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 March 31, 2002
---------------------------
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 382,815,471 shares of common stock, $1.25 par
value, outstanding at April 30, 2002.
PART I. FINANCIAL INFORMATION
- ----------------------------------------------------------------------
Consolidated Statement of Operations Phillips Petroleum Company
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
2002 2001
-------------------
Revenues
Sales and other operating revenues* $9,372 5,281
Equity in earnings of affiliated companies 20 27
Other revenues 6 9
- ----------------------------------------------------------------------
Total Revenues 9,398 5,317
- ----------------------------------------------------------------------
Costs and Expenses
Purchased crude oil and products 6,031 2,509
Production and operating expenses 921 599
Exploration expenses 163 67
Selling, general and administrative expenses 472 135
Depreciation, depletion and amortization 415 322
Property impairments 10 -
Taxes other than income taxes* 1,215 567
Accretion on discounted liabilities 5 -
Interest expense 107 84
Foreign currency transaction losses 1 7
Preferred dividend requirements of capital trusts 13 13
- ----------------------------------------------------------------------
Total Costs and Expenses 9,353 4,303
- ----------------------------------------------------------------------
Income before income taxes and cumulative
effect of change in accounting principle 45 1,014
Provision for income taxes 147 526
- ----------------------------------------------------------------------
Income (Loss) Before Cumulative Effect of Change
in Accounting Principle (102) 488
Cumulative effect of change in accounting
principle - 28
- ----------------------------------------------------------------------
Net Income (Loss) $ (102) 516
======================================================================
Net Income (Loss) Per Share of Common Stock
Basic
Before cumulative effect of change in
accounting principle $ (.27) 1.91
Cumulative effect of change in accounting
principle - .11
- ----------------------------------------------------------------------
Net Income (Loss) $ (.27) 2.02
======================================================================
Diluted
Before cumulative effect of change in
accounting principle $ (.27) 1.90
Cumulative effect of change in accounting
principle - .11
- ----------------------------------------------------------------------
Net Income (Loss) $ (.27) 2.01
======================================================================
Dividends Paid $ .36 .34
- ----------------------------------------------------------------------
Average Common Shares Outstanding (in thousands)
Basic 382,337 255,556
Diluted 382,337 257,161
- ----------------------------------------------------------------------
*Includes excise taxes on petroleum
products sales $ 1,048 413
See Notes to Financial Statements.
1
- ----------------------------------------------------------------------
Consolidated Balance Sheet Phillips Petroleum Company
Millions of Dollars
----------------------
March 31 December 31
2002 2001
----------------------
Assets
Cash and cash equivalents $ 170 142
Accounts and notes receivable (less
allowances of $32 million in 2002
and $33 million in 2001) 1,607 1,189
Accounts and notes receivable--related parties 89 105
Inventories 2,519 2,618
Deferred income taxes 34 47
Prepaid expenses and other current assets 210 262
- ----------------------------------------------------------------------
Total Current Assets 4,629 4,363
Investments and long-term receivables 3,351 3,317
Properties, plants and equipment (net) 23,868 23,796
Goodwill 2,343 2,281
Intangibles 1,317 1,313
Deferred income taxes 15 9
Deferred charges 148 138
- ----------------------------------------------------------------------
Total $35,671 35,217
======================================================================
Liabilities
Accounts payable $ 2,906 2,669
Accounts payable--related parties 94 91
Notes payable and long-term debt due
within one year 481 44
Accrued income and other taxes 1,127 941
Other accruals 650 797
- ----------------------------------------------------------------------
Total Current Liabilities 5,258 4,542
Long-term debt 8,421 8,645
Accrued dismantlement, removal and
environmental costs 1,209 1,142
Deferred income taxes 3,920 4,015
Employee benefit obligations 998 953
Other liabilities and deferred credits 1,104 930
- ----------------------------------------------------------------------
Total Liabilities 20,910 20,227
- ----------------------------------------------------------------------
Company-Obligated Mandatorily
Redeemable Preferred Securities of
Phillips 66 Capital Trusts I and II 650 650
- ----------------------------------------------------------------------
Common Stockholders' Equity
Common stock--1,000,000,000 shares
authorized at $1.25 par value
Issued (2002 and 2001--430,439,743 shares)
Par value 538 538
Capital in excess of par 9,109 9,069
Treasury stock (at cost:
2002--20,243,430 shares;
2001--20,725,114 shares) (1,018) (1,038)
Compensation and Benefits Trust (CBT)
(at cost: 2002 and 2001--27,556,573 shares) (934) (934)
Accumulated other comprehensive loss (283) (255)
Unearned employee compensation--Long-
Term Stock Savings Plan (LTSSP) (232) (237)
Retained earnings 6,931 7,197
- ----------------------------------------------------------------------
Total Common Stockholders' Equity 14,111 14,340
- ----------------------------------------------------------------------
Total $35,671 35,217
======================================================================
See Notes to Financial Statements.
2
- ----------------------------------------------------------------------
Consolidated Statement of Cash Flows Phillips Petroleum Company
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
2002 2001
-------------------
Cash Flows from Operating Activities
Net income (loss) $(102) 516
Adjustments to reconcile net income (loss) to
net cash provided by operating activities
Non-working capital adjustments
Depreciation, depletion and
amortization 415 322
Property impairments 10 -
Dry hole costs and leasehold impairment 109 17
Accretion on discounted liabilities 5 -
Deferred taxes (77) 119
Cumulative effect of accounting change - (28)
Other 138 (19)
Working capital adjustments*
Decrease in aggregate balance of
accounts receivable sold (102) -
Decrease (increase) in other
accounts and notes receivable (305) 417
Decrease (increase) in inventories 99 (174)
Decrease in prepaid expenses and
other current assets 51 10
Increase (decrease) in accounts payable 239 (88)
Increase in taxes and other accruals 99 163
- ----------------------------------------------------------------------
Net Cash Provided by Operating Activities 579 1,255
- ----------------------------------------------------------------------
Cash Flows from Investing Activities
Acquisitions, net of cash acquired - (5)
Capital expenditures and investments,
including dry hole costs (657) (656)
Proceeds from asset dispositions 45 12
Long-term advances to affiliates and
other investments (12) (17)
- ----------------------------------------------------------------------
Net Cash Used for Investing Activities (624) (666)
- ----------------------------------------------------------------------
Cash Flows from Financing Activities
Issuance of debt 243 -
Repayment of debt (39) (496)
Issuance of company common stock 25 4
Dividends paid on common stock (138) (87)
Other (18) (16)
- ----------------------------------------------------------------------
Net Cash Provided by (Used for) Financing
Activities 73 (595)
- ----------------------------------------------------------------------
Net Change in Cash and Cash Equivalents 28 (6)
Cash and cash equivalents at beginning of period 142 149
- ----------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 170 143
======================================================================
*Net of acquisition and disposition of businesses.
See Notes to Financial Statements.
3
- -----------------------------------------------------------------
Notes to Financial Statements Phillips Petroleum Company
Note 1--Interim Financial Information
The financial information for the interim periods presented in
the financial statements included in this report is unaudited and
includes all known accruals and adjustments which Phillips
Petroleum Company (hereinafter referred to as "Phillips" or the
"company") considers necessary for a fair presentation of the
consolidated financial position of the company and its results of
operations and cash flows for such periods. All such adjustments
are of a normal and recurring nature. Certain amounts in the
2001 financial statements have been reclassified to conform with
the 2002 presentation.
In the third quarter of 2001, Phillips changed its method of
accounting for the costs of major maintenance turnarounds from
the accrue-in-advance method to the expense-as-incurred method to
reflect the impact of turnarounds in the periods that they occur.
Also, the company began including excise taxes on the sale of
petroleum products in operating revenues, with the corresponding
expense included in taxes other than income taxes. Both changes
were effective January 1, 2001, so the financial information
relating to the first quarter of 2001 has been restated to
reflect both changes.
Note 2--Acquisition of Tosco Corporation
On September 14, 2001, Phillips closed on the $7 billion
acquisition of Tosco Corporation (Tosco). Tosco's operating
results have been included in Phillips' consolidated financial
statements since that date. The transaction was accounted for
using the purchase method of accounting. The allocation of the
purchase price to specific assets and liabilities is based, in
part, upon an outside appraisal of Tosco's long-lived assets.
The allocation is still preliminary at this time. The company
expects the outside appraisal of the long-lived assets and the
determination of the fair value of all other Tosco assets and
liabilities to be completed later in 2002. Deferred tax
liabilities will also be finalized after the final allocation of
the purchase price and the final tax basis of the assets and
liabilities has been determined.
Pursuant to the terms of the Tosco merger agreement, the company
converted outstanding Tosco Long-Term Incentive Plan performance
units into equivalent Phillips performance units and will
continue the program over their remaining terms. At March 31,
4
2002, there were 2.4 million units outstanding, held by six
former senior executives of Tosco, none of whom are now employees
of Phillips. These units represent three separate grants that
expire 0.5 million on June 30, 2003, 0.5 million on March 31,
2004, and 1.4 million on January 4, 2006. Cash payouts occur on
the anniversary dates of the grants if Phillips' 15-day rolling
average stock price during the preceding 365 days, on a maximum
look-back basis, exceeds a stipulated strike price. If a payout
occurs, the payout price becomes the strike price for future
measurement dates. Between the acquisition of Tosco on
September 14, 2001, and March 31, 2002, the strike price was
$62.92 per unit and no payouts were required. The units are
considered to be derivative financial instruments tied to
Phillips' stock price and will be marked-to-market each reporting
period. Any resulting gains or losses from these mark-to-market
adjustments will be reported in "Other revenues" in the
consolidated statement of operations and discussed as part of
Corporate in Management's Discussion and Analysis. The company
estimated the fair value of these units to be $70 million at both
September 14, 2001, and March 31, 2002. This amount has been
recorded in "Other liabilities and deferred credits" in the
consolidated balance sheet at March 31, 2002, with an offsetting
increase in goodwill.
In addition to the above Tosco Long-Term Incentive Plan
adjustment, other adjustments to the preliminary purchase price
allocation were made during the first quarter of 2002, primarily
to pre-acquisition contingent liabilities, which increased
goodwill by $51 million. Deferred tax liabilities were reduced
by $48 million related to the other adjustments to the
preliminary purchase price allocation, which had the effect of
reducing goodwill by the same amount. Also, tax benefits
accruing to the company from the exercise of stock options by
former Tosco employees reduced goodwill by $11 million during the
first quarter of 2002.
The company has tentatively allocated $1,251 million to
identifiable intangible assets, which consist primarily of
marketing trade names ($655 million) and refinery air emission
and operating permits ($562 million). The preliminary appraisal
methodology used to value refinery air emission permits is
presently under review and, depending on the outcome of that
review, could result in a re-allocation of purchase price between
identifiable intangible assets and goodwill. Of the
$1,251 million, $1,240 million has been preliminarily allocated
to intangible assets not subject to amortization, while
$11 million has been preliminarily allocated to intangible assets
with a weighted-average amortization period of seven years.
5
The company has not yet determined the assignment of Tosco
goodwill to specific reporting units, as defined by Financial
Accounting Standards Board (FASB) Statement No. 142, "Goodwill
and Other Intangible Assets." Currently, all Tosco goodwill is
being reported as part of the Refining, Marketing and
Transportation (RM&T) reporting segment. Of the $2,328 million of
goodwill associated with this acquisition, a significant portion,
$1,707 million, was attributable to deferred tax liabilities,
which are required to be recorded on an undiscounted basis.
This goodwill is expected to be allocated to reporting units
based on the sources of the book-tax differences that give rise
to the deferred tax liabilities and is not deductible for tax
purposes. The remaining $621 million of true goodwill will
ultimately be assigned to those reporting units that benefit
from the synergies and strategic advantages of the merger.
Note 3--Inventories
Inventories consisted of the following:
Millions of Dollars
---------------------
March 31 December 31
2002 2001
---------------------
Crude oil and petroleum products $2,143 2,241
Merchandise 148 144
Materials, supplies and other 228 233
- -----------------------------------------------------------------
$2,519 2,618
=================================================================
Included were inventories valued on a LIFO basis totaling
$2,101 million and $2,194 million at March 31, 2002, and
December 31, 2001, respectively. The excess of current
replacement cost over LIFO cost of inventories amounted to
$568 million and $2 million at March 31, 2002, and December 31,
2001, respectively.
Note 4--Summarized Financial Data of Significant Equity
Affiliates
Duke Energy Field Services, LLC
Phillips owns 30.3 percent of Duke Energy Field Services,
LLC (DEFS). Phillips' consolidated results of operations
include its 30.3 percent share of DEFS' earnings, which
are recorded in a single line item on the statement of
operations: "Equity in earnings of affiliated companies,"
and are included in Phillips' Gas Gathering, Processing,
and Marketing (GPM) segment. Included in the GPM
6
segment's operating results in the first three months of both
2002 and 2001 were after-tax benefits of $9 million representing
the amortization of the $814 million basis difference between the
book value of Phillips' contribution to DEFS and its 30.3 percent
equity interest in DEFS. This difference is being amortized over
15 years, consistent with the remaining estimated useful lives of
the properties, plants and equipment contributed to DEFS.
Summarized financial information for DEFS (100 percent) follows:
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
2002 2001
-------------------
Revenues $1,554 3,380
Income (loss) before income taxes and
cumulative effect of change in
accounting principle (15) 143
Net income (loss) (17) 142
- -----------------------------------------------------------------
Phillips and Duke Energy Corporation are generally taxable on
their respective shares of income for U.S. and state income tax
purposes. Phillips' share of income taxes incurred directly by
DEFS is reported in equity in earnings, not included in income
taxes in Phillips' consolidated financial statements.
Chevron Phillips Chemical Company LLC
Phillips and ChevronTexaco Corporation each own 50 percent of the
voting and economic interests in Chevron Phillips Chemical
Company LLC (CPChem). Phillips' consolidated results of
operations include its 50 percent share of CPChem's earnings,
which are recorded in a single line item on the statement of
operations: "Equity in earnings of affiliated companies," and are
included in Phillips' Chemicals segment. Also included in the
first three months of both 2002 and 2001 operating results were
after-tax reductions of $1 million for the amortization of the
$116 million basis difference between the book value of Phillips'
contribution to CPChem and its 50 percent interest in the equity
of CPChem. This basis difference is being amortized over
20 years, the remaining estimated useful life of the properties,
plants and equipment contributed.
In May 2002, CPChem's Board of Directors authorized the issuance
of $250 million of Preferred LLC Interests. Phillips has agreed
to the material terms under which it will purchase 50 percent, or
$125 million, of these securities. Preferred distributions will
7
be payable quarterly from cash earnings of CPChem. It is
expected that the securities will be issued in the second quarter
of 2002.
Summarized financial information for CPChem (100 percent)
follows:
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
2002 2001
-------------------
Revenues $1,160 1,854
Loss before income taxes (21) (117)
Net loss (22) (118)
- -----------------------------------------------------------------
Phillips and ChevronTexaco are generally taxable on their
respective shares of income for U.S. and state income tax
purposes. Phillips' share of income taxes incurred directly by
CPChem is reported in equity in earnings, not included in income
taxes in Phillips' consolidated financial statements.
Note 5--Properties, Plants and Equipment
Properties, plants and equipment included the following:
Millions of Dollars
---------------------
March 31 December 31
2002 2001
---------------------
Properties, plants and equipment (at cost) $35,297 35,429
Less accumulated depreciation, depletion
and amortization 11,429 11,633
- -----------------------------------------------------------------
$23,868 23,796
=================================================================
Note 6--Impairments
In the first quarter of 2002, the company entered into an
agreement to sell its 24.4 percent interest in the Janice field
in block 30/17a in the U.K. North Sea. As a result, a property
impairment of $10 million before tax, $7 million after tax, was
recorded by the Exploration and Production (E&P) segment in the
first quarter. At March 31, 2002, the carrying value of the
Janice field was $26 million. The Janice field contributed net
income of $3.2 million in the first quarter of 2002. The sale
is expected to close in the second quarter of 2002.
8
Exploration expenses in the first quarter of 2002 included
$77 million for the partial impairment of the company's
investment in deepwater block 34, offshore Angola. Initial
results released in early May 2002 indicated that the first
exploratory well drilled in block 34 was a dry hole, resulting in
Phillips' re-assessment of the fair value of the remainder of the
block. Since the majority of the drilling costs were incurred in
April 2002, the dry hole costs will be recorded by the company in
the second quarter of 2002, and are estimated to be approximately
$5 million net to Phillips.
Note 7--Debt
At March 31, 2002, Phillips had two bank credit facilities in
place, totaling $3 billion, available for use either as direct
bank borrowings or as support for the issuance of commercial
paper. The facilities included a $1.5 billion revolving facility
expiring in October 2006, and a $1.5 billion 364-day credit
agreement, which expires October 16, 2002. At March 31, 2002,
the company had no debt outstanding under these credit
facilities, but had $1,323 million in commercial paper
outstanding, which is supported 100 percent by the credit
facilities. This amount approximates fair value.
On April 12, 2002, the company announced that it plans to redeem
its $250 million 8.86% Notes due May 15, 2022, on May 15, 2002,
at 104.43 percent.
Note 8--Company-Obligated Mandatorily Redeemable Preferred
Securities of Phillips 66 Capital Trusts
On April 29, 2002, the company announced that it plans to redeem all
all of its outstanding 8.24% Junior Subordinated Deferrable
Interest Debentures due 2036 held by the Phillips 66 Capital I
statutory business trust on May 31, 2002. This will trigger the
redemption of $300 million of 8.24% Trust Originated Preferred
Securities at par value, $25 per share.
9
Note 9--Comprehensive Income (Loss)
Phillips' comprehensive income (loss) for the three-month periods
ended March 31 was as follows:
Millions of Dollars
-------------------
2002 2001
-------------------
Net income (loss) $(102) 516
After-tax changes in:
Foreign currency translation adjustments (1) (22)
Unrealized loss on securities - (2)
Equity affiliates
Foreign currency translation (4) 1
Derivatives related (23) 2
- -----------------------------------------------------------------
Comprehensive income (loss) $(130) 495
=================================================================
Accumulated other comprehensive loss in the equity section of the
balance sheet included:
Millions of Dollars
---------------------
March 31 December 31
2002 2001
---------------------
Minimum pension liability adjustment $(143) (143)
Foreign currency translation adjustments (85) (84)
Unrealized gain on securities 4 4
Deferred net hedging loss (4) (4)
Equity affiliates
Foreign currency translation (43) (39)
Derivatives related (12) 11
- -----------------------------------------------------------------
$(283) (255)
=================================================================
Note 10--Contingencies
In the case of all known contingencies, the company accrues an
undiscounted liability when the loss is probable and the amount
is reasonably estimable. These liabilities are not reduced for
potential insurance recoveries. If applicable, undiscounted
receivables are accrued for probable insurance or other third-
party recoveries. Based on currently available information, the
company believes that it is remote that future costs related to
known contingent liability exposures will exceed current accruals
by an amount that would have a material adverse impact on the
company's financial statements.
10
As facts concerning contingencies become known to the company,
the company reassesses its position both with respect to accrued
liabilities and other potential exposures. Estimates that are
particularly sensitive to future change include contingent
liabilities recorded for environmental remediation, tax and legal
matters. Estimated future environmental remediation costs are
subject to change due to such factors as the unknown magnitude of
cleanup costs, the unknown time and extent of such remedial
actions that may be required, and the determination of the
company's liability in proportion to that of 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 processes.
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.
When the company prepares its financial statements, accruals for
environmental liabilities are recorded based on Management's best
estimate using all information that is available at the time.
Loss estimates are measured and liabilities are based on
currently available facts, existing technology, and presently
enacted laws and regulations, taking into consideration the
likely effects of inflation and other societal and economic
factors. Also considered when measuring environmental liability
are the company's prior experience in remediation of contaminated
sites, other companies' cleanup experience and data released by
the Environmental Protection Agency (EPA) or other organizations.
Unasserted claims are reflected in Phillips' determination of
environmental liabilities and are accrued in the period that they
are both probable and reasonably estimable.
Although liability of those potentially responsible is generally
joint and several for federal sites and frequently so for state
sites, the company is usually but one of many companies cited at
a particular site. Due to the joint and several liabilities, the
company could be responsible for all of the cleanup costs at any
site which it has been designated as a potentially responsible
party. If Phillips was solely responsible, the costs, in some
cases, could be material to its, or one of its segments'
operations, capital resources or liquidity. However, settlements
and costs incurred in matters that previously have been resolved
have not been materially significant to the company's results of
operations or financial condition. The company has, to date,
been successful in sharing cleanup costs with other financially
sound companies. Many of the sites at which the company is
potentially responsible are still under investigation by the EPA
11
or the state agencies concerned. Prior to actual cleanup, those
potentially responsible normally assess the site conditions,
apportion responsibility and determine the appropriate
remediation. In some instances, Phillips may have no liability
or attain a settlement of liability. Where it appears that other
potentially responsible parties may be financially unable to bear
their proportional share, this inability has been considered in
estimating Phillips' potential liability and accruals have been
adjusted accordingly.
Upon Phillips' acquisition of Tosco on September 14, 2001, the
assumed environmental obligations of Tosco, some of which are
mitigated by indemnification agreements, became contingencies
reportable on a consolidated basis by Phillips. Beginning with
the acquisition of the Bayway refinery in 1993, but excluding the
Alliance refinery acquisition, Tosco negotiated, as part of its
acquisitions, environmental indemnification from the former
owners for remediating contamination that occurred prior to the
respective acquisition dates. Some of the environmental
indemnifications are subject to caps and time limits. No
accruals have been recorded for any potential contingent
liabilities that will be funded by the prior owners under these
indemnifications.
As part of Tosco's acquisition of Unocal's West Coast petroleum
refining, marketing, and related supply and transportation assets
in March 1997, Tosco agreed to pay the first $7 million per year
of any environmental remediation liabilities at the acquired
sites arising out of, or relating to, the period prior to the
transaction's closing, plus 40 percent of any amount in excess of
$7 million per year, with Unocal paying the remaining 60 percent
per year. The indemnification agreement with Unocal has a
25-year term from inception, and, at March 31, 2002, had a
maximum cap of $140 million of environmental remediation costs
that Phillips has to fund over the remainder of the agreement
period. This maximum has been adjusted for amounts paid through
March 31, 2002.
The company is currently participating in environmental
assessments and cleanup under these laws at federal Superfund and
comparable state sites. After an assessment of environmental
exposures for cleanup and other costs, the company makes accruals
on an undiscounted basis (except, if assumed in a purchase
business combination, such costs are recorded on a discounted
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. At March 31, 2002,
contingent liability accruals of $10 million had been made for
the company's PRP sites, and $3 million for other environmental
contingent liabilities. Accrued environmental liabilities will
be paid over periods extending as far as 30 years in the future.
12
These accruals have not been reduced for possible insurance
recoveries. In the future, the company may be involved in
additional environmental assessments, cleanups and proceedings.
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 and penalties for fees
related to throughput capacity not utilized by Phillips.
Note 11--Income Taxes
The company's effective tax rates for the three-month periods
ended March 31, 2002 and 2001, were 327 percent and 52 percent,
respectively. The increase in the effective tax rate for the
first three months of 2002 reflects a higher proportion of income
in higher-tax-rate jurisdictions, due in part to losses in lower-
tax-rate jurisdictions worldwide.
Note 12--Foreign Currency
The following table summarizes the foreign currency transaction
gains (losses) included in the company's reported net income
(loss):
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
2002 2001
-------------------
After-Tax
E&P $ 2 2
RM&T 3 3
Chemicals - -
Corporate and Other (4) (12)
- -----------------------------------------------------------------
Total 1 (7)
=================================================================
Before-Tax
E&P - 2
RM&T 3 2
Chemicals - -
Corporate and Other (4) (11)
- -----------------------------------------------------------------
Total $ (1) (7)
=================================================================
13
Note 13--Supplemental Cash Flow Information
Non-cash investing and financing activities and cash payments for
the three-month periods ended March 31 were as follows:
Millions of Dollars
-------------------
2002 2001
-------------------
Non-Cash Investing and Financing Activities
Investment in properties, plants and
equipment of Alaska businesses
through the assumption of net non-cash
liabilities of these businesses $ - 107
Investment in equity affiliate through
direct guarantee of debt 13 13
Company stock issued under compensation
and benefit plans 7 10
Change in fair value of securities 3 (13)
- -----------------------------------------------------------------
Cash payments
Interest
Debt $ 64 35
Taxes and other 5 7
- -----------------------------------------------------------------
$ 69 42
=================================================================
Income taxes $ 40 131
- -----------------------------------------------------------------
Note 14--Sales of Receivables
At March 31, 2002, Phillips had sold certain credit card and
trade receivables under revolving sales agreements with four
unrelated bank-sponsored entities. These agreements provide for
Phillips to sell up to $1.2 billion of senior, undivided
interests in pools of the credit card or trade receivables to the
bank-sponsored entities. Phillips retained interests in the
pools of receivables, which are subordinate to the interests sold
to the bank-sponsored entities. At March 31, 2002, and
December 31, 2001, respectively, Phillips' retained interests
were $478 million and $450 million, reported on the balance sheet
in accounts and notes receivable.
14
Total cash flows received from and paid to the bank-sponsored
entities in the first three months of 2002 and 2001 were as
follows:
Millions of Dollars
-------------------
2002 2001
-------------------
Receivables sold at beginning of year $ 940 500
New receivables sold 6,578 1,605
Cash collections remitted (6,680) (1,605)
- -----------------------------------------------------------------
Receivables sold at March 31 $ 838 500
=================================================================
Discounts and other fees paid on
revolving balances $ 4 6
- -----------------------------------------------------------------
Note 15--Related Party Transactions
Significant transactions with related parties were:
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
2002 2001
-------------------
Operating revenues (a) $155 303
Purchases (b) 157 328
Operating expenses (c) 35 79
Selling, general and
administrative expenses (d) 45 15
Interest expense (e) 2 2
- -----------------------------------------------------------------
(a) Phillips' E&P segment sells natural gas to DEFS for
processing and marketing. The company sells natural gas
liquids, solvents and petrochemical feedstocks to CPChem
and charges CPChem for the use of common facilities, such
as steam generators, waste and water treaters, and
warehouse facilities at its refining operations.
(b) Phillips purchases natural gas and natural gas liquids from
DEFS and CPChem for use in its refinery processes and other
feedstocks from various affiliates.
(c) Phillips pays processing fees to various affiliates.
(d) Phillips charges both DEFS and CPChem for corporate
services provided to the two equity companies under
transition service agreements. Phillips pays fees to its
pipeline equity companies for transporting finished
products. Phillips pays common facility fees to its
affiliates.
15
(e) Phillips pays interest to Merey Sweeny, L.P. for a loan
related to improvements at the Sweeny refinery.
Elimination of the company's equity percentage share of profit or
loss on the above transactions was not material.
Note 16--Segment Disclosures and Related Information
Phillips has organized its reporting structure based on the
grouping of similar products and services, resulting in four
operating segments:
(1) Exploration and Production (E&P)--This segment explores for
and produces crude oil, natural gas and natural gas liquids
on a worldwide basis. At March 31, 2002, E&P was producing
in the United States; the Norwegian and U.K. sectors of the
North Sea; Canada; Nigeria; Venezuela; the Timor Sea; and
offshore Australia and China.
(2) Gas Gathering, Processing and Marketing (GPM)--This segment
gathers and processes natural gas produced by Phillips and
others. Since March 31, 2000, Phillips' GPM segment has
consisted primarily of its 30.3 percent equity investment in
DEFS.
(3) Refining, Marketing and Transportation (RM&T)--This segment
refines, markets and transports crude oil and petroleum
products, primarily in the United States. The company has
10 U.S. refineries and one in Ireland. Phillips markets
petroleum products nationwide. On September 14, 2001,
Phillips acquired Tosco Corporation, significantly
increasing the RM&T segment's assets and operations.
(4) Chemicals--This segment manufactures and markets
petrochemicals and plastics on a worldwide basis. Since
July 1, 2000, Phillips' Chemicals segment has consisted
primarily of its 50 percent equity investment in CPChem.
Corporate and Other includes general corporate overhead; all
interest revenue and expense; preferred dividend requirements of
capital trusts; certain eliminations; and various other corporate
activities, such as a captive insurance subsidiary and tax items
not directly attributable to the operating segments. Corporate
assets include all cash and cash equivalents and the company's
owned office buildings and research and development facilities
in Bartlesville, Oklahoma.
16
The company evaluates performance and allocates resources based
on, among other items, net income. Intersegment sales are
recorded at prices that approximate market value. There have
been no material changes in the basis of segmentation or in the
basis of measurement of segment net income since the 2001 annual
report.
Analysis of Results by Operating Segment
Millions of Dollars
---------------------------------------------------------
Operating Segments
-------------------------------- Corporate
E&P GPM RM&T Chemicals and Other Consolidated
---------------------------------------------------------
Three Months Ended March 31, 2002
Sales and Other Operating Revenues
External customers $ 1,293 - 8,074 3 2 9,372
Intersegment (eliminations) 221 - 2 - (223) -
- --------------------------------------------------------------------------------------------
Segment sales $ 1,514 - 8,076 3 (221) 9,372
============================================================================================
Net income (loss) $ 142 5 (89) (11) (149) (102)
============================================================================================
Three Months Ended March 31, 2001
Sales and Other Operating Revenues
External customers $ 2,308 - 2,972 - 1 5,281
Intersegment (eliminations) 140 - 2 - (142) -
- --------------------------------------------------------------------------------------------
Segment sales $ 2,448 - 2,974 - (141) 5,281
============================================================================================
Net income (loss) $ 581 35 72* (44) (128) 516
============================================================================================
Total Assets
At March 31, 2002 $14,954 149 17,647 1,931 990 35,671
- --------------------------------------------------------------------------------------------
At December 31, 2001 $14,796 178 17,138 1,934 1,171 35,217
- --------------------------------------------------------------------------------------------
*Includes a favorable $28 million cumulative effect of accounting change.
Note 17--Goodwill and Other Intangible Assets
The company adopted FASB Statement No. 142, "Goodwill and Other
Intangible Assets," on January 1, 2002. Almost all of the
company's recorded goodwill and other intangible assets resulted
from the acquisition of Tosco in September 2001. The Tosco
transaction was subject to the provisions of Statement No. 142
in 2001 under the special transitional effective dates of the
Statement. See Note 2--Acquisition of Tosco Corporation for
additional information about the Tosco acquisition, including
the preliminary purchase price allocation, goodwill, and other
categories of intangible assets.
Other than the goodwill related to Tosco, the company had only
$16 million of recorded goodwill, which related to the
acquisition of Petroz NL in early 2001, of which $1 million was
amortized to expense during 2001. Under Statement No. 142, the
Petroz goodwill amortization ceased on January 1, 2002. There
are no indications that the Petroz goodwill is impaired. In
accordance with the transition provisions of FASB Statement
No. 142, the company plans to conduct initial impairment tests
of goodwill during the second quarter of this year.
17
Other than assets related to Tosco, the company has no
recorded intangible assets with indefinite useful lives.
Adoption of Statement No. 142 did not result in any adjustments
of estimated useful lives for other intangible assets that are
being amortized, the aggregate value of which is immaterial.
Note 18--Merger with Conoco Inc.
On November 18, 2001, Phillips and Conoco Inc. (Conoco)
announced that their Boards of Directors had unanimously
approved a merger and that the companies had signed a definitive
merger agreement to form a new company, ConocoPhillips. On
March 12, 2002, stockholders of both companies approved the
merger at special stockholder meetings. At inception, Phillips
stockholders will own approximately 57 percent of the new
company and Conoco stockholders will own approximately
43 percent.
The merger is conditioned upon, among other things, customary
regulatory clearances. Phillips and Conoco continue to work
closely with the U.S. Federal Trade Commission and the Antitrust
Division of the U.S. Department of Justice in their review of
previously filed notification and report form documentary
materials and additional requested information. Senior
management team members of the new company have been named, to
be effective upon completion of the merger. Teams with
representatives from both companies continue to plan for an
efficient transition after the merger closes, which is expected
to be in the second half of 2002.
18
- -----------------------------------------------------------------
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 resources, that are made pursuant to the "safe
harbor" provisions of the Private Securities Litigation Reform
Act of 1995. The words "intends," "believes," "expects,"
"plans," "scheduled," "anticipates," "estimates," 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 42.
RESULTS OF OPERATIONS
Unless otherwise indicated, discussion of results for the three-
month period ending March 31, 2002, is based on a comparison with
the corresponding period in 2001.
Consolidated Results
A summary of the company's net income (loss) by business segment
follows:
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
2002 2001
-------------------
Exploration and Production (E&P) $ 142 581
Gas Gathering, Processing and Marketing (GPM) 5 35
Refining, Marketing and Transportation (RM&T) (89) 72*
Chemicals (11) (44)
Corporate and Other (149) (128)
- -----------------------------------------------------------------
Net income (loss) $ (102) 516
=================================================================
*Includes a favorable $28 million cumulative effect of accounting
change.
19
Net income is affected by transactions, defined by Management and
termed "special items," which are not representative of the
company's ongoing operations. These special items can obscure
the underlying operating results for a period and affect
comparability of operating results between periods. The
following table summarizes the gains (losses), on an after-tax
basis, from special items included in the company's net income:
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
2002 2001
-------------------
Impairments* $(84) -
Net loss on asset sales - (3)
Pending claims and settlements (13) (5)
Equity companies' special items 2 (5)
Cumulative effect of accounting change - 28
Other items - (1)
- -----------------------------------------------------------------
Total special items $(95) 14
=================================================================
*See Note 6--Impairments in the Notes to Financial Statements for
additional information.
Excluding the special items listed above, the company's net
operating income (loss) by business segment was:
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
2002 2001
-------------------
E&P $ 223 585
GPM 5 35
RM&T (88) 46
Chemicals (8) (39)
Corporate and Other (139) (125)
- -----------------------------------------------------------------
Net operating income (loss) $ (7) 502
=================================================================
Phillips' net loss in the first quarter of 2002 was $102 million,
compared with net income of $516 million in the first quarter of
2001. Special items increased the net loss by $95 million in the
first quarter of 2002 and increased net income $14 million in the
first quarter of 2001. After excluding special items, the net
operating loss in the first quarter of 2002 was $7 million,
compared with net operating income of $502 million in the first
quarter of 2001.
20
The largest decline in earnings was incurred in the E&P segment,
where the company's average worldwide crude oil price decreased
25 percent and its average U.S. Lower 48 natural gas price
declined 69 percent. RM&T's results were negatively impacted by
extremely low refining and marketing margins during the first
quarter of 2002, while GPM's average natural gas liquids price
decreased 49 percent. Although results improved, the Chemicals
segment continued to be hampered by low margins and weak demand.
Analysis of Statement of Operations
On September 14, 2001, Phillips closed on the $7 billion
acquisition of Tosco Corporation (Tosco). This transaction
significantly increased operating revenues, purchase costs,
operating expenses and other income statement line items. See
Note 2--Acquisition of Tosco Corporation in the Notes to
Financial Statements for additional information.
Sales and other operating revenues increased 77 percent in the
first quarter of 2002, primarily as a result of the Tosco
acquisition. The impact of the acquisition was partially offset
by lower revenues from oil and natural gas sales due to lower
product prices.
Equity in earnings of affiliated companies decreased 26 percent
in the first quarter of 2002. While net losses from Chevron
Phillips Chemical Company LLC were lower, earnings from Duke
Energy Field Services, LLC declined on lower natural gas liquids
prices. Equity earnings from Merey Sweeny, L.P. also decreased
in the quarter due to lower crude oil heavy-light differentials
and volumes processed. Other revenues decreased 33 percent in
the first quarter of 2002 on lower insurance dividends.
The Tosco acquisition was the primary reason behind a 140 percent
increase in purchase costs in the first quarter of 2002.
Partially offsetting the acquisition impact were lower crude oil
and natural gas prices, which lowered purchase costs for these
products.
Management defines controllable costs as production and operating
expenses; selling, general and administrative expenses; and the
general administrative, geological, geophysical and lease rentals
component (G&G) of exploration expenses. Controllable costs,
adjusted to exclude G&G, increased 90 percent in the first
quarter of 2002, primarily the result of the Tosco acquisition.
This was partially offset by lower fuel and utility costs at the
company's Sweeny and Borger, Texas, refineries due to lower
natural gas prices. Controllable costs in the E&P segment were
about the same as in the first quarter of 2001.
21
Exploration expenses increased 143 percent in the first quarter
of 2002, primarily due to a $77 million leasehold impairment of
deepwater block 34, offshore Angola. The increase also reflects
higher dry hole and G&G costs.
Depreciation, depletion and amortization (DD&A) increased
29 percent in the first quarter of 2002, primarily as a result of
the Tosco acquisition, as well as higher DD&A from the company's
Alaska E&P operations. A $10 million property impairment was
recorded on the Janice field in the U.K. North Sea in the first
quarter of 2002. See Note 6--Impairments in the Notes to
Financial Statements for additional information.
Taxes other than income taxes increased 114 percent in the first
quarter of 2002, reflecting the impact of the Tosco acquisition
and the corresponding increase in petroleum product sales, as
well as increased property and payroll taxes. These items were
partially offset by a decrease in production taxes resulting from
lower crude oil and natural gas prices.
The company added a new line item to its statement of operations
in 2001 to disclose the accretion of discounted environmental
liabilities acquired in acquisitions. The $5 million accretion
in the first quarter of 2002 is related to environmental
obligations acquired in the ARCO Alaska and Tosco acquisitions.
Interest expense increased 27 percent in the first quarter of
2002, primarily as a result of higher debt levels after the Tosco
acquisition, as well as lower amounts of interest being
capitalized.
Foreign currency losses of $1 million were incurred in the first
quarter of 2002, compared with losses of $7 million in the
corresponding quarter of 2001. Preferred dividend requirements
were unchanged from the prior-year quarter.
22
Segment Results
E&P
Three Months Ended
March 31
-------------------
2002 2001
-------------------
Millions of Dollars
-------------------
Operating Results
Net income $ 142 581
Less special items (81) (4)
- -----------------------------------------------------------------
Net operating income $ 223 585
=================================================================
Dollars Per Unit
-------------------
Average Sales Prices
Crude oil (per barrel)
United States
Alaska $18.72 25.95
Lower 48 18.86 27.10
Total 18.73 26.06
Foreign 20.86 25.43
Total consolidated 19.41 25.84
Equity affiliate in Venezuela 13.94 -
Worldwide 19.35 25.84
Natural gas--lease (per
thousand cubic feet)
United States
Alaska 2.13 1.79
Lower 48 1.99 6.41
Total 1.99 6.10
Foreign 2.41 2.83
Worldwide 2.15 4.90
- -----------------------------------------------------------------
Millions of Dollars
-------------------
Worldwide Exploration
Expenses
General administrative; geological
and geophysical; and lease rentals $ 54 50
Leasehold impairment 93 11
Dry holes 16 6
- -----------------------------------------------------------------
$ 163 67
=================================================================
23
Three Months Ended
March 31
------------------
2002 2001
------------------
Thousands of
Barrels Daily
------------------
Operating Statistics
Crude oil produced
United States
Alaska 353 349
Lower 48 33 33
- -----------------------------------------------------------------
386 382
Norway 118 122
United Kingdom 17 20
Nigeria 27 30
China 13 13
Timor Sea 4 8
Canada 1 1
Denmark* - 4
Venezuela* - 3
- -----------------------------------------------------------------
Total consolidated 566 583
Equity affiliate in Venezuela 6 -
- -----------------------------------------------------------------
572 583
=================================================================
*Producing properties in these countries were sold during 2001.
Natural gas liquids produced
United States
Alaska* 27 27
Lower 48 1 1
- -----------------------------------------------------------------
28 28
Norway 5 5
Other areas 4 4
- -----------------------------------------------------------------
37 37
=================================================================
*Includes 15,000 and 16,000 barrels per day in the first quarters
of 2002 and 2001, respectively, that were sold from the Prudhoe
Bay lease to the Kuparuk lease for reinjection to enhance crude
oil production.
Millions of
Cubic Feet Daily
-------------------
Natural gas produced*
United States
Alaska 168 182
Lower 48 734 721
- -----------------------------------------------------------------
902 903
Norway 135 138
United Kingdom 173 202
Canada 19 22
Nigeria 37 43
Australia 83 40
- -----------------------------------------------------------------
1,349 1,348
=================================================================
*Represents quantities available for sale. Excludes gas
equivalent of natural gas liquids shown above.
Liquefied natural gas sales 117 116
- -----------------------------------------------------------------
24
Net operating income from Phillips' E&P segment decreased
62 percent in the first quarter of 2002. The decline reflects a
25 percent decrease in Phillips' average worldwide crude oil
price and a 69 percent decrease in its average U.S. Lower 48
natural gas price.
U.S. E&P
- --------
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
2002 2001
-------------------
Operating Results
Net income $ 158 472
Less special items - (2)
- -----------------------------------------------------------------
Net operating income $ 158 474
=================================================================
Alaska $ 125 245
Lower 48 33 229
- -----------------------------------------------------------------
$ 158 474
=================================================================
Net operating income from the company's U.S. E&P operations
decreased 67 percent in the first quarter of 2002, primarily the
result of lower crude oil and natural gas prices, partially
offset by lower production taxes. Phillips' average U.S. Lower
48 natural gas sales price declined 69 percent in the first
quarter, compared with the historically high prices experienced
in the first quarter of 2001. The average U.S. crude oil price,
while lower than the corresponding quarter of the prior year, was
only slightly lower than the average price of the fourth quarter
of 2001. U.S. crude oil and natural gas production levels in the
first quarter of 2002 were about the same as the first quarter of
2001.
There were no special items in the first quarter of 2002, while
the first quarter of 2001 included a net loss on the disposition
of assets.
25
Foreign E&P
- -----------
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
2002 2001
-------------------
Operating Results
Net income (loss) $(16) 109
Less special items (81) (2)
- -----------------------------------------------------------------
Net operating income $ 65 111
=================================================================
Net operating income from the company's foreign E&P operations
declined 41 percent in the first quarter of 2002, primarily as a
result of lower crude oil production and prices, along with
higher exploration expenses.
Foreign crude oil production decreased 7 percent in the first
quarter of 2002, as new heavy-oil production from the company's
equity affiliate in Venezuela was more than offset by the impact
of asset sales, normal field declines and production quotas.
Lower natural gas production in the U.K. North Sea was offset by
increased production offshore Australia.
Special items in the first quarter of 2002 included a $77 million
leasehold impairment of deepwater block 34, offshore Angola. The
initial exploratory well in this block was unsuccessful, and the
drilling costs, the majority of which were incurred in April,
will be charged to dry hole expense in the second quarter of
2002. Special items in the first quarter of 2002 also included
an impairment of the Janice field in the U.K. North Sea in
connection with its planned sale, partially offset by a deferred
tax benefit associated with the sale. See Note 6--Impairments in
the Notes to Financial Statements for additional information on
these impairments. Special items in the first quarter of 2001
consisted of a net loss on asset dispositions.
26
GPM
Three Months Ended
March 31
-------------------
2002 2001
-------------------
Millions of Dollars
-------------------
Operating Results
Net income $ 5 35
Less special items - -
- -----------------------------------------------------------------
Net operating income $ 5 35
=================================================================
Dollars Per Barrel
-------------------
Average Sales Prices
U.S. natural gas liquids* $12.83 25.38
- -----------------------------------------------------------------
Millions of
Cubic Feet Daily
-------------------
Operating Statistics**
Raw gas throughput 2,242 2,273
- -----------------------------------------------------------------
Thousands of
Barrels Daily
-------------------
Natural gas liquids production 118 112
- -----------------------------------------------------------------
*Prices are based on index prices from the Mont Belvieu and
Conway market hubs that are weighted by DEFS' natural gas
liquids component and location mix.
**Volumes represent Phillips' 30.3 percent of DEFS' throughput
and production.
The GPM segment consists primarily of the company's 30.3 percent
interest in Duke Energy Field Services, LLC (DEFS). Net
operating income from the GPM segment decreased 86 percent in the
first quarter of 2002, reflecting a sharp drop in natural gas
liquids sales prices, partially offset by increased natural gas
liquids production.
Included in the GPM segment's earnings in both the first quarter
of 2002 and 2001 was a benefit of $9 million, representing the
amortization of the basis difference between the book value of
Phillips' contribution to DEFS and its 30.3 percent equity
interest in DEFS.
There were no special items in the first quarter of 2002 or 2001.
27
RM&T
Three Months Ended
March 31
-------------------
2002 2001
-------------------
Millions of Dollars
-------------------
Operating Results
Net income (loss) $ (89) 72
Less special items (1) 26
- -----------------------------------------------------------------
Net operating income (loss) $ (88) 46
=================================================================
Dollars Per Gallon
-------------------
Average Sales Prices
Automotive gasoline
Wholesale $ .67 .89
Retail .81 1.02
Distillates .59 .84
- -----------------------------------------------------------------
Thousands of
Barrels Daily
-------------------
U.S. Operating Statistics
Refining operations
United States
Rated crude oil capacity 1,681 368
Crude oil runs 1,438 346
Capacity utilization (percent) 86 94
Refinery and natural gas
liquids production 1,662 503
Foreign
Rated crude oil capacity 75 -
Crude oil runs 64 -
Capacity utilization (percent) 85 -
Refinery production 62 -
- -----------------------------------------------------------------
Petroleum products outside sales
United States
Automotive gasoline
Branded 644 242
Unbranded and spot 393 59
Aviation fuels 23 43
Distillates
Wholesale and retail 116 106
Spot 436 29
Natural gas liquids 140 101
Other products 363 52
- -----------------------------------------------------------------
2,115 632
Foreign 43 -
- -----------------------------------------------------------------
2,158 632
=================================================================
28
The RM&T segment incurred a net operating loss of $88 million in
the first quarter of 2002, compared with net operating income of
$46 million in the first quarter of 2001. The results reflect
extremely difficult market conditions in the refining and
marketing business, brought about by a decline in petroleum
products demand as a result of unseasonably warm weather in the
northeast United States and the continued weak economic
environment. Refining margins in the first quarter of 2002 were
well below average margins for the past 10 years, with Phillips'
average crack spread down 62 percent from the first quarter of
2001.
As a result of low refining margins, Phillips continued
production reductions instituted late in the fourth quarter of
2001. This, along with two major scheduled maintenance
turnarounds, resulted in a crude oil capacity utilization rate of
86 percent for the quarter, compared with 94 percent in the first
quarter of 2001. Turnaround maintenance costs impacted first
quarter 2002 results by approximately $45 million after-tax.
Special items in the first quarter of 2002 consisted of work
force reduction charges, while special items in the first quarter
of 2001 consisted of a favorable $28 million cumulative effect of
an accounting change and a property impairment recorded by an
equity-affiliate pipeline company.
29
Chemicals
Three Months Ended
March 31
-------------------
2002 2001
-------------------
Millions of Dollars
-------------------
Operating Results
Net loss $ (11) (44)
Less special items (3) (5)
- -----------------------------------------------------------------
Net operating loss $ (8) (39)
=================================================================
Millions of Pounds
-------------------
Operating Statistics
Production*
Ethylene 805 828
Polyethylene** 525 479
Styrene 203 109
Normal alpha olefins 158 130
- -----------------------------------------------------------------
*Phillips' 50 percent share of Chevron Phillips Chemical Company
LLC.
**Domestic production only.
The company's Chemicals segment consists primarily of its
50 percent interest in Chevron Phillips Chemical Company LLC
(CPChem). The Chemicals segment incurred a net operating loss of
$8 million in the first quarter of 2002, compared with a net
operating loss of $39 million in the first quarter of 2001.
Global chemical demand remained depressed in the first quarter of
2002, resulting in production cutbacks and low margins across
most product lines. The chemicals industry is experiencing
excess capacity for many products and industry operating rates
remained reduced. In response to these conditions, CPChem shut
down several facilities in late 2001 and in the first quarter of
2002. Even with the resulting lower capacity levels, the
quarterly capacity utilization rates for CPChem's two largest
product lines, ethylene and domestic polyethylene, were still
low, at 86 percent and 92 percent, respectively.
Special items in the first quarter of 2002 consisted of
contingency accruals and severance charges, partly offset by the
partial reversal of a previous inventory lower-of-cost-or-market
writedown. Special items in the first quarter of 2001 were
contingency related.
30
Corporate and Other
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
2002 2001
-------------------
Operating Results
Corporate and Other $(149) (128)
Less special items (10) (3)
- -----------------------------------------------------------------
Adjusted Corporate and Other $(139) (125)
=================================================================
Adjusted Corporate and Other includes:
Net interest $ (78) (68)
Corporate general and
administrative expenses (47) (31)
Preferred dividend requirements (8) (10)
Other (6) (16)
- -----------------------------------------------------------------
Adjusted Corporate and Other $(139) (125)
=================================================================
Net interest represents interest expense, net of interest income
and capitalized interest. Net interest costs increased
15 percent in the first quarter of 2002, primarily as a result of
higher debt levels after the Tosco acquisition, as well as lower
amounts of interest being capitalized.
Corporate general and administrative expenses increased
52 percent in the first quarter of 2002, reflecting higher
benefit-related expenses, including the effects of the vesting
acceleration of certain stock compensation resulting from the
shareholder approval of the proposed merger with Conoco.
Preferred dividend requirements represent dividends on the
preferred securities of the Phillips 66 Capital Trusts I and II.
The category "Other" consists primarily of a captive insurance
subsidiary, certain foreign currency transaction gains and
losses, and income tax and other items that are not directly
associated with the operating segments on a stand-alone basis.
Results from Other were improved in the first quarter of 2002,
primarily due to lower foreign currency losses compared with the
first quarter of 2001.
Special items in the first quarter of 2002 consisted of
contingency accruals and external transition costs related to the
proposed merger with Conoco. Special items in the first quarter
of 2001 consisted of an environmental accrual.
31
CAPITAL RESOURCES AND LIQUIDITY
Financial Indicators
Millions of Dollars
-------------------------------
At At At
March 31 December 31 March 31
2002 2001 2001
-------------------------------
Current ratio .9 1.0 .7
Total debt repayment obligations
due within one year 481 44 262
Total debt $ 8,902 8,689 6,405
Company-obligated mandatorily
redeemable preferred securities $ 650 650 650
Common stockholders' equity $14,111 14,340 6,496
Percent of total debt to capital* 38% 37 47
Percent of floating-rate debt
to total debt 22% 20 11
- -----------------------------------------------------------------
*Capital includes total debt, company-obligated mandatorily
redeemable preferred securities and common stockholders' equity.
During the first three months of 2002, funds of $579 million were
provided by operating activities, a decrease of $676 million from
the same period of 2001, primarily the result of a $541 million
decrease in net income due to lower prices and margins.
Commodity price changes also affected non-cash working capital
items, including receivables, payables, and inventories, which
contributed to the decrease in cash from operating activities.
Reduced levels of revolving sales of accounts receivable under
the company's receivables sales programs decreased cash from
operations $102 million. The company used the cash provided by
operations and borrowings to pay dividends and fund $657 million
of its 2002 capital program. Cash and cash equivalents increased
$28 million since December 31, 2001.
During the first quarter of 2002, Merey Sweeny L.P. (MSLP), the
limited partnership which owns and operates the coker facilities
located at Phillips' Sweeny Complex, issued $25 million of tax-
exempt bonds due 2022. This issuance, combined with similar
bonds issued by MSLP in 1998, 2000, and 2001 bring the total
outstanding to $100 million. As a result of the company's
support as a primary obligor of a 50 percent share of MSLP
financings, equal to its partnership interest, $50 million and
$38 million of long-term debt is included in Phillips' balance
sheet at March 31, 2002, and December 31, 2001, respectively.
32
Phillips' debt-to-capital ratio was 38 percent at March 31, 2002,
up slightly from December 31, 2001, but improved significantly
from 47 percent at March 31, 2001, primarily as a result of the
company's issuing 124.1 million shares of common stock in the
acquisition of Tosco Corporation (Tosco).
In April 2002, the company announced plans to redeem its
$250 million 8.86% Notes due May 15, 2022, on May 15, 2002, at
104.43 percent. Phillips also plans to redeem all of its
outstanding 8.24% Junior Subordinated Deferrable Interest
Debentures due 2036 held by the Phillips 66 Capital I statutory
business trust on May 31, 2002. This will trigger the redemption
of $300 million of 8.24% Trust Originated Preferred Securities at
par value, $25 per share. Phillips plans to fund both
redemptions by issuing commercial paper. Together, these
redemptions are estimated to reduce pretax costs by approximately
$30 million per year. "Notes payable and debt due within one
year" increased significantly due to the company's intent to
redeem the above debt and preferred securities, and to the
increased issuance of commercial paper supported by the company's
364-day credit facility.
To meet its liquidity requirements, including funding its capital
program, paying dividends and repaying debt, the company looks to
a variety of funding sources, primarily cash generated from
operating activities. Over the next two years, however, the
company anticipates also raising funds from the sale of
approximately $1 billion of assets from its RM&T segment.
While the stability of the company's cash flows from operating
activities benefits from geographic diversity and the offsetting
effects of upstream and downstream integration, the company's
operating cash flows remain exposed to the volatility of
commodity crude oil and natural gas prices and downstream
margins, as well as periodic cash needs to fund tax payments and
crude oil, natural gas and petroleum products purchases. The
company's primary swing funding source for short-term working
capital needs is a $3 billion commercial paper program.
At March 31, 2002, Phillips had two revolving bank credit
facilities: a five-year credit agreement providing for
commitments not to exceed $1.5 billion; and a $1.5 billion
364-day credit agreement, which expires October 16, 2002. The
$3 billion of credit facilities are available either as direct
bank borrowings or as support for the issuance of commercial
paper. At March 31, 2002, Phillips had $1,323 million of
commercial paper outstanding supported by the credit facilities,
compared with $1,081 million outstanding at December 31, 2001,
while Phillips' Norwegian subsidiary had no debt outstanding on
its two $300 million revolving credit facilities that expire in
June 2004.
33
At March 31, 2002, Phillips had $3.5 billion of various types of
debt and equity securities, and securities convertible into
either, available to issue and sell, under a universal shelf
registration that was filed with the U.S. Securities and Exchange
Commission.
In addition to the bank credit facilities, Phillips sells certain
credit card and trade receivables under revolving sales
agreements with four unrelated bank-sponsored entities. These
agreements provide for Phillips to sell up to $1.2 billion of
senior, undivided interests in pools of the credit card or trade
receivables to the bank-sponsored entities. At March 31, 2002,
and December 31, 2001, the company had sold undivided interests
of $838 million and $940 million, respectively. Phillips
retained interests in the pools of receivables, which are
subordinate to the interests sold to the bank-sponsored entities.
At March 31, 2002, and December 31, 2001, Phillips' retained
interests were $478 million and $450 million, respectively,
reported on the balance sheet in accounts and notes receivable.
On April 16, 2002, Tosco, the seller, and the sponsoring bank
agreed to terminate an agreement that provided for the sale of
$100 million of Tosco credit card receivables. The company plans
to replace its existing receivables facilities with a new
$1.1 billion receivables facility during the second quarter of
2002.
The company leases ocean transport vessels, tank railcars,
corporate aircraft, service stations, computers, office buildings
and other facilities and equipment. Phillips has $200 million of
master leasing arrangements, under which it leases and supervises
the construction of retail marketing outlets. At March 31, 2002,
approximately $158 million had been utilized under these
arrangements.
34
Capital Expenditures and Investments
Millions of Dollars
-------------------------------
Three Months Ended
March 31
Estimated ------------------
2002 2002 2001
--------- ------------------
E&P
Alaska $ 807 205 248
Lower 48 314 64 65
Foreign 1,483 248 279
- -----------------------------------------------------------------
2,604 517 592
GPM - - -
RM&T 839 116 49
Chemicals - 10 -
Corporate and Other 64 14 15
- -----------------------------------------------------------------
$3,507 657 656
=================================================================
United States $1,994 405 377
Foreign 1,513 252 279
- -----------------------------------------------------------------
$3,507 657 656
=================================================================
During April 2002, the Polar Resolution, the second of five
double-hulled Endeavour Class tankers which Phillips is having
built for use in transporting Alaska crude oil to the U.S. West
Coast, commenced sea trials. The vessel is expected to enter
service during the third quarter of 2002. The third tanker, the
Polar Discovery, was christened on April 13, 2002, and is
expected to enter service in 2003. Phillips expects to add a new
Endeavour Class tanker to its fleet each year through 2005,
resulting in a safer, more cost-effective fleet.
Drilling and testing of appraisal wells by Phillips and its co-
venturers in the Kashagan structure on the Kazakhstan shelf in
the north Caspian Sea continued during the first quarter of 2002.
Drilling on the second and third of five planned appraisal wells
is in progress. Phillips' current ownership interest in this
project is 7.14 percent. Pre-emptive rights to purchase the
interests of other co-venturers have been exercised, increasing
the company's ownership to 8.33 percent when the purchase is
completed, expected later in the second quarter of 2002.
In the U.K. sector of the North Sea, Phillips' Jade field began
production in late February 2002. Development drilling on the
second production well continues, expected to begin producing
during the second quarter of 2002. Phillips is the operator and
holds a 32.5 percent interest in Jade.
35
In the first quarter of 2002, Phillips continued pursuing the
goal of increasing its presence in high-potential deepwater
areas. Phillips was the high bidder in the Central Gulf of
Mexico sale for the Lorien prospect located in Green Canyon
block 199. The company was officially awarded the block during
the second quarter of 2002. In early May 2002, initial results
showed that the first exploratory well drilled in block 34,
offshore Angola, was a dry hole. In view of this information,
the company re-assessed the fair value of the remainder of the
block and determined that the company's investment in the block
needed to be impaired by $77 million, both before- and after-tax.
Further technical analysis of the results of this first well
continues and the second of three commitment wells in this block
is scheduled for drilling later in 2002.
As a result of the current uncertain economic environment, the
company is reviewing its budgeted capital expenditures for 2002,
for possible reduction later in the year if the economic
environment does not improve.
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.
On June 23, 1999, a flash fire occurred in a reactor vessel at
the K-Resin styrene-butadiene copolymer (SBC) plant at the
Houston Chemical Complex. Two individuals employed by a
subcontractor, Zachry Construction Corporation (Zachry), were
killed and other workers were injured. Ten lawsuits were filed
in Texas in connection with the incident, including two actions
for wrongful death. All of the significant litigation arising
from this incident has now been resolved.
On March 27, 2000, an explosion and fire occurred at Phillips'
K-Resin SBC plant at the Houston Chemical Complex due to the
overpressurization of an out-of-service butadiene storage tank.
One employee was killed and several individuals, including
employees of both Phillips and its contractors, were injured.
36
Additionally, individuals who were allegedly in the area of the
Houston Chemical Complex at the time of the incident have claimed
they suffered various personal injuries due to exposure to the
event. The wrongful death claim and the claims of the most
seriously injured workers have been resolved. Currently, there
are 14 lawsuits pending on behalf of 188 primary plaintiffs. A
trial is scheduled for the fall of 2002. Under the
indemnification provisions of subcontracting agreements with
Zachry and Brock Maintenance, Inc., Phillips has sought
indemnification from these subcontractors with respect to claims
made by their employees. The Contribution Agreement, pursuant to
which CPChem was formed, does not require CPChem to indemnify
Phillips for liability arising out of this litigation.
Environmental
Phillips is subject to the same numerous federal, state, local
and foreign environmental laws and regulations as are other
companies in the oil and gas exploration and production; and
refining, marketing and transportation of crude oil and refined
products businesses. The most significant of those laws, and the
regulations issued thereunder, affecting Phillips' operations
are:
o The Clean Air Act, as amended.
o The Federal Water Pollution Control Act.
o Safe Drinking Water Act.
o Regulations of the United States Department of the Interior
governing offshore oil and gas operations.
These acts, along with their associated regulations, set limits
on emissions and, in the case of discharges to water, establish
water quality limits. They also, in most cases, require permits
in association with new or modified operations. These permits
can require an applicant to obtain substantial information in
connection with the application process, which can be expensive
and time-consuming. In addition, there can be delays associated
with notice and comment periods and the agency's processing of
the application. Many of the delays associated with the
permitting process are beyond the control of the applicant.
Many states also have similar statutes and regulations governing
air and water. While similar, in some cases these regulations
impose additional, or more stringent, requirements that can add
to the cost and difficulty of marketing or transporting products
across state lines.
37
Phillips is also subject to certain acts and regulations
primarily governing remediation of wastes or oil spills. 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 that may now require investigatory
or remedial work to adequately protect the environment or to
address new regulatory requirements. The applicable acts are:
o The Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended (CERCLA), commonly referred
to as Superfund, and comparable state statutes. CERCLA
primarily addresses historic contamination and imposes joint
and several liability for cleanup of contaminated sites on
owners and operators of the contaminated sites, or on those
who have contributed wastes to a site. Many states have their
own statutes and regulatory requirements that are similar to
CERCLA. Phillips is involved in a number of Superfund sites--
see the discussion below. CERCLA also requires reporting of
releases to the environment of substances defined as
hazardous. These requirements add cost and complexity to
Phillips' operations.
o The Resource Conservation and Recovery Act of 1976, as
amended, and comparable state statutes, govern the management
and disposal of wastes, with the most stringent regulations
applicable to treatment, storage or disposal of hazardous
wastes at the owner's property.
o The Oil Pollution Act of 1990, as amended, under which owners
and operators of tankers, owners and operators of onshore
facilities and pipelines, and lessees or permittees of an area
in which an offshore facility is located are liable for
removal and cleanup costs of oil discharges into navigable
waters of the United States.
Pursuant to the authority of the Clean Air Act (CAA), the
Environmental Protection Agency (EPA) has issued several
standards applicable to the formulation of motor fuels, which are
designed to reduce emissions of certain air pollutants when the
fuel enters commerce or is used. Pursuant to state laws
corresponding to the CAA, several states have passed similar or
more stringent regulations governing the formulation of motor
fuels. Where these regulations are currently applicable,
Phillips has already incurred the operational or capital costs of
control or manufacturing limitations, but will continue to incur
the costs of compliance such as ongoing operational requirements
and recordkeeping.
38
The EPA has also promulgated specific rules governing the sulfur
content of gasoline, known generically as the "Tier II Sulfur
Rules," which become applicable to Phillips' gasoline production
as early as 2004. The company is implementing a compliance
strategy for meeting the requirements, including the use of
Phillips' proprietary technology known as S Zorb Sulfur Removal
Technology (S Zorb). Phillips expects to use a combination of
technologies to achieve compliance with the rules. Phillips has
made preliminary estimates of its cost of compliance with this
rule and will include these costs in future budgeting for
refinery compliance. The EPA has also promulgated sulfur content
rules for highway diesel fuel that become applicable in 2006.
Phillips is currently developing and testing an S Zorb system for
removing sulfur from diesel fuel. It is anticipated that S Zorb
will be used as part of Phillips' strategy for complying with
these rules. Because the company is still evaluating and
developing capital strategies for compliance with the rule,
Phillips cannot provide precise estimates for compliance at this
time, but will do so and report these compliance costs as
required by law.
In 1997, an international conference on global warming concluded
an agreement known as the Kyoto Protocol, which called for the
reduction of certain emissions that may contribute to increases
in atmospheric greenhouse gas concentrations. The United States
has not ratified the treaty codifying the Kyoto Protocol and it
is not clear whether it will do so in the future. If the
protocol is ratified by the United States, the cost of complying
with regulations implementing the protocol could be substantial.
It is not, however, possible to accurately estimate the costs
that could be incurred by Phillips to comply with such
regulations.
Because of the nature of Phillips' businesses, it is likely that
environmental laws and regulations will continue to have an
effect on its operations in the future. Phillips does not,
however, currently expect any material adverse effect on its
operations or financial position as a result of compliance with
such laws and regulations.
At year-end 2001, Phillips reported 29 sites where it had
information indicating that it might have been identified as a
Potentially Responsible Party (PRP) under the federal Superfund
law. Since then, one of these PRP sites has been resolved and no
new sites were added. Of the 28 sites remaining at March 31,
2002, the company believes it has a legal defense or its records
indicate no involvement for six sites. At 15 other sites,
present information indicates that it is probable that the
company's exposure is less than $100,000 per site. Of the
39
remaining sites, the company has provided for any probable costs
that can be reasonably estimated. At a number of sites, Phillips
has had no communication or activity with government agencies or
other PRPs in more than two years. Experience has shown,
however, that the mere passage of time is no guarantee that the
site will never become active or that the company's connection to
the site will not be established.
Phillips does not consider the number of sites at which it has
been designated potentially responsible by state or federal
agencies as a relevant measure of liability. Some companies may
be involved in few sites but have much larger liabilities than
companies involved in many more sites. Although liability of
those potentially responsible is generally joint and several for
federal sites and frequently so for state sites, the company is
usually but one of many companies cited at a particular site.
Phillips has, to date, been successful in sharing cleanup costs
with other financially sound companies. Many of the sites at
which the company is potentially responsible are still under
investigation by the EPA or the state agencies concerned. Prior
to actual cleanup, those potentially responsible normally assess
site conditions, apportion responsibility and determine the
appropriate remediation. In some instances, Phillips may have no
liability or attain a settlement of liability. Actual cleanup
costs generally occur after the parties obtain EPA or equivalent
state agency approval.
At March 31, 2002, contingent liability accruals of $10 million
had been made for the company's PRP sites, and $3 million for
other environmental contingent liabilities. In addition, the
company had accrued $522 million for other planned remediation
activities, including resolved state, PRP, and other federal
sites, as well as sites where no claims have been asserted, for
total environmental accruals of $535 million, compared with
$539 million at December 31, 2001. No one site exceeds 10
percent of the total.
After an assessment of environmental exposures for cleanup and
other costs, except those acquired in purchase business
combinations, 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.
40
OUTLOOK
On November 18, 2001, Phillips and Conoco announced that their
Boards of Directors had unanimously approved a merger and that a
definitive merger agreement to form a new company,
ConocoPhillips, had been signed. On March 12, 2002, stockholders
of both companies approved the merger at special stockholder
meetings. At inception, Phillips stockholders will own
approximately 57 percent of the new company and Conoco
stockholders will own approximately 43 percent. The transaction
is expected to be completed in the second half of 2002.
Effective January 1, 2002, the Norwegian authorities implemented
a production curtailment on the Norwegian Continental shelf to
support the efforts of major oil exporting countries to stabilize
crude prices. Phillips has incurred only minimal impacts to its
Norway production volumes during 2002 as a result of these
curtailments--less than 1 percent, compared with budgeted volumes,
and no significant changes are expected during the second quarter
of the year. In Nigeria, curtailment of oil production from the
company's joint-venture operations is expected for the remainder
of 2002, in support of major oil exporting country curtailment
recommendations. The exact future impact of this curtailment is
uncertain. The company expects its second-quarter 2002
production to be lower than the first quarter, averaging
approximately 800,000 barrels-of-oil-equivalent per day, due to
normal seasonal declines in Alaska.
In March 2002, the Norwegian government approved, in a
parliamentary bill, the company's plan for in-place disposal of
the Ekofisk I concrete tank in a cleaned condition. Removal of
other Ekofisk structures, according to the recommended cessation
plan, had been previously approved in December 2001. All removal
and cleaning activity is expected to be completed by 2013.
During the second quarter of 2002, CPChem, the 50 percent-owned
joint-venture which comprises Phillips' chemicals segment, plans
to issue $250 million of Preferred LLC Interests. Phillips has
agreed to the material terms under which it will purchase
50 percent of these securities for $125 million.
On April 17, 2002, the U.K. government announced proposed
changes, as part of its 2002 budget, to corporate taxation
methods specifically impacting the oil and gas industry
and production from the U.K. sector of the North Sea. A
10 percent supplementary charge to corporation taxes will be
assessed on profits, partially offset by the elimination of
royalties and an increase in first-year deduction allowances for
41
capital investments. The proposed changes are subject to public
and industry review and comment, but it is anticipated that the
changes will be implemented during 2002. If the proposed changes
become law, Phillips estimates a one-time deferred tax charge of
approximately $25 million at implementation, with an ongoing
increase in U.K. taxes of $5 million to $10 million annually.
Crude oil and natural gas prices are subject to external factors
over which the company has no control, such as global economic
conditions, demand growth, inventory levels, weather, competing
fuel prices and availability of supply. Unusually warm winter
weather depressed petroleum and natural gas demand, and thus
prices, in January and February of 2002. Evidence of emerging
strength in the U.S. economy improved demand expectations for the
remainder of 2002 by early March. As crude oil prices began to
recover, major exporting nations elected to extend their export
restraints into the second quarter, in an attempt to avoid
oversupplying the market during the historically weakest demand
season of the year. Escalating tensions in the Middle East put
further upward pressure on prices at the end of the first
quarter.
Refining margins are subject to the price of crude oil and other
feedstocks, and the price of petroleum products, which are
subject to market factors over which the company has no control,
such as the U.S. economy; seasonal factors that affect demand,
such as the summer driving months; and the levels of refining
output, including refining capacity relative to demand. Warm
winter weather and anticipation of slow economic growth dampened
refined product prices relatively more than crude oil prices in
early 2002, resulting in historically low refining margins.
Improving economic indicators reversed the market perception
toward the end of the first quarter, and refining margins began
to improve. Energy demand growth is expected to continue as the
U.S. economy recovers, which should support improved petroleum
product prices and refining margins. However, the political
crises in the Middle East could drive oil prices up relative to
U.S. petroleum product prices, which could lead to a tightening
of refining margins.
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
42
actual results to differ materially from those expressed. Where
any such forward-looking statement includes a statement of the
assumptions or bases underlying such forward-looking statement,
the company 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, there can be no
assurance that the statement of expectation or belief will
result, or be achieved or accomplished.
The following are identified as important risk factors, but not
all of the 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 for the further implementation of Management's announced
strategy for certain of its business segments are subject to:
the completion of the announced merger with Conoco; receipt of
any approvals or clearances that may be required from domestic
and foreign government authorities; required disposition of
assets, if any, to meet regulatory requirements; successful
integration of Conoco businesses, assets, operations and
personnel with those of the company; continued successful
integration of the recently acquired Tosco assets; the
successful development and operation of the company's current
E&P projects, and the achievement of production estimates; the
achievement of cost savings and synergies that are dependent
on the integration of personnel, business systems and
operations from the Conoco merger and the Tosco acquisition;
the operation and financing of the DEFS and CPChem joint
ventures; and the demand and prices for the products produced
by DEFS and CPChem.
o Plans to drill wells and develop offshore or onshore
exploration and production properties are subject to: the
company's ability to obtain agreements with co-venturers,
partners and governments and government agencies, including
necessary permits; its ability to engage specialized drilling,
construction and other contractors and equipment and to obtain
economical and timely financing; construction of pipelines,
processing and production facilities for its Bayu-Undan, Bohai
Bay, Hamaca and other E&P projects; geological, land or sea
conditions; world prices for oil, natural gas and natural gas
liquids; adequate and reliable transportation systems,
including the Trans-Alaska Pipeline System, the Valdez Marine
Harbor Terminal, and the acquired and to-be-constructed crude
oil tankers; and foreign and United States laws, including tax
laws.
43
o Plans for the modernization, the debottlenecking or other
improvement projects at its refineries, including the
installation and operation of its proprietary sulfur removal
technology implementation, and the timing of production from
such plants are subject to: approval from the company's and/or
subsidiaries' Boards of Directors; obtaining loans and/or
project financing; the issuance by foreign, federal, state,
and municipal governments, or agencies thereof, of timely
building, environmental and other permits; and the
availability of specialized contractors, work force and
equipment. Production and delivery of the company's products
are subject to: domestic and worldwide prices and demand for
refined products; availability of raw materials; and the
availability of transportation for products 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 borrowings,
asset sales, and operations, is subject to: the negotiation
and execution of various bank, project and public financings
and related financing documents, the market for any such debt,
and interest rates on the debt; the identification of buyers
and the negotiation and execution of instruments of sale for
any assets that may be identified for sale; changes in the
commodity prices of the company's basic products of oil,
natural gas and natural gas liquids, over which Phillips may
have little or no control; its ability to operate refineries
and exploration and production operations consistently and
safely, with no major disruption in production or
transportation of products from such operations; the
successful and profitable operations of its chemicals and mid-
stream joint ventures; 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, 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. Estimates of project costs, cost savings and
synergies were developed by the company from current
information. The estimates for reserves, supplies, costs,
maintenance, environmental remediation, savings and synergies
can change positively or negatively as new information and
data become available.
44
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The company held a special stockholders meeting on March 12,
2002. The proposal considered and the voting results were as
follows:
A company proposal to adopt the Agreement and Plan of
Merger dated as of November 18, 2001, by and among
Phillips Petroleum Company and Conoco Inc., a Delaware
corporation, ConocoPhillips, a Delaware corporation,
which we refer to as New Parent, C Merger Corp., a
Delaware corporation and a wholly owned subsidiary of New
Parent, and P Merger Corp., a Delaware corporation and a
wholly owned subsidiary of New Parent.
For 317,436,274
Against 10,001,985
Abstentions 915,338
Not Voted 82,089,146
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
- --------
12 Computation of Ratio of Earnings to Fixed Charges.
Reports on Form 8-K
- -------------------
During the three months ended March 31, 2002, the company filed
three reports on Form 8-K.
The first report was filed February 25, 2002, to report in Item 5
the company's 2001 reserve production replacement and finding and
development costs.
The second report was filed February 26, 2002, to report in
Item 5 that the company and Conoco Inc. had named the initial
members of the ConocoPhillips management team that will take
office after the completion of the merger.
The third report was filed March 12, 2002, to report in Item 5
that the company's stockholders had voted to approve the proposed
merger between Phillips and Conoco Inc. at a special meeting held
on March 12, 2002.
45
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)
May 13, 2002
46