION 4. NONFEDERAL POLITICAL COMMITTEES: ............. 30 SECTION 5. OTHER POLITICAL ACTIVITIES: .................. 31 ARTICLE XII MISCELLANEOUS SECTION 1. CHECKS, NOTES AND DRAFTS: .................... 31 SECTION 2. SEAL: ........................................ 31 SECTION 3. DIVIDENDS AND RESERVES: ...................... 32 SECTION 4. WAIVER OF NOTICE: ............................ 32 SECTION 5. CHAIRMAN OF THE BOARD EMERITUS: .............. 32 SECTION 6. AMENDMENTS: .................................. 32 - vi - BYLAWS OF PHILLIPS PETROLEUM COMPANY ARTICLE I LOCATION OF OFFICES ARTICLE I. SECTION 1. LOCATION: The statutory registered office shall be in Dover, Delaware, and the principal operating offices shall be in Bartlesville, Oklahoma. The company may also have offices or agencies in New York, New York, and in such other places as the Board of Directors or the Executive Committee may designate. ARTICLE II STOCKHOLDERS MEETINGS ARTICLE II. SECTION 1. ANNUAL MEETING: NOTICE: An annual meeting of the stockholders of the company for the election of directors and the transaction of such other business as may properly come before the meeting shall be held, at such place, on such date and at such time, as shall be determined by the Board. Notice of the place, date and time of the meeting shall be given by mailing at least 10 days, but not more than 60 days, previous to such meeting, postage prepaid, a copy of such notice addressed to each stockholder at his post office address as recorded on the books of the company. The Board of Directors may postpone or reschedule any previously scheduled annual meeting. ARTICLE II. SECTION 2. SPECIAL MEETINGS: NOTICE: Special meetings of the stockholders, other than those required by statute, may be called at any time by the Chairman of the Board of Directors, the Vice Chairman, or the President, or by the Board of Directors pursuant to a resolution approved by a majority of the entire Board of Directors. Notice of every special meeting, stating the time, place and purpose, shall be given by mailing, postage prepaid, at least 10 but not more than 60 days before each such meeting, a copy of such notice addressed to each stockholder of the company at his post office address as recorded on the books of the company. The Board of Directors may postpone, reschedule or cancel any previously scheduled special meeting. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the company's notice of meeting. ARTICLE II. SECTION 3. QUORUM: At any meeting of the stockholders the holders of a majority of the issued and outstanding shares of the common stock, present in person or by proxy, shall constitute a quorum for all purposes unless otherwise provided by law. If the holders of the amount of stock necessary to constitute a quorum shall fail to attend in person or by proxy at the time and place fixed for an annual or special meeting, the person serving as chairman of the meeting may adjourn the meeting, without notice other than by announcement of the time and place at the meeting; provided, however, that if the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given in conformity with the notice requirements for the meeting being adjourned. At any such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the original meeting. ARTICLE II. SECTION 4. VOTING RIGHTS: PROXIES: RECORD DATE: LIST OF STOCKHOLDERS: At each stockholders meeting every stockholder shall be entitled to vote in person or by proxy appointed in accordance with Delaware law. The votes for directors shall be by ballot. All questions shall be determined by a majority vote of the stock represented at the meeting, unless a different vote is required by law or by the Certificate of Incorporation of the company. For a period of at least 10 days prior to each meeting of the stockholders, and during such meeting, there shall be maintained a complete list, in alphabetical order, of all of the stockholders entitled to vote at such meeting, -2- indicating the address of and number of shares held by each, which list shall be certified by the person in charge of the stock ledger of the company. Only the persons in whose names shares of stock are registered on the books of the company on the record date for such meeting shall be entitled to vote. Subsequent to the record date for any meeting, and prior to such meeting, any proxy may submit his power of attorney to the Secretary for examination. The certificate of the Secretary as to the regularity of such power of attorney, and as to the number of shares held by the stockholder who executed such power of attorney, shall be received as prima facie evidence of the number of shares represented by the holder of such power of attorney for the purpose of establishing the presence of a quorum at such meeting and of organizing the same, and for all other purposes. ARTICLE II. SECTION 5. CHAIRMAN AND SECRETARY OF MEETINGS: The Chairman of the Board of Directors, and in his absence, the Vice Chairman, and in the absence of both the Chairman and the Vice Chairman, the President, shall act as chairman of and preside at all meetings of stockholders. The Board of Directors may appoint any stockholder to act as chairman of any such meeting in the absence of the Chairman of the Board of Directors, the Vice Chairman and the President. The chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including the determination of the date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at such meeting and such other regulation of the manner of voting and the conduct of discussion as he determines to be reasonably in order. The chairman may adjourn any meeting of stockholders, whether pursuant to Section 3 of this Article II or otherwise, and notice of such adjournment need be given only if required by law. The Secretary shall act at all meetings of the stockholders, but, in the absence of the Secretary at any such meeting, an Assistant Secretary of the company shall act in his stead, or the presiding officer may appoint any other person to act as secretary of the meeting. ARTICLE II. SECTION 6. ELECTION OF DIRECTORS: The stockholders shall at each annual meeting select by ballot a Board of Directors consisting of not less than eleven nor more than twenty-one members, with the exact number to be fixed from time to time by resolution of the Board. A majority of the total number of directors elected shall be persons who are -3- independent outside directors, as defined in this Section. The persons receiving votes of a majority of the stock represented at the meeting shall be directors for the ensuing year or until their successors shall be elected. As used in these Bylaws, the term "independent outside directors" means any person who, on the date of his election, (i) is not an officer or employee of this company; (ii) is not an officer or employee of, or does not own directly or indirectly in excess of 1% of the shares of, a corporation (A) which has received payments from this company for property or services in excess of 1% of its gross receipts during any one of the four calendar years immediately preceding such date, as determined by its financial statement for the year in question, or (B) which is proposed to receive during the following year such payments in excess of 1% of its gross receipts as determined by its financial statement for the immediately preceding year; (iii) is not a member, officer, or employee of any business or professional organization (other than a corporation) which (A) has received payments from this company for property or services in excess of $500,000 during any one of the four calendar years immediately preceding such date, or (B) is proposed to receive such payments in excess of $500,000 in the following year; (iv) is not a person who individually (as a share partner or otherwise) has received payments, directly or indirectly, from this company in excess of $50,000 (other than fees as a director) for property or services sold or provided by him during any one of the four calendar years immediately preceding such date, and is not proposed to receive such payments in excess of $50,000 in the following year; and (v) is not a member of or associate in a law firm which is proposed to be or in the preceding four calendar years has been engaged by this company. Notwithstanding the foregoing definition, any person elected a director at this company's 1975 annual meeting of stockholders, who was not an officer or employee of this company when so elected and is not such an officer or employee on the date on which his status is determined, shall be considered within the definition of "independent outside director." As used in this Section, the term "this company" means Phillips Petroleum Company or any company which is controlled directly or indirectly by it; and the term "officer or employee" shall not include any director of a corporation who is not otherwise an officer or employee of such corporation. ARTICLE II. SECTION 7. INSPECTORS: The company shall, in advance of any meeting of stockholders, appoint one or more inspectors to act at the meeting and make a written report thereof. The company may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering -4- upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his ability. ARTICLE II. SECTION 8. INDEPENDENT PUBLIC ACCOUNTANTS: Independent public accountants ("accountants") designated by the Board of Directors require approval by the stockholders. At each annual meeting a vote of stockholders shall be taken to ascertain their approval or disapproval of the accountants designated by the Board as the accountants to audit the books, records, and accounts of the company for the current fiscal year. If the accountants designated by the Board are disapproved by the stockholders, the Board shall determine whether to replace such accountants for the current fiscal year, but in any case shall not designate such accountants for the next fiscal year. If the accountants designated by the Board are approved by the stockholders, they shall not be discharged or removed by the Board prior to the beginning of the next fiscal year, except with the concurrence of the stockholders acting at a special meeting called for that purpose. The accountants shall have access at reasonable times to all records, documents, accounts, and information of the company, and shall be entitled to require from directors, officers, and employees of the company such information and explanation as, in their opinion, are necessary to enable them to make their certification or render their report or opinion, or to pursue any inquiry which the Audit Committee has directed them to conduct. ARTICLE II. SECTION 9. STOCKHOLDER ACTION: Any action required or permitted to be taken by the stockholders of the company must be effected at a duly called annual or special meeting of such holders and may not be effected by any consent in writing by such holders. ARTICLE II. SECTION 10. NOMINATIONS AND STOCKHOLDER BUSINESS: Nominations of persons for election to the Board of Directors of the company and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (a) pursuant to the company's notice of meeting, (b) by or at the direction of the Board of Directors, or (c) by any stockholder of the company who was a stockholder of record at the time of giving of notice provided for in this Section, who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Section. -5- For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to this Section, the stockholder must have given timely notice thereof in writing to the Secretary of the company, and such business must be a proper subject for stockholder action under the Delaware General Corporation Law. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the company not less than 60 days nor more than 90 days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the company's books, and of such beneficial owner, and (ii) the class and number of shares of the company which are owned beneficially and of record by such stockholder and such beneficial owner. Notwithstanding anything in this Section to the contrary, in the event that the number of directors to be elected to the Board of Directors of the company is increased and there is no public announcement specifying the size of the increased Board of Directors made by the company at least 70 days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this Section shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the company not later than the close of business on the 10th day following the day on which such public announcement is first made by the company. -6- Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the company's notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the company's notice of meeting (a) by or at the direction of the Board of Directors or (b) by any stockholder of the company who is a stockholder of record at the time of giving of notice provided for in this Section, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this Section. Nominations by stockholders of persons for election to the Board of Directors may be made at such a special meeting of stockholders if the stockholder's notice required by this Section shall be delivered to the Secretary at the principal executive offices of the company not earlier than the 90th day prior to such special meeting and not later than the close of business on the later of the 60th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. Only such persons who are nominated in accordance with the procedures set forth in this Section shall be eligible for election as directors at any meeting of stockholders. Only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section. The chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made in accordance with the procedures set forth in this Section and, if any proposed nomination or business is not in compliance with this Section, to declare that such defective proposal shall be disregarded. For purposes of this Section, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the company with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. Notwithstanding the foregoing provisions of this Section, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section. Nothing in this Section shall be deemed to affect any rights of stockholders to request inclusion of proposals in the company's proxy statement pursuant to Rule 14a-8 under the Exchange Act. -7- ARTICLE III DIRECTORS ARTICLE III. SECTION 1. POWERS: The Board of Directors shall have all the powers of the company and all the management of its business, except as otherwise provided by law. It shall appoint and remove all officers, employees, and agents of the company except as hereinafter stated, prescribe their duties, fix their compensation except as hereinafter stated, and require, when deemed advisable, security for their faithful service. It may make rules and regulations not inconsistent with law and these Bylaws for the guidance of the company's officers, employees, and agents. Each director shall have full access to any and all company records and shall have the right to interview any company officer or employee with respect to any aspect of the company's business. It shall cause a report to be made to the annual meeting of the stockholders showing the business operations and financial position of the company. It shall generally possess all the powers and perform all the duties usually exercised by or imposed upon boards of directors of similar corporations. Directors who do not qualify as independent outside directors, as defined in Section 6, Article II of these Bylaws, shall not vote on the selection or retention of independent public accountants. Although resignation, death, or removal of one or more independent outside directors, as defined in Section 6, Article II, may result in the Board's being composed of less than the proportion of independent outside directors required by that Section, the Board shall nevertheless have the same powers as otherwise, but shall fill each such vacancy with an independent outside director within a reasonable period of time. ARTICLE III. SECTION 2. FIRST MEETING OF NEWLY ELECTED BOARD OF DIRECTORS: Immediately after each annual meeting of stockholders, the newly elected directors shall meet at the place where the annual meeting of stockholders was held, for the purpose of electing officers and transacting any other business that shall come before the meeting. ARTICLE III. SECTION 3. REGULAR MEETINGS: Regular meetings of the Board of Directors shall be held at the offices of the company in Bartlesville, Oklahoma, at 12:30 p.m., or at such time as the Board directs, on the second Monday of each month unless otherwise designated by the Board, except (i) the meeting for which provisions have been made in Section 2 of this Article III shall count as the regular meeting for the month of May, and (ii) no regular meeting shall be held in the months of January, -8- March, June, August and November. No notice of any regular meeting shall be necessary. Regular meetings may be adjourned to be held at any place within or without the States of Oklahoma and Delaware at the time and place specified in the resolution of adjournment. No notice of any adjourned meeting of any regular meeting shall be necessary. ARTICLE III. SECTION 4. SPECIAL MEETINGS: NOTICE: Special meetings of the Board of Directors may be called by the Chairman of the Board of Directors, the Vice Chairman, the President, the Secretary, or an Assistant Secretary, and shall be called by any of said officers upon the request of at least three directors. Any such meeting shall be held at the time and place, within or without the States of Oklahoma and Delaware, specified in the notice thereof. One day's notice of the time and place of special meetings shall be given to each director by letter or telegram sent to the residence or usual place of business of such director. No notice of any adjourned meeting of any special meeting shall be necessary. ARTICLE III. SECTION 5. QUORUM AND VOTING: A majority of the total number of directors then in office shall constitute a quorum for the transaction of business, but less than a quorum may adjourn from time to time and from place to place. The affirmative votes of a majority of the total number of directors then in office shall be required to constitute action by the Board of Directors, unless the vote of a greater number shall be required by law and except as may be otherwise provided in the Certificate of Incorporation of the company; except that (i) only the affirmative votes of a majority of the total number of independent outside directors then in office shall be required on the question of the selection or retention of independent public accountants, and (ii) only the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum, shall be required on any question involving the compensation of directors other than those who are employees of the company. -9- ARTICLE III. SECTION 6. VACANCIES: A vacancy occurring in the Board of Directors shall be filled by a person elected by the remaining members of the Board, though less than a quorum, to serve until the next annual election by the stockholders. ARTICLE III. SECTION 7. COMMITTEES, APPOINTMENT AND LIMITATION OF POWERS: All committees shall be appointed by the Board of Directors, except to the extent otherwise authorized by Section 5, Article IX of these Bylaws, and except further, that the Executive Committee may appoint subcommittees, as provided in Section 5, Article IV of these Bylaws. No committee, whether or not appointed by the Board, shall have authority to: (a) declare dividends or distributions; (b) approve or recommend to stockholders action or proposals required by law to be approved by stockholders; (c) designate candidates for the office of director, for purposes of proxy solicitation or otherwise, or fill vacancies on the Board or any committee thereof; (d) amend the Bylaws; (e) reduce earned or capital surplus; (f) authorize or approve the reacquisition of shares unless pursuant to a general formula or method specified by the Board; or (g) authorize or approve the issuance or sale of, or any contract to issue or sell, shares or designate the terms of a series of a class of shares, provided that the Board, having acted regarding general authorization for the issuance or sale of shares, or any contract therefor, and, in the case of a series, the designation thereof, may, pursuant to a general formula or method specified by the Board by resolution or by adoption of a stock option or other plan, authorize a committee to fix the terms upon which such shares may be issued or sold, including, without limitation, the price, the dividend rate, provisions for redemption, sinking fund, -10- conversion, preferential rights, and provisions for other features of a class of shares, or a such committee to adopt any final resolution setting forth all the terms thereof and to authorize the statement of the terms of a series for filing with the Secretary of State of Delaware. Nothing contained in this Section is intended to prohibit a committee from submitting recommendations to the Board regarding any matter. ARTICLE III. SECTION 8. AUDITING OF ACCOUNTS: It shall be the duty of the Board of Directors to cause the books and accounts of the company and vouchers and papers relating thereto to be audited at least once a year. ARTICLE III. SECTION 9. CHANGE IN NUMBER OF DIRECTORS: The Board of Directors may increase or decrease the number of directors from time to time without approval of the stockholders, provided that the proportion of independent outside directors shall conform to the provisions of Section 6, Article II of these Bylaws. Where the number of directors is increased, the Board shall elect a person to fill each vacancy thus created, to serve until the next annual election by the stockholders. ARTICLE III. SECTION 10. OTHER INTERESTS OF DIRECTORS: No transaction between this company and any director or officer or any corporation, partnership, association, or other organization shall be affected by any personal interest in such transaction of any director of this company except to the extent provided by law. ARTICLE III. SECTION 11. SUBMISSION OF ACTS TO STOCKHOLDERS: The Board of Directors may submit any transaction for approval or ratification at any meeting of the stockholders. -11- ARTICLE III. SECTION 12. COMPENSATION TO DIRECTORS: Directors, other than those who are employees of the company, shall be compensated for their services as members of the Board of Directors and of any committee thereof in such manners and in such amounts as may be fixed from time to time by the Board. In fixing such compensation, the Board shall take into account not only the time required for attendance at meetings of the Board and committees thereof, but also the time spent in preparation for such meetings. Upon request, the company shall furnish to any stockholder, without charge, a statement of the total annual compensation of any director who is not an employee of the company, showing the method by which such compensation was computed. In addition to such compensation any director may be reimbursed by the company for all reasonable expenses incurred in attending meetings of the Board and its committees. Subject to the provisions of Section 6, Article II, nothing herein shall be construed to preclude any director from serving the company in any other capacity and receiving compensation therefor. ARTICLE III. SECTION 13. ELIGIBILITY OF DIRECTORS: Any person shall be eligible for election as a director provided that any person reaching their 70th birthday during any calendar year may be elected in such calendar year and continue to serve out any term for which they are so elected but will not thereafter be eligible. Any employee who is also a director, including the Chairman of the Board of Directors, shall resign as a director upon his retirement as an employee. ARTICLE III. SECTION 14. INDEMNIFICATION: Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he is or was a director, officer or employee of the company or is or was serving at the request of the company as a director, officer employee of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (hereinafter an "indemnitee"), whether the basis of such proceeding is alleged action in an official capacity as a director, officer employee or in any other capacity while serving as a director, officer employee, shall be indemnified and held harmless by the company to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the company to provide broader indemnification rights than such law permitted -12- the company to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, Employee Retirement Income Security Act of 1974 excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such indemnitee in connection therewith; provided, however, that, except as provided in this Section with respect to proceedings to enforce rights to indemnification, the company shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the Board of Directors of the company. The right to indemnification conferred in this Section shall include the right to be paid by the company the expenses incurred in defending any such proceeding in advance of its final disposition (hereinafter an "advancement of expenses"); provided, however, that, if the Delaware General Corporation Law requires, an advancement of expenses incurred by an indemnitee in his capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the company of an undertaking, by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (hereinafter a "final adjudication") that such indemnitee is not entitled to be indemnified for such expenses under this Section or otherwise. The rights to indemnification and to the advancement of expenses conferred in this Section shall be contract rights and such rights shall continue as to an indemnitee who has ceased to be a director, officer or employee and shall inure to the benefit of the indemnitee's heirs, executors and administrators. If a claim under this Section is not paid in full by the company within 60 days after written claim had been received by the company, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be 20 days, the indemnitee may at any time thereafter bring suit against the company to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the company to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) in any suit by the company to recover an advancement of expenses pursuant to the terms of an undertaking the company shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met any applicable standard for indemnification set forth in the Delaware General Corporation Law. Neither the failure of the company (including its Board of -13- Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the company (including its Board of Directors, independent legal counsel, or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or by the company to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this Section or otherwise shall be on the company. The rights to indemnification and to the advancement of expenses conferred in this Section shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, the company's Certificate of Incorporation, Bylaws, agreement, vote of stockholders or disinterested directors or otherwise. The company may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the company or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the company would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. The company may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification, and rights to be paid by the company the expenses incurred in defending any proceeding in advance of its final disposition, to any agent of the company or to any agent of another corporation or of a partnership, joint venture, trust or other enterprise, including any employee benefit plan, serving as such agent at the request of the company, to the fullest extent of the provisions of this Section with respect to the indemnification and advancement of expenses of directors, officers and employees of the company. -14- ARTICLE IV EXECUTIVE COMMITTEE ARTICLE IV. SECTION 1. MEMBERS: The Board of Directors, by resolution adopted by a majority of the whole Board, may establish an Executive Committee, the members of which shall consist of the Chairman of the Board of Directors, the President and three independent outside directors of the Board, as defined in Section 6, Article II of these Bylaws, designated by the Board. In addition, the Board may from time to time designate one or more other directors to serve as members of the Committee, provided that a majority of the members of the Committee shall be independent outside directors. ARTICLE IV. SECTION 2. POWERS: Subject to the limitations stated in Sections 1 and 7 of Article III and Sections 2 and 3 of Article XI of these Bylaws and to any limitations imposed by law or imposed by the Board of Directors, the Executive Committee may exercise all the powers of the Board in the management of specified matters where such authority is delegated to it by the Board, and also, subject to the same limitations, when the Board is not in session, the Committee shall have, and may exercise, all the powers and authority of the Board in the management and business of the company (including the power to authorize the seal of the company to be affixed to all papers which may require it). ARTICLE IV. SECTION 3. MEETINGS: The Executive Committee shall adopt such rules and regulations for the calling and holding of its meetings and for the transaction of business at such meetings as to the Committee shall seem appropriate and not inconsistent with the law or these Bylaws. As provided by law, the Committee is authorized to hold meetings by conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation shall constitute presence in person at such meeting. ARTICLE IV. SECTION 4. QUORUM: Three members of the Executive Committee shall constitute a quorum for the transaction of business, but less than a quorum may adjourn from time to time and from place to place. The vote of the majority of the members present -15- at a meeting at which a quorum is present or of three members present at such meeting, whichever is greater, shall be required to constitute action by the Committee, unless the vote of a greater number shall be required by law. ARTICLE IV. SECTION 5. OFFICERS: SUBCOMMITTEES: The Chairman of the Board, and in his absence the President, shall preside at the meetings of the Executive Committee but, in the absence of both the Chairman of the Board and the President, the majority of the members of the Committee present at a meeting shall appoint a member to preside at such meeting. The Secretary of the company shall serve as secretary of the Committee, but in the absence of the Secretary, the presiding officer at a meeting shall appoint any other director or officer of the company to act as secretary of such meeting. The Secretary shall keep the records of the Committee. The Committee shall also have power to appoint such subcommittees as it may deem necessary. ARTICLE IV. SECTION 6. VACANCIES: Vacancies occurring in the Executive Committee shall be filled by the Board of Directors. ARTICLE V COMMITTEE ON DIRECTORS' AFFAIRS ARTICLE V. SECTION 1. MEMBERS: At the first meeting of each newly elected Board of Directors, the Board shall appoint a Committee on Directors' Affairs of the Board containing at least three members and consisting entirely of independent outside directors of the Board, as defined in Section 6, Article II of these Bylaws, and shall designate its chairman. The Board may from time to time designate one or more independent outside directors as alternate members of the Committee. ARTICLE V. SECTION 2. POWERS: By such date as may be specified by the Board of Directors each year, the Committee on Directors' Affairs shall recommend and submit to the Board for its approval a list of persons proposed for nominations by the Board for election as directors at the next annual stockholders meeting. If for any reason a vacancy -16- occurs in any slate of persons nominated by the Board for election as directors, or a vacancy occurs on the Board between annual meetings, the Committee shall, by the date specified by the Board, submit to the Board for approval a recommendation of a person to fill each such vacancy. Except as otherwise provided in Section 5 of this Article V, only persons recommended by the Committee shall be eligible for nomination by the Board for election as directors or to fill a vacancy, but if the Board does not approve of one or more of the persons recommended by the Committee, the Committee shall submit a recommendation of other persons by the date specified by the Board. ARTICLE V. SECTION 3. MEETINGS: The Committee on Directors' Affairs shall adopt such rules and regulations for the calling and holding of its meetings and for the transaction of business at such meetings as to the Committee shall seem meet and consistent with law and these Bylaws. ARTICLE V. SECTION 4. QUORUM AND VOTING: Three members or a majority of the Committee on Directors' Affairs, whichever is greater, shall constitute a quorum for the transaction of business, but less than a quorum may adjourn from time to time and from place to place. The vote of the majority of the members present at a meeting at which a quorum is present or of three members present at such meeting, whichever is greater, shall be required to constitute action by the Committee, unless the vote of a greater number shall be required by law. ARTICLE V. SECTION 5. FAILURE TO ACT: If for any reason the Committee shall fail or determine not to make a recommendation of director nominees with respect to any annual stockholders meeting or with respect to any vacancy on the Board by the date specified by the Board, the Board shall select such nominees or fill such vacancy in such manner as it deems appropriate. ARTICLE V. SECTION 6. RIGHTS OF STOCKHOLDERS: Nothing in this Article V shall affect or restrict the right of any stockholder to nominate any person for election as a director where such nomination is -17- otherwise authorized by law and made in accordance with Section 10, Article II of these Bylaws. ARTICLE VI AUDIT COMMITTEE ARTICLE VI. SECTION 1. MEMBERS: At the first meeting of each newly elected Board of Directors, the Board shall appoint an Audit Committee of at least three members, consisting entirely of independent outside directors of the Board, as defined in Section 6, Article II of these Bylaws, and shall designate its chairman. From time to time the Board may designate one or more independent outside directors as alternate members of the Committee. ARTICLE VI. SECTION 2. POWERS: The Audit Committee shall have the following powers and duties: (a) The Committee shall recommend annually to the Board of Directors the independent public accountants to be engaged to audit the books, records, and accounts of the company for the ensuing fiscal year. Only accountants recommended by the Committee and approved by the Board shall be engaged. In case of a vacancy in the position of independent public accountants, the Committee shall recommend and the Board shall approve the engagement of other independent public accountants to fill the vacancy until the next annual stockholders meeting; (b) The Committee shall arrange the details of the engagement of the independent public accountants, including the remuneration to be paid; (c) The Committee shall review with the company's independent public accountants, as well as the company's Controller and other appropriate company personnel, the following matters: (i) the company's general policies and procedures with respect to audits and accounting and financial controls; and (ii) the general accounting and reporting principles and practices which should be applied in preparing the company's financial statements and conducting financial audits of its affairs; -18- (d) The Committee shall meet with the independent public accountants as required, but at least twice a year, and shall review with them the company's interim and year-end financial statements, any certification, report, or opinion which the independent public accountants propose to render in connection with such statements, and any other appropriate matter; (e) The Committee shall meet with the company's internal audit staff as required, but at least twice a year, and shall review with that staff the company's interim and year-end financial statements, and the extent to which the company's accounting staff has implemented any reforms suggested by the independent public accountants or the Committee; (f) The Committee shall have power to direct the independent public accountants and the company's internal audit staff to inquire into and report to it on any corporate contract, transaction, or procedure; the conduct of any corporate office, division, profit center, subsidiary, or other unit; or any other matter having to do with the company's business and affairs; (g) The Committee shall become and remain apprised of those matters relating to the payment by the company of finders', promoters' or consultants' commissions or fees, or any similar commissions or fees, as shall be necessary to permit the Committee to recommend to the Board the policies which the Board should adopt and the action which the Board should take to prevent any use of company funds or other assets which is unlawful or contrary to Board policy; and (h) The Committee shall make such reports and recommendations to the Board in connection with the foregoing functions as it shall deem appropriate or as the Board may request, and shall take such action thereon as the Board may direct it to take. ARTICLE VI. SECTION 3. DEFINITION: The term "independent public accountants" shall include individuals, companies, or firms serving as the independent outside auditors or independent outside public accountants for the company. -19- ARTICLE VI. SECTION 4. MEETINGS: The Committee may adopt such rules and regulations for the calling and holding of its meetings and for the transaction of business at such meetings as shall be considered by the Committee to be necessary or desirable; provided, that two members of the Committee shall constitute a quorum for the transaction of the business and the affirmative vote of a majority of the whole Committee shall be required to constitute action by the Committee. ARTICLE VI. SECTION 5. STAFF: The Committee may select and appoint such full-time or part-time staff assistants, as the Committee deems necessary or desirable, who shall perform such duties and responsibilities as the Committee shall assign. The compensation of its staff shall be fixed by the Committee in accordance with general company policy, and any member of its staff may be discharged only by the Committee. ARTICLE VII COMPENSATION COMMITTEE ARTICLE VII. SECTION 1. MEMBERS: At the first meeting of each newly elected Board of Directors, the Board shall appoint a Compensation Committee of at least three members, consisting entirely of independent outside directors of the Board, as defined in Section 6, Article II of these Bylaws, and shall designate its chairman. From time to time the Board may designate one or more independent outside directors as alternate members of the Compensation Committee. ARTICLE VII. SECTION 2. POWERS: The Compensation Committee shall have the following powers and duties: (a) The Compensation Committee shall review and recommend to the Board of Directors for its consideration and determination the salaries of the Chairman of the Board of Directors and the President, and to determine on its own initiative the salaries of any Executive Officer (as the term "Executive Officer" is defined from time to time under Rule 3b-7 of the Securities Exchange Act of 1934, as amended) or employee who has an annual salary of $250,000 or more; -20- (b) The Compensation Committee shall consider and make recommendations to the Board of Directors with respect to (i) any proposals for the application of new benefits and incentive compensation plans or programs to officers who are also directors, and (ii) the application to such officers of amendments to any then existing such plans or programs which would significantly increase the compensation of such officers; and (c) The Compensation Committee shall perform such other duties as may, from time to time, be delegated to the Compensation Committee under any compensation or benefit plans. ARTICLE VII. SECTION 3. MEETINGS: The Compensation Committee shall adopt such rules and regulations for the calling and holding of its meetings and for the transaction of business at such meetings as shall be considered by the Compensation Committee to be necessary or desirable; provided, that two members of the Compensation Committee shall constitute a quorum for the transaction of business and the affirmative vote of a majority of the whole Compensation Committee shall be required to constitute action by the Compensation Committee. ARTICLE VII. SECTION 4. STAFF: The Compensation Committee shall be assisted by appropriate corporate staffs, and in addition, the Compensation Committee may obtain assistance from such other persons, who need not be employees of the company, or organizations as it may deem advisable, with the expenses incurred thereby to be borne by the company. ARTICLE VIII PUBLIC POLICY COMMITTEE ARTICLE VIII. SECTION 1. MEMBERS: At the first meeting of each newly elected Board of Directors, the Board shall appoint a Public Policy Committee of at least three members, consisting entirely of independent outside directors of the Board, as defined in Section 6, Article II of these Bylaws, and shall designate its chairman. From time to time the Board may designate one or more directors as alternate members of the Public Policy Committee, provided that those members and alternates from time to time -21- serving as the Public Policy Committee shall at all times consist entirely of independent outside directors. ARTICLE VIII. SECTION 2. POWERS: The Public Policy Committee shall have the following powers and duties: (a) The Public Policy Committee shall act in an advisory capacity to the Board of Directors and the management of the company in response to current and emerging public policy issues and in development and review of policies and budgets in respect of contributions, including but not limited to contributions to organizations whose primary purpose is charitable, civic, cultural or educational; (b) The Public Policy Committee shall identify, evaluate and monitor the social, political, environmental, occupational safety and health trends, issues and concerns, domestic and foreign, which affect or could affect the company's business activities and performance; (c) The Public Policy Committee shall review information from company management and approve recommendations to assist in the formulation and adoption of policies, programs and practices concerning the matters set forth in subparagraph (b) above, including but not limited to ecological and environmental protection, employee safety, ethical business conduct, consumer affairs, alcohol and drug abuse, equal opportunity matters and government relations; (d) The Public Policy Committee shall exercise the powers with respect to political activities conferred upon it by the provisions of Article XI of these Bylaws; and (e) The Public Policy Committee shall monitor and evaluate on an ongoing basis the company's compliance with the policies, programs and practices established under the Public Policy Committee's oversight. -22- ARTICLE VIII. SECTION 3. MEETINGS: The Public Policy Committee shall adopt such rules and regulations for the calling and holding of its meetings and for the transaction of business at such meetings as shall be considered by the Public Policy Committee to be necessary or desirable; provided that three members or a majority of the Public Policy Committee, whichever is greater, shall constitute a quorum for the transaction of business and the affirmative vote of a majority of the whole Public Policy Committee shall be required to constitute action by the Public Policy Committee. ARTICLE VIII. SECTION 4. STAFF: The Public Policy Committee shall be assisted by appropriate corporate staffs, and in addition, the Public Policy Committee may obtain assistance from such other persons, who need not be employees of the company, or organizations as it may deem advisable, with the expenses incurred thereby to be borne by the company. ARTICLE IX OFFICERS ARTICLE IX. SECTION 1. DESIGNATION: The officers of the Company shall consist of a Chairman of the Board of Directors and a President, each of whom shall be a director, one or more Executive Vice Presidents, one or more Vice Presidents, a Secretary, a Treasurer, and a Controller, who need not be but may be directors, and such other officers, including a Vice Chairman of the Board of Directors who shall be a director, as may be elected or appointed by the Board of Directors. Except for the offices of Chairman of the Board of Directors, Vice Chairman, President, and Executive Vice President, any two offices may be held by the same person. -23- ARTICLE IX. SECTION 2. ELECTION: TERM OF OFFICE: The officers of the company shall be elected by the Board of Directors at its first meeting after the annual meeting of the stockholders and thereafter as appropriate. Each officer shall hold office from the date of his election until the first meeting of the directors held after the next annual meeting of the stockholders, or until his successor is elected. ARTICLE IX. SECTION 3. REMOVAL FROM OFFICE: FAILURE TO PERFORM DUTIES: Any officer of the company may be removed with or without cause by the Board of Directors. If any officer shall be unable or refuse or fail to perform any of the duties of his office, the officer of the company which has been designated the chief executive officer pursuant to Section 5 of this Article may designate any other person or persons to perform such duties until such time as the Board may act with respect thereto. ARTICLE IX. SECTION 4. CHAIRMAN OF THE BOARD OF DIRECTORS: VICE CHAIRMAN: PRESIDENT: The Chairman of the Board of Directors shall preside at all meetings of the Board of Directors and of the stockholders. In the absence of the Chairman, the Vice Chairman, and in the absence of both the Chairman and the Vice Chairman, the President shall preside at all such meetings. The Chairman, Vice Chairman, or the President is empowered to sign any contract, deed, certificate, or other instrument or document authorized by the Board or the Executive Committee, or required by law to be signed by such officer or officers. -24- ARTICLE IX. SECTION 5. CHIEF EXECUTIVE OFFICER: The Chairman of the Board of Directors shall be the chief executive officer of the company. The Chairman of the Board of Directors may designate the Vice Chairman or the President to act as chief executive officer during the Chairman's absence. The chief executive officer of the company shall have general and active supervision over the business, affairs and operations of the company and over its several officers, agents and employees, subject, however, to the control of the Board and the Executive Committee. The chief executive officer shall see that all orders and resolutions of the Board and the Executive Committee are carried into effect, and, in general, shall perform all duties incident to the position of chief executive officer and such other duties as may from time to time be assigned by the Board or the Executive Committee. The chief executive officer may delegate and assign to other officers, employees and agents of the company or to committees appointed by him such duties as the chief executive officer considers proper and not inconsistent with these Bylaws or any delegations and assignments made by the Board or the Executive Committee. ARTICLE IX. SECTION 6. EXECUTIVE VICE PRESIDENTS: VICE PRESIDENTS: The Executive Vice Presidents and the Vice Presidents shall have such authority and shall perform such duties as may be delegated to them pursuant to these Bylaws. The power of the Executive Vice Presidents and the Vice Presidents to sign on behalf of the company any contract, deed, certificate, or other instrument or document authorized by the Board of Directors or the Executive Committee shall be coordinate with like powers of the Chairman of the Board of Directors, the Vice Chairman, and the President and shall have the same effect as if signed by the Chairman or the President. ARTICLE IX. SECTION 7. SECRETARY: The Secretary shall attend to the giving of all notices of all meetings of the Board of Directors and stockholders, shall attend all such meetings and shall record the minutes of such meetings in books provided for that purpose. He shall be the custodian of all papers brought before the Board for action or ordered on file. He shall have the custody of the corporate seal, and shall, as necessary or appropriate, affix and attest the same on all documents authorized by the Board or the Executive Committee. He shall make or cause to be made the necessary or appropriate determinations as to the owners of stock pursuant to the establishment of a record date, as provided in Section 3, Article X of these -25- Bylaws, and shall prepare or cause to be prepared the required or appropriate stockholder lists or records reflecting these determinations. Such list shall be certified by the Secretary or other person in charge of the stock ledger of the company. The Secretary shall have such other authority and duties as may be assigned to him in accordance with these Bylaws. The Board may appoint one or more Assistant Secretaries who shall assist the Secretary in the performance of his duties and shall perform all the duties of the Secretary in his absence. ARTICLE IX. SECTION 8. TREASURER: The Treasurer shall keep full and accurate accounts of all receipts and disbursements. With the approval of the Board of Directors he shall deposit all moneys and other valuable effects in the name and to the credit of the company in such depositories as he may select and, under direction of the Board, he shall disburse the same. He shall have authority to receive and give receipts for all moneys due and payable to the company from any source whatsoever and to give full discharge for the same, and to endorse for deposit on behalf of the company all checks, drafts, notes, warrants, orders and other papers requiring endorsement. He may be required to give a bond in any amount satisfactory to the Board for the faithful performance of the duties of his office and for the restoration to the company in case of his death, resignation or removal from office, of all books, papers, vouchers, money or other property of whatever kind in his possession, belonging to the company. The Treasurer shall have such other authority and duties as may be assigned to him in accordance with these Bylaws. The Board may appoint one or more Assistant Treasurers who shall assist the Treasurer in the performance of his duties and shall perform all the duties of the Treasurer in his absence. ARTICLE IX. SECTION 9. CONTROLLER: The Controller shall be the officer principally in charge of the accounts of the company, and shall have such other authority and duties as may be assigned to him in accordance with these Bylaws. -26- The Board of Directors may appoint one or more Deputy Controllers and Assistant Controllers who shall assist in the performance of all the duties of the Controller in his absence. ARTICLE IX. SECTION 10. GENERAL: All other officers of the company shall have such powers and duties as may be assigned in accordance with these Bylaws. ARTICLE X CAPITAL STOCK ARTICLE X. SECTION 1. CERTIFICATES: FACSIMILE SIGNATURES: LOST STOCK: Certificates of stock shall be issued in numerical order, and every holder of stock in the company shall be entitled to a certificate or certificates signed by, or in the name of, the company, by the Chairman of the Board of Directors, the Vice Chairman, the President, an Executive Vice President, or a Vice President, or by two or more of them, and by the Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer, of the company, certifying the number of shares owned by him in the company. If such certificate is countersigned by a transfer agent other than the company or its employee, or by a registrar other than the company or its employee, any other signature on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the company with the same effect as if he were such officer, transfer agent or registrar at the date of issue. The seal of the company, or a facsimile thereof, may, but shall not be required to be affixed to certificates for shares of stock. The name of each person to whom a certificate of stock shall be issued, together with the number of shares and the date of issue, shall be entered upon the books of the company. If any certificate of stock shall be lost, stolen, mutilated or destroyed, the Board of Directors shall cause a new certificate of stock to be issued in the place -27- of such certificate and may, in its discretion, require the owner of the replaced certificate, or his legal representatives, to give the company a bond, in such form and amount as the Board may direct, sufficient to indemnify the company and other interested persons against any loss on account of the issuance or any action in connection with the issuance of any such new certificate. ARTICLE X. SECTION 2. TRANSFERS: PRESERVATION OF CANCELED CERTIFICATES: FRACTIONAL SHARES: TRANSFER AGENTS: Transfer of shares of the common stock of the company shall be made upon its books by the holder thereof, in person or by attorney duly authorized, upon the surrender of a certificate or certificates, properly endorsed, for a like number of shares. No new certificate shall be issued until the former certificate or certificates for the same number of shares shall have been surrendered and canceled, except in the case of a certificate issued in replacement as provided in Section 1 of this Article X. All certificates surrendered to the company for transfer shall be canceled and each certificate canceled shall be preserved for a period of 10 years after cancellation, or for such shorter or longer period as the Chairman of the Board of Directors, the Vice Chairman, or the President, with the approval of the General Counsel of the company, may direct from time to time. No certificate for less than one share of the common stock shall be issued; however, scrip for fractional shares may be issued on such terms and conditions as the Board of Directors may prescribe. The Board of Directors may appoint such stock transfer agents and assistant transfer agents, and stock registrars, as it shall deem proper and may require all stock certificates to bear the signature or facsimile signature of a transfer agent, and of a registrar, or either of them. ARTICLE X. SECTION 3. DATE FOR DETERMINATION OF STOCKHOLDERS: For the purpose of enabling the company to determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 60 -28- days prior to any other action. In such case, only such persons in whose names shares of stock are registered on the books of the company on the date so fixed shall be considered stockholders for the purpose or purposes for which such determination was made, notwithstanding any transfer of any stock on the books of the company after any such record date. ARTICLE X. SECTION 4. ADDITIONAL REGULATIONS: The Board of Directors may at any time adopt such additional and further rules and regulations relating to common stock and stock certificates as it deems appropriate and not inconsistent with the law or these Bylaws. ARTICLE XI POLITICAL ACTIVITIES ARTICLE XI. SECTION 1. COMPLIANCE WITH LAWS CONCERNING POLITICAL CONTRIBUTIONS: Any officer or employee of the company who fails to comply with all federal, state, and local laws regarding corporate contributions and expenditures in connection with election of public officials shall be subject to appropriate disciplinary action, which may include discharge from employment. The Audit Committee of the Board of Directors shall be responsible for monitoring compliance with those laws and shall require written annual assurances by principal corporate officers of their compliance with these laws and policies adopted by the Board. In performing that responsibility, the Committee shall utilize the services of the company's independent public accountants, its internal audit staff, and its General Counsel. ARTICLE XI. SECTION 2. POLITICAL CONTRIBUTIONS: Except as otherwise provided in the succeeding paragraph, the Board of Directors shall have the sole and non-delegable power and authority to authorize the use of company funds and facilities to make political contributions and expenditures, if and to the extent permitted by applicable law, to or in support of political candidates, political committees (including but not limited to political committees established by the company pursuant to Section 4 of this Article XI), and political parties, in connection with nomination and election of candidates for state or local office. -29- The Public Policy Committee (subject to any rules or restrictions which the Board may establish) shall have and may exercise the power and authority of the Board to authorize such contributions, expenditures, and use of company funds and facilities, if and to the extent permitted by applicable law. The Public Policy Committee may delegate such power and authority, in whole or in part, to the Vice President with responsibility for the Company's government relations activities, subject to such further rules and restrictions as the Committee may specify. All contributions made pursuant to the authority granted by this paragraph shall be reported quarterly to the Board. ARTICLE XI. SECTION 3. POLITICAL COMMITTEE AUTHORIZED BY FEDERAL LAW: The Board of Directors shall have the sole and non-delegable power and authority to authorize the establishment, administration, and solicitation of contributions to a separate segregated fund to be utilized for political purposes by the company as authorized by Section 441b of Title 2 of the United States Code. No such separate segregated fund shall be established or administered by the company, except through a political committee, organized as provided in Section 432 of Title 2 of the United States Code, registered as provided in Section 433 of such Title, and otherwise operated in compliance with law. Any decision of the Board authorizing the establishment of a political committee permitted by Section 441b of Title 2 shall be noted in its minutes. The minutes shall include an estimate of the annual cost to the company of establishing, administering, and soliciting for such committee. Any such committee which is established shall report in writing to the Board on its activities not later than March 15 of each year. Such report shall include a summary of any reports filed with the Federal Election Commission or any other government agency, together with a statement of the costs incurred by the company in connection with such a committee during the preceding year. ARTICLE XI. SECTION 4. NONFEDERAL POLITICAL COMMITTEES: The Board of Directors or the Public Policy Committee or the Vice President with responsibility for the Company's government relations activities (subject to any rules and regulations which the Public Policy Committee may establish), and each of them shall have the power and authority to authorize the establishment, administration, and solicitation of contributions to one or more political committees, and to authorize use of corporate funds to pay or bear all costs associated with such establishment, administration, and solicitation, and to authorize use of such political committees by the company to make political contributions and expenditures or otherwise support candidates for state or local office, authorized committees of such candidates, and other political committees supporting state or local candidates; provided, however, that the foregoing -30- authorizations may be granted and committees so established may be so used only if permitted by applicable state law and only to the extent, if any, permitted by such law. Such political committees as may be established by the company shall be registered if required by applicable state law and shall otherwise be operated in compliance with law. Any decision of the Board authorizing establishment of such a committee shall be noted in its minutes. By March 15 following the calendar year in which such a committee is otherwise established, such establishment shall be reported to the Board and noted in its minutes. Any such committee shall report in writing to the Board on its activities not later than March 15 of each year. Such report shall include a summary of any reports filed by the committee with any government agency, together with a statement of costs incurred by the company in connection with such committee during the preceding year. ARTICLE XI. SECTION 5. OTHER POLITICAL ACTIVITIES: Nothing contained in these Bylaws shall be deemed to prohibit any officer or employee from engaging in political activities in an individual capacity at his own expense or from making political contributions or expenditures of his personal funds or from expressing views and taking appropriate action as a company officer or employee with respect to legislative or political matters affecting the company and not pertaining to election of public officials. ARTICLE XII MISCELLANEOUS ARTICLE XII. SECTION 1. CHECKS, NOTES AND DRAFTS: All checks, notes, drafts, warrants, or orders for the payment of money, shall be executed on behalf of the company by such person or persons, and in such manner by such method as the Board of Directors may from time to time specify. ARTICLE XII. SECTION 2. SEAL: The seal of the company shall be in the form of a circle and shall bear the name of the company, the name of the state under the laws of which it is incorporated, and the year of its incorporation. -31- ARTICLE XII. SECTION 3. DIVIDENDS AND RESERVES: The Board of Directors may declare dividends to the full extent permitted by the law, provided the Board from time to time may set apart out of any funds available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve. ARTICLE XII. SECTION 4. WAIVER OF NOTICE: Whenever notice is required to be given under any provision of these Bylaws, the Certificate of Incorporation or the Delaware General Corporation Law, a written waiver thereof signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. ARTICLE XII. SECTION 5. CHAIRMAN OF THE BOARD EMERITUS: The Board of Directors may, from time to time, at its discretion, create the honorary position of Chairman of the Board Emeritus, without executive functions, and elect a person to fill the position so created. ARTICLE XII. SECTION 6. AMENDMENTS: Subject to the provisions of the Certificate of Incorporation, these Bylaws may be altered, amended or repealed in whole or in part by the stockholders at any annual meeting or at any special meeting provided that the notice of such special meeting shall contain a statement of the contemplated alteration, amendment or repeal. Subject to the laws of the State of Delaware, the Certificate of Incorporation, and these Bylaws, the Board of Directors shall have power to make, alter, amend and repeal these Bylaws in whole or in part, except those Bylaws adopted by stockholders of the company or those Bylaws as to which power to make, alter, amend or repeal is reserved to stockholders of the company. -32- EX-12 3 Exhibit 12 PHILLIPS PETROLEUM COMPANY AND CONSOLIDATED SUBSIDIARIES TOTAL ENTERPRISE Computation of Ratio of Earnings to Fixed Charges Millions of Dollars ------------------------ Nine Months Ended September 30 ------------------------ 1998 1997 ------------------------ (Unaudited) Earnings Available for Fixed Charges Income before income taxes $ 879 1,501 Distributions in excess of (less than) equity in earnings of less-than-fifty-percent-owned companies (5) (16) Fixed charges, excluding capitalized interest and the portion of the preferred dividend requirements of a subsidiary not previously deducted from income* 230 265 - ---------------------------------------------------------------------------- $1,104 1,750 ============================================================================ Fixed Charges Interest and expense on indebtedness, excluding capitalized interest $ 149 166 Capitalized interest 38 34 Preferred dividend requirements of subsidiary and capital trusts 40 86 One-third of rental expense, net of subleasing income, for operating leases 29 27 - ---------------------------------------------------------------------------- $ 256 313 ============================================================================ Ratio of Earnings to Fixed Charges 4.3 5.6 - ---------------------------------------------------------------------------- *Includes amortization of capitalized interest totaling approximately $12 million and $10 million in 1998 and 1997, respectively. 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, which was repaid in June 1998. The $400 million loan was amended in 1994, 1995, and again in 1997. Consolidated interest expense included a minimal amount of interest related to LTSSP borrowings for the first nine months of 1998 and 1997. EX-27 4
5 This schedule contains summary financial information extracted from the consolidated balance sheet of Phillips Petroleum Company as of September 30, 1998, and the related consolidated statement of income for the nine months ended September 30, 1998, and is qualified in its entirety by reference to such financial statements. 1,000,000 9-MOS DEC-31-1998 SEP-30-1998 127 0 1,388 14 599 2,365 22,857 12,002 14,462 2,426 3,495 650 0 308 4,331 14,462 8,947 9,167 7,517 7,694 40 0 136 879 432 447 0 0 0 447 1.72 1.71 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 capital trusts.
-----END PRIVACY-ENHANCED MESSAGE-----