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
<PAGE>
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
<PAGE>
- ------------------------------------------------------------------
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
<PAGE>
- -----------------------------------------------------------------
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
<PAGE>
- -----------------------------------------------------------------
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
- -----------------------------------------------------------------
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
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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
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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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
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Exhibit 3(ii)
BYLAWS
PHILLIPS PETROLEUM COMPANY
(INCORPORATED UNDER THE LAWS OF DELAWARE)
SEPTEMBER 14, 1998
<PAGE>
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 -
<PAGE>
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 -
<PAGE>
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 -
<PAGE>
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 -
<PAGE>
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 -
<PAGE>
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 -
<PAGE>
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
<PAGE>
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,
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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
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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
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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.
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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.
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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.
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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,
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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.
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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,
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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.
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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
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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
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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.
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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
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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
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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
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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;
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(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.
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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;
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(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
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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.
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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.
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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.
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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
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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.
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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
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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
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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.
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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
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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.
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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-
<PAGE>
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.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 127
<SECURITIES> 0
<RECEIVABLES> 1,388
<ALLOWANCES> 14
<INVENTORY> 599
<CURRENT-ASSETS> 2,365
<PP&E> 22,857
<DEPRECIATION> 12,002
<TOTAL-ASSETS> 14,462
<CURRENT-LIABILITIES> 2,426
<BONDS> 3,495
650
0
<COMMON> 308
<OTHER-SE> 4,331
<TOTAL-LIABILITY-AND-EQUITY> 14,462
<SALES> 8,947
<TOTAL-REVENUES> 9,167
<CGS> 7,517<F1>
<TOTAL-COSTS> 7,694<F2>
<OTHER-EXPENSES> 40<F3>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 136
<INCOME-PRETAX> 879
<INCOME-TAX> 432
<INCOME-CONTINUING> 447
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 447
<EPS-PRIMARY> 1.72
<EPS-DILUTED> 1.71
<FN>
<F1> Purchased crude oil and products + Production and operating expenses +
Exploration expenses + Depreciation, depletion and amortization.
<F2> CGS + Taxes other than income taxes.
<F3> Preferred dividend requirements of capital trusts.
</FN>
</TABLE>
