UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
--------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------------- --------------------
Commission file number 1-720
----------------------------------------------------
PHILLIPS PETROLEUM COMPANY
(Exact name of registrant as specified in its charter)
Delaware 73-0400345
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Phillips Building, Bartlesville, Oklahoma 74004
(Address of principal executive offices) (Zip Code)
918-661-6600
(Registrant's telephone number, including area code)
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
The registrant had 254,625,488 shares of common stock, $1.25 par value,
outstanding at October 31, 1998
PART I. FINANCIAL INFORMATION
- ---------------------------------------------------------------------
Consolidated Statement of Income Phillips Petroleum Company
Millions of Dollars
---------------------------------
Three Months Nine Months
Ended Ended
September 30 September 30
---------------------------------
1998 1997 1998 1997
---------------------------------
Revenues
Sales and other operating revenues $2,890 3,844 8,947 11,497
Equity in earnings of affiliated
companies 12 33 62 98
Other revenues 11 18 158 57
- ---------------------------------------------------------------------
Total Revenues 2,913 3,895 9,167 11,652
- ---------------------------------------------------------------------
Costs and Expenses
Purchased crude oil and products 1,700 2,272 5,015 6,955
Production and operating expenses 533 561 1,605 1,613
Exploration expenses 45 44 144 159
Selling, general and
administrative expenses 135 171 418 467
Depreciation, depletion and
amortization 270 250 753 622
Taxes other than income taxes 52 65 177 201
Interest expense 56 50 136 153
Preferred dividend requirements
of subsidiary and capital trusts 14 21 40 62
- ---------------------------------------------------------------------
Total Costs and Expenses 2,805 3,434 8,288 10,232
- ---------------------------------------------------------------------
Income before income taxes and
Kenai LNG tax settlement 108 461 879 1,420
Kenai LNG tax settlement - 5 - 81
- ---------------------------------------------------------------------
Income before income taxes 108 466 879 1,501
Provision for income taxes 62 250 432 751
- ---------------------------------------------------------------------
Net Income $ 46 216 447 750
=====================================================================
Net Income Per Share of Common
Stock
Basic $ .18 .82 1.72 2.85
Diluted .18 .81 1.71 2.82
- ---------------------------------------------------------------------
Dividends Paid $ .34 .34 1.02 1.00
- ---------------------------------------------------------------------
Average Common Shares Outstanding
(in thousands)
Basic 256,779 263,503 259,786 263,459
Diluted 258,659 265,784 261,858 265,419
- ---------------------------------------------------------------------
See Notes to Financial Statements.
1
- ------------------------------------------------------------------
Consolidated Balance Sheet Phillips Petroleum Company
Millions of Dollars
-------------------------
September 30 December 31
1998 1997*
-------------------------
Assets
Cash and cash equivalents $ 127 163
Accounts and notes receivable (less
allowances: 1998--$14; 1997--$19) 1,374 1,717
Inventories 599 500
Deferred income taxes 136 168
Prepaid expenses and other current assets 129 100
- ------------------------------------------------------------------
Total Current Assets 2,365 2,648
Investments and long-term receivables 1,003 964
Properties, plants and equipment (net) 10,855 10,022
Deferred income taxes 90 82
Deferred charges 149 144
- ------------------------------------------------------------------
Total $14,462 13,860
==================================================================
Liabilities
Accounts payable $ 1,553 1,546
Notes payable and long-term debt due
within one year 124 234
Accrued income and other taxes 401 365
Other accruals 348 300
- ------------------------------------------------------------------
Total Current Liabilities 2,426 2,445
Long-term debt 3,495 2,775
Accrued dismantlement, removal and
environmental costs 762 713
Deferred income taxes 1,403 1,257
Employee benefit obligations 404 436
Other liabilities and deferred credits 683 770
- ------------------------------------------------------------------
Total Liabilities 9,173 8,396
- ------------------------------------------------------------------
Company-Obligated Mandatorily
Redeemable Preferred Securities
of Phillips Capital Trusts I and II 650 650
- ------------------------------------------------------------------
Common Stockholders' Equity
Common stock--500,000,000 shares
authorized at $1.25 par value
Issued (306,380,511 shares)
Par value 383 383
Capital in excess of par 2,051 2,031
Treasury stock (at cost:
1998--22,434,279 shares;
1997--14,000,882 shares) (1,139) (752)
Compensation and Benefits Trust (CBT)
(at cost: 1998--29,125,863 shares;
1997--29,200,000 shares (987) (989)
Accumulated other comprehensive income
Foreign currency translation adjustments (10) (8)
Unrealized gain on available-for-sale
securities 8 -
Unearned employee compensation--Long-
Term Stock Savings Plan (LTSSP) (313) (342)
Retained earnings 4,646 4,491
- ------------------------------------------------------------------
Total Common Stockholders' Equity 4,639 4,814
- ------------------------------------------------------------------
Total $14,462 13,860
==================================================================
See Notes to Financial Statements.
*Reclassified to conform to current presentation.
2
- -----------------------------------------------------------------
Consolidated Statement of Phillips Petroleum Company
Cash Flows
Millions of Dollars
-------------------
Nine Months Ended
September 30
-------------------
1998 1997
-------------------
Cash Flows from Operating Activities
Net income $ 447 750
Adjustments to reconcile net income to net
cash provided by operating activities
Non-working capital adjustments
Depreciation, depletion and
amortization 753 622
Dry hole costs and leasehold
impairment 29 57
Deferred taxes 139 196
J-Block settlement - 161
Other (58) 56
Working capital adjustments
Increase in aggregate balance of
accounts receivable sold 200 -
Decrease in other accounts and
notes receivable 161 193
Increase in inventories (97) (97)
Increase in prepaid expenses and
other current assets (20) (9)
Decrease in accounts payable (10) (199)
Increase in taxes and other accruals 132 128
- -----------------------------------------------------------------
Net Cash Provided by Operating Activities 1,676 1,858
- -----------------------------------------------------------------
Cash Flows from Investing Activities
Capital expenditures and investments,
including dry hole costs (1,574) (1,277)
Proceeds from asset dispositions 36 19
Long-term advances to affiliates and
other investments (11) (21)
- -----------------------------------------------------------------
Net Cash Used for Investing Activities (1,549) (1,279)
- -----------------------------------------------------------------
Cash Flows from Financing Activities
Issuance of debt 712 -
Repayment of debt (124) (270)
Purchase of company common stock (417) (21)
Issuance of company common stock 11 18
Issuance of company-obligated mandatorily
redeemable preferred securities - 350
Dividends paid on common stock (266) (263)
Other (79) (109)
- -----------------------------------------------------------------
Net Cash Used for Financing Activities (163) (295)
- -----------------------------------------------------------------
Increase (Decrease) in Cash and Cash
Equivalents (36) 284
Balance at beginning of period 163 615
- -----------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 127 899
=================================================================
See Notes to Financial Statements.
3
- -----------------------------------------------------------------
Notes to Financial Statements Phillips Petroleum Company
Note 1--Interim Financial Information
The financial information for the interim periods presented in
the financial statements included in this report is unaudited and
includes all known accruals and adjustments which Phillips
Petroleum Company (hereinafter referred to as "Phillips" or "the
company") considers necessary for a fair presentation of the
consolidated financial position of the company and its results of
operations and cash flows for such periods. All such adjustments
are of a normal and recurring nature.
Note 2--Accounting Changes
Comprehensive Income
Effective January 1, 1998, the company adopted Financial
Accounting Standards Board (FASB) Statement No. 130, "Reporting
Comprehensive Income." Statement No. 130 establishes new rules
for the reporting and display of comprehensive income and its
components. Comprehensive income is net income, plus certain
other items that are recorded directly to stockholders' equity.
Phillips' comprehensive income for the three- and nine-month
periods ended September 30 was as follows:
Millions of Dollars
---------------------------------
Three Months Nine Months
Ended Ended
September 30 September 30
---------------------------------
1998 1997 1998 1997
---------------------------------
Net income $46 216 447 750
After-tax changes in:
Foreign currency
translation adjustments 13 (7) (2) (46)
Net unrealized gain on
available-for-sale
securities 8 - 8 -
- -----------------------------------------------------------------
Comprehensive income $67 209 453 704
=================================================================
4
Segments
The company adopted FASB Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information," effective
January 1, 1998. The adoption of this Statement did not result
in a change in the composition of the company's operating
segments, or in the previously reported net income for each
segment.
Full interim disclosures are not required by Statement No. 131
until the first quarter of 1999.
Note 3--Inventories
Inventories consisted of the following:
Millions of Dollars
-------------------------
September 30 December 31
1998 1997
-------------------------
Crude oil and petroleum products $221 156
Chemical products 279 254
Materials, supplies and other 99 90
- -----------------------------------------------------------------
$599 500
=================================================================
Note 4--Properties, Plants and Equipment
Properties, plants and equipment (net) included the following:
Millions of Dollars
-------------------------
September 30 December 31
1998 1997
-------------------------
Properties, plants and equipment
(at cost) $22,857 21,426
Less accumulated depreciation,
depletion and amortization 12,002 11,404
- -----------------------------------------------------------------
$10,855 10,022
=================================================================
Note 5--Impairments
Impairments totaling $26 million after-tax were taken in third
quarter 1998 to reduce the net book values of the Maureen, Ann
and Alison fields, offshore the United Kingdom. The Maureen
impairment resulted from a $32 million before-tax upward
revision in the platform dismantlement cost estimate. The Ann
and Alison impairments were the result of a downward revision to
reserves and increased cost estimates on well work-overs. The
5
fair market values of the Ann and Alison properties were
determined using the present value of expected future cash flows,
resulting in before-tax charges totaling $5 million to
depreciation, depletion and amortization expense.
Note 6--Debt
On July 6, 1998, the company issued $300 million of 6.65%
Debentures due July 15, 2018, in the public market. This was in
addition to the $300 million of 7.125% Debentures due March 15,
2028, issued in first quarter 1998.
At September 30, 1998, no amounts were outstanding under the
company's revolving bank credit facility. However, $216 million
in commercial paper, which is 100 percent supported by this
credit facility, was outstanding. Also, $250 million of the
Phillips Petroleum Company Norway $300 million revolving credit
facility was outstanding at September 30, 1998.
Note 7--Kenai LNG Tax Settlement
Final resolution of all outstanding issues with the Internal
Revenue Service (IRS) was achieved for years 1983 through 1986.
Refunds, including interest, of $107 million, primarily relating
to the company's sales of liquefied natural gas from its Kenai,
Alaska, facility, increased net income for the nine-month period
ended September 30, 1997, by $83 million. The company also has a
number of issues outstanding with the IRS related to tax years
1987 through 1992, further discussed in Note 9--Contingencies.
Note 8--Income Taxes
The company's effective tax rates for the third quarter and the
first nine months of 1998 were 57 and 49 percent, respectively,
compared with 54 and 50 percent for each of the same periods a
year ago. The third quarter increase in the effective tax rate
was due mainly to a higher proportion of income in higher tax
rate jurisdictions.
Note 9--Contingencies
In the case of all known contingencies, the company accrues an
undiscounted liability when the loss is probable and the amount
is reasonably estimable. These liabilities are not reduced for
potential insurance recoveries. If applicable, undiscounted
receivables are accrued for probable insurance or other third-
party recoveries. Based on currently available information, the
6
company believes that it is remote that future costs related to
known contingent liability exposures will exceed current accruals
by an amount that would have a material adverse impact on the
company's financial statements.
As facts concerning contingencies become known to the company,
the company reassesses its position both with respect to accrued
liabilities and other potential exposures. Estimates that are
particularly sensitive to future change include contingent
liabilities recorded for environmental remediation, tax and legal
matters. Estimated future environmental remediation costs are
subject to change due to such factors as the unknown magnitude of
clean-up costs, the unknown time and extent of such remedial
actions that may be required, and the determination of the
company's liability in proportion to other responsible parties.
Estimated future costs related to tax and legal matters are
subject to change as events evolve and as additional information
becomes available during the administrative and litigation
process.
Environmental--The company is subject to federal, state and local
environmental laws and regulations. These may result in
obligations to remove or mitigate the effects on the environment
of the placement, storage, disposal or release of certain
chemical, mineral and petroleum substances at various sites. The
company is currently participating in environmental assessments
and clean-up under these laws at federal Superfund and comparable
state sites. In the future, the company may be involved in
additional environmental assessments, clean-ups and proceedings.
Tax--The company has a number of issues outstanding with the IRS
related to tax years 1987 through 1992 that are expected to be
resolved this year as a result of the favorable outcome in 1996
of the Kenai LNG tax case related to the company's sales of LNG
from Kenai, Alaska. A favorable resolution of these issues would
have a positive effect on net income and cash flow of up to
$125 million while an unfavorable one would not impact the
company's net income or cash position. All outstanding issues
with the IRS for years prior to 1987 have been resolved.
Other Legal Proceedings--The company is a party to a number of
other legal proceedings pending in various courts or agencies for
which, in some instances, no provision has been made.
Other Contingencies--The company has contingent liabilities
resulting from throughput agreements with pipeline and processing
companies in which it holds stock interests. Under these
agreements, Phillips may be required to provide any such company
with additional funds through advances against future charges for
the shipping or processing of petroleum liquids, natural gas and
refined products.
7
Note 10--Cash Flow Information
Cash payments and non-cash investing and financing activities for
the nine-month periods ended September 30 were as follows:
Millions of Dollars
-------------------
1998 1997
-------------------
Cash payments
Interest
Debt $163 155
Taxes and other 6 16
- -----------------------------------------------------------------
$169 171
=================================================================
Income taxes $287 449
- -----------------------------------------------------------------
Non-Cash Financing and Investing Activities
Stock awards issued (canceled) under
incentive compensation plans $ 7 (1)
Change in market value of investments 12 13
Accrued repurchase of company common stock - 5
Deferred payment obligation to purchase
property, plant and equipment 8 -
Investment in a joint venture in exchange
for non-cash assets 5 -
Investment in equity affiliate through
direct guarantee of debt 13 -
- -----------------------------------------------------------------
Note 11--Environmental Cost Recovery
During the first nine months of 1998, as part of a comprehensive
environmental cost recovery project, the company entered into
settlement agreements with certain of its historical liability
and pollution insurers in exchange for releases or commutations
of their present and future liabilities to the company under its
historical liability and pollution policies. As a result of
these settlement agreements, the company recorded a before-tax
benefit to earnings of $109 million, $71 million after-tax. At
September 30, 1998, $109 million had been collected.
8
- -----------------------------------------------------------------
Management's Discussion and Phillips Petroleum Company
Analysis of Financial Condition
and Results of Operations
Management's Discussion and Analysis contains forward-looking
statements including, without limitation, statements relating to
the company's plans, strategies, objectives, expectations,
intentions, and adequate resources, that are made pursuant to the
"safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. The words "forecasts," "intends," "to be,"
"possible," "potential," "targeted," "believe," "expect," "may,"
"plan," or "plans," "scheduled," "would," "should," "could,"
"perceives," "anticipate," "estimate," "designed," and similar
expressions identify forward-looking statements. The company
does not undertake to update, revise or correct any of the
forward-looking information. Readers are cautioned that such
forward-looking statements should be read in conjunction with the
company's disclosures under the heading: "CAUTIONARY STATEMENT
FOR THE PURPOSES OF THE 'SAFE HARBOR' PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995" beginning on page 38.
RESULTS OF OPERATIONS
Unless otherwise noted, discussion of results for the three- and
nine-month periods ending September 30, 1998, are based on a
comparison with the corresponding periods in 1997.
Consolidated Results
A summary of the company's net income by business segment
follows:
Millions of Dollars
--------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1998 1997* 1998 1997*
------------------ -----------------
Exploration and Production
(E&P) $ 22 122 188 448
Gas Gathering, Processing
and Marketing (GPM) 13 25 44 75
Refining, Marketing and
Transportation (RM&T) 53 64 159 144
Chemicals 24 78 142 212
Corporate and Other (66) (73) (86) (129)
- -----------------------------------------------------------------
Net Income $ 46 216 447 750
=================================================================
*Restated to reflect the transfer of the company's natural gas
liquids fractionation and marketing business from Chemicals to
RM&T.
9
Net income included the following special items on an after-tax
basis:
Millions of Dollars
--------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1998 1997 1998 1997
------------------ -----------------
Property impairments $(26) (25) (46) (36)
Kenai LNG tax settlement - 3 - 83
Net gain on asset sales - - 3 7
Foreign currency gains
(losses) 3 (12) (2) (26)
Pending claims and
settlements (2) 2 98 18
Other items 5 1 5 (4)
- -----------------------------------------------------------------
Total special items $(20) (31) 58 42
=================================================================
Excluding the special items listed above, the company's net
operating income by business segment was:
Millions of Dollars
--------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1998 1997 1998 1997
------------------ -----------------
E&P $ 52 146 226 474
GPM 11 25 42 66
RM&T 53 64 156 145
Chemicals 21 70 145 205
Corporate and Other (71) (58) (180) (182)
- -----------------------------------------------------------------
Net operating income $ 66 247 389 708
=================================================================
The company's net operating income continued to be adversely
affected by two significant factors in the third quarter of 1998:
sharp declines in both the company's average worldwide crude oil
sales price and ethylene margins. Also negatively impacting
third quarter results were lower crude oil production, lower
natural gas prices and lower refinery gasoline margins.
In the nine-month period, the company's net operating income
decreased 45 percent, reflecting lower product prices and margins
across most major product lines.
10
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1998 1997 1998 1997
Phillips at a Glance ------------------ -----------------
U.S. crude oil
production (MBD) 59 65 62 67
Worldwide crude oil
production (MBD) 195 244 229 230
U.S. natural gas
production (MMCFD) 985 1,014 981 1,040
Worldwide natural gas
production (MMCFD) 1,370 1,474 1,476 1,465
Worldwide natural gas
liquids production (MBD) 169 173 174 168
Liquefied natural gas
sales (MMCFD) 145 114 130 115
Refinery utilization
rate (%) 94 101 94 93
U.S. automotive gasoline
sales (MBD)* 344 344 323 343
U.S. distillates
sales (MBD) 150 138 136 130
Worldwide petroleum
products sales (MBD)* 709 700 682 692
Natural gas liquids
processed (MBD) 176 213 211 206
Ethylene
production (MMlbs)** 656 838 2,314 2,288
Polyethylene
production (MMlbs)** 569 503 1,710 1,486
Polypropylene
production (MMlbs)** 112 100 344 326
Paraxylene
production (MMlbs) 178 195 560 353
- -----------------------------------------------------------------
*Includes certain sales by the Chemicals segment.
**Includes Phillips' share of equity affiliates' production.
Income Statement Analysis
Sales and other operating revenues declined 25 and 22 percent in
the third quarter and first nine months of 1998, respectively,
reflecting lower sales prices for crude oil, natural gas,
petroleum and chemicals products. These same factors also
accounted for 25 and 28 percent declines in purchase costs in the
respective 1998 periods.
11
Equity in earnings of affiliated companies decreased 64 and
37 percent in the third quarter and nine-month period of 1998,
respectively, primarily because of lower ethylene margins
experienced by the company's 50 percent-owned Sweeny Olefins
Limited Partnership, as well as lower polyethylene margins at the
company's 50 percent-owned polyethylene facility in Singapore.
Other revenues declined 39 percent in the third quarter of 1998,
mainly due to a decrease in interest income resulting from the
company's lower average cash balance in the third quarter of
1998, compared with the third quarter a year ago. For the
nine-month period of 1998, other revenues increased $101 million,
primarily as a result of recoveries from certain of the company's
historical liability and pollution insurers related to claims
made as a part of a comprehensive environmental cost recovery
project, partially offset by lower interest income.
After adjustment for special items, controllable costs--primarily
production and operating expenses, and selling, general and
administrative expenses--declined 4 percent in the third quarter
and were approximately the same as a year ago for the nine-month
period of 1998. This reflects the company's emphasis on cost
control in the current environment of depressed product prices.
Foreign currency translation gains in 1998, compared with losses
a year ago, and a favorable contingency-related item in 1998 are
the most significant special items affecting these income
statement line items.
Exploration costs were slightly higher in the third quarter of
1998, and 9 percent lower in the first nine months of 1998. Both
periods reflect higher geological and geophysical expenses, while
in the nine-month period these were more than offset by lower dry
hole charges.
Depreciation, depletion and amortization (DD&A) increased 8 and
21 percent in the third quarter and first nine months of 1998.
The increase in the third quarter of 1998 is primarily the result
of the E&P acquisition in the Zama area of Canada that was
completed in late 1997. In addition, higher DD&A rates in
Norway, as a result of the newly completed Ekofisk II facilities
and in the United States, due to downward reserve revisions, also
served to increase DD&A expense. The year-to-date 1998 period
also reflects full production from J-Block in the U.K. North Sea,
which came on-line in mid-1997. In addition, property
impairments of $37 million and $67 million were included in the
third quarter and nine-month period of 1998, respectively,
compared with $39 million and $54 million in the corresponding
periods of 1997.
12
Taxes other than income taxes decreased 20 and 12 percent in the
third quarter and first nine months of 1998, respectively, as
declining U.S. E&P sales prices and production resulted in lower
production taxes.
Interest expense increased 12 percent in the third quarter of
1998, primarily due to higher debt balances. In the first nine
months of 1998, interest expense decreased 11 percent, reflecting
the benefit of reversals of the interest portion of previously
accrued contingencies in the second quarter of 1998, partially
offset by higher debt balances. Preferred dividend requirements
were 33 and 35 percent lower in the third quarter and nine-month
period of 1998, as a result of the redemption of Phillips Gas
Company's preferred stock in December 1997.
Segment Results
E&P
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1998 1997 1998 1997
------------------ -----------------
Millions of Dollars
--------------------------------------
Operating Income
Reported net income $ 22 122 188 448
Less special items (30) (24) (38) (26)
- -----------------------------------------------------------------
Net operating income $ 52 146 226 474
=================================================================
Dollars Per Unit
--------------------------------------
Average Sales Prices
Crude oil (per barrel)
United States $10.70 16.19 11.20 17.64
Foreign 12.22 18.51 13.14 19.13
Worldwide 11.81 17.92 12.64 18.72
Natural gas--lease (per
thousand cubic feet)
United States 1.75 2.15 1.90 2.22
Foreign 2.39 2.46 2.48 2.61
Worldwide 1.99 2.28 2.15 2.37
- -----------------------------------------------------------------
Millions of Dollars
--------------------------------------
Worldwide Exploration
Expenses
Geological and geophysical $38 32 107 95
Leasehold impairment 4 6 16 17
Dry holes - 3 13 40
Lease rentals 3 3 8 7
- -----------------------------------------------------------------
$45 44 144 159
=================================================================
13
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1998 1997 1998 1997
------------------ -----------------
Thousands of Barrels Daily
--------------------------------------
Operating Statistics
Crude Oil Produced
United States 59 65 62 67
Norway 76 108 103 105
United Kingdom 20 26 23 14
Nigeria 19 25 20 24
China 13 16 14 16
Canada 7 4 7 4
Venezuela 1 - - -
- -----------------------------------------------------------------
195 244 229 230
=================================================================
Natural Gas Liquids Produced
United States 3 4 3 4
Norway 3 8 6 7
Other areas 5 3 5 3
- -----------------------------------------------------------------
11 15 14 14
=================================================================
Millions of Cubic Feet Daily
--------------------------------------
Natural Gas Produced
United States (less gas
equivalent of liquids
shown above) 985 1,014 981 1,040
Norway* 132 288 216 285
United Kingdom* 158 120 185 92
Canada 95 52 94 48
- -----------------------------------------------------------------
1,370 1,474 1,476 1,465
=================================================================
*Dry basis.
Liquefied Natural Gas
Sales 145 114 130 115
- -----------------------------------------------------------------
E&P's net operating income decreased 64 and 52 percent in the
third quarter and first nine months of 1998, respectively,
primarily as a result of continued weak crude oil prices relative
to a year ago. Phillips' worldwide average crude oil sales price
reached a 1998 low of $11.35 per barrel for the month of July,
before recovering marginally to $12.70 per barrel in September.
The third quarter 1998 average price of $11.81 per barrel was
$6.11 per barrel lower than the corresponding quarter in 1997.
Industry production continued to outpace demand in the third
quarter of 1998; however, the downward price trend eased late in
the quarter on supply disruptions and production curtailments.
14
Lower lease gas sales prices also negatively impacted both 1998
periods, as did lower crude oil production rates in the third
quarter.
U.S. E&P
- --------
Millions of Dollars
--------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1998 1997 1998 1997
------------------ -----------------
Operating Income
Reported net income $ 38 52 147 269
Less special items 2 (25) 1 (11)
- -----------------------------------------------------------------
Net operating income $ 36 77 146 280
=================================================================
Net operating income decreased 53 and 48 percent in the company's
U.S. E&P operations for the third quarter and first nine months
of 1998, respectively. Lower sales prices for crude oil, natural
gas and liquefied natural gas were primarily responsible, along
with lower crude oil and natural gas production volumes. These
items were partially offset by lower lifting costs in both
periods, reflecting lower well workover activity; as well as
lower exploration expenses and production taxes.
U.S. crude oil production in the third quarter of 1998 was
9 percent lower than the third quarter of 1997, reflecting lower
production at Prudhoe Bay, Alaska; Point Arguello, offshore
California; and in the Gulf of Mexico, including the Mahogany
subsalt field and South Marsh Island Blocks 146/147. In
addition, production in the Gulf of Mexico was shut-in nine days
during the third quarter of 1998 due to tropical storm activity.
U.S. natural gas production declined 3 percent in the third
quarter of 1998, primarily due to lower production of coal-seam
gas in the San Juan basin of New Mexico, as well as lower
production from various fields in the Gulf of Mexico.
Special items in the third quarter of 1998 primarily included a
gain from the sale of the company's right to an interest in a
power plant being constructed in Mississippi. The nine-month
period of 1998 also included a reversal of a previously accrued
contingency, which was mostly offset by impairments taken on two
producing properties in the Gulf of Mexico.
Special items in the third quarter of 1997 consisted mainly of an
after-tax charge of $25 million for an impairment of Garden Banks
Blocks 70/71 in the Gulf of Mexico. In addition, the first nine
months of 1997 included a net after-tax gain on asset sales of
$7 million and a reversal of a contingent liability of $7 million
after-tax.
15
Foreign E&P
- -----------
Millions of Dollars
--------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1998 1997 1998 1997
------------------ -----------------
Operating Income
Reported net income (loss) $(16) 70 41 179
Less special items (32) 1 (39) (15)
- -----------------------------------------------------------------
Net operating income $ 16 69 80 194
=================================================================
Net operating income from the company's foreign E&P operations
decreased 77 and 59 percent in the third quarter and nine-month
period of 1998, respectively. Both periods were negatively
impacted by lower crude oil prices and higher exploration
expenses, while the third quarter was also hurt by lower crude
oil production volumes. In the nine-month period of 1998,
earnings benefited from higher production volumes of crude oil
and natural gas.
Foreign crude oil production volumes declined 24 percent in the
third quarter of 1998, reflecting downtime incurred during the
tie-in of the new Ekofisk II facilities that impacted both Norway
and U.K. production, as well as problems encountered following
the start-up of the Ekofisk II facilities. These items also
primarily accounted for the 16 percent decline in natural gas
production in the third quarter of 1998.
Special items in the third quarter and nine-month period of 1998
included impairments of the Maureen, Ann, and Alison fields in
the U.K. North Sea totaling $26 million after-tax, as well as
foreign currency transaction losses. Most of the impairment
related to the Maureen field and was triggered by a revised
estimate of platform decommissioning costs, resulting from the
July 23, 1998, decision by the Oslo and Paris convention related
to the disposal of offshore installations that are no longer
used.
Special items in the first nine months of 1997 primarily included
a property impairment of two U.K. North Sea fields totaling
$11 million, after-tax, as well as foreign currency losses.
16
GPM
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1998 1997 1998 1997
------------------ -----------------
Millions of Dollars
--------------------------------------
Operating Income
Reported net income $13 25 44 75
Less special items 2 - 2 9
- -----------------------------------------------------------------
Net operating income $11 25 42 66
=================================================================
Dollars Per Unit
--------------------------------------
Average Sales Prices
U.S. residue gas (per
thousand cubic feet) $ 1.90 2.18 2.02 2.28
U.S. natural gas liquids
(per barrel--
unfractionated) 8.36 12.39 9.30 12.71
- -----------------------------------------------------------------
Millions of Cubic Feet Daily
--------------------------------------
Operating Statistics
Natural Gas Purchases
Outside Phillips 1,281 1,389 1,318 1,371
Phillips 152 159 154 159
- -----------------------------------------------------------------
1,433 1,548 1,472 1,530
=================================================================
Raw Gas Throughput 1,829 1,973 1,879 1,995
- -----------------------------------------------------------------
Residue Gas Sales
Outside Phillips 930 997 951 995
Phillips 47 57 54 55
- -----------------------------------------------------------------
977 1,054 1,005 1,050
=================================================================
Thousands of Barrels Daily
--------------------------------------
Natural Gas Liquids Net
Production
From Phillips E&P
leasehold gas 15 15 15 15
From gas purchased
outside Phillips 143 143 145 139
- -----------------------------------------------------------------
158 158 160 154
=================================================================
GPM's net operating income decreased 56 and 36 percent in the
third quarter and first nine months of 1998, respectively. The
decline in both periods was the result of sharply lower natural
gas liquids sales prices--$4.03 per barrel lower in the third
quarter, and $3.41 lower in the nine-month period. Industry
natural gas liquids prices have generally followed the decline in
crude oil prices through the first nine months of the year.
17
Raw gas throughput volumes declined 7 percent in the third
quarter of 1998, due to field production declines in the Austin
Chalk area of south central Texas and the sale of a small
gathering system. Natural gas liquids production volumes in the
third quarter were the same as the corresponding quarter last
year.
Residue gas sales prices were 13 percent lower in the third
quarter, reflecting lower demand, particularly in the month of
September, than was experienced in 1997. For the nine-month
period, residue gas sales prices were 11 percent lower, primarily
due to the reduced demand in the first quarter of 1998 resulting
from warmer-than-normal winter weather.
Special items in the third quarter and first nine months of 1998
represented the partial reversal of previously accrued severance
charges. Special items in the nine-month period of 1997
consisted of a settlement of a dispute with a producer.
18
RM&T
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1998 1997* 1998 1997*
------------------ -----------------
Millions of Dollars
--------------------------------------
Operating Income
Reported net income $ 53 64 159 144
Less special items - - 3 (1)
- -----------------------------------------------------------------
Net operating income $ 53 64 156 145
=================================================================
Dollars Per Gallon
--------------------------------------
Average Sales Prices
Automotive gasoline
Wholesale $.49 .68 .51 .68
Retail .66 .83 .67 .83
Distillates .41 .56 .44 .60
- -----------------------------------------------------------------
Thousands of Barrels Daily
--------------------------------------
Operating Statistics
U.S. Refinery Crude Oil
Rated capacity 355 345 355 345
Crude runs 335 347 334 320
Capacity utilization
(percent) 94% 101 94 93
Natural gas liquids
fractionation
Capacity 252 250 252 250
Processed 176 213 211 206
Capacity utilization
(percent) 70% 85 84 82
- -----------------------------------------------------------------
Petroleum Products Outside
Sales
United States
Automotive gasoline
Wholesale 295 292 275 293
Retail 37 38 37 37
Aviation fuels 33 30 32 28
Distillates 150 138 136 130
Natural gas liquids
(fractionated) 129 129 128 134
Other products 26 15 28 13
- -----------------------------------------------------------------
670 642 636 635
Foreign 27 44 35 44
- -----------------------------------------------------------------
697 686 671 679
=================================================================
*Restated to reflect the transfer of the company's natural gas
liquids fractionation and marketing business from Chemicals to
RM&T.
19
Net operating income from the company's RM&T operations declined
17 percent in the third quarter of 1998, primarily the result of
lower earnings from the company's refining operations, partially
offset by improved performance in wholesale marketing. The
decrease in refining results was attributable to lower gasoline
margins, partially offset by higher gasoline sales volumes. In
wholesale marketing, gasoline margins were higher in the third
quarter of 1998 than a year ago. Earnings in the quarter were
also negatively impacted by tropical storms that led to a
temporary shutdown of the Sweeny, Texas, refinery.
In the nine-month period of 1998, RM&T's net operating income
increased 8 percent, reflecting improved refinery results due to
higher sales volumes of gasoline, distillates and other products.
This was partially offset by lower gasoline margins.
For the first nine months of 1998, RM&T's crude oil throughput
volumes were 4 percent higher, due in part to a scheduled
maintenance turnaround at the Sweeny refinery in the first
quarter of 1997. The increased throughput was achieved even
though the Sweeny refinery was temporarily shutdown in the third
quarter of 1998 by flooding caused by tropical storms.
Special items in the nine-month period of 1998 consisted of gains
from the sale of certain non-strategic retail service stations.
Special items in the first nine months of 1997 included certain
costs associated with an external power outage at the Sweeny
refinery.
20
Chemicals
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1998 1997* 1998 1997*
--------------------------------------
Millions of Dollars
--------------------------------------
Operating Income
Reported net income $ 24 78 142 212
Less special items 3 8 (3) 7
- -----------------------------------------------------------------
Net operating income $ 21 70 145 205
=================================================================
*Restated to reflect the transfer of the company's natural gas
liquids fractionation and marketing business from Chemicals to
RM&T.
Millions of Pounds
Except as Indicated
--------------------------------------
Operating Statistics
Production**
Ethylene 656 838 2,314 2,288
Polyethylene 569 503 1,710 1,486
Propylene 115 131 387 359
Polypropylene 112 100 344 326
Paraxylene 178 195 560 353
Cyclohexane (millions
of gallons) 40 41 138 115
- -----------------------------------------------------------------
**Includes Phillips' share of equity affiliates' production.
Chemicals' net operating income declined 70 percent in the third
quarter of 1998, and 29 percent in the nine-month period. Both
periods were adversely affected by a sharp drop in ethylene
margins, as well as lower polyethylene margins. Excess industry
capacity and weak global demand have continued to depress margins
in the commodity chemicals and plastics industry.
Ethylene production volumes were 22 percent lower in the third
quarter of 1998, with the decrease attributable to a maintenance
turnaround and the temporary shutdown during the quarter of the
company's Sweeny refinery and petrochemicals facility, due to
flooding caused by tropical storms. The Houston Chemical Complex
continued to run well in the third quarter, which contributed to
the increase in polyethylene production volumes. Also
contributing to the higher volumes was increased production from
the company's 50 percent interest in a polyethylene plant in
Singapore, as well as new production from the company's
40 percent interest in Shanghai Golden Phillips, a joint-venture
polyethylene facility in China that started up in the second
quarter.
Special items in the third quarter of 1998 consisted of foreign
currency gains and a favorable excise tax settlement. The 1998
nine-month period also included an impairment taken on a plastics
recycling facility that will be closed.
21
Special items in the third quarter and first nine months of 1997
primarily consisted of a gain on the settlement of a
license-related contingency.
Corporate and Other
Millions of Dollars
--------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1998 1997 1998 1997
------------------ -----------------
Operating Results
Reported Corporate and
Other $(66) (73) (86) (129)
Less special items 5 (15) 94 53
- -----------------------------------------------------------------
Adjusted Corporate and
Other $(71) (58) (180) (182)
=================================================================
Adjusted Corporate and Other includes:
Corporate general and
administrative expenses $(22) (15) (59) (48)
Net interest (39) (29) (101) (87)
Preferred dividend
requirements (10) (18) (31) (53)
Other - 4 11 6
- -----------------------------------------------------------------
Adjusted Corporate and
Other $(71) (58) (180) (182)
=================================================================
Corporate general and administrative expenses increased 47 and
23 percent in the third quarter and first nine months of 1998,
respectively. The increases were primarily attributable to
higher salaries, benefits and Year-2000-Project costs.
Net interest represents interest income and expense, net of
capitalized interest. In both the third quarter and year-to-date
period of 1998, net interest was higher, primarily because of
lower interest income resulting from the company carrying a
smaller cash balance in 1998. In addition, higher average debt
levels increased interest expense in the third quarter of 1998.
Preferred dividend requirements includes dividends on the
Phillips Gas Company preferred stock and on the preferred
securities of the Phillips 66 Capital I (Trust I) and Phillips 66
Capital II (Trust II) trusts. Preferred dividend requirements
were lower in the third quarter and nine-month period of 1998 due
to the redemption of the preferred stock of Phillips Gas Company
in late 1997.
22
Other consists primarily of the company's captive insurance
subsidiary, along with income tax and other items that are not
directly associated with the operating segments on a stand-alone
basis. In the third quarter, results were lower due mainly to
tax-related items. In the nine-month period, results benefited
from the receipt of dividends from certain industry insurance
companies in which Phillips has an ownership interest, partially
offset by higher tax-related items.
Special items in the third quarter of 1998 consisted primarily of
foreign currency gains, partially offset by insurance claims for
property damage caused by tropical storms. The nine-month period
of 1998 also included insurance recoveries related to a
comprehensive environmental cost recovery project, as well as
favorable contingency-related settlements or accrual reversals.
Special items in the third quarter of 1997 consisted primarily of
after-tax non-cash foreign currency transaction losses of
$13 million. In addition, the nine-month period of 1997 included
an $83 million favorable resolution of U.S. income tax issues
covering the years 1983 through 1986, related primarily to income
from the company's Kenai liquefied natural gas facility. In
addition, the period included non-cash foreign currency
transaction losses.
CAPITAL RESOURCES AND LIQUIDITY
Financial Indicators
Millions of Dollars
---------------------------------------
At At At
September 30 December 31 September 30
1998 1997 1997
---------------------------------------
Current ratio 1.0 1.1 1.2
Total debt $3,619 3,009 2,859
Preferred stock of
subsidiary $ - - 345
Company-obligated
mandatorily redeemable
preferred securities $ 650 650 650
Common stockholders'
equity $4,639 4,814 4,721
Percent of total debt to
capital* 41% 36 33
Percent of floating-rate
debt to total debt 25% 30 15
- -----------------------------------------------------------------
*Capital includes total debt, preferred stock of subsidiary,
company-obligated mandatorily redeemable preferred securities
and common stockholders' equity.
23
Cash from operations decreased $182 million for the nine-month
period ending September 30, 1998, compared with the same period
in 1997. However, excluding the $161 million favorable cash
impact of the J-Block settlement in 1997, cash from operations
only decreased slightly. Net operating income decreased
$319 million, or 45 percent, in the first nine months of 1998,
compared with the first nine months of 1997. However, this
decrease was primarily offset by the receipt of $109 million
resulting from settlements pursuant to the comprehensive
environmental cost recovery project, and the sale of $200 million
of receivables under the company's receivables monetization
program.
In May 1998, Phillips filed a universal shelf registration
statement with the U.S. Securities and Exchange Commission for
$700 million of various types of debt and equity securities, and
securities convertible into either. This registration statement
became effective June 5, 1998. Securities to be issued under the
universal shelf registration statement can be combined by
prospectus with $300 million of securities remaining under earlier
shelf registrations. As a result, the company could issue and
sell a total of $1 billion of the various types of securities
available under the universal shelf registration statement. On
July 6, 1998, the company issued $300 million of 6.65% Debentures
due July 15, 2018, in the public market, leaving $700 million of
securities available.
The company is continuing its previously announced stock
repurchase program to buy back up to $500 million of its common
stock by year-end 1998. Through November 6, 1998, approximately
$408 million worth of shares had been repurchased. The company
also has a $150 million stock repurchase program expiring
December 31, 1999. Under the two programs, the company has
repurchased approximately $488 million worth of shares since the
programs began.
During the first nine months of 1998, cash decreased $36 million.
Cash was provided by operating activities, the previously
mentioned $300 million of debentures issued in the third quarter
1998, $300 million of debentures issued in first quarter 1998,
and the issuance of $92 million of revolving debt. These funds were
used to retire $94 million of revolving debt, pay $28 million to
retire the first of two LTSSP bank loans, fund the company's
capital expenditures program, and purchase $417 million of the
company's common stock under the stock repurchase programs.
The company has agreements with a bank-sponsored entity for the
revolving sale of credit card and trade receivables. During
September 1998, these agreements were extended until September
1999, the expiration date of the supporting liquidity facilities
related to these agreements. The maximum aggregate amount of
24
receivables that can be sold and outstanding under these
agreements is limited to $200 million, all of which was
outstanding at September 30, 1998.
At September 30, 1998, no amounts were outstanding under the
company's revolving bank credit facility of $1.5 billion, but
$216 million in commercial paper and $250 million of the Phillips
Petroleum Company Norway $300 million revolving credit facility
were outstanding.
To meet its liquidity requirements, including funding its capital
program, the company looks primarily to existing cash balances,
cash generated from operations and financing.
Capital Expenditures and Investments
Millions of Dollars
-----------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
Estimated 1998 1998 1997 1998 1997
-------------- ------------------ -----------------
E&P $1,426 573 345 1,114 811
GPM 90 22 27 51 86
RM&T 241 49 53 154 158
Chemicals 261 66 63 188 172
Corporate
and Other 101 22 17 67 50
- ------------------------------------------------------------------
$2,119 732 505 1,574 1,277
==================================================================
United States $1,013 226 270 685 736
Foreign 1,106 506 235 889 541
- ------------------------------------------------------------------
$2,119 732 505 1,574 1,277
==================================================================
Phillips' Board of Directors recently approved an 18 percent
increase in the company's capital budget, from $1.79 billion to
$2.12 billion. This increase was primarily attributable to
approval of the acquisition of a 7 percent interest in an
exploration project in the Kazakhstan sector of the Caspian Sea.
The company signed an agreement with the Republic of Kazakhstan
on September 14, 1998, to acquire this interest. In addition,
Phillips agreed to study the development, gathering and
processing of natural gas, and the extraction, transportation and
marketing of natural gas liquids on behalf of the government.
The exploration area consists of 10 blocks totaling nearly
2,000 square miles about 50 miles west-northwest of the giant
Tengiz oil field onshore Kazakhstan. The offshore acreage
comprises a number of prospects. The joint venturers, including
Phillips, are committed to drill six exploration wells and
25
conduct additional seismic work over six years, with an option to
extend the exploration phase another two years. Drilling is
expected to begin on the first well in the spring of 1999. The
blocks are covered by a production-sharing agreement with the
Kazakhstan government. The initial production phase of the
contract is for 20 years, with options to extend the agreement
another 20 years.
The Ekofisk II project to replace the majority of the facilities
in the former Ekofisk complex was completed on schedule and about
20 percent under budget. Ekofisk II consists of two new
platforms--one for drilling and production, and one for
processing and transportation. It has taken longer than
originally expected to reach stable operations at design capacity
due to problems after start-up. However, crude oil production
is expected to be at about 90 percent of the platform's
design capacity in the fourth quarter. Field tests are under way
on a poorly performing low-pressure separator, used to separate
oil and gas from water, and a resolution is expected by late-1998
or early-1999. Production is expected to be shut-in for about a
week while the separator is being repaired. In addition, a fire
in a gas compressor caused production to be shut-in on
October 12, 1998. Production restarted October 14, but gas
production has been limited to about 60 percent of the platform's
design capacity until the damaged compressor can be repaired.
Actions are also being taken that are expected to debottleneck
processing and increase crude oil production.
As a result of Ekofisk II, Phillips phased out or modified
10 existing platforms, installing 31 miles of new pipeline.
The company plans to submit a cessation plan for the redundant
Ekofisk facilities to the Norwegian government in July 1999.
Current plans are to sell as many platforms as possible for
reuse. Phillips is evaluating the existing offshore hotel
platform to determine how it will be impacted by continuing
subsidence and expected usage over the license period. Studies
are in progress to determine what future actions are necessary
with regard to this facility, either to be moved, jacked up, or
replaced with new construction. The cost of the project is still
being analyzed, but is not expected to materially impact the
financial position of the company.
Also in the Greater Ekofisk Area of the Norwegian North Sea,
offshore construction activity related to the waterflood project
for the Eldfisk field has commenced. Development drilling is
expected to begin in mid-1999 and the new platform, controlled
from an existing manned Eldfisk platform, is scheduled to start
up in early 2000.
26
In western Venezuela, Phillips acquired interests in three
projects under the third bid round. The company now holds a
90 percent interest in Ambrosio, a 31.5 percent interest in La
Vela, and an 18 percent interest in LL-652. The company is
operator on the Ambrosio block, where operations were taken over
this year in June, and on La Vela, where drilling was recently
begun on the first of two exploration wells. At LL-652, the
participants are proceeding with a plan for workovers, drilling
new wells and upgrading the infrastructure for a major waterflood
project.
In the North Cook Inlet of Alaska, the drilling of an additional
well was recently completed on the Tyonek project. The results
of this well, along with plans to test a previously drilled well,
will help determine the reservoir size and commercial potential
of the project. Engineering and commercial studies continue with
the objective of reducing the cost of project development.
Pending satisfactory results from these wells and the cost
studies, plans for development will continue. The book
investment was approximately $105 million at October 31, 1998.
Depending on the reservoir size and project development costs, it
is possible that some impairment of this asset will be required.
Other E&P spending has been focused on several key development
projects during 1998. In the United Kingdom, development is
under way at the Janice, Renee and Rubie fields, with expected
production in the fourth quarter of 1998. Net peak production at
Janice is expected to be 13,000 barrels of oil per day, and
9,000 barrels per day at the combined Renee and Rubie fields. In
Denmark, the Siri development is expected to begin production in
first quarter 1999. Recently approved, development of the
Chinook discovery, offshore Louisiana, is scheduled to commence
in fourth quarter 1998, with initial production expected in 2000.
Phillips holds a one-third interest in Chinook.
GPM's capital expenditures and investments for the first nine
months of 1998 were substantially lower than those of the same
period in 1997, primarily because the 1997 period included a
major gathering asset acquisition.
RM&T continued its retail marketing expansion during the first
nine months of 1998, with the purchase of 12 retail outlets in
the Dallas, Texas, area, and the opening of nine new outlets. In
addition, four outlets were razed and rebuilt. Since the
expansion program began, the company has acquired 36 retail
outlets, opened 40 new ones, and razed and rebuilt 20 others.
Both new outlets and those that are razed and rebuilt utilize the
new Kicks 66 convenience store design. Also during the first
nine months of 1998, the company sold 44 retail units in non-
strategic areas.
27
The company's pipeline capacity has been expanded during 1998.
Early in the year, Phillips purchased interests in an El Paso,
Texas, terminal and pipeline system. Construction of a 148-mile
pipeline to connect the Seaway Pipeline system to the company's
existing Midwest distribution system near Wichita, Kansas, was
also completed. Engineering and survey work has begun on a new
55-mile natural gas liquids pipeline from Wichita, Kansas, to
Conway, Kansas, targeted for completion in second quarter 1999,
to allow Phillips to better serve its customers by providing
better access to propane and butane bulk storage in the Midwest.
In second quarter 1998, the company's Board of Directors approved
the construction of a 36,000 barrels-per-day continuous catalyst
regeneration reformer at the Sweeny, Texas, refinery and
petrochemical complex. The new catalytic reformer is designed to
convert a higher percentage of plant yield to higher-margin
petrochemicals. This project is now scheduled to commence in
early 1999, with completion scheduled for mid-2000.
On October 30, 1998, Phillips and the Venezuelan state oil
company, Petroleos de Venezuela S.A. (PdVSA), signed agreements
to form a limited partnership to build a 58,000 barrels-per-day
coker and related facilities at Phillips' Sweeny Complex. A
coker allows the processing of heavier, lower-cost crude oil,
thus lowering crude oil acquisition costs. Under terms of the
agreements, PdVSA will supply the refinery with up to
165,000 barrels per day of heavy Venezuelan crude oil once the
coker is completed, which is scheduled to be in the fourth
quarter of 2000. Phillips and PdVSA each hold a 50 percent
interest in the limited partnership. The total capital cost of
the project is estimated at $450 million, which will be financed
by the limited partnership. Expenditures are expected to begin
in late 1998.
During the third quarter in Chemicals, construction was completed
on a 100 million-pounds-per-year methyl mercaptan plant at the
company's Borger facility and production commenced. In addition,
commercial production of metallocene compounds began at a new
facility at the Phillips Research Center in Bartlesville,
Oklahoma. Metallocene compounds are used to manufacture
catalysts for the production of medium- and low-density linear
polyethylenes. The plant's current annual capacity is expected
to meet Phillips' and its licensees' projected yearly demand
through at least the year 2000.
28
New Accounting Standards
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which is required
to be adopted in years beginning after June 15, 1999. The
Statement permits early adoption as of the beginning of any
fiscal quarter after its issuance. The company expects to adopt
the new Statement effective January 1, 2000. The Statement will
require the company to recognize all derivatives on the balance
sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If a derivative is a
hedge, depending on the nature of the hedge, changes in the fair
value of the derivative will either be offset against the change
in fair value of the hedged asset, liability, or firm commitment
through earnings, or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective
portion of a derivative's change in fair value will be
immediately recognized in earnings. The company does not
anticipate that the adoption of this Statement will have a
significant effect on its results of operations or financial
position.
Year 2000 Update
General
- -------
Phillips' company-wide Year 2000 Project (Project) is proceeding
on schedule as planned. The Project is addressing the issue of
computer programs and embedded computer chips being unable to
distinguish between the year 1900 and the year 2000. In 1995, in
order to improve access to business information through common,
integrated computing systems across the company, Phillips began a
worldwide business systems replacement project with systems that
use programs primarily from SAP America, Inc. (SAP) and, for
certain E&P operations, Oracle Corporation (Oracle). The new
systems, which are expected to make approximately 70 percent of
the company's business computer systems Year 2000 compliant, are
scheduled for completion by mid-1999. Implementation of the SAP
programs is on schedule and was approximately 61 percent complete
at September 30, 1998. Implementation of the Oracle programs is
slightly behind schedule and was approximately 67 percent
complete at that date. The company developed a contingency plan
to make the programs that are scheduled to be replaced by the
Oracle programs Year 2000 compliant. However, the company has
determined that it is not necessary to implement the contingency
plan at this time and estimates that the Oracle project will be
completed by June 30, 1999. Remaining business software programs
are expected to be made Year 2000 compliant through the Year 2000
Project, including those supplied by vendors, or they will be
29
retired. None of the company's other information technology (IT)
projects have been delayed due to the implementation of the Year
2000 Project.
Project
- -------
Phillips' Project is divided into four major sections--
Infrastructure, Applications Software (Infrastructure and
Applications Software are sometimes collectively referred to as
"IT Systems"), third-party suppliers and customers (External
Agents), and process control and instrumentation (PC&I). The
company has engaged third parties, including Ernst & Young LLP,
to assist in the completion of various phases of the Project.
The general phases common to all sections are: (1) inventorying
Year 2000 items; (2) assigning priorities to identified items;
(3) assessing the Year 2000 compliance of items determined to be
material to the company; (4) repairing or replacing material
items that are determined not to be Year 2000 compliant;
(5) testing material items; and (6) designing and implementing
contingency and business continuation plans for each organization
and company location.
The inventory and priority assessment phases of each section of
the Project have been completed. Material items are those
believed by the company to have a risk involving the safety of
individuals, or that may cause damage to property or the
environment, or affect revenues. The testing phases of the
Project are being performed by the company.
The Infrastructure section consists of hardware and systems
software other than Applications Software. This section is on
schedule, and the company estimates that approximately 69 percent
of the planned activities related to the section had been
completed at September 30, 1998. The testing phase is ongoing as
hardware or system software is remediated, upgraded or replaced.
Contingency planning for the section commenced in third quarter
1998 and is scheduled for completion by mid-1999. All
Infrastructure activities (related to definition, testing, and
implementation of Year-2000-ready products) are scheduled to be
completed by June 30, 1999.
The Applications Software section includes both the conversion of
applications software that is not Year 2000 compliant and, where
available from the supplier, the replacement of such software.
The company estimates that the software conversion phase was
77 percent complete at September 30, 1998, and the remaining
conversions are on schedule to be completed by mid-1999. The
testing phase of this section, scheduled for completion by mid-
1999, is ongoing. The vendor software replacements and upgrades
were approximately 63 percent complete at September 30, 1998, and
30
remaining replacements and upgrades will be completed on schedule
by mid-1999. The testing phase is conducted as the software is
replaced and is also scheduled to be completed by mid-1999.
Contingency planning for this section began in third quarter 1998
and is scheduled for completion by mid-1999.
The External Agents section includes the process of identifying
and prioritizing critical suppliers and customers at the direct
interface level, and communicating with them about their plans
and progress in addressing the Year 2000 problem. Detailed
evaluations of the most critical third parties have been
initiated. These evaluations will be followed by the development
of contingency plans as necessary, which are scheduled to
commence in the fourth quarter of 1998, with completion by mid-
1999. The company estimates that this section was on schedule
and 27 percent completed at September 30, 1998. The process of
evaluating these external agents began in third quarter 1998 and
is scheduled for completion by mid-1999, with follow-up reviews
scheduled through the remainder of 1999.
Plans detailing the critical tasks and resources required for the
PC&I section of the Project have been developed. This section
includes the hardware, software and associated embedded computer
chips that are used in the operation of all facilities operated
by the company. This section is on schedule and the company
believes that the repair and testing of PC&I equipment is
approximately 66 percent complete. The company estimates that
75 percent of the date-sensitive PC&I equipment will be Year 2000
ready by year-end 1998. The company has scheduled and expects
that most repair and testing will be completed by mid-1999, with
the remaining repair and testing to be completed in third quarter
1999 because of planned turnaround schedules. Contingency
planning for this section began in third quarter 1998 and is
scheduled to be completed by year-end 1999.
Costs
- -----
The total cost associated with required modifications to become
Year 2000 compliant is not expected to be material to the
company's financial position. The estimated total cost of the
Year 2000 Project is approximately $63 million. This estimate
includes Phillips' estimated share of Year 2000 repair and
replacement costs that may be incurred by partnerships and joint
ventures in which the company participates but is not the
operator, but does not include any estimates of liability for
non-compliance. The total amount expended on the Project through
September 30, 1998, was $26 million, of which approximately
$18 million related to the cost to repair or replace software and
related hardware problems, approximately $7 million related to
the cost of replacing non-compliant PC&I equipment, and
31
approximately $1 million related to the cost of identifying and
communicating with External Agents. The estimated future cost of
completing the Year 2000 Project is estimated to be approximately
$37 million--$11 million to repair or replace software and
related hardware, $18 million to repair or replace non-compliant
PC&I equipment, $3 million to identify and communicate with
External Agents, and $5 million for operations in which Phillips
is not the operator. Funds for the Project are provided from a
separate budget of $29 million for all items other than PC&I and
External Agent costs, which are included in existing operating
budgets. The costs of implementing the SAP and Oracle business
replacement systems are not included in these cost estimates.
Risks
- -----
The failure to correct a material Year 2000 problem could result
in an interruption in, or a failure of, certain normal business
activities or operations. Such failures could materially and
adversely affect the company's results of operations, liquidity
and financial condition. Due to the general uncertainty inherent
in the Year 2000 problem, resulting in part from the uncertainty
of the Year 2000 readiness of third-party suppliers and
customers, the company is unable to determine at this time
whether the consequences of Year 2000 failures will have a
material impact on the company's results of operations, liquidity
or financial condition. The Year 2000 Project is expected to
significantly reduce the company's level of uncertainty about the
Year 2000 problem and, in particular, about the Year 2000
compliance and readiness of its material External Agents. The
company believes that, with the implementation of new business
systems and completion of the Project as scheduled, the
possibility of significant interruptions of normal operations
should be reduced.
The above contains forward-looking statements including, without
limitation, statements relating to the company's plans,
strategies, objectives, expectations, intentions, and adequate
resources that are made pursuant to the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995. Readers
are cautioned that forward-looking statements contained in the
Year 2000 Update should be read in conjunction with the company's
disclosures under the heading: "CAUTIONARY STATEMENT FOR THE
PURPOSES OF THE 'SAFE HARBOR' PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995" beginning on page 38.
32
Contingencies
Legal and Tax Matters
Phillips accrues for contingencies when a loss is probable and
the amounts can be reasonably estimated. Based on currently
available information, the company believes that it is remote
that future costs related to known contingent liability exposures
will exceed current accruals by an amount that would have a
material adverse impact on the company's financial statements.
Environmental
Most aspects of the businesses in which the company engages are
subject to various federal, state, local and foreign
environmental laws and regulations. Similar to other companies
in the petroleum and chemical industries, the company incurs
costs for preventive and corrective actions at facilities and
waste disposal sites.
Phillips may be obligated to take remedial action as the result
of the enactment of laws, such as the federal Superfund law, the
issuance of new regulations, or as a result of leaks and spills.
In addition, an obligation may arise when a facility is closed or
sold. Most of the expenditures to fulfill these obligations
relate to facilities and sites where past operations followed
practices and procedures that were considered appropriate under
regulations, if any, existing at the time, but may now require
investigatory or remedial work to adequately protect the
environment or address new regulatory requirements.
At year-end 1997, Phillips reported 43 sites where it had
information indicating that it might have been identified as a
Potentially Responsible Party (PRP). Two sites were added in the
nine month period ending September 30, 1998. Of these 45 sites
remaining at September 30, 1998, the company believes it has a
legal defense or its records indicate no involvement for
13 sites. At eight sites, present information indicates that it
is probable that the company's exposure is less than $100,000 per
site. At seven other sites, Phillips has had no communication or
activity with government agencies or other PRPs in more than two
years. Of the 17 remaining sites, the company has provided for
any probable costs that can be reasonably estimated.
Phillips does not consider the number of sites at which it has
been designated potentially responsible by state or federal
agencies as a relevant measure of liability. Some companies may
be involved in few sites but have much larger liabilities than
companies involved in many more sites. Although liability of
33
those potentially responsible is generally joint and several for
federal sites and frequently so for state sites, the company is
usually but one of many companies cited at a particular site. It
has, to date, been successful in sharing clean-up costs with
other financially sound companies. Many of the sites at which
the company is potentially responsible are still under
investigation by the Environmental Protection Agency (EPA) or the
state agencies concerned. Prior to actual clean-up, those
potentially responsible normally assess site conditions,
apportion responsibility and determine the appropriate
remediation. In some instances, Phillips may have no liability
or attain a settlement of liability. Actual clean-up costs
generally occur after the parties obtain EPA or equivalent state
agency approval.
At September 30, 1998, accruals of $6 million had been made for
the company's unresolved PRP sites. In addition, the company has
accrued $62 million for other planned remediation activities,
including resolved state, PRP, and other federal sites, as well
as sites where no claims have been asserted, and $3 million for
other environmental contingent liabilities, for total
environmental accruals of $71 million. No one site represents
more than 10 percent of the total.
After an assessment of environmental exposures for clean-up and
other costs, the company makes accruals on an undiscounted basis
for planned investigation and remediation activities for sites
where it is probable that future costs will be incurred and these
costs can be reasonably estimated. These accruals have not been
reduced for possible insurance recoveries, although claims for
recovery of remediation costs have been filed with certain of the
company's insurers.
During the first nine months of 1998, as part of a comprehensive
environmental cost recovery project, the company entered into
settlement agreements with certain of its historical liability
and pollution insurers in exchange for releases or commutations
of their present and future liabilities to the company under its
historical liability and pollution policies. As a result of
these settlement agreements, the company recorded a before-tax
benefit to earnings of $109 million, all of which had been
collected at September 30, 1998. At this time, the company is in
negotiations with several other historical insurers. The
ultimate amount, if any; the terms of the settlements; and the
timing of recoveries from these other insurers remain uncertain.
34
OUTLOOK
On October 8, 1998, Phillips and Ultramar Diamond Shamrock
Corporation (UDS) announced that they had signed a letter of
intent to form a joint venture company to be named Diamond 66,
combining all of the operating assets of UDS and the North
American refining, marketing, and transportation operations of
Phillips (including Phillips' interest in the previously
mentioned limited partnership formed to build a 58,000 barrels-
per-day coker at the Sweeny Complex). Under the terms of the
letter of intent, UDS will own 55 percent and Phillips will own
45 percent of Diamond 66. Phillips will receive or retain a one-
time cash or cash equivalent amount of $500 million from the
joint venture company upon the closing of the transaction and a
$300 million cash distribution one year from the closing of the
transaction. Diamond 66 will be a consolidated subsidiary of
UDS, who will account for the transaction as a stock purchase of
Phillips' refining, marketing and transportation business.
Phillips' minority interest in the joint venture will be
reflected as an equity investment. The parties are working to
close the transaction in the first quarter of 1999. Closing is
subject to final approvals by the respective boards of directors,
the negotiation and execution of definitive agreements,
regulatory approvals, and the approval of UDS shareholders.
Phillips is participating in several appraisal wells on the north
slope of Alaska at the Schrader Bluff and Northwest Eileen
fields, which are satellite fields to the main Prudhoe Bay and
Kuparuk fields. The results to date at Northwest Eileen have
been successful, and the co-venturers plan to pursue an
aggressive program for additional appraisal and development well
drilling during 1999 and 2000. Testing of appraisal wells is
under way at Schrader Bluff.
In Nigeria, the company's oil mining leases for production of oil
and gas have been renewed for 30 years from June 14, 1997. These
interests are operated on behalf of the company under a joint
operating agreement with Nigerian Agip Oil Company (Agip).
Recently, domestic unrest there has caused production
interruptions. On October 5, 1998, two pipelines transporting
oil and condensates to the Brass terminal were turned off,
affecting 120,000 gross barrels of oil per day. Production was
restored October 17, 1998. Estimated net production lost to
Phillips was about 230,000 barrels.
In the United Kingdom, a development well drilled from the
Maureen platform to extend production from the field was a dry
hole. It is now expected that Maureen will cease production in
1999 or 2000. Phillips continues its effort to find another user
for the Maureen platform and its review of other disposal
35
options. An additional financial provision for decommissioning
was recorded in third quarter 1998, which should cover the cost
of any option currently being considered.
Production of liquefied natural gas at the Bayu-Undan gas field
in the Timor Sea has been delayed at least two years from 2003 to
2005. The delay is due to the weak Asian market and
disagreements with Phillips' major co-venturer concerning the
potential location of the proposed liquefied natural gas plant.
Due to the delay, Phillips is exploring opportunities for selling
the gas in the domestic Australian market. If the company is
unsuccessful at finding a market, the gas is expected to be
reinjected. Initial production of the field's liquid reserves is
expected in late 2002.
Phillips anticipates that the joint-venture project to develop
extra-heavy oil reserves from the Hamaca region of the Orinoco
Oil Belt in eastern Venezuela, in which it has a 20 percent
interest, will be approved in 1999. Initial production is
expected in 2000 with peak production in 2003 or 2004.
Phillips continues to jointly acquire, process and interpret 3-D
seismic data with Mobil Corporation to build a portfolio of
drilling prospects on its jointly held deep-water leases in the
Gulf of Mexico. The delivery of a previously contracted deep-
water drillship has been cancelled due to construction delays.
However, drilling is planned to begin on the first prospect in
early 1999 using a semi-submersible drilling rig.
In January 1999, several European countries will begin operating
with a single currency, the Euro, starting the process of
completely replacing their national currencies during the next
three and one-half years. This European Monetary Union will
affect many of the business and financial functions for companies
operating in these countries. The previously mentioned worldwide
business systems replacement project is expected to position the
company for the introduction of the Euro and no significant
adverse economic impact is anticipated.
Phillips operates in three countries where cutbacks in production
have been announced. Norway previously volunteered to implement
measures to cut back crude oil production on the Norwegian
continental shelf by 3 percent for the remainder of 1998. This
reduction plan is no longer anticipated to impact the Phillips-
operated Ekofisk area fields since the yearly production volumes
were reduced in the third quarter due to the previously mentioned
production problems after start-up of Ekofisk II. The Nigerian
government dictated quota reductions of 6 percent, effective
April 1, 1998, and an additional 9 percent, effective July 1,
1998. These affect leases operated on behalf of the company
under the joint operating agreement with Nigerian Agip Oil Company,
36
but anticipated 1998 annual production from these leases falls
within the limits allowed under the revised production
arrangements. Venezuela, an OPEC member, has agreed to cut back
oil production, but third-bid-round-property operators have not
been asked to curtail production. Based on the above, the
company does not expect the economic impact of these announced
production curtailments in any of the three countries to have a
material adverse impact on the company's results of operations or
financial position in 1998.
Low crude oil prices and low chemical margins are expected to
negatively impact earnings in fourth quarter 1998. However,
production levels at Ekofisk have increased over third quarter
levels and production is also expected to increase in the United
Kingdom as a result of the start-up of production from the Janice
field during fourth quarter, and a full quarter's production from
the Britannia field, which began producing during the third
quarter. These production increases could be somewhat offset if
the previously mentioned domestic unrest in Nigeria causes
production interruptions there. Natural gas prices are
anticipated to increase in the fourth quarter as winter
approaches.
The current climate of low crude oil prices could have the impact
of shortening the economic limits on field lives, which
potentially could reduce proved property reserve estimates
sufficiently to trigger impairment losses. Phillips constantly
monitors its assets for signs of potential impairment and
recognizes impairment losses whenever the carrying amount of a
field is not expected to be recovered by future, undiscounted
cash flows. Given the current low level of crude oil prices, and
indications of only modest recovery, a comprehensive impairment
analysis of E&P properties is being conducted that is expected to
be completed in the fourth quarter.
The company has a number of issues outstanding with the IRS
related to tax years 1987 through 1992 that are expected to be
resolved this year as a result of the favorable outcome in 1996
of the Kenai liquefied natural gas tax case related to the
company's sales of liquefied natural gas from Kenai, Alaska. A
favorable resolution of these issues would have a positive effect
on net income and cash flow of up to $125 million while an
unfavorable one would not impact the company's net income or cash
position. All outstanding issues with the IRS for years prior to
1987 have been resolved.
37
CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995
Phillips is including the following cautionary statement to take
advantage of the "safe harbor" provisions of the PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995 for any forward-looking
statement made by, or on behalf of, the company. The factors
identified in this cautionary statement are important factors
(but not necessarily all important factors) that could cause
actual results to differ materially from those expressed in any
forward-looking statement made by, or on behalf of, the company.
Where any such forward-looking statement includes a statement of
the assumptions or bases underlying such forward-looking
statement, the company cautions that, while it believes such
assumptions or bases to be reasonable and makes them in good
faith, assumed facts or bases almost always vary from actual
results, and the differences between assumed facts or bases and
actual results can be material, depending on the circumstances.
Where, in any forward-looking statement, the company, or its
Management, expresses an expectation or belief as to future
results, such expectation or belief is expressed in good faith
and believed to have a reasonable basis, but there can be no
assurance that the statement of expectation or belief will
result, or be achieved or accomplished.
Taking into account the foregoing, the following are identified
as important risk factors that could cause actual results to
differ materially from those expressed in any forward-looking
statement made by, or on behalf of, the company:
o Plans to drill wells and develop offshore or onshore
exploration and production properties are subject to: (1) the
company's ability to obtain agreements from co-venturers or
partners, and governments; engage drilling, construction and
other contractors; and obtain economical and timely financing;
(2) geology, land or sea, or ocean conditions; (3) world
prices for oil, natural gas and natural gas liquids; and
(4) foreign and United States laws, including tax laws.
o Plans for the construction, modernization or debottlenecking
of domestic and foreign refineries and chemical plants, and
the timing of production from such plants are subject to
approval from the company's and/or subsidiaries' Boards of
Directors; loan or project financing; the issuance by
foreign, federal, state, and municipal governments, or
agencies thereof, of building, environmental and other
permits; and the availability of specialized contractors and
work force. Production and delivery of the company's
products are subject to worldwide prices and demand for the
38
products; availability of raw materials; and the availability
of transportation in the form of pipelines, railcars, trucks
or ships.
o The ability to meet liquidity requirements, including the
funding of the company's capital program from operations, is
subject to changes in the commodity prices of the company's
basic products of oil, natural gas and natural gas liquids,
over which Phillips has no control, and to a lesser extent
the commodity prices for its chemical and other products; its
ability to operate its refineries and chemical plants
consistently; and the effect of foreign and domestic
legislation of federal, state and municipal governments that
have jurisdiction in regard to taxes, the environment and
human resources.
o Estimates of proved reserves, raw natural gas supplies,
project cost estimates, and planned spending for maintenance
and environmental remediation were developed by company
personnel using the latest available information and data,
and recognized techniques of estimating, including those
prescribed by the U.S. Securities and Exchange Commission,
generally accepted accounting principles and other applicable
requirements.
o The dates on which the company believes the Year 2000 Project
will be completed and the SAP and Oracle business computer
systems will be implemented are based on Management's best
estimates, which were derived utilizing numerous assumptions
of future events, including the continued availability of
certain resources, third-party modification plans and other
factors. However, there can be no guarantee that these
estimates will be achieved, or that there will not be a delay
in, or increased costs associated with, the implementation of
the Year 2000 Project. A delay in the implementation of SAP
could also impact the company's readiness for the
introduction of the Euro. Specific factors that might cause
differences between the estimates and actual results include,
but are not limited to, the availability and cost of
personnel trained in these areas, the ability to locate and
correct all relevant computer code, timely responses to and
corrections by third-parties and suppliers, the ability to
implement interfaces between the new systems and the systems
not being replaced, and similar uncertainties. Due to the
general uncertainty inherent in the Year 2000 problem,
resulting in part from the uncertainty of the Year 2000
readiness of third-parties and the interconnection of global
businesses, the company cannot ensure its ability to timely
and cost-effectively resolve problems associated with the
Year 2000 issue that may affect its operations and business
or expose it to third-party liability.
39
PART II. OTHER INFORMATION
Item 5. OTHER INFORMATION
On October 8, 1998, Phillips and Ultramar Diamond Shamrock
Corporation (UDS) announced that they had signed a letter of
intent to contribute all of UDS's operating assets and the North
American refining, marketing, and transportation operations of
Phillips into a joint venture company to be named Diamond 66.
Information describing this joint venture is located on page 35
in Management's Discussion and Analysis and is incorporated
herein by reference.
At the July 1998 meeting of the company's Board of Directors, the
date of the company's 1999 annual meeting of stockholders was
changed from May 10, 1999, to May 3, 1999. This change will not
impact the date, November 30, 1998, by which stockholder
proposals must be submitted. Under Article II, Section 10 of the
company's bylaws, Nominations and Stockholder Business (an
advance notice bylaw), a stockholder must deliver to the company
notice of nominations or other business to be considered at the
1999 annual meeting of stockholders not less than 60 nor more
than 90 days prior to the anniversary of last year's meeting or
not later than March 12, 1999, or earlier than February 10, 1999.
In September 1998, the Board of Directors, upon the
recommendation of the Committee on Directors' Affairs, amended
the second paragraph of Article II, Section 6, of the company's
bylaws to increase the amounts that could be paid and received by
a director or an affiliated entity before such director would not
be considered independent under the definition of "Independent
Director" in the bylaws. This change was made to update the
amounts not changed since the Section was adopted in 1976.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
- --------
3(ii) Bylaws of Phillips Petroleum Company, as amended effective
September 14, 1998.
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule.
Reports on Form 8-K
- -------------------
During the three months ended September 30, 1998, the company did
not file any reports on Form 8-K.
40
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
PHILLIPS PETROLEUM COMPANY
/s/ Rand C. Berney
-----------------------------
Rand C. Berney
Vice President and Controller
(Chief Accounting and Duly
Authorized Officer)
November 10, 1998
41